ALASKA AIR GROUP, INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
10-Q
For the quarterly period ended
June 30, 2022
OR
For the transition period from to
Commission File Number
1-8957
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| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
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| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
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☒ | Accelerated filer | ☐ |
Non-accelerated filer
(Do not check if a smaller reporting company) |
☐ | Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes
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No
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The registrant has
126,764,811
common shares, par value $0.01, outstanding at July 31, 2022.
This document is also available on our website at http://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2021. Please consider our forward-looking statements in light of those risks as you read this report.
3
PART I
| ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | ||
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| (in millions) | June 30, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Marketable securities |
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| Total cash and marketable securities |
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| Receivables - net |
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| Inventories and supplies - net |
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| Prepaid expenses and other current assets |
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| Total Current Assets |
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| Property and Equipment | |||||||||||
| Aircraft and other flight equipment |
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| Other property and equipment |
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| Deposits for future flight equipment |
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| Less accumulated depreciation and amortization |
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| Total Property and Equipment - Net |
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| Other Assets | |||||||||||
| Operating lease assets |
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| Goodwill and intangible assets |
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| Other noncurrent assets |
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| Total Other Assets |
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| Total Assets | $ |
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$ |
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4
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| (in millions, except share amounts) | June 30, 2022 | December 31, 2021 | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued wages, vacation and payroll taxes |
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| Air traffic liability |
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| Other accrued liabilities |
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| Deferred revenue |
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| Current portion of operating lease liabilities |
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| Current portion of long-term debt |
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| Total Current Liabilities |
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| Long-Term Debt, Net of Current Portion |
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| Noncurrent Liabilities | |||||||||||
| Long-term operating lease liabilities, net of current portion |
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| Deferred income taxes |
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| Deferred revenue |
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| Obligation for pension and post-retirement medical benefits |
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| Other liabilities |
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| Total Noncurrent Liabilities |
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| Commitments and Contingencies (Note 7) |
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| Shareholders' Equity | |||||||||||
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Preferred stock, $
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Common stock, $
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| Capital in excess of par value |
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Treasury stock (common), at cost: 2022 -
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| Accumulated other comprehensive loss |
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(
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| Retained earnings |
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| Total Liabilities and Shareholders' Equity | $ |
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$ |
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5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Passenger revenue | $ |
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$ |
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$ |
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$ |
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| Mileage Plan other revenue |
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| Cargo and other |
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| Total Operating Revenues |
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| Operating Expenses | |||||||||||||||||||||||
| Wages and benefits |
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| Variable incentive pay |
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| Payroll Support Program grant wage offset |
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| Aircraft fuel, including hedging gains and losses |
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| Aircraft maintenance |
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| Aircraft rent |
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| Landing fees and other rentals |
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| Contracted services |
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| Selling expenses |
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| Depreciation and amortization |
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| Food and beverage service |
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| Third-party regional carrier expense |
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| Other |
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| Special items - fleet transition and related charges |
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(
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| Special items - restructuring charges |
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(
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(
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| Total Operating Expenses |
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| Operating Income (Loss) |
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(
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| Non-operating Income (Expense) | |||||||||||||||||||||||
| Interest income |
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| Interest expense |
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(
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(
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| Interest capitalized |
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| Other - net |
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| Total Non-operating Income (Expense) |
(
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(
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(
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(
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| Income (Loss) Before Income Tax |
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(
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| Income tax expense (benefit) |
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(
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| Net Income (Loss) | $ |
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$ |
(
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$ |
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| Basic Earnings (Loss) Per Share: | $ |
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$ |
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$ |
(
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$ |
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| Diluted Earnings (Loss) Per Share: | $ |
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$ |
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$ |
(
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$ |
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| Shares used for computation: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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6
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Income (Loss) | $ |
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$ |
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$ |
(
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$ |
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| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Marketable securities |
(
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(
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(
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(
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| Employee benefit plans |
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| Interest rate derivative instruments |
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| Total other comprehensive income (loss), net of tax | $ |
(
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$ |
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$ |
(
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$ |
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| Total comprehensive income (loss), net | $ |
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$ |
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$ |
(
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$ |
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7
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
| (in millions) | Common Stock Outstanding | Common Stock | Capital in Excess of Par Value | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Net income (loss) | — | — | — | — | — |
(
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(
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| Other comprehensive income (loss) | — | — | — | — |
(
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— |
(
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| Stock-based compensation | — | — |
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— | — | — |
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| Stock issued under stock plans |
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— |
(
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— | — | — |
(
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| Balances at March 31, 2022 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Net income (loss) | — | — | — | — | — |
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| Other comprehensive income (loss) | — | — | — | — |
(
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— |
(
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| Stock-based compensation |
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— |
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— | — | — |
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| Stock issued for employee stock purchase plan |
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— |
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— | — | — |
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| Stock issued under stock plans |
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— |
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— | — | — |
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| Balances at June 30, 2022 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| (in millions) | Common Stock Outstanding | Common Stock | Capital in Excess of Par Value | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Net income (loss) | — | — | — | — | — |
(
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(
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| Other comprehensive income (loss) | — | — | — | — |
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— |
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| Stock-based compensation | — | — |
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— | — | — |
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| CARES Act warrant issuance | — | — |
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— | — | — |
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| Stock issued under stock plans |
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— |
(
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— | — | — |
(
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| Balance at March 31, 2021 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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| Net income (loss) | — | — | — | — | — |
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| Other comprehensive income (loss) | — | — | — | — |
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— |
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| Stock-based compensation |
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— |
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— | — | — |
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| CARES Act warrant issuance | — | — |
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— | — | — |
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| Stock issued for employee stock purchase plan |
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— |
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— | — | — |
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| Stock issued under stock plans |
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— |
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— | — | — |
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| Balances at June 30, 2021 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, | ||||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net Income (Loss) | $ |
(
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$ |
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| Adjustments to reconcile net gain (loss) to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization |
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| Stock-based compensation and other |
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| Special items - fleet transition and related charges |
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| Special items - restructuring charges |
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(
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| Changes in certain assets and liabilities: | ||||||||||||||
| Changes in deferred tax provision |
(
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| Increase in accounts receivable |
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| Increase in air traffic liability |
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| Increase in deferred revenue |
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| Federal income tax refund |
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| Other - net |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | ||||||||||||||
| Property and equipment additions: | ||||||||||||||
| Aircraft and aircraft purchase deposits |
(
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(
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| Other flight equipment |
(
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(
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| Other property and equipment |
(
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(
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| Total property and equipment additions, including capitalized interest |
(
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(
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| Purchases of marketable securities |
(
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(
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| Sales and maturities of marketable securities |
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| Other investing activities |
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(
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| Net cash used in investing activities |
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(
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| Cash flows from financing activities: | ||||||||||||||
| Proceeds from issuance of debt |
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| Long-term debt payments |
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(
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| Other financing activities |
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| Net cash used in financing activities |
(
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(
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| Net increase (decrease) in cash, cash equivalents, and restricted cash |
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(
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| Cash, cash equivalents, and restricted cash at beginning of period |
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| Cash, cash equivalents, and restricted cash at end of the period | $ |
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$ |
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9
| Six Months Ended June 30, | ||||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||
| Cash paid during the period for: | ||||||||||||||
| Interest (net of amount capitalized) | $ |
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$ |
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| Income taxes |
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| Non-cash transactions: | ||||||||||||||
| Right-of-use assets acquired through operating leases |
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| Reconciliation of cash, cash equivalents, and restricted cash at end of the period | ||||||||||||||
| Cash and cash equivalents |
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| Restricted cash included in Prepaid expenses and other current assets |
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| Total cash, cash equivalents, and restricted cash at end of the period | $ |
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$ |
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10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1.
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of June 30, 2022 and the results of operations for the three and six months ended June 30, 2022 and 2021. Such adjustments were of a normal recurring nature.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three and six months ended June 30, 2022 are not necessarily indicative of operating results for the entire year.
NOTE 2.
FLEET TRANSITION
In the first quarter of 2022, the Company announced plans to accelerate the transition of mainline operations to an all-Boeing 737 fleet. It also announced new plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska will accelerate the retirement of its Airbus A320 aircraft, with all expected to exit the fleet by early 2023. Alaska also operates A321neo aircraft, and is evaluating options to remove them from its fleet by the end of 2023, subject to agreement with counterparties. The Company operated 29 A320 and ten A321neo aircraft as of June 30, 2022. Horizon plans to retire its Q400 fleet, which includes 25 owned and seven leased aircraft in operation at June 30, 2022, in early 2023.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable. During the first quarter of 2022, the Company recorded an impairment charge of $
70
million related to the Q400 fleet, reflecting the amount by which carrying value exceeded fair value of the owned Q400 aircraft as of March 31, 2022. This amount was recorded within the "Special items - fleet transition and related charges" line in the consolidated statement of operations. Refer to Note 2 to our consolidated financial statements in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 for additional details.
In the second quarter, the Company adjusted useful lives and depreciation schedules for Airbus and Q400 capitalized leasehold improvements, spare engines, inventory, and other fixed assets, as well as the amortization schedules for the right of use assets and aircraft rent expenses. These accelerated schedules are based on the dates the aircraft are expected to be removed from operating service and were effective beginning this quarter. Incremental costs associated with the accelerated schedules are recognized within the "Special items - fleet transition and related charges" line item.
The Company has estimated future lease return costs for the leased Airbus aircraft. Costs of returning leased aircraft begin accruing when the costs are probable and reasonably estimable, and are recognized over the remaining operating life of the aircraft. These estimates are based on the time remaining on the lease, planned aircraft usage, and lease terms. These estimates may change as actual amounts due to any lessor upon return may not be known with certainty until lease termination. In the second quarter, all lease return costs were recorded within the "Special items - fleet transition and related charges" line in the consolidated statement of operations.
A summary of special charges for fleet transition activities is included below for the three and six months ended June 30, 2022. The impairment charges are one-time in nature, while the other special charges continue to be recorded consistent with the
11
schedules described above. The majority of remaining special charges associated with the fleet transition will be recorded in 2022, with additional amounts to be recorded in 2023. The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| (in millions) | Airbus | Q400 | Total | Airbus | Q400 | Total | ||||||||||||||||||||||||||||||||
| Impairment of long-lived assets | $ |
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$ |
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$ |
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$ |
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$ |
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$ |
|
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| Accelerated aircraft ownership expenses |
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
| Lease return costs and other expenses |
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
| Total special items - fleet transition and related charges | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
NOTE 3.
REVENUE
Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue is passenger ancillary revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
In the first quarter of 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The amendment extended the term of the agreement into 2030 and resulted in modifications to the separately identifiable performance obligations.
The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Passenger ticket revenue, including ticket breakage, net of taxes and fees | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Passenger ancillary revenue |
|
|
|
|
|||||||||||||||||||
| Mileage Plan passenger revenue |
|
|
|
|
|||||||||||||||||||
| Total Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Mileage Plan Loyalty Program
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|||||||||||||||||||
| Total Mileage Plan revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
12
Cargo and Other
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cargo revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Other revenue |
|
|
|
|
|||||||||||||||||||
| Total Cargo and other revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $
132
million and $
36
million from the prior year-end air traffic liability balance for the three months ended June 30, 2022 and 2021, and $
522
million and $
175
million for the six months ended June 30, 2022 and 2021.
Mileage Plan assets and liabilities
The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had
$
76
million
of such receivables as of June 30, 2022 and $
64
million as of December 31, 2021.
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Total Deferred revenue balance at January 1 | $ |
|
$ |
|
|||||||
| Travel miles and companion certificate redemption - Passenger revenue |
(
|
(
|
|||||||||
| Miles redeemed on partner airlines - Other revenue |
(
|
(
|
|||||||||
| Increase in liability for mileage credits issued |
|
|
|||||||||
| Total Deferred revenue balance at June 30 | $ |
|
$ |
|
|||||||
NOTE 4. FAIR VALUE MEASUREMENTS
In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.
Fair Value of Financial Instruments on a Recurring Basis
As of June 30, 2022, total cost basis for all marketable securities was $
2.7
billion, compared to a total fair value of $
2.6
billion. The decline in value is primarily due to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available information as of June 30, 2022.
13
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Equity mutual funds |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Foreign government bonds |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Mortgage-backed securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Corporate notes and bonds |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Municipal securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total Marketable securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Derivative instruments | |||||||||||||||||||||||||||||||||||
| Fuel hedge - call options |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Interest rate swap agreements |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total Assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Derivative instruments | |||||||||||||||||||||||||||||||||||
| Interest rate swap agreements |
|
|
|
|
(
|
(
|
|||||||||||||||||||||||||||||
| Total Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts are determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Maturities for marketable securities (in millions):
| June 30, 2022 | Cost Basis | Fair Value | |||||||||
| Due in one year or less | $ |
|
$ |
|
|||||||
| Due after one year through five years |
|
|
|||||||||
| Due after five years |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
As of June 30, 2022, $
6
million of total marketable securities do not have a maturity date and are therefore excluded from the total fair value of maturities for marketable securities above.
14
Fair Value of Other Financial Instruments
The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash, Cash Equivalents, and Restricted Cash
: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.
The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.
Debt
: To estimate the fair value of all fixed-rate debt as of June 30, 2022, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $
721
million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.
| June 30, 2022 | December 31, 2021 | ||||||||||
| Total fixed-rate debt | $ |
|
$ |
|
|||||||
| Estimated fair value | $ |
|
$ |
|
|||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded during the six months ended June 30, 2022.
NOTE 5.
LONG-TERM DEBT
| June 30, 2022 | December 31, 2021 | ||||||||||
| Fixed-rate notes payable due through 2029 | $ |
|
$ |
|
|||||||
| Fixed-rate PSP notes payable due through 2031 |
|
|
|||||||||
| Fixed-rate EETC payable due through 2025 & 2027 |
|
|
|||||||||
| Variable-rate notes payable due through 2029 |
|
|
|||||||||
| Less debt issuance costs |
(
|
(
|
|||||||||
| Total debt |
|
|
|||||||||
| Less current portion |
|
|
|||||||||
| Long-term debt, less current portion | $ |
|
$ |
|
|||||||
| Weighted-average fixed-interest rate |
|
% |
|
% | |||||||
| Weighted-average variable-interest rate |
|
% |
|
% | |||||||
Approximately $
372
million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, 2022, resulting in an effective weighted-average interest rate for the full debt portfolio of
3.4
%.
15
During the six months ended June 30, 2022, the Company made scheduled debt payments of $
222
million and prepayments of $
17
million for loans related to Q400 aircraft.
Debt Maturity
| Total | |||||
| Remainder of 2022 | $ |
|
|||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| Thereafter |
|
||||
| Total | $ |
|
|||
Bank Lines of Credit
Alaska has
three
credit facilities totaling $
486
million as of June 30, 2022. One of the credit facilities for $
150
million expires in March 2025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. A second credit facility for $
250
million expires in June 2024 and is secured by aircraft. Both facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $
86
million expires in June 2023 and is secured by aircraft.
Alaska has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $
500
million. Alaska was in compliance with this covenant at June 30, 2022.
NOTE 6.
EMPLOYEE BENEFIT PLANS
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Pension expense included in Wages and benefits |
|
|
|
|
|||||||||||||||||||
| Interest cost |
|
|
|
|
|||||||||||||||||||
| Expected return on assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Recognized actuarial loss |
|
|
|
|
|||||||||||||||||||
| Pension expense included in Nonoperating Income (Expense) | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
16
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of June 30, 2022 (in millions):
|
Aircraft Commitments
(a)
|
Capacity Purchase Agreements
(b)
|
|||||||||||||
| Remainder of 2022 | $ |
|
$ |
|
||||||||||
| 2023 |
|
|
||||||||||||
| 2024 |
|
|
||||||||||||
| 2025 |
|
|
||||||||||||
| 2026 |
|
|
||||||||||||
| Thereafter |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
(a)
Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management. Option deliveries are excluded from minimum commitments until exercise.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. In the second quarter of 2022, Horizon amended its aircraft purchase agreement with Embraer, adding
eight
firm E175 deliveries between 2023 and 2026 and
13
options to purchase additional aircraft with deliveries between 2024 and 2025. The aircraft covered by the second quarter amendment may be assigned by Horizon to another entity. Horizon intends to take delivery of and operate all
eight
firm E175 aircraft.
Details are outlined in the table below.
Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change.
| Firm Orders | Options | Total | |||||||||||||||
| Aircraft Type | 2022-2026 | 2024-2026 | 2022 - 2026 | ||||||||||||||
| Boeing 737-8 |
|
|
|
||||||||||||||
| Boeing 737-9 |
|
|
|
||||||||||||||
| Boeing 737-10 |
|
|
|
||||||||||||||
| Embraer E175 |
|
|
|
||||||||||||||
| Total |
|
|
|
||||||||||||||
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016.
The Company pursued numerous appeal paths following a February 2019 federal district court order against Virgin America and Alaska Airlines awarding plaintiffs approximately $
78
million, including approximately $
25
million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the PAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.
The final total judgment amount has not been determined by the lower court as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $
0
and $
22
million, and holds an accrual for $
22
million in Other accrued liabilities on the condensed consolidated balance sheets. The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of
17
these solutions may have an adverse impact on the Company’s operations and financial position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
NOTE 8.
SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $
1
billion share repurchase program. The Company repurchased
7.6
million shares for $
544
million under this program. In March 2020, subject to restrictions under the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Company suspended the share repurchase program indefinitely.
CARES Act Warrant Issuances
As additional taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of
1,455,438
warrants to purchase ALK common stock in 2020 and 2021. An additional
427,080
warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.
The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $
30
million, recorded in stockholders' equity at issuance.
| Number of warrants outstanding | Strike Price | ||||||||||
| PSP 1 |
|
|
|||||||||
| CARES Act loan warrants |
|
|
|||||||||
| PSP 2 |
|
|
|||||||||
| PSP 3 |
|
|
|||||||||
| Outstanding June 30, 2022 |
|
||||||||||
Accumulated other comprehensive loss
A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), is shown below for the three and six months ended June 30, 2022:
| Marketable Securities | Employee Benefit Plan | Interest Rate Derivatives | Total | ||||||||||||||||||||
|
Balance at March 31, 2022, net of tax effect of $93
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax impact of $1
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax impact of $4
|
(
|
|
|
(
|
|||||||||||||||||||
|
Balance at June 30, 2022, net of tax effect of $98
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Balance at December 31, 2021, net of tax effect of $83
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax impact of $1
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax impact of $14
|
(
|
|
|
(
|
|||||||||||||||||||
|
Balance at June 30, 2022, net of tax effect of $98
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
Earnings (Loss) Per Share (EPS)
EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, restricted stock units, and warrants, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and six months ended June 30, 2022 and June 30, 2021, anti-dilutive shares excluded from the calculation of EPS were not material.
18
NOTE 9.
OPERATING SEGMENT INFORMATION
Alaska Air Group has two operating airlines – Alaska and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon and SkyWest, under which Alaska receives all passenger revenues.
Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:
•
Mainline
- includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, Costa Rica, and Belize.
•
Regional
- includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•
Horizon
- includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
19
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses, excluding fuel |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Fuel expense |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Expenses |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Non-operating Income (Expense) |
|
|
(
|
|
(
|
|
(
|
||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Tax | $ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||
| Pretax Margin |
|
% |
|
% | |||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses, excluding fuel |
|
|
|
(
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Fuel expense |
|
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Expenses |
|
|
|
(
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Non-operating Income (Expense) |
(
|
|
(
|
|
(
|
|
(
|
||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Tax | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Pretax Margin |
(
|
% |
|
% | |||||||||||||||||||||||||||||||||||||
20
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses, excluding fuel |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Fuel expense |
|
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Expenses |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Non-operating Income (Expense) |
|
|
(
|
|
(
|
|
(
|
||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Tax | $ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||||||
| Pretax Margin |
|
% |
(
|
% | |||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenues |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses, excluding fuel |
|
|
|
(
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Fuel expense |
|
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Expenses |
|
|
|
(
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Non-operating Income (Expense) |
(
|
|
(
|
|
(
|
|
(
|
||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Tax | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Pretax Margin |
(
|
% |
|
% | |||||||||||||||||||||||||||||||||||||
(a)
Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)
The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges. See Note A in the accompanying pages for further information.
(c)
Includes Payroll Support Program grant wage offsets, special items and mark-to-market fuel hedge accounting adjustments.
Total assets were as follows (in millions):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Mainline | $ |
|
$ |
|
|||||||
| Horizon |
|
|
|||||||||
| Consolidating & Other |
(
|
(
|
|||||||||
| Consolidated | $ |
|
$ |
|
|||||||
21
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021. This overview summarizes the MD&A, which includes the following sections:
•
Second Quarter Review
—highlights from the second quarter of 2022 outlining some of the major events that occurred during the period and how they affected our financial performance.
•
Results of Operations
—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the three and six months ended June 30, 2022. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2022.
•
Liquidity and Capital Resources
—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
SECOND QUARTER REVIEW
Business Recovery and Second Quarter Results
We recorded consolidated pretax income for the second quarter of 2022 under GAAP of $185 million, compared to consolidated pretax income of $528 million in the second quarter of 2021. On an adjusted basis, we reported consolidated pretax income for the quarter of $371 million, compared to consolidated pretax loss of $48 million in the same period of 2021. Our airlines faced challenges early in the second quarter as we ramped staffing to meet historic levels of demand. By June, we stabilized the operation and returned reliability to our standard, resulting in industry-leading on-time performance for the month. Despite these operational difficulties, we generated record quarterly revenue of $2.7 billion, driven by yield strength and record load factors for each month of the quarter, as well as strong revenue growth from our Mileage Plan program.
As we ramp capacity back to 2019 levels, we have experienced increases to non-fuel operating expenses. Costs have also been impacted by inflationary pressures and supply chain constraints. Non-fuel operating expense, excluding special items, rose 26% over the prior year period, driven by a combination of increased departure-related costs on 16% more capacity flown and higher wages and training costs as we hire new employees. Second quarter fuel prices were at historically high levels. Although our hedging program provided a benefit of $88 million for the quarter, total fuel cost exceeded 2021 levels due primarily to a 98% increase in economic price per gallon. We also incurred special charges of $146 million in the second quarter of 2022 related to our fleet transition, compared to a special benefit of $503 million recorded in the second quarter of 2021 primarily from Payroll Support Program grant wage offsets.
See “
Results of Operations
” below for further discussion of changes in revenue and operating expenses as compared to 2021, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
Environmental, Social and Governance Updates
In order to achieve our long-term target of zero carbon emissions by 2040, the use of sustainable aviation fuel (SAF) will play a crucial role. During the quarter, we signed an agreement with Aemetis to purchase 13 million gallons of SAF to be delivered over the seven year term of the agreement. Subsequent to quarter end, we announced a partnership with Microsoft and Twelve, a carbon transformation company, to advance the use of SAF within the commercial airline industry.
Delivering on our diversity, equity and inclusion goals is critical to our long-term success. As a reflection of our commitment to these goals, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we
22
have incorporated a carbon emissions target into our company-wide Performance Based Pay Plan, which is currently tracking to target achievement.
Labor Update
In April 2022, Alaska's dispatchers represented by the Transport Workers Union ratified an agreement that includes increased pay with added steps to ensure wage rates remain competitive, enhanced benefits, and streamlined training. In May 2022, Horizon's mechanics represented by the Aircraft Mechanics Fraternal Association ratified an agreement that includes increased pay and license premiums. In June 2022, Alaska reached a tentative agreement with employees represented by the International Association of Machinists and Aerospace workers; voting will be completed in the third quarter.
Alaska is actively negotiating for a new contract with its mainline pilots represented by the Air Line Pilots Association, whose contract became amendable in April 2020.
Outlook
For the third quarter and remainder of the year, we remain committed to best positioning our airlines for long-term sustainable growth. We have moderated our capacity plans for the remainder of the year to stabilize our operation, improve our training throughput and execute on our fleet transition plans. As a result, we now anticipate our capacity for the third quarter to be down 5% to 8% versus 2019, with full year capacity down 8% to 9%. Lower capacity, coupled with pressures from wages and training costs, has shifted our expectation for third quarter CASMex to be up 16% to 19% over 2019. Continued strength in the demand environment is expected to generate revenue 16% to 19% over 2019 levels. For the full year, we continue to anticipate adjusted pretax margins will range between 6% and 9%.
Although our operations have stabilized, ongoing industry-wide labor shortages and supply chain delays could have a material impact on our results moving forward. Our plans will continue to be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. As we leverage our network, Mileage Plan program, and fleet for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years that will continue to serve us well in 2022 and beyond.
RESULTS
OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND
PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of aircraft fuel, the Payroll Support Program grant wage offset and other special items is useful information to investors because:
•
By excluding fuel expense and certain other items, such as the Payroll Support Program grant wage offset and other special items, from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as productivity, airport costs, maintenance costs, etc., which are more controllable by management.
•
Cost per ASM (CASM) excluding fuel and certain other items, such as the Payroll Support Program grant wage offset and other special items, is one of the most important measures used by management and by our Board of Directors in assessing quarterly and annual cost performance.
•
CASM excluding fuel and certain other items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.
•
Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual incentive plan, which covers the majority of employees within the Alaska Air Group organization.
•
Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above
23
is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
•
Although we disclose our unit revenue, we do not, nor are we able to, evaluate unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
24
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenue and adjusted unit costs, which are non-GAAP measures.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||
|
Consolidated Operating Statistics:
(a)
|
|||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 11,005 | 8,712 | 26.3% | 19,700 | 13,379 | 47.2% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 13,746 | 10,334 | 33.0% | 24,332 | 15,727 | 54.7% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 15,611 | 13,413 | 16.4% | 29,394 | 23,810 | 23.5% | |||||||||||||||||||||||||||||
| Load factor | 88.1% | 77.0% | 11.1 pts | 82.8% | 66.1% | 16.7 pts | |||||||||||||||||||||||||||||
| Yield | 17.59¢ | 13.09¢ | 34.4% | 16.15¢ | 12.79¢ | 26.3% | |||||||||||||||||||||||||||||
| RASM | 17.03¢ | 11.38¢ | 49.6% | 14.76¢ | 9.76¢ | 51.2% | |||||||||||||||||||||||||||||
|
CASM excluding fuel and special items
(b)
|
9.92¢ | 9.20¢ | 7.8% | 10.24¢ | 9.95¢ | 2.9% | |||||||||||||||||||||||||||||
|
Economic fuel cost per gallon
(b)
|
$3.76 | $1.90 | 97.9% | $3.23 | $1.85 | 74.6% | |||||||||||||||||||||||||||||
| Fuel gallons (000,000) | 196 | 168 | 16.7% | 368 | 294 | 25.2% | |||||||||||||||||||||||||||||
| ASMs per fuel gallon | 79.6 | 79.8 | (0.3)% | 79.9 | 81.0 | (1.4)% | |||||||||||||||||||||||||||||
| Average full-time equivalent employees (FTEs) | 22,603 | 19,001 | 19.0% | 22,092 | 18,071 | 22.3% | |||||||||||||||||||||||||||||
| Mainline Operating Statistics: | |||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 8,321 | 6,151 | 35.3% | 14,887 | 9,302 | 60.0% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 12,460 | 8,966 | 39.0% | 21,972 | 13,555 | 62.1% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 14,052 | 11,611 | 21.0% | 26,439 | 20,464 | 29.2% | |||||||||||||||||||||||||||||
| Load factor | 88.7% | 77.2% | 11.5 pts | 83.1% | 66.2% | 16.9 pts | |||||||||||||||||||||||||||||
| Yield | 16.28¢ | 11.96¢ | 36.1% | 14.89¢ | 11.64¢ | 27.9% | |||||||||||||||||||||||||||||
| RASM | 16.02¢ | 10.59¢ | 51.3% | 13.81¢ | 9.09¢ | 51.9% | |||||||||||||||||||||||||||||
|
CASM excluding fuel and special items
(b)
|
8.98¢ | 8.48¢ | 5.9% | 9.29¢ | 9.17¢ | 1.3% | |||||||||||||||||||||||||||||
|
Economic fuel cost per gallon
(b)
|
$3.74 | $1.88 | 98.9% | $3.21 | $1.84 | 74.4% | |||||||||||||||||||||||||||||
| Fuel gallons (000,000) | 165 | 135 | 22.2% | 311 | 233 | 33.5% | |||||||||||||||||||||||||||||
| ASMs per fuel gallon | 85.2 | 86.0 | (0.9)% | 85.0 | 87.8 | (3.2)% | |||||||||||||||||||||||||||||
| Average FTEs | 17,315 | 14,021 | 23.5% | 16,825 | 13,247 | 27.0% | |||||||||||||||||||||||||||||
| Aircraft utilization | 10.1 | 9.9 | 2.0% | 9.8 | 9.2 | 6.5% | |||||||||||||||||||||||||||||
| Average aircraft stage length | 1,363 | 1,320 | 3.3% | 1,349 | 1,313 | 2.7% | |||||||||||||||||||||||||||||
|
Operating fleet
(d)
|
233 | 202 | 31 a/c | 233 | 202 | 31 a/c | |||||||||||||||||||||||||||||
|
Regional Operating Statistics:
(c)
|
|||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 2,685 | 2,562 | 4.8% | 4,813 | 4,077 | 18.1% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 1,285 | 1,367 | (6.0)% | 2,360 | 2,172 | 8.7% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 1,559 | 1,802 | (13.5)% | 2,955 | 3,346 | (11.7)% | |||||||||||||||||||||||||||||
| Load factor | 82.4% | 75.9% | 6.5 pts | 79.9% | 64.9% | 15.0 pts | |||||||||||||||||||||||||||||
| Yield | 30.35¢ | 20.48¢ | 48.2% | 27.88¢ | 19.95¢ | 39.7% | |||||||||||||||||||||||||||||
| RASM | 26.04¢ | 16.41¢ | 58.7% | 23.21¢ | 13.84¢ | 67.7% | |||||||||||||||||||||||||||||
|
Operating fleet
(d)
|
104 | 94 | 10 a/c | 104 | 94 | 10 a/c | |||||||||||||||||||||||||||||
(a)
Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)
See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.
(c)
Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)
Excludes all aircraft removed from operating service, as well as new aircraft which have not yet entered operating service.
25
Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2022 to 2019.
| FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited) | |||||||||||||||||||||||||||||||||||
| Alaska Air Group, Inc. | |||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2019 | Change | 2022 | 2019 | Change | ||||||||||||||||||||||||||||||
| Passenger revenue | $ | 2,418 | $ | 2,111 | 15% | $ | 3,929 | $ | 3,827 | 3% | |||||||||||||||||||||||||
| Mileage plan other revenue | 175 | 118 | 48% | 287 | 228 | 26% | |||||||||||||||||||||||||||||
| Cargo and other | 65 | 59 | 10% | 123 | 109 | 13% | |||||||||||||||||||||||||||||
| Total operating revenue | $ | 2,658 | $ | 2,288 | 16% | $ | 4,339 | $ | 4,164 | 4% | |||||||||||||||||||||||||
| Operating expense, excluding fuel and special items | $ | 1,549 | $ | 1,414 | 10% | $ | 3,010 | $ | 2,819 | 7% | |||||||||||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 776 | 502 | 55% | 1,123 | 922 | 22% | |||||||||||||||||||||||||||||
| Special items | 146 | 8 | NM | 221 | 34 | NM | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 2,471 | $ | 1,924 | 28% | $ | 4,354 | $ | 3,775 | 15% | |||||||||||||||||||||||||
| Total non-operating expense | (2) | (13) | (85)% | (6) | (32) | (81)% | |||||||||||||||||||||||||||||
| Income (loss) before income tax | $ | 185 | $ | 351 | (47)% | $ | (21) | $ | 357 | (106)% | |||||||||||||||||||||||||
| Consolidated Operating Statistics: | |||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 11,005 | 12,026 | (8)% | 19,700 | 22,442 | (12)% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 13,746 | 14,638 | (6)% | 24,332 | 27,087 | (10)% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 15,611 | 16,980 | (8)% | 29,394 | 32,487 | (10)% | |||||||||||||||||||||||||||||
| Load Factor | 88.1% | 86.2% | 1.9 pts | 82.8% | 83.4% | (0.6) pts | |||||||||||||||||||||||||||||
| Yield | 17.59¢ | 14.43¢ | 22% | 16.15¢ | 14.13¢ | 14% | |||||||||||||||||||||||||||||
| RASM | 17.03¢ | 13.48¢ | 26% | 14.76¢ | 12.82¢ | 15% | |||||||||||||||||||||||||||||
| CASMex | 9.92¢ | 8.33¢ | 19% | 10.24¢ | 8.68¢ | 18% | |||||||||||||||||||||||||||||
| FTEs | 22,603 | 21,921 | 3% | 22,092 | 21,876 | 1% | |||||||||||||||||||||||||||||
26
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2022 TO THREE MONTHS ENDED JUNE 30, 2021
Our consolidated net income for the three months ended June 30, 2022 was $139 million, or $1.09 per share, compared to a consolidated net income of $397 million, or $3.13 per share, for the three months ended June 30, 2021.
Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net income for the second quarter of 2022 was $280 million, or $2.19 per share, compared to an adjusted net loss of $38 million, or $0.30 per share, in the second quarter of 2021. The following table reconciles our adjusted net income per share (EPS) to amounts as reported in accordance with GAAP:
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| GAAP net income per share | $ | 139 | $ | 1.09 | $ | 397 | $ | 3.13 | |||||||||||||||
| Payroll Support Program grant wage offset | — | — | (503) | (3.97) | |||||||||||||||||||
| Mark-to-market fuel hedge adjustments | 40 | 0.31 | (46) | (0.36) | |||||||||||||||||||
| Special items - fleet transition and related charges | 146 | 1.14 | (4) | (0.03) | |||||||||||||||||||
| Special items - restructuring charges | — | — | (23) | (0.18) | |||||||||||||||||||
| Income tax effect of reconciling items above | (45) | (0.35) | 141 | 1.11 | |||||||||||||||||||
| Non-GAAP adjusted net income (loss) per share | $ | 280 | $ | 2.19 | $ | (38) | $ | (0.30) | |||||||||||||||
CASM excluding fuel and special items reconciliation is summarized below:
| Three Months Ended June 30, | |||||||||||||||||
| (in cents) | 2022 | 2021 | % Change | ||||||||||||||
| Consolidated: | |||||||||||||||||
| CASM | 15.84 | ¢ | 7.29 | ¢ | 117 | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Payroll Support Program grant wage offset | — | (3.75) | NM | ||||||||||||||
| Aircraft fuel, including hedging gains and losses | 4.98 | 2.04 | 144 | % | |||||||||||||
| Special items - fleet transition and related charges | 0.94 | (0.03) | NM | ||||||||||||||
| Special items - restructuring charges | — | (0.17) | NM | ||||||||||||||
| CASM excluding fuel and special items | 9.92 | ¢ | 9.20 | ¢ | 8 | % | |||||||||||
| Mainline: | |||||||||||||||||
| CASM | 15.06 | ¢ | 6.24 | ¢ | 141 | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Payroll Support Program grant wage offset | — | (3.79) | NM | ||||||||||||||
| Aircraft fuel, including hedging gains and losses | 5.06 | 1.78 | 184 | % | |||||||||||||
| Special items - fleet transition and related charges | 1.02 | (0.03) | NM | ||||||||||||||
| Special items - restructuring charges | — | (0.20) | NM | ||||||||||||||
| CASM excluding fuel and special items | 8.98 | ¢ | 8.48 | ¢ | 6 | % | |||||||||||
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OPERATING REVENUE
Total operating revenue increased $1.1 billion, or 74%, during the second quarter of 2022 compared to the same period in 2021. The changes are summarized in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Passenger revenue | $ | 2,418 | $ | 1,352 | 79 | % | |||||||||||
| Mileage Plan other revenue | 175 | 118 | 48 | % | |||||||||||||
| Cargo and other | 65 | 57 | 14 | % | |||||||||||||
| Total operating revenue | $ | 2,658 | $ | 1,527 | 74 | % | |||||||||||
Passenger revenue
On a consolidated basis, Passenger revenue for the second quarter of 2022 increased by $1.1 billion, or 79%, driven by a 33% increase in passenger traffic and a 34% improvement in ticket yields. Record setting demand for air travel and constrained capacity industry wide enabled record load factors in each month of the second quarter of 2022. Higher revenue on improved Mileage Plan award redemptions and from our alliance partners following the relaxing of international travel restrictions also contributed meaningfully to revenue growth as compared to 2021.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue for the second quarter of 2022 increased by $57 million, or 48%. The change is largely due to an increase in commissions from our bank card partners driven by increased consumer spending and improved economics from our new co-branded credit card agreement. Second quarter Mileage Plan other revenue includes a one-time $20 million adjustment recorded as a result of finalizing accounting conclusions for the new agreement.
Cargo and other
On a consolidated basis, Cargo and other revenue for the second quarter of 2022 increased by $8 million, or 14%. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed, due to greater use of belly capacity which grew on an increase in scheduled departures.
OPERATING EXPENSES
Total operating expenses increased $1.5 billion, or 153%, compared to the second quarter of 2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Fuel expense | $ | 776 | $ | 274 | 183 | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 1,549 | 1,234 | 26 | % | |||||||||||||
| Payroll Support Program grant wage offset | — | (503) | NM | ||||||||||||||
| Special items - fleet transition and related charges | 146 | (4) | NM | ||||||||||||||
| Special items - restructuring charges | — | (23) | NM | ||||||||||||||
| Total operating expenses | $ | 2,471 | $ | 978 | 153 | % | |||||||||||
Fuel expense
Aircraft fuel expense includes
raw fuel expense
(as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease.
Raw fuel expense
is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S.
Raw fuel expense
approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.
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Aircraft fuel expense increased $502 million, or 183%, compared to the second quarter of 2021. The elements of the change are illustrated in the following table:
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 824 | $ | 4.20 | $ | 330 | $ | 1.96 | |||||||||||||||
| (Gain)/loss on settled hedges | (88) | (0.44) | (10) | (0.06) | |||||||||||||||||||
| Consolidated economic fuel expense | $ | 736 | $ | 3.76 | $ | 320 | $ | 1.90 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | 40 | 0.20 | (46) | (0.27) | |||||||||||||||||||
| GAAP fuel expense | $ | 776 | $ | 3.96 | $ | 274 | $ | 1.63 | |||||||||||||||
| Fuel gallons | 196 | 168 | |||||||||||||||||||||
Raw fuel expense
increased 150% in the second quarter of 2022 compared to the second quarter of 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel expense per gallon increased by approximately 114% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. Crude oil prices have risen 62% while refining margins have risen exponentially compared to 2021. Fuel gallons consumed increased 17%, consistent with rising capacity.
We also evaluate
economic fuel expense
, which we define as
raw fuel expense
adjusted for the cash we receive from hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and
economic fuel expense
is the timing of gain or loss recognition on our hedge portfolio.
Economic fuel expense
includes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.
Gains recognized for hedges that settled during the second quarter were $88 million in 2022, compared to gains of $10 million in the same period in 2021. These amounts represent cash received from hedges at settlement, offset by cash paid in prior periods for premium expense.
Non-fuel expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel, the Payroll Support Program grant wage offset and other special items. Significant operating expense variances from 2021 are more fully described below.
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Wages and benefits | $ | 639 | $ | 510 | 25 | % | |||||||||||
| Variable incentive pay | 56 | 34 | 65 | % | |||||||||||||
| Aircraft maintenance | 104 | 102 | 2 | % | |||||||||||||
| Aircraft rent | 73 | 62 | 18 | % | |||||||||||||
| Landing fees and other rentals | 136 | 144 | (6) | % | |||||||||||||
| Contracted services | 82 | 54 | 52 | % | |||||||||||||
| Selling expenses | 78 | 41 | 90 | % | |||||||||||||
| Depreciation and amortization | 104 | 98 | 6 | % | |||||||||||||
| Food and beverage service | 50 | 35 | 43 | % | |||||||||||||
| Third-party regional carrier expense | 50 | 37 | 35 | % | |||||||||||||
| Other | 177 | 117 | 51 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 1,549 | $ | 1,234 | 26 | % | |||||||||||
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Wages and benefits
Wages and benefits increased by $129 million, or 25%, in the second quarter of 2022. The primary components of Wages and benefits are shown in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Wages | $ | 486 | $ | 386 | 26 | % | |||||||||||
| Pension - Defined benefit plans service cost | 12 | 13 | (8) | % | |||||||||||||
| Defined contribution plans | 39 | 26 | 50 | % | |||||||||||||
| Medical and other benefits | 66 | 59 | 12 | % | |||||||||||||
| Payroll taxes | 36 | 26 | 38 | % | |||||||||||||
| Total wages and benefits | $ | 639 | $ | 510 | 25 | % | |||||||||||
Wages increased $100 million, or 26%, primarily driven by 19% growth in FTEs as Alaska and Horizon hire to support the ramp up in operations, as well as higher wage rates. Increased expense for defined contribution plans, payroll taxes, and medical and other benefits are consistent with the change in wages.
Variable incentive pay
Variable incentive pay expense increased by $22 million, or 65%, in the second quarter of 2022. The increase is primarily due to the expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.
Aircraft rent
Aircraft rent expense increased by $11 million, or 18%, in the second quarter of 2022. Increased expense is due to the delivery of eight leased Boeing 737-9 aircraft and ten leased E175 aircraft operated by SkyWest since June 30, 2021.
Landing fees and other rentals
Landing fees and other rentals decreased by $8 million, or 6%, in the second quarter of 2022. The decrease compared to the same period in 2021 is due to favorable resolution for certain pandemic period airport accruals, coupled with decreased airport rates as compared to the prior year.
Contracted services
Contracted services increased by $28 million, or 52%, in the second quarter of 2022, driven primarily by increased departures and passengers, coupled with higher rates charged by vendor partners.
Selling expense
Selling expense increased by $37 million, or 90%, in the second quarter of 2022, driven primarily by an increase in distribution costs and credit card commissions incurred with the overall revenue recovery.
Food and beverage service
Food and beverage service increased by $15 million, or 43%, in the second quarter of 2022, consistent with a 26% increase in revenue passengers. Additional on-board offerings coupled with increased charges for transportation also contributed to the overall increase.
Third-party regional carrier expense
Third-party regional carrier expense, which represents expenses associated with SkyWest under our CPA, increased by $14 million, or 35%, in the second quarter of 2022. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period.
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Other expense
Other expense increased $60 million, or 51%, in the second quarter of 2022. Training events, including travel costs, were a significant driver of the increased cost. Incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity, also contributed to the year-over-year increase.
Special items - fleet transition and related charges
We recorded non-recurring expenses associated with fleet transition and related charges of $146 million in the second quarter of 2022. Refer to Note 2 to the consolidated financial statements for additional details.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline operations reported an adjusted pretax profit of $375 million in the second quarter of 2022, compared to an adjusted pretax loss of $24 million in the second quarter of 2021. The $399 million improvement was primarily driven by a $956 million increase in Passenger revenue, offset by a $364 million increase in economic fuel cost and a $278 million increase in non-fuel operating costs.
As compared to the prior year, higher Mainline revenue is primarily attributable to a 39% increase in traffic and a 36% increase in yield, driven by a historically strong demand environment. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Higher fuel prices, combined with more gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations reported an adjusted pretax loss of $2 million in the second quarter of 2022, compared to an adjusted pretax loss of $56 million in the second quarter of 2021. Improved results were attributable to a $110 million increase in operating revenue, partially offset by a $53 million increase in fuel costs.
Regional passenger revenue increased significantly compared to the second quarter of 2021, primarily driven by an improved load factor and a 48% improvement in yield. Higher fuel prices contributed to the increase in Regional fuel expense.
Horizon
Horizon reported an adjusted pretax loss of $2 million in the second quarter of 2022, compared to an adjusted pretax profit of $15 million in the second quarter of 2021. The shift to adjusted pretax loss is driven by lower CPA revenue on decreased departures, combined with incremental maintenance expense on E175 aircraft and higher wage and benefit costs on incremental FTEs.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2022 TO SIX MONTHS ENDED JUNE 30, 2021
Our consolidated net loss for the six months ended June 30, 2022 was $4 million, or $0.03 per share, compared to consolidated net income of $266 million, or $2.10 per share, for the six months ended June 30, 2021.
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Our adjusted net income for the six months ended June 30, 2022 was $113 million, or $0.89 per share, compared to an adjusted net loss of $474 million, or $3.75 per share, in the six months ended June 30, 2021. The following table reconciles our adjusted net income and adjusted EPS to amounts as reported in accordance with GAAP:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| GAAP net income (loss) per share | $ | (4) | $ | (0.03) | $ | 266 | $ | 2.10 | |||||||||||||||
| Payroll Support Program grant wage offset | — | — | (914) | (7.23) | |||||||||||||||||||
| Mark-to-market fuel hedge adjustments | (67) | (0.53) | (68) | (0.54) | |||||||||||||||||||
| Special items - impairment charges and other | 221 | 1.75 | 14 | 0.11 | |||||||||||||||||||
| Special items - restructuring charges | — | — | (12) | (0.09) | |||||||||||||||||||
| Income tax effect of reconciling items above | (37) | (0.30) | 240 | 1.90 | |||||||||||||||||||
| Non-GAAP adjusted net income (loss) per share | $ | 113 | $ | 0.89 | $ | (474) | $ | (3.75) | |||||||||||||||
CASM excluding fuel and special items reconciliation is summarized below:
| Six Months Ended June 30, | |||||||||||||||||
| (in cents) | 2022 | 2021 | % Change | ||||||||||||||
| Consolidated: | |||||||||||||||||
| CASM | 14.81 | ¢ | 8.13 | ¢ | 82 | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Payroll Support Program grant wage offset | — | (3.84) | NM | ||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.82 | 2.00 | 91 | % | |||||||||||||
| Special items - fleet transition and related charges | 0.75 | 0.07 | NM | ||||||||||||||
| Special items - restructuring charges | — | (0.05) | NM | ||||||||||||||
| CASM excluding fuel and special items | 10.24 | ¢ | 9.95 | ¢ | 3 | % | |||||||||||
| Mainline: | |||||||||||||||||
| CASM | 13.69 | ¢ | 6.72 | ¢ | 104 | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Payroll Support Program grant wage offset | — | (4.21) | NM | ||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.84 | 1.75 | 119 | % | |||||||||||||
| Special items - fleet transition and related charges | 0.56 | 0.07 | NM | ||||||||||||||
| Special items - restructuring charges and other | — | (0.06) | NM | ||||||||||||||
| CASM excluding fuel and special items | 9.29 | ¢ | 9.17 | ¢ | 1 | % | |||||||||||
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OPERATING REVENUE
Total operating revenue increased $2.0 billion, or 87%, during the first six months of 2022 compared to the same period in 2021. The changes are summarized in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Passenger revenue | $ | 3,929 | $ | 2,011 | 95 | % | |||||||||||
| Mileage Plan other revenue | 287 | 212 | 35 | % | |||||||||||||
| Cargo and other | 123 | 101 | 22 | % | |||||||||||||
| Total operating revenue | $ | 4,339 | $ | 2,324 | 87 | % | |||||||||||
Passenger revenue
On a consolidated basis, Passenger revenue for the first six months of 2022 increased by $1.9 billion, or 95%, on a 55% increase in passenger traffic and a 26% improvement in ticket yields. Although our airlines experienced operational disruptions in the first half of 2022, demand for both leisure and business travel continues to drive meaningful improvements to revenue results.
We expect Passenger revenue to continue to grow compared to 2021 results as we are flying more capacity, and also due to the relative strength in the demand environment, coupled with incremental revenue from Mileage Plan award redemptions and alliance partners as global travel restrictions have eased.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased $75 million, or 35%, in the first six months of 2022. The change is largely due to an increase in commissions from our bank card partners driven by increased consumer spending and improved economics from our new co-branded credit card agreement.
We expect continued strength in Mileage Plan other revenue for the remainder of 2022 relative to the prior year, driven by higher commissions from the new co-branded credit card agreement.
Cargo and other
On a consolidated basis, Cargo and other revenue increased $22 million, or 22%, in the first six months of 2022. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed, due to greater use of belly capacity which grew on an increase in scheduled departures.
We expect Cargo and other revenue continue to increase compared to 2021 driven by greater ancillary revenue and growth in our cargo business.
OPERATING EXPENSES
Total operating expenses increased $2.4 billion, or 125%, compared to the first six months of 2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Fuel expense | $ | 1,123 | $ | 477 | 135 | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 3,010 | 2,371 | 27 | % | |||||||||||||
| Payroll Support Program grant wage offset | — | (914) | NM | ||||||||||||||
| Special items - impairment charges and other | 221 | 14 | NM | ||||||||||||||
| Special items - restructuring charges | — | (12) | NM | ||||||||||||||
| Total operating expenses | $ | 4,354 | $ | 1,936 | 125 | % | |||||||||||
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Fuel expense
Aircraft fuel expense increased $646 million, or 135%, compared to the six months ended June 30, 2021. The elements of the change are illustrated in the table:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 1,328 | $ | 3.61 | $ | 552 | $ | 1.87 | |||||||||||||||
| (Gain)/loss on settled hedges | (138) | (0.38) | (7) | (0.02) | |||||||||||||||||||
| Consolidated economic fuel expense | 1,190 | 3.23 | $ | 545 | $ | 1.85 | |||||||||||||||||
| Mark-to-market fuel hedge adjustments | (67) | (0.18) | (68) | (0.23) | |||||||||||||||||||
| GAAP fuel expense | $ | 1,123 | $ | 3.05 | $ | 477 | $ | 1.62 | |||||||||||||||
| Fuel gallons | 368 | 294 | |||||||||||||||||||||
Raw fuel expense
increased 141% in the first six months of 2022 compared to the first six months of 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel expense per gallon increased by approximately 93% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. Crude oil prices have risen 48% while refining margins have more than doubled. Fuel gallons consumed increased 25%, consistent with rising capacity.
We also evaluate
economic fuel expense
, which we define as
raw fuel expense
adjusted for the cash we receive from hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and
economic fuel expense
is the timing of gain or loss recognition on our hedge portfolio.
Economic fuel expense
includes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.
Gains recognized for hedges that settled in the first six months of 2022 were $138 million, compared to gains of $7 million in the same period in 2021. These amounts represent cash received from settled hedges, offset by cash paid in prior periods for premium expense.
We expect continued pressure in aircraft fuel expense as we progress through 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the third quarter to range between $3.79 and $3.89 per gallon. Based on expected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio during 2022. We expect the magnitude of the hedge benefit to be lesser in the second half of the year as the strike price of the portfolio approaches projected market cost per barrel.
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Non-fuel expenses
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Wages and benefits | $ | 1,245 | $ | 1,003 | 24 | % | |||||||||||
| Variable incentive pay | 92 | 67 | 37 | % | |||||||||||||
| Aircraft maintenance | 239 | 183 | 31 | % | |||||||||||||
| Aircraft rent | 146 | 124 | 18 | % | |||||||||||||
| Landing fees and other rentals | 274 | 273 | — | % | |||||||||||||
| Contracted services | 160 | 105 | 52 | % | |||||||||||||
| Selling expenses | 136 | 74 | 84 | % | |||||||||||||
| Depreciation and amortization | 206 | 195 | 6 | % | |||||||||||||
| Food and beverage service | 91 | 58 | 57 | % | |||||||||||||
| Third-party regional carrier expense | 92 | 67 | 37 | % | |||||||||||||
| Other | 329 | 222 | 48 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 3,010 | $ | 2,371 | 27 | % | |||||||||||
For the remainder of the year, we generally anticipate recognizing incremental costs as compared to 2021 as we continue to increase our capacity and scheduled departures, and hire additional employees at higher wage rates to staff our operation.
Wages and benefits
Wages and benefits increased by $242 million, or 24%, in the first six months of 2022. The primary components of wages and benefits are shown in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2022 | 2021 | % Change | ||||||||||||||
| Wages | $ | 953 | $ | 743 | 28 | % | |||||||||||
| Pension - Defined benefit plans service cost | 23 | 26 | (12) | % | |||||||||||||
| Defined contribution plans | 77 | 58 | 33 | % | |||||||||||||
| Medical and other benefits | 122 | 124 | (2) | % | |||||||||||||
| Payroll taxes | 70 | 52 | 35 | % | |||||||||||||
| Total wages and benefits | $ | 1,245 | $ | 1,003 | 24 | % | |||||||||||
Wages increased $210 million, or 28%, in the first six months of 2022, primarily driven by 22% growth in FTEs as Alaska and Horizon hire to support the ramp up in operations, as well as higher wage rates. Increased expense for defined contribution plans and payroll taxes are consistent with the change in wages.
Variable incentive pay
Variable incentive pay expense increased $25 million, or 37%, in the first six months of 2022. The increase is primarily due to the expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.
Aircraft maintenance
Aircraft maintenance expense increased by $56 million, or 31%, in the first six months of 2022. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft recorded in the first quarter of 2022 and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.
Aircraft rent
Aircraft rent expense increased by $22 million, or 18%, in the first six months of 2022. Increased expense is due to the delivery of eight leased Boeing 737-9 aircraft and ten leased E175 aircraft operated by SkyWest since June 30, 2021.
35
Landing fees and other rentals
Landing fees and other rentals in the first six months of 2022 were flat as compared to the same period in 2021, despite an increase in departures and passengers. Flat expense is due to favorable resolution for certain pandemic period airport accruals, coupled with a reduction in airport rates as traffic returns fees per landing are reduced from 2021 levels.
Contracted services
Contracted services increased by $55 million, or 52%, in the first six months of 2022, driven primarily by increased departures and passengers in line with increased demand, coupled with increased rates charged by vendor partners.
Selling expense
Selling expense increased by $62 million, or 84%, in the first six months of 2022, primarily driven by an increase in distribution costs and credit card commissions incurred with the overall revenue recovery.
Food and beverage service
Food and beverage service increased by $33 million, or 57%, in the first six months of 2022. Incremental food and beverage charges are in line with the 47% increase in revenue passengers as well as additional offerings of on-board products as compared to the prior-year period.
Third-party regional carrier expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $25 million, or 37%, in the first six months of 2022. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period.
We expect third-party regional carrier expense to grow in 2022 as compared to 2021 as we operate incremental E175 aircraft into the CPA with SkyWest through the year.
Other expense
Other expense increased $107 million, or 48%, in the first six months of 2022. Training events, including travel costs, were a significant driver of the increased cost. Incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity, also contributed to the year-over-year increase.
Special items - fleet transition and related charges
We recorded non-recurring expenses associated with fleet transition and related charges of $221 million in the first six months of 2022. We expect to record additional special charges associated with the fleet transition during 2022, primarily related to accelerated aircraft ownership and lease return expenses. At this time, these costs are estimated to be between $200 million and $250 million for the remainder of 2022, and are subject to change as management continues to evaluate its leased aircraft returns. Refer to Note 2 to the consolidated financial statements for additional details.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline operations reported an adjusted pretax profit of $201 million in the first six months of 2022, compared to an adjusted pretax loss of $468 million in the same period in 2021. The $669 million improvement was driven by a $1.8 billion increase in Mainline operating revenue offset by a $571 million increase in Mainline fuel expense and a $579 million increase in Mainline non-fuel operating expense.
36
As compared to the prior year, higher Mainline revenue are primarily attributable to a 62% increase in traffic and a 28% increase in yield, driven by the significant increase in demand. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Higher fuel prices, combined with additional gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations reported an adjusted pretax loss of $57 million in the first six months of 2022, compared to an adjusted pretax loss of $206 million in the first six months of 2021. Improved results were attributable to a $223 million increase in operating revenue which was the result of higher demand and yields, partially offset by a $74 million increase in fuel costs on higher fuel prices.
Horizon
Horizon reported an adjusted pretax loss of $12 million in the first six months of 2022, compared to an adjusted pretax profit of $26 million in the same period in 2021. The shift to adjusted pretax loss is driven by lower CPA revenue on decreased departures, combined with incremental maintenance expense on E175 aircraft and higher wage and benefit costs on incremental FTEs.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
•
Existing cash and marketable securities balance of $3.4 billion, and cash flows from operations;
•
63 unencumbered aircraft that could be financed, if necessary;
•
Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.
During the three months ended June 30, 2022, we took free and clear delivery of seven Boeing 737-9 aircraft. We also made debt payments totaling $69 million, ending the quarter with a debt-to-capitalization ratio of 50%, within our target range of 40% to 50%. During the second quarter, we received $260 million in federal income tax refunds as a result of filing amended returns to utilize carry back losses from the 2020 tax year.
As our business returns to sustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and maintaining a strong balance sheet remain high priorities. Our capital expenditures for 2022 are expected to be approximately $1.6 billion, which we plan to fund with cash generated by operating activities and cash on hand.
We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.
37
The table below presents the major indicators of financial condition and liquidity:
| (in millions) | June 30, 2022 | December 31, 2021 | Change | ||||||||||||||
| Cash and marketable securities | $ | 3,425 | $ | 3,116 | 10 % | ||||||||||||
| Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 47 | % | 57 | % | (10) pts | ||||||||||||
| Long-term debt, net of current portion | 1,961 | 2,173 | (10)% | ||||||||||||||
| Shareholders’ equity | $ | 3,799 | $ | 3,801 | —% | ||||||||||||
| Debt-to-capitalization, adjusted for operating leases | |||||||||||||||||
| (in millions) | June 30, 2022 | December 31, 2021 | Change | ||||||||||||||
| Long-term debt, net of current portion | $ | 1,961 | $ | 2,173 | (10)% | ||||||||||||
| Capitalized operating leases | 1,779 | 1,547 | 15% | ||||||||||||||
| Adjusted debt, net of current portion of long-term debt | $ | 3,740 | $ | 3,720 | 1% | ||||||||||||
| Shareholders' equity | 3,799 | 3,801 | —% | ||||||||||||||
| Total invested capital | $ | 7,539 | $ | 7,521 | —% | ||||||||||||
| Debt-to-capitalization, including operating leases | 50 | % | 49 | % | 1 pt | ||||||||||||
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | |||||||||||
| (in millions) | June 30, 2022 | December 31, 2021 | |||||||||
| Current portion of long-term debt | $ | 342 | $ | 366 | |||||||
| Current portion of operating lease liabilities | 274 | 268 | |||||||||
| Long-term debt | 1,961 | 2,173 | |||||||||
| Long-term operating lease liabilities, net of current portion | 1,505 | 1,279 | |||||||||
| Total adjusted debt | 4,082 | 4,086 | |||||||||
| Less: Cash and marketable securities | (3,425) | (3,116) | |||||||||
| Adjusted net debt | $ | 657 | $ | 970 | |||||||
| (in millions) | Twelve Months Ended June 30, 2022 | Twelve Months Ended December 31, 2021 | |||||||||
|
GAAP Operating Income
(a)
|
$ | 282 | $ | 685 | |||||||
| Adjusted for: | |||||||||||
| Payroll Support Program grant wage offset and special items | 208 | (925) | |||||||||
| Mark-to-market fuel hedge adjustments | (46) | (47) | |||||||||
| Depreciation and amortization | 405 | 394 | |||||||||
| Aircraft rent | 276 | 254 | |||||||||
| EBITDAR | $ | 1,125 | $ | 361 | |||||||
| Adjusted net debt to EBITDAR | 0.6x | 2.7x | |||||||||
(a)
Operating Income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.
38
ANALYSIS OF OUR CASH FLOWS
Cash Provided by Operating Activities
For the first six months of 2022, net cash provided by operating activities was $1.2 billion, compared to $1.0 billion during the same period in 2021. The $228 million net increase in our operating cash flows is due to a combination of factors. First, we received $260 million in federal income tax refunds during the first six months of 2022. Additionally, growth in our air traffic liability resulting from historic levels of demand led to an increase in operating cash flows of $155 million compared to the same period in the prior year. These amounts were partially offset by uses of cash on increasing operating expenses as the business returned capacity back to the network.
Cash Used in Investing Activities
Cash used in investing activities was $721 million during the first six months of 2022, compared to $1.1 billion during the same period of 2021. Cash used in capital expenditures for aircraft purchase deposits and other property and equipment was $632 million in the first six months of 2022, compared to $102 million in the first six months of 2021. This increase in cash used in capital expenditures was offset by a decrease in net purchases of marketable securities, which were $87 million in the first six months of 2022, compared to $963 million in the first six months of 2021.
Cash Used in Financing Activities
Cash used in financing activities was $206 million during the first six months of 2022, compared to $281 million during the same period in 2021. During the first six months of 2022, we had no new proceeds from issuance of debt and utilized cash on hand to repay $239 million of outstanding long-term debt, compared to debt proceeds of $363 million and payments of $681 million during the same period in 2021.
MATERIAL CASH COMMITMENTS
Aircraft Commitments
As of June 30, 2022, Alaska has firm orders to purchase 60 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease six Boeing 737-9 aircraft with deliveries in 2022 and 2023. Alaska has options to acquire up to 11 additional Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries between 2024 and 2026. Horizon has commitments to purchase 20 Embraer E175 aircraft with deliveries between 2022 and 2026. Horizon has options to acquire 13 Embraer E175 aircraft between 2024 and 2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
39
The following table summarizes our anticipated fleet count by year, as of June 30, 2022:
| Actual Fleet |
Anticipated Fleet Activity
(a)
|
||||||||||||||||||||||||||||||||||||||||||||||
| Aircraft | June 30, 2022 | 2022 Additions | 2022 Removals | Dec 31, 2022 | 2023 Changes | Dec 31, 2023 | 2024 Changes | Dec 31, 2024 | |||||||||||||||||||||||||||||||||||||||
| B737-700 Freighters | 3 | — | — | 3 | — | 3 | — | 3 | |||||||||||||||||||||||||||||||||||||||
| B737-800 Freighters | — | — | — | — | 2 | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| B737-700 | 11 | — | — | 11 | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||
| B737-800 | 61 | — | — | 61 | (2) | 59 | — | 59 | |||||||||||||||||||||||||||||||||||||||
| B737-900 | 12 | — | — | 12 | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||||||||
| B737-900ER | 79 | — | — | 79 | — | 79 | — | 79 | |||||||||||||||||||||||||||||||||||||||
| B737-8 | — | — | — | — | 5 | 5 | 5 | 10 | |||||||||||||||||||||||||||||||||||||||
| B737-9 | 28 | 14 | — | 42 | 31 | 73 | 5 | 78 | |||||||||||||||||||||||||||||||||||||||
| B737-10 | — | — | — | — | — | — | 6 | 6 | |||||||||||||||||||||||||||||||||||||||
|
A320
(c)
|
29 | — | (16) | 13 | (13) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| A321neo | 10 | — | — | 10 | (10) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total Mainline Fleet | 233 | 14 | (16) | 231 | 13 | 244 | 16 | 260 | |||||||||||||||||||||||||||||||||||||||
|
Q400 operated by Horizon
(c)
|
32 | — | (11) | 21 | (21) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| E175 operated by Horizon | 30 | 3 | — | 33 | 8 | 41 | 3 | 44 | |||||||||||||||||||||||||||||||||||||||
|
E175 operated by third party
(d)
|
42 | — | — | 42 | — | 42 | — | 42 | |||||||||||||||||||||||||||||||||||||||
|
Total Regional Fleet
(b)
|
104 | 3 | (11) | 96 | (13) | 83 | 3 | 86 | |||||||||||||||||||||||||||||||||||||||
| Total | 337 | 17 | (27) | 327 | — | 327 | 19 | 346 | |||||||||||||||||||||||||||||||||||||||
(a)
Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted or agreed to by counterparties yet.
(b)
Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party, which are not yet contracted.
(c)
In the first quarter of 2022, management announced its intention to accelerate the retirement of the A320 and Q400 aircraft and remove them from the operating fleet by early 2023. Management continues to refine anticipated removal dates for individual aircraft, and as such, timing of removals may shift between 2022 and 2023.
(d)
Alaska intends to expand its long-term capacity purchase agreement with SkyWest Airlines by one Embraer E175 aircraft, with expected delivery in 2025.
For future firm orders and option exercises, we intend to finance the aircraft through cash flow from operations or long-term debt.
40
Fuel Hedge Positions
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. Our crude oil positions are as follows:
|
Approximate % of Expected Fuel Requirements
(a)
|
Weighted-Average Crude Oil Price per Barrel | Average Premium Cost per Barrel | |||||||||||||||
| Third Quarter 2022 | 60 | % | $80 | $3 | |||||||||||||
| Fourth Quarter 2022 | 60 | % | $88 | $5 | |||||||||||||
| Remainder of 2022 | 60 | % | $84 | $4 | |||||||||||||
| First Quarter of 2023 | 40 | % | $91 | $7 | |||||||||||||
| Second Quarter of 2023 | 30 | % | $97 | $7 | |||||||||||||
| Third Quarter of 2023 | 20 | % | $106 | $8 | |||||||||||||
| Fourth Quarter of 2023 | 10 | % | $108 | $9 | |||||||||||||
| Full Year 2023 | 25 | % | $98 | $7 | |||||||||||||
(a)
We are hedged at approximately 60% of expected fuel consumption for the remainder of 2022 due to schedule reductions that occurred subsequent to the Company entering these positions.
Contractual Obligations
The following table provides a summary of our contractual obligations as of June 30, 2022. For agreements with variable terms, amounts included reflect our minimum obligations.
| (in millions) | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Beyond 2026 | Total | ||||||||||||||||||||||||||||||||||
| Debt obligations | $ | 146 | $ | 329 | $ | 235 | $ | 256 | $ | 176 | $ | 1,178 | $ | 2,320 | |||||||||||||||||||||||||||
|
Aircraft lease commitments
(a)
|
167 | 279 | 222 | 217 | 213 | 896 | 1,994 | ||||||||||||||||||||||||||||||||||
| Facility lease commitments | 9 | 16 | 9 | 8 | 8 | 86 | 136 | ||||||||||||||||||||||||||||||||||
|
Aircraft-related commitments
(b)
|
834 | 1,932 | 388 | 124 | 113 | 275 | 3,666 | ||||||||||||||||||||||||||||||||||
|
Interest obligations
(c)
|
44 | 97 | 68 | 53 | 56 | 151 | 469 | ||||||||||||||||||||||||||||||||||
|
Other obligations
(d)
|
100 | 199 | 206 | 210 | 207 | 832 | 1,754 | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,300 | $ | 2,852 | $ | 1,128 | $ | 868 | $ | 773 | $ | 3,418 | $ | 10,339 | |||||||||||||||||||||||||||
(a)
Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.
(b)
Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations. Contractual commitments do not reflect the impact of the impending fleet transition.
(c)
For variable-rate debt, future obligations are shown above using interest rates forecast as of June 30, 2022.
(d)
Comprised of non-aircraft lease costs associated with capacity purchase agreements and other miscellaneous obligations.
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
41
Leased Aircraft Return Costs
For many of our leased aircraft, we are required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. We anticipate recording material expenses and cash outflows to return aircraft in 2022 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.
While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control.
CRITICAL ACCOUNTING ESTIMATES
Except as described below, for information regarding our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2021.
FREQUENT FLYER PROGRAMS
The rate at which we defer sales proceeds related to services sold:
Following the amendment of our agreement with our co-brand bank card partner in the first quarter, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.
The number of miles that will not be redeemed for travel (breakage):
Following its review of significant Mileage Plan assumptions, the Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. At June 30, 2022, the deferred revenue balance associated with the Mileage Plan program was $2.4 billion. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $7 million impact on annual revenue recognized.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt -
long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Adjusted net debt to EBITDAR
- represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
42
Aircraft Utilization
- block hours per day; this represents the average number of hours per day our aircraft are in transit
Aircraft Stage Length
- represents the average miles flown per aircraft departure
ASMs
- available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
CASM
- operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items
CASMex
- operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control
Debt-to-capitalization ratio
- represents adjusted debt (long-term debt plus capitalized operating leases) divided by total equity plus adjusted debt
Diluted Earnings per Share
- represents earnings per share (EPS) using fully diluted shares outstanding
Diluted Shares
- represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised
Economic Fuel
- best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period
Load Factor
- RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers
Mainline
- represents flying Boeing 737, Airbus 320 family and Airbus 321neo jets and all associated revenue and costs
Productivity
- number of revenue passengers per full-time equivalent employee
RASM
- operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile
Regional
- represents capacity purchased by Alaska from Horizon and SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and SkyWest under the respective capacity purchased arrangement (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon.
RPMs
- revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM
Yield
- passenger revenue per RPM; represents the average revenue for flying one passenger one mile
43
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | ||
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2021.
44
| ITEM 4. CONTROLS AND PROCEDURES | ||
Evaluation of Disclosure Controls and Procedures
As of June 30, 2022, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
45
PART II
| ITEM 1. LEGAL PROCEEDINGS | ||
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016.
The Company pursued numerous appeal paths following a February 2019 federal district court order against Virgin America and Alaska Airlines awarding plaintiffs approximately $78 million, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the PAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.
The final total judgment amount has not been determined by the lower court as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of these solutions may have an adverse impact on the Company’s operations and financial position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
| ITEM 1A. RISK FACTORS | ||
See Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for a detailed discussion of risk factors affecting Alaska Air Group.
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||
Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely. These restrictions are effective until October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.
As of June 30, 2022, a total of 1,455,438 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $31.61 (928,127 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES | ||
None.
| ITEM 4. MINE SAFETY DISCLOSURES | ||
None.
| ITEM 5. OTHER INFORMATION | ||
None.
46
| ITEM 6. EXHIBITS | ||
The following documents are filed as part of this report:
1.
Exhibits:
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALASKA AIR GROUP, INC. | |||||
| /s/ EMILY HALVERSON | |||||
| Emily Halverson | |||||
| Vice President Finance and Controller | |||||
| August 2, 2022 | |||||
47
EXHIBIT INDEX
|
Exhibit
Number |
Exhibit
Description |
Form | Date of First Filing | Exhibit Number | ||||||||||
| 3.1 | 10-Q | August 3, 2017 | 3.1 | |||||||||||
| 10.1#† | 10-Q | |||||||||||||
| 10.2#† | 10-Q | |||||||||||||
| 10.3*† | 10-Q | |||||||||||||
| 31.1† | 10-Q | |||||||||||||
| 31.2† | 10-Q | |||||||||||||
| 32.1† | 10-Q | |||||||||||||
| 32.2† | 10-Q | |||||||||||||
| 101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | |||||||||||||
| 101.SCH† | XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| † | Filed herewith | |||||||||||||
| * | Indicates management contract or compensatory plan or arrangement. | |||||||||||||
| # | Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended. | |||||||||||||
48
TABLE OF CONTENTS
Part IprintItem 1. Condensed Consolidated Financial StatementsprintNote 1. General and Summary Of Significant Accounting PoliciesprintNote 2. Fleet TransitionprintNote 3. RevenueprintNote 4. Fair Value MeasurementsprintNote 5. Long-term DebtprintNote 6. Employee Benefit PlansprintNote 7. Commitments and ContingenciesprintNote 8. Shareholders' EquityprintNote 9. Operating Segment InformationprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosure About Market RiskprintItem 4. Controls and ProceduresprintPart IIprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint