Executives: Lavanya Sareen - MD, IR Bradley Tilden - CEO and Chairman Andrew Harrison - EVP and CCO Brandon Pedersen - CFO and EVP, Finance Benito Minicucci - President and COO Kyle Levine - VP, Legal and General Counsel Mark Eliasen - Treasurer and VP, Finance David Campbell - President, Horizon Air

Analysts: Savanthi Syth - Raymond James & Associates, Inc. Rajeev Lalwani - Morgan Stanley & Co. LLC Julie Yates - Credit Suisse Securities Hunter Keay - Wolfe Research LLC Joseph DeNardi - Stifel, Nicolaus & Co., Inc. Jamie Baker - JPMorgan Securities LLC Michael Linenberg - Deutsche Bank Helane Becker - Cowen & Co. LLC Darryl Genovesi - UBS Securities LLC Dan McKenzie - The Buckingham Research Group, Inc.

Operator: Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group third quarter 2016 earnings conference call. Today's call is being recorded and will be accessible for future playback at www.alaska.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. [Operator Instructions] Thank you. I would like to now turn the call over to Alaska Air Group's Managing Director of Investor Relations, Lavanya Sareen.

Lavanya Sareen: Thanks, Christina. Good morning, everyone and thank you for joining us for Alaska Air Group's third quarter 2016 earnings call. On the call today, our CEO, Brad Tilden will provide an overview of the business and share our progress on the proposed acquisition of Virgin America. 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 and outlook for the rest of 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 have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release. This morning Alaska Air Group reported a third quarter GAAP net profit of $256 million. Excluding the $14 million in merger-related costs and a $2 million impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net income of $272 million and earnings per share grew by 2% to $2.20 per share that compares to First Call analyst consensus estimate of $2.09 per share. Additional information of our 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 with that, I’ll turn it over to Brad.

Bradley Tilden: Thanks, Lavanya, and good morning everyone. As Lavanya just shared, our third quarter net income was $272 million, a bit below last year, but our earnings per share of $2.20 or 2% higher than last and our highest quarterly earnings per share ever. 2016 is shaping up to be a year of record profitability. Pretax income for the first nine months of the year was over a $1 billion and $90 million higher than last year. And on a trailing 12 months’ basis, our pretax margin now stands at just under 25%. This is an extraordinary level of performance not only in relation to our industry but also in relation to other high quality industrial companies. Some have asked, would Alaska’s margin should be over the longer-term? This is a good question, one that we can all speculate about, where we can say definitively is that our goal is to be a leader in this industry. That means we need to be safe, be on time, provide great service and very importantly have both low payers and low cost. If we do these things well, we will be in a position to lead the industry in terms of financial performance regardless of what part of the cycle we're in. Before we get into details of the quarter, I’d like to touch briefly on Virgin America. Many of you have asked questions about the timing of the merger and about our ongoing discussions with the Justice Department. As the timing, we were hoping to get this done a couple of weeks ago and we are obviously not there quite yet. The scope of issues that remain with the Justice Department is manageable, but there are important matters and we want to take the time that’s necessary to work through that. It’s hard to predict the exact timing for when we'll ramp up, since there are two parties involved. There is a process at play and we're working through that process and we're respectful of that process. Our hope is that we'll have answers for our clearance soon. All that said, we continue to be very confident that the deal will get done and get done in a way that benefits all of our stakeholders, most importantly our customers. This is a pro-consumer merger of two smaller airlines that will bring new low payer competition, industry leading service and innovative product offerings for the customers we serve. And unfortunately, when I have just shared the extent of the comments that we're going to be able to make this morning about the review process. As we prepared for the merger, there are two things our leadership team is really focused on. First, bring in together these two teams, so everyone has aligned, motivated and working on the same things, a pulling together in other words. In doing this well lays the groundwork for number two, which is achieving the synergies of the deal, which based on everything we have seen to-date, we feel confident about doing. Ben Minicucci and his team have been working hard on the integration planning and Ben and others will be happy to share details of the planning work during the Q&A. And as a reminder, this combination ultimately positions us as the fifth largest airline in the country and airline with the national footprint and an unmatched stability to serve West Coast travelers. And with that, I'd like to turn the focus of this call back to our standalone business and our Q3 performance. It’s football season and we're all cheering on Sea Hawks and our other CFO Russell Wilson. One of the things that Sea Hawks do well is stick to their game plan and I am really proud of our folks for sticking to our game plan during our busiest summer yet. A big part of Alaska’s success is built on being safe, being on time and taking great care of our customers. Our team flat delivered during the third quarter. Let me start with safety. You've heard us say that safety is our number one priority. In last quarter, we were the first airline to have our new safety management system or SMS accepted by the FAA. This system was the FAA's mandating for all airlines is the new way of monitoring, managing and mitigating safety risk and it’s a project that we've been working on for almost five years. I am really proud of the teams in Alaska and arise for being the first airlines to have this in place. And again, leading the industry on this underscores our commitment to operating safely and to doing things right. Second, we continue to run a solid operation and in fact this was one of our best quarters operationally ever. 89.1% of Alaska's flights arrived on time during the quarter and we completed 99.8% of our flights. On a year-to-date basis, our on-time rate is 88.5% and we expect it will be the best among the six largest carriers for the seventh year in a row. Over and horizon, Dave and his team have been focused on improving their operations and their efforts are paying off as our third quarter performance went from 79.9% last year to 85.3% this year. This is especially important as we continue to grow the regional side of the business, including the addition of new Embraer jets. And third, our people are taking care of customers. Our internal customer satisfaction score for the third quarter was 87.3%, our highest score since we started tracking this back in 2007. This is a fantastic achievement and I want to thank our employees for taking great care of our customers over the summer. As no surprise that how you treat matters. We're seeing the results as active members in our mileage plan have increased by 35% in the last two years. And this in the face of intense competition in some of our markets. Being safe, being on time and offering a great service with low payers are the key ingredients of our game plan, not only for customers, but also for our owners. Looking at the most recent quarter, we expect our trailing 12 month ROIC of 24% and our third quarter pretax margin of 27% will be among the very best in the industry. These are strong results and you'll hear more from Andrew, Brandon next on the underlying actions that drove these outcomes. As I look to the future, I am very confident about our core business and even more excited about the future when the Virgin America merger is complete. A lot of people will say this, but I really feel it's true at Alaska. We have a fantastic group of people here who are working together and I want to thank that for everything they're doing to make us the best airline that we can possibly be for our customers. Now, I'll turn the call over the Andrew.

Andrew Harrison: Thanks, Brad, and good morning, everyone. Our third quarter revenue performance was solid with growth of 3.4% or $51.2 million. This contrast with the industry revenue contraction of approximately 2%. We were able to sustain high load factors, while increasing capacity at a right more than two times that of the industry. Our present change improved about 200 basis points from the prior quarter and outperformed the industry by approximately 40 basis points despite competitive capacity growing double-digits in our markets once again. Looking at monthly trends, revenue [ph] was down by an average of 6.5% in both July and August yet it was up 0.5% in September. Slower September growth and strong bookings within the month along with an improved closing yield trajectory contributed to the strong performance during the shorter period. Our September load factor of 84.1% was up 2.5 points year-over-year and while sales remain low, they appear to be stable and we're not seeing anything to suggest that this will not continue into the fourth quarter. Our underlying business remains sound and we expect to continue to outcome of momentum for several reasons. First, our revenue streams continue to grow and diversify due to our growth. We started our transcon service 15 years ago in September of 2001 with one flight from Seattle to DCA. Today, we serve 15 cities in this region with 33 flights a day and transcon service now accounts for approximately 15% of our revenues and the similar amount of our profits. We're continuing this growth with new flights to New York from Portland, San Diego, San Jose and a third daily departure from Seattle. And here is a little fun fact, if you combined our network with Virgin America, we'd have up to 31 flights today to the New York City area alone. Second, we added Embraer 175 into our fleet a year ago and this has been a fantastic aircraft for reaching markets in the mid-continent, which were too fast for the Q400 and too thin for the 737. We've rapidly growing the number of markets served by the Embraer 29. These aircraft that delivering the results we'd hope for as they are creating new and profitable revenue streams supporting our mainline growth and providing greater non-stop convenience for our customers. Even though many of our Embraer 175 markets are still maturing. In aggregate, they're profitable and already earning their cost of capital. We take delivery of 18 175s next year. Third, this growth is buttressed by the loyalty we enjoy from our members. We believe we have the most generous and far reaching loyalty program in the industry. Members in our credit card portfolio grew 11.5% for the quarter with retail spend on the portfolio outpacing this membership growth and additionally, our frequent flyer members grew 10%. And fourth, our growth is enabled by offering low fares. In some recent analysis, we conducted, we found Alaska's one way fares were more than $40 or 23% lower than each of the three network carriers on a system wide stage length adjusted basis. Our low fares were enabled by our low costs. We remained focused on bringing these low fares to our customers and maintaining the cost advantage that enables these fares. I want to move to the fourth quarter now. Our Q4 growth was slow substantially to just over 3%, this brings our full year capacity growth to about 8.5% in line with our previous guidance. However, competitive capacity is expected to stay elevated for the remainder of the year at about 10%. While we expect to close in bookings strengths, we have seen in September that carried through to the fourth quarter, December is expected to be softer than October and November on a relative basis, as both Christmas and New Year’s fall on a weekend this year, compressing the holiday travels. We estimate this will lower PRASM for the quarter by about 0.5 point. I also want to update you on the progress we are making on our premium cost product. We expect to complete the conversion of all 61, 737, 800s by year-end, we’ll start selling tickets for premium class in early November and travel starting January 5, 2017. As a reminder, we expect this to add approximately $50 million in revenue next year and achieve $85 million, a new run rate by the end of 2018. With that, I’d like to touch on 2017. On a standalone basis, that is excluding any impacts from the acquisition of Virgin America. We expect to have growth to slow by about a 150 basis points versus this year to slightly more than 7%. This growth comprises as approximately two points from longest stage length and a point from the annualization of markets we already launched in 2016. As we look at published schedules, we expect Q1 2017 competitive capacity to come down slightly to 9% in our markets, still elevated but a nice change from the double-digit increases we have been seeing for quite a while. As we enter the last quarter of the year and look to 2017, we remain confident in our business. We are operating well, fundamentals in the economies we serve are strong. Our loyal customer base continues to grow and we continue to add new and profitable revenue streams through our portfolio. Like everyone else at Alaska, the rest of my commercial team and I are excited about the opportunity that Virgin America presents for our business, which will allow us to accelerate our growth while bringing low fares to more customers and strong returns for our shareholders. With that, I will turn the call over to Brandon.

Brandon Pedersen: Thanks, Andrew, and good morning, everybody. We’re pleased to report another very strong quarter financially punctuated by the 2% increase in earnings per share. Even though net profit declined very slightly, we’re benefiting from the significant share repurchases that we have made since the end of third quarter of last year. As Andrew said, revenues grew by more than 3% and although our non-fuel cost grew by nearly 10%, we were none the less pleased with our cost performance. Our non-fuel unit cost was up 1.6%, but that was lower than we initially expected for the quarter. We remain on track to have a full year unit cost reduction of about a 0.5% which would make this the 7th straight year of unit cost reduction. Andrew offered some early guidance on next year’s growth, but we aren’t yet able to share initial 2017-unit cost guidance. Our leaders are busy compiling budgets right now, folks across both Alaska and Horizon recognize that low cost create an important competitive advantage over higher cost legacy carriers and are required for us to grow. We’re planning to provide 2017 cost guidance on our fourth quarter call and speaking of guidance, I want to remind everyone that we’re taking a little different approach this year by having our Investor Day in March, we’re looking forward to sharing much more with you about our past merger plan at that time. Our earnings benefited less of it’s from less of a tailwind of lower fuel prices that in Q1 or Q2. Economic fuel cost declined by $18 million this quarter, where that the year-over-year declines in Q1 and Q2 were more than three times that amount. With oil prices now over $50 a barrel, it’s worth mentioning the improving efficiency of our fleet that will help offset rising fuel cost. ASMs per gallon improved by another 2% this quarter, because of the ongoing retirement of 737-400s and the addition of fuel efficient of 900 ERs. In fact, we've taken delivery of 21 737-900 ERs since the end of the third quarter of last year and our mainline efficiency should just continue to get better as we finish retiring the 400s and add another 13 900 ERs by the end of 2017. As we've told you before these new aircrafts are 37 seats larger, they're more comfortable they're more reliable and set the fuel like a pre [ph] with wings. A 900 ER brings less than 910 gallons per flight compared to 940 gallons per flight hour burnt by the smaller 737-400. Turning to the balance sheet, you might have noticed that we ended the quarter with more than $3.2 billion of cash that total includes more than $1.5 billion that we've raised at quarter end to fund the Virgin America acquisition. At this point, we're fully prepared to close the deal once we have DOJ approval. Our treasury and legal teams did an incredible job putting all this together and I wanted to extend a huge thanks to both of them. We're using a mix of fixed and floating rate debt and our weighted average interest rate on this new money currently stands at 2.37% even after the financing. We still have more than 40 unencumbered Boeing 737 aircraft, including 20 next generation 800s and 900 ERs. The borrowing rates and the fact that we have so much remaining collateral are both the testament to the great balance sheet that we've built and incredible amount of cash flow we've been able to generate over the last five years. Cash flow from operations for the first nine months of the year was $1.2 billion about flat compared to the first nine months of last year. Year-to-date CapEx is just over $500 million resulting in about $700 million of free cash flow. We expect full year CapEx to be now be $680 million down slightly from prior guidance. There are two drivers. First, we elected to differ our first step our first 737 MAX aircraft from the fall of 2017 to early '18. The MAX will be a great airplane for Alaska with its extra range and lower fuel burnt that was so much going on we wanted to fit more time to bring it into service. We want to thank Boeing for accommodating our request. And second, we've lowered our estimate of non-aircraft spending as certain projects have shifted to the right. Looking forward, and as we told you last quarter, we're planning for 2017 CapEx to be about $1.1 billion, which of course is current air group [ph]. Andrew and I have thrown out a lot of information on fleet changes, so I thought I'd might recap. On the mainline side in 2016, we're adding a total of 19 new aircraft and retiring 10. And in 2017, we're adding 12 new aircraft and retiring 16 which is the rest of the 737-400 fleet. On the regional side, we'll take delivery of our first 13 E-175 jets into the Horizon fleet. And by the way I want to recognize the Horizon team that's working on entry into service and we'll add another five to our capacity of purchase arrangement with SkyWest. We're very pleased with the strong results both operational and financial and our people should celebrate the great summer we had. We're mindful that there is a lot going on, a lot of hard work lies ahead and we need to keep executing on the things that continue to make us successful. And with that, let's go to questions.

Operator: [Operator Instructions]. Your first question comes from Savanthi Syth from Raymond James. Your line is open.

Savanthi Syth: Hey, good morning, everyone.

Bradley Tilden: Good morning.

Savanthi Syth: And just a quick follow up on the Virgin comment you made Brandon. You said is everything been wind up as soon as you get approval you've been close. Or are there kind a non-financing that need to happen. And if you get too close to the holidays and just to get a shot for 2017?

Brandon Pedersen: Sav, it's Brandon we are good to go from a financing perspective but I might turn it over to Kyle to just touch on the other process. Thanks.

Kyle Levine: Hey, Savvy, good morning. Yeah, the things now as things currently stand as soon as we get DOJ clearance and have the financing all set up, we're good to go.

Savanthi Syth: Okay, great. And then on the Horizon front, just wondering is that kind of middle of the next year and how should we think about is there are going to be something transition introduction expenses around that and as we think about 2017?

Kyle Levine: On the Horizon, the introduction of E175s?

Savanthi Syth: Exactly.

Kyle Levine: Yes, so time we have right now, we'll take the first aircraft in March of next year, we hold the service by the first of May. We submitted all of our manual update with the exception of one, so far the feedback is very positive, so I think we're pretty much on target. We have no confirms at all, training and staffing for the policy that is going very, very well so, I think we had a really, really good position overall, 175s.

Savanthi Syth: All right. Great. Thanks. I'll get back in the queue.

Bradley Tilden: Thanks, Savvy.

Operator: Your next question comes from Rajeev Lalwani from Morgan Stanley. Your line is open.

Rajeev Lalwani: Hi, gentlemen. Thanks for the time. Just on the Virgin transaction on a high-level question for you. Just dig on that various headlines out there, how do we get comfortable with that. Yeah, the full price you pay, it doesn't get fuller and that synergies remain intact?

Bradley Tilden: Rajeev, its Brad. This is a hard deal. But I think the bottom-line of this is, we actually have said, what we are going to say about it. I think everyone on the call was familiar with the M&A process in our country. And we’re going through that process and what we have said is that we are extremely confident that the deal will get done and we’re also very confident that we’re going to realize the synergies that we talked about. But that’s actually the limit of what we can talk about on the call today, unfortunately.

Rajeev Lalwani: Okay, that's okay, no it’s a tough question to answer. A related question to the – if I could maybe just explore sort of a plan B in the event that the deal doesn’t go through for whatever the reason. What would you then do with the $3 billion or so of cash that you’ve got sitting on your balance sheet?

Bradley Tilden: Again, Rajeev, I just don’t think we can go there, but I do respect you for trying and thanks very much. We’ve actually just said what we can say about the process.

Rajeev Lalwani: Okay, no worries. Thanks.

Bradley Tilden: Yep.

Operator: Your next question comes from Julie Yates from Credit Suisse. Your line is open.

Julie Yates: Good morning. Thanks for taking my question. Question on the growth cadence for '17, any color you guys can provide, I imagine you'll be starting below the 7% in Q1, and ending above in Q4?

Andrew Harrison : Julie, it's Andrew. At this time, you know we may have Investor Day in November where just giving high level guidance or a group today at about 7% for next year. To your point we start lower as we come into the first quarter but as we move through the year and come to event today we'll give you quarter-by-quarter guidance.

Julie Yates: Okay, great. And then Andrew, you mentioned a competitive capacity, remaining elevated, but around 10%, In Q4, I think last you told this it was 12%. So, I’m assuming thing are looking a bit better, is that correct?

Andrew Harrison: You know I don't want to celebrate too early but the third quarter competitive capacity of that 13%, fourth quarter 10, as we mentioned nine in the first quarter, but as the bookings sit today, the book schedule is currently up 1% in the second quarter. So, that’s going to be very good.

Bradley Tilden : Julie, it's been a long time since we’re seeing numbers like that in our markets, obviously.

Julie Yates: That’s great news. Okay, great. Thanks so much.

Andrew Harrison: Thank you.

Operator: You next question comes from Hunter Keay from Wolfe Research. Your line is open.

Hunter Keay: Hey, good morning. How are you guys doing? So, Brad, you talked about, I mean the first things you said about people are asking you about long-term margins and you said they’re going to be better than everybody else, but you didn’t give a number. If I were to think about the average pretax margins you guys did in '12, '13, and '14 it's about 14% pretax. So, is that good sort of all sequel guide post to how I think about long-term margins or will it be a little bit lower than that, given some likely dilution from Virgin? You can answer the standalone or pro forma however you want?

Bradley Tilden: Yeah. I think this is the place where we’re all - you guys probably have a better view of what’s going to happen with long-term margins in our industry than we do. Btu we do look at other industries, we look at other high quality industrials, and we look at sort of gaps that people are earning over their cost of capital. And so, I think the industry, you would hope that as we settle down, and have capacity, control and have consolidation that we settle into a place where we're earning as an industry, margins that are several hundred points above our cost of capital. And then what we’re saying is the last, it should be above that that sort of how we see ourselves, that’s what we want to do. How you do that math I don't think I want to be the one -- I think I have told you what we know and we want to -- we have always done is try to talk about what we know and not talk about what we don’t know. So, I think that’s where I am leaving. As divergent is to be really candid, yes, the two together. We're not issuing one new share for this acquisition, so any profit that they bring into the company is accretive to our profit. But I think you have seen the math, Virgin's historical margins are lower than Alaska. So, I would expect that our company-wide margins will dilute a little bit and Brandon I can’t remember the exact numbers, but it's not huge -- once the synergies are realized, it’s not a significant decrease as I recall.

Brandon Pedersen: In the margin….

Bradley Tilden: In the margin percentage.

Brandon Pedersen: Yes. Once that synergies are realized and then obviously, we need to have Virgin’s actual numbers for this year in the next to know that with certainty.

Hunter Keay: Yeah, right, okay. Cool. And then what’s on the table in terms of assume it still gets done, how you guys might think about communicating with the industry, you have been pretty consistent over the last seven or eight years I thought not giving PRASM guidance, not giving margin guidance. I think the stability of your earnings are better than most, have you ever considered talking about -- I know we talked three months ago about long-term PRASM guidance. But is there any -- are you guys give any thought to how you want to think about communicating financial guidance in general once the deal closes. I mean in particularly giving something like annual EPS guidance like other high quality industrial companies do, so you can pull. Yeah, right I mean like it’s -- I am serious you can improve, so if you give me a range and you hit it year-after-year your multiple will go higher. If you believe the fuel and surge correlated for example, you should be able to hit a range of EPS. So, as you guys think about this, are you giving thought to how you communicate guidance longer-term in general, not just PRASM, but guidance in general.

Andrew Harrison: Yeah, Hunter. We are thinking about it. What I will tell you is, we were on the cost of giving a lot more forward-looking disclosure and then we went in and did the deal of Virgin and so we're not going to do that right now. And what I would say is I recognized that that’s what good high quality industrials do. I would love to get there at some point, what I will tell you is that the reality of putting business A together with business B, we are going to have numbers that are unfamiliar to us for a while and I think what we'll do is we'll wait until we get more familiar with those numbers and we'll get really confident on what the comps look like from our own perspective and then ones we're confident with that we'll start giving more to you guys.

Hunter Keay: All right, yeah, that’s cool. Thanks, guys.

Bradley Tilden: Thanks, Hunter.

Operator: Your next question comes from Joseph DeNardi from Stifel. Your line is open.

Joseph DeNardi: Andrew, just kind of looking at the competitor capacity and again if you look at the composition of the growth that’s changed a lot over the past 18 months there was a lot more coming from Delta, now it seems to be American and Spirit. So just can you just speak to conceptually kind of what that mean for you guys from a PRASM standpoint, is it better for you, I would imagine it is, but the growth is coming from American and Spirit rather than Delta or is that not the case.

Andrew Harrison: Joe, the numbers we give you a sort of divided to us now I think you can just 1% versus 9 at the end of the day, we compete with everybody, each competitor comes with their different flavor, but at the end of the day as it relates to that from my perspective competitive capacity is competitive capacity on our network and we just needed to deal with that irrespective of what that it is.

Joseph DeNardi: Okay. And then Brand and you mentioned mainline fuel efficiency potentially getting better next year, I mean can you put a finer point on that should we think mainline items per gallon up like 3% or 4% or just kind of in line with what you guys have done in the past couple of years?

Brandon Pedersen: Yeah, I don’t have the number off the top of my head, but if I had I would say it’s probably what we have done over the last couple of years. We have been on this course of phasing out the 400s now for a few years, next year they said the last 10 go out. So, I think it’s probably pretty consistent with what we would expect to see again on an Alaska only basis. As we look ahead to the merger Virgin America does enjoy a very high fuel efficiency as well and so the combined entity should be just as well positioned.

Joseph DeNardi: Great. Thank you very much.

Brandon Pedersen: Thank you.

Operator: Your next question comes from Jamie Baker from JPMorgan. Your line is open.

Jamie Baker: Hey, good morning, everybody.

Bradley Tilden: Good morning.

Jamie Baker: When the merger was announced you talked about re-deleveraging and I am wondering if you've dug deeper into the integration planning process, have you established any timing or sort of annual progress that you hope to make in that regard I mean is it a five-year goal to return to where you currently are premerger or where you were in March or some other timeframe, is there some annual number in terms of how much you'd like to, how many terms of leverage you might want to decline, anything like that?

Brandon Pedersen: Hi Jamie, it's Brandon. Good morning. Maybe I’ll start and then Ben can tell you about the integration progress that we're making. We have models that re-deleveraging that we talked about and when we come out of the gates, we should have debt to cap right 59% to 60% and -- but our would be to get down into the mid-40s within say three years or so that’s obviously depended on the economic environment. But if we do it right that’s where we’ll be and then I think we'll stay there for a while, I think we like leverage in the mid -- low to mid 40% range, I don’t see us going back down to 28% like we were pre-deal, but I think we can get there quick and at that level we'll have a balance sheet that looks a lot like another high or other high quality industrials and it will look very favorable compared to other carriers in the industry.

Jamie Baker : Very helpful. I appreciate that. Second question and this is not uniquely tied to merger specifics or the negotiations, so hopefully you will choose to answer. Can you assure us that you at least identify the terms under which you would not do the deal and the reason I ask is that I am just trying to assess whether the goal here is to get the deal done and give up as little as possible which make sense or get the deal done only if you can assure that ROIC remains above acts, I mean have you established a floor internally, I’m not asking you what the floor is, just trying to dig into the thought process here?

Bradley Tilden : Jamie, it's Brad. I think what we will say is that we’ve always run this business for the long-term, we think about what’s going to be good for all of the people that's been on this place over the long-term for customers, for employees, for all of you, for the owners of the business and that’s the mindset we're taking as we have this conversation with Justice Departments and so we are pushing. There are some things that we feel are important to our future success and our ability to do good things for customers and that’s what's motivating us here, but -- and I'll just say, we do have a pretty strong internal accomplice about what is workforce and what will workforce in the future so that’s an answer to your question, there you have it, but there is just not a lot more than we can say about this.

Jamie Baker : No, that'll suffice and I could just sneak a housekeeping question and I guess somewhat revenue - Hunter was asking about in terms of guidance, have you thought about how you are going to be reporting post-merger? Should we expect these still breakouts regional mainline or is there an opportunity to just move everything into a consolidated basis as you guys going forward, any thoughts there or we're just jumping too far ahead? I’m just thinking about how do I rebuild my model?

Bradley Tilden: Yes. What about you Jamie. What we’ll do is we’ll probably report regional and mainline, I would say, but until we have a single operating certificate, Virgin America and Alaska Airlines separate results would be available on that one as well.

Jamie Baker: Yes, okay. Yes, make sense. All right, I’ll turn it over to somebody else. Thanks for taking my questions.

Operator: Your next question comes from Michael Linenberg from Deutsche Bank. Your line is open.

Michael Linenberg: Hi, good morning everybody. Just follow up on Jamie’s question about Brandon, where you would want to get to with respect to debt to cap, if getting back to the low to mid 40s still then get you back to an IG rating. Would that be -- would that matter or is it at the very least you want to do what you need to do in order to get back to the coveted investment grade credit rating?

Mark Eliasen: Hi, Mike, this is Mark Eliasen maybe I’ll take a shot at that one. First of all, we are not changing our principals and our principal got us to the investment grade rating and that is generating good cash flow on a conservative balance sheet running a good company, good high quality industrial company. So, we’re going to get there and we’re confident that the rating agencies will come around, when they see that and they know as well and they'll see that we are going to just refer back toward to our pattern. One point I’ll make about the -- we are going to have additional debt, but because the interest rate is quite a bit lower than what we have before actual interest expense will be right in the range of what we’ve had historically. That’s a good thing even though our leverage is a little bit higher.

Michael Linenberg: Okay, great. And then just a second question and this is probably, I don’t know it’s for Brad or Ben but we had the new, I guess another phase from the DOT as it relates to consumer protection and legislation and well there was kind of lot of verbiage, lot of noise, it seems like that there were a couple of things that are going to come into play here and one of it has to do with the on-time performance, and I am just curious I mean I know that you know under the new rules Horizon doesn’t need the new threshold, but it looks like it actually very close to the threshold, so maybe it’s a 2017-2018 type event. But if you could, if you would include Horizon in with the Alaska numbers, where would you stack up on time completion factor, like how would you compare you know and I really you probably have to do that analysis for your other carriers but does it enhance, is it neutral or does it take away from the numbers.

Benito Minicucci: Hi, Mike, yeah that’s a great question and Frank and you guys would it expect that it from me, I track that every day Alaska, Horizon and I actually track every other carrier in the industry and I was backup and I will tell you today, if we combined Alaska and Horizon we would still lead the industry in on time and combined completion rates. So Horizon I am looking forward to Horizon getting the 175 a more reliable airplane, in fact we’d include sky in that total as well. So, I think it’s a good thing what the DOT has done, I mean the customer when they book on an airline they really don’t distinguish whether they are flying a regional airplane or mainline airplane, I mean it’s our commitment it’s been our philosophy all the time here at Alaska that whether you fly mainline or regional we will look after you like the same across all touch points.

Michael Linenberg: That’s super helpful, Ben. Thank you.

David Campbell: Michael, this is David Campbell of Horizon. One of the things that we’ve turned our decision towards really, really clear focus on operational excellence, we’ve seen a 9 and 7% improvement so far in this year on DOT performance for getting out – DOT on time performance for getting out the gate and still about a 5% improvement as far as on time arrival. One of the challenges I think we have here is the idler is really dealing with ATC delays, but everything else that we can control, we’re driving a much, much stronger profits in place, so I am pretty excited about the focus, I think you better see a continued progress on performance from Horizon. I think the second piece of it, that you’ll certify that’s a reliable great airplane that’s could actually help us in great deal so that’s going to be really a good tool in our toolbox that will really take care about of our customers.

Michael Linenberg: Great. Thanks, David. Thanks, everyone.

David Campbell: Thank you.

Operator: Your next question comes from Darryl Genovesi from UBS. Your line is open.

Darryl Genovesi: Hi, guys. Thanks for the time. Andrew is there a further step up in the credit card economics in 2017.

Andrew Harrison: I am sorry, if you could repeat that.

Darryl Genovesi: Right, I was asking if there is some of your peers have announced so that credit cards that they have signed recently have had a step up in the economics in year two as well and I was wondering if that was the case on the deal that you announced at the Investor Day last year.

Andrew Harrison: I am going to look at Brandon, we don’t normally just throw the traction relationships with the bank, what I can tell you is that we expect and we continue to see a continues strengthening of our economics through our credit card arrangement because we have got strong growth both on the Boeing side and the loyalty.

Brandon Pedersen: Yeah Darryl, it’s Brandon, it does step up due to term although I don’t remember of the top of my head whether it’s annually if there is something here that we go flat for a year.

Darryl Genovesi: Okay. Thanks for that. And then Brandon you said, you weren’t ready to provide 2017-unit cost guidance yet, which is understandable, but just wondering if you could highlight what some of the big moving pieces are for us I guess you’ve got the 175 introductions that’s been discuss, but there is anything else I think you have got a mechanics deal that’s amendable I mean any other sort of big items that you would highlight.

Brandon Pedersen: Yeah, you’re right, we do have mechanic deal that is amendable on the Alaska side. We have what I would call a likely increase in our pension expense just given returns and where rates are this year we won’t know that amount until the end of the year, I think it’s possible that we might have a deal with the OEM for an engine services agreement we’re still looking into that so if that gets done that would be a cost win for us, although that’s really just a smoothing arrangement over a longer term period and then we do have a little bit of a I’d say both cost and ASM headwind associated with premium class as Andrew shared premium class is going to be awesome from a margin perspective both dollars from the dollars perspective on the margin line although it does dilute ASMs a little bit and there is additional cost of serving those premium class passengers. So, those are kind of the big things of the top of my head.

Darryl Genovesi: Okay. And then, if I could just quick one last one in. when you retired the last 737 classic, is there some sort of step down in infrastructure spend or something associated with that in addition to the fuel cost savings or no longer operating that airplane.

Brandon Pedersen: Yeah, I'll let Ben to take that one.

Benito Minicucci: Well, first that we're going to have a party when the last classic goes at least the maintenance at all. There will be some we're investing in an anchorage hanger. The anchorage hanger only accommodates classics. We do need a bigger hanger up in the State of Alaska to accommodate the larger NGs. Besides that, we have chilling and spares and -- to maintain the rest of the speeds, so we're -- with that.

Darryl Genovesi: Okay. All right, thanks guys.

Benito Minicucci: Thank you, Darryl.

Operator: Your next question comes from Helane Becker from Cowen. Your line is open.

Helane Becker: Thanks, operator. Hi, everybody. Thanks for the time here. So, I have two questions. One you didn't really mention much about Hawaii. I was kind of wondering if you could talk about the competitive capacity that's going on in the market and what you're seeing there and whether there are plans to increase capacity or not?

Andrew Harrison: Helane, it's Andrew. I would generally characterize the Hawaii right now as stable. We've seen some capacity increase in California especially in the Bay Area. But again, without going into too much detail, we feel very, very good about our Hawaii 26 plus flights a day franchise and it's performing very, very well, very, very stable right now.

Helane Becker: Okay. And then I think over the past couple maybe last week or the week before there were some really bad weather in your neck of so what you don't normally see. So maybe you can talk about the impact that would have on October results?

Benito Minicucci: Helane, it's Ben. Yeah it was we were expecting extremely high winds and rain. What I will tell you is that we got some of it but it wasn't to the extent that we expect it. We did cancel just a handful of flights maybe about 30 flights we accommodated most of customers we did that alone then. So, I can't tell you dollar amounts maybe I'll ask Brandon.

Brandon Pedersen: Yeah, I think it would be immaterial.

Benito Minicucci: Yeah, so we came through it particularly yeah we don't get to see many of those storms so hopefully it will be the last when we see in a while.

Helane Becker: Okay. And then Brandon, I noticed that the CRJs are going away at the end of the year. Is there any impact we need to be aware from balance sheet perspective?

Brandon Pedersen: No there is just couple of left that are flying and maybe the one that's still flying. We've taken care of all of it from a balance sheet perspective.

Helane Becker: Okay. Thank you.

Brandon Pedersen: You're welcome.

Operator: Your next question comes from Dan McKenzie from Buckingham Research. Your line is open.

Dan McKenzie: Hi. Good morning. Thanks, guys. Andrew, taking a step back, I am wondering if you can help us understand how codeshare agreements work more broadly. There is a broad view that there will be like a light switch either you don't -- you turn them on, you turn them off. And so, the question here is, does how it really work? What are the various components how easy are they to customize it? And where does the value really come from, it is on the routes that you don't serve, but your partner does. Or is it on the markets that you both serve?

Andrew Harrison: Hey Dan, good morning, that’s a very good, big question, I'll keep it high level I think and I'll just speak for an Alaska Group. In couple of key things here that codeshare provide us firstly domestically, we can connect into our partners' hubs in the middle of the country and then connect our customers to anywhere in the rest of the country. So, first this codeshare agreements domestically give us a lot of ability to be able to get our passengers everywhere I need to go at the times that need to go and give them plenty of choice if there is when that need to go. I think the other key component of that is also obviously the loyalty side. So, our customers can still prove elite status in miles when they fly on our partners' metal or on their own metal and of course redemptions, our customers want to redeem -- 85% of our customers redeem on our sales. And then the last piece is really international and the international is really, really important. For our international partners, we provide huge value to help them fill their airplanes. I mean the statistics are quite significant, hubs especially on how many passengers we put on our foreign flag friends. And for Alaska customers, it allows them to both redeem globally 800 plus destinations globally as well as earn and redeem miles. So, overall, I would say that these codeshare relationships provide great utility, but at the end of the day, Alaska able to fill fun its fundamental products and the majority of customers and majority of loyalty, majority of revenue is all based-on Alaska Air Group's metal and what we do.

Dan McKenzie: Got it. But if I can kind of just back up Andrew just a little bit there, how early customize them to turn on or turn off certain routes I guess number one. And then secondly, the majority of the value come from the markets that you don't serve or because I would presume there are some markets that you jointly serve. I'm just wondering if you just kind a help us understand a little bit further.

Andrew Harrison: So, I think for mechanics it's very easy to turn things on or off. We just got to give notice to that customer, change the booking schedule and not disrupt passengers, so we work very closely with our partners. And you know there is no silver bullet on value. In our Seattle hub, it might come from connecting beyond from international loyalty in California where we're less prevalent or maybe even in Los Angeles, our partners give us a much full schedule and allow customers where we don't have a whole lot of utility still stay in the family and in our program to travel on them. I think loyalty codeshare revenue, all of these things are the portfolio, Dan, I honestly there is no one single area that's more important that the other from my perspective at least.

Dan McKenzie: Understood. And I then I guess secondly here Andrew you mentioned the transcon presence for Alaska. The rest of the industry is gone to a life flat scene in this segment. And I guess I'm just wondering what are your thoughts about this going forward just given the acquisition of Virgin here. Is the more upscale approach make sense or is the thought simply to maintain a density advantage.

Andrew Harrison: Yeah, Dan, it's a great question and that's a project that we are working on right now. I think the point you're making is the good one that a lot of carriers are moving to, but certain number of [indiscernible] in certain markets. The other side of it is Alaska has got a long standing, we're very proud of the low cost low fare position that we have. And so, those are the two and there is also a simplicity element of this thing. So, those are the things that we're going to be balancing as we think about this decision. I think you'll hear say more about this in the next few months. But it is an open question. I think you know the two sides - the two arguments for each side of it.

Dan McKenzie: Okay. Thanks, guys.

Andrew Harrison: Okay, Dan.

Bradley Tilden : Hey Christina, we have got time for one more question.

Operator: Your next question comes from Savanthi Syth from Raymond James. Your line is open.

Savanthi Syth: Hey guys. Thanks for taking the follow-up. Just maybe on the capacity growth side, I'm little bit surprised by next year's level of growth given that you are having pressure on the field side and you're going through this integration. Just any thoughts on what got you comfortable with that. And given the changes in the fleet that you've talked about. I know in the investor day you've had outlined maybe getting like 80 ASMs per gallon level of fuel efficiency and if that still the same thing?

Bradley Tilden: Savvy, maybe I'll start with the first part on capacity. But so, couple of things as you've heard earlier. There is obviously decent growth on the regional side of our business. And all the CIJ is going away that was 70 seats we're going to 70 seats on the 175. So, there is some good growth there. A lot of our growth is really transcon and midcon, 80% of it was this quarter a 100% of it will be next quarter. We'll give more details later on. But there are markets that we found to be very, very good for us and adding a lot of new revenue. As Brandon shared these are high level estimates and again as we said today the hub and all the new each of those were point of growth were three quarters of point of growth. So, it's not have to get the 7% already with what we've already done. We will continue to monitor this and of course with the new combined entity we will take a high look at it. But what we are seeing to-date is our growth has provided good economics for this company. If these economic conditions and the continuing strengthen of close in bookings and the environment are still very next year we will continue with our plan.

Savanthi Syth: Excellent.

Mark Eliasen: Hey Savvy, this is Mark. You've talked about ASMs per gallon, are we talking about an objective or goal for Alaska.

Savanthi Syth : I thought at the Investor Day that you outlined the 85 number.

Mark Eliasen: Yeah, so I can give you a couple of facts that I just looked up. The 900 ER gets about 92 seat miles per gallon right now on our fleet. And the 800s are about 85, so as we phase out the 737-400 as Brandon mentioned, we should approach to that number, we should be in the 80 -- that’s going to be about 88% of our fleet will be those very large jets and they're great airplanes for us.

Savanthi Syth: Okay. Sounds great. Thanks.

Mark Eliasen: Thank you.

Bradley Tilden: Thanks, Savvy.

Operator: At this time, I would like to turn call over to Brad Tilden.

Bradley Tilden: All righty. Thanks, all of you for tuning in today. We appreciate your questions and we look forward to chatting with you in 90 days’ time. Thank you.

Operator: 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.