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, 2023
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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| Telephone: |
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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
127,224,437
common shares, par value $0.01, outstanding at July 31, 2023.
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, 2023
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, 2022. Some of these risks include competition, labor costs, relations and availability, general economic conditions including those associated with pandemic recovery, increases in operating costs including fuel, inability to meet cost reduction, ESG and other strategic goals, seasonal fluctuations in demand and financial results, supply chain risks, events that negatively impact aviation safety and security, and changes in laws and regulations that impact our business. 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, 2023 | December 31, 2022 | |||||||||
| 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 |
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| 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, 2023 | December 31, 2022 | |||||||||
| 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 and finance leases |
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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: 2023 -
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(
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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) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Operating Revenue | |||||||||||||||||||||||
| 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 revenue |
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| Total Operating Revenue |
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| Operating Expenses | |||||||||||||||||||||||
| Wages and benefits |
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| Variable incentive pay |
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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 other |
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| Special items - labor and related | — | — |
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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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| Interest capitalized |
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| Special items - net non-operating |
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| Other - net |
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| Total Non-operating Expense |
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(
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(
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| Income (Loss) Before Income Tax |
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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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$ |
(
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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) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 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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| Employee benefit plans |
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| Interest rate derivative instruments |
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(
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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 of Tax | $ |
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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 Loss | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||
| Balance at December 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 loss | — | — | — | — | — |
(
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(
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| Other comprehensive income | — | — | — | — |
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— |
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| Common stock repurchase |
(
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— | — |
(
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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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| Balance at March 31, 2023 |
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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 | — | — | — | — | — |
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| Other comprehensive income | — | — | — | — |
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— |
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| Common stock repurchase |
(
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— | — |
(
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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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| Balance at June 30, 2023 |
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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 Loss | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||
| Balance 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 loss | — | — | — | — | — |
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(
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| Other comprehensive 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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| Balance 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 | — | — | — | — | — |
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| Other comprehensive 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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| Balance 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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8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, | ||||||||||||||
| (in millions) | 2023 | 2022 | ||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net Income (Loss) | $ |
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$ |
(
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| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||
| Depreciation and amortization |
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| Stock-based compensation and other |
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| Special items - fleet transition and other |
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| Special items - labor and related |
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| Changes in certain assets and liabilities: | ||||||||||||||
| Changes in deferred income taxes |
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| Increase in accounts receivable |
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(
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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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(
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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 |
(
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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: | ||||||||||||||
| Long-term debt payments |
(
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(
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| Common stock repurchases |
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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 in cash and cash equivalents |
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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) | 2023 | 2022 | ||||||||||||
| Supplemental disclosure: | ||||||||||||||
| Cash paid during the period for: | ||||||||||||||
| Interest, net of amount capitalized | $ |
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$ |
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| Income taxes, net of refunds received |
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| Non-cash transactions: | ||||||||||||||
| Right-of-use assets acquired through operating leases |
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| Operating leases converted to finance leases |
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| Property and equipment acquired through the issuance of debt |
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| Reconciliation of cash, cash equivalents, and restricted cash: | ||||||||||||||
| Cash and cash equivalents |
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Restricted cash included in Prepaid expenses and Other noncurrent 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, and other immaterial business units. All 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, 2022. 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, 2023 and the results of operations for the three and six months ended June 30, 2023 and 2022. 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 revenue and expenses, including impairment charges. 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, 2023 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 its mainline operations to an all-Boeing 737 fleet. It also announced plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. The removal of all A320 and Q400 aircraft from operating service was completed in January 2023. Alaska continues to operate
ten
A321neo aircraft, and plans to remove them from its operating fleet by the end of the third quarter of 2023. Management plans to exit the leases by purchasing the aircraft, and subsequently sell them to a third-party. During the quarter, Alaska reached agreements with two lessors to exit
six
of the
ten
A321neo operating leases and purchase the aircraft.
One
of the aircraft purchases closed in the second quarter; the other
five
transactions are expected in the third and fourth quarters of 2023. As a result of the new agreements, the operating leases associated with the
five
aircraft that have not yet been purchased were considered modified, and upon evaluation were reclassified as finance leases.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the total carrying value of an asset or asset group may not be recoverable. Management identified indicators of impairment for the A321neo fleet and performed an impairment analysis in the second quarter.
For the purposes of recoverability testing, three asset groups were identified: owned A321neo aircraft, A321neo aircraft operated under finance leases, and A321neo aircraft operated under operating leases. The Company performed recoverability tests for the aircraft, comparing each asset group's carrying value to the sum of its estimated undiscounted future cash flows. Future cash flows were estimated utilizing a combination of historical data, forecasted results, and anticipated use of the aircraft as of June 30, 2023. The analysis indicated the carrying value for all three asset groups was not recoverable, and an impairment measurement was required.
The Company estimated the fair market value for the A321neo aircraft using available market price information with adjustments based on quantitative and qualitative considerations. Based on this fair market value, the Company recorded an impairment charge of $
156
million, reflecting the amount by which carrying value exceeded fair value of these asset groups. This charge is included within "Special items - fleet transition and other" in the condensed consolidated statements of operations.
Other Fleet Related Disclosure
The five A321neo aircraft operated under finance leases are reflected within "Aircraft and other flight equipment." As of June 30, 2023, and subsequent to recognizing the related impairment charges, the assets total $
175
million. The finance lease
11
liabilities are reflected within "Current portion of long-term debt and finance leases" and total $
316
million as of June 30, 2023. Interest expense of $
6
million associated with the finance leases was recognized within "Special items - net non-operating" in the condensed consolidated statements of operations.
Special charges were also recognized during the quarter reflecting adjustments to estimated costs to return the A320 fleet, as well as penalty rent for Airbus aircraft which have not yet been returned to the lessor as of the lease expiration date.
The following table summarizes our special charges for fleet transition costs for the three and six months ended June 30, 2023 and 2022:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
|
Impairment of long-lived assets
(a)
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Accelerated aircraft ownership expenses |
|
|
|
|
||||||||||||||||||||||
| Lease return costs and other expenses |
|
|
|
|
||||||||||||||||||||||
| Special items - fleet transition and other | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
(a) Net of other immaterial activity recognized in the three months ended June 30, 2023.
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.
The Company disaggregates revenue by segment in Note 10. 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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Passenger ticket revenue, 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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|||||||||||||||||||
| Total Mileage Plan revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
12
Cargo and Other Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| 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
$
103
million
and
$
132
million
from the prior year-end air traffic liability balance for the three months ended June 30, 2023 and 2022, and
$
588
million
and
$
522
million
from the prior year-end air traffic liability balance for the six months ended June 30, 2023 and 2022.
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
$
96
million
of such receivables as of June 30, 2023 and $
83
million as of December 31, 2022.
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 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, 2023, total cost basis for all marketable securities was $
2.0
billion, compared to a total fair value of $
1.9
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 industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of June 30, 2023.
13
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| 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 contracts - call options |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Interest rate swap agreements |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total Assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
The Company uses 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 interest LIBOR-based and SOFR-based forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
| June 30, 2023 | Cost Basis | Fair Value | |||||||||
| Due in one year or less | $ |
|
$ |
|
|||||||
| Due after one year through five years |
|
|
|||||||||
| Due after five years |
|
|
|||||||||
| Due after 10 years |
|
|
|||||||||
| No maturity date |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
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.
14
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, 2023, 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 $
567
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, 2023 | December 31, 2022 | ||||||||||
| 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 and finance lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for details regarding impairment charges recorded in the three and six months ended June 30, 2023.
NOTE 5.
LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheets (in millions):
| June 30, 2023 | December 31, 2022 | ||||||||||
| 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 2035 |
|
|
|||||||||
| Less debt issuance costs |
(
|
(
|
|||||||||
| Total debt |
|
|
|||||||||
|
Less current portion
(a)
|
|
|
|||||||||
| Long-term debt, less current portion | $ |
|
$ |
|
|||||||
| Weighted-average fixed-interest rate |
|
% |
|
% | |||||||
| Weighted-average variable-interest rate |
|
% |
|
% | |||||||
(a) Excludes finance lease liabilities recognized within "Current portion of long-term debt and finance leases" in the condensed consolidated balance sheets as of June 30, 2023.
Approximately $
265
million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, 2023, resulting in an effective weighted-average interest rate for the full debt portfolio of
3.8
%.
In the second quarter, Horizon executed an agreement to finance E175 aircraft scheduled to be delivered in 2023 and 2024. The financing, which covers a portion of the total aircraft cost and is secured by the related aircraft, is funded upon each delivery and will total $
247
million over the duration of the agreement. During the six months ended June 30, 2023, the Company incurred new debt associated with this agreement of $
134
million, covering
six
E175 aircraft. This financing activity is reflected as a non-cash transaction within the supplemental disclosures in the condensed consolidated statements of cash flows.
Also during the six months ended June 30, 2023, the Company made scheduled debt payments of $
147
million and prepayments of $
2
million.
15
Debt Maturity
| Total | |||||
| Remainder of 2023 | $ |
|
|||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| 2027 |
|
||||
| Thereafter |
|
||||
| Total Principal Payments | $ |
|
|||
Bank Lines of Credit
Alaska has three credit facilities totaling $
476
million as of June 30, 2023. 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 SOFR plus a specified margin. A third credit facility for $
76
million expires in June 2024 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, 2023.
NOTE 6.
EMPLOYEE BENEFIT PLANS
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Pension expense included in Wages and benefits |
|
|
|
|
|||||||||||||||||||
| Interest cost |
|
|
|
|
|||||||||||||||||||
| Expected return on assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Recognized actuarial loss |
|
|
|
|
|||||||||||||||||||
| Pension expense included in Non-operating Income (Expense) | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
16
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of June 30, 2023 (in millions):
|
Aircraft-Related Commitments
(a)
|
Capacity Purchase Agreements and Other Obligations
(b)
|
|||||||||||||
| Remainder of 2023 | $ |
|
$ |
|
||||||||||
| 2024 |
|
|
||||||||||||
| 2025 |
|
|
||||||||||||
| 2026 |
|
|
||||||||||||
| 2027 |
|
|
||||||||||||
| Thereafter |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
(a)
Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
Aircraft Commitments
Aircraft purchase commitments include contractual commitments for aircraft and engines. Details for contractual aircraft commitments as of June 30, 2023 are outlined in the table below.
| Firm Orders | Options and Other Rights | Total | |||||||||||||||
| Aircraft Type | 2023-2027 | 2025-2030 | 2023-2030 | ||||||||||||||
| B737 |
|
|
|
||||||||||||||
| E175 |
|
|
|
||||||||||||||
| Total |
|
|
|
||||||||||||||
The fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of June 30, 2023. Alaska has received information from Boeing that certain B737 deliveries in 2023 are expected to be delayed into 2024.
Alaska has contractual agreements as of June 30, 2023 to purchase
five
of its leased A321neo aircraft. These transactions are expected to occur in the third and fourth quarters of 2023. The obligations for these aircraft, including both the remaining lease payments and subsequent purchase, are reflected within "Current portion of long-term debt and finance leases" in the condensed consolidated balance sheets as of June 30, 2023 and are not reflected in the tables above. Subsequent to quarter end, Alaska signed agreements to purchase
two
additional leased A321neo aircraft, with transactions expected to occur in the first quarter of 2024. Refer to Note 2 to the condensed consolidated financial statements for additional details.
Aircraft Maintenance
Aircraft maintenance commitments include contractual commitments for engine maintenance agreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft. In turn, these maintenance agreements transfer certain risks to the third-party service provider. Alaska has contracts for maintenance on its B737-800 and B737-900ER aircraft engines through 2026 and 2032, respectively. Horizon has a contract for maintenance on certain E175 aircraft engines through 2033.
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.
17
The Company has paid the final total judgment amount of approximately $
31
million in the
Bernstein v. Virgin America, Inc.
class action lawsuit, and expects to pay $
6
million in additional settlement fees, disbursements, and costs to close the matter.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $
8
million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $
10
million and $
160
million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence, and applied for permission to appeal the decision. On July 31, 2023, the UK appellate court granted the Company's application for appeal. A date for the appellate court proceedings has not been set. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.
NOTE 8.
SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $
1
billion share repurchase program. In March 2020, the Company suspended the share repurchase program as required by the CARES Act. These restrictions ended on October 1, 2022. The Company restarted the share repurchase program in February 2023 pursuant to the existing repurchase program. As of June 30, 2023, the Company has repurchased
8.9
million shares for $
601
million under this program. No shares were repurchased in 2022.
Share purchase activity (in millions, except share amounts):
|
Three Months Ended
June 30, 2023 |
Six Months Ended
June 30, 2023 |
||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||
| 2015 Repurchase Program—$1 billion |
|
$ |
|
|
$ |
|
|||||||||||||||||
CARES Act Warrant Issuances
As taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the U.S. government a total of
1,455,437
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.
As of June 30, 2023, there are
1,882,517
total warrants outstanding, with a weighted average strike price of $
39.06
. 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.
Diluted 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. For the three and six months ended June 30, 2023 and June 30, 2022, anti-dilutive shares excluded from the calculation of EPS were not material.
18
NOTE 9.
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, 2023 and 2022:
| Marketable Securities | Employee Benefit Plan | Interest Rate Derivatives | Total | ||||||||||||||||||||
|
Balance at March 31, 2023, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax effect of $(
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax effect of $
|
(
|
|
|
(
|
|||||||||||||||||||
|
Balance at June 30, 2023, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Balance at December 31, 2022, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax effect of $(
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax effect of $(
|
|
|
(
|
|
|||||||||||||||||||
|
Balance at June 30, 2023, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| Marketable Securities | Employee Benefit Plan | Interest Rate Derivatives | Total | ||||||||||||||||||||
|
Balance at March 31, 2022, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax effect of $
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax effect of $
|
(
|
|
|
(
|
|||||||||||||||||||
|
Balance at June 30, 2022, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
|
Balance at December 31, 2021, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
|
Reclassifications into earnings, net of tax effect of $
|
|
|
|
|
|||||||||||||||||||
|
Change in value, net of tax effect of $
|
(
|
|
|
(
|
|||||||||||||||||||
|
Balance at June 30, 2022, net of tax effect of $
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
NOTE 10.
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 revenue.
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 revenue 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
19
used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
| Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenue | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| 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, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenue | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| 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, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenue | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| 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, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Mainline | Regional | Horizon |
Consolidating & Other
(a)
|
Air Group Adjusted
(b)
|
Special Items
(c)
|
Consolidated | |||||||||||||||||||||||||||||||||||
| Operating Revenue | |||||||||||||||||||||||||||||||||||||||||
| Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| CPA revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Cargo and other revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total Operating Revenue |
|
|
|
(
|
|
|
|
||||||||||||||||||||||||||||||||||
| 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.
(c)
Includes special items and mark-to-market fuel hedge accounting adjustments.
Total assets were as follows (in millions):
| June 30, 2023 | December 31, 2022 | ||||||||||
| 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, 2022. This overview summarizes the MD&A, which includes the following sections:
•
Second Quarter Review
—highlights from the second quarter of 2023 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, 2023. 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 2023.
•
Liquidity and Capital Resources
—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
SECOND QUARTER REVIEW
Second Quarter Results
We recorded consolidated pretax income for the second quarter of 2023 under GAAP of $325 million, compared to consolidated pretax income of $185 million in the second quarter of 2022. On an adjusted basis, we reported consolidated pretax income for the quarter of $518 million, compared to consolidated pretax income of $371 million in 2022. Strength in the demand environment on 10% incremental capacity over 2022 lifted second quarter revenue to the highest total in company history.
During the second quarter we continued to experience cost pressures, with the most acute impact stemming from a 18% year-over-year increase in wages and benefits, driven by new labor contracts and elevated staffing levels to support operational integrity. Fuel costs moderated in the second quarter, with economic price per gallon decreasing 27% as compared to the prior year. As further progress was made in our transition towards an all-Boeing single fleet at Alaska, we also recorded $186 million in operating special charges representing impairment charges and other exit costs for the Airbus fleet.
See “
Results of Operations
” below for further discussion of changes in revenue and operating expenses as compared to 2022, 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.
Labor Updates
Alaska is actively negotiating for new contracts with its mainline flight attendants represented by the Association of Flight Attendants, whose contract became amendable in December 2022, and its mainline mechanics represented by the Aircraft Mechanics Fraternal Association, whose contract becomes amendable in October 2023. Horizon is actively negotiating for a new contract with its pilots, represented by the International Brotherhood of Teamsters, whose contract becomes amendable in December 2024.
Environmental, Social and Governance Updates
In order to achieve our long-term target of net-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 Shell Aviation to advance SAF technology and
22
infrastructure throughout the West Coast. Shell Aviation will also supply Alaska with up to 10 million gallons of SAF in Los Angeles.
Additionally, we contributed a retired Q400 aircraft to ZeroAvia, a hydrogen-electric aircraft engine developer, to support its research and development of zero emissions technology for the aviation industry.
Outlook
Looking to the second half of 2023, we will continue to prioritize running an excellent operation with an emphasis on improving productivity as we work through pilot transition training and adjust to post-pandemic employee behavior. Demand remains strong, even as we have come off the peak of historically high fares. As a primarily domestic leisure carrier, we expect the recent surge in international demand could impact our third quarter revenue performance, which we have reflected in our guidance. Yields remain well above 2019 levels. We expect third quarter revenue to be flat to up 3% on capacity up 10% to 13% versus 2022. We anticipate third quarter CASMex will be flat to down 2%, as both periods include the impacts of labor deals with various workgroups.
We will continue to respond to emerging information and trends, which could lead to changes in the guidance we have provided above. 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 in 2023 and beyond.
RESULTS
OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND
PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of aircraft fuel and special items is useful information to investors because:
•
By excluding fuel expense and special items from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction and productivity initiatives. 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 expense and 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 expense and special 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 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.
23
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are nonrecurring, 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, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
|
Consolidated Operating Statistics:
(a)
|
|||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 11,592 | 11,005 | 5% | 21,444 | 19,700 | 9% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 14,936 | 13,746 | 9% | 27,491 | 24,332 | 13% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 17,160 | 15,611 | 10% | 32,865 | 29,394 | 12% | |||||||||||||||||||||||||||||
| Load factor | 87.0% | 88.1% | (1.1) pts | 83.6% | 82.8% | 0.8 pts | |||||||||||||||||||||||||||||
| Yield | 17.40¢ | 17.59¢ | (1)% | 16.67¢ | 16.15¢ | 3% | |||||||||||||||||||||||||||||
| RASM | 16.54¢ | 17.03¢ | (3)% | 15.32¢ | 14.76¢ | 4% | |||||||||||||||||||||||||||||
|
CASMex
(b)
|
10.15¢ | 9.92¢ | 2% | 10.33¢ | 10.24¢ | 1% | |||||||||||||||||||||||||||||
|
Economic fuel cost per gallon
(b)
|
$2.76 | $3.76 | (27)% | $3.07 | $3.23 | (5)% | |||||||||||||||||||||||||||||
| Fuel gallons (000,000) | 207 | 196 | 6% | 396 | 368 | 8% | |||||||||||||||||||||||||||||
| ASMs per fuel gallon | 82.9 | 79.6 | 4% | 83.0 | 79.9 | 4% | |||||||||||||||||||||||||||||
| Departures (000) | 104.4 | 105.7 | (1)% | 199.8 | 198.9 | —% | |||||||||||||||||||||||||||||
| Average full-time equivalent employees (FTEs) | 23,301 | 22,603 | 3% | 23,140 | 22,092 | 5% | |||||||||||||||||||||||||||||
| Mainline Operating Statistics: | |||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 9,221 | 8,321 | 11% | 17,054 | 14,887 | 15% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 13,827 | 12,460 | 11% | 25,496 | 21,972 | 16% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 15,851 | 14,052 | 13% | 30,462 | 26,439 | 15% | |||||||||||||||||||||||||||||
| Load factor | 87.2% | 88.7% | (1.5) pts | 83.7% | 83.1% | 0.6 pts | |||||||||||||||||||||||||||||
| Yield | 16.12¢ | 16.28¢ | (1)% | 15.37¢ | 14.89¢ | 3% | |||||||||||||||||||||||||||||
| RASM | 15.48¢ | 16.02¢ | (3)% | 14.26¢ | 13.81¢ | 3% | |||||||||||||||||||||||||||||
|
CASMex
(b)
|
9.26¢ | 8.98¢ | 3% | 9.38¢ | 9.29¢ | 1% | |||||||||||||||||||||||||||||
|
Economic fuel cost per gallon
(b)
|
$2.74 | $3.74 | (27)% | $3.05 | $3.21 | (5)% | |||||||||||||||||||||||||||||
| Fuel gallons (000,000) | 179 | 165 | 8% | 345 | 311 | 11% | |||||||||||||||||||||||||||||
| ASMs per fuel gallon | 88.6 | 85.2 | 4% | 88.3 | 85.0 | 4% | |||||||||||||||||||||||||||||
| Departures (000) | 67.2 | 61.6 | 9% | 129.8 | 117.4 | 11% | |||||||||||||||||||||||||||||
| Average full-time equivalent employees (FTEs) | 18,147 | 17,315 | 5% | 17,966 | 16,825 | 7% | |||||||||||||||||||||||||||||
| Aircraft utilization | 11.5 | 10.1 | 14% | 11.3 | 9.8 | 15% | |||||||||||||||||||||||||||||
| Average aircraft stage length | 1,384 | 1,363 | 2% | 1,375 | 1,349 | 2% | |||||||||||||||||||||||||||||
|
Operating fleet
(d)
|
226 | 233 | (7) a/c | 226 | 233 | (7) a/c | |||||||||||||||||||||||||||||
|
Regional Operating Statistics:
(c)
|
|||||||||||||||||||||||||||||||||||
| Revenue passengers (000) | 2,372 | 2,685 | (12)% | 4,390 | 4,813 | (9)% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 1,109 | 1,285 | (14)% | 1,994 | 2,360 | (16)% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 1,309 | 1,559 | (16)% | 2,403 | 2,955 | (19)% | |||||||||||||||||||||||||||||
| Load factor | 84.7% | 82.4% | 2.3 pts | 83.0% | 79.9% | 3.1 pts | |||||||||||||||||||||||||||||
| Yield | 33.37¢ | 30.35¢ | 10% | 33.30¢ | 27.88¢ | 19% | |||||||||||||||||||||||||||||
| RASM | 29.26¢ | 26.04¢ | 12% | 28.59¢ | 23.21¢ | 23% | |||||||||||||||||||||||||||||
| Departures (000) | 37.2 | 44.1 | (16)% | 70.0 | 81.5 | (14)% | |||||||||||||||||||||||||||||
|
Operating fleet
(d)
|
81 | 104 | (23) a/c | 81 | 104 | (23) 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.
25
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2023 TO THREE MONTHS ENDED JUNE 30, 2022
Our consolidated net income for the three months ended June 30, 2023 was $240 million, or $1.86 per share, compared to a consolidated net income of $139 million, or $1.09 per share, for the three months ended June 30, 2022.
Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net income for the second quarter of 2023 was $387 million, or $3.00 per share, compared to an adjusted net income of $280 million, or $2.19 per share, for the second quarter of 2022. The following table reconciles our adjusted net income per share (EPS) to amounts as reported in accordance with GAAP:
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| GAAP net income per share | $ | 240 | $ | 1.86 | $ | 139 | $ | 1.09 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | 1 | 0.01 | 40 | 0.31 | |||||||||||||||||||
| Special items - fleet transition and other | 186 | 1.44 | 146 | 1.14 | |||||||||||||||||||
| Special items - net non-operating | 6 | 0.05 | — | — | |||||||||||||||||||
| Income tax effect of reconciling items above | (46) | (0.36) | (45) | (0.35) | |||||||||||||||||||
| Non-GAAP adjusted net income per share | $ | 387 | $ | 3.00 | $ | 280 | $ | 2.19 | |||||||||||||||
CASM excluding fuel and special items reconciliation is summarized below:
| Three Months Ended June 30, | |||||||||||||||||
| (in cents) | 2023 | 2022 | % Change | ||||||||||||||
| Consolidated: | |||||||||||||||||
| CASM | 14.57 | ¢ | 15.84 | ¢ | (8) | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.34 | 4.98 | (33) | % | |||||||||||||
| Special items - fleet transition and other | 1.08 | 0.94 | 15 | % | |||||||||||||
| CASM excluding fuel and special items | 10.15 | ¢ | 9.92 | ¢ | 2 | % | |||||||||||
| Mainline: | |||||||||||||||||
| CASM | 13.56 | ¢ | 15.06 | ¢ | (10) | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.10 | 5.06 | (39) | % | |||||||||||||
| Special items - fleet transition and other | 1.20 | 1.02 | 18 | % | |||||||||||||
| CASM excluding fuel and special items | 9.26 | ¢ | 8.98 | ¢ | 3 | % | |||||||||||
OPERATING REVENUE
Total operating revenue increased $180 million, or 7%, during the second quarter of 2023 compared to the same period in 2022. The changes are summarized in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Passenger revenue | $ | 2,598 | $ | 2,418 | 7 | % | |||||||||||
| Mileage Plan other revenue | 170 | 175 | (3) | % | |||||||||||||
| Cargo and other revenue | 70 | 65 | 8 | % | |||||||||||||
| Total Operating Revenue | $ | 2,838 | $ | 2,658 | 7 | % | |||||||||||
26
Passenger revenue
On a consolidated basis, Passenger revenue for the second quarter of 2023 increased by $180 million, or 7%, on a 9% increase in passenger traffic, partially offset by a slight decrease in yield. Passenger traffic growth as compared to the prior year was driven primarily on increased gauge and departures from our Mainline fleet. Although yields softened from prior year historic highs, improvements in premium class revenues and award redemption by Mileage Plan members lessened the negative impact.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue for the second quarter of 2023 decreased by $5 million, or 3%. The decrease was primarily due to a one-time $20 million favorable adjustment recorded in the second quarter of 2022 as a result of finalizing accounting conclusions for the contract with Bank of America. The decrease was partially offset by higher commissions from our bank card partners due to increased spend levels, annual membership fees, and credit card acquisitions.
Cargo and other revenue
On a consolidated basis, Cargo and other revenue for the second quarter of 2023 increased by $5 million, or 8%. The increase was driven by a combination of factors, including higher lounge revenue and increased freight volumes during the quarter.
OPERATING EXPENSES
Total operating expenses increased $30 million, or 1%, compared to the second quarter of 2022. 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) | 2023 | 2022 | % Change | ||||||||||||||
| Fuel expense | $ | 573 | $ | 776 | (26) | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 1,742 | 1,549 | 12 | % | |||||||||||||
| Special items - fleet transition and other | 186 | 146 | 27 | % | |||||||||||||
| Total Operating Expenses | $ | 2,501 | $ | 2,471 | 1 | % | |||||||||||
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.
Aircraft fuel expense decreased $203 million, or 26%, compared to the second quarter of 2022. The elements of the change are illustrated in the following table:
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 555 | $ | 2.68 | $ | 824 | $ | 4.20 | |||||||||||||||
| (Gain)/loss on settled hedges | 17 | 0.08 | (88) | (0.44) | |||||||||||||||||||
| Consolidated economic fuel expense | $ | 572 | $ | 2.76 | $ | 736 | $ | 3.76 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | 1 | — | 40 | 0.20 | |||||||||||||||||||
| GAAP fuel expense | $ | 573 | $ | 2.76 | $ | 776 | $ | 3.96 | |||||||||||||||
| Fuel gallons | 207 | 196 | |||||||||||||||||||||
Raw fuel expense decreased 33% in the second quarter of 2023 compared to the second quarter of 2022, due to significantly lower per gallon costs, partially offset by increased fuel consumption. Raw fuel expense per gallon decreased by 36% due to
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lower all-in jet fuel prices. Jet fuel prices are impacted by the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel, both of which have decreased in the second quarter of 2023 compared to the prior year. Fuel gallons consumed increased 6%, 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.
Losses recognized for hedges that settled during the second quarter were $17 million in 2023, compared to gains of $88 million in the same period in 2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.
Non-fuel expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel and other special items. Significant operating expense variances from 2022 are more fully described below.
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Wages and benefits | $ | 754 | $ | 639 | 18 | % | |||||||||||
| Variable incentive pay | 57 | 56 | 2 | % | |||||||||||||
| Aircraft maintenance | 125 | 104 | 20 | % | |||||||||||||
| Aircraft rent | 54 | 73 | (26) | % | |||||||||||||
| Landing fees and other rentals | 167 | 136 | 23 | % | |||||||||||||
| Contracted services | 95 | 82 | 16 | % | |||||||||||||
| Selling expenses | 81 | 78 | 4 | % | |||||||||||||
| Depreciation and amortization | 113 | 104 | 9 | % | |||||||||||||
| Food and beverage service | 60 | 50 | 20 | % | |||||||||||||
| Third-party regional carrier expense | 54 | 50 | 8 | % | |||||||||||||
| Other | 182 | 177 | 3 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 1,742 | $ | 1,549 | 12 | % | |||||||||||
Wages and benefits
Wages and benefits increased by $115 million, or 18%, in the second quarter of 2023. The primary components of Wages and benefits are shown in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Wages | $ | 576 | $ | 486 | 19 | % | |||||||||||
| Pension—Defined benefit plans | 8 | 12 | (33) | % | |||||||||||||
| Defined contribution plans | 49 | 39 | 26 | % | |||||||||||||
| Medical and other benefits | 77 | 66 | 17 | % | |||||||||||||
| Payroll taxes | 44 | 36 | 22 | % | |||||||||||||
| Total Wages and benefits | $ | 754 | $ | 639 | 18 | % | |||||||||||
Wages increased $90 million, or 19%, on 3% growth in FTEs. When combined with FTE increases, higher wage rates stemming from labor agreements executed in 2022 were the primary driver for incremental year-over-year expense for wages and related taxes. Higher stock-based compensation also contributed to the increase in wages, driven by additional stock award grants within the period.
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Incremental expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for many labor groups. Increased expense for medical and other benefits was driven by an increase in claims compared to the prior year and the increase in FTEs, including high value claims which were not experienced in 2022.
Aircraft maintenance
Aircraft maintenance expense increased by $21 million, or 20%, in the second quarter of 2023. The increase was primarily driven by the new B737-900ER power-by-the-hour contract in 2023, as well as increased aircraft utilization.
Aircraft rent
Aircraft rent expense decreased by $19 million, or 26%, in the second quarter of 2023. The decrease was driven by the retirement of 29 leased A320 and the reclassification of five A321neo from operating leases to finance leases. These decreases were partially offset by delivery of five leased B737-9 aircraft since the second quarter of 2022.
Landing fees and other rentals
Landing fees and other rentals increased by $31 million, or 23%, in the second quarter of 2023. The increase was driven by higher terminal rent costs resulting from both rate and volume increases. Landing fees increased due to higher rates and larger landing weights due a shift in the mix of flying from Regional to Mainline. Additionally, there was less favorability from settlements in 2023 as compared to 2022.
Contracted services
Contracted services increased by $13 million, or 16%, in the second quarter of 2023. The increase was driven by incremental passengers throughout our network, coupled with higher rates charged by vendors.
Food and beverage service
Food and beverage service increased by $10 million, or 20%, in the second quarter of 2023. The increase was driven by a combination of 5% growth in revenue passengers, additional onboard offerings, and higher costs for food, food service supplies, and transportation.
Third-party regional carrier expense
Third-party regional carrier expense, which represents expenses associated with SkyWest under the CPA with Alaska, increased by $4 million, or 8%, in the second quarter of 2023. Although total regional capacity and departures have decreased year-over-year, the increase in third-party regional carrier expense is driven by incremental SkyWest-operated departures. SkyWest departures have risen due to the annualization of six E175 aircraft operating under the CPA which were delivered in the second quarter of 2022. Higher wage rates for flight crews have also contributed to the increase.
Special items - fleet transition and other
We recorded expenses associated with fleet transition and related charges of $186 million in the second quarter of 2023. Refer to Note 2 to the consolidated financial statements for additional details.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 10 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 $498 million in the second quarter of 2023, compared to $375 million in the same period in 2022. The $123 million improvement was driven by a $200 million increase in Passenger revenue and a $127 million decrease in economic fuel, partially offset by a $206 million increase in non-fuel operating expenses.
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Compared to the prior year, higher Mainline revenue is primarily attributable to a 11% increase in traffic, driven by continued strength in the demand environment. Lower all-in fuel prices relative to 2022, partially offset by more gallons consumed, drove the decrease in Mainline fuel expense. Non-fuel operating expenses increased, driven by higher wage rates and higher variable costs, largely consistent with the overall growth in capacity and departures.
Regional
Regional operations reported an adjusted pretax profit of $22 million in the second quarter of 2023, compared to an adjusted pretax loss of $2 million in the same period in 2022. The $24 million improvement was driven by a $38 million decrease in fuel costs and a a $10 million decrease in non-fuel operating expenses, partially offset by a $24 million decrease in Operating revenue. These decreases are primarily the result of reduced flying activity, with a 16% decrease in capacity. Lower price per gallon on decreased consumption drove the decrease in Regional fuel expense.
Horizon
Horizon reported an adjusted pretax loss of $5 million in the second quarter of 2023, compared to $2 million in the same period in 2022. The loss is driven by lower CPA revenue on decreased departures and block hours, as well as higher wage and benefit costs due to increased wage rates.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2023 TO SIX MONTHS ENDED JUNE 30, 2022
Our consolidated net income for the six months ended June 30, 2023 was $98 million, or $0.76 per share, compared to consolidated net loss of $4 million, or $0.03 per share, for the six months ended June 30, 2022.
Our adjusted net income for the six months ended June 30, 2023 was $308 million, or $2.39 per share, compared to an adjusted net income of $113 million, or $0.89 per share, for the six months ended June 30, 2022. The following table reconciles our adjusted net income and adjusted EPS to amounts as reported in accordance with GAAP:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| GAAP net income (loss) per share | $ | 98 | $ | 0.76 | $ | (4) | $ | (0.03) | |||||||||||||||
| Mark-to-market fuel hedge adjustments | 21 | 0.16 | (67) | (0.53) | |||||||||||||||||||
| Special items - fleet transition and other | 199 | 1.54 | 221 | 1.75 | |||||||||||||||||||
| Special items - labor and related | 51 | 0.40 | — | — | |||||||||||||||||||
| Special items - net non-operating | 6 | 0.05 | — | — | |||||||||||||||||||
| Income tax effect of reconciling items above | (67) | (0.52) | (37) | (0.30) | |||||||||||||||||||
| Non-GAAP adjusted net income per share | $ | 308 | $ | 2.39 | $ | 113 | $ | 0.89 | |||||||||||||||
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CASM excluding fuel and special items reconciliation is summarized below:
| Six Months Ended June 30, | |||||||||||||||||
| (in cents) | 2023 | 2022 | % Change | ||||||||||||||
| Consolidated: | |||||||||||||||||
| CASM | 14.86 | ¢ | 14.81 | ¢ | — | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.77 | 3.82 | (1) | % | |||||||||||||
| Special items - fleet transition and other | 0.61 | 0.75 | (19) | % | |||||||||||||
| Special items - labor and related | 0.15 | — | NM | ||||||||||||||
| CASM excluding fuel and special items | 10.33 | ¢ | 10.24 | ¢ | 1 | % | |||||||||||
| Mainline: | |||||||||||||||||
| CASM | 13.73 | ¢ | 13.69 | ¢ | — | % | |||||||||||
| Less the following components: | |||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 3.52 | 3.84 | (8) | % | |||||||||||||
| Special items - fleet transition and other | 0.67 | 0.56 | 20 | % | |||||||||||||
| Special items - labor and related | 0.16 | — | NM | ||||||||||||||
| CASM excluding fuel and special items | 9.38 | ¢ | 9.29 | ¢ | 1 | % | |||||||||||
OPERATING REVENUE
Total operating revenue increased $695 million, or 16%, during the first six months of 2023 compared to the same period in 2022. The changes are summarized in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Passenger revenue | $ | 4,582 | $ | 3,929 | 17 | % | |||||||||||
| Mileage Plan other revenue | 324 | 287 | 13 | % | |||||||||||||
| Cargo and other revenue | 128 | 123 | 4 | % | |||||||||||||
| Total operating revenue | $ | 5,034 | $ | 4,339 | 16 | % | |||||||||||
Passenger revenue
On a consolidated basis, Passenger revenue for the first six months of 2023 increased by $653 million, or 17%, on a 13% increase in passenger traffic and a 3% improvement in ticket yield. Demand for air travel remained strong through the second quarter, which we were able to capture through increased departures flown by larger aircraft in our Mainline fleet. Redemptions by Mileage Plan members also provided a benefit over the prior year, with greater redemption on both Alaska and partner airlines.
We expect to see growth to Passenger revenue for the remainder of the year compared to 2022 driven by increased capacity and continued strength in flown redemptions by our Mileage Plan members.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased $37 million, or 13%, in the first six months of 2023. The increase was driven by higher commissions from our bank card partners due to increased spend levels, annual membership fees, and credit card acquisitions.
We expect to see continued strength in Mileage Plan other revenue for the remainder of 2023, enabled by higher commissions from increased card spend.
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Cargo and other revenue
On a consolidated basis, Cargo and other revenue for the first six months of 2023 increased by $5 million, or 4%. The increase was driven by a combination of factors, including higher lounge revenue and increased freight volumes.
We expect Cargo and other revenue to continue to increase compared to 2022 due to the factors described above as well as the addition of one 737-800 freighter to our fleet in the fourth quarter.
OPERATING EXPENSES
Total operating expenses increased $529 million, or 12%, compared to the first six months of 2022. 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) | 2023 | 2022 | % Change | ||||||||||||||
| Fuel expense | $ | 1,238 | $ | 1,123 | 10 | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 3,395 | 3,010 | 13 | % | |||||||||||||
| Special items - fleet transition and other | 199 | 221 | (10) | % | |||||||||||||
| Special items - labor and related | 51 | — | NM | ||||||||||||||
| Total operating expenses | $ | 4,883 | $ | 4,354 | 12 | % | |||||||||||
Fuel expense
Aircraft fuel expense increased $115 million, or 10%, compared to the six months ended June 30, 2022. The elements of the change are illustrated in the table:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 1,188 | $ | 3.00 | $ | 1,328 | $ | 3.61 | |||||||||||||||
| (Gain)/loss on settled hedges | 29 | 0.07 | (138) | (0.38) | |||||||||||||||||||
| Consolidated economic fuel expense | $ | 1,217 | $ | 3.07 | $ | 1,190 | $ | 3.23 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | 21 | 0.05 | (67) | (0.18) | |||||||||||||||||||
| GAAP fuel expense | $ | 1,238 | $ | 3.12 | $ | 1,123 | $ | 3.05 | |||||||||||||||
| Fuel gallons | 396 | 368 | |||||||||||||||||||||
Raw fuel expense decreased 11% in the first six months of 2023 compared to the first six months of 2022, due to lower per gallon costs, partially offset by increased fuel consumption. Raw fuel expense per gallon decreased by approximately 17% due to lower all-in jet fuel prices. Jet fuel prices are impacted by the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel, both of which have decreased in the first six months of 2023 compared to the prior year. Fuel gallons consumed increased 8%, 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.
Losses recognized for hedges that settled in the first six months of 2023 were $29 million, compared to gains of $138 million in the same period in 2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.
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We expect our economic fuel cost per gallon in the third quarter to range between $2.70 to $2.80 per gallon.
Non-fuel expenses
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Wages and benefits | $ | 1,477 | $ | 1,245 | 19 | % | |||||||||||
| Variable incentive pay | 104 | 92 | 13 | % | |||||||||||||
| Aircraft maintenance | 249 | 239 | 4 | % | |||||||||||||
| Aircraft rent | 113 | 146 | (23) | % | |||||||||||||
| Landing fees and other rentals | 319 | 274 | 16 | % | |||||||||||||
| Contracted services | 190 | 160 | 19 | % | |||||||||||||
| Selling expenses | 147 | 136 | 8 | % | |||||||||||||
| Depreciation and amortization | 217 | 206 | 5 | % | |||||||||||||
| Food and beverage service | 114 | 91 | 25 | % | |||||||||||||
| Third-party regional carrier expense | 106 | 92 | 15 | % | |||||||||||||
| Other | 359 | 329 | 9 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 3,395 | $ | 3,010 | 13 | % | |||||||||||
Wages and benefits
Wages and benefits increased by $232 million, or 19%, in the first six months of 2023. The primary components of wages and benefits are shown in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | % Change | ||||||||||||||
| Wages | $ | 1,134 | $ | 953 | 19 | % | |||||||||||
| Pension - Defined benefit plans service cost | 15 | 23 | (35) | % | |||||||||||||
| Defined contribution plans | 100 | 77 | 30 | % | |||||||||||||
| Medical and other benefits | 143 | 122 | 17 | % | |||||||||||||
| Payroll taxes | 85 | 70 | 21 | % | |||||||||||||
| Total wages and benefits | $ | 1,477 | $ | 1,245 | 19 | % | |||||||||||
Wages increased $181 million, or 19%, on 5% growth in FTEs. When combined with FTE increases, higher wage rates stemming from labor agreements executed in 2022 were the primary driver for incremental year-over-year expense for wages and related taxes. Higher stock-based compensation also contributed to the increase in wages, driven by additional stock award grants within the period.
Incremental expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for many labor groups. Increased expense for medical and other benefits was driven by an increase in claims compared to the prior year and incremental FTEs. Decreased defined benefit expense was driven by changes in actuarial assumptions.
We expect to see higher wages and benefits for the remainder of 2023 due to the increase in wage rates and new labor agreements. Wages and benefits could also increase further in 2023 due to agreements we may reach during the year with represented labor groups.
Variable incentive pay
Variable incentive pay expense increased $12 million, or 13%, in the first six months of 2023. The increase was driven by growth in the variable incentive pay wage base due to incremental FTEs and increased wage rates compared to 2022.
33
Aircraft maintenance
Aircraft maintenance expense increased by $10 million, or 4%, in the first six months of 2023. The increase was primarily driven by the new B737-900ER power-by-the-hour contract and increased aircraft utilization, partially offset by $35 million of lease return costs in the first quarter of 2022 that did not recur in 2023 as all lease return costs associated with the Company's fleet transition have been recorded to Special items - fleet transition and other since the second quarter of 2022.
We expect aircraft maintenance to increase for the remainder of 2023 as compared to 2022 due primarily to the B737-900ER power-by-the-hour contract, which will total approximately $100 million for the year, as well as increased aircraft utilization.
Aircraft rent
Aircraft rent expense decreased by $33 million, or 23%, in the first six months of 2023. The decrease was driven by the retirement of 29 leased A320 and the reclassification of five A321neo operating leases to finance leases. These decreases were partially offset by delivery of five leased B737-9 aircraft since the second quarter of 2022.
We expect aircraft rent will remain below 2022 levels for the remainder of 2023, due to the net reduction in overall leased aircraft described above as well as the purchase of currently leased A321neo aircraft.
Landing fees and other rentals
Landing fees and other rentals increased by $45 million, or 16%, in the first six months of 2023. The increase was driven by higher terminal rent costs resulting from both rate and volume increases. Landing fees increased due to higher rates and larger landing weights due a shift in the mix of flying from Regional to Mainline.
We expect landing fees and other rentals to increase for the remainder of 2023 as compared to 2022 due to increased capacity and higher rates at airports.
Contracted services
Contracted services increased by $30 million, or 19%, in the first six months of 2023. The increase was driven by incremental passengers throughout our network, coupled with higher rates charged by vendors.
We expect contracted services to increase for the remainder of 2023 as compared to 2022 as we continue to increase capacity and departures throughout our network.
Selling expenses
Selling expenses increased by $11 million, or 8%, in the first six months of 2023. The increase was driven by incremental credit card commissions and distribution costs incurred from increased bookings. Commissions and fees associated with alliances and business travel also contributed to the increase.
We expect selling expenses to increase for the remainder of 2023 as compared to 2022 due primarily to higher sales.
Food and beverage service
Food and beverage service increased by $23 million, or 25%, in the first six months of 2023. The increase was driven by a combination of 9% growth in revenue passengers, additional onboard offerings, and higher costs for food, food service supplies, and transportation.
We expect the factors described above will continue to have a similar impact on food and beverage service for the remainder of 2023 as compared to 2022.
Third-party regional carrier expense
Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $14 million, or 15%, in the first six months of 2023. Although total regional capacity and departures have decreased year-over-year, the increase in third-party regional carrier expense is driven by incremental SkyWest-operated departures. SkyWest departures
34
have risen due to the annualization of ten E175 aircraft operating under the CPA which were delivered during the first six months of 2022. Higher wage rates for flight crews have also contributed to the increase.
We expect third-party regional carrier expense will continue to be higher for the remainder of 2023 as compared to 2022 due to incremental departures and block hours, as well as higher wage rates for flight crews.
Other expense
Other expense increased $30 million, or 9%, in the first six months of 2023. The increase was driven by higher professional services and software costs, as well as increases for crew hotel stays and crew per diem. Increases in crew-related costs are due to contract improvements for Alaska pilots.
We expect other expense will continue to be higher for the remainder of 2023 as compared to 2022 due to overall growth throughout our network.
Special items - fleet transition
We recorded expenses associated with fleet transition and related charges of $199 million in the first six months of 2023.
We expect to record additional special charges associated with the retirement of the A321neo aircraft. At this time, these costs are estimated to range between $100 million and $150 million for the remainder of 2023. We also anticipate recording gains upon the sale of certain Q400 aircraft. Refer to Note 2 to the consolidated financial statements for additional details.
Special items - labor and other
We recorded a nonrecurring expense of $51 million in the first quarter of 2023 due to a Letter of Agreement with Alaska pilots, represented by ALPA. The charge is a one-time adjustment of accrued benefits related to expected future cash payments of pilots' unused sick leave upon retirement.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 10 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 $431 million in the first six months of 2023, compared to $201 million in the same period in 2022. The $230 million improvement was driven by a $692 million increase in Mainline operating revenue, partially offset by a $402 million increase in Mainline non-fuel operating expense and a $53 million increase in Mainline fuel expense.
As compared to the prior year, higher Mainline revenue is primarily attributable to a 16% increase in traffic and a 3% increase in yield, driven by the increase in capacity and demand. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Additional gallons consumed and prior year gains from settled hedges drove the increase in Mainline fuel expense.
Regional
Regional operations reported an adjusted pretax loss of $14 million in the first six months of 2023, compared to $57 million in the same period in 2022. Improved results were attributable to higher yields and decreased operating expenses on reduced traffic and departures.
Horizon
Horizon reported an adjusted pretax loss of $19 million in the first six months of 2023, compared to $12 million in the same period in 2022. The loss is driven by lower CPA revenue on decreased departures and block hours, combined with higher wage and benefit costs due to increased wage rates resulting from the annualization of new collective bargaining agreements with Horizon employees.
35
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
•
Existing cash and marketable securities of $2.4 billion;
•
Cash flows from operations of $832 million;
•
82 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, 2023, we took free and clear delivery of eight owned Boeing 737-9 aircraft. We incurred new of debt of $134 million and made debt payments totaling $53 million. We ended the quarter with a debt-to-capitalization ratio of 48%, within our target range of 40% to 50%. We continued share repurchases, spending $39 million in the second quarter, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.
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.
The table below presents the major indicators of financial condition and liquidity:
| (in millions) | June 30, 2023 | December 31, 2022 | Change | ||||||||||||||
| Cash and marketable securities | $ | 2,442 | $ | 2,417 | 1 % | ||||||||||||
| Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 27 | % | 29 | % | (2) pts | ||||||||||||
| Long-term debt, net of current portion | 1,889 | 1,883 | —% | ||||||||||||||
| Shareholders’ equity | $ | 3,951 | $ | 3,816 | 4% | ||||||||||||
| Debt-to-capitalization, adjusted for operating and finance leases | |||||||||||||||||
| (in millions) | June 30, 2023 | December 31, 2022 | Change | ||||||||||||||
| Long-term debt, net of current portion | $ | 1,889 | $ | 1,883 | —% | ||||||||||||
| Capitalized operating leases | 1,425 | 1,621 | (12)% | ||||||||||||||
|
Capitalized finance leases
(a)
|
316 | — | NM | ||||||||||||||
| Adjusted debt | $ | 3,630 | $ | 3,504 | 4% | ||||||||||||
| Shareholders' equity | 3,951 | 3,816 | 4% | ||||||||||||||
| Total invested capital | $ | 7,581 | $ | 7,320 | 4% | ||||||||||||
| Debt-to-capitalization, including operating and finance leases | 48 | % | 48 | % | — | ||||||||||||
(a)
To best reflect our leverage at June 30, 2023, we included our capitalized finance lease balances, which are recognized within the 'Current portion of long-term debt and finance leases' line in the condensed consolidated balance sheets.
36
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | |||||||||||
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Current portion of long-term debt and finance leases | $ | 572 | $ | 276 | |||||||
| Current portion of operating lease liabilities | 277 | 228 | |||||||||
| Long-term debt | 1,889 | 1,883 | |||||||||
| Long-term operating lease liabilities, net of current portion | 1,148 | 1,393 | |||||||||
| Total adjusted debt | 3,886 | 3,780 | |||||||||
| Less: Cash and marketable securities | 2,442 | 2,417 | |||||||||
| Adjusted net debt | $ | 1,444 | $ | 1,363 | |||||||
| (in millions) | Twelve Months Ended June 30, 2023 | Twelve Months Ended December 31, 2022 | |||||||||
|
GAAP Operating Income
(a)
|
$ | 236 | $ | 70 | |||||||
| Adjusted for: | |||||||||||
| Special items | 609 | 580 | |||||||||
| Mark-to-market fuel hedge adjustments | 164 | 76 | |||||||||
| Depreciation and amortization | 426 | 415 | |||||||||
| Aircraft rent | 258 | 291 | |||||||||
| EBITDAR | $ | 1,693 | $ | 1,432 | |||||||
| Adjusted net debt to EBITDAR | 0.9x | 1.0x | |||||||||
(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.
ANALYSIS OF OUR CASH FLOWS
Cash Provided by Operating Activities
For the first six months of 2023, net cash provided by operating activities was $832 million, compared to $1.2 billion during the same period in 2022. Cash provided by ticket sales and from our co-branded credit card agreement are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.
The $403 million net decrease in our operating cash flows is due to a combination of factors. First, there were non-recurring federal income tax refunds of $260 million in 2022. Additionally, payments made in 2023 for our 2022 performance-based pay program were approximately $110 million higher than payments in the prior year for our 2021 program. Less significant growth in our air traffic liability and an increase in cash used for operating expenses was partially offset by an improved net income compared to the prior year.
Cash Used in Investing Activities
Cash used in investing activities was $479 million during the first six months of 2023, compared to $721 million in 2022. The change in cash used in investing was largely driven by marketable securities activity, which was $185 million of net sales during the first six months of 2023, compared to $87 million of net purchases in 2022. Cash used for capital expenditures was flat as compared to the prior year period.
37
Cash Used in Financing Activities
Cash used in financing activities was $165 million during the first six months of 2023, compared to $206 million in 2022. During the first six months of 2023, we utilized cash on hand to repay $149 million of outstanding long-term debt, compared to payments of $239 million during the same period in 2022. We also repurchased $57 million of our common stock during the first six months of 2023.
MATERIAL CASH COMMITMENTS
Material cash requirements include the following contractual and other obligations:
Aircraft Commitments
As of June 30, 2023, Alaska has firm orders to purchase 94 B737 aircraft with deliveries between 2023 and 2027 and a firm commitment to lease one B737-9 aircraft with delivery in 2023. Alaska has rights for 105 additional B737-10 aircraft through 2030. Alaska also has commitments to lease two B737-800 freighters with deliveries in 2023 and 2024.
Alaska has received information from Boeing that certain B737 deliveries in 2023 are expected to be delayed into 2024. The anticipated fleet count outlined below reflects the expected impact of these delays. Alaska will continue to work with Boeing on delivery timelines that support Alaska's plans for growth.
Horizon has commitments to purchase 11 E175 aircraft with deliveries between 2023 and 2026. Horizon has options to acquire 13 E175 aircraft between 2025 and 2026. The E175 deliveries expected for the remainder of 2023 and 2024 are covered under a financing agreement executed in the second quarter. Capital expenditures for these deliveries, which are included within aircraft-related commitments in the contractual obligations table below, will be reflected as a non-cash transaction in the condensed consolidated statements of cash flows.
Options will be exercised only if we believe return on invested capital targets can be met over the long term. We intend to finance future aircraft deliveries and option exercises using cash flow from operations or long-term debt.
To best reflect our expectations of future fleet activity, we have incorporated anticipated delivery delays related to 2023 described above into the following table, which summarizes our expected fleet count by year, as of August 2, 2023:
| Actual Fleet |
Anticipated Fleet Activity
(a)
|
||||||||||||||||||||||||||||||||||||||||||||||
| Aircraft | June 30, 2023 | 2023 Additions | 2023 Removals | Dec 31, 2023 | 2024 Changes | Dec 31, 2024 | 2025 Changes | Dec 31, 2025 | |||||||||||||||||||||||||||||||||||||||
| B737-700 Freighters | 3 | — | — | 3 | — | 3 | — | 3 | |||||||||||||||||||||||||||||||||||||||
| B737-800 Freighters | — | 1 | — | 1 | 1 | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| B737-700 | 11 | — | — | 11 | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||
| B737-800 | 60 | — | (1) | 59 | — | 59 | — | 59 | |||||||||||||||||||||||||||||||||||||||
| B737-900 | 12 | — | — | 12 | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||||||||
| B737-900ER | 79 | — | — | 79 | — | 79 | — | 79 | |||||||||||||||||||||||||||||||||||||||
| B737-8 | — | 1 | — | 1 | 4 | 5 | 4 | 9 | |||||||||||||||||||||||||||||||||||||||
| B737-9 | 51 | 17 | — | 68 | 16 | 84 | 5 | 89 | |||||||||||||||||||||||||||||||||||||||
| B737-10 | — | — | — | — | 6 | 6 | 21 | 27 | |||||||||||||||||||||||||||||||||||||||
| A321neo | 10 | — | (10) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total Mainline Fleet | 226 | 19 | (11) | 234 | 27 | 261 | 30 | 291 | |||||||||||||||||||||||||||||||||||||||
| E175 operated by Horizon | 39 | 2 | — | 41 | 3 | 44 | 3 | 47 | |||||||||||||||||||||||||||||||||||||||
| E175 operated by third party | 42 | — | — | 42 | — | 42 | 1 | 43 | |||||||||||||||||||||||||||||||||||||||
| Total Regional Fleet | 81 | 2 | — | 83 | 3 | 86 | 4 | 90 | |||||||||||||||||||||||||||||||||||||||
| Total | 307 | 21 | (11) | 317 | 30 | 347 | 34 | 381 | |||||||||||||||||||||||||||||||||||||||
(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.
38
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 and, 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 | Weighted-Average Crude Oil Price per Barrel | Average Premium Cost per Barrel | |||||||||||||||
| Third Quarter of 2023 | 50 | % | $100 | $7 | |||||||||||||
| Fourth Quarter of 2023 | 50 | % | $96 | $7 | |||||||||||||
| Full Year 2023 | 50 | % | $98 | $7 | |||||||||||||
| First Quarter of 2024 | 40 | % | $87 | $6 | |||||||||||||
| Second Quarter of 2024 | 30 | % | $86 | $6 | |||||||||||||
| Third Quarter of 2024 | 20 | % | $82 | $6 | |||||||||||||
| Fourth Quarter of 2024 | 10 | % | $79 | $6 | |||||||||||||
| Full Year 2024 | 25 | % | $85 | $6 | |||||||||||||
Contractual Obligations
The following table provides a summary of our obligations as of August 2, 2023 and reflects anticipated delivery delays described above. For agreements with variable terms, amounts included reflect our minimum obligations. Discussion of these obligations follow the table below.
| (in millions) | Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | Beyond 2027 | Total | ||||||||||||||||||||||||||||||||||
| Debt obligations | $ | 135 | $ | 251 | $ | 304 | $ | 184 | $ | 544 | $ | 741 | $ | 2,159 | |||||||||||||||||||||||||||
|
Lease commitments
(a)
|
518 | 268 | 196 | 194 | 188 | 840 | 2,204 | ||||||||||||||||||||||||||||||||||
|
Aircraft-related commitments
(b)
|
948 | 1,619 | 1,440 | 689 | 335 | 598 | 5,629 | ||||||||||||||||||||||||||||||||||
|
Interest obligations
(c)
|
65 | 95 | 89 | 74 | 69 | 114 | 506 | ||||||||||||||||||||||||||||||||||
|
CPA and other obligations
(d)
|
109 | 224 | 227 | 218 | 220 | 739 | 1,737 | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,775 | $ | 2,457 | $ | 2,256 | $ | 1,359 | $ | 1,356 | $ | 3,032 | $ | 12,235 | |||||||||||||||||||||||||||
(a)
Lease commitments include minimum payments for aircraft operated under operating and finance leases, as well as for aircraft which have been removed from operating service, as we have remaining obligation under existing terms. It also includes minimum lease payments for facilities.
(b)
Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
(c)
For variable-rate debt, future obligations are shown above using interest rates forecast as of June 30, 2023.
(d)
Primarily comprised of non-lease costs associated with capacity purchase agreements.
Debt Obligations and Interest Obligations
The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. During the six months ended June 30, 2023, the Company incurred new debt of $134 million and repaid $149 million in existing debt. At June 30, 2023, our debt portfolio carries a weighted average interest rate of 3.8%. Interest is paid with regular debt service. Debt service obligations remaining in 2023 are expected to be approximately $200 million, inclusive of interest and principal. Refer to Note 5 to the consolidated financial statement for further discussion of our debt and interest balances.
CPA and Other Obligations
We have obligations primarily associated with our capacity purchase agreement between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.
39
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. Additional charges to be recorded in 2023 will reflect adjustments to estimated costs to return the A320 fleet. A total of $200 million is accrued at June 30, 2023, including costs recorded in prior year periods.We anticipate recording material cash outflows to return aircraft in 2023 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.
Credit Card Agreements
Alaska has 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.
Sustainability Commitments
As part of our efforts to reach net-zero carbon emissions by 2040, we have outlined a five-part path that we expect to include operational efficiency, fleet renewal, SAF, enabling new technologies including zero emission aircraft in the future, and using credible offsetting and removal technologies to close the gaps to the target in future years. We anticipate these efforts will require cash outlays, not all of which are reflected in our contractual commitments. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of neat SAF to be delivered between 2025 and 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within the CPA and other obligations row in the above table, as appropriate.
Income Taxes
For federal income tax purposes, the majority of our property and equipment 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 property and equipment difference will reverse into taxable income, potentially resulting in an increase in income taxes payable.
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 and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices, among other factors out of our control), whether “bonus depreciation” provisions are available, as well as other legislative changes beyond our control. We believe we have the liquidity to make our future tax payments.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three and six months ended June 30, 2023. 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, 2022.
40
GLOSSARY OF AIRLINE TERMS
Adjusted net debt -
long-term debt, including current portion, plus capitalized operating and finance 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)
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 and finance 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 A320, and Airbus A321neo 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
41
| 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, 2022.
42
| ITEM 4. CONTROLS AND PROCEDURES | ||
Evaluation of Disclosure Controls and Procedures
As of June 30, 2023, 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, 2023.
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, 2023, 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).
43
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.
The Company has paid the final total judgment amount of approximately $31 million in the
Bernstein v. Virgin America, Inc.
class action lawsuit, and expects to pay $6 million in additional settlement fees, disbursements, and costs to close the matter.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence, and applied for permission to appeal the decision. On July 31, 2023, the UK appellate court granted the Company's application for appeal. A date for the appellate court proceedings has not been set. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.
| ITEM 1A. RISK FACTORS | ||
See Part I, Item 1A. "Risk Factors," in our 2022 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 | ||
This table provides certain information with respect to our purchases of shares of our common stock during the second quarter of 2023.
|
Total Number of
Shares Purchased |
Average Price
Paid per Share |
Maximum remaining
dollar value of shares that can be purchased under the plan (in millions) |
|||||||||||||||
| April 1, 2023 - April 30, 2023 | 259,224 | 42.71 | |||||||||||||||
| May 1, 2023 - May 31, 2023 | 399,204 | 43.82 | |||||||||||||||
| June 1, 2023 - June 30, 2023 | 213,559 | 48.71 | |||||||||||||||
| Total | 871,987 | $ | 44.69 | $ | 399 | ||||||||||||
The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.
As of June 30, 2023, a total of 1,882,517 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 (928,126 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. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020 at a strike price of $31.61. 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. 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.
44
| ITEM 4. MINE SAFETY DISCLOSURES | ||
None.
| ITEM 5. OTHER INFORMATION | ||
| 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, 2023 | |||||
45
EXHIBIT INDEX
|
Exhibit
Number |
Exhibit
Description |
Form | Date of First Filing | Exhibit Number | ||||||||||
| 3.1 | 10-Q | August 3, 2017 | 3.1 | |||||||||||
| 3.2 | 8-K | December 15, 2015 | 3.2 | |||||||||||
| 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 | |||||||||||||
| 104† | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
| † | Filed herewith | |||||||||||||
| * | Indicates management contract or compensatory plan or arrangement. | |||||||||||||
| # | Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10). | |||||||||||||
46
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. Accumulated Other Comprehensive LossprintNote 10. 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