Good morning. My name is Amber, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group Third Quarter Earnings Release Conference Call. Today's call is being recorded and will be accessible for future playback at www.alaskaair.com. Thank you. I would now like to turn the call over to Alaska Air Group's Director of Investor Relations, Matt Grady.

Thanks, Amber. Good morning, everyone, and thank you for joining us for our third quarter 2018 earnings call. On the call today, our CEO, Brad Tilden, will provide an overview of the business; Andrew Harrison, our Chief Commercial Officer, will share an update on our revenue results and outlook; and our CFO, Brandon Pedersen, will discuss our cost performance and cash flows. Several other members of our management team are also on hand to help answer your questions. Earlier this morning, Alaska Air Group reported third quarter GAAP net income of $217 million. Excluding merger-related costs and mark-to-market fuel hedging adjustments, Air Group reported adjusted net income of $237 million and adjusted earnings per share of $1.91, ahead of the First Call consensus. 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. On today's call, we will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release. And with that, I will turn the call over to Brad.

Thanks, Matt, and good morning, everyone. We are rapidly approaching the two-year mark since our merger closed and while there's still a lot of work ahead of us, we are extremely happy about the pace of progress and we remain confident in our future. We've now completed roughly 90% of the integration milestones and have done so at a pace that is equal to or more rapid than virtually any other merger in the industry. The performance of our core business remains strong and our brand and product are gaining increasing traction in California. As our network investments mature and the merger synergies accelerate, we're doubling down on the disciplines of productivity, teamwork and cost control, disciplines that have been the source of our competitive advantage for many years now. In the third quarter, our financial performance started to turn the corner with our employees delivering unit revenues and unit costs that were both better than plan. We were especially encouraged to see RASM stabilize in the face of multiple headwinds. We expect RASM to inflect positive in the fourth quarter as we begin the steady climb toward the higher margins and higher returns that we believe are achievable with our combined network. As we've discussed, we're not satisfied with our current financial returns. Fuel prices continue to rise and we need to do more to recover these higher costs. One way we've responded is by raising bag fees for the first time in five years, bringing our fees into line with those that are now prevalent in the marketplace. We announced these changes last week and Andrew will discuss them further in just a moment. Stepping back a bit, we see an industry environment that has not yet adequately adjusted to higher fuel prices. We've slowed our growth in…

Thanks, Brad, and good morning everyone. Total revenue for the third quarter rose 5% to $2.2 billion on capacity growth of 4.8%. RASM came in flat which was our best unit revenue result in five quarters. We had good progression during the quarter with unit revenues down 1.3% in July but up 0.7% in August and up 0.5% in September. This is only the beginning and we expect our unit revenue momentum to continue as we execute on a number of substantive initiatives to ensure that our recent trajectory continues into the fourth quarter and well beyond. Other bright spots worth a mention include Mileage Plan revenues were up 11%, Premium Class revenues were more than double at 122% and First Class revenues increased 8%. Once we work through some IT issues related to paid upgrades on the Airbus along with Airbus cabin modifications that begin this quarter to increase First Class capacity by 50%, we expect to see significant revenue increases from the front cabin in 2019. Before I get to the outlook though, I'd like to provide some additional color on our third quarter results. First, same-stores, or markets in operation longer than 12 months and representing about 94% of our capacity, delivered positive TRASM of 1.5%. Solid demand and stabilizing and improving close-in pricing across most of our network drove this result. Overall, we were pleased with the quarter's revenues given the 150 basis point headwind created by the higher level of award redemptions across our system which we guided to last quarter and have mitigated going forward. Now turning to new markets, or markets in operation less than 12 months, these negatively impacted RASM by 160 basis points versus the 210 basis points last quarter as new market capacity declined to 6% of capacity from 9%…

Thanks, Andrew, and good morning, everyone. As you've seen, Air Group posted a third quarter adjusted net profit of $237 million or $1.91 per share. Our pre-tax margin was about 14% which was a 6.6 point decline from Q3 of last year. Flat unit revenue performance was certainly positive in light of recent trends but inadequate to recapture much of the higher fuel prices and higher wages and benefits costs resulting from labor agreements we've amended over the last year. Like Q1 and Q2, our unit costs were better than our original guidance despite completing fewer ASMs than we had planned. About $14 million of our better performance came from lower incentive pay accruals as the higher fuel prices take their toll on expected full year profits and we failed to meet certain other non-financial metrics that are part of our annual goals-based plan that we call PBP or performance based pay. In addition, we had approximately $10 million of expense shift from Q3 into Q4 as the timing of certain maintenance and marketing activities was delayed versus prior plan. Yet, even accounting for these two items leaves more than a point of CASMex true cost outperformance in the quarter. This is partially a testament to the growth of the loyalty program, since more bookings are coming directly through our website and on our credit card today than at this time last year, which is our lowest cost form of distribution. But it also illustrates the hard work of our leaders and other employees who have delivered better productivity and have embraced the back-to-basics culture of frugality and cost discipline that has made us successful for many years. As mentioned, fuel continues to be a substantial headwind with per gallon costs rising 30%. Higher fuel prices alone reduced our pre-tax…

Savi Syth of Raymond James, your line is open. Savanthi N. Syth - Raymond James & Associates, Inc.: Hey, good morning, everyone.

Good morning, Savi.

Hi, Savi. Savanthi N. Syth - Raymond James & Associates, Inc.: You laid out a lot of initiatives that should be – different initiatives that should be kind of being a nice tailwind next year. Could you talk a little bit about the progression as you go through the year on how those build?

Hey Savi, this is Andrew. I think by, probably as you go into the second quarter, we should be pretty much at full run rate. The Saver Fares will kick in and really be up and running for sales beginning January 1. Bag fees are already going in and there's a booking curve happened. So, I would say that we'll start off a little lighter in the first quarter but as we go into the second quarter, we should be at full pace.

Michael Linenberg of Deutsche Bank, your line is open.

Yeah. Hey, good morning everyone. Two questions here. I think, Brad, you basically said you're at a point now where you're comfortable with the network and I guess there were, what, 44 city pairs that were added, but there was also some culling, some cutting of frequency in some city pairs. Are we at a point now where going forward – and I guess maybe this is even the question for Andrew as well – that we're not going to see anything more material with respect to the network, like the big changes have occurred and this is the network of 2019 and beyond?

Yeah. Michael, this is Andrew. That's right. I think if you look at the culling, we cleaned up Dallas Love Field to the East Coast. We took care of our Mexico City slots which weren't going to be long-term winners for us. And as we've shared previously, the network we inherited from Virgin America, we've made significant changes there. So, we feel really good about the network. Our big opportunity – Ben may comment on this – on the schedule, but also just the marketing times of our network and getting our flights leaving at the times we want them to leave is our next big opportunity.

And, Mike, also, we talked about the cross-fleeting of airplanes, putting the right airplanes in the right markets. So what we're doing by Q1 is making sure we deploy the bigger airplanes on the right markets and the small airplanes on the right markets as well.

Okay, great. And then just my second question, you did a really nice job laying out all the different revenue initiatives next year, $330 million or exceeding $330 million but you also threw out some things that clearly are going to benefit on the cost side. I mean, Ben, you just mentioned cross-fleeting, your flight attendants are going to be working under a single contract January next year, you'll be able to sort of mix and match, that's obviously going to help on the cost side. Is there a number out there that we should use for the cost savings in 2019?

Mike, it's Brandon, maybe I'll take that one. No, not at this point. We do have a lot of stuff going on but as I said in my prepared remarks, we're still working hard on the budget and we'll have more to say about that at Investor Day.

Okay, great. Thank you.

Thanks, Mike.

Your next question is from Duane Pfennigwerth of Evercore ISI.

Hey, thanks. Not to start exactly where Mike left off, but obviously lower growth has been discussed as a headwind, but from a high level, could you just discuss the tailwinds that you see? For example, you've adjusted the plan lower at least a couple of times this year and my guess is there's some costs associated with that, with those mid-course corrections. Can you just give us your list of tailwinds that you see?

Duane, hi, it's Brandon. Maybe I'll start with that. I mean, certainly the biggest tailwind to that is just the variable costs that come with the business and just the lack of startup costs and things like that, training costs I would say are a big one. You do have a certain element of the cost structure that's fixed and obviously with lower capacity growth, there'll be pressure on that, but to the extent that there are variable costs both on an ongoing basis and then costs that we incur in anticipation of further growth, those will be certainly mitigated in 2019.

And, Duane, it's Ben. As you heard some of the things that are coming together with the integration in terms of systems coming together and labor groups coming together, for example, our flight attendants will be flying together by the end of January of 2019, that drives productivity back into our business. So as we bring systems together and we start aligning the operations and how we run it, those are going to be tailwinds for us in 2019.

Thanks. And then just for my follow-up, on Hawaii, I wonder if you could provide a little more detail historically, because capacity has been up there for a while. You had a high rates of growth from an industry perspective 1Q, Q2. My guess is the industry was absorbing it. You've had some non-recurring events here, volcanoes, hurricanes and maybe there's some lingering impact. But maybe could you provide some longer-term perspective on Hawaii? And you've seen competitors come, you've seen competitors go, typically capacity finds a level. Maybe the incumbents have overshot a bit here. Would love some more fleshed out thoughts on Hawaii. Thank you.

Yeah. Thanks. That's a really good question. And you just said it. I think for those who've been in Hawaii, and we've been there 11 years now, Hawaii really follows supply and demand of seats. And there's been an escalation of industry seats over the last few quarters and that will continue, and we've seen what that has done to the revenue environment. I think specifically to us, a couple of important things to note. Number one is that we serve Hawaii from eight gateways off the West Coast, and many of those all four islands on a nonstop basis. So, we have very much – have our flights not anchored in any single or specific city. But what's really exciting I think is you heard about on the initiatives, as we roll out, many of these will directly impact the economics in a very positive way of our Hawaii routes, and especially with our onboard product now, with satellite coming onboard, with the Premium Class seating, First Class seating, food and beverage programs both in the main cabin, we feel really good about our product, our network and the incremental revenues coming into 2019 that will help us deal with some of the softness as the industry finds its water level.

Thank you.

Thanks, Duane.

Our next question is from the line of Rajeev Lalwani with Morgan Stanley. Rajeev Lalwani - Morgan Stanley & Co. LLC: Hi, gentlemen.

Good morning, Rajeev. Rajeev Lalwani - Morgan Stanley & Co. LLC: Two questions, a RASM one and then a CASM one. Andrew, I'll start with you. You're seeing a nice inflection in unit revenues here in the fourth quarter. Would it be unfair to assume that you can just build on some of these numbers as we go into next year and then maybe just add on top of the 4Q levels the 3 to 4 points of revenue initiatives that you're seeing? Is that too optimistic or too aggressive?

No, Rajeev, I'll give you my personal views. But I think we are going to continue to ramp. I mean, I think if you just look at the industry's revenue guidance for the fourth quarter, I think our guidance is starting to nestle right in there amongst many of the ranges. And if you take into account all the real revenue initiatives that are kicking in as we speak, I would personally expect us to start to outperform the industry in unit revenue increases as we go into the first quarter. Rajeev Lalwani - Morgan Stanley & Co. LLC: Helpful. And then, Brandon, a question for you on the CASM side. So in the fourth quarter you've got 1%, 2% capacity growth and you're seeing 3.5 points of unit cost pressures or an increase there. Can you just help break that down? And I'm assuming we shouldn't be using that as a run rate for 2019 to maybe think of some of the headwinds associated with lower growth. I think you get where I'm going.

Yeah. Hi. Yeah, I totally get where you're going. It really just is a timing thing. I don't think the Q4 CASM guide should have surprised anybody, because our full year CASM guide really remains unchanged. When you put together a business plan and you make estimates of what certain things are going to land in certain quarters, and stuff is just slipping into the fourth quarter. So it's really timing more of anything else, not indicative of where we think we're going to be long term on the CASM guide with lower capacity. Rajeev Lalwani - Morgan Stanley & Co. LLC: And then within that 3.5 points, how much is timing? Can you parse that out a bit?

You know what? If I went back to our original CASM guide for the fourth quarter – which I don't have in front of me, I bet it's probably – I would say it's probably most of it. Hold on, I'm looking at something here.

This is Chris. About half of the increase in CASM really came from the decline in capacity. And then the other, we got about $10 million, $15 million worth of shift in timing of costs into the fourth quarter. So those two things together pretty much get to your CASM guide for the fourth quarter.

Thank you. Rajeev Lalwani - Morgan Stanley & Co. LLC: Very helpful. Thank you.

Your next question is from Jamie Baker with JPMorgan.

Hey, good morning, everybody. A follow-up to Rajeev's question which was a follow-up to Duane's question, which was a follow-up to Mike's question. I know you don't want to give a precise cost guide, you're holding something back for Investor Day, that's fine. But I can't think of a time since standalone United that an airline was ever able to materially decelerate without seeing a substantive year-on-year increase in ex-fuel CASM, and they only pulled it off – this was quite some time ago – because they punted all of their 737 Classics. So, obviously that's not an option here. If ex-fuel CASM goes up 3% this year, which is the guide, isn't it a foregone conclusion that next year goes up more than this, it's just a question of magnitude?

Hey, Jamie, it's Shane Tackett. Love your questions. I think maybe I'd just start higher level. We spend something like $5.5 billion on non-fuel costs, and natural sort of inflation of that might be, I don't know, call it 5%, something like $300 million. I don't think it's a foregone conclusion that we have to go up $300 million next year, and that's sort of where – that's where our mindset has been, that's what Brandon has talked about throughout the year, that's what we're alluding to as we lay out cost initiatives. Similar to a list of revenue initiatives that were very well laid out by Andrew, we just need to do the exact same thing with costs. The other thing that I think you can appreciate is as we've gone through the integration and merger, there's just a lot of potential opportunity to go in and look at areas that got a little bit ahead of themselves the last couple of years.

Okay. Fair enough. Can't blame a guy for trying. Second, on the segmentation, and this is somewhat similar to what I asked last quarter, but many of your – well, not many – your peers have stumbled out of the gate with basic economy. Do you plan to roll out Saver Fares all at once on January 1? It sounds like that's the plan. I'm just wondering if staggering the rollout might be an option that would minimize execution risk.

Hey, Jamie, this is Shane again. And I might speak to this, I've been sort of principally involved with it. We are going to do a – what we're calling a soft launch on November 7 where we will start selling Saver Fares in a small subset of markets for flying in December and we'll use those lessons learned throughout December to figure out if it makes sense to launch fully on January 1. And it probably won't be January 1, it'll be like the 10th, we'll get through the holiday returns or if we need to go at a little slower pace. But I will say, as is often the case, we go a little slower on these sorts of things, and the benefit of that is we've been able to learn from others that have gone before us and so, we should be able to get here quicker than others have had in the past.

And just super quick follow-up. Are you going to disclose those markets or is it up to us to find them? I mean we – and which we can do, I mean, anybody can. It's just trial and error.

Yeah. No, I think we won't – we'll disclose them once we've got sort of the final decision on where they're going to be. We'll have Matt follow up with you all.

Okay, cool. Thank you, everybody.

Thank you, Jamie.

Your next question is from the line of Helane Becker of Cowen Securities. Helane Becker - Cowen & Co. LLC: Thanks, operator. Hi, team. Thanks for taking the time. When we look at the changes that you guys were talking about in terms of the retrofit of the fleet, where are we seeing that on the income statement? And is there a reason why, or is it in that line item for maintenance that was up 22% in the last quarter?

Helane, it's Brandon. Good morning. In terms of the retrofit costs, those are capital and so you'll see those in CapEx, which will ultimately flow through in depreciation once those mods go into service. There's really nothing in the maintenance line per se related to reconfiguration of Airbus airplanes. Helane Becker - Cowen & Co. LLC: Okay. Then was there a reason why those costs were up so much in the last quarter?

I mean, certainly there's reasons. It was just really timing of various activities and some of it is the power-by-the-hour deal that is, on a year-over-year basis, driving some of that increase. But we've talked about that a couple of quarters in a row now. Helane Becker - Cowen & Co. LLC: Okay, got you. All right. Well, thanks very much. Good luck. See you next month.

Thanks, Helane.

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

Hi. Folks, you guys are probably disappointed not to pay out PBP at target, and I'm kind of curious to know how you're thinking about setting PBP levels next year. Are you going to set them low? You like to set them generally sort of conservatively so you can make payments. I know that. But how are you preliminarily thinking about setting PBP targets and how should I think about that variable incentive pay line next year if you set them really low?

Hunter, it's Ben. I think in terms of payout, we are going to be above target for 2018. So I just want to correct that.

Oh, okay.

Yeah. So we're going to be above target. I think our philosophy hasn't changed in terms of how we set our performance goals. We want them to be aggressive and reachable. Like if you look at the last nine years, we've been about a month's pay. It's a little lower this year. I mean, fuel has been a big issue for us. And some of the other targets, we didn't miss. But I think we're looking hard at those goals. We're setting targets right now. And I think I personally feel good and where we're going to hit them. Just in terms of context, at least 20% of the PBP goals are non-financial elements like safety and customer service. So, there's always a good balance in terms of how we set them.

Okay. And then a little bit more on Hawaii and Saver Fares to marry these two things up a little bit. How are you thinking about the appetite for those fares in Hawaii? And was one of the reasons why Hawaii might be soft right now is because of some of that basic version that's being deployed that you could see in filings of course by your competitors maybe ahead of your Saver Fare launch? Is that one of the issues that you think maybe you're optimistic that can get cleaned up pretty quickly once Saver Fares are in that market, if that makes any sense?

Yeah, I think it does, Hunter. I think what you're saying actually is system-wide for us. Our hands are a little bit tied behind our back because we don't offer Saver Fares. And so our competitors, one in four times they're getting an extra $25 to $35 more than we are. And that will be rectified going forward next year, and obviously we've seen that on Hawaii across all our major competitors.

Okay. Thanks.

Thank you.

Thanks, Hunter.

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

Hey, good morning. Thanks, guys. Andrew, I wonder if you can clarify the positive RASM result in the Northwest despite high single-digit capacity. I wouldn't have guessed that that would have been the outcome. Is it that Anchorage offset some of the pressure at Seattle, is it just local economic growth in Seattle, is it corporate growth, all of the above? How do we think about the demand and revenue drivers in that market as we look ahead, because it seems like capacity may continue to be somewhat elevated there?

Yeah. I think a couple of things. I mean, we've had new growth everywhere, not just California but also the Pacific Northwest. But I think fundamentally, and you've heard us talk about this, is back to basics. We have been – with most of this integration behind us, we are focusing back on our core disciplines and what we do and what we do well and I think especially with the Pacific Northwest, we've continued to mature markets, we've continued to look at our pricing environment and our network and our hub structure. Certainly Horizon has been performing exceptionally. We had real challenges last year as you know. So, I think all of those things are coming together. And loyalty continues to grow at very significant rates believe it or not in the Pacific Northwest, not just California.

Is there any international traffic benefit that's – I wonder if you can just elaborate a little bit more on that as well. You mentioned that in the prepared remarks. To what extent is that helping to benefit your revenues, not just in San Francisco but across your system?

Yeah. I mean, on the international, it's not huge in the scheme of things. It helps us fill in some seats here and there but the real advantage on the international is giving our loyalty members access to the globe, helping fill our partners' planes with valuable revenue and giving our members award redemption. So it's a very profitable relationship for both parties and that's only going to get stronger.

If I could sneak a third one in here. Brandon, the cash levels, now that Alaska is 90% integrated, you're essentially at your target leverage in the mid 40s, does that loosen up some liquidity for some incremental shareholder returns as we look ahead to 2019, or does it make sense to take down the debt a little bit further before you consider some more aggressive shareholder returns?

Hi, Dan. I wouldn't say we're in the mid 40s yet. We ended the quarter at 49%. We'll be there by – we'll be at that same level at year-end. Here's the way I'm looking at it though, and I'm glad you asked the question because I think it's a super exciting story. As we look to next year and we see profit improvement and cash flow improvement and free cash flow improvement, our current maturities will be about $300 million. Once we hit that, we'll probably be in the low 40% range debt to cap, our dividends probably in the neighborhood of $160 million, $170 million. So anything in the free cash flow bucket beyond say $450 million to $500 million, that would probably be available for share buyback.

Perfect. Thanks, guys.

Thank you.

Dan, it's Brad. I might just weigh in. We have gone through this merger process and the profitability has been challenged. A lot of the theme of this call and the last couple have been the different initiatives we have to improve margins, improve returns for shareholders and we've got a lot of confidence in that stuff. That said, I've been super impressed with the cash flows the business have produced, what Brandon and his team have done with the balance sheet. To be sitting here two years into the merger having paid off $800 million of the $2 billion we borrowed and have an adjusted debt to capital below 50% is really something else. And we've got – I think you're asking a great question. We've got the ability to improve that even further in 2019 and then this business is producing a lot of cash flow that we'll have a good problem to have as what do we do with that cash flow that we're producing.

Okay. Operator, I think Dan's off the line. The next question?

Yeah. Sure. Next question is from Joseph DeNardi of Stifel Nicolaus. Joseph William DeNardi - Stifel, Nicolaus & Co., Inc.: Yeah. Thank you very much. Good segue. Brad, I think I asked you this question before, just going to try and ask it a little bit differently and in a multiple choice format. Has your experience with Virgin and the M&A process made you more likely, less likely or equally likely to engage in further M&A in the future?

Everyone's – they're all doing their hands, they're pushing them sideways, Joe. Here's what we'll say about it is I think the industry has changed a lot. If you look 10 or 15 years ago, it took nine airlines to make up 80% of the pie. Today it's four. I do think we're all really, really happy of what this company has done for everybody that depends on us over decades and getting bigger was important. And so we're really happy with the merger in that respect. In terms of culturally, we bit off a lot and the interesting thing about business and life is you sort of learn as you go. I think in terms of us biting off another merger, our plate is more than full right now and we're just going to be completely focused on doing what we – what we've got on our plate right now, doing it as well as we possibly can. So thanks for the question though. Joseph William DeNardi - Stifel, Nicolaus & Co., Inc.: Thank you.

Yes.

Your final question comes from the line of Brandon Oglenski of Barclays.

Hey, good morning or good afternoon, everyone. Thanks for getting me on here. Andrew, I want to come back to the revenue question area because it's been asked several ways, but if we think specifically about this Saver Fare opportunity, I think you called it out as about $100 million looking into next year. But if that's explaining some of your underperformance to the market, is it still fair to say, yeah, we can get back to market RASM and then some of these initiatives will actually be additive above and beyond that?

Yeah. I mean, I think if you want to talk about bag fees, that's getting back to market, Saver Fares is maybe getting back to market although Saver Fares will help us compete very aggressively against other carriers that don't have Saver Fares. So that's a big win. But the big one that we've also been talking about is just really the synergies and bringing our product to life across the system is going to be very incremental. We won't be at – we've still got low fares, so I don't think we'll ever going to be at market RASM, if you put it that way. We rely greatly as well on our low costs to have the low fares. But I think overall, all of these things come together to provide a good rising tide for us next year.

Okay. I appreciate that. And, Brandon, I'm going to take it one more time on the cost side, see if we can get something out of you. But it seems like you do have a lot of integration activities ongoing this year. I got to believe that's impacting the operating cost structure too just from even an overhead perspective. Shouldn't some of that activity come down as we head into 2019 and could you help us quantify what that was this year?

Brandon, thanks for the follow-up question to the follow-up question to the follow-up question and we appreciate that. Here's what I'll say. We have a long history of doing a good job managing cost because ultimately we know it's important to our success. We're going to manage the heck out of costs in 2019 and we'd be delighted to tell you more about that at Investor Day.

See you there.

Okay. Thank you very much. Hey, thanks, everybody, for tuning in today. Investor Day is November?

27.

27. We look forward to seeing hopefully all of you at Investor Day in New York on November 27. Thanks very much. Have a great day.

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