Alaska Air Group, Inc. · NYSE:ALK
Alaska Air — Investor Presentation (July 2013)
31 slides from Alaska Air's investor presentation, Jul 11, 2013
Slide 1: Capital Allocation and Business Update
1 Capital Allocation and Business Update July 11, 2013 This presentation and the discussion today will include forward-looking statements regarding the performance of Alaska Air Group or its subsidiaries. Actual results may differ materially from these projections. Please see our most recent Annual
Slide 2: Agenda
2 Agenda 1. Capital Allocation 2. Hedging Update 3. Revenue Opportunities 4. Capacity 5. Other
Slide 3: Today's Announcement: ALK declares dividend
3 Today’s Announcement: ALK declares dividend Company intends to return approximately $325m to shareholders in 2013-2014. By executing the “2010 Plan” and “Five Focus Areas,” Air Group’s business is now stronger. Award-winning customer service Operational excellence Great employees aligned wi
Slide 4: Dividend signals our confidence in the future
4 Dividend signals our confidence in the future. Quarterly dividend will be initiated at 20 cents per share. More than $55m on an annual basis with a yield of 1.4% at $57.54* per share. Record date of August 6th and payment date of August 22nd. Existing share repurchase authorization of $250 mi
Slide 5: Business transformation has resulted in consistent ROIC in excess of WACC
5 10.7% 11.7% 13.0% 13.4% 6.0% 0.0% 3.0% 6.0% 9.0% 12.0% 2009 2010 2011 2012 LTM 3-31-2013 ($ in millions) * Adjusted for hedge mark-to-market and unusual items. WACC estimated at 7% - 8% Business transformation has resulted in consistent ROIC in excess of WACC and strong cash flows. $293 $553 $696
Slide 6: And our ROIC is among the top in the industry
6 Source: Company financial releases * ROIC = ((EBIT+ lease interest) – taxed at 40%)/(average long-term debt + book equity + cap. operating leases) 2012 ROIC* 13.5% 13.0% 11.5% 10.1% 7.9% 6.1% 5.2% 5.0% 5.0% And our ROIC is among the top in the industry.
Slide 7: Since 2009, we've used a balanced approach to capital allocation
7 $1,600m $1,400m $550m Invested in the fleet and technology Reduced leverage and risk Managed pension obligation Returned capital to shareholders $230m Since 2009, we’ve used a balanced approach to capital allocation.
Slide 8: Shift to larger airplanes improves per-seat operating costs
8 *Data Source: 2012 DOT Form 41 and 298C -- domestic and international travel combined 2012 DOT Statistics Shift to larger airplanes improves per-seat operating costs. Aircraft investments have resulted in modern, fuel- efficient single-type fleets at Alaska and Horizon. 22.8 16.8 15 13.3 12.4 11.3
Slide 9: Future capital spending expected to result in continued free cash flow generation
9 $438 $185 $387 $518 $508 $500 $462 $424 $465 $- $100 $200 $300 $400 $500 $600 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Tot al C api tal Ex pen dit ure s Capital Expenditures Necessary to Maintain Stable Fleet Count Current Firm Aircraft Non-Aircraft Future capital spending expected to res
Slide 10: We have reduced net debt by $1.4 billion
10 $- $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000 2008 2009 2010 2011 2012 Q1 2013 We have reduced net debt by $1.4 billion. $105 $63 $- $20 $40 $60 $80 $100 $120 2008 LTM 3-31-2013 Net Debt Including Capitalized Operating Leases Interest Expense ($ in millions) Net debt includes capitalized o
Slide 11: Adjusted Debt-to-Capitalization
11 Adjusted Debt-to-Capitalization As of March 31, 2013 26% 39% 53% 55% 61% 81% 90% 99% 47% 43% 34% 0% 20% 40% 60% 80% 100% Leverage is consistent with other high quality industrial companies and lower than almost all airlines. 2008
Slide 12: Our ability to meet our debt obligations is among industry's best
12 Other sources of liquidity $200 million available on lines of credit 35 unencumbered Boeing 737-800/900ER aircraft Net Debt* to LTM EBITDAR As of March 31, 2013 Our ability to meet our debt obligations is among industry’s best. 0.5 1.2 1.9 2.3 3.2 3.5 3.9 3.9 -1.4 * Net debt includes capitali
Slide 13: Our pensions are well funded
13 59% 90+% 0% 20% 40% 60% 80% 100% 12/31/2008 6/30/2013 Fu nd ed St at us (% ) $560m voluntary contributions to plans from 2009 through Q1 2013. No required contributions expected going forward. All plans are closed to new entrants. A 25 bps increase in the discount rate would result in a 1
Slide 14: Pensions can be fully funded without additional cash contributions
14 Pensions can be fully funded without additional cash contributions. Alaska Airlines' Pension Liability $(200) $(100) $- $100 $200 $300 $400 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 (M illi on s) 3.95% Projection 4.85%* Discount Rate * Projected discount rate 4.85% as of J
Slide 15: Air Group plans to return approximately $325m to shareholders in 2013-2014
15 Air Group plans to return approximately $325m to shareholders in 2013-2014. Share Repurchase Dividend Annual Return of Capital ($ in millions) *Based on quarterly dividend per share: $0.20 Subject to Board approval.
Slide 16: Investments such as seat project will improve revenues and reduce costs
16 Investments such as seat project will improve revenues and reduce costs. Retrofit B737-800s and B737-900s with space enhancing Recaro seats. * Revenue and cost data are estimates. 800/900 Aircraft 73 Average Seats Added per Aircraft 6.5 Total Seats 474 Average Trips per Day 3.1 Total Additional S
Slide 17: Hedging: We are shortening the hedge tenor to 18-months
17 Hedging: We are shortening the hedge tenor to 18-months to further reduce premium costs. Est. $4 $3 $9 $5 $0 $2 $4 $6 $8 $10 A ve ra ge P re m iu m $ /b b l (round ed ) Move to 10% OTM Strike Implement 10-20% OTM Strike Grid Shorten Tenor to 18 months 3 year tenor, “At the Money” Strike Historica
Slide 18: ALK's hedge tenor is now more consistent with the industry
18 6 9 12 12 15 18 18 18 60 36 0 12 24 36 48 60 ALK’s hedge tenor is now more consistent with the industry – yet simple, low risk approach remains. (m o n ths ) None None Pre-6/30 Post-6/30 Hedge Program Maximum Tenor We are layering crude oil positions 18- months in advance and achieving our 50% he
Slide 19: Annual cash spent on hedge premiums expected to decline further
19 $41 $67 $56 $40 $- $25 $50 $75 $100 2009 2010 2011 2012 2013 2014 2015 2016 With this change, our annual cash spent on hedge premiums expected to decline further. Est. New run rate ~$15m/year Est. Est. Est. Annual Cash Premium Spend ($ in millions)
Slide 20: Modified Affinity Card agreement expected to produce strong incremental cash flow
20 Modified Affinity Card agreement expected to produce strong incremental cash flow. Agreement improves rate per mile received from the bank and includes other enhancements. In total, the new agreement is expected to generate an additional $55m of cash flow annually at today’s card and spend vo
Slide 21: Bag and Change Fees: significant incremental revenue opportunity
21 1st 2nd 3rd 4+ Oversize / Weight 1st 2nd Oversize / Weight Old Reservations Bag Fees Change Fees > 60 Days 0-59 Days $75 $100 $75 $75 Free $125 New Online $20 $20 $20 $50 $50-75 3+ $25 $25 Bag and Change Fees: We are increasing bag and change fees resulting in a significant incremental revenue op
Slide 22: Capacity: Air Group load factors have increased
22 76% 77% 79% 82% 84% 86% 80% 80% 81% 82% 83% 82% 2007 2008 2009 2010 2011 2012 Full Year Load Factor Trend Capacity: Air Group load factors have increased as a result of strategic capacity allocation. Air Group achieved load factor growth of 10 pts despite 14% ASM growth. US Airline Industry (
Slide 23: Capacity: Summer 2013 adjustments
23 Capacity: For Summer 2013, we continued to adjust capacity while balancing short & long-term goals. 12 (4 pts) (54) (2%) Hawaii Alaska Kona – Oakland Anchorage - Fairbanks Kona – San Jose Fairbanks – Seattle Lihue – Oakland Lihue – San Jose Maui- Sacramento Weekly Frequencies Change Percent Syste
Slide 24: Capacity: winter 2013/2014 day of week scheduling
24 88% 86% 87% 89% 90% 93% 90% Mon Tue Wed Thu Fri Sat Sun 89% 86% 88% 90% 90% 86% 90% Mon Tue Wed Thu Fri Sat Sun Capacity: For winter 2013/2014, capacity will be refined in Hawaii and Transcon markets by utilizing day of week scheduling. Hawaii Load Factor by Day of Week Transcon Load Factor by Da
Slide 25: Capacity: Competition concentrated in peak summer months
25 Capacity: Competition in Air Group markets is heavily concentrated in peak summer months. Most capacity is in Alaska long haul network. Q1 Q2 Q3 Q4 YE (3%) 3% 10% 5% 4% 6 pts 2 pts -Impact of new long haul Alaska capacity Weighted Competitive Capacity 2013 vs. 2012 Majority of other airlines are
Slide 26: Capacity: New markets launched during 2012 and 2013
26 Capacity: We have launched/announced 35 new markets during 2012 and 2013. New market growth will slow in 2014 as we digest & mature new service. Region New Markets Region New Markets Transcon 6 So. Cal 8 Hawaii 6 PacNW 3 Midcon 4 Arizona / Nevada 3 Alaska Long-Haul 3 Midcon 2 Total 19 Total 16 Ne
Slide 27: Delta: International growth is positive for AAG
27 Delta: International growth is positive for AAG and we continue to leverage our strong relationship. Delta Growing SEA International Capacity by 41% - Summer 2013. Delta connecting traffic is up 22% in Seattle for the trailing 12 months. 7 of AAG’s core cities represent 90% of all western US
Slide 28: Pilots ratified a long-term contract
28 We are pleased to announce that our pilots ratified a long-term contract. Alaska pilots ratified a 5-year contract on July 10, 2013 with an effective date of April 1, 2013. Continues a trend of long-term deals with our labor groups. Date of signing increase of 10%-11%, with downline increas
Slide 29: Working on our SeaTac hub; Port of Seattle lease update
29 We are working on our Seatac hub to make it one of the most operationally efficient hubs in the US. The Port of Seattle is an active partner in that effort and we continue to work closely with them. Update on lease negotiations: We are working on a mutually beneficial lease agreement with the P
Slide 30: In summary
30 In summary… Our strong cash flows have allowed us de-lever the business, fund pensions, and actively repurchase stock. We're working on changes that will make our business stronger in the future: Q400s in Alaska Additional seats to generate additional revenue and lower unit costs Extens
Slide 31: Capital Allocation and Business Update
31 Capital Allocation and Business Update July 11, 2013 This presentation and the discussion today will include forward-looking statements regarding the performance of Alaska Air Group or its subsidiaries. Actual results may differ materially from these projections. Please see our most recent Annual