Good morning. My name is Lupita,and I will be your conference operator today. At this time, I would like towelcome everyone to the Alaska Air Group fourth quarter 2007 Earnings Call. Alllines have been placed on mute to prevent any background noise. After thespeakers’ remarks, there will be a question and answer session. (OperatorInstructions) Now, I will turn the call over toMs. Shannon Alberts, managing director, Investor Relations. Please go ahead,ma’am.

Thanks you Lupita. Helloeveryone, and thank you for joining us today for Alaska Air Group’s fourthquarter and full year 2007 conference call. Alaska Air Group chairman and CEOBill Ayers, CFO Brad Tilden, and Horizon Air CEO Jeff Pinneo, will provide anoverview of the quarter, after which we’ll be happy to take questions fromanalysts, and then from journalists. Other members of the senior managementteam are also present to help answer your questions. Today’s call will includeforward-looking statements that may differ materially from actually results. Additionalinformation on risk factors that could affect our business can be found in ourperiodic SEC filings. Our presentation includes some non-GAAP financialmeasures, and we’ve provided a reconciliation between the most directlycomparable GAAP and non-GAAP measures in our earnings release, which can befound on our website, at alaskaair.com. As we reported earlier thismorning, in the fourth quarter 2007, Alaska Air Group earned GAAP net income of$7.4 million, or $0.19 per diluted share, versus a net loss of $11.6 million,or $0.29 per share last year. We should note that the 2006 GAAP resultsincluded a favorable adjustment to the restructuring reserve, and both quartersincluded mark-to-market fuel hedge adjustments. After adjusting for these items,Air Group reported a fourth quarter net loss of $17.9 million, or $0.46 pershare, which compares to a first column mean loss estimate of $0.32 per share,and to a 2006 loss of $0.08 per share. For the full year, again adjusting forthe unusual items in each year, Air Group’s net income was $92.3 million, or$2.28 per share, versus $137.7 million, or $3.45 per share in 2006. Our fourth quarter resultsincluded $3.75 million adjustments that resulted from our recent decision notto capitalize the investment we’ve made in Row 44, our technology partner withwhom we’re developing onboard broadband connectivity, given their early stagenature. As a result, it was not included in our most recent guidance. Theadjustment was $2.3 million after tax, or $0.06 per share. Please see pages9-10 of our earnings release for a reconciliation of our GAAP and our adjustedresults, as well as additional information about expected capacity changes,unit costs, fuel hedge positions, capital expenditures, and fleet count. Now I’ll turn the call over toBill Ayer.

Thanks Shannon,and good morning everyone. We’re continuing to make good overall progress onour transformation, but our adjusted results for the fourth quarter and fullyear fell short of our plan and lagged our 2006 performance. Now the primaryreason was the significant rise in the price of fuel, combined with ourinability to recoup the added cost through higher fares in the currentcompetitive and economic environment. And in addition, Horizon had a difficult2007, and our capacity purchase market performance did not meet ourexpectations. Jeff and his team, along with our planning group, are hard atwork to improve these results. We face several challenges in2008, including fuel costs, the economy and some new competition, but as westart a new year, I think it’s helpful to put these challenges in the contextof what we’ve already achieved. We have many things going for us. Two greatbrands, loyal customers, a strong balance sheet, a strategic plan thatrecognizes the needs of all of our stakeholders, progress towards simplifiedfleets at both carriers, and employees at Alaska Airlines and Horizon Air whoare the best in the business. As evidence that our plan isworking, for the four quarters ended September 30, Alaska Airlines had thesecond best pre-tax margin in the industry, and we expect to again make astrong showing for the full year 2007, once other carrier’s results are all in.These results reflect the fact that Alaska Airlines achieved mainline CASMex-fuel of $0.075, which is at the low end of the guidance range that we gaveyou last January. We’ve achieved meaningful CASM decreases in five of the lastsix years. These unit cost reductions are saving us $298 million per year,based on the ASMs that we flew in 2007. It’s hard to imagine that we’d be heretoday, had we not made these reductions. And I really want to thank our peoplewho have…

Thanks Bill, and good morningeveryone. Excluding the unusual items, Alaska Airlines reported an adjustedpre-tax loss for the quarter of $18.8 million, compared to a loss of $1.9million in 2006. For the full year, Alaskareported an adjusted pre-tax profit of $172.7 million, down from $200.5 millionin 2006. Our full year results equates to a mainline profit margin of 7% versus7.4% in 2006. Mainline passenger revenueincreased 7.4% this quarter, on a 4.6% increase in capacity, and a 2.7%increase in passenger RASM. The quarterly PRASM increase was driven by a 1.3%increase in yield, and a 1 point improvement in load factor. Regionally, we saw unit revenuestrength in Alaska, Canada,and in our trans-con markets, but continued softness in Mexico. Our2.7% unit revenue increase was lower than the industry’s 5.9% increase. As youknow, we’ve increased the amount of long haul flying that we’re doing, and infact, almost all our capacity increases for the quarter is represented by aboutsix new long haul flights, two trans-cons out of Portland, three new Hawaii flights,and increases in our Seattle-Cancun service. We calculate that these long haulflights depressed our system yield and RASM figures by about 2.5 points. If youadjust for this, our numbers would have been much closer to the industryaverage. We expect to see this effect through the next three quarters as weannualize flying recently added. Although we’ve seen some modestyield increases, I think everyone in the industry recognizes that domesticfares are not high enough to cover fuel at $90 per barrel. We recentlycalculated that a one-way fare for our average 1,100 mile market needs toincrease by $15 to cover the increase in raw fuel costs since May. Our revenuemanagement folks have been working diligently to realize fare increases, but todate, we’ve had mixed results. Our [advance book load] factorsare strong and have been bolstered by very solid…

Great, thanks Brad and good dayeverybody. Horizon Air reported an adjusted pre-tax loss for the quarter of$11.2 million, compared to a loss of $500,000 in fourth quarter of 2006. Forthe full year, we reported an adjusted pre-tax loss of $19.5 million comparedto a profit of $23.2 million in 2006. Contributing to the losses inboth the quarter and the full year were extraordinary costs associated with ourfleet simplification, record high fuel prices and a highly competitive fareenvironment in many of our brand markets. Adding to the burden was an increasein planned engine overhaul activity that added about $16 million in expenseover the prior year as well as the challenge of integrating several CRJ-700sback into our native network on their return from Frontier jet express service. While we knew going into the yearwe'd encountered many such headwinds, we're clearly not satisfied with theseresults and have a sense of urgency about making the changes needed to turn ourperformance around to achieve adequate levels of return. We believe the majorchanges we made in 2007 to our fleet, our fare structure and our business modelwere appropriate and necessary to lay the right groundwork for our futuresuccess. We remain focused on improving our cost performance and on furtherdeveloping markets to improve profitability. As we shifted capacity away fromthe low CASM, low RASM Frontier flying to higher RASM and CASM flying for Alaska and our ownbrand, we began to report changes in capacity, load factor, yield and RASM byline of business to provide more transparency. You’ll find information aboutour product mix changes in our lines of business section of the press release. Our total revenues for the fourthquarter were higher by 14.5% or about $23 million on 10.3% growth in systemcapacity. Approximately half of the revenue increase came from our brand flyingwhich with ASM growth of 30%…

Thanks Jeff. Air Group enteredthe quarter with $823 million in cash and short term investments, down about a$190 million from our balance at the end of 2006. We generated $482 million ofcash flow from operations during 2007 and had proceeds from new financings ofapproximately $280 million, both of which were offset by capital spending of$770 million and debt repayments of $130 million. Almost all of the capitalspending this year was related to advance deposits and delivery payments forthe 14 737-800s and 13 Q400s we took delivery of. We currently expect ourcapital expenditures to be $570 million in 2008 and the good news is that bythe end of this year, our $2 billion fleet transition will be complete and ourrequired capital spending will decrease materially. During the year we madecontributions to our defined benefit pension plans totaling $52 million,bringing our contributions since 9-11 to $368 million. On a PBO basis, which is the mostconservative measure, we are now funded at approximately 86%, up from 80% in2006 and 65% in 2002. On an ABO basis, we are approximately 97% funded. Through December 31 werepurchased 2.6 million shares of our stock for $63 million and throughyesterday we had repurchased 3.3 million shares or approximately $80 million.These repurchases were made at an average price of $24.06 per share. At this point I'll turn the callback to Shannon.

Thanks Brad. We're happy toaddress questions from analysts at this time.

[Operator Instructions] Yourfirst question comes from the line of Ray Neidl.

Good afternoon. Basically, Ithink you said that demand in most of your sectors still looks like it's prettystrong going into the first quarter. Mexico was weak. I'm just wonderingwhat your seeing as far as the competition looks on the west coast,particularly in the key Los Angelesmarket?

Yeah Ray, this is Brad, maybeI'll start and see if Gregg wants to chime in. I think the basic point you'remaking is the right point. Demand does look fairly good for us as we lookforward, I think, advances are up by three points in January and February and abit more than that in March. Regionally there's strength in Alaska,in our trans-con markets in Canada,in Vegas, in Phoenix and there is some weaknessin Mexicoas you point out. If we talk about competition,there are both increases and decreases. Out of SeattleI think everyone is aware that Virgin is going to start four Los Angeles flights this spring, three in April and one more in May,and three San Franciscoflights. And there are some other modest increases. Southwest has got a coupleof frequencies into San Jose and Sacramento and they've got new service into Denver. Those areyear-over-year comps. I think it's important to pointout there are a lot of decreases as well. Into LAX out of Seattle, United has got one less flight. Theyhave one less flight into San Francisco. In Denver,both United and Frontier are dropping a flight. Our competitors are dropping acouple of flights into Chicago.Vegas has a flight down, Dallashas a flight down, you get the picture. So there is an increase in capacityinto San Franciscoand LA. These are very, very important markets to the company that we are goingto defend. But I think, apart from that, I think the picture is notparticularly bad. Gregg, is there anything you can addto that?

No, I think it’s worthwhilerepeating the fact 25% of our capacity is to and from Californiaand the Pacific Northwest and so as Brad saidthese are important markets for us to defend and we’re going to do thataggressively. And yet we only have to look backat history and see the mistakes that were made at in Atlanta, perhaps a decade ago when oneairline didn’t do much to defend its turf when a second carrier entered. Andwe’re not going to allow history repeat itself here in Seattle.

OK, great. And regarding Horizon,it seems like it’s still being a heavy drag on the company even though you’remaking major adjustments. Is there any thought of doing something maybe moreradical? I know you don’t want to sell off because it’s part of the Alaska AirGroup. But have you ever thought of selling part of it off to say like a skywest to give it greater economics of scale and maybe give it a little betterchance of competing across the whole spectrum.

Yeah Ray. This is Bill. We reallyhaven’t. I mean our focus here is as you said, Horizon is an integral part.It’s a strategic part of Air Group and the relationship with Alaska is really important both from a flowtraffic perspective as well as these harmonization markets. And the focus is onmaking all that work. And that’s got 100% of our attention.

Okay.

And this is Jeff, Ray. I thinkit’s really important to point out that as strategic as the arrangement is,it’s incumbent on Horizon to be a competitive partner in the whole process heretoo. So all of the efforts that we cited and are supported by short termblocking and tackling work, continuous improvement on cost efficiencies, and thenthe structural stuff we talked about should aid that as well. A huge effort inmaintenance and engineering is going on this year as well, that’s partiallyrelated to simplification and lean. But all in all, that’s where our attentionis focused.

Great. And Brad did you give us afuel cost estimate by quarter?

You might ask Jay Schaefer tohandle that. I guess, maybe as we do that, are you looking for historically,Jay, or are you looking for the future, or Ray?

The future.

That’s a hard one.

I know.

You know, Ray, we have the same[ford] curve you have so I won’t give it to you by quarter. I’ll give you whatwe put in our forecast, which is $87 a barrel. That will be wrong. I just don’tknow whether it will be high or low. But, let me give you our fuel hedgepositions by quarter, and then maybe you can work from there. We’re 50% hedgedfor Q1 at almost $67, $66 a barrel; Q2, 50% hedged at $72 a barrel; Q3, 30%, excuse me, 33% hedged at $68 abarrel; and Q4, 34% hedged at $68 a barrel.

Ok. Thank you.

Ray, in terms of our crudeassumption for our plan for whatever it’s worth, we’ve assumed $95 a barrel inthe first quarter going down by $5 a barrel each quarter after that. So - 95,90, 85, 80 and that gets to the $87 figure Jay mentioned.

You next question comes from theline of Christopher Cuomo with Goldman Sachs

Hello everybody. I just wanted tohave a cost question here. First could you just remind us of your goal, your7.25 mainline CASM ex-fuel goal. What’s your timing around that and howconfident do you feel in sort of meeting that goal.

Yeah, Chris, maybe I’ll start.Maybe we can get Glen Johnson to chime in here, but, I guess, we look at thisas what is going to be required for this company to be successful and have ananswer to all of our competitors, and we’ve started, five or six years ago,when our costs were $.0873 and we put a goal out of $.0725 and nothing hashappened to change our belief that we need to get to $.0725. And in fact westill think that we probably need to get lower than that. So we just kind ofstart with that requirement and then, we didn’t file for bankruptcy. So theidea of defaulting on our pension plans or, you know we took charges to ourP&L. when we got out of the MD-80 fleet. It’s kind of the way we are doingfleet transitions, so the improvements that we’re getting come from procurementefforts or efficiency or better real estate utilization, that sort of thing. Somaybe directionally, the 725 is still a goal. As we said the goal for 2008 isflat and we can talk about why that is. We’re not giving a specific time framefor 725. But that’s, maybe that’s alittle bit of a big picture sense of where we need to go. Glenn, maybe you can chime in onsome of the things that, the opportunities we have in front of us to work on toget cost down.

Sure. I’d be happy to Brad. So, Iguess we look at this from kind of a couple different perspectives and on theCASM ex-fuel, and I’ll talk about fuel in a second, but, there’s really twomajor focuses; kind of our supply chain management efforts and then our leanmanufacturing principles. And just a reminder; We’ve been on this lean journeyfor a couple of years here where we really are trying to remove waste in anyform from; time, effort, dollars, material. And that’s a journey that we’vebeen on. We have now specialists in everydivision, really working on those projects. So some of the areas that we aregoing to be specifically focused on this year to be looking for leanefficiencies would be in our engine maintenance agreements; our power by thehour agreements; our ground service handling contracts; our real estatefootprint; our efficiency of real estate usage both from a square foot usage aswell as rates and with particular focus on our Seattle and Portland hubs, wherewe think we have particular opportunity; air frame overhaul efficiencies from acost perspective; our operational improvements that Bill mentioned in terms ofimproving our operations with a real focus on Seattle. We think we’ll bring costs in theareas of passenger remuneration and employee overtime. There are significantbenefits to be realized if we complete our single fleet transition both fromthe pilot efficiencies in training and reserves in the fuel line clearlybecause of the MDs being out and the more efficient 800s replacing those. Andthen we continued to leverage technology in terms of our “Airport of theFuture” that Bill mentioned, a 40% improvement in our throughput of customersat Seattle, andAlaskasir.com improvements as well.

And Chris, I might just add thatour initial plan back in late ‘06 had growth around 6%. We are now planning 3%growth for this year, and that puts some pressure on CASM obviously. And the other really big picturething that I think Brad said was that once we decided we weren’t going to dothis via bankruptcy, that by definition means it takes longer to get the costsdown and in some respects I think it’s harder. But hopefully we’re doing itmore with our people working together to find these savings and make processchanges and it’s longer than any of us would like, for sure, in terms ofrealizing the CASM reductions. But we’re on a steady path. We’ve got a verynice trend line and we intend to keep moving down that trend line on CASM.

Well I appreciate the detailedanswer. Then let me just throw one out on a popular topic of consolidation. Ifwe were to assume that Alaskais not directly involved in consolidation, just curious how you believe yourairline is positioned. What are the challenges? What are the opportunitiespresented to you, if the USairline industry were to consolidate?

Chris, Bill again. I thinkeverybody knows our position on consolidation which is for us we think our bestfuture is to remain independent. Wet think that’s best for all of ourstakeholders and particularly for the state of Alaska where we have a mission that isbeyond just economics there. It really is a community mission to provideservice, passenger and cargo service, to a lot of communities that otherwisewouldn’t have it. And we all feel like that’s pretty darn important andprobably wouldn’t be continued if we were bought by a big carrier. But we also understand that wehave to perform. Otherwise somebody else might make that decision about ourremaining independent. Having said that, the world may very well be changinghere and we need to follow what’s happening closely and keep track of events. So that’s, in terms ofpositioning for other people making changes, I think we feel pretty good aboutthat. I think that to the extent there are domestic, and industry wide, I thinkwe’re also of the belief, as most of you are, that some consolidation could behealthy for this industry to the extent that it results in less capacity. And that’s, capacity is sort ofthe root of all evil here, that too much capacity is a fundamental problem withthis industry and has been for a long time. So we’re in favor of some industrymovement. We just don’t think it’s right for us. And we do think we’re wellpositioned with our partnerships that we have, our alliances that we have withsome of the big carriers and the extent that they may be re-looking at theirnetworks both domestically and internationally. There might be someopportunities for us in that.

Thank you for your time.

Your next question comes from theline of Jamie Baker with JPMorgan Chase.

Hey, good morning. You know, BillI appreciate the 10% ROIC target. I’ve actually been trying to pin down many ofyour competitors as to what sort of returns they target and how they measurethat progress, but I haven’t had much luck in that regard. I’m not going tohold you to this number, but do you have a plan, and maybe it’s not the planthat’s in front of you, right now, but a plan that nonetheless gets yousomewhere close to this return, in an $85 soft, $85 oil soft economy typeenvironment?

It’s a good question and we’recertainly, I think the first thing to say is we’ve recognized the need tostrive for 10%, and so we’ve got a lot of pressure coming to work everyday tokeep working both the cost and revenue side of the equation. So I think that’s really important, I feelreally good about the fact that our team understands the importance of thatgoal. Then you get to the how do youexecute on that, how do you actually get there and what are the things you cando? And we don’t have all the answers right now. We’re certainly trying to work both sides ofthis, as hard as we can. We are frustrated with the yieldside and the prospect of a softening economy in ’08, yield improvements aregoing to be tough. And we’ve got tocontinue to work on that; we’ve got to understand the segmentation of ourmarket’s business and leisure traffic and bucket mix and all of that and howcan we get an extra dollar or two in various markets. At the same time we’ve got some newcompetitive incursions and we’re going to take those very seriously and tograce point it back, you don’t just pretend that somebody isn’t there when theyare, and we’re not going to let that happen. So, that all adds up to saying,’08, I think when we talk about ’08 we talk about let’s have good relative performanceto the industry. But certainly as you goout beyond ’08 we understand that we need to have not only good relativeperformance but good absolute performance and make progress against this 10%goal. We don’t know exactly how we’regoing to get there, but we’re intent on doing it and we’re going to find a way.

Okay, well I appreciate that, andas a follow-up to the earlier consolidation question, you know the deals thatare being popularly discussed today are of a magnitude that are of a magnitudethat are almost certain to result in at least in my opinion, BOJ mandateddivestitures. So I’m not asking youabout your participation in sort of a deal making perspective, you already answeredthat question thoroughly, but with a stronger balance sheet than most, shouldwe assume that you are both capable and interested in stepping up to the plateif sufficiently lucrative assets are put up for sale?

We’re going to stay awake here,and if there’s opportunities, like over our 75-year history there have beenopportunities, we’re going to look at those things and do things that are inthe best interest of our long-term, for all of our stakeholders.

I appreciate the clarity, thankyou very much.

Your next question comes from theline of Mike Linenberg with Merrill Lynch.

Good morning all. I guess two questions. Brad, when you were going through the forwardbook you indicated that advance bookings were running up, call it three points,but largely due to Hawaii. I’m curious if you were to strip out Hawaii what does thatnumber look like? And maybe as acorollary to that you did indicate that yields were running down 0.5% sopresumably the Hawaiian service, while it’s adding to bookings, it’s alsopressuring yields. So if you could just pull that piece out.

Sure, bookings, Mike, areokay. Hawaiibooks earlier than the rest of our market, so Hawaii is changing the nature of our bookingcurve. So I guess we wouldn’t right now,if we were up three, three and more than three for March, we wouldn’t currentlyforecast that we would end up that good. Hawaiibooks early. But if you look around, I think Ialready mentioned this, we see strength in the Alaskalong haul, we see strength in both Phoenixand Vegas, we see strength in the trans-cons, and candidly we don’t see bignegatives anywhere in terms of our markets, in terms of the bookings. On the yield side, I think you make a fairpoint; the yield on a 2,500-mile stage length flight is considerably lower thanour system average, so the long haul flights do put downward pressure onyields.

Okay, and then just my secondquestion, you spent some time highlighting a lot of the macro issues and it’scoming up on a lot of these calls. Youare growing at a decent clip in the first quarter, although it looks like a lotof this new long haul stuff kicking in; it wasn’t in place a year ago and so asyou move through the year your supply does come down. You did hit several times, I think Brad andBill, that you were going to look toward the fall maybe as an opportunity topare further. I just want to explore that alittle more, is the proper interpretation that basically the schedule for themost part is set in stone for the next 6-9 months and that’s largely a functionof the fact that you have a lot of airplanes coming in and it would be moredifficult for the sizeable amount of airplanes that are also going out, maybeto accelerate that. I mean, what sort offlexibility, such that if things really slowed, that, forget about the fall,you could address it within the next couple months. Call it a March-April timeframe.

One thing to keep in mind, Mike,is that we are more seasonal than most of the airlines out there, even in apretty lousy year, which I don’t think that we’re currently seeing for 2008,our company does very well in the summer months, so I’m not sure that we thinkit’s profitable to talk about a lot of capacity reductions for the summermonths, which are really our bread and butter months. So that’s one of the things that pushes us tothe fall. The other thing is that we do have the seven MD-80s that will flythrough the summer and that they currently are scheduled the be phased out ofour fleet, on a pro-rata basis, September, October, November, December. So, if you had wanted to make a capacityreduction, that’s an easy place to look, those seven, instead of doing a scaledown through the fall, to do them a little bit earlier. That’s maybe the main thing we’re thinkingabout at this point.

Okay, very good, thank you.

Your next question comes from theline of Frank Boroch with Bear Stearns.

Morning everyone. Bill, I know in the past you’ve talked about,you’ve given your outlook on profitability and factoring in some of the costguidance and new competitive incursions and changes, it looks as though ’08could be another down earnings year for Alaska,second in a row. What is your earlyread, how would you want to comment on that, and do you think that’sunreasonable to, that that could happen.

We don’t obviously give earningsguidance per se; we’ve given you pieces of the puzzle and some of the coloraround it. We’re just all focused everyday on doing what we can to run a great airline and optimize revenue and keepdownward pressure on cost, and I think that’s all the guidance we should giveyou right now.

Brad, in the CASM ex-fuelguidance, does that assume any changes to labor contracts?

We don’t, Frank, we don’tnormally get into details like that in terms of the CASM guidance that weprovide.

So we should assume it’s a steadystate, current contracts?

Bottom line is we don’t normallygive guidance in terms of assumptions like that, that underline the guidance.

Okay, a lot of the other airlinesdo talk about that. I think in thesecond quarter of ’08 you have a new policy change on the mileage expirationfor the frequent flier plan, do you expect that to have a RASM benefit in 2Q?

I’ll get Brandon Pedersen, our controllerto address that.

You know that, the expirationchange will take place in April, and at this point we expect that probably 3-4%of our miles could expire, there are some initiatives underway to make surethat we reach out to customers and try to re-engage them, so that maychange. If we do expire that number ofmiles, there would be a benefit that comes through in RASM, although that mightbe coupled with a change in our breakage assumptions. So we’re really not sure of the net effect,we’re kind of looking at that right now.

Okay, great, thanks.

Peter Jacobs with Ragen Mackenziehas the next question.

Thank you, good morninggentleman. Brad and Bill, when I thinkabout the fuel costs or the cost guidance ex-fuel for 2008, I guess I’m alittle surprised and a little disappointed that there won’t be continuedprogress made on that front. And thetake away from the last couple calls has been, at least in my interpretation,is that progress could probably still be made there in 2008, so perhaps if yougo through the three items that you talked about in terms of wages,maintenance, and contract and services and help me understand if there’s beenanything now that’s come to light as you’re looking at 2008 that maybe wasn’tthere mid-year 2007, that has put the breaks on progress on that front, please.

Sure, maybe I’ll start and thensee if Brandon or someone wants to jump in here and help Peter, but if we lookat wages, you saw a significant reduction this year in the invariable incentivepay that we would probably budget that at more of a targeted level as we lookforward. On the wage line itself thereisn’t major changes in terms of our assumptions, but many of our people do getstep increases and some of our benefit lines are having increases, so there’sincreases that aren’t really material to the wage and benefit line, butthey do match CASM up a little bit. Contract services, we are doing some,essentially all of our growth is outside of Seattle where we don’t handle ourselves, sothat’s pushing the contract services line up a little bit. Maintenance, the 737-400s are entering, Ithink our folks in maintenance have done a terrific job managing those costsdown over the last several years and we’re much more competitive today than wewere a few years ago. But we are looking at a year nextyear where there is kind of an unusually high level of overhaul work with our737-400 fleet, and also engine overhaul work with our older 737 next-gens, andthen finally depreciation, I mentioned that it’s up 14%, that’s $20 million, oralmost 10 basis points of CASM. So thoseare the increases. I think that the bigthing is we look at it and say “Well, why isn’t that going down?” it’s probablynot those increases; it’s just the lack of other decreases that are fundingit. So Glenn got to some of that stuffthat we’re going to be looking at. We’ll be looking at theprocurement, at the supply chain, what can we do with engine agreements, whatcan we do with airport costs. Andanother big thing to talk about is a primary focus for our company in 2008 ison improving our operating numbers, so improving our completion rate, improvingour baggage rate, improving our on-time arrival rate. And so we are making investments across theboard in that and I guess our view isthat it’s short-term investment and long-term payoffs. So, I think all of us can see the payoff ofthose improvements down the road, but we’re not budgeting them in 2008.

Okay, two other quickquestions. First, raw fuel prices thatyou’re seeing at the airport now?

This is Jay. So, if we assume sort of $87-90 a barrelthat, with hedging, would put us at about $2.53-2.55 a gallon.

Do you have a raw number Jay?

Yes, 2.72.

Okay, 2.72, thank you. And then for Jeff, when I look at the higherfuel consumption per ASM at Horizon, which you did speak about in your preparedpresentation, is that a good rate to think about going forward now?

Well, we’re going to continue tohave some year over year shifts and mix as we get to the point where theFrontier experience is completely behind us, Peter, so by the end of the yearwe’ll be there. But the difference is ofcourse is we purchase and consume the fuel on our books for brand and CPAversus what we do for Frontier. You’llsee you have to do the math on both rate and volume and the volume part of thatwill continue to peter out through the year.

But the fuel burn per ASM, areyou saying that could continue, then, to step up as we go through the year?

Fuel burn per mainlining attemptfor Horizon should continue to come down as we introduce more Q-400s in placeof the 200s. We’re looking at this lastyear at the 4% efficiency gain on fuel CASM and we expect that to continue goingforward.

I might have to take that offlinewith Shannon or you. I’m showing thatthe fuel consumption per ASM was up about 16% year over year and I’m justcurious on just how that would move forward for the entire operation.

Hey Peter, just to be clear onthat, we didn’t, when those airplanes were flying for Frontier we didn’t buythe fuel, we didn’t show the gallons and [the come back], the mix changes, sowe’re buying the fuel and showing the gallons for those airplanes. The ’08 plan, all the airplanes are flyingfor us, in ’07 they weren’t.

The question I was driving at isthe rate that we saw in the fourth quarter is that the appropriate rate to beusing in 2008 or could it continue to step up until the transition iscompletely done?

That’s the right answerPeter. We had Frontier flying goingthrough November 28th, so fourth quarter was affected by that.

Thank you. That’s all I have.

Your next question comes from theline of Dan Mckenzie with Credit Suisse.

Hi, good morning. I’m wonderingwhat your thoughts, maybe this is for Brad, I’m wondering what your thoughtsare about how much passengers would be willing to pay for onboard Internetservice and then related to that, what that could potentially mean for Alaska,and of course any timing.

Dan, this is Gregg Saretsky,maybe I’ll take that, since Row 44 is a project that my team is workingon. We’re going to test what [pray]sensitivity is to that type of a feature. We’re hoping for a first aircraft sometime in Q2 and we’re going to lookat a variety of different pricing models, ranging from a per use to a subscriptionsmodel, and we’ll how the numbers work best for us.

Okay, and then I guessseparately, it sounds like there are a number of potential changes here atHorizon. I’m wondering if you can provide some perspective with respect totiming for any decision about cutting RJs or outsourcing [flying], and thenrelated to that, whether labor input would be required for any change?

Dan, I think we probably want tostick largely to what we said in our prepared remarks there. What we basicallysaid is that we’re looking at that flying and we’re not satisfied with thereturns, we’re looking at the idea of moving, helping Horizon move to a singlefleet, and we’re going to do an analysis. And that analysis is going to takeall these things into consideration, alternatives, what they would look like,all the issues, the financial issues. And I think probably what we would say isthat you should expect to hear more from us about this. We’ll at least give youan update on next quarter’s conference call.

I see, okay. That’s it, thanksvery much.

Okay, we have time for one morequestion, and then Alaska’sManaging Director of Corporate Communications, Caroline Boren, will conduct themedia portion of the call.

Your next question comes from theline of Robert Toomey with E.K.Riley Investments.

Hi good morning, a number of myquestions of been answered. Just a follow-up to that last question, for Jeffreally, you spent some time talking about the initiatives that you’re taking atHorizon to improve your operations, and I know you can’t go into a great amountof detail, more than what you said earlier, but can you tell us your relativelevel of confidence of how much you think you’re going to accomplish in ’08. Imean, should ’08 be significantly better, or materially better operationallythan ’07?

You mean in terms of ouroperation costs, Rob?

In terms of your overallperformance, really bottom-line performance.

Yeah, I think the answer is yes,for a couple reasons. First of all, I cited the timing issues, the engineoverhaul activity that’s going to subside by about $20 million, the relatedbenefits of moving [inaudible] fleet, and stripping out inventory, gettingsimplicity on that front. That is going to drive it as well. As we move towarda two fleet type operation, we’re starting to get a better line of sight to theoverhead reduction benefits that accompany that, in terms of inventory andtraining programs, pilot bidding cycles, etc. So we’re confident that’s goingto materialize as well. In the look though, we’verecognized, particularly in maintenance and engineering, that we haverelatively high costs related to a complicated three fleet type supportoperations. We do an excellent job, our people are terrific, but spread across65 airplanes, three fleet types, it drives a lot of cost that we’ll take careof as we further simplify. So we have a lot of confidence on that front. Thechallenge on the [inaudible] basis, of course, is to produce on a declining ASMbase. We’re coming down 4% overall this year, even though there’s significantchanges on brand and CPA because of the returning Frontier aircraft. So ourbudget for this year has many, many stretch elements in it, to keep to even aflat CASM, because of that decline. Every division’s participating, they’re allstretching hard and working very hard, and I think most of my confidence liesaround the great work that’s happening, process wise, with a view to the futuretoward greater simplicity.

Great, and one other question.Other expense with 63 million in the quarter, that was higher than what I hadmodeled, and up quite a bit from the fourth quarter. Was there anything inthat, or can you explain what’s in that number, and is there anything that wasof a little more non-recurring type nature in that 63 million?

Yeah, Bob, this is Brandon. Let me getoriented her for just a second. So you’re looking at other expense on the Alaska side, I guess Ididn’t quite follow what you were asking.

I guess it’s consolidated, if youlook at the top, the consolidated number. I believe it shows 63, and that’s upquite a bit from last year, and quite a bit more than I was modeling. And upquite a bit from Q3. Just wondering if there was anything in there of anon-recurring nature, or why was it up so much.

You know, it really was ahodgepodge of things. It was…

Did I say income, I meantexpense. I meant other expense.

You know, I’m looking at thedetail, it really was a whole bunch of stuff. One of the inflationary pressuresthat we’ve been seeing all year is in the area of crew hotel costs. That was up15%, that’s been, as I said, something all year. We had a number of consultantsworking on various projects. Those expenses were up $2.5 million a year. We’ve seen some cost increases inproperty taxes, as we bring on new 800s, but offsetting that there’s been somenice declines in liability insurance and a couple of other things, so it reallyis a whole host of things. Some of them were one time in nature, some of themare ongoing.

Okay, and one last quick questionif I can. You mentioned that the competitive situation, in I think Los Angeleswas more difficult, can you kind of give us an update on what Delta has beendoing in the LA and Mexico market?

Bob, this is Gregg Saretsky, theyhave been actually pulling back, they’ve taken a number of their services outof LA from daily to a couple of times weekly, I’m thinking specifically in LaPaz, Loreto, and Manzanillo from Los Angeles. Their capacity has been shrinkingyear over year.

It’s been shrinking.

Yes

Okay, thank you.

All right, this is CarolineBoren, we now have time for questions from any journalists participating today.Lupita, would you please remind our callers of the procedure for askingquestions?

[Operator Instructions] Yourfirst question comes from the line of Elizabeth Gillespie with the AssociatedPress.

Hello, this is a question forBrad or Bill. Brad, you mentioned that a $15 fare increase would be needed tobasically cover your costs. I'm wondering if you can describe what kind ofresistance you're seeing from passengers. Can you quantify how much of a fareincrease prompted a drop-off in ticket purchases? I'm just wondering how youare trying to get to the point where you can start to recoup some of thosecosts.

Sure Liz. I might start, maybe wecan get Greg to chime in here as well. The first thing I would say is that thisis an industry issue, it's not just an Alaska Air Group issue, and $15 ispretty significant on a fare of roughly $140. That's pretty material, and itwill be difficult without either significant capacity reductions or a verystrong economy. In terms of what we are seeing,we’ve been working this really hard. In terms of some of the things we've donewe've been working the structural fares, we've been poking around trying to getfares that we think are - I mean, we want to keep the value proposition thecompany has but recapture the higher fuel. So, if you look we do have $20increases we've got through in the Seattle-Anchorage market. In Intra-Alaskawe've got through $5 or $10 increases. Some of the trans-con markets we've gotincreases in the $10 to $20 range. Other markets, where there's really intensecompetition we've had less success getting through increases. So, I guess we think that we havethe same problem that every other airline has that when fuel - our fuel bill'sgone from $300 million a few years ago to what will likely be over $1 billionnext year. So the fares have to go up but for that to happen, for the industryI think we either need a strong economy or fewer seats flying around. Gregg, doyou want to add to that?

Yeah, all I'd say is that we'reseeing demand staying pretty strong and what corporate accounts are telling usis that they expect their travel in 2008 to continue at levels equal to whatthey were doing in '07 but there is pressure on them to buy down, to shop inadvance and take in advantage of lower fares. And so getting an increase in amarketplace where our biggest corporate customers are telling us they're buyingdown our fare structure is what actually moves us in the wrong direction.

And one more question if I could.Mexicohas been such an important market for you. Can you describe why you think itwas soft this quarter and what changes you are making to improve performance inthe coming quarters?

Yeah, Mexico is soft only because we havea case of supply exceeding demand. Last year the bilateral between the United States and Mexico was liberalized and we hadnew competition entering every single market that was available under thatbilateral liberalization. Now what we're seeing is some ofthose new services that were added were not successful. Frontier is suspendingservice from Los Angeles to Los Cabos and Deltahas been pulling back off the west coast and Mexico as well. It remains to beseen what happens as a result of some of those bilaterals being vacated. Ithink there are other airlines that are queuing up to take advantage of that.So, the situation of excess capacity will likely endure for the foreseeablefuture.

Thanks.

Elizabeth, maybe just onto thatfare increase question, this notion of fares need to go up $15 to cover theincrease in the price of crude, that $15 assumes that it all has to made up onthe revenue side and one point that we would make, and I think ContinentalAirlines made this point as well, is that when we replace an MD-80 with a737-800, our fuel cost per passenger goes down by $15. Obviously we can't dothat for 115 airplanes, but in terms of where the company is positioned, it'snot like we have to make up all of these problems on the fare side. There areother things that we can do to help our profitability.

Your next question comes from theline of Susanna Ray with Bloomberg.

Hi Susanna.

Hi there, I know you guys havesaid all along that you prefer to stay independent but most CEOs have said theywere at least considering consolidation or studying partner possibilities, orlanguage like that. Are you guys in the mix anywhere? Or are you truly juststaying out of the fray and watching it all?

Yeah Susanna, Bill again. I'lljust reiterate what I said earlier, I think, which in our long held position onthis is that we think our best future is as an independent carrier and we thinkthere's a great viable position for us given the nature of our network andespecially the state of Alaskan markets. But also, the world is changing andwe've just got to stay up to speed on what's happening around us. But we thinkthat's our best path. The other thing is we've lookedat mergers in the past. Maybe it would be different in the future and we hopeit would for the industry's sake but the actual integration of two companies,two airlines is very, very difficult. It's difficult from a technicalstandpoint with systems. For example, systems that need to talk to each otherso the combined networks operate well for customers. It's also proven to bevery difficult from a labor relations standpoint and the integration of pilotsin particular in seniority lists. I think if you are staying abreast of what'sgoing on at US Air you see an example today of how difficult this is. And so, typically I think some ofthe planned synergies, the planned economic benefits of these mergers, in thepast anyway haven’t been realized because of the difficulty in actually gettingit done. So, we watched that and we say that's difficult but moreover we thinkwe have a good path remaining independent, but it does require that we continueto execute our plan and that's where our focus is.

Okay, and you kind of looked atbenefits that you would see if there was consolidation elsewhere in theindustry. Could you, maybe expand upon that? More so than just bringing downcapacity which obviously would help everyone.

Well, there are just so manydifferent combinations and possibilities, I really can't speculate but we arean opportunistic carrier, and when there are opportunities in the marketplacewe have a history of trying to take advantage of those, where it works for us,where it works for everybody involved, customers, employees, and shareholders.And so, we're going to just continue to watch and where there areopportunities, if there are any, either in markets or whatever, we'll beevaluating those things. It's not as though we haveblinders on here and we don't want to hear about what's going on around us. Weunderstand and we're part of the industry and we need to be aware of what'shappening and if that does produce opportunities for us then we'll be lookingat that.

Okay, and then just, lastly, adifferent topic. If you could justexplain for me in sort of a layman's summary, if you are using less fuel andgetting all these savings from the new planes and your hedging is second best inthe industry and fares are up and all of that, can you just briefly describewhy the adjusted loss widened by so much?

Susanna, the fuel increases are,I mean I just would reiterate, the fuel increases are huge this industry hassustained over the last four or five years. We've gone from fuel, if you goback a few years ago, fuel at $25 a barrel, for our company $300 million, toeconomic fuel that pushed $1 billion this year. So that's why we're talkingabout fare increases and that's why we're talking about the efficiency of our fleet,and all of that. I think we really do believe thatthis company is as well positioned as anyone to deal with this priceenvironment, but these increases are just very, very big. Jay, do you have somemore?

Well, I was just going to - forthe fourth quarter in particular and I think that's what you are asking about.For Q4 of 2006 on average a barrel of oil was $60. This is all raw. And in Q4of '07 it was $90 so that's $30 per barrel increase and for Alaska Air Groupthat was again, unhedged, an $81 million increase in expense. And so even withthe great hedge position and fuel efficient planes, it's very difficult tocompletely overcome that kind of a headwind.

That's in the quarter.

That's just for the quarter.

Okay.

Your next question comes from theline of John Crawley with Reuters.

Hi, Bill and everybody. Thepotential for divested assets was mentioned earlier and you said you'd stayawake on that one. But I don’t know if you can add any more perspective on whatkind of assets might make sense for you. What could you swallow withoutchanging your plans?

Yeah, we don't have anythingspecific there John. There's just somany possibilities. The basic point is that there may be opportunities, don'tknow what those would be at all but if anything makes sense for us, again andif it works for our customers and employees and our shareholders then we wouldbe interested. Whatever it is, well this is totally undefined in thisconversation. I don’t know what it is but we're just not saying no toeverything in this environment. We're saying we're going to be sensible andwe're going to look, if there are opportunities that would work for us longterm then we would be, of course, evaluating those things. Any company would.

Okay thank you.

[Operator instructions]

If there are no more questions wecan wrap up.

Why don't we do that? Thankseverybody for their participation and we will talk with you all next quarter.Take care.

This concludes today's conferencecall. You may now disconnect.