ALK
#Yes, <UNK>, hi, it's <UNK>.
Maybe I will jump into that.
I think what I would just simply say is in Seattle what we see is quite a strong economy.
We are adding, we're growing, we're taking delivery of these new airplanes, we're putting them into markets.
As <UNK> sort of suggested many of these markets are doing great right out of the gate.
<UNK>, I can't remember the exact figure you quoted but 75% are early in their life producing returns that cover our cost of capital.
So I think the simple answer to your question is yes, this is good new growth.
We're producing returns as a Company that are far in excess of our cost of capital and this is helping us with our substantial returns to the owners of the Company.
I don't know that I would call it inflation necessarily.
But what I would say is that we've done a lot to invest in our product.
And ultimately at the end of the day customers choose your service because you operate well and you have got great people on board and you have got great product and we want to make sure that our product is as good as it can be.
So we are investing into food and beverage.
We are investing in some of the training initiatives that we've talked about.
I wouldn't necessarily call it inflation, I would call it intentional investment into what customers see every day.
<UNK>, it's <UNK>.
I will take the first question on the bag performance.
We had a rough quarter on mishandled bags and the operations folks own that.
We're not happy with how we performed.
We actually have an initiative right now and going into 2016 to get our mishandled bags right in line.
I don't want to put the cause on the free bag with the credit card.
That is us to perform at the levels that I know we can perform.
And <UNK>, in terms of if we were to renegotiate our bank card deal, whatever's in the base is in the base, so I just think the economics get better across the board.
In terms of free bags is in the base is what I mean to say.
Yes, <UNK> I might start and then I'm going to turn it over to a new personality on the call.
But sure, the way we would look at our network is we have incredible strength in the state of Alaska and Washington State and Oregon and considerable strength in California.
To the extent we have competition in those markets that's a lot of these results that you see are the results of the loyal customer base, the flight schedule, everything we're doing out of these markets.
So for sure we would want to do to work hard for originating traffic out of those hubs, out of those regions and protect what we have here.
In terms of your second question I want to introduce a new personality.
<UNK> <UNK> is our Vice President of Revenue Management.
<UNK> has been with the Company a long time, 15 years, <UNK>.
Yes.
<UNK> has worked in our corporate real estate group.
He's spent a long time at financial planning and analysis.
He did a terrific job in labor relations.
He is the one that helped us get many of these deals that we have today and now he's running revenue management.
So <UNK> will ---+ there is your introduction.
Thanks, <UNK>.
Good morning everybody.
Hey, I would add just a little bit to what <UNK> said.
We are keenly focused on making sure we retain the loyalty of the customers in our work.
And so we're very strategic about what competitors are doing, what fares they're offering and you'll find that we're competitive across the board.
We're not interested in yielding our base of strength.
I think in terms of outside of Seattle I incurred some of the core parts of our network, we actually have been doing a little bit better in terms of focusing on getting originating passengers off of the core network.
One place that we've done a good job over the last 12 months is Salt Lake City where we sort of started struggling a little bit out of the gate in terms of load factor.
We put a lot of energy into it as a commercial team and we've seen those load factors come up nearly to our system average.
So we will do more that as the network gets broader and more complex but I think we're doing a great job and most of that is to the credit of my team down in RM.
Good morning, <UNK>.
It's <UNK>.
Maybe I'll start with that.
It's actually a good question and it's one that we're thinking a lot about right now.
Back a decade or so ago when we set out a goal of having a 10% margin it was viewed as sort of aspirational in nature certainly by others in the industry.
And we worked hard to get there and our 10% margin was directly connected to an ROIC goal.
What I will say is the industry is much different now than it was then, structurally revenue environment competition in Seattle.
And so it's really fair to say that 10% or $0.10 on the dollar as we talk about internally is probably not a relevant place to be over the long-term.
On the other hand we're at a 29% margin for the quarter, 23% on a rolling 12 basis among the top three in the industry, typically behind Spirit and Allegiant and congratulations to those guys, they are doing very well.
But that's probably not sustainable either both because as you say fuel will recover but I think just in the context of where airlines as a mature industry that's healthy are going to be it's probably going to look more like industrials broadly than as a real outlier like it is today.
So it's a really good question.
It's one I don't have a great answer for but I suppose what I've done is maybe set out the goalposts on each side and the right answer is probably somewhere in between.
I might sort of jump onto that as well.
It is something we're spending time on right now just to make sure we understand where our profitability comes from so that we can sustain it.
I think a lot of our margin performance comes from our low cost structure, just simply said.
Our costs as <UNK> said they've been down 13 of the last 14 years.
We did restructure this Company outside of bankruptcy.
We sit here today with a low cost position.
And <UNK> you know the exact numbers, I don't, but I think we're something like 20% lower CASM ex-fuel than the mainline airlines and we're just a little bit higher than the LCCs.
So part of that low cost structure gives us margin.
Part of that low cost structure gives us the ability to offer our low fares.
I think a second big thing that leads to our margin performance is customer preference.
Our customers do like to fly with Alaska Air Group.
They like to fly with Alaska, with Horizon and some of that is the fare but a lot of it is the service.
So I think those two things.
And then you might say okay you've got a low cost structure, where does that come from.
And there's lots of answers to that.
But I guess I just want to simply say that I think the low cost structure is a very, very important part of our margin advantage.
It's <UNK>.
Yes, I think we're down about 2.8% and I think what you're seeing right now is sort of a transition period.
As you know we've gone out with three bags on the first bag fee but we've also seen massive increases in our loyalty membership credit card holdings.
So our goal and we continue to be focused on getting to be more industry average on our ancillary revenues as far as the big network carriers go.
And as you've heard from <UNK> a little bit his team is also very focused on our first-class cabin and continuing to as we invest in the product there continue to achieve the premium and the first-class load factors that we also need, even if it fell up at the gate and the preferred seating we've launched this year.
All of these things together we think are going to continue to work well but we just need a little bit more time after the first three bag adjustment.
<UNK>, it's <UNK>.
It's hard to predict the future but what I will tell you as I look at our COO here that the room at the inn is getting very tight.
If you take our morning banks between 8 and 10 a.
m.
and our evening banks between 2,000, 2,200 these things are full, completely full.
And we're already having to move our network around because we have a sizable network to accommodate.
So while I don't know what the future holds, what I do know is that I think we're going to see it slow and in my prepared remarks the size of the new markets that competitors are coming into are getting smaller and smaller and smaller.
So we've learned to adjust in this environment and so I don't have huge concerns that we will be continuing to be able to adjust as we move forward.
<UNK>, <UNK>.
Maybe I will add ---+ <UNK> here, maybe I will add one other thought on that.
We've tried to build our business to withstand competition.
We've seen it over the last three years to be sure but our mindset is that there's always going to be competition in our markets.
This is an extremely competitive industry but for the reason that we just talked about with <UNK> I think this Company has been successful and will continue to be successful because of the great service that we provide, the excellent operation that we run and our low cost structure.
So I think we'll be fine.
Any debt paydown that we've done has been just paying off normal maturities.
We've got an awesome balance sheet right now.
And we don't have any specific initiative to pay down more debt because we're already in a very substantial net cash position.
I think what I'm saying is the strong free cash flow that we're generating is for the most part going to get deployed back to our shareholders just like it has been over the last nine months or so.
Good morning, <UNK>, it's <UNK>.
You know I'd say a couple of things.
We're focused on really two aspects: our partners and ourselves.
And I think if you look at the dynamics and we will share with you at Investor Day much more visibility on where we are today with all of our alliance partners and the traffic, so look forward to that.
We're finding that we're basically American is as I shared in my comments up 10% but we're also finding a lot of traffic coming back onto our network.
And so really the way we look at it is growing the overall traffic.
And so we're using our own network and our own expanded network as well as American and their expanded network to net-net be better off.
And that's how we're looking today and that's where we want to keep moving forward.
I think a couple of things and honestly, maybe we can follow up, I don't have a scientific split for you right in front of me on that whole question as it relates to the flow and the local.
But the way I look at it is especially on the domestic side for our network good, solid, local demand where we have capacity that's coming in that's maybe incremental and that's where <UNK> and his team can use our expanded regional network to bring traffic in from our Montanas, Washingtons, Oregons and Alaska to help fill those additional seats.
I think what's really exciting on the international front to your point is Seattle relative to New York, Los Angeles, San Francisco demand is way, way smaller.
And so the feed is imperative for these international carriers and partners of ours.
And so what we're seeing number one is our own members with our partners choosing to fly on our international partners and then we're using our network including all of our new markets to help bring traffic to the West Coast through their international network and beyond.
So overall all these pieces have been working well for us and we have a lot of refining to do.
We have more things to do but we are feeling very good about that.
Yes I mean we have Interline with United.
Maybe what you're referring to is there have been changes in our lounge agreements and we won't be partnering with Delta in our lounges anymore but we have a new agreement globally with American and so we've got about five club rooms where we're using United to help supplement our lounge system.
So that's really what you're seeing.
<UNK>, good morning, it's <UNK>.
Yes, I think obviously Portland is extremely important to us, so well over 120-plus flights a day.
And what we've seen with the strength of our cost performance and our lower cost performance and our rule of thumb is Portland is always half the demand of Seattle, we're seeing opportunity with our cost structure and new aircraft especially the 175 to grow Portland.
So you see in the first quarter we got Portland-Minne, we've got Portland-Kansas City, Portland-Omaha, so I think you'll see us continue to grow Portland as we move forward.
Yes, I believe so.
<UNK>, that's a hard question so I'm going to ask <UNK> to answer it.
<UNK>, most airlines today we struggle with carry-on bags.
And the problem with airplanes today on 737-800 with 150 people we have maybe 120, 130 carry-on bags, there is at least 10 to 20 on every flight that don't fit.
So we have a process to try and manage carry-on bags on every flight they get lined up in the jetway, they get taken downstairs.
These are legal carry-on bags.
These are not bags that people would normally check.
So what we've done, what the bigger bins will actually do is actually speed up the boarding process, have people bring their bags in instead of us having to create a process where after we check in 110 or on 110 people we start tagging bags and putting on the jetway for our rampers to come pick them up.
So operation-wise this is going to be a massive, massive help and help for our operation.
And just on that, I mean you know <UNK> is talking about already regulation carry on board bags.
So these were coming on anyway, it's just that he's not having to take them downstairs.
And one thing that I think we've shared this in the past but we're very aware of obviously what the bag fees generate for our business but that's not something that bags fees, the different views on those.
We are investing in additional or ancillary products that our customers want to pay for, really enjoy, so our Preferred Seating is an example, our buy on board products and other things as we invest in our business.
Those are the things that we are looking to increase the revenue per ship versus bag fee revenue.
Off the top of my head I don't know.
I'm pretty sure, well we've been growing it double digit per quarter or many quarters, first and second quarter were double-digit growth and in previous years.
Actual 13% off the top of my head.
But it's certainly within a point or two of what we've done many, many times over the past few years.
That's just off the top of my head.
And <UNK>, <UNK> pulled some data for us just in the last couple of days.
We have, so 13% is the high-water mark.
We plan to grow 8% next year for the year and we've actually grown 7.2% ASMs I think is what you told us <UNK> for the last five years.
We've grown 7% on average for the last 20 years.
So next year's growth is on an annual basis is right in line with a little bit high given what's happening in Seattle but basically in line with what we have been doing.
I mean it is what it is, it's a little high in the fourth quarter and the first quarter but there is no difference in our thinking about next year as compared to other years.
I think what you're really seeing is us continuing to accelerate new markets as we see new revenue opportunities.
And they are performing and we will continue to do this as long as they perform.
Those are the main reasons.
Also next year we have a lot of gauge going on and even this year I think we updated our forecast to about 10%, we're going to be about 10.6%.
That's basically flying half or more airplane than we had shared with you.
So you're going to continue to find us waver around a little bit but we will make sure that we adjust capacity one way or the other given the economic environment if we see a change.
Further to your point, <UNK>, <UNK>, if you go back and look at 2009 I think what you would see is Alaska quickly, quickly responding to a downturn in demand.
So this is working now as <UNK> says but if things change we will change.
I think high-level the color I would give you is that <UNK>'s team has done a fantastic job where we've incursions in the first year.
As they move into the second year our performance has actually improved and I think what you're also seeing is some of the downward pressure, especially on like Alaska long-haul being offset with good strong revenue performance in other areas of our system.
So I probably didn't do a great job answering your question.
But overall where we see pressure on unit revenues we have offsetting benefits on our unit revenues from a network perspective.
I think overall on a complete partner basis I think traffic is about 15% for the third quarter.
And I think what you're going to find, <UNK>, is that we will lose in some and gain in others.
Net-net the solid, the goal, though, is to increase the yield and really working with American and our other partners with premium product corporate customers and accounts.
So we are we're very, very optimistic about turning that on in a powerful way.
But as for specifics I will share what we can at Investor Day and I think you'll learn more there.
Yes, I would say really broad scope here is anything we've lost we've replaced.
And that's the big picture.
Yes, it's actually a touch over 15 right now, <UNK>.
And that is my sense is that maybe is a little higher than we been the last few years.
Maybe I will start and then <UNK> can jump in here.
What I would say is that to the extent that 400s are exiting the fleet that's a benefit to maintenance CASM.
But we are getting to a point where some of those initial NGs are getting to their first big overhaul and that's something that we're thinking about as we move into 2016 and certainly into 2017.
<UNK>, you want to talk about that.
Yes, so we have of course we have our Classics and they will be going away but our NGs are reaching 13- to 15-years old.
We've got brand-new ones and ones that are 15-years old.
So we manage those NGs with costs, larger heavy maintenance costs and getting into the first major overhaul on engines.
So you will see an uptick in maintenance cost on our older NGs but with the younger airplanes, the NGs when they are new have just a terrific cost profile for the first 10 or so years.
I'm going to let <UNK> handle that one as he looks after our corporate accounts.
Hey, this is <UNK> <UNK>.
I've got external relations and sales as part of that team.
In fact we have a more intense effort going around corporate accounts in Seattle but throughout our system right now than probably ever before and the team is really doing great.
We are doing more and more joint sales activities with American and we think that's a big opportunity for us going forward.
And then you've heard us talk about our partnerships with the foreign flag carriers, the international carriers particularly here in Seattle and promoting those to corporate accounts here in Seattle is another big opportunity.
There's a lot of interest in folks that fly us domestically that can then use those other international carriers out of Seattle to get anywhere in the globe.
We've still got 8% in the sites here and as I said earlier it's really mid-con and transcon are big primary drivers in the first part.
And then as it relates to the landscape and the economy we will continue to look out and make adjustments as necessary.
But nothing materially changed since we last spoke.
This is <UNK>.
I will touch on the state of Alaska piece and <UNK> can pick up anything else.
The state of Alaska, the falling oil prices there are having a big impact on the state government but overall consumer demand is strong.
Their permanent fund dividend check they get each year, all the state residents get was one of the highest ever.
The tourism numbers up to the state of Alaska this summer were quite strong.
So I think that market is steady and I think will be for the foreseeable future.
And <UNK>, isn't it correct that the state has big budget reserves that they will use to smooth out variations according to it.
They do.
And then just on the demand side, the only thing that's keeping me up most at night is just managing competitive capacity coming in on our markets and using the full breadth and depth of our network and our partners to compensate from that.
All other things being equal demand is very good.
Thanks, <UNK>.
So I think that sort of takes us to the end of our hour.
Thanks everybody for dialing in.
And we look forward to seeing many of you in New York City on December 3 for our Investor Day.
Thank you.
