Good afternoon. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group's Fourth Quarter Earnings Release Conference Call. Today’s call is being recorded and will be accessible for future playback at 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. [Operator Instructions]. Thank you. I would now like to turn the call over to Alaska Air Group's Director of Investor Relations, Emily Halverson.

Thanks Catherine. Good afternoon and thank you for joining us for our fourth quarter and full year 2019 earnings call. In today's prepared remarks, you'll hear updates from our leaders Brad, Ben, Andrew, Brandon and Shane Tackett. Several other members of our management team are also on hand to answer your questions during the Q&A portion of the call. This afternoon, Alaska Air Group reported fourth quarter net income of $181 million on both the GAAP and adjusted basis with the latter excluding merger related costs and mark-to-market fuel hedging adjustments. Air Group's reported adjusted earnings per share for $1.46, $0.05 ahead of the first call consensus. These results compare to adjusted net income of $93 million and adjusted earnings per share of $0.75 in the fourth quarter of 2018. Our fourth quarter adjusted pre-tax margin expanded 470 basis points to 10.9%. This marks the fourth quarter of sequential improvement in our margin expansion. For the full year 2019 Air Group reported record revenues of $8.8 billion, adjusted net income of $798 million and adjusted earnings per share of $6.42. Pretax margin was 12% with adjusted operating cash flow of $1.8 billion, and adjusted free cash flow of $1.1 billion. Our debt to capitalization ratio declines to 41% and our return on invested capital was 12.2%. As a reminder, our comments today will include forward looking statements on our expected future performance, which may differ materially 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've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. And now, I'll turn the call over to Brad for his opening remarks.

Thank you, Emily, and good afternoon everybody. As we discussed in the last couple calls, we feel that 2019 marked a turning point for us as we got to the bulk of our Virgin America integrations and begin to see the returns on that investment. And more importantly, as we focus our energy on running a fantastic airline and on executing initiatives, which we designed to strengthen our long-term competitive advantage. As Emily shared, today we reported that our 2019 adjusted pretax income grew by 43% to nearly $1.1 billion and our adjusted pretax margin expanded 3.1 point to 12%. Our operating cash flow was exceptional as it grew 37% to $1.8 billion. Our free cash flow of $1.1 billion and our net income to free cash flow conversion of about 140% were also very strong. We've now paid down 75% of the $2 billion we borrow to buy Virgin America and as Emily said, our debt to cap ratio is now down to 41%. These results deliver terrific value for our owners. In 2019 ROIC grew 280 basis points to 12.2% and our earnings per share for the full-year group 44%, which is the highest growth rate of any airline that reported so far. Of this value we've returned $250 million to shareholders in 2019 through dividends and share repurchases. Brandon will talk in a moment about our capital return plans for 2020, which will include the $0.10 increased our annual dividend which we announced today. We've made progress on many fronts. But we're especially pleased with our momentum on commercial initiatives designed to improve the guest experience and drive revenue gains. For both the fourth quarter and the full-year we expect our unit revenue growth will be the best in the industry. I want to congratulate Andrew and…

Thanks, Brad and good afternoon everyone. At our Investor Day in the fall of 2018, we laid our a roadmap to achieving our goal of 13% to 15% pretax margins and a series of revenue and cost initiatives that would move us closer to that goal. Building on that momentum, we been working on our strategic plan for the last six months that sets the vision for Alaska for the next five years. The plan builds on our strengths and addresses key areas of opportunities for our company to thrive in a consolidated and increasingly competitive industry. The plan is comprehensive and for obvious reasons we won't share specific details, but at high level that's focused on three areas. The first is growth, which includes how we build our network and hubs. How we unlock the value proposition of our brand in California. How we build the best-in-class merchandisers. How we become the best-in-class merchandisers. And how we drive guest and employee facing innovation. Second is people, which addresses how we continue to nurture our fantastic culture. How we build excellent labor relations. And how we develop that leaders in the industry. And third is our business model, which builds on our strong safety culture and operational excellence. Our path of being leaders and sustainability. And our focus on creating a robust financial engine that allows us to generate appropriate financial returns over the long term. .: Building these muscles as required enormous discipline. Of the last 10 years, we've demonstrated our ability to be at or near the top of the industry in each of these areas. We know that preserving these competitive advantages is key to continued profitable growth. But we're seeing increasing congestion in our largest hubs that is challenging us. Gary Beck, our new Chief Operating…

Thanks, Ben and good afternoon everyone. Eco what you've heard from others. The commercial business ended the year on a very strong note. Our total revenue grew 7.9% in the fourth quarter on just 3.5% capacity increase. This translates to unit revenue growth of 4.2%, which we believe will exceed industry by over 350 basis points. Both leisure and business demand was solid this quarter. I'm pleased report that New York and California Transcon performance were both among the top three TRASM improvement stories for Alaska. Our team have worked hard this year to recover from the challenges we faced early in 2019 and have made a positive impact turning those markets around. This is a testament to what we know to be true, putting the right aircraft in the right markets when combined with Alaska's high quality product and service is a win for both our guests and Alaska airlines. An important contributor to our revenue growth has been a premium product. You may recall the prior 2017, our mainline fleet was segmented into just two classes. First, in main cabin with the regional fleet only main cabin. At that time premium product revenues comprise just 7% of all revenues, with 70% of revenue generated by main cabin seats. Today first class and premium class represent 22% of our total revenues. This mix will grow as we complete the reconfiguration of the airbus to bring the premium product mix in line with the rest of the fleet. On the regional side of our business, we also see solid demand for premium seating on the Embraer 175s. We are intentional about how we manage our premium product business. Our goal is to keep out premium cabins affordable, provide generous benefits to our loyalty members while competing effectively against our peers.…

Hey, thanks Andrew. Good afternoon everybody. As part of our transition you're going to hear from both Shane and me to today as we walk through our Q4 and full-year performance and talk about 2020. We were pleased with our fourth quarter results. Net income and earnings per share both nearly doubled. Our 10.9% pretax margin was 470 basis points better than last year on the strength of unit revenues, solid execution against our cost plan again and a modest decline in fuel prices. This was our fourth consecutive quarter of margin improvement and the largest. For the full-year adjusted pretax margin was 12%, a 3.1 point improvement over last year and meaningful progress on our path to 13% to 15% margin. Profits increased because our teams executed well on the initiatives we laid out at our 2018 Investor Day. Our fourth quarter unit cost increase seven-tenths of a percent on 3.5% increase in capacity. We weren't happy with the result. We did have a modest reduction in capacity given December's weather and some related costs, but we also saw some late adjustments to employee benefit accruals including high dollar adjustments to pilot disability accruals and large medical claims that came in the last couple weeks of the year. Brad mentioned our performance-based pay program and I thought it might be useful to connect our year-end benefits related adjustments to the PBP payouts earned by our people. These late adjustments reduce the payout of an employee making $50,000 a year by $275. We need to improve the structure of these programs to better manage these costs prospectively. Overall, our full-year cost performance was solid. Our teams across the company both in operational roles and support roles did a nice job developing aggressive plans and then hitting them. It's notable that our full-year CASM increased only 2.3% on 2% ASM growth. You might recall that our initial guidance for 2019 was for 2% to 2.5% unit cost growth. We achieve that while absorbing $48 million of costs associated with the new Collective Bargaining agreement with our IAM and AMPA represented employees, not in the original guide. Productivity was good, but we still have lots of opportunity to get back to peak performance. Overhead was down 3.5% or $25 million year-over-year helped by the outstanding work of our supply chain team and their very successful initiative to improve terms with our business partners and the steps we took to right size our corporate staff. In fact there's more work underway to simplify reporting structures and make us more agile. Now over to Shane.

Thank you, Brandon, and good afternoon everybody. My remarks today will touch on both capacity and cost guidance for 2020. And then briefly on our fleet plan and owners manual. Regarding capacity, it remains our intent to grow between 3% and 4% this year. This does assume midyear MAX returned to service which given Boeing's press release last week and the likely requirement for sim-based training for MAX pilot is still uncertain. Regarding cost guidance, we believe unit costs will be up about 2% for 2020, excluding the impact of a new agreement with Alaska's pilots. I would also note, the 2% excludes any impact to capacity due to the MAX delivery timing, as well as any costs associated with potentially required training related to returning the MAX to service. We'll continue to update both our capacity and cost guidance as we gain more certainty about the timing of the 10 MAX aircraft we are scheduled to receive this year. To discuss costs a little further we just wrapped our annual budget process and although I'm happy that we have a plan that will again grow our pretax margin, we continue to have opportunity on our cost structure. As you know, during integration, we intentionally be prioritized to a modest degree our cost focus. That is now behind us and we know that our long-term health is secured only with the ability to offer low fares and high-value to our guests and that to offer low fares we need to be relentless again in our focus on efficiency and low costs. While goals are aggressive for 2020 in light of a few large headwinds, we are committed to demonstrating our continued focus on cost discipline in the quarters and years ahead. For Q1 specifically we expect unit cost to increase…

Thanks Shane. Turning to the balance sheet, we ended the quarter with $1.5 billion in cash and marketable securities. We produced a record $1.8 billion of operating cash flow before pension funding, while net CapEx was approximately $700 million resulting in $1.1 billion of free cash flow, a $760 million improvement over last year. Free cash flow conversion was exceptional at approximately 140%. CapEx was lower than planned because of MAX delivery delays, but plan CapEx was also low because of the intentional constraints we put on CapEx two years ago in order to improve our ability to generate free cash flow. Our number one capital allocation priority for 2019 was to re-deleverage our balance sheet. We paid off more than $600 million of balance sheet debt that have now paid off $1.5 billion or 75% of the amount we borrowed to acquire Virgin America. We close the quarter with a debt-to-cap ratio of 41% and with a trailing 12 months net debt-to-EBITDA ratio of 0.9x. We also made a $65 million contribution to our defined-benefit pension plans which are now 86% funded. Last quarter I mentioned that our treasury team was working hard not only to prepay debt, but to restructure the debt that remains to take advantage of the low rate environment. They've done a great job. We have $1.5 billion of balance sheet debt remaining, 79% of that is fixed and the overall portfolio rate is currently 3%. Current maturities average only $250 million per year over the next three years, rounding out our fortress balance sheet, our 113 unencumbered mainline and E175 aircraft and $400 million of undrawn lines of credit. On the capital return side, I hope you all saw that we once again increase the dividend this time $0.10 per share or 7%, signaling…

[Operator Instructions] And your first question comes from the line of Catherine O'Brien with Goldman Sachs.

Good afternoon everyone. I think I'd be remiss to not start off by saying congratulations Brandon on your retirement, but I'm sure you know that you will be miss by all. And then from there, I guess, I'll start off with the cost question. So just -- on your cost 2020 outlook, so thinking back, this year's costs were up 2.3% on 2% capacity growth, which as you've just highlight includes about 100 basis points of labor headwind from new agreement featuring [ph] this year? And then in 2020 you're expecting unit cost to increase the similar amount and what could be 150 basis points more capacity. Can you just help us walk through any headwinds you're facing this year? Or any big cost tailwinds dropping from 2019 to help explain that pickup in unit costs? Thanks.

Yes. Hi, Katy, this is Shane. I'll take that. And just [Indiscernible], I do think we had a really good year in 2019. If you recall at Investor Day in 2018 we laid out a multiyear sort of roadmap that articulated $160 million of cost savings that we were going to go after over the next couple of years. I think we did really well on a number of those selling related expenses, constraining overhead which was down $40 million. Brandon mentioned the supply chain work that was done this year. So that's all really good. We do have more work to do on the productivity side of the business, asset utilization side of the business. In order to get those unlocked we need to be able to grow more and to do that we just need more stability in our fleet plan, and we need to unlock some of the constraints in the way of growing which include crew training, and again just sort of knowing which aircraft are going to have over the next year or two. There are a couple of headwind areas principally airport related cost. That is a place we used to be super efficient at, it was maybe 3% or 4% of the cost structure, it 7% or 8% now and I think it can be elevated for a while as aging infrastructure airports does need to be upgraded and we understand and support that. And then, we do have a big maintenance sort of driven expense item this year both on the Airbus and the Boeing side. A lot of the Airbus related costs are related to beginning to account for lease returns that begin in earnest next year.

Okay, great. Maybe just one quick follow-up on that one. So on the lease returns, do you have any sense or could you give us some color on like what portion of the CASM that's driving this year? Thanks.

Yes. Katy, I think we do know that, but I don't think we've given that level of detail on the call.

Got it. And maybe just one more on the MAX. So couple of your peers were negatively impacted by lost capacity due to grounding of the MAX in 2019 have reached agreements with Boeing, that should reduce CapEx going forward. Could we see downside to your $750 million CapEx forecast, not only just from the timing shift but also from potential reduction in purchase price if the MAX remains out of service through later this year.

Katy, it's Nat Pieper. How are you?

Thanks.

We're talking with Boeing as I think every other airline is on the planet right now. With potential delivery schedules, as you know, we were supposed to have three airplanes last year and take seven more in 2020. It's part of our longer-term fleet strategy and looking at growth and replacement going forward and there's just going to be more to come on that.

Understood. Thank you.

Thanks Katy.

Your next question comes from the line of Savi Syth with Raymond James.

Hey, good afternoon. Just a little bit of slightly different side of coin to Katy's question on CASMex, but I think Shane you mentioned that your -- the plan is to expand pretax margin. So kind of curious on the revenue side, it seems like there some confidence and maybe you'd outperformed -- you be able to continue outperform in the industry. I'm not quite clear on kind of all the drivers there and what gives you confidence as with everybody having these various revenue initiative. And I was just wondering if you could talk a little bit more about that?

Hey, Savi, it's Andrew. I think a lot of things that we've had an opportunity to do that we're going to continue to see. The first is, as I shared in my prepared remarks, we do have carryover synergies and initiate that are quite significant. And most of the other carriers had their basic economy in already and of course the synergies in cross fleeting and other things. So that's the benefit that's going to come through. The other thing is that we are really hitting our stride now. We're squarely focused on running our core business. The network team is doing a magnificent job at getting seasonal schedules tighter, more efficient, more productive working with the ops groups and we are now moving away from integration is squarely focused on getting our revenue initiative in more quickly and doing a much better job of it. Overall, from what I'm saying in the first quarter, we feel really good about how all those things are working together on the revenue momentum front.

Thanks. And then Brandon, if might ask you a question as Brad pointed out, you been doing this for -- Alaska for 16 years and I think longer being part of Alaska. Just wondering over this time, what you consider to be advantages that Alaska have today you didn't see when you kind of joined? And maybe what are the challenges that you see today that are different than that maybe 10, 15 years ago?

Hi, Savi, that's an interesting question, just off the cuff. What I would say is we're way more discipline than we were 16 years ago, and that just comes from us maturing as a company and getting a better leadership team and focusing more on process that cuts across the operation and how we think about our service and also things cuts across the finance part of the business, as well. In terms of challenges going forward, I think it's just continuing to grow profitably in an industry where four carriers have 85% market share. But I'm confident as I said that we've got a mix of competitive advantages, some tangible and some intangible that will allow us to do this going forward, and I'm really optimistic about the company's future.

Okay. Thank you.

Your next question comes from the line of Joe Caiado with Credit Suisse.

Hey, good afternoon, everyone. Congrats again, Brandon and Shane. Congrats to Kyle Sangita, lots of congratulations to go around over there. As you as you work on putting together your five-year plan, how was the uncertainty around the MAX impacted that process internally? Have you had to delay certain decisions? Or could it even be seen as an opportunity as you revisit your delivery schedule with Boeing? Shane, you talked about, you're thinking about up gauging, might this actually afford you more flexibility in terms of fleet or CapEx planning as you think about putting together that five-year plan?

Hey, Joe, it's Nat Pieper again. I think what we've been focused on is really defining our fleet requirements for the next five to 10 years covering our replacement needs and covering growth. Shane mentioned the 61 A319s and 320s that we currently operate and those are the airplanes that are the primary candidates for replacement. We're looking at the MAX 9 and the MAX 10, looking at the A321neo, and there's going to be upgauge benefits for us with that better cost performance, better revenue performance. Boeing's challenges with the MAX did cause us to rework the sequencing of events and some of our timing. But we're confident that over the next six to nine months we're going to come with a good decision for Alaska. Later this quarter, we're going to start the acquisition process. We will work it through the summer, and we're confident we'll come up with an answer in third quarter, fourth quarter of this year.

Appreciate that. Thank you. And then maybe just a quick question on this owners manual, understand more details to come at the annual meeting. We certainly look forward to that. But just can you describe the document a little bit more and its intended purpose? Is that something that would be accompanied by formal changes to the proxy, management compensation structure? Is it more sort of a philosophical documentary or guide post for management. Just how should investors think about that document? Thank you.

Hey, Joe, this is Chris Berry. It really is more of the latter. I mean, it's, a pretty comprehensive document, but it shares our competitive advantages, our management philosophy, our style, and then really sets up these guideposts for long term financial performance. And so you'll see that laid out in the owners manual. We'll spend more time with you all after we make those announcements to share more of the detail on the sausage making, but that's generally how its laid out.

Got it. Thanks, Chris.

Chris gave a great answer. I might just sort of maybe add some perspective from the board. Our Board of Directors got very interested in this process. We had two or three investors come and speak with the board 18 months or 24 months ago. The basic idea was we feel like we do articulate how we bring value to our communities, to our customers, to our employees, and they really not just us to say, get more articulate about what the deal is for people that own the business. And I think we've had a lot of fun putting the manual together, I think -- I hope, as we put it out there, I hope you all give us feedback. But it's -- the idea is that we don't want our stock to be a trading vehicle. We don't want as a shareholder roster to be filled with short term investors. We want this to be a fantastic place for you to invest over decades, and we want to be part of getting more respect for the industry, getting people to invest in the airline space to have a mindset when they invest that it's going to be a great long term investment. So this is sort of us taking a stab at putting -- making some commitments. We know that we've done well when we've made public commitments about what we want to do. So it's Ben and Chris has said, we'll roll this out in May, but we're anxious to get your feedback to it and then have it get better as we move along.

Appreciate that insight. Thanks, Brad.

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

Brandon, and congratulation Ben, it's been a real pleasure with you, dude.

Thanks Hunter.

Sure. So I have a question.

Did you want me to say it's been great working with you dude?

No. That's enough for me for now. Thanks Buddy. Giving your comments Ben on hub congestion and Shane some of the comments you made about rising airport costs. So what's the company view on this proposed second airport in the CTAC region? Thanks.

Hunter, you're talking Paine Field?

No, I'm talking about the proposed -- didn't the city Council talk about that there can be some proposal is going to be debated at some point in 2022. about building a second airport in the region just completely from scratch.

Yes. This is a great chance for Diana Birkett Rakow to jump in and she's been working on this, Hunter, and, Diana, why don't you share your thoughts on?

Sure. Thanks. Hunter, you've been reading some good, Washington State News. So, the legislature passed a bill last year to set up a governor commission's board to look at potential options for growing capacity across the region. That could be at Paine Field. That could be at another airport in the region, and asked for a recommendation to the governor by January 1, 2022. Shane Jones, who is our Vice President of Airports is on that commission along with many others. And we're very interested in the results. We certainly know that we have fantastic growth in this region, and we have constrained airport space and we want to make sure that we can continue to grow.

So Yes, what's your view on it? Do you do you want it to happen? Or I mean, what's your what's your company view?

Yes. We do want it to happen. We're really glad that the Commission was set up. We don't have a bias yet as to where that capacity increase occurs. Obviously, there's some underway at CTAC. But we need more than that, and we're anxious to get through the evaluation to make sure we do have a thoughtful answer about where. And it more maybe one location and maybe more than one location at the end.

Okay, great. Thanks. And then the second question, Andrew, you talked about sort of the revenue initiatives and network initiatives. It looks like seasonality is kind of creeping back into the P&L a little bit. And that means bad margins in 1Q, and really good margins in 3Q. You guys kind of got away from that a few years ago, and the balance was something you talked about. As you make network changes to sort of return to areas of strength, does it also reintroduce a little bit of sort of quarter-to-quarter seasonal imbalance in your annual earnings results? Is that something you're trying to manage?

Yes. That's how that's been squarely on my team's radar. In fact, just to be frank, I'm watching January and February of this quarter very, very closely, because we made some very significant network moves. And what I'm seeing right now is very decent load factor increases company by yield increases. So, I think going forward, our job will still be in the first and the fourth quarter. But the first quarter is really our biggest challenge. And I think as we move the network around, as we upguage, as we do a lot of other stuff, I think we'll get this a little more in line. But our first quarter is probably going to be always the weakest.

Okay. Thank you.

Our next question comes from a line of Michael Linenberg with Deutsche Bank.

Hey, everybody, and just to kind of echo the sentiment of everyone else. Brandon, it's been a great run. So on that note, I'm going to ask a pension question, but you can deflect over. One more pension question, right. But I don't know if you may have mentioned it earlier. But do we see in 2020, do we see a benefit in the non-op from maybe better than expected returns in your pension in 2019?

Yes, definitely, the non-op portion will be a small favorable improvement year-over-year.

Okay, great. And then just my second question, and maybe this is more to Andrew. When we think about, you talk about growth, and I sense that, it's all about margin growth and earnings growth. But we also look at sort of where your supply growth is relative to the industry. And the 3% to 4% number, if we were to go back, 12 plus months pre MAX, was that where the planning was for 2020? Maybe 2021? Or is that maybe even a bit on the low side, because you've had some pretty meaningful network changes. It does seem like you've pulled back some trans cons and some longer hauls. That 3%, 4%, how has that changed maybe post MAX is what I'm asking? Thanks.

That's good question. I think, well, for 2019 we were more deliberate about slowing our growth as we tried to get the integration behind us. I would say for 2020, our growth is lower than we would like, just to be honest. And the MAX for sure, has pushed on that a little bit. But also, we're working through this multi fleet and crew and all the rest. But at the end of the day, as we've shared, it's 4% to 6% growth. And I'm looking forward to getting through some of these decisions and challenges so that we can move this forward.

Okay, great. And just one just one last word to Brandon, and I presumably you picked the march week, the first week of March, because that's when S&P upgrades you to investment grade, right? We should assume that?

Bless you, man.

Congratulations.

Thanks.

Your next question comes from the line of Helane Becker with Cowen.

Thank you very much operator, and Brandon, I will echo everybody else's comments wellness [ph] working with you. Shane, we're looking forward to working with you. And Brandon, I'm looking forward to seeing what your next chapter is going to look like. So two questions. One is, are you doing any accruals for prospective contracts like for the pilot contract? Or is that an after the fact item?

No. It's an after the fact item for us.

Okay. And then my next question is kind of unrelated to some of the things we've talked about so far. With --I know you guys have a lot of co-chair agreements and interline agreements with various international airlines, especially ones in Asia, and China. And I'm wondering if you're seeing any declines in passenger transfers between your airline and those airlines? Or if it's way too soon with what's going on in China?

Helane, it's Andrew. We've looked at it. The International connectivity to and from especially China and some of Asia is a very small number for us. And so, as we look at our growth and traffic right now, it has not been impacted at this time because of this.

Okay. And then just one other question. On Transcon, do you have to rethink your decision not to have live flat seats, as you grow that business or are you not going to grow that business going forward? Thank you.

Yes. Thanks Helane. Actually, that's a fair question, but I have been extremely encouraged by what's happened in the Transcom business. How we've restructured our pricing and the product and the loyalty growth that we've seen. So right now, the product that we have on board is working very well for us. And I still see upside, even going forward. So for me right now live flat seeds is not something that I'm consider -- that we're looking at.

Okay, great. Thank you.

Thanks Helane.

Your next question comes from the line of Joseph DeNardi with Stifel.

Hey, good evening, everybody. Brandon, congrats.

Thanks Joe.

I felt like some of the commentary around the fleet transition and the capital that could go with that what was a little bit cryptic. So can you just maybe provide a little bit more clarity around maybe how capital intensive the business could get over that period? Or what your commitments in terms of returning cash to shareholders would be through that? Thank you.

Hey, Joe, it's Shane. Yes, we're not sort of in a position to have a lot of precision around that, just because we don't know what this deal might look like or deals might look like as we go out and look at acquiring aircraft. But certainly, replacing 61 aircraft over a period of time is going to require some capital. A lot of those as you know our lease today, there's a chance that we could replace some of those with leases. But our goal is to sort of get the best value and the best deal for Alaska as we go through this process with the manufacturers. And we'll say more about this when we roll out the owner's manual, but also be very committed to returns to shareholders assuming we have good profitability, which is what we're planning to have over the next several years.

And just Brandon maybe just a follow-up, but it's not intended to be cryptic at all. It's really just the uncertainty around the timing and what we actually do that will drive CapEx for the year. But just to reiterate what Shane said, that's really one of the purposes of the owners manual was to allow some guidelines to make sure that we're meeting our commitments on balance sheet strength and free cash flow generation.

Okay, and then Brad I think, either you or Brandon have mentioned how much of the Virgin debt you've paid down about 73 times over the past 12 months. So, it's clearly something that you think is important. Can you just give -- help us understand what we should interpret that as like what happens when all of the debt is paid down? What, why is that so important in your view? Thank you.

Yes, well, we'd never done M&A before. If I recall, we paid $2.6 billion, the equity value for Virgin America we financed to, 2 or 2.1 billion of that were debt and Brandon, you can audit me as we go here. But that was different, and we are super proud of a very conservative balance sheet, a conservative financial profile. And it was important to get the balance sheet back to what investors think of, what we, how we think of ourselves as quickly as we could. So we are really proud to have paid off 75% of 2 billion and now it's 74 times or whatever that we have mentioned that. I think the other reason that's important is, is all of this and some of the messaging we're trying to do today. All of this positions us to move forward. Now. It's, as you go through every -- you always learn things, but these are big things. There's all kinds of systems and brand and loyalty and single certificate, reservations. There's so much stuff that needs to be done and for a while you are actually really held into that space. But what we're trying to say is that's behind us now, we're no more looking through the rear-view mirror. We're looking forward where what are the things that make Alaska great, what are the things that make it great for investors and customers and investors? Sorry, investors, customers, employees, and let's, let's -- let's put all eyes to the front windshield moving forward, continuing to make a great airline even better. So that's what we're -- that's the messaging we're trying to do. I'm not sure how well we've done it, but that is our mindset.

Thanks, Brad.

Yes.

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

Hey there. Another shout out to Brandon. It's important to me to try to one up hundred sentiments in particular. So, I'm actually planning to send you an aircraft model as a gift currency glass because at that run, it won't run afoul of my compliance policy. It’s a perfect gift. Question on the on the two-week road show that Brad spoke enthusiastically about in the prepared remarks. Presumably the mood amongst the rank and file is positive, but could you identify the typical areas of dissatisfaction?

Hey, Jamie, it's Ben. It’s – I’m thinking back within several roadshows across all our big hubs, there were a lot of questions related to some internal things, internal systems that we needed to operate better within the company, so it's and this will be stuff that borrows you guys with timekeeping systems and scheduling systems. But I would say overall what was really good for me, my big takeaway is they were really energized about the vision and the plan over the next five years. There was growth and the big thing, yes, one of the biggest things was that the Virgin America questions weren't there anymore. These people were gelling as one team, and it just felt for the first time in three years doing all these road shows that it felt like the airline was one, and that was so inspiring. And again, we did all our big stations it was a lot of fun.

Okay, thanks a lot. Second, when I think back, pre-merger Alaska, went through a phase of innovation. I think you were the first with, self printing bag tags, I remember to experiment with our RFID key chain that would check customers in when they enter the terminals. So obviously that switching back before smartphones. It's not going to impact my 2020 model or anything. But was that, was that just a phase? I mean, I'm wondering if the march to 13% to 15% margins also includes, once again, pushing the envelope in terms of technology and I think it more about what the customer experiences, not too much, distribution. Is this also a mandate for choose area?

Hi, Jamie, this is Andrew. It absolutely is, and I think if you just look at the airline industry today, it's not as much about networks anymore. Obviously for the big guys. I fly everywhere. It's about the guests. It's about the interaction of the guests. It's about making it easy and bringing that all together. And I think on the innovation front we got distracted by the integration. And I think what I'm really excited about is organizationally, and I think it's okay to say too we also have an order. Excuse me. We have a subcommittee of the board now, that's focused on innovation, that true and I are accountable to. So, I think you're going to see some real momentum here. You're right. 2020 won't be started. But on the next few years is a big focus for us.

Excellent. I appreciate the color. Take care, everybody.

Thanks, Jamie.

Your next question comes from the line of Duane Pfennigwerth with Evercore.

Hey thanks, not much more to add at this point. Best wishes Brandon on the next chapter. Not sure if you'd be willing to talk about it. But do you have a non-compete and if you do, how long does it last?

It last’s 15 years. And actually, not willing to talk about it because it's not focused on Air Group going forward. So next question please?

Fair enough. On free cash flow. Great to hear you're stepping back up the buyback in 2020. Just checking the math a little bit, because if you truly are done re-deleveraging, it feels like it could be substantially bigger than what you've outlined. So, should we think about this as a starting point? Or are you looking to build cash for now?

Duane, maybe I'll take that one. Yes, we're not looking to build cash. We ended the year with a billion five. That's probably about where we see it ending next year as well. You are absolutely right with the math that you are doing. There will be more, but it's all dependent on what we end up doing with the fleet decision. That's why we started at 250. But we're going to be flexible on that and we have capacity under our existing repurchase program to do more than 400. So, we'll wait and see.

Thanks. And then if I could sneak one last one in for Andrew sorry for the baseball analogy. What inning would you say you're in with respect to the premium revenue push, both in inventory, availability, availability and your ability to merchandise it? Thanks for taking the questions.

Yes, I'd say we're sort of in the final innings as far as putting the inventory on the shelf. We took 25 175 and all the conversions. We're now turning over to upselling and all the rest of it. And we've got, we've got ways to go there to do a better job there.

Thank you.

Thanks, Duane.

Your next question comes from the line of Brandon Oglenski with Barclays.

Hey, this is actually Matt Wisniewski on for Brandon. First Congrats, Brandon. But I just had one quick question. One that is think about to get some additional color on how we should be thinking about growth this year. Last year, I was focused on regional this year shift towards the main line. Whether that's new markets. And then, in the case of the Max not returning, what levers potentially could you pulled it potentially mitigate the impact whether it's utilize, utilization or anything else?

Yes, basically, the -- I'm sorry, I got distracted on growth…

Where it was reasonably, geographically where it’s going to be….

The growth is 100% mainline, the regional is shrinking just a little bit. And then we do have some levers to pull, whether it's paint lines, mod lines or some other things that we really don't want to, but if we needed to, we might be able to squeeze some more out, possibly Airbus lease extensions as well.

Okay, thank you.

Thanks, Matt.

Your next question comes from the line of Myles Walton with UBS.

Good evening. Thanks for taking the question. I was wondering in the context of the 3% to 4% capacity growth you are looking for in 2020 kind of what you're looking for from the regional versus the main line and also in the context of your fleet planning decision? How intertwined is the exercise of the options and the 175s to the decisions on the main line side, and did they kind of have to happen in sequence?

Just on the growth as I just shared it's all mainline this year, regionals flat down.

Yes. And on the question about the options for E175, we've, we've done a bunch of regional growth recently, we're going to focus on mainline, fleet plan over the next several months and then by the end of the year miles, we do plan to make some decisions about what we want to do with the regional fleet over a five to 10 year period as well.

And you guys have that kind of unique advantage of having in the past operated the single fleet and going to get the complexity of the second type and I know in the prepared remarks you, you hinted at the evaluation of that single fleet benefit. Can you maybe lay out economically what you've seen as that complexity costs of the dual fleets and maybe what that is as a put, if you decide to maintain a dual fleet?

Hey Myles, I might not provide a specific number. We do -- we have looked at it, there are clearly some hard costs associated with just crew and some maintenance, provisioning and those sorts of things, some training, there are a lot of soft costs that sort of get lost that it's hard to quantify around just schedule efficiency and making sure you have the right planes in the right, the right cities on every single flight and it gets more complicated during the regular ops. But I mean, it's not insignificant and so if we maintain a dual fleet, we'll just need to make sure we can get the revenue out of the aircraft.

All right, thanks.

Your next question comes from the line of Darryl Genovesi with Vertical Research.

Hi guys. Thanks for time. Hey Andrew as a follow-up to Savi the 2019 RASM outperformance of the industry really just reversed the underperformance that you saw in 2018 despite the synergies and commercial initiatives. So just wanted to ask you when you say you will be similarly, you think it will be similar successful in 2020? Do you think that you have enough in the toolbox actually outperformed domestic industry RASM in 2020? Particularly starting in the second quarter when the prior comp start to get more difficult?

Yes, and again, I'm only going to comment on the first quarter, but I think what I would share is that we have some good initiatives and some good momentum here to continue to grow unit revenues over the course of every quarter this year.

Okay. And then Brandon, I apologize in advance because the overall body of work speaks for itself. But Shane, without completely front running the Investor Day message, what do you think Brandon might have done a little differently over the last 10 years?

Brandon was a particular stickler for not allowing us to enjoy box lunches, but expected us to work at the same time. But I'll probably adopt that, it was a good a good message of reality.

Okay. And then Brandon now that Shane has completed the airing of grievances in a [Indiscernible] way as possible, how sympathetic to this situation where you feeling when you came up with this 2% CASM ex-guide?

Honestly, I'm really not to dodge the question. I actually do love the discipline we have in the 2020 budget. And I know everybody's aligned around, just really getting back to a place where we reinforce that competitive advantage. We have that as the cost advantage. And I don't know what you thought of the headline 2% number was that some uncertainty with respect to capacity, but I'll tell you we are really focused on making sure that this place rocks when it comes to cost performance.

Right. Thanks a lot guys. Congrats, Brandon.

Thanks.

Operator, we have time for one more question.

Okay, and your last question comes from the line of Dan McKenzie with Buckingham Research.

Hey, thanks good afternoon, everybody. Thanks for squeezing me in here. Congrats Brandon and Shane. Nicely done, echoing everybody else here of course. So I guess a couple questions Andrew or Shane, I wonder if you can elaborate a bit more on how you plan to integrate the Max's into the fleet once they come, so, specifically once you get the green light from Boeing, how much time are you building in for filling the plane before they go into service? So like, a one month booking window two months. And I just, I guess what my question is getting at is could this shorter booking window, way on system revenue? And are the new revenue initiatives that you, you kind of outlined intended to offset some of those challenges?

Yes, Dan, we've got we've got pilots that are available to fly. I think at the end of the day, what I would say is, is that we're going to start this thing off, we're just going to fly it up and down the West Coast. But we will have enough flexibility, given the number that we're getting to be able to weave these into the schedule, maybe first as spares and then build into revenue production over a period depending on the market 60 to 90 days.

But Andrew, I think it's true, we're going to sell as if we plan to lift the capacity one way or the other. So, I'm not going to shorten the booking window, right, but we intend to deploy the Max's.

I see. Okay, very good. And then, the reference on the premium revenue and the repaired prepared remarks. What is the plan growth on premium seats this year? And, and where are you at in the premium seating reconfiguration of the Virgin fleet?

So where the growth is going to slow significantly, we've got about 20 units to convert, of which the front cabin goes from 8 seats to 12 seats, but at the end of the day, we're now really Dan the opportunity is now we've got all the premium class out there all the 175 out there, and all the conversions that's really the upsell and growing that nicely.

Understood. Okay, thanks for the time you guys.

And I think that is my understanding is correct. I think Dan McKenzie was our last question for the quarter. Thanks, everybody, for tuning in. Thanks for being a part of this and we look forward to talking with you after the first quarter earnings and we as Ben said, I hope many of you can join our shareholder call where we talk more about the owner's manual. Thanks very much.

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