Sees Streamlined Fleet Necessary For Continuing Transformation

Alaska Airlines announced Monday the Alaska Air Group Board of Directors has authorized a plan to transition the airline to a fleet of all-Boeing 737 aircraft by the end of 2008. The board's action will accelerate the retirement of the airline's current fleet of MD-80s.

To accomplish the transition, Alaska now anticipates taking delivery of 39 737-800s between 2006 and 2008, including the two aircraft that have already been delivered in 2006. In addition to these airplanes, Alaska has firm commitments for 13 aircraft, options for 24 and purchase rights for 27 in 2009 and beyond.

"This decision represents a major milestone in our transformation and moves us significantly along the path toward becoming an undisputed leader in our industry. Having a common fleet and growing with next-generation, fuel-efficient Boeing 737s will make a major difference in our operating costs, fleet reliability and the onboard experience for our customers," said Bill Ayer, Alaska's chairman and chief executive officer. "This move represents a significant upfront investment and will continue our momentum toward sustained profitability, growth and long-term job security and career opportunities for our employees."

The plan to retire the airline's 26 MD-80 aircraft by the end of 2008 will require an investment of approximately $750 million. Alaska expects to save more than $115 million per year in operating expenses once the transition is complete -- primarily by lowering costs for fuel, maintenance, training and crew scheduling.

"This level of investment requires that we continue our transformation and keep delivering on our cost goals and profit objectives," Ayer said. "Our employees are a crucial part of that equation, and we need to continue working together to provide optimum value for our customers."

The acceleration of the conversion plan, when combined with the purchase of new aircraft, will expand Alaska's fleet to 114 aircraft from 110 at the start of 2006, and is expected to increase available seat miles (ASMs or the number of seats available per mile flown) by 18 percent by the end of 2008.

With an average fleet age of eight years following the transition, Alaska will have one of the youngest fleets in the industry.

Alaska currently flies a mix of 737 variants. The carrier lists 12 737-900s in its fleet, five 737-800s, 22 737-700s, 40 737-400s, and two 737-200 "Combis" (bottom).

The new agreement with Boeing, as well as a December 2005 equity offering that raised $200 million, were key elements in accelerating the fleet changeover. The equity offering strengthened Alaska's balance sheet, helping to offset the charge to equity associated with the early retirement of the MD-80 (file photo of type, below) fleet.

Expected Exit Costs And Impairment Charges

Alaska Airlines representatives tell Aero-News the airline expects to take a financial hit during the first quarter of 2006, by reducing the carrying value of its 15 owned MD-80 aircraft to fair market value. Although the amount of the special charge has not been finalized, the airline expects it to be between $130 million and $150 million before tax (or between $80 million and $95 million after tax).

Alaska Airlines also has 11 leased MD-80s. The airline is unable to determine the amount or timing of future charges associated with its leased MD-80 aircraft, but expects the total of these charges also to be in the range of $130 million to $150 million before tax (or between $80 million and $95 million after tax). These charges will be recognized in future periods as the disposition plans are finalized.

Combined, the airline expects total special charges to its income statement to be between $160 million and $190 million after tax.

Alaska Airlines and sister carrier, Horizon Air, together serve 88 cities through an expansive network throughout Alaska, the Lower 48, Canada and Mexico.

FMI: www.alaskaair.com