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, 2024
OR
For the transition period from to
Commission File Number
1-8957
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| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
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| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
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☒ | Accelerated filer | ☐ |
Non-accelerated filer
(Do not check if a smaller reporting company) |
☐ | Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes
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No
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The registrant has
126,159,173
common shares, par value $0.01, outstanding at July 31, 2024.
This document is also available on our website at https://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2024
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, 2023. 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, 2024 | December 31, 2023 | |||||||||
| 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, 2024 | December 31, 2023 | |||||||||
| 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: 2024 -
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(
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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) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| 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 - operating |
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| Total Operating Expenses |
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| Operating Income |
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| Non-operating Income (Expense) | |||||||||||||||||||||||
| Interest income |
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| Interest expense |
(
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(
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(
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| Interest capitalized |
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| Special items - net non-operating |
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| Other - net |
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(
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| Total Non-operating Expense |
(
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(
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(
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(
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| Income Before Income Tax |
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| Income tax expense |
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| Net Income | $ |
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$ |
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$ |
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$ |
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| Basic Earnings Per Share: | $ |
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$ |
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$ |
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$ |
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| Diluted Earnings Per Share: | $ |
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$ |
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$ |
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$ |
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| Weighted Average Shares Outstanding 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) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net Income | $ |
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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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| Employee benefit plans |
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| Interest rate derivative instruments |
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(
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| Total other comprehensive income, net of tax | $ |
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$ |
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$ |
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$ |
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| Total Comprehensive Income, 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, 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 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, 2024 |
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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, 2024 |
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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, 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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| 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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8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, | ||||||||||||||
| (in millions) | 2024 | 2023 | ||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net Income | $ |
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$ |
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| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization |
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| Special items - operating |
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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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| Other - net |
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| Net cash provided by operating activities |
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| Cash Flows from Investing Activities: | ||||||||||||||
| Property and equipment additions | ||||||||||||||
| Aircraft and aircraft purchase deposits |
(
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(
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| Other flight equipment |
(
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(
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| Other property and equipment |
(
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(
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| Supplier proceeds |
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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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| Fleet transition |
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(
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| Other investing activities |
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| Net cash used in investing activities |
(
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(
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| Cash Flows from Financing Activities: | ||||||||||||||
| Proceeds from issuance of long-term debt, net of issuance costs |
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| Long-term debt payments |
(
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(
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| Common stock repurchases |
(
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(
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| Other financing activities |
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| Net cash provided by (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) | 2024 | 2023 | ||||||||||||
| 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 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 unaudited Condensed Consolidated Financial Statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The unaudited 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 Quarterly Report on 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 Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2024 and the results of operations for the three and six months ended June 30, 2024 and 2023. Such adjustments were of a normal recurring nature. Certain rows, columns, figures, or percentages may not recalculate due to rounding.
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, 2024 are not necessarily indicative of operating results for the entire year.
Flight 1282 and Boeing 737-9 MAX Grounding
As a result of the Flight 1282 accident and the subsequent grounding of Boeing 737-9 MAX (B737-9) aircraft, Air Group's operation and results in the first and second quarters were significantly impacted. The Company received compensation from Boeing to address the financial damages incurred as a result of the grounding. In the first quarter, Boeing paid Air Group $
162
million in cash. In the second quarter, Boeing issued Air Group $
61
million in supplier credit memos to be applied against future Boeing goods and services purchases.
Compensation received under the agreement is accounted for as a reduction in cost basis of certain B737-9 aircraft. The compensation is reflected within Aircraft and other flight equipment and Deposits for future flight equipment in the unaudited Condensed Consolidated Balance Sheets.
NOTE 2. PROPOSED ACQUISITION OF HAWAIIAN HOLDINGS, INC.
On December 2, 2023, the Company entered into a definitive agreement to acquire Hawaiian Holdings, Inc. (Hawaiian). The Company has agreed to pay Hawaiian's shareholders $
18.00
per share, or approximately $
1.0
billion, in cash for the outstanding shares of Hawaiian. In addition, the Company expects to assume Hawaiian's debt and lease obligations on the date of acquisition. The acquisition has been approved by Hawaiian's shareholders and is subject to final approval by various regulatory bodies.
On February 7, 2024, Air Group and Hawaiian each received a request for additional information and documentary material (the “Second Request”) from the Antitrust Division of the Department of Justice (the “DOJ”) in connection with the DOJ’s review of the acquisition. On March 27, 2024, Air Group and Hawaiian entered into a timing agreement with the DOJ pursuant to which they agreed, among other things, not to consummate the acquisition before 90 days following the date on which both parties have certified substantial compliance with the Second Request unless they have received written notice from the DOJ prior to the end of such 90-day period that the DOJ has closed its investigation of the acquisition.
On May 7, 2024, Air Group and Hawaiian certified substantial compliance with the Second Request. The certification of substantial compliance triggered the start of the 90-day period described in the prior paragraph, which was previously scheduled to expire on August 5, 2024. On July 29, 2024, Air Group and Hawaiian agreed with the DOJ to extend the Review Period until 12:01 a.m. Eastern Time on August 15, 2024.
In the three and six months ended June 30, 2024, the Company incurred integration costs of $
30
million and $
38
million, respectively, primarily consisting of professional services fees. These costs are included within Special items - operating in the
11
unaudited Condensed Consolidated Statements of Operations. The Company expects to continue to incur integration costs as activities supporting the proposed acquisition continue.
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 level of detail within the Company’s unaudited Condensed Consolidated Statements of Operations 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
Passenger revenue recognized in the unaudited Condensed Consolidated Statements of Operations (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Passenger ticket revenue, net of taxes and fees | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Passenger ancillary revenue |
|
|
|
|
|||||||||||||||||||
| Mileage Plan passenger revenue |
|
|
|
|
|||||||||||||||||||
| Total Passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Mileage Plan Loyalty Program
Mileage Plan revenue included in the unaudited Condensed Consolidated Statements of Operations (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Mileage Plan passenger revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Mileage Plan other revenue |
|
|
|
|
|||||||||||||||||||
| Total Mileage Plan revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Cargo and Other Revenue
Cargo and other revenue included in the unaudited Condensed Consolidated Statements of Operations (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cargo revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Other revenue |
|
|
|
|
|||||||||||||||||||
| Total Cargo and other revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
12
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of
$
150
million
and
$
103
million
from the prior year-end air traffic liability balance for the three months ended June 30, 2024 and 2023, and
$
717
million
and
$
588
million
from the prior year-end air traffic liability balance for the six months ended June 30, 2024 and 2023.
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
$
87
million
of such receivables as of June 30, 2024 and $
102
million as of December 31, 2023.
The table below presents a roll forward of the total frequent flyer liability (in millions):
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| 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, 2024, cost basis and fair value for marketable securities were $
1.4
billion. Differences in cost basis and fair value of marketable securities are primarily a result of changes in interest rates and general market conditions. Management does not believe any unrealized losses are the result of credit quality based on its evaluation of industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of June 30, 2024.
13
Fair values of financial instruments on the unaudited Condensed Consolidated Balance Sheets (in millions):
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| 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 SOFR-based forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Maturities for marketable securities (in millions):
| June 30, 2024 | Cost Basis | Fair Value | |||||||||
| Due in one year or less | $ |
|
$ |
|
|||||||
| Due after one year through five years |
|
|
|||||||||
| Due after five years through ten 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, 2024, 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 $
601
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.
Fixed-rate debt on the unaudited Condensed Consolidated Balance Sheets and the estimated fair value of long-term fixed-rate debt (in millions):
| June 30, 2024 | December 31, 2023 | ||||||||||
| 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. No material impairments were recorded during the three and six months ended June 30, 2024.
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the unaudited Condensed Consolidated Balance Sheets (in millions):
| June 30, 2024 | December 31, 2023 | ||||||||||
| 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 2036 |
|
|
|||||||||
| 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 unaudited Condensed Consolidated Balance Sheets as of December 31, 2023.
Approximately $
223
million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, 2024, resulting in an effective weighted-average interest rate for the full debt portfolio of
4.7
%.
During the six months ended June 30, 2024, the Company incurred debt of $
348
million from multiple lenders and sources. New debt includes proceeds of $
280
million, secured by a combination of aircraft and flight simulators. Additionally, $
68
million was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement is reflected as a non-cash transaction within the supplemental disclosures in the unaudited Condensed Consolidated Statements of Cash Flows. During the six months ended June 30, 2024, the Company made debt payments of $
149
million.
Subsequent to quarter end, the Company incurred debt of $
67
million, secured by aircraft.
15
Debt Maturity
At June 30, 2024, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
| Total | |||||
| Remainder of 2024 | $ |
|
|||
| 2025 |
|
||||
| 2026 |
|
||||
| 2027 |
|
||||
| 2028 |
|
||||
| Thereafter |
|
||||
| Total Principal Payments | $ |
|
|||
Bank Lines of Credit
Alaska has three credit facilities totaling $
626
million as of June 30, 2024. One credit facility is for $
150
million, expires in April 2028, and is secured by certain accounts receivable, spare engines, spare parts, and ground service equipment. A second credit facility is for $
400
million, expires in June 2026, and is secured by aircraft. Both facilities have variable interest rates based on SOFR plus a specified margin. A third credit facility is for $
76
million, expires in June 2025, and is secured by aircraft.
Alaska has secured letters of credit against the third facility. 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, 2024.
NOTE 6.
EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Pension expense included in Wages and benefits |
|
|
|
|
|||||||||||||||||||
| Interest cost |
|
|
|
|
|||||||||||||||||||
| Expected return on assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Recognized actuarial loss |
|
|
|
|
|||||||||||||||||||
| Pension expense (benefit) included in Non-operating Income | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
16
NOTE 7. COMMITMENTS AND CONTINGENCIES
Boeing has communicated to Alaska that certain B737 aircraft are expected to be delivered later than the contracted delivery dates. This includes certain B737-8 and B737-9 aircraft contracted for delivery in 2024 that have been moved to 2025, as well as certain B737-10 aircraft contracted for delivery in 2025 that have been moved to 2026, pending certification of the B737-10. The Company has incorporated these adjustments in the tables below, however, management expects that additional Boeing aircraft deliveries may also be delayed beyond what is depicted in the tables.
Future minimum contractual payments for commitments as of June 30, 2024 (in millions):
|
Aircraft-Related Commitments
(a)
|
Capacity Purchase Agreements and Other Obligations
(b)
|
|||||||||||||
| Remainder of 2024 | $ |
|
$ |
|
||||||||||
| 2025 |
|
|
||||||||||||
| 2026 |
|
|
||||||||||||
| 2027 |
|
|
||||||||||||
| 2028 |
|
|
||||||||||||
| Thereafter |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
(a)
Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
(b)
Excludes lease costs associated with capacity purchase agreements.
Aircraft Commitments
Aircraft purchase commitments include contractual commitments for aircraft and engines. Details for contractual aircraft commitments as of June 30, 2024 are outlined below.
| Firm Orders | Options and Other Rights | Total | |||||||||||||||
| Aircraft Type | 2024-2027 | 2026-2030 | 2024-2030 | ||||||||||||||
| B737 |
|
|
|
||||||||||||||
| E175 |
|
|
|
||||||||||||||
| Total |
|
|
|
||||||||||||||
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 contracts for maintenance on its E175 aircraft engines through 2033 and 2039.
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
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. 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 appealed the decision. On June 11, 2024, the appellate court issued a final decision affirming the lower court ruling in favor of the Virgin Group. 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. Alaska recorded an accrual in the second quarter of 2024 for $
45
million, representing the expenses associated with the trademark license agreement between January 2020 and June 2024. The expense is classified within Special items – operating in the unaudited Condensed Consolidated Statements of Operations.
On April 15, 2024, a private antitrust action captioned
Warren Yoshimoto, et al., v. Alaska Airlines, Inc., et al.
was filed in the United States District Court for the District of Hawaii, against Alaska Airlines, Inc. and Alaska Air Group, Inc. The plaintiffs, whom the complaint describes as airline passengers, allege that the pending acquisition of Hawaiian Airlines, Inc. by Alaska Airlines, Inc. would violate U.S. antitrust laws. They seek to enjoin the merger or obtain divestitures, as well as costs and attorneys’ fees. The Company believes the allegations in the complaint are without merit and will defend against them vigorously, while continuing to work cooperatively with the U.S. Department of Justice to obtain regulatory clearance to close the acquisition.
NOTE 8.
SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $
1
billion share repurchase program. The Company repurchased
1.2
million shares for $
49
million during the six months ended June 30, 2024 and
1.3
million shares for $
57
million during the six months ended June 30, 2023. As of June 30, 2024, the Company has repurchased
12.3
million shares for $
738
million, with $
262
million remaining under this program.
CARES Act Warrant Issuances
As taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the U.S. Department of the Treasury 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. The warrants were sold at auction in the second quarter of 2024 to a third party investor. The sale had no impact to the amount held on the Company's balance sheet.
NOTE 9. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding, including the dilutive effect of outstanding share-based instruments such as employee stock awards and warrants.
18
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
|
(in millions, except per share amounts)
|
2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Basic weighted average shares outstanding
|
|
|
|
|
|||||||||||||||||||
| Dilutive effect of employee stock awards |
|
|
|
|
|||||||||||||||||||
| Dilutive effect of stock warrants |
|
|
|
|
|||||||||||||||||||
|
Diluted weighted average shares outstanding
|
|
|
|
|
|||||||||||||||||||
| Basic earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Antidilutive amounts excluded from calculation: | |||||||||||||||||||||||
| Employee stock awards |
|
|
|
|
|||||||||||||||||||
| Stock warrants |
|
|
|
|
|||||||||||||||||||
NOTE 10.
ACCUMULATED OTHER COMPREHENSIVE LOSS
A roll forward of the amounts included in accumulated other comprehensive loss is shown below for the three and six months ended June 30, 2024 and 2023:
| (in millions) | Marketable Securities | Employee Benefit Plan | Interest Rate Derivatives | Tax Effect | Total | ||||||||||||||||||||||||
| Balance at March 31, 2024 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Change in value |
|
|
|
|
|
||||||||||||||||||||||||
| Reclassifications into earnings |
|
|
|
(
|
|
||||||||||||||||||||||||
| Balance at June 30, 2024 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Balance at December 31, 2023 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Change in value |
|
|
|
|
|
||||||||||||||||||||||||
| Reclassifications into earnings |
|
|
|
(
|
|
||||||||||||||||||||||||
| Balance at June 30, 2024 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Marketable Securities | Employee Benefit Plan | Interest Rate Derivatives | Tax Effect | Total | |||||||||||||||||||||||||
| Balance at March 31, 2023 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Change in value |
(
|
|
|
|
(
|
||||||||||||||||||||||||
| Reclassifications into earnings |
|
|
|
(
|
|
||||||||||||||||||||||||
| Balance at June 30, 2023 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
| Balance at December 31, 2022 |
(
|
(
|
|
|
(
|
||||||||||||||||||||||||
| Change in value |
|
|
(
|
(
|
|
||||||||||||||||||||||||
| Reclassifications into earnings |
|
|
|
(
|
|
||||||||||||||||||||||||
| Balance at June 30, 2023 | $ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||
19
NOTE 11.
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 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. Historically, our CODM has reviewed financial performance information for our airline operations and the Horizon CPA as part of three reportable operating segments:
•
Mainline
- includes scheduled air transportation on Alaska's Boeing jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, Costa Rica, Belize, Guatemala, and the Bahamas.
•
Regional
- includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S., Canada, and Mexico 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.
In addition to these reported segments, the Company has a "Consolidating and Other" column which reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the Company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Over time, our Mainline and Regional airline segments have increasingly been managed as a single component that provides scheduled air transportation for passengers and cargo, and includes our loyalty program. Managing this component in an integrated manner enables our team to leverage our comprehensive network, single route scheduling system, and fleet as a single business to deliver optimized consolidated financial results. In 2024, management began evaluating changes to internal reporting that may change the discrete information that is provided to our CODM in the future to better align with the way the business is managed. Such changes may have an impact on the Company’s reportable segments once finalized. The Company will continue to report using the existing segment structure until changes in our internal reporting have been fully implemented, and a segment analysis has been performed to determine if any changes to reportable segments are indicated.
20
Operating segment information is as follows (in millions):
| Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| 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, 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 |
|
% |
|
% | |||||||||||||||||||||||||||||||||||||
21
| Six Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| 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, 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 |
|
% |
|
% | |||||||||||||||||||||||||||||||||||||
(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, 2024 | December 31, 2023 | ||||||||||
| Mainline | $ |
|
$ |
|
|||||||
| Horizon |
|
|
|||||||||
| Consolidating & Other |
(
|
(
|
|||||||||
| Consolidated | $ |
|
$ |
|
|||||||
22
NOTE 12. SPECIAL ITEMS
The Company has classified certain operating and non-operating expenses as special items due to their unusual or infrequently occurring nature. The Company believes disclosing information about these items separately improves comparable year over year analysis and allows stakeholders to better understand our results of operations. A description of the special items is provided below.
Fleet transition:
Costs are associated with the retirement and disposition of Airbus and Q400 aircraft.
Labor agreements:
Costs are for the retroactive pay offered to Alaska flight attendants pursuant to the tentative agreement reached in the second quarter of 2024 and for changes to Alaska pilots' sick leave benefits resulting from an agreement signed in the first quarter of 2023.
Integration costs:
Costs are associated with the proposed acquisition of Hawaiian Airlines.
Litigation:
Costs represent expenses that were recognized following a negative appeal ruling in the second quarter of 2024 associated with the Virgin trademark license agreement with the Virgin Group.
Net non-operating:
Costs are for interest expense associated with certain A321neo lease agreements which were modified as part of Alaska's fleet transition.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fleet transition | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Labor agreements |
|
|
|
|
|||||||||||||||||||
| Integration costs |
|
|
|
|
|||||||||||||||||||
| Litigation |
|
|
|
|
|||||||||||||||||||
| Special items - operating | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Non-operating Income (Expense) | |||||||||||||||||||||||
| Special Items - net non-operating | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
23
| 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 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, 2023. This overview summarizes the MD&A, which includes the following sections:
•
GAAP to Non-GAAP Reconciliations and Operating Statistics
- reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis, as well as operating statistics we use to measure operating performance.
•
Second Quarter Review -
highlights from the second quarter of 2024 outlining some of the major events that occurred during the period.
•
Results of Operations -
an in-depth analysis of our consolidated revenue and expenses for the three and six months ended June 30, 2024. This section includes forward-looking statements regarding our view of the remainder of 2024.
•
Liquidity and Capital Resources -
an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
GAAP TO NON-GAAP RECONCILIATIONS AND OPERATING STATISTICS
We are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:
•
By excluding certain costs from our unit metrics, we believe that we have better visibility into the results of operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. 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 investors to understand the impact of company-specific cost drivers which are more controllable by management. We adjust for expenses related directly to our freighter aircraft operations to allow for better comparability to other domestic carriers that do not operate freighter aircraft. We also exclude certain special charges as they are unusual or nonrecurring in nature and adjusting for these expenses allows management and investors to better understand our cost performance.
•
CASMex is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance. CASMex is also a measure commonly used by industry analysts, and we believe it is the basis 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 pretax income is an important metric for the employee incentive plan, which covers the majority of Air Group employees.
•
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
24
evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not consider them a substitute for GAAP figures. Amounts in the tables below are rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to the Company's actual figures presented in the tables below.
GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Income before income tax | $ | 316 | $ | 325 | $ | 138 | $ | 126 | |||||||||||||||
| Adjusted for: | |||||||||||||||||||||||
| Mark-to-market fuel hedge adjustment | (5) | 1 | (18) | 21 | |||||||||||||||||||
| Special items - operating | 146 | 186 | 180 | 250 | |||||||||||||||||||
| Special items - net non-operating | — | 6 | — | 6 | |||||||||||||||||||
| Adjusted income before income tax | $ | 457 | $ | 518 | $ | 300 | $ | 403 | |||||||||||||||
| Pretax margin | 10.9 | % | 11.5 | % | 2.7 | % | 2.5 | % | |||||||||||||||
| Adjusted pretax margin | 15.8 | % | 18.3 | % | 5.8 | % | 8.0 | % | |||||||||||||||
25
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| Net income per share | $ | 220 | $ | 1.71 | $ | 240 | $ | 1.86 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | (5) | (0.04) | 1 | 0.01 | |||||||||||||||||||
| Special items - operating | 146 | 1.14 | 186 | 1.44 | |||||||||||||||||||
| Special items - net non-operating | — | — | 6 | 0.05 | |||||||||||||||||||
| Income tax effect of reconciling items above | (34) | (0.26) | (46) | (0.36) | |||||||||||||||||||
| Adjusted net income per share | $ | 327 | $ | 2.55 | $ | 387 | $ | 3.00 | |||||||||||||||
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in millions, except per-share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||||||||||
| Net income per share | $ | 88 | $ | 0.69 | $ | 98 | $ | 0.76 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | (18) | (0.14) | 21 | 0.16 | |||||||||||||||||||
| Special items - operating | 180 | 1.41 | 250 | 1.94 | |||||||||||||||||||
| Special items - net non-operating | — | — | 6 | 0.05 | |||||||||||||||||||
| Income tax effect of reconciling items above | (39) | (0.31) | (67) | (0.52) | |||||||||||||||||||
| Adjusted net income per share | $ | 211 | $ | 1.65 | $ | 308 | $ | 2.39 | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Total operating expenses | $ | 2,575 | $ | 2,501 | $ | 4,973 | $ | 4,883 | |||||||||||||||
| Less the following components: | |||||||||||||||||||||||
| Aircraft fuel, including hedging gains and losses | 615 | 573 | 1,180 | 1,238 | |||||||||||||||||||
| Freighter costs | 13 | 12 | 28 | 26 | |||||||||||||||||||
| Special items - operating | 146 | 186 | 180 | 250 | |||||||||||||||||||
| Total operating expenses, excluding fuel, freighter costs, and special items | $ | 1,801 | $ | 1,730 | $ | 3,585 | $ | 3,369 | |||||||||||||||
| ASMs | 18,196 | 17,160 | 33,575 | 32,865 | |||||||||||||||||||
| CASMex | 9.89 | ¢ | 10.08 | ¢ | 10.67 | ¢ | 10.25 | ¢ | |||||||||||||||
26
OPERATING STATISTICS (unaudited)
Below are consolidated 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, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||||||||||||||||||||||||
| Revenue passengers (000) | 11,888 | 11,592 | 3% | 21,662 | 21,444 | 1% | |||||||||||||||||||||||||||||
| RPMs (000,000) "traffic" | 15,309 | 14,936 | 2% | 27,833 | 27,491 | 1% | |||||||||||||||||||||||||||||
| ASMs (000,000) "capacity" | 18,196 | 17,160 | 6% | 33,575 | 32,865 | 2% | |||||||||||||||||||||||||||||
| Load factor | 84.1% | 87.0% | (2.9) pts | 82.9% | 83.6% | (0.7) pts | |||||||||||||||||||||||||||||
| Yield | 17.32¢ | 17.40¢ | —% | 16.73¢ | 16.67¢ | —% | |||||||||||||||||||||||||||||
| PRASM | 14.57¢ | 15.14¢ | (4)% | 13.86¢ | 13.94¢ | (1)% | |||||||||||||||||||||||||||||
| RASM | 15.92¢ | 16.54¢ | (4)% | 15.28¢ | 15.32¢ | —% | |||||||||||||||||||||||||||||
|
CASMex
(a)
|
9.89¢ | 10.08¢ | (2)% | 10.67¢ | 10.25¢ | 4% | |||||||||||||||||||||||||||||
|
Economic fuel cost per gallon
(a)
|
$2.84 | $2.76 | 3% | $2.95 | $3.07 | (4)% | |||||||||||||||||||||||||||||
| Fuel gallons (000,000) | 219 | 207 | 6% | 406 | 396 | 3% | |||||||||||||||||||||||||||||
| ASMs per fuel gallon | 83.1 | 82.9 | —% | 82.7 | 83.0 | —% | |||||||||||||||||||||||||||||
| Departures (000) | 112.4 | 104.4 | 8% | 208.1 | 199.8 | 4% | |||||||||||||||||||||||||||||
| Average full-time equivalent employees (FTEs) | 23,368 | 23,301 | —% | 23,190 | 23,140 | —% | |||||||||||||||||||||||||||||
|
Operating fleet
(b)
|
326 | 307 | 19 a/c | 326 | 307 | 19 a/c | |||||||||||||||||||||||||||||
(a)
Refer to reconciliation of this non-GAAP measure to the most directly related GAAP measure.
(b)
Includes aircraft owned and leased by Alaska and Horizon as well as aircraft operated by third-party regional carriers under capacity purchase agreements. Excludes non-operating aircraft.
SECOND QUARTER REVIEW
Financial Overview
We reported consolidated pretax income for the second quarter of 2024 of $316 million, compared to $325 million in the prior year. Despite challenges in the domestic fare environment, the Company achieved record quarterly revenue of $2.9 billion due to growth in our premium cabins and the continued strength of our loyalty program. Total operating expenses increased $74 million compared to the prior year. While fuel costs rose year over year due to increased flying and higher per gallon costs, the Company's focus on managing its non-fuel operating costs led to CASMex improvement of nearly 2% compared to the prior year.
See “
Results of Operations
” below for further discussion of changes in revenue and operating expenses as compared to 2023. A glossary of financial terms can be found at the end of this Item 2.
Labor Updates
In June 2024, Alaska reached a tentative agreement with its flight attendants represented by the Association of Flight Attendants (AFA) for an updated collective bargaining agreement. Voting is expected to take place in mid-August. In the second quarter, we accrued $30 million which approximates the retroactive pay offered to flight attendants for the service period through June 30, 2024. This expense is classified within Special items - operating in the unaudited Condensed Consolidated Statements of Operations.
Horizon is in negotiations with certain labor groups for updated CBAs, including its pilots, represented by the International Brotherhood of Teamsters; its flight attendants, represented by AFA; and its technicians, represented by AMFA.
27
Outlook
The following represents the Company's expectations for the third quarter and full year 2024 results. Full year adjusted EPS guidance has been lowered by $0.25 at the midpoint to reflect the economics of a newly signed tentative agreement with Alaska's flight attendants and a moderating domestic revenue environment.
| Q3 Expectation | ||||||||
| Capacity (ASMs) % change versus 2023 | Up 2% to 3% | |||||||
| CASMex % change versus 2023 | Up high single digits | |||||||
| RASM % change versus 2023 | Flat to positive | |||||||
| Economic fuel cost per gallon | $2.85 to $2.95 | |||||||
|
Adjusted earnings per share
(a)
|
$1.40 to $1.60 | |||||||
| Full Year Expectation | ||||||||
| Capacity (ASMs) % change versus 2023 | Up < 2.5% | |||||||
|
Adjusted earnings per share
(a)
|
$3.50 to $4.50 | |||||||
| Capital expenditures | $1.2 billion - $1.3 billion | |||||||
(a) Adjusted earnings per share guidance assumes a full year tax rate of approximately 25%. Full year EPS guidance assumes an economic fuel cost per gallon of approximately $2.90 for FY 2024.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2024 TO THREE MONTHS ENDED JUNE 30, 2023
OPERATING REVENUE
Total operating revenue increased $59 million, or 2%, in the second quarter of 2024 compared to the same period in 2023. The changes are summarized in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Passenger revenue | $ | 2,651 | $ | 2,598 | 2 | % | |||||||||||
| Mileage Plan other revenue | 174 | 170 | 2 | % | |||||||||||||
| Cargo and other revenue | 72 | 70 | 3 | % | |||||||||||||
| Total Operating Revenue | $ | 2,897 | $ | 2,838 | 2 | % | |||||||||||
Passenger revenue
Passenger revenue for the second quarter of 2024 increased $53 million, or 2%, on a 2% increase in passenger traffic, partially offset by a slight decrease in yield. Passenger traffic growth was driven by increased gauge and departures throughout the network. Increased revenue from the premium cabins also contributed to the year over year improvement.
Mileage Plan other revenue
Mileage Plan other revenue for the second quarter of 2024 increased by $4 million, or 2%. The increase was driven by higher award redemption on partner airlines and incremental commissions from third party partners.
28
OPERATING EXPENSES
Total operating expenses increased $74 million, or 3%, compared to the second quarter of 2023. 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) | 2024 | 2023 | % Change | ||||||||||||||
| Fuel expense | $ | 615 | $ | 573 | 7 | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 1,814 | 1,742 | 4 | % | |||||||||||||
| Special items - operating | 146 | 186 | (22) | % | |||||||||||||
| Total Operating Expenses | $ | 2,575 | $ | 2,501 | 3 | % | |||||||||||
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 increased $42 million, or 7%, compared to the second quarter of 2023. The elements of the change are illustrated in the following table:
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 610 | $ | 2.79 | $ | 555 | $ | 2.68 | |||||||||||||||
| Losses on settled hedges | 10 | 0.05 | 17 | 0.08 | |||||||||||||||||||
| Economic fuel expense | $ | 620 | $ | 2.84 | $ | 572 | $ | 2.76 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | (5) | (0.03) | 1 | — | |||||||||||||||||||
| Aircraft fuel, including hedging gains and losses | $ | 615 | $ | 2.81 | $ | 573 | $ | 2.76 | |||||||||||||||
| Fuel gallons | 219 | 207 | |||||||||||||||||||||
Raw fuel expense increased 10% in the second quarter of 2024 compared to the second quarter of 2023 due to higher fuel consumption and per gallon costs of crude oil, partially offset by a decrease in refining margins associated with the conversion of crude oil to jet fuel.
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 $10 million in 2024, compared to losses of $17 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement. In 2023, we suspended our crude oil hedge program. Our final option position will settle in the first quarter of 2025.
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Non-fuel expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel and special items. Significant operating expense variances from 2023 are more fully described below.
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Wages and benefits | $ | 782 | $ | 754 | 4 | % | |||||||||||
| Variable incentive pay | 49 | 57 | (14) | % | |||||||||||||
| Aircraft maintenance | 129 | 125 | 3 | % | |||||||||||||
| Aircraft rent | 46 | 54 | (15) | % | |||||||||||||
| Landing fees and other rentals | 173 | 167 | 4 | % | |||||||||||||
| Contracted services | 106 | 95 | 12 | % | |||||||||||||
| Selling expenses | 84 | 81 | 4 | % | |||||||||||||
| Depreciation and amortization | 128 | 113 | 13 | % | |||||||||||||
| Food and beverage service | 67 | 60 | 12 | % | |||||||||||||
| Third-party regional carrier expense | 64 | 54 | 19 | % | |||||||||||||
| Other | 186 | 182 | 2 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 1,814 | $ | 1,742 | 4 | % | |||||||||||
Wages and benefits
Wages and benefits increased by $28 million, or 4%, in the second quarter of 2024. The primary components of Wages and benefits are shown in the following table:
| Three Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Wages | $ | 592 | $ | 576 | 3 | % | |||||||||||
| Payroll taxes | 44 | 44 | — | % | |||||||||||||
| Medical and other benefits | 82 | 77 | 6 | % | |||||||||||||
| Defined contribution plans | 57 | 49 | 16 | % | |||||||||||||
| Pension - Defined benefit plans | 7 | 8 | (13) | % | |||||||||||||
| Total Wages and benefits | $ | 782 | $ | 754 | 4 | % | |||||||||||
Wages increased $16 million, or 3%, driven by increased wage rates across multiple labor groups since the prior year. The increase was partially offset by certain nonrecurring stock awards granted in the second quarter of 2023.
The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for Alaska technicians.
Variable incentive pay
Variable incentive pay expense decreased by $8 million, or 14%, in the second quarter of 2024. The decrease was driven by a lower assumed payout percentage compared to the prior year, partially offset by an increased wage base.
Aircraft rent
Aircraft rent expense decreased by $8 million, or 15%, in the second quarter of 2024. The decrease was primarily driven by the retirement of ten leased A321neo aircraft fleet from operations since the second quarter of 2023.
30
Landing fees and other rentals
Landing fees and other rentals increased by $6 million, or 4%, in the second quarter of 2024. Landing fees increased due to the volume of departures and landed weight. Increases to terminal rents were primarily due to growth throughout the network, but were largely offset by favorable settlements received during the quarter from certain airports.
Contracted services
Contracted services increased by $11 million, or 12%, in the second quarter of 2024, driven by higher rates charged by vendors as well as increased passengers throughout our network.
Depreciation and amortization
Depreciation and amortization increased by $15 million, or 13%, in the second quarter of 2024. The increase was primarily due to the addition of 22 owned B737 aircraft and five owned E175 aircraft to our fleet since the second quarter of 2023, as well as incremental depreciation on ground service and other equipment additions.
Food and beverage service
Food and beverage service increased by $7 million, or 12%, in the second quarter of 2024. The increase was driven by a combination of 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 $10 million, or 19%, in the second quarter of 2024. The increase in third-party regional carrier expense was driven by increased SkyWest-operated departures and block hours.
Special items - operating
We recorded $146 million of operating special items in the second quarter of 2024, compared to $186 million in the same period in 2023. Refer to Note 12 to the consolidated financial statements for details.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 11 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's results.
Mainline
Mainline reported a pretax profit of $387 million in the second quarter of 2024, compared to a pretax profit of $479 million in the same period in 2023. The $92 million decrease was driven by a $17 million decrease in passenger revenue, a $48 million increase in non-fuel operating expenses, and a $30 million increase in economic fuel expense.
Compared to the prior year, lower Mainline revenue is primarily attributable to weaker ticket yield, driven by a moderating domestic pricing environment. Non-fuel operating expenses increased, driven by higher wage rates across multiple labor groups and higher variable costs associated with overall network growth. Increased economic fuel cost was driven by higher per gallon costs and incremental fuel consumption.
Regional
Regional reported a pretax profit of $55 million in the second quarter of 2024, compared to a pretax profit of $41 million in the same period in 2023. The $14 million improvement was driven by higher passenger revenue consistent with the increase in traffic, partially offset by higher operating expenses associated with increased capacity.
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Horizon
Horizon reported a pretax profit of $8 million in the second quarter of 2024, compared to a pretax loss of $5 million in the same period in 2023. The $13 million improvement was driven by increased revenue consistent with increased capacity sold to Alaska, partially offset by increased expenses driven by the addition of five owned E175 aircraft added to Horizon's fleet since the second quarter of 2023. Cost reductions resulting from Horizon's transition to single fleet also contributed to this improvement.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2024 TO SIX MONTHS ENDED JUNE 30, 2023
OPERATING REVENUE
Total operating revenue increased $95 million, or 2%, during the first six months of 2024 compared to the same period in 2023. The changes are summarized in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Passenger revenue | $ | 4,655 | $ | 4,582 | 2 | % | |||||||||||
| Mileage Plan other revenue | 338 | 324 | 4 | % | |||||||||||||
| Cargo and other revenue | 136 | 128 | 6 | % | |||||||||||||
| Total Operating Revenue | $ | 5,129 | $ | 5,034 | 2 | % | |||||||||||
Passenger revenue
Passenger revenue for the first six months of 2024 increased by $73 million, or 2%, driven by increased passenger traffic. Traffic growth was due to increased gauge and departures throughout the network. Strength in premium class products and increased redemptions by Mileage Plan members on both Alaska and partner airlines also contributed to this increase. These improvements were offset by lost revenue from the B737-9 grounding as well as a moderating domestic revenue environment in the second quarter.
We expect to see Passenger revenue growth for the remainder of 2024 compared to 2023 as a result of capacity growth plans, strength in the premium cabins, and continued recovery of corporate travel.
Mileage Plan other revenue
Mileage Plan other revenue increased $14 million, or 4%, in the first six months of 2024. The increase was driven by higher commissions from bank card and third party partners.
We expect to see continued strength in Mileage Plan other revenue for the remainder of 2024, driven by higher commissions from increased card spend and acquisition bonuses, offset by incremental redemption on other air partners as compared to the prior year.
OPERATING EXPENSES
Total operating expenses increased $90 million, or 2%, compared to the first six months of 2023. 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) | 2024 | 2023 | % Change | ||||||||||||||
| Fuel expense | $ | 1,180 | $ | 1,238 | (5) | % | |||||||||||
| Non-fuel operating expenses, excluding special items | 3,613 | 3,395 | 6 | % | |||||||||||||
| Special items - operating | 180 | 250 | (28) | % | |||||||||||||
| Total Operating Expenses | $ | 4,973 | $ | 4,883 | 2 | % | |||||||||||
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Fuel expense
Aircraft fuel expense decreased $58 million, or 5%, compared to the six months ended June 30, 2023. The elements of the change are illustrated in the table:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||||||||||
| Raw or "into-plane" fuel cost | $ | 1,175 | $ | 2.89 | $ | 1,188 | $ | 3.00 | |||||||||||||||
| (Gain)/loss on settled hedges | 23 | 0.06 | 29 | 0.07 | |||||||||||||||||||
| Consolidated economic fuel expense | $ | 1,198 | $ | 2.95 | $ | 1,217 | $ | 3.07 | |||||||||||||||
| Mark-to-market fuel hedge adjustments | (18) | (0.05) | 21 | 0.05 | |||||||||||||||||||
| GAAP fuel expense | $ | 1,180 | $ | 2.90 | $ | 1,238 | $ | 3.12 | |||||||||||||||
| Fuel gallons | 406 | 396 | |||||||||||||||||||||
Raw fuel expense decreased 1% in the first six months of 2024 compared to the first six months of 2023. While fuel consumption and per gallon costs of crude oil were higher, these increases were more than offset by lower refining margins.
Economic fuel expense includes losses recognized for hedges that settled in the first six months of 2024 of $23 million, compared to losses of $29 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.
We expect our economic fuel cost per gallon in the third quarter to range between $2.85 to $2.95.
Non-fuel expenses
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Wages and benefits | $ | 1,586 | $ | 1,477 | 7 | % | |||||||||||
| Variable incentive pay | 93 | 104 | (11) | % | |||||||||||||
| Aircraft maintenance | 251 | 249 | 1 | % | |||||||||||||
| Aircraft rent | 93 | 113 | (18) | % | |||||||||||||
| Landing fees and other rentals | 338 | 319 | 6 | % | |||||||||||||
| Contracted services | 203 | 190 | 7 | % | |||||||||||||
| Selling expenses | 161 | 147 | 10 | % | |||||||||||||
| Depreciation and amortization | 254 | 217 | 17 | % | |||||||||||||
| Food and beverage service | 125 | 114 | 10 | % | |||||||||||||
| Third-party regional carrier expense | 118 | 106 | 11 | % | |||||||||||||
| Other | 391 | 359 | 9 | % | |||||||||||||
| Total non-fuel operating expenses, excluding special items | $ | 3,613 | $ | 3,395 | 6 | % | |||||||||||
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Wages and benefits
Wages and benefits increased by $109 million, or 7%, in the first six months of 2024. The primary components of wages and benefits are shown in the following table:
| Six Months Ended June 30, | |||||||||||||||||
| (in millions) | 2024 | 2023 | % Change | ||||||||||||||
| Wages | $ | 1,201 | $ | 1,134 | 6 | % | |||||||||||
| Payroll taxes | 88 | 85 | 4 | % | |||||||||||||
| Medical and other benefits | 165 | 143 | 15 | % | |||||||||||||
| Defined contribution plans | 118 | 100 | 18 | % | |||||||||||||
| Pension - Defined benefit plans | 14 | 15 | (7) | % | |||||||||||||
| Total Wages and benefits | $ | 1,586 | $ | 1,477 | 7 | % | |||||||||||
Wages increased $67 million, or 6%, driven by increased wage rates across multiple labor groups since the prior year, as well as additional impact from irregular operations following the B737-9 grounding in the first quarter of 2024. The increase was partially offset by nonrecurring stock awards granted in the second quarter of 2023. Increased expense for payroll taxes is consistent with the change in wages.
The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for Alaska technicians.
We expect to see higher wages and benefits for the remainder of 2024 due to the impact of the new contract for Alaska flight attendants as well as increases in wage rates for other labor groups.
Variable incentive pay
Variable incentive pay expense decreased by $11 million, or 11%, in the first six months of 2024. The decrease was driven by a lower assumed payout percentage compared to the prior year, partially offset by an increased wage base.
Aircraft rent
Aircraft rent expense decreased by $20 million, or 18%, in the first six months of 2024. The decrease was primarily driven by the retirement of ten leased A321neo aircraft from operations.
We expect aircraft rent will remain below 2023 levels for the remainder of 2024, due to the reduction in leased aircraft described above.
Landing fees and other rentals
Landing fees and other rentals increased by $19 million, or 6%, in the first six months of 2024. Higher terminal rent costs were due to rate and volume increases at many of our facilities. Landing fees increased due to the volume of departures and landed weight.
We expect landing fees and other rentals to increase for the remainder of 2024 as compared to 2023 due to higher rates at airports and a greater volume of flying.
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Contracted services
Contracted services increased by $13 million, or 7%, in the first six months of 2024, driven by higher rates charged by vendors as well as increased passengers throughout our network.
We expect contracted services to increase for the remainder of 2024 as compared to 2023 due to the same factors described above.
Selling expenses
Selling expenses increased by $14 million, or 10%, in the first six months of 2024. The increase was driven by incremental credit card commissions and additional marketing costs.
We expect selling expenses to increase for the remainder of 2024 as compared to 2023, primarily due to incremental credit card commissions, partially offset by the timing of certain marketing campaigns in the respective years.
Depreciation and amortization
Depreciation and amortization increased by $37 million, or 17%, in the first six months of 2024. The increase was primarily due to the addition of 22 owned B737 aircraft and five owned E175 aircraft to our fleet since the second quarter of 2023, as well as incremental depreciation on ground service and other equipment additions.
We expect depreciation and amortization to increase for the remainder of 2024 as compared to 2023 due to incremental owned aircraft added to our fleet.
Food and beverage service
Food and beverage service increased by $11 million, or 10%, in the first six months of 2024. The increase was driven by a combination of additional onboard offerings and higher costs for food, food service supplies, and transportation.
We expect food and beverage service costs to increase for the remainder of 2024 as compared to 2023 due to the same factors described above.
Third-party regional carrier expense
Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $12 million, or 11%, in the first six months of 2024. The increase was driven by incremental departures and block hours operated by SkyWest.
We expect third-party regional carrier expense will continue to be higher for the remainder of 2024 as compared to 2023 due to the same factors described above.
Other expense
Other expense increased $32 million, or 9%, in the first six months of 2024. The increase was primarily driven by passenger remuneration and crew hotel costs due to the B737-9 grounding. Additional software costs and other miscellaneous services also contributed to this increase.
We expect other expense will continue to be higher for the remainder of 2024 as compared to 2023 due to the same factors described above.
Special items - operating
We recorded $180 million of operating special items in the first six months of 2024, compared to $250 million in the same period in 2023. Refer to Note 12 to the consolidated financial statements for additional details.
ADDITIONAL SEGMENT INFORMATION
35
Refer to Note 11 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's results.
Mainline
Mainline reported a pretax profit of $225 million in the first six months of 2024, compared to a pretax profit of $395 million in the same period in 2023. The $170 million decrease was driven by a $172 million increase in non-fuel operating expenses, including increased wage rates across multiple labor groups and higher variable costs associated with overall network growth. The $50 million decrease in Mainline operating revenue also contributed to lower pretax profit, driven by decreased passenger revenue following the B737-9 grounding in the first quarter and decreased yield. A lower average per gallon fuel cost lessened the negative impact of these items.
Regional
Regional reported a pretax profit of $53 million in the first six months of 2024, compared to a pretax profit of $22 million in the same period in 2023. The $31 million improvement was driven by higher passenger revenue consistent with the increase in traffic, partially offset by higher operating expenses driven by increased capacity.
Horizon
Horizon reported a pretax profit of $13 million in the first six months of 2024, compared to a pretax loss of $19 million in the same period in 2023. The $32 million improvement was driven by incremental revenue consistent with increased capacity sold to Alaska, partially offset by increased expenses driven by the addition of five owned E175 aircraft added to Horizon's fleet since the second quarter of 2023. Cost reductions resulting from Horizon's transition to single fleet also contributed to this improvement.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity as of June 30, 2024 are:
•
Existing cash and marketable securities of $2.5 billion;
•
Cash flows from operations in the first six months of 2024 of $872 million;
•
Combined bank line-of-credit facilities, with no outstanding borrowings, of $550 million;
•
Our Mileage Plan program and 69 unencumbered aircraft which could be financed, if necessary.
During the three months ended June 30, 2024, we took free and clear delivery of six owned B737-9 aircraft and three owned B737-8 aircraft. We incurred new debt of $153 million and made debt payments of $47 million. We ended the quarter with a debt-to-capitalization ratio of 45%, within our target range of 40% to 50%.
In the second quarter, we continued share repurchases, spending $28 million, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015. We also purchased a 600,000 square-foot facility in Renton, Washington for $86 million. Alaska plans to invest an additional $100 million to renovate the property, which will serve as the future home for our training programs and operational teams following completion of renovations in 2025.
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.
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The table below presents the major indicators of financial condition and liquidity:
| (in millions) | June 30, 2024 | December 31, 2023 | Change | ||||||||||||||
| Cash and marketable securities | $ | 2,509 | $ | 1,791 | 40 % | ||||||||||||
| Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 29 | % | 22 | % | 7 pts | ||||||||||||
| Long-term debt, net of current portion | 2,313 | 2,182 | 6% | ||||||||||||||
| Shareholders’ equity | $ | 4,226 | $ | 4,113 | 3% | ||||||||||||
| Debt-to-capitalization, including operating and finance leases | |||||||||||||||||
| (in millions) | June 30, 2024 | December 31, 2023 | Change | ||||||||||||||
| Long-term debt, net of current portion | $ | 2,313 | $ | 2,182 | 6% | ||||||||||||
| Capitalized operating leases | 1,203 | 1,283 | (6)% | ||||||||||||||
|
Capitalized finance leases
(a)
|
— | 64 | NM | ||||||||||||||
| Adjusted debt, net of current portion of long-term debt | $ | 3,516 | $ | 3,529 | —% | ||||||||||||
| Shareholders' equity | 4,226 | 4,113 | 3% | ||||||||||||||
| Total invested capital | $ | 7,742 | $ | 7,642 | 1% | ||||||||||||
| Debt-to-capitalization, including operating and finance leases | 45 | % | 46 | % | (1) pt | ||||||||||||
(a)
To best reflect our leverage at December 31, 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 unaudited Condensed Consolidated Balance Sheets.
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items, and rent | |||||||||||
| (in millions) | June 30, 2024 | December 31, 2023 | |||||||||
| Current portion of long-term debt and finance leases | $ | 359 | $ | 353 | |||||||
| Current portion of operating lease liabilities | 153 | 158 | |||||||||
| Long-term debt | 2,313 | 2,182 | |||||||||
| Long-term operating lease liabilities, net of current portion | 1,050 | 1,125 | |||||||||
| Total adjusted debt | 3,875 | 3,818 | |||||||||
| Less: Cash and marketable securities | 2,509 | 1,791 | |||||||||
| Adjusted net debt | $ | 1,366 | $ | 2,027 | |||||||
| (in millions) | Twelve Months Ended June 30, 2024 | Twelve Months Ended December 31, 2023 | |||||||||
|
GAAP Operating Income
(a)
|
$ | 399 | $ | 394 | |||||||
| Adjusted for: | |||||||||||
| Special items - operating | 373 | 443 | |||||||||
| Mark-to-market fuel hedge adjustments | (41) | (2) | |||||||||
| Depreciation and amortization | 488 | 451 | |||||||||
| Aircraft rent | 188 | 208 | |||||||||
| EBITDAR | $ | 1,407 | $ | 1,494 | |||||||
| Adjusted net debt to EBITDAR | 1.0x | 1.4x | |||||||||
(a)
Operating Income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.
37
ANALYSIS OF OUR CASH FLOWS
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance.
Cash Provided by Operating Activities
For the first six months of 2024, cash provided by operating activities was $872 million, compared to cash provided by operating activities of $832 million in 2023. 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 $40 million net increase in our operating cash flows was primarily due to a combination of changes in various working capital account balances.
Cash Used in Investing Activities
Cash used in investing activities was $135 million during the first six months of 2024, compared to cash used in investing activities of $479 million in 2023. In 2024, the Company received $162 million in supplier proceeds from Boeing related to the B737-9 grounding. The Company also received $180 million for the sale of certain owned aircraft and equipment. Total property and equipment expenditures decreased $47 million due to fewer deliveries of B737 aircraft in the first half of 2024 compared to 2023, and due to changes in contractual terms of our aircraft purchase deposit schedule with Boeing. This was partially offset by the purchase of a facility in Renton, Washington for $86 million in the second quarter of 2024. Finally, net sales of marketable securities decreased by $60 million compared to the prior year.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities was $87 million during the first six months of 2024, compared to cash used in financing activities of $165 million in 2023. The increase was driven by $279 million in new debt proceeds in 2024 compared to zero in 2023, partially offset by increased cash used in other financing activities, of which the settlement of the final A321neo finance lease was the largest component.
MATERIAL CASH COMMITMENTS
Material cash requirements include the following contractual and other obligations.
Aircraft Commitments
As of June 30, 2024, Alaska had firm orders to purchase 72 B737 aircraft with deliveries between 2024 and 2027. Alaska also had rights for 105 additional B737 aircraft through 2030.
Boeing has communicated to Alaska that certain B737 aircraft are expected to be delivered later than the contracted delivery dates. This includes certain B737-8 and B737-9 aircraft contracted for delivery in 2024 that have been moved to 2025, as well as certain B737-10 aircraft contracted for delivery in 2025 that have been moved to 2026, pending certification of the B737-10. We have incorporated these adjustments in the tables below, however, management expects that additional Boeing aircraft deliveries may also be delayed beyond what is depicted in the tables.
As of June 30, 2024, Horizon had commitments to purchase six E175 aircraft with deliveries between 2025 and 2026. Horizon also had options to acquire four E175 aircraft in 2026, two of which expired subsequent to quarter end.
Options will be exercised only if we believe return on invested capital targets can be met over the long term.
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The following table summarizes our fleet plan based on contractual terms, with adjustments to reflect delivery delays as communicated by Boeing:
| Actual Fleet | Anticipated Fleet Activity | ||||||||||||||||||||||||||||||||||||||||
| Aircraft | June 30, 2024 | 2024 Changes | Dec 31, 2024 | 2025 Changes | Dec 31, 2025 | 2026 Changes | Dec 31, 2026 | ||||||||||||||||||||||||||||||||||
| B737-700 Freighters | 3 | — | 3 | — | 3 | — | 3 | ||||||||||||||||||||||||||||||||||
| B737-800 Freighters | 2 | — | 2 | — | 2 | — | 2 | ||||||||||||||||||||||||||||||||||
| B737-700 | 11 | — | 11 | — | 11 | — | 11 | ||||||||||||||||||||||||||||||||||
| B737-800 | 59 | — | 59 | — | 59 | — | 59 | ||||||||||||||||||||||||||||||||||
| B737-900 | 12 | (6) | 6 | (6) | — | — | — | ||||||||||||||||||||||||||||||||||
| B737-900ER | 79 | — | 79 | — | 79 | — | 79 | ||||||||||||||||||||||||||||||||||
| B737-8 | 4 | 1 | 5 | 15 | 20 | — | 20 | ||||||||||||||||||||||||||||||||||
| B737-9 | 70 | 8 | 78 | 2 | 80 | — | 80 | ||||||||||||||||||||||||||||||||||
| B737-10 | — | — | — | — | — | 21 | 21 | ||||||||||||||||||||||||||||||||||
| Total Mainline Fleet | 240 | 3 | 243 | 11 | 254 | 21 | 275 | ||||||||||||||||||||||||||||||||||
| E175 operated by Horizon | 44 | — | 44 | 3 | 47 | 3 | 50 | ||||||||||||||||||||||||||||||||||
| E175 operated by third party | 42 | — | 42 | 1 | 43 | — | 43 | ||||||||||||||||||||||||||||||||||
| Total Regional Fleet | 86 | — | 86 | 4 | 90 | 3 | 93 | ||||||||||||||||||||||||||||||||||
| Total | 326 | 3 | 329 | 15 | 344 | 24 | 368 | ||||||||||||||||||||||||||||||||||
Fuel Hedge Positions
In 2023, we suspended our crude oil hedge program. Existing positions entered into before suspension of the program will settle through the first quarter of 2025. All 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. Prior to suspension, our program was designed to hedge on 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 2024 | 30 | % | $88 | $5 | |||||||||||||
| Fourth Quarter of 2024 | 20 | % | $87 | $5 | |||||||||||||
| Rest of Year 2024 | 25 | % | $88 | $5 | |||||||||||||
| First Quarter of 2025 | 10 | % | $92 | $5 | |||||||||||||
| Full Year 2025 | 2 | % | $92 | $5 | |||||||||||||
39
Contractual Obligations
The following table provides a summary of our obligations as of June 30, 2024. For agreements with variable terms, amounts included reflect our minimum obligations.
| (in millions) | Remainder of 2024 | 2025 | 2026 | 2027 | 2028 | Beyond 2028 | Total | ||||||||||||||||||||||||||||||||||
| Debt obligations | $ | 164 | $ | 385 | $ | 342 | $ | 666 | $ | 176 | $ | 953 | $ | 2,686 | |||||||||||||||||||||||||||
|
Lease commitments
(a)
|
114 | 204 | 203 | 196 | 187 | 678 | 1,582 | ||||||||||||||||||||||||||||||||||
|
Aircraft-related commitments
(b)
|
864 | 1,064 | 1,186 | 1,100 | 151 | 715 | 5,080 | ||||||||||||||||||||||||||||||||||
|
Interest obligations
(c)
|
74 | 129 | 124 | 119 | 59 | 122 | 627 | ||||||||||||||||||||||||||||||||||
| CPA and other obligations | 119 | 242 | 235 | 231 | 234 | 658 | 1,719 | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,335 | $ | 2,024 | $ | 2,090 | $ | 2,312 | $ | 807 | $ | 3,126 | $ | 11,694 | |||||||||||||||||||||||||||
(a)
Lease commitments include minimum payments for aircraft (operating and non-operating) with associated operating leases, as we have remaining cash obligations 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, 2024.
Debt Obligations and Interest Obligations
The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. At June 30, 2024, our debt portfolio carries a weighted average interest rate of 4.7%. Interest is paid with regular debt service. At June 30, 2024, debt service obligations remaining in 2024 are expected to be approximately $238 million, inclusive of interest and principal. Refer to Note 5 to the consolidated financial statements for further discussion of our debt and interest balances.
CPA and Other Obligations
We have obligations primarily associated with our capacity purchase agreements between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.
Leased Aircraft Return Costs
For leased aircraft, contractual terms require us to return the aircraft in a specified state. As a result of these contractual terms, we incur significant costs to return these aircraft at the termination of the lease. Costs to return leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return or any expected early retirement date, unless a determination is made to remove the leased asset from operation. If the leased aircraft is removed from the operating fleet, the estimated cost to return is accrued at the time of removal. Lease return accrual estimates are based on the time remaining on the lease 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. At June 30, 2024, $94 million is accrued for lease returns, and classified within Other accrued liabilities in the consolidated balance sheets.
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 includes operational efficiency, fleet renewal, sustainable aviation fuel (SAF), investing in new technologies, and using credible offsetting and removal technologies to close the gaps to our emissions 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 certain agreements to purchase SAF to be delivered in the coming
40
years. 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 defined minimum obligations, including those related to Alaska Star Ventures, are included within the CPA and other obligations row in the above table.
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.
Proposed Acquisition of Hawaiian Holdings Inc
.
On December 2, 2023, the Company entered into a definitive agreement to acquire Hawaiian Holdings, Inc. (Hawaiian). The Company has agreed to pay Hawaiian's shareholders $18.00 per share, or approximately $1.0 billion, in cash for the outstanding shares of Hawaiian. In addition, the Company expects to assume Hawaiian's debt and lease obligations on the date of acquisition. The acquisition is dependent on approval by various regulatory bodies and other customary closing conditions. The Company expects to fund this acquisition through a combination of existing cash and marketable securities, new debt, as well as other available sources of liquidity.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three and six months ended June 30, 2024. 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, 2023.
GLOSSARY OF 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 net adjusted 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; represents all operating expenses including fuel, freighter costs, and special items
CASMex
- operating costs excluding fuel, freighter costs, and special items per ASM, or "unit cost"
Debt-to-capitalization ratio
- represents adjusted debt (long-term debt plus capitalized operating and finance lease liabilities) divided by total equity plus adjusted debt
Diluted Earnings per Share
- represents earnings per share (EPS) using fully diluted shares outstanding
41
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 our fuel-hedging program
Freighter Costs -
operating expenses directly attributable to the operation of Alaska's Boeing 737 freighter aircraft exclusively performing cargo missions
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
PRASM
- passenger revenue per ASM, or "passenger unit revenue"
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. Financial results in this segment include 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 Air Group 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
42
| 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, 2023.
43
| ITEM 4. CONTROLS AND PROCEDURES | ||
Evaluation of Disclosure Controls and Procedures
As of June 30, 2024, 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, 2024.
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, 2024, 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).
44
PART II
| ITEM 1. LEGAL PROCEEDINGS | ||
See Note 7 to the condensed consolidated financial statements within Part I, Item 1 of this document for a discussion of the Company's ongoing legal proceedings.
| ITEM 1A. RISK FACTORS | ||
See Part I, Item 1A. "Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2023 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 2024.
|
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, 2024 - April 30, 2024 | 225,427 | 43.11 | |||||||||||||||
| May 1, 2024 - May 31, 2024 | 228,850 | 42.97 | |||||||||||||||
| June 1, 2024 - June 30, 2024 | 208,900 | 41.07 | |||||||||||||||
| Total | 663,177 | $ | 42.42 | $ | 262 | ||||||||||||
The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.
As of June 30, 2024, 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”). The warrants were sold at auction in the second quarter of 2024 to a third party investor.
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES | ||
None.
| ITEM 4. MINE SAFETY DISCLOSURES | ||
None.
| ITEM 5. OTHER INFORMATION | ||
During the three months ended June 30, 2024, no director or officer of Alaska Air Group adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K promulgated under the Securities Exchange Act of 1934.
45
| ITEM 6. EXHIBITS | ||
The following documents are filed as part of this report:
1.
Exhibits:
See Exhibit Index.
46
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 | |||||||||||
| 10.1#† | 10-Q | |||||||||||||
| 31.1† | 10-Q | |||||||||||||
| 31.2† | 10-Q | |||||||||||||
| 32.1† | 10-Q | |||||||||||||
| 32.2† | 10-Q | |||||||||||||
| 101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | |||||||||||||
| 101.SCH† | XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 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). | |||||||||||||
47
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, Controller, and Treasurer | |||||
| August 2, 2024 | |||||
48
TABLE OF CONTENTS
Part IprintItem 1. Condensed Consolidated Financial StatementsprintNote 1. General and Summary Of Significant Accounting PoliciesprintNote 2. Proposed Acquisition Of Hawaiian Holdings, IncprintNote 3. RevenueprintNote 4. Fair Value MeasurementsprintNote 5. Long-term DebtprintNote 6. Employee Benefit PlansprintNote 7. Commitments and ContingenciesprintNote 8. Shareholders' EquityprintNote 9. Earnings Per ShareprintNote 10. Accumulated Other Comprehensive LossprintNote 11. Operating Segment InformationprintNote 12. Special ItemsprintItem 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