Good morning. My name is Sean, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Alaska Air Group First Quarter 2016 Earnings Conference Call. Today's call is being recorded and will be accessible for future playback at www.alaskaair.com. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for analysts and journalists. [Operator Instructions] Thank you. I'd now like to turn the call over to Alaska Air Group's Managing Director of Investor Relations, Lavanya Sareen. Please go ahead, sir.

Thanks, Sean. Good morning, everyone, and thank you for joining us for Alaska Air Group's first quarter 2016 earnings call. On the call today, our CEO, Bradley Tilden, will provide an overview of the business; our Chief Commercial Officer, Andrew Harrison, will share the revenue results for the quarter; followed by Brandon Pedersen, our CFO, who will discuss our financial results, capital allocation plans, and outlook for 2016. Several members of our senior management team are also on hand to help answer your questions. As a reminder, our comments today will include forward-looking statements regarding our future expectations, which may differ significantly from actual results. Information on risk factors that could affect our business can be found in our SEC filings. We will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. We've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release. In addition, today's call may be deemed a solicitation in respect of Alaska Air Group's contemplated acquisition of Virgin America. The information discussed today is qualified in its entirety by the proxy statement that Virgin America will be filing in the future. And that will be available on Virgin America's inventor relations page at ir.virginAmerica.com. All right. With that lengthy disclosure done, let's look at the results. This morning Alaska Air Group reported the first quarter GAAP net profit of $184 million. Excluding the small important of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported a record adjusted net income of $183 million. That's up 23%. Earnings per share grew by 29.5%, $1.45 per share. The higher growth rate in EPS is driven by over 7.3 million shares that we have repurchased during the last 12 months. Additional information about cost expectations, capacity plans, fuel hedging capital expenditures, and other items can be found in our investor update included in our form 8-K issued this morning and available on our website at alaskaair.com. And now, I'll turn the call over to Brad.

Thanks, Lavanya. And good morning, everyone. Before I jump into the results for this quarter, I want to talk for a minute about our proposed acquisition of Virgin America. Virgin America and Alaska share similar philosophies about building alignment with and taking care of our people and about putting customers first. Both of us run strong operations. We're both recognized for our terrific customer service. We both have a great onboard product, and we have two of the youngest and most fuel-efficient fleets in the industry. We're excited about bringing together two great airlines to create an airline that will have a national footprint and one that we believe will be the premier airline for people that live anywhere along the West Coast. The next steps in the process involve a vote by Virgin America shareholders sometime in the second quarter, and a review by the Department of Justice. We believe this combination strengthens our two airlines and enhances competition from the innovative and low-fare segment of the market. So, we are hoping for swift clearance to close which could be a 60 days or less. Even if the DOJ decides that the deal warrants a closer look, we hope to have clearance well before the end of the year. In the meantime, we remain focused on execution and integration planning. On that front, I want to share that Ben Minicucci, our Chief Operating Officer will be leading the charge on integration. He understands operations very well and while he drives hard for results, he cares a lot about people and that is the real key to success. We're all fully invested on this. But we're also very excited to see Ben do great things with this responsibility. We're working hard to lay out the groundwork for smooth integration and…

Thanks, Brad, and good morning, everyone. Our first quarter revenue performance was solid especially when compared to the industry. We grew revenues by $78 million or 6.1% while industry revenues declined 1%. We're able to achieve these revenue results in the face of 13% competitive [audio gap] (09:51). Our load factors remained high while growing our own capacity 12.9%. Despite expanding capacity over two times the industry, our RASM decline of 6.1% was within 50 basis points of the industry. A growth enabling us to continue to offer our customers more destinations, grow our revenues and most importantly grow a diverse and stable earnings stream. A strong business performance is a result of a number of key drivers. First, adding new markets is giving our customers more nonstop choices as well as providing greater options for connecting passengers. In the last 12 months, we've added 23 new markets to our network. In retail [indiscernible], we are putting new products on the shelf and they're selling. Second, we have new regional jets that enable us to provide customers with nonstop service to destinations previously could only access via one or two stops. Seven, about 23 markets launch in the past 12 months were only made viable due to the introduction of the Embraer 175. This aircraft delivers the trip costs and range to ensure longer, thin markets can be served profitably. We're excited about the possibilities of this aircraft and Brandon will share a little more about our delivery stream in just a minute. Third, our costs have come down approximately 1% for the 12-month period ending March 2016 while we expect industry costs have risen by about 3%. That's a net GAAP of 4 points in just one year. Our low costs are a sustainable advantage allowing us to offer…

Thanks, Andrew, and hey, everyone. As you've heard, Air Group's adjusted net profit improved by 23% and EPS grew by 29% to a $1.45 a share. Our trailing 12-month ROIC of 25.6% was 550 basis points higher than at the end of this point last year. On an adjusted pre-tax basis, we earned $290 million, a $50 million or 21% increase over prior year. Revenues grew by $78 million, fuel cost declined by $66 million, and those gains were offset by a $94 million increase in non-fuel cost. This is the seventh consecutive year of profitability in the seasonally weak first quarter, and profit has increased steadily for each of those seven years. Consolidated non-fuel unit costs were down 1.2%. Our leaders are doing a good job managing divisional cost to budget and hitting productivity metrics. For example, our broadest measure of productivity passengers per FTE is tracking at 1.8% better than planned on main line. Our flight ops group is spot on their hard time plan, and our maintenance division productivity is tracking slightly ahead of plan, just to name a few. Our people understand how high productivity is an important source of our cost advantage. For the second quarter, we forecast unit cost ex-fuel to be down 1%, and for the full year, we now expect ex-fuel cost to decline by 0.5%. There are three main drivers from the change from our initial full year guidance. First, we've changed our performance-based pay or PBP plan to increase the participation level for our supervisors and our managers. These are incredibly important roles, and our board wanted to have their PBP participation better reflect their level of responsibility. PBP has been and continues to be a very strong driver of engagement among our employees. Next, third party regional expense was…

[Operator Instructions] We'll pause for just a moment and compile the Q&A roster. And your first question comes from the line of Savi Syth with Raymond James. Your line is now open.

Hey. Good morning.

Hey, Savi.

Savi.

Based on the – hey. On the CapEx front, we are seeing this step-up in 2017 even without the options. And wondering if you could provide a little bit more color [indiscernible] the next couple of years on CapEx and the likelihood of those options. And then also maybe on the funding side, I know there's $2 billion related to the acquisition. Are you planning to raise any more debt beyond that? And with the E175, any chance of the sale leaseback or is that financing?

Hey, Savi. It's Brandon. Maybe I'll start with the first, then Mark can take the second. In terms of CapEx specifically for 2017, if you look at our old guidance on the firm, it was about $620 million. Our new guidance on firm is $925 million. That change is about $300 million. Nearly all of that is related to the E175 purchase. So, if you just look at those 30 firms, kind of the way it staggers out is $40 million in 2016, $280 million in 2017, and roughly $250 million in 2018 and 2019. So, the big increase in CapEx is simply related to the regional jet order that we placed.

Great. Savi, this is Mark. Good morning. On the financing side, we are going to raise the $2 billion as we talked about a couple of weeks ago. And that process is going very well. We're getting strong demand. We've got exceptional collateral and it's a rare opportunity really for a lot of these lenders to work with Alaska because as you know we haven't been borrowing over the last six or seven years. Going forward, we're going to manage leveraging that 40% to 50% range and borrow for some aircraft and pay cash for some aircraft.

Very helpful. Thank you. And just for the second question on the State of Alaska and I know there has been some concerns with the budgetary cuts there and the [indiscernible] oil and gas sector there that there might be some demand impact. Could you talk about what you're seeing there and how's that impacted demand?

Savi, this is Joe. If I screw this up, Andrew can correct me on the demand, but I don't we've seen anything really appreciable up or down with respect to demand in the State of Alaska. We're heading into the summer months and they are expecting a record summer for tourism. So, I think our numbers over the next few months are likely to be quite strong. But with respect to the oil-and-gas traffic, there's still a fair bit of exploration activity happening on the North Slope and I think things have been more or less steady.

Yeah. It's very helpful. Thank you.

Thanks, Savi.

Thank you.

And your next question comes from Rajeev Lalwani from Morgan Stanley. Your line is now open.

Hey, gentlemen. Thanks for the time. I wanted to ask about just competitive capacity, I guess, specifically from the ULCCs. They've added some in recent weeks and months, and I was just curious to see how that's been playing out. If there has been just a rational competition if you will or anything like that, that's the first question.

Hey, Rajeev, it's Andrew. From our perspective, the competitive capacity hasn't materially changed as it relates to the ULCCs that's both in Portland and Seattle about eight departures a day. And if you look at our competitive capacity numbers, which we've been dealing with double-digit numbers since the fourth quarter of 2014, over 70% of that is actually from the big network carriers. So, again, we remain vigilant as it relates to competition, but there's been no material changes for us since the last time we spoke.

Okay. But in terms of places where the ULCCs have added, the pricing activity hasn't sort of gotten out of control or hasn't been incredibly weak with new legacies matching the sorts of welfares or anything like that?

I mean, I'll take this Shane because we have seen some pricing activities that really more coming from the majors versus anything else.

Yes, Rajeev. Yes, in Vegas and LA, it's a little hard to say if [indiscernible] ULCCs because there's been a lot of capacity from others coming into those markets. There are full flights, the demand has been really strong. There are lower prices in the market, but we haven't had to use them at time, and so our goal is just to use as many of the discount prices as we have to and get back into our structure. And we do a good job of that and haven't been too concerned about what's going on in those two markets.

Great. I'll leave it there. Thanks, guys.

Thank you.

Thanks, Rajeev.

And your next question comes from Michael Linenberg of Deutsche Bank. Your line is now open.

Yes. Hey. Two questions here. It looks like that Horizon's margin performance had declined March quarter versus fourth quarter, and maybe I'm doing the numbers wrong, but it look like you had like a 9% operating margin last quarter, and it look like it actually went negative this quarter. Is that right or is there some sort of one-off in the numbers that's on this thing?

Michael, this is David Campbell. What you're seeing there is the restructuring cost from our commit to compete size window was about $7 million worth of cost from severance pay for the reduction in force, as well as a signing bonuses. That's the bulk of the shift that you've seen. Operationally, the revenue I think is still very solid there. We were down a little bit in terms of capacity for the first two months of the year. We actually pulled down two lines of flying just to make sure we have enough focus on taking care of our customers.

Okay. Great. Thanks, David. And then, my second question. This is to Mark. Mark, when you mentioned the $2 billion of financing and how there was a positive response to the market, you talked about, you mentioned exceptional collateral, is the $2 billion financing that's being used for the Virgin deal, is that all secured or you're going to look to do a mix of secured and unsecured? What's going on there?

Yeah, Mike. That's a great question, and I would say that it will be all secured. We are able to do unsecured. We just like the pricing frankly better on the secured borrowing. 737-800 and 737-900 that we have are very new. We've got over 70 of those really desirable aircraft. They're unencumbered, and it's just a great source of borrowing.

And my comment to that is I've asked that question to these guys several times, should we be doing some unsecured and the pricing does look attractive but it's just not good enough to take you there instead of to secure financing.

Yeah. And we will be an unsecured borrower at some point. Just for this transaction it made sense to use that collateral we have.

Okay. Great. Is that just all, is that aircraft assets or would you consider, I mean, I know you do have some slots at airports like Reagan National, and I'm sure you also probably have some hard assets maybe you could potentially pledge, or is it a 100% aircraft?

This will be 100% aircraft. We do have a lot of assets, but the aircraft is what will get us the lowest rate, frankly.

Okay. Great. Thank you.

Thanks, Mike.

Your next question from the line of Hunter Keay with Wolfe Research. Your line is open.

Hey. Good morning.

Hello there.

Hey. How you doing? So, okay. Hey, Andrew, as we look at your own growth slowing and your competitor capacity growth, I don't know, maybe slowing a little bit in the fourth quarter. Is there a scenario where Alaska actually starts outperforming the industry on RASM again in the second half or towards the end of the year in sort of an [indiscernible] environment and let me give you an out if you don't want to answer that way. Is there a scenario where maybe the improvement in the rate of change in PRASM actually moves faster than your capacity decelerates for whatever reason as we move through the year?

Thank you for testing my intellectual ability here, Hunter. What I can tell you is that when we look at this we do still believe that really the pricing environment is somewhat connected to the price of fuel today. As you know, we don't give guidance that far out. What I will tell you though, is that our load factors are based – they were flat in March. They were – they'll be flat in April and they'll be flat in May. So, we're seeing good solid demand as we come into the peak season for us.

Got it. All right. That's cool. And then, I only want to ask two questions, so I'm going to ask a sort of a loaded one. Ben, can you talk to me about your plan of attack on integration at a high level? Are you going to be using consultants and then just – can you have maybe some targets that maybe we're not going to see underneath the surface and as you ramp up the integration process, are you going to be more inclined to maybe slow the organic growth a little bit? And then also, a separate question for Brad. Can you talk to us about how the meetings went with DOJ?

We'll get Ben to answer the first one and I cannot talk to you because I wasn't in them, but we'll get Kyle Levine – we'll see if he's willing to say anything about the DoJ meetings.

Great.

Well, go ahead.

Good morning, Hunter. It's Ben. Yeah. I'm really excited so far at how we've begun this integration process. At this point, we've created the structure of which how we're going to attack the integration. We're starting to fill the structure with strong team members. I've been down to San Francisco a couple of times. I met with their folks. So, we've got a lot of strong momentum. I will tell you that we are focused on and we're going to be disciplined at achieving the revenue and cost synergies that we identified through our due diligence. And a little bit about us, a little bit about me. We're going to be extremely disciplined with metrics and score cards as we drive this thing through. But we're going to be also very sensitive to the cultural and the brand niches that we have to bring together as well. So, I'm extremely positive and optimistic we're going to do this well. And our goal is to do this hopefully in a way that people can look back and say this is one of the best integrations that's been executed in a long time.

Okay.

Hey, Hunter. This is Kyle. So, as you know, the regulatory review situation is just getting started. But what I'll say is so far so good. I'm not going to presume to say what the DoJ is going to – how they're going to view it or what timing they're going to impose. But I'll tell you that we're answering their questions. And we're working really hard to show them why we think this is such a good combination for consumers and competition. And we are hoping, conservatively, that we're going to have closing before the end of the year.

Thank you, Kyle.

Hey, Hunter. It's Brandon. Just to add one more thing, you asked about our use of consultant fee. We are going to use some consultants. But one of the controls that I talked about in my prepared remarks is how much we're going to use on consultants. We're going to keep a very tight lid on that. Price matters a lot. We want to build the talent internally and take ownership internally. And so, while there will be consultants, the budget for consultants is going to be tightly controlled.

Great. Thanks, Brandon.

Yeah. Thanks, Hunter.

Your next question comes from the line of Helane Becker with Cowen & Company. Your line is open.

Thanks very much, operator. Hi, guys. Thank you very much for taking my question. One of the things that we are seeing a lot of here on the East Coast is – and we're seeing in Seattle, really increased security lines. I mean, people having to wait more than, maybe, 20 minutes up to an hour sometimes. And I'm just kind of wondering how you guys are thinking about handling that as you go into the busy summer months because SeaTac is pretty close to full capacity at this point. And you've got a lot of people wanting to fly and yet, you don't really have the staffing that you need – the TSA, actually, doesn't have the staffing you need to process all those passengers. How are you thinking about that for the summer?

Hi, Helane. It's Ben. We actually met with the TSA administrator messenger and we had a real positive meeting. I came away actually feeling a lot more optimistic than when I went into it. They are on top of the problem. They understand their staffing issues. They're looking at technology. They're looking at dogs. Adding more dogs which actually accelerates the screening process. What I'll say, from a month ago to now, we have seen improvements in Seattle. And I'm actually – we're actually going to use also third-party vendors in certain parts of the screening process to help TSA move their staffing where it's critical. So, we're looking at all our key airports and working hand in hand with the TSA. This is now just a TSA problem, this is everyone's problem. And I'm actually more optimistic than I was going into the summer. They know it's a big issue and they're focused on it.

Okay. Is that going to cost you more money?

There will be some cost not – I don't think it's going to be material just to help with some screening, just identification – personnel identification prior to entering the screening process.

Okay. Thanks, Ben. Brandon, I just had a question about interest expense. It was $13 million in the quarter, up from $11 million. And yet your debt went down a little bit. So why did that extra $2 million occur? And can you also say what the credit card contributed in the first quarter?

Helane...

Go ahead. [Ph] Chris will take that.

Hey, Helane. This is [ph] Chris.

Okay. Thanks. Hi, [ph] Chris.

On the interest expense line item, one of the things that happened that you might recall we – at the end of the year last year, we had a – for this proposition one here in Seattle, we had to sort of accrue some staff wages associated with that. There's some statutory interest on those staff wages that we recorded in the first quarter. So that's why the interest is up even though debt is down. So that's related to that. And then the credit card, really, the mileage plan overall sort of on that other line item, really, was up about $25 million, $30 million in the quarter. So that was kind of the contribution there and a lot of that is driven by, again, the new credit card deal that we have and the new economic on that deal started in January and then just the volume. As Andrew mentioned in his remarks, credit cardholders are up 12%. So that really drove volume in the number of miles that we sold to the affinity partner. So overall, it's really good economics and really good result for the quarter on that.

Great. Thanks very much for your help.

Anytime.

Your next question comes from the line of Jamie Baker with JPMorgan. Your line is open.

Hey. Good morning, everybody. As you know, I happen to be in the Bay Area when the deal was announced, and I must say that as a New Yorker, you grossly underestimated just how strong of a cult-like following Virgin has built out there. And I don't ordinarily allow my earnings models to be influenced by passenger preference and stuff like that. But I'm thinking I might have to make an exception this time. I know it's only been two and a half weeks, but does your analysis still assume that you retain 100% of the Virgin loyalists? It really seems to me that you might be – you might want to be modeling for some spill there.

Jamie, it's Brad. I'll start. Maybe Andrew wants to pop in. But I think it's a really good question. We were attracted to Virgin because they have built an incredible company in nine years. You are right. There is a very, very strong allegiance to that company. The employees feel tremendous amount of passion for the company and the customers too. And that's – I'll just think that's why the company is so attractive to us. So, the biggest challenge, I think, for this leadership team isn't – we're going to have all kinds of challenges, bringing the [indiscernible] together, bringing this – doing this safely, integrating collective bargaining agreements, [indiscernible] and all of that. The biggest challenge is going to be bringing the customers together, and that's what we're focused on. And that's why we've talked a lot about the brand. We're going to go into this with a humble approach. We're going to look at both product sets, the tangible product features. And we're going to look at Virgin's approach, look at Alaska's approach in over 12 or 18 months, make a decision of what's best for our collective customers. As we look at the brand, we're going to think about the brand and do what's best. But our goal – I guess what I just want to reassure you, we are aware of the value that that company has brought to its customers. And our goal isn't to lose that. Our goal is to gain that as a foothold in the State of California. It's something that we grow in a decade or two ahead. In terms of specific modeling, I haven't done any specific modeling on this. Maybe our team has but I think the long-term idea isn't to lose passengers, it's to grow them substantially over the...

Sure.

...next 15 years that are in front of us.

Have you put any thought into what the costs would be to retrofit your current flying with much of the hard product that makes Virgin so curiously popular – to me?

There's a lot to be done there. We are really just starting that now, Jamie. We are starting to look at the transcon service out of San Francisco and L.A. to JFK. In particular, the product offering is different than what we've [indiscernible]. But it will be complex analysis. There's RASM implications, there's [indiscernible], there's countless implications. And we're going to try to do this in a way where we are known for innovation, we're known for great service, we're known for low fares. And for the analyst community, we're known for making money and making returns. So, we've got – we have a work cut out for us but that's where we're going to be thinking about.

Okay. And as a follow-up, other than maybe just an e-mail or a phone call saying congratulations, have either Boeing or Airbus reached out in a meaningful way to start discussing how they might participate in the fleet simplification process? I'm just trying to gauge how eager they might be or if that is a work-in-progress?

Hey, Jamie. This is Mark. I'll just answer it, start out by saying that we have a fabulous relationship with Boeing. We have a terrific partnership and really with all the manufacturers we work with. We don't work directly with Airbus today but we will be talking to them and we anticipate the same type of relationship.

All right. I'll just...

Okay.

...that Mark has said, we couldn't be more apperceive of the relationship we have with Boeing. We get treated like an airline that's much bigger than we actually are and they've been fantastic to us.

Okay. Thank you very much. I really appreciate it.

Yeah.

Your next question comes from the line of Julie Yates with Credit Suisse. Your line is open.

Hi there. Good morning. I'm going to try to crack at Hunter's first question a little differently. So, Andrew, you mentioned you have a 23 new markets for the network in the last 12 months. And as you knew market additions slow in the back half of the year and perhaps into 2017, when do you start to see a tailwind to your unit revenues from the market maturation dynamic and how many could that be?

Julie, I think we're already seeing good tailwinds as we go in. And as Brad mentioned on his remark, I think the bigger issue honestly is just where do competitive capacity numbers continue to be over the remainder of the year and then, really the industry pricing environment. So, I think those two things are the biggest variables for us. At the end of the day, as we look into the back half of the year, we're entering into a very strong demand periods for us. We feel very confident about how we've setup the summer, how we setup our network, so we feel very good about that.

Okay. Is there a preliminary estimate on competitive capacity in the fourth quarter?

No. I took a look at that. Honestly, especially with Southwest and others, they not all nailed down. So I look at that and it's a little elevated but I don't believe it. There's a lot of cleanup and through-up that's going to happen over the next few months of the fourth quarter.

Okay. Got it. And then, are there any trends you can highlight just maybe between leisure and business in Q1? And then, also, just how advanced yields are looking for the peak summer period?

Joe, you should take the business. I can talk leisure.

Okay.

This is Joe. I'll just mention that the corporate traffic for Alaska Airlines was actually really strong over the last quarter. It did outpace system revenue a bit. And the strength of that is really coming from the Seattle market where the economy is not only doing quite well, but a lot of the large corporations that are headquartered here are some of the most prosperous companies in the country right now. Tech is doing well, professional services, and also the retail sector. Companies like Costco and Amazon are doing well and they're traveling a lot. And, Julie, the leader side of the business is very strong. As you know, a lot of our ASMs are in the Hawaii and other part of Mexico, East Coast, leisure destination. I might just sort of backtrack on to what Andrew said and mention a couple of other things. From our perspective, if you look at the pricing environment in general, it's actually very stable. There's a little more discount used in the trough periods, that's what we would expect. And if you want – we don't give guidance, but what I would say is yields most likely to come when and if capacity sort of slows down and oil starts to go up. And the only other thing I just – I would want to say is we're here today due to low cost and low fares. And we sort of believe that carrying more people at a slightly lower fair is the best thing long term folks, and we want our customers to know they don't have to aggressively price shop us. And we think over the long term, that's ultimately proud and positive for us.

Okay. And then, just one more longer term – maybe, how do we think about the percent of your business that's corporate today and then how you expect that mix to change with the Virgin acquisition, as you have a stronger foothold in major markets like LA and San Francisco in a more expansive network?

Julie, good question. Thanks. This is Joe again. I think today, it's relatively small. We do have great network utility out of Seattle and that sort of overlaps with a lot of corporate activity here in Seattle. Outside of Seattle, historically, we haven't had a strong base for corporate travel. That certainly will change with the Virgin America acquisition. We're really excited to get down and get smarter about what the opportunities are in SoCal and especially in the Bay areas, there are lot of overlapping some of the tech companies between Seattle and the Bay areas. We'll have a little bit of a head start in the relationship there. So, I would just say that we don't have exact numbers today, but that is going to evolve, and I think corporate will become a more important of our network going forward. And I might just jump on that. Julie, it's the business travel will be important and we will want to be the go-to airline for business travel up and down the West Coast, but [indiscernible] just sent out some updated information, which sort of confirms something a lot of us already do. It basically show the roughly 70% of the market. I think it's a survey period within the last 12 months. 70% of the market in the last 12 months was leisure. And that's up from 50%, Joe, you might remember, but it's 20 years ago or something like that. But the business has just moved more and more towards leisure. And for leisure to work, you got to have a stronger economy business that seems to be doing well. You got to have people with money in their pockets buy tickets. The point I'm making is this we feel really good about this combination with Virgin because we're really well set to serve the high end of that leisure markets as well as the business markets. So, we think we're really in the sweet spot of where the demand is and perhaps and even in underserved segment of the market here.

Got it. All right. Thanks for the color.

Your next question comes from the line of David Fintzen with Barclays. Your line is open.

Hey, good morning, everyone. Just a quick cleanup question. On the second half capacity growth could, could you repeat that, I thought you said five but also, is it pretty constant through 3Q, 4Q, is it really tail off 4Q?

Hey, David, it's Andrew. It tails off. So, my prepared remarks with 5.5% to 6.5% but it really tails down in the fourth quarter. I do want to add one thing though that as part of our guidance, as you will know, we've applied for two flights to Cuba and also with Newark being, I suppose, unconstrained for some period of time, and we've often wanted to grow in Newark. So, if there is anything to report on opportunity for us in Newark and Cuba, we will update you on that when we have something to update you on, and adjust our guidance for capacity growth.

Okay. Great. And then just a comment, Brandon. Appreciate sort of not losing budget focus, but you're going to – there's a lot going on Alaska stand-alone, a lot of innovation you're working on – you have been working on. And now a deal. What falls off the plate in terms of the initiatives particularly on the standalone Alaska time just to get everything done over the next couple of years?

That's a great question. It's one we actually talked about the other day. We have a lot of people focus on the integration as you pointed out. And so we're asking the question are there things that should come off the list? Some of the really important and revenue positive stuff like premium class won't, but there probably are some things internally that will slow down that we could move to future years. It's an important question, and one that we haven't answered fully yet.

Okay. And then just is the IT platform in place where you can – if you have to kind of go about maintaining the Virgin brand or at least the Virgin revenue premium in maybe a different way, do you have enough flexibility in the IT platform to sort of be innovative around pricing or is that a long-term process in the way we should think about it?

This is Andrew. I mean, we're both – Virgin America and our sales are on SABRE reservation systems. So, from a platform [indiscernible] booking system, we're in a good place there but a lot of work to be done like anything, we will likely find also the technical challenges.

I'm sure. Thank you. I appreciate all the color.

Thank you, David.

Your next question comes from the line of Dan McKenzie with Buckingham Research. Your line is open.

Hey, guys. Thanks for the time here. My question, I guess, is perhaps for Brandon or Joe that follows up on the last question. We are seeing some marketing initiatives from your peers with respect to the unbundling and then the rebundling or repackaging of fares. And I'm wondering what work Alaska has done here and how would you characterize the marketing opportunity just in terms of ancillary revenue per passenger?

Yeah. I might take that. This is Shane again. We've been sort of interested as the industry has evolved sort of back towards fare families or bundling. We haven't done a lot of that. We haven't need to really. So, it's sort of a greenfield opportunity for us going forward. The biggest ancillary revenue opportunity, as you know, is paid seats and that's really what we're working on the premium economy project that Andrew talked about in the opening remarks and you guys know about. We are starting to think about what happens after that, and I think there are a lot of opportunities for us to look at bundling or fare families, those sorts for things. But it's early days yet for us to talk about what sort of valuation that might have.

Got it. And Shane, I guess, if you could just remind us what is the ancillary revenue per passenger today at Alaska and how do we think about that trajectory?

It was $12.91 this last quarter. It was actually up 11.8% then but that was primarily due – you might recall we had a big credit card or free bag promotion for our loyalty in January, so that's really the driving force of last year where we're giving a lot of way, free bags, but would normalize again. So, it was actually up to $12.91 per passenger.

And premium economy add something like $3 or $4 to that ultimately.

Okay. Thanks for the time, guys.

Thanks, Dan.

Your next question comes from the line of Adam Hackel with CRT. Your line is now open.

Hey, guys. Thanks for taking the question. You know, while I'm in the queue, I'm going to ask some sort of tech related questions, so here it comes. A couple of things. First of all, I'm just curious more – kind of coming back to the Virgin products here. Just some personal experience and some – those I talked throughout in the Bay Area. It seems like you do things very differently but they are kind of smaller things. Just curious what you guys think about things like – I mean, the ones that are obvious, the moonlighting, the inside video, and the touch screen ordering, all those kinds of smaller in-flight things, how are you guys looking at that in terms of bringing that potentially to Alaska?

Adam, this is Ben. This is what the integration team is going to do. We're going to bring those teams that specialize in those areas and from both airlines, and together with the joint team, we're going to be thoughtful, we're going to be deliberate, and maybe to go back to the other point is we want to make sure we keep the existing Virgin customers and make this thing even better than it is. So we're actually excited about getting our energies behind that. And I think we're going to be in a better place than we are today.

Okay. It seems like between the Virgin product than Alaska's, [indiscernible] you have to have a pretty nice combination there. And I guess one more, just we talked about it a little bit before, but in terms of the job versions within the corporate side of kind of Silicon Valley tech world, what are some things that they've done that you guys could potentially apply in Seattle and if you've done anything of that yet?

Sorry Adam, could you – we missed that first part of that question.

Sure. Yes. Just the success that Virgin's had in the corporate side on the Silicon Valley and the [indiscernible]. I know they said 7 of their top 10 corporate accounts were [indiscernible]. So, just some of the things that they may have done that you can maybe learn from and use in your Seattle base.

Hi. This is [indiscernible]. One thing is we've operated down in San Francisco, our sales obviously a much more limited presence, but we've actually had our own corporate sales people in the Bay Area for 25 years. So, we've got a couple of folks down there now that know these accounts. Obviously, Virgin America has their own team down there and as you've heard from them, they do have good relationships with these companies down there. So, between the small presence we've down there combined with their work side if they can get to know those accounts better and as I've mentioned earlier in the call, a lot of them are companies that also have a presence he in Seattle. So, we're looking to build on those relationships as much as we possibly can.

The other thing I would add to is if you think about global alliances and our foreign flag carriers. I think we will be bringing a very deep and rich portfolio of international carriers to California where we have also reciprocal benefits in earning and burning opportunities. So, we really see opportunity for the corporate both domestic and international travel as we move forward.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Tom Banse with KUOW Radio Seattle. Your line is open.

All right. Thanks for taking my question. I've got follow-up on the keeping the loyalty of the Virgin customers. I'm curious maybe for Ben or Brad perhaps. Did your meetings down in San Francisco or your assessment of the customer reaction after the acquisition made public change and if you're thinking about how long to keep the Virgin ground house an independent operations?

Tom, it's Brandon. I'll start and maybe Ben want to jump on as well, but we did have a good meeting down there, I think, a week ago, Tuesday with a huge turnout of Virgin employees. And we also got a chance to walk around the terminal and just sort of visible [indiscernible]. I don't know that it changed our perception, but we did sense firsthand the love those employees have for that company and the loyalty of those customers for the brand and the product. So, we got closer to it. We sensed it firsthand and that was – I think that was an important thing for us to experience. So, this – I must say, we're looking forward to the challenge. I'll just restate the big challenge in front of us is to get all of the value out of this acquisition, but we're really – the reason we're doing this is to get a foothold in – a bigger foothold in the State of California, something that we can grow in the decades ahead. I mean, the good news is that the Alaska Airlines is good and building loyalty and growing customers. And that's what we're going to be doing in California and one of these days, we're all really looking forward to that. Anything you want to add, Ben?

That's perfect, Brad.

Thank you.

Thank you.

Your next question comes from the line of Dominic Gates with The Seattle Times. Your line is open.

Good morning.

Dominic...

Good morning, Dominic.

My question is for Brad, can you tell us what has been the financial impact on Alaska of the $15 minimum wage legislation that's gone into effect or has been pressing you? And do you intend to continue fighting it?

Dominic, maybe we'll just chat about that for a minute. I think Alaska's position on that has been misunderstood. When that actually started, it started in the City of SeaTac which is a community here with 11 square miles and our minimum wage at that time went from something like $9, changed to $15. And Alaska's position was, hey, this is kind of a – the playing field isn't leveled. This is sort of a patchwork way of rolling out a new idea for our society. And so, we've sort of said that this does have the ability to penalize the hometown airline and an airline that we think is a tremendous – we think we bring a lot of value to the community for customers and employees and so forth. So, we just said we did push back on the SeaTac minimum wage ordinance. But it was really in the sense of let's do something in a less patchwork fashion. As you know, I think, we, at the same time as we did that, we asked our contractors two or three years ago to take their own minimum wages up from the rates they were to $12 an hour and I think they've gone to $15 an hour now, if I'm not. I think they've all gone to $15 an hour. So, I guess in that sense, we're not fighting it anymore. They are at $15 an hour. But, yeah, I guess – the other point, Dominic, that we've tried to make throughout this thing is, I don't know. I think there's a challenge for all of us right now to work with our economies for this economy's benefit, everybody who is participating in the economy. But we don't damage the businesses too much in the process. And that's another point Alaska is trying to make as we roll through this. But I don't know. So, maybe to summarize where society is going through a process here. We're participants in that process. We want to be – we want to do our civic duty. We want our – these jobs to be good jobs for people. But what we do want to do is make sure you've got an environment or an economy where businesses can thrive and grow and bring value to customers and employees and owners.

Well, now that it's – so you're saying that it's essentially been implemented now and you don't have to fight it anymore, has it damaged? What has been the financial impact like in the first quarter of that? Have you been able to assess that?

Dominic, it's Brandon. Maybe I'll take that. We're not going to share a number only because it's hard to share a number because it's really hard to say how you measure that. Is it just the direct impact on the contractors? And do you measure that from where they were three years ago when it started or versus the voluntary increases that Alaska implemented? And then, how do you measure the impact it has on the other network groups that aren't directly impacted by the $15 an hour. So there's a trickle-down impact into other work groups. So, it's really hard to put a specific number on it. But what I will say is that it has been meaningful. But it's something that is real and we're doing our part here.

Brandon, you guys, we did – in the fourth quarter we shared a number as we – as our contractors took their employees to $15 an hour.

We didn't share the specifics on that.

Oh, we didn't share the number [indiscernible].

Yeah. Got it.

There are no further questions at this time. I turn the call back over to Brad Tilden for closing remarks.

Thanks, everybody, for tuning in. We appreciate your support. We look forward to talking with you next quarter.

Thank you for participating in today's conference call. This call will be available for future playback at www.alaskair.com. Thank you. You may now disconnect.