Apr 26, 2017
Executives
Lavanya Sareen - Alaska Air Group, Inc. Bradley D.
Tilden - Alaska Air Group, Inc. Andrew R.
Harrison - Alaska Air Group, Inc. Brandon S.
Pedersen - Alaska Air Group, Inc. Shane R.
Tackett - Alaska Airlines, Inc. David L.
Campbell - Horizon Air Industries, Inc. Benito Minicucci - Alaska Air Group, Inc.
Joseph A. Sprague - Alaska Air Group, Inc.
Mark G. Eliasen - Alaska Air Group, Inc.
Analysts
Savanthi N. Syth - Raymond James & Associates, Inc.
Joseph DeNardi - Stifel, Nicolaus & Co., Inc. Hunter K.
Keay - Wolfe Research LLC Helane Becker - Cowen & Co. LLC Jamie N.
Baker - JPMorgan Securities LLC Rajeev Lalwani - Morgan Stanley & Co. LLC Andrew George Didora - Bank of America Merrill Lynch Van Kegel - Barclays Capital, Inc.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
Kevin Crissey - Citigroup Global Markets, Inc.
Operator
Good morning. My name is Krista and I will be your conference operator today.
At this time, I would like to welcome everyone to the Alaska Air Group First Quarter 2017 Earnings Release Conference Call. Today's call is being recorded and will be accessible for future playback at www.alaskaair.com.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for analysts.
Thank you. I would now like to turn the call over to Alaska Air Group's Managing Director of Investor Relations, Lavanya Sareen.
Lavanya Sareen - Alaska Air Group, Inc.
Thanks, Krista, and good morning, everyone, and thank you for joining us for Alaska Air Group's first quarter 2017 earnings call. On the call today, our CEO, Brad Tilden, will provide an overview of the business; our Chief Commercial Officer, Andrew Harrison, will provide color on the revenue environment; followed by Brandon Pedersen, our CFO, who will discuss our financial results and outlook for the rest of 2017.
Several members of our senior management team are also on hand to help answer your questions. As a reminder, 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've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release. Moving to results.
This morning Alaska Air Group reported a first quarter GAAP net profit of $99 million. Excluding merger-related costs and impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net income of $130 million and earnings per share of $1.05, $0.04 better than the First Call consensus of $1.01 per diluted share.
As a result of the merger, our business this year is nearly one-third bigger than last year. Passengers are up 28%, revenues are keeping pace and up 30%, and we've announced 37 new markets since the deal closed, with a lot of this growth coming in the state of California.
While we're excited about this growth to help investors make meaningful comparisons about the changes in our business, we have included certain unaudited supplementary data labeled Combined Comparative statistics on page 7 of our Investor Update. Unless otherwise noted, the numbers discussed today will be on a Combined Comparative basis.
In other words, comparing our Q1 results this year to the combined results of Alaska and Virgin America last year. We think this provides investors better insights into how the overall business was performing.
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 with that, I'll turn the call over to Brad.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks very much, Lavanya, and good morning, everybody. A few weeks ago we had the chance to speak with you at our Investor Day about our strategy for the combined company, including our integration plans, the brand decision, our updated synergy commitments, and our approach to capital allocation.
For today, we want to focus on our first quarter results and provide a more near-term look at the business. We'll try to keep our comments brief, so that we have plenty of time for your questions.
Well, one quarter into 2017, and the business is looking good. The West Coast economy remains very strong, as you saw with the Crane Index that we showed you at Investor Day, and this strength is not only benefiting our existing routes, but it's also helping unlock the value of the merger, as shown by our many recent new route announcements.
Speaking of the merger, the integration continues to progress well. Last week, the flight attendants became the first labor group to receive a single carrier certification from the National Mediation Board.
This is an important milestone and enables them to start moving forward with things like seniority list integration. Most of the other groups – other labor groups have also filed for certification and are currently going through the approval process.
Finally, from a financial perspective, we reported $202 million of adjusted pre-tax profit for the quarter, which is down from last year with the higher fuel prices we've experienced, but still very solid. This marks the eighth consecutive year of profitability in the first quarter and an 11.5% pre-tax margin, in what has traditionally been our weakest quarter shows the strength of our business model.
Moving on to the operation being safe and reliable is one of the core promises we have for our guests, and we have a history of delivering, as shown by our recent number one spot in the 2016 airline quality rankings. However, this business has a way of keeping you humble and a rough winter on the West Coast shows that we have room for improvement in our handling of irregular operations, particularly snow, de-icing, and ATC delays.
And this is especially true in locations where real estate is already highly constrained. We had five times more snow or freezing rain events in Seattle and Portland this year versus last.
But even accounting for this, our performance is still disappointing. For the quarter, Alaska and Virgin Mainline on-time performance was 78% and 65%, respectively, and on the Regional side, Horizon came in at 71%, while SkyWest came in at 80%.
We are committed to doing a better job of getting our guests to their destinations on time, regardless of the weather, and we're in the process of reviewing our operational procedures, including the winter ops program. While we need to improve our processes, our people did a fantastic job taking care of our guests throughout the quarter.
Although Alaska's Mainline customer satisfaction results were down in January, our employees quickly rebounded and exceeded our target in both February and March. I want to personally thank each of them for their hard work and for staying focused on our guests, despite weather and operational challenges.
I also want to thank our social care team. When the operation is under pressure, guests often post on social media, and they expect a quick response, and this team delivers.
A recent study found the average response time was under 5 minutes on Alaska's social media channels versus over an hour for the industry. Given the text-savvy nature of many of our West Coast guests, this is an important and growing part of the customer experience and it's one we remain focused on.
As we look ahead to the rest of 2017, I'm mindful that success isn't only about having the right strategy or plan. It's about execution.
For the past year, we've been focused on getting DOJ approval, arranging financing, setting up integration, and doing all the other things that go with acquiring a business. In fact, we've got so many new things going on right now, you might say that our business is under construction.
But in the midst of this construction, it's time for us to refocus on the fundamentals of running a good airline. This includes taking care of our guests, running a tight operation, and having a frugal mindset with respect to costs and capital spending.
In other words, it's time for us to execute the plans we've laid out and to make sure that we're doing the right things day in and day out to make this a great airline for our employees, our guests, and our owners. That's it from me, and now I'd like to turn the call over to Andrew and then Brandon, who will share more detail with you on how we did in the first quarter.
Andrew R. Harrison - Alaska Air Group, Inc.
Thanks, Brad, and good morning, everyone. As Brad said, in the spirit of keeping things crisp, I'm going to briefly walk through our first quarter performance, share a few thoughts on our capacity and the revenue environment, and then close with a brief update on our commercial integration work.
So starting with the first quarter, our passenger revenue grew by $22 million, or about 2%. This outpaced the industry, which grew less than 1%.
And as anticipated, our March leisure travel was impacted by the Easter, shifting into the second quarter of this year. In total, the Easter shift cost March revenue approximately 3 points of unit revenue growth, which will shift into April.
But, overall, we were very pleased with our first quarter, our traditional softness shaped up. Our load factor of 81.3% was essentially flat year-over-year, despite a 4.9% increase in capacity, as we saw a solid demand across our network.
Importantly, we saw continued strength in our loyalty program during the quarter. In fact, during March we had the largest number of new members enrolling in both the state of California, as well as our overall Mileage Plan on record.
Building loyalty is a critical part of our growth strategy in California, and while it's still early stages, initial results are encouraging. Looking ahead to the second quarter, we expect competitive capacity increases in our markets to be approximately 2 points.
While this is a fraction of what we've seen over the last several years, it is an increase from the last call when the second quarter capacity changes were tracking closer to flat. Our capacity will be up about 6% in the second quarter, with roughly 3 points of this growth due to the new markets Brad mentioned, 2 points due to longer stage length, and the remaining a mix of core adds with some gauge adjustment.
Although these forms of growth generally have a negative impact on PRASM, the new markets are already performing in line with our initial forecasts and we're confident that this growth will be profit accretive. Overall, we feel good about what we're seeing system-wide for the second quarter.
And even after removing the benefit from the Easter shift, we expect to have positive unit revenue in the second quarter due to maturing markets, stabilization of competitive capacity, and solid demand. We foresee the second quarter being the best quarter of the year with respect to year-over-year revenue performance, given our growth is weighted more heavily towards the third and fourth quarter.
Speaking of capacity, our guide for the full year is 8.5% and remains unchanged from previous guidance. With capacity in the first half of the year around 5.5%, this implies growth of approximately 11.5% for the second half of 2017.
For comparison, our growth in the second half of 2016 was 8%, or 350 basis points, lower. This will make unit revenues comps more difficult; however, we're also confident this added capacity will contribute to Air Group's long-term track record of profitable growth.
Moving to our progress on the revenue commitments and integration. As Dan and Darryl pointed out at Investor Day, revenue synergies can be hard for investors to see and measure.
So I wanted to highlight recent changes at Love Field as tangible examples of progress on the fleet deployment and network growth synergies. First, as many of you know, Virgin's existing routes from Dallas Love Field to DCA and LaGuardia were losing money.
The network team moved quickly to downgauge these routes to a 76-seat Embraer 175 regional jet, which was something Virgin couldn't do, because it didn't have the breadth of fleet options that we do at Alaska. What this allowed us to do was offer business travelers the same utility on DCA, and more in the case of LaGuardia, with a three cabin product, while improving the economics of these routes.
Secondly, we also announced that we're adding new routes from Love Field to four points of strength on the West Coast; Seattle, Portland, San Jose, San Diego, which are routes we believe will make the best use of the two gates we have at this highly constrained airport. This is incremental revenue growth that was unlocked by the merger, will increase our relevance and loyalty on the West Coast, and generate higher utilization of gates and airport space, thus reducing unit costs.
I'm very proud of the revenue management team. In April, we finished bringing three years of Virgin America's booking history into Sabre.
This will help us better manage inventory as a single entity. We're also on track, thanks to our airports organization and real estate, to collocate operations at key airports, including Seattle, Portland, San Francisco, L.A, Newark, and JFK by the end of this year.
This will allow us to operate more efficiently and also eliminate the potential source of confusion for our guests at airports, as they make connections across our expanded network. So, in summary, we're really excited about the opportunities for the combined network and are moving forward on our revenue synergy commitments, consolidation of airport operations, and aggressive brand and loyalty marketing, now that the question about the Virgin brand has been answered.
We look forward to a solid second quarter, and with that, I'll turn the call over to Brandon.
Brandon S. Pedersen - Alaska Air Group, Inc.
Hey. Thanks, Andrew, and good morning, everybody.
Air Group's $130 million adjusted profit equates to a pre-tax profit of $202 million, which was $117 million, or 37%, lower than last year on a combined basis. Although operating revenues were up $39 million, they weren't sufficient to offset the $56 million increase in non-fuel costs and the $88 million increase in fuel prices.
Non-operating costs also increased by $12 million due to the higher interest expense. Overall, our first quarter pre-tax margin fell by 710 basis points to 11.5%.
We expect that to be the largest decline of any quarter this year, given what we see currently in the revenue and fuel environment. Andrew talked about unit revenues, so I'll focus on unit costs.
CASM ex-fuel was basically flat, which was consistent with our initial guidance. While the operational challenge, as Brad mentioned, did create some added costs during the quarter, we benefited from having lower than forecasted maintenance costs and certain marketing spend that has shifted into the latter part of the year.
For Q2, we're currently forecasting CASM ex-fuel to increase by 3% on the 6% increase in capacity. There are number of drivers for the increase, including the timing of maintenance events, some costs that shifted from Q1, and an assumed ratification bonus related to the tentative agreement that we reached with Horizon's pilots earlier this month that will improve our ability to recruit and retain pilots.
Despite the 3% expected increase in unit costs in the second quarter, we're still on pace for flattish unit costs for the year, excluding the impact of an agreement with our Alaska and Virgin America pilots. There is a lot going on at Air Group right now, and some of those activities drive costs that don't captured in the merger cost line on our external P&L.
We're working hard to make sure those costs don't get embedded in our long-term cost structure, because we know how important low costs are to our long-term success. Although profits are down, we continue to generate strong cash flow from operations, approximately $470 million for the quarter, and ended Q1 with $1.7 billion of cash on hand.
Reinforcing what I said at Investor Day, we remain committed to a thoughtful capital allocation strategy. First, we're going to make smart investments to leverage our acquisition of Virgin America.
Those include growing the fleet to support our West Coast expansion, retrofitting the cabins of the Virgin America aircraft to add premium class, and adding satellite connectivity to Alaska's aircraft. We're also making important investments into airport and other facilities in many of our locations.
Given the elevated level of capital spending, we're working hard to make sure our controls over capital are robust and we're spending money as if it's our own. And, yes, that comment was directed to other group leaders.
We're currently projecting 2017 CapEx to be above $1.2 billion, consistent with prior guidance. Most to that, of course, is fleet related and we've added a bit more detail to the fleet section of our Investor Update to help investors understand all the moving parts.
We did have two notable fleet events since Investor Day. The first was Horizon taking delivery of our first E175.
The second was Virgin America taking delivery of our first LEAP powered A321neo. In fact, we were the global launch customer of that aircraft type.
Both airplanes will be great additions to the fleet. We're also equally committed to re-deleveraging our balance sheet, our debt-to-capital by 1 point since the year end of 58%, and we expect to end the year at about 55%, driven by profits and roughly $320 million in scheduled principal payments.
Overall, our first full post-acquisition quarter was solid. There is a ton going on right now, and I want to credit our frontline folks for taking great care of our guests.
But I also want to give a shout out to all the back office folks, who are working so hard to put these two companies together. This is really hard work.
But having said that, I hope everyone listening to the call today, or reading the transcript, can sense the optimism that we have here. With that, we're ready for your questions.
Operator
And your first question comes from the line of Savi Syth with Raymond James. Your line is now open.
Savanthi N. Syth - Raymond James & Associates, Inc.
Hey. Good morning.
Unknown Speaker
Good morning, Savi.
Unknown Speaker
Good morning, Savi.
Savanthi N. Syth - Raymond James & Associates, Inc.
Just – if I may ask a question on the Dallas strategy. You guys talk about being a West Coast airline, and I think in past discussions you focused on that being your strength and knowing not really wanting to grow anywhere outside of that, and I know the – so I was kind of curious about the thinking on the Dallas-New York and Dallas-DC flights as to how that fits in that overall strategy.
I know it's very small, but in the grand scheme of things.
Andrew R. Harrison - Alaska Air Group, Inc.
Hey, Savi. It's Andrew.
I think those were two routes that, obviously, we inherited on the purchase of Virgin America. So as we look at those, as we look at our relevance in New York City specifically and the network we're going to have there, these are two routes that, I think, as they get incrementally better, we're just going to watch and see.
But the greater strategy, as you point out, is really directing things to the left side of the country to the West, where we want to continue to build loyalty and the top destinations folks want to go. So that's where we are there.
West Coast will be the focus.
Savanthi N. Syth - Raymond James & Associates, Inc.
All right, helpful. Thank you.
And then just on the kind of 2Q RASM color, wondering if you can give us a little bit more if you're seeing an improvement. It sounds like it's beyond just capacity that you are seeing an underlying improvement.
Just any more color on that and how that – maybe that progresses through the quarter.
Andrew R. Harrison - Alaska Air Group, Inc.
I'll maybe start with a high level, and I'll kick it over to Shane. But I think in generally what we're really excited about is as we continue to put the two airlines together, single revenue management system and start to work all the levers and the loyalty, as well as going into the second quarter is a much stronger quarter from us traditionally with the Easter move.
We feel very, very good about the demand environment. But Shane can give you a little color on the details there.
Shane R. Tackett - Alaska Airlines, Inc.
Yeah. Thanks, Andrew.
Yeah, Savi, I think the quarter, April will probably be the best month, just because Easter is sitting in it. But if you sort of look at Q1 and you adjust Easter out, we sequentially got better every single month.
We would've been close to flat in March had we not had the Easter shift. So I think we kind of see that basic progression happening through April, and then – I think that (20:05) on the comments, we see that May and June being good and positive.
Just want to continue to note the second half of the year will be challenged with the uptick in capacity.
Savanthi N. Syth - Raymond James & Associates, Inc.
Makes sense. All right.
Thank you, Shane.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks, Savi.
Operator
And your next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.
Joseph DeNardi - Stifel, Nicolaus & Co., Inc.
Yeah, thank you very much. Just one question for Andrew and one for Brandon.
Andrew, you guys are pretty unique, in that you have actually increased the value of your currency for your loyalty program members. Other airlines have kind of gone the other way.
You're still distance based, others are spend based. I'm wondering if you could just talk about whether you made those decisions based on kind of the value of just being different or if you made them in the context of actually trying to improve the value of the currency for your customers in the context of how the value that you get from that relationship and the credit card.
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah. Thanks for the question, Joe.
As we've shared on Investor Day, and as we've moved with our strategy, we very much want to be the low-cost airline and provide great value to our guests. And we have a huge percentage of our guests who are earning miles and using miles, and that's just as equally as important as how much you actually pay for that ticket.
To your point being different in the industry, we all have different business models, but at the end of the day we believe that a generous loyalty program for our business on what we want to achieve will be a very, very good thing for us longer term for our investors.
Joseph DeNardi - Stifel, Nicolaus & Co., Inc.
Okay. And then, Brandon, you spoke about the focus that you have on the cost side and you guys have obviously done a really nice job in terms of CASM performance.
But on the CapEx side, you're right, 2017 went up a tiny bit, 2018 went up a little bit more, 2019 went up more. It seems like that number kind of goes up every quarter.
So can you just talk about why that is? And if we're sitting here, and we're modeling a 20% margin for you guys in 2019, should we just assume that you're going to – that CapEx for you will be $1.7 billion, $1.6 billion?
I mean, that's a pretty big number.
Brandon S. Pedersen - Alaska Air Group, Inc.
Hi, Joe. Yeah, it is a really big number.
I would say is, at this point I would not read too much into the modest adjustments that occur in 2018 and 2019. I think what you're seeing is changing estimates on the timing and the amount of the various initiatives that we have going here, and those range from putting satellite on the airplanes to the transition of the interiors of the Airbus airplanes into the Alaska configuration.
And so all of those business cases are in work right now. So, as we get through the next three, four, five, six months and pin down the timing and the scope of those projects, I think you will have more confidence in the 2018 and 2019 numbers.
I would say, substantially, all of those changes come in the non-aircraft lines. On the aircraft stuff, what I would say is that right now we're in the process of finishing the final transition of the – out of the 400s into the Boeing 737-900ERs, which is a great investment into a more fuel efficient, more reliable, more comfortable airplane.
We're at the frontend of taking E175s into Horizon, which is going to be a great machine for us to reach thin Mid-Con markets. But we'll do the right thing with respect to aircraft deliveries, like we always have, and to the extent we don't feel like they wouldn't be profitable endeavors, we would change that order book.
Joseph DeNardi - Stifel, Nicolaus & Co., Inc.
Thank you.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks, Joe.
Operator
And your next question comes from the line of Hunter Keay with Wolfe Research. Your line is now open.
Hunter K. Keay - Wolfe Research LLC
Hi. Good morning.
Thank you.
Bradley D. Tilden - Alaska Air Group, Inc.
Hey, Hunter.
Hunter K. Keay - Wolfe Research LLC
Hey. So how much of the fourth quarter capacity growth had to do with Southwest being flat in the quarter?
Because one may conclude that you're using Southwest's fleet transition and their own flight capacity growth as an opportunity to kind of move in and take some share and be a little more aggressive.
Andrew R. Harrison - Alaska Air Group, Inc.
Hey, Hunter. I had media training a long time ago and I'm pretty sure that's called [Technical Difficulty] (24:25), but the [Technical Difficulty] (24:28) is really what you're seeing here, which we're being very transparent about, is really unlocking the synergies and the potential of the acquisition is to build a more firmer network on which to build loyalty, efficiency, and revenue growth.
And really that's what you're seeing going on here as it relates to our growth and, again, you're going to see these new markets slowdown, but that's the reason.
Bradley D. Tilden - Alaska Air Group, Inc.
Yeah, Hunter, I might just jump on it. We've really wanted to sort of activate the merger with Virgin with some of this stuff.
I think we actually go through and look at the markets, no carrier is being targeted or anything like that. We're really trying to improve the utility for our customers.
I think San Diego is an interesting example. I think we fly to – 46 flights with 29 or 30 different airports out of San Diego.
So we're not picking on a route. Same thing in the Bay Area.
We're really trying to add new utility for our customers, and we believe that adding that utility is going to grow loyalty. And so, I mean, honestly, we don't think a lot about – we think about our customers and growing loyalty and doing good things that will help our business [Technical Difficulty] (25:32) competition might be.
And I think a lot of these markets you might – Andrew, you were saying could pop in, but I think a lot of these markets are unserved today.
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah.
Bradley D. Tilden - Alaska Air Group, Inc.
On a non-stop basis.
Hunter K. Keay - Wolfe Research LLC
Okay. That's fair.
I am disappointed by the way that you have given Andrew media training. I liked him better the old way, but the paid load factor in your premium cabin, what is that?
And how many Delta Elites have historically gotten free upgrades on you guys? And as that partnership kind of dissolves away, does that free – have you done the analysis in terms of how many premium seats that frees up for you to now sell on your own?
Shane R. Tackett - Alaska Airlines, Inc.
The load factor in first class, Hunter?
Hunter K. Keay - Wolfe Research LLC
Yeah, paid load factor in premium. What, sorry?
Shane R. Tackett - Alaska Airlines, Inc.
In first class – in premium economy or just first class?
Hunter K. Keay - Wolfe Research LLC
First class.
Shane R. Tackett - Alaska Airlines, Inc.
Yeah, paid load factors are sort of 35% to 40%. They've ticked up a little bit as we've removed four seats out of the 800 to make room for premium economy, but they've held steady there for a number of years now.
And I think the Delta Elite upgrade was a very small overall number.
Andrew R. Harrison - Alaska Air Group, Inc.
I mean, Hunter, at the end of the day, Alaska Elites got first preference than the Delta Elites, and so that's the way it works. So really what we are seeing now is, as Shane has pointed out , is we're adding premium class, but reducing the number of first class seats in the first class cabin.
We are seeing a tick up in higher paid load factor there, but we're also being mindful of making sure that we – as again, the philosophy for us have generous upgrade policy.
Hunter K. Keay - Wolfe Research LLC
Cool. Thanks a lot.
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks, Hunter.
Operator
And your next question comes from the line of Helane Becker with Cowen & Company. Your line is now open.
Helane Becker - Cowen & Co. LLC
Thanks, operator. Hi, team.
Just a couple of questions, first is on the Virgin network. As you get into that, how much more is available to do changes like you did in Dallas, with changing gauge and being more – I don't know what the right word is, but adjusting capacity that way I guess?
Andrew R. Harrison - Alaska Air Group, Inc.
So we've made two big changes at the Love Field, obviously, and then also where we – on our trunk routes, Seattle-San Francisco, Seattle-Los Angeles, where we have a lot of overlap we've sort of got better schedules. But with all the new markets, we're moving to the single operating certificate in the first quarter of next year.
And so the cost bleeding is what you're referring to is, you're going to see much more of that starting in the spring of 2018. Right now we're sort of holding tight until we get all this integration done.
So that's the last of it you'll see, but spring next year you're going to see some more in some of these high opportunity routes of the West Coast (28:23).
Helane Becker - Cowen & Co. LLC
Okay. And then when you do that, will you talk more about the financial impact of those kind of changes?
Like what do you think – like as you changed Dallas, like how should we think about the financial impact of that? Because obviously load factor has improved, presumably pricing can improve a little bit.
So how should we think about that benefiting you guys?
Andrew R. Harrison - Alaska Air Group, Inc.
I think, Helane, you won't find us getting into the specifics that I think you're really asking about. What I hope that you will see is just a continual improvement and forward motion on the strength of both our margins, our unit revenue, and our loyalty program.
And I think when you see all those things working together, we will get confidence that these moves are a good thing.
Helane Becker - Cowen & Co. LLC
Okay. And then did you say how much the ratification bonus was for the Horizon pilots?
David L. Campbell - Horizon Air Industries, Inc.
Hi, Helane. This is Dave Campbell.
It is really about $9.6 million, but the real key for us, as you recall, last year we actually completed our (29:32). It was really about productivity and really driving that.
So this agreement that we have really preserve that productivity, allow us to go out and be competitive, and really grow this network the right way. And so I really feel good that it's a great deal for our pilots and for our employees.
It's a great deal for Air Group, and I feel really good about the opportunity and growth it creates for Horizon.
Helane Becker - Cowen & Co. LLC
Okay. And then this is a topic and actually, Brad, you may not have seen this, but just as your conference call started, your pilots put out a press release talking about your first quarter earnings and I'm kind of amazed that they would write this.
But they talked about the fact that you guys are not being as forthcoming with them as they want you to be. I don't know if you saw what they wrote, but it's out there.
So you might take a look at that.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks, Helane. Somebody just handed me a phone and we took a quick peek at it.
I might talk about it a little bit and get – ask Ben if he wants to chime in, but I will just tell you from my own perspective. We've invested a tremendous amount of time and energy into the relationships with all of our labor groups at all of our companies over the last ten years, and it's something we're really proud of.
It's something we care a lot about. It is in integral.
Those great working relationships are integral to the culture that we've built here about us, everybody being committed to this airline and making this airline great, making it great for our customers. Things are changing in the industry and I think we're – they're changing in Alaska with this merger and things are moving fast, and so expectations are changing.
And I think people are a little bit more on edge, and I think that we're showing some – there are – we are showing signs of it. That's what's going on right now.
But I'll just – I'll tell you, Helane, and I'll tell any of our pilots that happen to be listening that nothing has changed at Alaska. We value our employees.
We are going to work with them. We have a model of working with our people to make this company great and do great things for our customers, and that's what we're going to do.
We also need to keep our – we survive, as an airline the size we are, by keeping our fares low. So the needle we've been able to thread the last couple of contracts with the pilots, that we will continue to try to thread, is how do we come up with a deal that honors them for the fantastic work that they do, while keeping this company strong and in a way that we can keep growing.
that's what we're about and that's what I have to say about that press release. Ben, anything you want to add to that?
Benito Minicucci - Alaska Air Group, Inc.
No, Brad you said all. What I'll say is just the very nature of negotiations are not easy.
In your negotiation process, these things – just the process is not easy. And I know our pilots are listening, and what I'll say is we are committed to getting a deal.
And we – philosophically for the last 10, 15 years we've used an approach that we're going to pay people well and fairly. We're going to provide them great benefits, both share in our profits and our PBP.
We have high productivity, and historically that's what we've done. We've all got deals and we will continue to get deals going forward in the future.
Helane Becker - Cowen & Co. LLC
Yeah. Thank you very much.
I'm sorry. I didn't mean to put you on the spot with the question.
Benito Minicucci - Alaska Air Group, Inc.
No, no, that's all right.
Helane Becker - Cowen & Co. LLC
It's just that, to your point, you've always had great labor relations and to see them do that right after start of the call is kind of surprising, that was all.
Bradley D. Tilden - Alaska Air Group, Inc.
Yeah. Thanks, Helane.
Unknown Speaker
Thanks.
Helane Becker - Cowen & Co. LLC
Thanks, guys.
Bradley D. Tilden - Alaska Air Group, Inc.
Thank you.
Operator
And your next question comes from the line of Jamie Baker with JPMorgan. Your line is now open.
Jamie N. Baker - JPMorgan Securities LLC
Hey. Good morning, everybody.
Bradley D. Tilden - Alaska Air Group, Inc.
Good morning.
Jamie N. Baker - JPMorgan Securities LLC
Not to hammer you guys on the RASM commentary, what you said about the second quarter was pretty clear. But when I think about the sequential revenue production, how your revenue typically rises from the second quarter to the third quarter, and then contracts from the third quarter to the fourth quarter, assuming those trends are consistent on a pro forma basis with what we've seen in recent years, it seems to all but rule out anything but negative RASM in the back half.
Is that too punitive of an interpretation of your earlier commentary?
Andrew R. Harrison - Alaska Air Group, Inc.
Jamie, again, media training 102 kicking in now. As you know, we don't comment on the unit revenue performance and certainly whether it's negative or positive in the backend.
But I think the thing that we are focused on is that by – in the back end of the year, a lot of the things that we're working on and the momentum and the strength of the company going from one level to the next level with the integration is what we are clearly focused on, and I'll let your models...
Jamie N. Baker - JPMorgan Securities LLC
Let me put it a different way, and we'll take RASM off the table altogether. Given the shifts in the network, would you expect the seasonality from one quarter to the next to differ slightly or materially from that in the past?
Brandon S. Pedersen - Alaska Air Group, Inc.
Jamie, it's Brandon. Maybe I'll take that one.
Jamie N. Baker - JPMorgan Securities LLC
Sure.
Brandon S. Pedersen - Alaska Air Group, Inc.
The forecast for the next three quarters, I think the seasonality is going to look pretty similar to what it has looked like in the past. We are currently seeing Q2 rise, Q3 would be above Q2, and consistent with all of our prior recent years, Q4 is going to fall.
Jamie N. Baker - JPMorgan Securities LLC
Yes.
Brandon S. Pedersen - Alaska Air Group, Inc.
And so that – I think your sense is right. You know our business very well and we don't see anything that would change that seasonal pattern.
Jamie N. Baker - JPMorgan Securities LLC
Okay. That's all right.
I appreciate that. I should have asked it better the first time out.
Second question, head count, obviously, a touching subject in the case of post-merger American. They purposely staffed up in order to ease some of the complexities of integration.
The result is today they're kind of top-heavy from a head count perspective. How should we think about your staffing levels as you approach the periods of heavy lifting?
Is there going to be any sort of similar cost build there?
Benito Minicucci - Alaska Air Group, Inc.
Jamie, it's Ben here. We've done a lot of work in the last two months building the transitional forward structure to take us through different milestones.
So what you'll see in 2017 is we're carrying a certain level of staffing to get us through to single operating certificate, and then people fall off. We have people – we had people going away in the first quarter.
We have people going away in June. We'll have people going away after single operating certificate.
And as we reach everything (36:21), the next big milestone is our passenger [Technical Difficulty] (36:24) Sabre system, more people will drop off. So we have direct line of path on what our full-time equivalents are going to be from 2017, 2018, and through 2019.
And the goal is to have – when you add the Virgin head count – and I'm talking more management here, because we're going to be growing on the front line, but when you add the Virgin head count and the Alaska head count, the goal is going for us to be less than that – than 19 (36:53).
Jamie N. Baker - JPMorgan Securities LLC
Okay. That color is helpful.
And if I can just sneak one in, simply the passenger – the consolidation of both airlines in the T7 at JFK, new lounge facility, BA facility, UA facility, what are you going to be using?
Andrew R. Harrison - Alaska Air Group, Inc.
The business case is pending with my CFO, but we have space already working with British Airways to create a lounge, and we're just working out the details. But either way we will have a facility there, whether it's our own or someone else's.
Jamie N. Baker - JPMorgan Securities LLC
Okay. Looking forward to it.
Thanks for letting me ask so many questions. Take care.
Operator
And your next question comes from the line of Rajeev Lalwani with Morgan Stanley. Your line is now open.
Rajeev Lalwani - Morgan Stanley & Co. LLC
Good morning, gentlemen. And, Andrew, a question for you in terms of lower competitive capacity, it's clearly showing up in schedules and pricing.
Can you just provide a little more color on the markets that it's showing up in and just some real data points if you can?
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah, Rajeev. As you know, we use this weighted model, but I think the easiest way to describe what's going on is really the majority of that – big chunk of that capacity is really related to Basin and Bay Area satellite airports.
So our Seattle hub, Portland hub, even San Francisco did some growth, but what you're seeing is increment in capacity from many carriers from the satellite airports around the LA Basin, and then, of course, the San Joses and the Oakland in the Bay Area to their hubs and other destinations. That's what you're seeing is really the movement.
The rest of our four hubs are pretty stable.
Jamie N. Baker - JPMorgan Securities LLC
Okay. And then another one for you, Andrew.
As you've added capacity fairly aggressively in some of the West Coast markets or traditional Virgin markets, what's been the reception to the Alaska brand? And maybe if you can share some quantitative data points on booking color or surveys, if you don't mind?
Andrew R. Harrison - Alaska Air Group, Inc.
I don't have the quantitative data per se on the brand and all that good stuff. What I will tell you is that what we're hearing anecdotally and seeing is that the increased utility, the increased options, as well as the loyalty growth that's coming along with all of this has been extremely positive.
Again, with we're about 15% of all the traffic being booked on Virgin America metal is coming through alaskaair.com, and we continue to roll out benefits, such as free bags, companion fares on to the Virgin metal, so that's sort of what's going on there. I don't know, Shane, if have you any comment, but...
Shane R. Tackett - Alaska Airlines, Inc.
No. Most of the new markets are actually on Virgin metal.
Some of the inter-Cal stuff we've done recently is actually super strong. Virgin has a long history in inter-Cal, but the E175 has been performing well for us.
And then the Dallas Love Field change, we actually had to move a lot of folks off of Virgin ticket onto Alaska metal. We actually called everybody personally, and most of the anecdotal sort of report backs from the res agents and team mates on the Virgin side have been super positive.
People haven't had a problem with switching metal.
Rajeev Lalwani - Morgan Stanley & Co. LLC
Great. Thank you so much.
Bradley D. Tilden - Alaska Air Group, Inc.
Thank you.
Operator
And your next question comes from the line of Andrew Didora with Bank of America Merrill Lynch. Your line is now open.
Andrew George Didora - Bank of America Merrill Lynch
Hi. Good morning, everyone, and thank you for the question.
I guess, Brad or Andrew, you've done a good job articulating the opportunities you have in California. I certainly agree with that.
But I guess I do see this as a little bit more risky growth than you've done in the past. You're growing in much more mature markets with a lot more competition in San Francisco and the LA Basin.
I guess, Andrew, can you maybe give us some color around what kind of response you've seen from others in those markets as you've kind of built out your schedules over the last few months? And is it fair to assume that the uptick in competitive capacity that you've mentioned in your prepared remarks is from new markets that you've recently put schedules on?
Andrew R. Harrison - Alaska Air Group, Inc.
Andrew, I think Brad sort of hit the nail on the head a little earlier, but again on the acquisition of Virgin America, they were already in the largest O&D markets in California, certainly to the East Coast and other places, so there was no change in capacity there per se. What you've seen us doing is filling out some of the more secondary and third tier cities, in some cases with smaller aircraft, where we connect the cities that we serve from the Pacific Northwest.
So we believe that, overall, this is actually utility growth and opens up opportunities for folks to get directly to where they want to go versus connecting historically.
Andrew George Didora - Bank of America Merrill Lynch
And just on the competitive capacity, have you seen it come on to those new routes that you put in or are they on all the Virgin America routes?
Andrew R. Harrison - Alaska Air Group, Inc.
We have not seen anything change really in what we're doing...
Bradley D. Tilden - Alaska Air Group, Inc.
Andrew, I think we're – we're not thinking of any – knock on wood, but I'm not thinking right now of any significant competitive reaction to any of our growth. Again, most of that growth, I'll – Virgin was in all of the largest cities.
I think out of San Francisco is an example. They flew to all of the top 10 cities out of SFO already.
And so the cities we've added are smaller cities with lower demand. They're cities that add utility for our customers, enable our customers to get to those places on a non-stop basis, but they weren't – they're not highly competitive cities in terms of other service.
Andrew George Didora - Bank of America Merrill Lynch
Understood. Thank you.
Operator
And your next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is now open.
Unknown Speaker
Hello?
Unknown Speaker
Hey, Mike.
Bradley D. Tilden - Alaska Air Group, Inc.
Sounds like Mike is not there.
Operator
And your next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.
Van Kegel - Barclays Capital, Inc.
Hi, good morning. This is actually Van Kegel on for Brandon.
Thank you for taking my question. You've announced a record number of new routes.
Do you think that with a bigger Virgin footprint now in the West Coast, you can spool up revenue faster relative to route additions in the past, or it will take a little bit longer, just given the magnitude of the acquisition and integration?
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah. I think, Van, it sort of goes both ways.
On the one hand, when we add capacity in the Pacific Northwest, where we are well-known and have a big loyalty program, that goes well with it. In California, we're certainly less well-known, but now we have the breadth and the depth in that and the loyalty from Virgin America and their network and their presence.
So, as Brad mentioned earlier, these are tougher markets, but we are also bringing equally new tools to the table, whether it's aircraft, loyalty, international partners, connectivity. So, overall we feel like we've got a good formula to continue to do this well, and as we build network utility I think it will get easier.
Bradley D. Tilden - Alaska Air Group, Inc.
Yeah.
Van Kegel - Barclays Capital, Inc.
Okay. Thank you.
And then maybe just, do you have any initial expectations for revenue performance in these new markets relative to maybe the network?
Andrew R. Harrison - Alaska Air Group, Inc.
We don't normally comment on that, Van. What I will say is, what we track very carefully is what my teams forecast the new route should do and then what they actually do, and that's what we focus on to get to maturity.
Van Kegel - Barclays Capital, Inc.
Thanks for the time.
Bradley D. Tilden - Alaska Air Group, Inc.
Thank you.
Operator
And your next question comes from the line of Dan McKenzie with Buckingham Research. Your line is now open.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Hey. Good morning, guys.
My first question is on connectivity, so probably for Andrew or Shane. There is a lot you guys can do to increase connectivity and drive revenue, even before you have the single operating certificate.
So, yeah, just simply making sure the planes of both airlines land and takeoff when you ideally want them to. I guess, that's what I'm really talking about here.
So, I guess, just looking at the second quarter schedules, I'm wondering what adjustments have been made along these lines and how far along you are in this area, and then just, of course, what incremental revenue that's helping to drive.
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah, Dan, just on the network, we've made very, very few changes, as you can appreciate, since closing. Certainly the first and the second quarter, the biggest change that we've made is trying to get some of those trunk routes a little bit more lined up.
Shane and the team have done a fantastic job about rolling pricing across the whole new network connectivity across metal, across cities, and I think you're just about done with that. And so that's going to be one of the biggest ways that we're going to open up the routing of our network going forward.
But really, honestly, you're going to see it more basically after single operating certificate is where you're going to see the really big changes going forward.
Shane R. Tackett - Alaska Airlines, Inc.
Yeah. Dan, I may just add, the other thing we're really focused on is the customer experience on these connections.
These are mostly codeshare connections right now and that experience is different. So, we want to be careful and make sure people have a really good experience with us when they sort of first do an Alaska to Virgin connection.
We'll get all that worked out throughout this year, and then we'll really turn this on next year.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Understood. I guess the second question actually will be for Ben here.
I know – I think the commentary earlier in the call was to take a look at the operations and maybe make some adjustments. So I'm just wondering at this point, is the mandate to be cost neutral with these operational fixes or is there some money that perhaps might need to be invested here that potentially could – that might not be factored into how we're thinking about cost for this year.
Benito Minicucci - Alaska Air Group, Inc.
Dan, thanks for the question. So a couple of things we're looking at.
There is winter operation, so today a lot of cost is done. Internally we use our own people.
We are looking at other options. We're getting an outside provider to provide de-icing operation in Seattle.
So we're just looking at the business case now. Our hope is to make it as cost neutral as possible.
On the other operational issues with – in terms of block times, we have an enormous amount of analytical data that will be very, very laser like in where we add more block in specific markets and time of day, day of week. So it'll be very, very laser like.
Our goal is to get the highest performance at least cost, and today we have the lowest block times in the industry and we will continue to be the lowest block time with the highest performance, which is what our goal is.
Dan J. McKenzie - The Buckingham Research Group, Inc.
Okay. That will do for me.
Thanks, guys.
Andrew R. Harrison - Alaska Air Group, Inc.
Yeah.
Operator
And your next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is now open.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
Hi, everyone. It's actually Catherine O'Brien filing for Mike.
Can you hear me now?
Bradley D. Tilden - Alaska Air Group, Inc.
Yes, ma'am. We can hear you.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
Hey, guys. Sorry about that, technical difficulties.
So since the close the Virgin merger, how have your corporate contracts faired? Have you seen uptick in your corporate signing up, given the addition of Virgin service and the new markets that the merger has made possible?
Joseph A. Sprague - Alaska Air Group, Inc.
Hey, Catherine. Good morning.
This is Joe. Thanks for the question.
Yeah, the corporate activity has been very encouraging since the close of the merger. Our corporate sales team – and it's worth noting that we took the entire – was albeit a small one, but the entire Virgin America sales team and just brought them in with the Alaska team, brought them together.
They've been working well together. From the time of deal close, we quickly reached out to over 300 corporate accounts that either Alaska or Virgin or both had agreements with and basically synced up those agreements to give the benefit of the agreement on one airline to the other, if it didn't already exist.
And so that's been very positively received by corporate accounts. Also worth nothing that a lot of those accounts are in both Seattle and in the Bay Area where the tech activity is quite strong right now.
And so over we're seeing an uptick in corporate revenue, and particularly so from the Bay Area.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
That's great. Thanks.
Maybe I could just ask one more. So, we've recently seen a strengthening in transcon fares.
One of your main competitor increasing fares in their economy cabin and in their front cabin last week. If that continues, do you think that could provide upside to your revenue synergy target?
Shane R. Tackett - Alaska Airlines, Inc.
Thanks, Catie. Yeah, we actually don't put – we didn't put fares into any of the revenue synergies, so I'm just – that's why I'm stumbling over that question.
So, no, not on the synergy side. And just know a lot of times those fares are sort of on the higher end of structures and you don't always sell a lot of those.
So, a lot of the airplane gets sold on discount. That's really where you need to focus.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
Okay. If I could just sneak one more in then.
While it's probably too early to count on, the fact that you generated free cash in the seasonally tough March quarter, given especially what fuel did, seems like that bodes well for the rest of the year. Do you have any updated thoughts on capital allocation this year given that or the focus going to remain on re-deleveraging?
Brandon S. Pedersen - Alaska Air Group, Inc.
Catie, it's Brandon. The focus is going to remain on re-deleveraging.
I went through it a little bit in my remarks. We've got a lot of things we need to do on the fleet and non-aircraft side to just activate the merger and pursue our growth plans, and then beyond that we really do want to stay focused on re-deleveraging the balance sheet.
We recently increased the dividend. That's a positive fact we announced at Investor Day.
We're going to do a little bit of share buyback this year, but I would say in general our capital allocation plans remain unchanged.
Catherine M. O'Brien - Deutsche Bank Securities, Inc.
Okay, great. Thanks for all that color.
Bradley D. Tilden - Alaska Air Group, Inc.
Thanks, Catie.
Brandon S. Pedersen - Alaska Air Group, Inc.
Thanks, Catie.
Operator
And your next question comes from the line of Kevin Crissey with Citi. Your line is now open.
Kevin Crissey - Citigroup Global Markets, Inc.
Hi. Thanks for the time.
Couple big picture questions maybe for Andrew. Just general – maybe this in general.
When you look at a flight, how far in advance do you know that you have a revenue problem or that it's likely to depart with a weak revenue performance?
Andrew R. Harrison - Alaska Air Group, Inc.
It varies. What I will tell you is that, as we built our image, Shane and his team have done a good great job.
Essentially, if it's Hawaii, you booked at a certain period, if it's into California, it's a different period, but the team has built in mechanisms and reports that will tell us when aircraft booking stall, when we sell too many seats relative to last year, and it's a whole sophisticated program going on. And I think really what we do is focus on the bigger picture what's going on in the industry, what's going on with capacity, and then Shane and Kevin Ger, head of VP, translate that down to our fleet of analysts to do that.
So we have very good and robust system as it relates to that.
Kevin Crissey - Citigroup Global Markets, Inc.
Yeah, okay. I appreciate that.
Thank you. The second question I guess is, when you have a problem with a flight, and this is in general for the industry, I guess, but speaking for your firm specifically, what leverage do you have to pull?
Because it seems like what happens is there is a fare sale, like oh, the flight is not booking, and so the problem has to be on the price rather than maybe the quantity demanded. For instance, why is price necessarily the answer?
Maybe it needs more online marketing dollars and stuff. Do you incorporate other types of marketing beyond just, hey, sending out an e-mail with lower fares.
How does that work when a flight isn't working well? What other levers beyond price are there?
Shane R. Tackett - Alaska Airlines, Inc.
Thanks, Kevin. This is Shane.
We could go on and on this. I'll try to be brief.
I will say just to append like, I mean, what Andrew said, we can watch our forecast pretty closely, and they tend to settle down about 45 days in advance. So we're pretty good at predicting the final flow in revenue well over a month out, notwithstanding the ever elusive closing yield situation the industry has dealt with.
But, yeah, Kevin Ger, who runs RM for us now, he came over Virgin America. He actually hosts a weekly coordination meeting with ecommerce and with marketing and they through any number of sort of potential opportunities, whether it's digital marketing, sort of search marketing, sort of email marketing.
Sometimes we just say, no, we don't need a fare sale, we'll accept slightly lower load factors and sort of hold out for good closing yield. So there is a real mixture based on our relevance in the market or strength in the market sort of historically what's worked well.
Kevin Crissey - Citigroup Global Markets, Inc.
Terrific. Thank you very much.
I appreciate that.
Bradley D. Tilden - Alaska Air Group, Inc.
Yeah.
Operator
And we have time for one more question, which comes from the line of Savi Syth with Raymond James. Your line is now open.
Savanthi N. Syth - Raymond James & Associates, Inc.
Hey, guys. On the fleet, I was just wondering, it looks like the retirements might be a little bit less than previously disclosed.
Are they – the retirements of the 400s, is that getting pushed out or is that still expected to be done this year?
Mark G. Eliasen - Alaska Air Group, Inc.
Hey, Savi. This is Mark.
We are definitely going to be retiring the 400s. So I think what you're seeing is just the last few coming out of the fleet, and by the end of the year we will be out of the classics completely.
Savanthi N. Syth - Raymond James & Associates, Inc.
Got it. And if I may ask, just on the unit revenue front, I think you're getting close to being maybe one of the only airlines that will be providing monthly revenue data and maybe one of the few that don't provide a kind of quarterly outlook on expectations, so I appreciate the color.
Any thoughts on switching the way you manage expectations?
Brandon S. Pedersen - Alaska Air Group, Inc.
Hi, Savi. It's Brandon.
Yes, I think we would ultimately want to join the rest of the industry in that regard. I think it's a mark of what good industrial companies do.
I think what we need to do is get through this year and we need to get through a good year of comps and have a clear forecast due to windshield that these two companies put together. But as I sit here today, if I had to say what does our guidance look like in 2018, I think there is a strong bias toward more forward-looking guidance and less on the unit revenue side looking in backwards.
Savanthi N. Syth - Raymond James & Associates, Inc.
Great. Thank you.
Bradley D. Tilden - Alaska Air Group, Inc.
Thank you.
Brandon S. Pedersen - Alaska Air Group, Inc.
All right. Thanks very much.
So is the operator – thanks very much, Savi. Thanks for tuning in today.
We look forward to talking you all at the end of the second quarter. Thank you.
Operator
Thank you for participating in today's conference call. This call will be available for future playback at www.alaskaair.com.
You may now disconnect.