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Alaska Air Group Reports First Quarter 2008 Results

Company Takes Steps to Increase Revenues, Reduce Expenses In Response to Fuel Costs, Economy
4/24/2008 5:12 am (PT)

SEATTLE — Alaska Air Group, Inc. (NYSE:ALK) today reported a first quarter net loss of $35.9 million, or $0.97 per share, compared to a net loss of $10.3 million, or $0.26 per share, in the first quarter of 2007. Both periods include adjustments resulting from mark-to-market fuel hedge accounting. Excluding the impact of these adjustments, the company would have reported a net loss of $36.3 million, or $0.98 per share, compared to a net loss of $15.8 million, or $0.39 per share, in the first quarter of 2007.
     
"Although Alaska Air Group is in a good position relative to the rest of the industry, high fuel prices are eroding our profits and revenues are not increasing fast enough to offset them," said Bill Ayer, chairman and chief executive officer. "In response to the current industry environment, we're taking a range of actions at Alaska Airlines and Horizon Air to increase revenues and lower costs, including transitioning Horizon to a single-type fleet of fuel-efficient Q400 aircraft."

Alaska Airlines' mainline passenger traffic in the first quarter increased 11.3 percent on a capacity increase of 6.8 percent. Load factor increased by 3.0 percentage points to 74.4 percent. Alaska's mainline operating revenue per available seat mile (ASM) increased 3.0 percent and its operating costs per ASM excluding fuel decreased 3.4 percent from the first quarter of 2007. Alaska's total pretax loss for the quarter was $37.9 million, compared to a pretax loss of $7.5 million in 2007. Excluding mark-to-market fuel hedging adjustments, Alaska would have reported a pretax loss of $37.7 million for the quarter, compared to a $14.3 million pretax loss in the first quarter of 2007.

Horizon Air's passenger traffic in the first quarter increased 4.9 percent on a 1.8 percent capacity increase. Load factor increased by 2.1 percentage points to 69.9 percent. Horizon's operating revenue per ASM increased 7.7 percent and its operating costs per ASM excluding fuel decreased 1.7 percent. Horizon's total pretax loss for the quarter was $17.2 million, compared to a pretax loss of $9.2 million in 2007. Excluding mark-to-market fuel-hedge accounting adjustments, Horizon's pretax loss was $18.1 million for the quarter, compared to a pretax loss of $11.2 million in the first quarter of 2007.

Alaska Air Group had cash and short-term investments of $922 million at March 31, 2008, and has more than $1 billion today. Alaska Air Group has the second-best fuel hedge position in the industry, with half of Alaska and Horizon's planned consumption for the remainder of 2008 indexed to a crude oil price of $76 per barrel.

Alaska Air Group's debt-to-total capitalization ratio at March 31, 2008, was 73 percent. The company finished the quarter with 36.4 million shares outstanding.

Company acting in response to fuel costs, economy

Alaska Air Group also announced steps to further increase revenues and reduce expenses in response to record high fuel costs and a slowing economy. When fully implemented, these measures are expected to improve the company's full-year pretax income by about $150 million.
     
"Our economic fuel costs for the first quarter of 2008 jumped $89 million or 45 percent over what we paid a year ago on a slight increase in consumption," Ayer said. "Given the magnitude of this increase and the softening economy, we're taking aggressive actions now to improve our business and profitability."
     
Central to these actions is Horizon Air's plan to transition from a fleet of 65 aircraft and three aircraft types to a single fleet of 76-seat Bombardier Q400s. To do so, the airline will transition out of its fleet of 20 Bombardier CRJ-700 regional jets within two years. This fleet change is in addition to a previously announced phase-out of its 12 remaining 37-seat Bombardier Q200s by June 2009.
     
"Through its combination of passenger comfort, speed and efficiency, the Q400 is the best aircraft for the majority of our markets," said Jeff Pinneo, president and chief executive officer of Horizon Air. "Simplifying to a single fleet of Q400s will result in increased fuel efficiency, plus substantially reduced costs for aircraft maintenance, spare parts, and pilot and mechanic training."
     
The Q400 is one of the most technologically advanced turboprop aircraft in the world. In addition to its jet-like speed and cabin environment, the Q400 burns 30 percent less fuel and produces 30 percent less emissions than a 70-seat jet.

When the transition out of Q200s and CRJ-700s is complete, Horizon's fleet will consist of 48 Q400s or more, depending on how many of its 20 purchase options with Bombardier the airline chooses to exercise.
     
Flight frequency reductions will be necessary in certain markets as Horizon transitions from the Q200 to the higher-capacity Q400.
     
Some workforce reductions, which the airline hopes to accomplish primarily through attrition during the transition period, also will be necessary as Horizon moves to a smaller fleet.

Fee changes

Alaska Airlines and Horizon Air plan to raise certain fees to better align them with the current costs of providing added services. These include increasing the charge for booking through reservations and airport sales agents from $10 to $15, raising the fee for overweight baggage from $25 to $50, increasing the charge for transporting pets in the cabin from $75 to $100 one-way, and raising the unaccompanied minor fee from $30 to $75 for one-way nonstop flights and from $60 to $75 for connecting flights. The increases are effective May 21, 2008.
     
By summer, the airlines also will begin charging $25 for a second checked bag. First class and top-tier Mileage Plan members and customers on flights within the state of Alaska will be exempt from the new fee.
     
"Rising fuel and service costs without equivalent fare increases have forced us to make these changes," said Gregg Saretsky, Alaska's executive vice president of flight and marketing. "We will continue to maintain a simple, customer-friendly fare structure and fees in accord with the costs of delivering these services in this environment of extremely high fuel prices."

Capacity changes

Alaska and Horizon are evaluating all routes to remove frequency in underperforming markets and redeploy it in more profitable ones. The airlines anticipate redeploying 3 percent to 5 percent of existing network capacity to generate new revenue in the fall schedule.     
The airlines have already made substantial changes to their spring and summer schedules that include leaving the Orange County-Oakland and San Diego-San Francisco markets and reducing Long Beach-Seattle, Los Angeles-Eugene, Los Angeles-Mexico City, San Diego-Boise and San Diego-Spokane service. Aircraft serving these routes have been redeployed on transcontinental flights from Portland, Ore.; new Hawaii flights, including Maui service starting in July; the airlines' new Seattle-California "West Most" schedule featuring 78 flights, with weekday hourly service to LAX and weekday flights nearly every two hours to five other airports; and new Horizon service between Los Angeles and Flagstaff, Ariz.

Fuel conservation

Alaska and Horizon announced further initiatives to reduce fuel consumption that will save the airlines roughly 1 million gallons a month. These include implementing a new flight planning system to select more direct routings, establishing single-engine taxi procedures for Alaska and using more ground power instead of burning fuel with the aircraft's onboard auxiliary power unit. These steps are in addition to ongoing measures that include transitioning to more fuel-efficient aircraft, installing winglets on Alaska's Next Generation 737s, eliminating unnecessary weight onboard, and working with the Federal Aviation Administration to pursue more direct routings and fuel-saving approaches and departures using existing flight deck technology.

A summary of financial and statistical data for Alaska Airlines and Horizon Air, as well as a reconciliation of the reported non-GAAP financial measures, can be found on pages 9 to 13. Additionally, Alaska Air Group filed an investor update and information regarding the decision to transition out of Horizon's CRJ-700 fleet on Form 8-K today. Please refer to that 8-K for unit cost and capacity guidance for the second quarter and full year of 2008.

A conference call regarding the first quarter 2008 results will be simulcast via the Internet at 8:30 a.m. Pacific time on April 24, 2008. It can be accessed through the company's Web site at alaskaair.com. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at alaskaair.com.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as "Alaska" and "Horizon," respectively, and together as our "airlines."

This news release contains forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the company's Annual Report on Form 10-K for the year ended Dec. 31, 2007. Some of these risks include increased competition, significant fuel costs, general economic conditions, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, terrorist attacks, seasonal fluctuations in our financial results, an aircraft accident, laws and regulations, and government fees and taxes. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines and sister carrier, Horizon Air, together serve 92 cities through an expansive network throughout Alaska, the Lower 48, Hawaii, Canada and Mexico. For reservations visit alaskaair.com. For more news and information, visit the Alaska Airlines/Horizon Air newsroom at http://newsroom.alaskaair.com.

View First Quarter Financial Results