Q2 2020 Alaska Air Group Inc Earnings Call

July 23, 2020

[music].

Good morning, My name is Erica and I'll be your conference operator today at this time I would like to welcome everyone to the Alaska Air Group second quarter earnings release Conference call. Today's call is being recorded and will be available for future playback at Alaska Air Dot Com.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question didn't answer session for analyst.

Waste to ask a question. Please press star one on your telephone keypad, if he would like to withdraw your question press. The pound key. Thank you I would now like to turn the call if were to Alaska Air Group's director Investor Relations Emilie Halverson [noise].

Thank you Erica good morning, Thank you for joining us for our second quarter 2020 earnings call on today's call you'll hear updates from Brad then and Shane.

All other members of our management team are also on the line to answer your questions during the Q and a portion of the call.

Global health and economic crises continue to significantly impact our business and outlook.

Morning, Alaska Air Group reported a second quarter GAAP net loss of $214 million, excluding special items and Mark to market adjustment Air Group reported an adjusted net loss of $439 million special items. This quarter included approximately $69 million of lease return charges that were triggered as a result of certain Eric.

After being permanently parks and a 362 million dollar benefit related to the cares Act payroll support program wage offset as a reminder, our comments today will include forward looking statements regarding future performance, which may differ materially from our actual results.

Information on risk factors that could affect our business can be found in our SEC filings on today's call will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel and as usual we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release, and now I'll turn it over to Brad for his over.

Being remarks.

Generally and good morning, everybody.

As you all know we're now nearly five months ended the deepest and most on certain downturn in aviation history, while we've weathered many crises before this global health pandemic and economic devastation or unlike any of the industry's phase before [noise].

Geared Alaska, we're focused on two priorities first keeping our employees and guess healthy unsafe and second ensuring our airline is here to support and serve them in the future.

Very confident there we're taking the right steps to get us through the crisis and to ensure our long term success.

In the second quarter, our leaders in front line employees to dramatic action to reduce our capacity to significantly lower cost trajectory to fortify our liquidity and to moderate our cash burn rate.

The men and women of Alaska, and Horizon has always been at their best in the face of adversity and this could not be more true today.

Here are a few examples of their efforts.

Our health and safety team led by matched Ted well I've led the charge and ensuring the health and safety of our guess they partnered with infectious disease experts from the University of Washington, and other medical advisors to add layers of safety throughout the travel journey that build our guests competence and flying.

Then we'll touch on these measures in a moment and many of these are also highlighted in our press release.

Our crews and probably workers have continued to provider cast with guests with remarkable care scaling down or operation revising schedules.

And changing policies have introduced a great deal of changing complexity to our operation.

Our people have handled this complexity with poise and grace educating our guests about the in airport and onboard policy changes and providing them the best and safest experience possible.

In the back office, our alliance teams and many others have continued to lay important groundwork for our future, but moving our partnerships with American and one world forward.

We're pleased to announce that we've received our formal invitation to join the one World Alliance and we challenged our teams to accelerate their behind the scenes efforts to push for our entrance by the end of the year. This is admittedly and aggressive goal.

And our finance and legal teams have worked with dedication to preserve and enhance our financial strength in July the team secured new WTC debt financing of nearly $1.2 billion, increasing our already strong liquidity position to $3.7 billion today.

We entered this crisis with a strong balance sheet and this liquidity infusion gives us even more staying power.

As Emily mentioned, we reported a second quarter adjusted net loss of $439 million, which excludes the benefit of cares Act payroll support program.

These results came while flying at capacity levels that were 75% below the prior to year.

This is a sobering loss, it's the largest quarterly loss in our history and it's obviously not a sustainable result.

Our total revenues were down 82% for the quarter and as bad as this number is we believe it will be significantly better than the industry, which is a testament to our route structure and our low fares.

Our adjusted operating expenses were down 47% for the quarter and excluding PSP wage offsets our wages and related costs were down 20%.

In the second quarter, we were among the fastest in the industry to bring our cash burn rate down.

During the month of June our absolute cash burn rate of $4 million per day was best in the industry on a size adjusted basis.

We expect our July cash burn rate to be up in part due to slowing ticket sales.

We're fully focused on getting our cash burn rate to zero.

As you know, it's our gold reaches objective by year end in achieving this goal will require two things one it will require us to do everything possible to manage costs and to help our customers know that they are say flying with us.

And to it will require a more positive national backdrop with respect to the virus.

The news of late has been negative with cases up returned to office scheduled delayed quarantines extended and schools announcing remote learning for the fall.

We take great pride and controlling everything that is within our control. We will continue to do this and I'm very confident that Alaska will reach cash breakeven at or near the front of the pack with respect to our airline competitors.

Once we get beyond cash breakeven, we have confidence that our low fare low cost structure and our strong network footprint will continue to be a source of strength, but in reality, we likely face is that a recovery to 2019 levels will take at least two years.

Flexibility is essential in this environment, but given what we know today, we're planning for our business to be smaller for the foreseeable future.

Then we'll share more details in a moment, but our current plans are to be 35% smaller than last year in October and then building gradually to 20% smaller than 2018 levels by the summer of 2021.

We've made some difficult changes to reduce management positions and we're working on programs now for our front line employees.

We've made significant progress already and I'm optimistic that we'll continue to reduce the number of furloughs required through early out programs leaves of absence and incentive lines.

Ben almost finished and we'll talk more about these in a moment.

To be clear our employees did nothing to cause or contribute to the economic environment that has led us to make these challenging decisions and they've given given everything they've got to push Alaska and horizon forward.

These two facts make these decisions incredibly difficult.

We look forward today, when we return to growing our airline for today, we're focused on structuring our organization for our current reality. This means adjusting our fleet size and our employee base.

While this has a necessary step I know that everyone. Here has the resolved to set a strong new foundation from which we from which we can and will build our airline back to the size and growth trajectory, we had prior to the crisis.

Before I pass over to ban I want to recognize the heavy weight that many people in our country, including many of our employees are carrying in these trying times.

Top of the tragedy of the Corona virus, our nation is grappling with longstanding and deeply rooted racial and justice.

We all have a responsibility responsibility to do better and I want the black employees at Alaska and horizon to know that this is a responsibility that those of us in leadership embrace.

We stand for helping one another and we stand for being good to one another we're committed to listen to learn and to do everything we can to affect positive and lasting changes in our company in our communities and in our country.

With that ill turn this over to Beth.

Thanks, Brad and good morning, everyone.

Since this crisis began earlier ship team has been focused on creating plans for whatever scenario. We may encounter that candidly communicate those plans with our people and then to execute to the best of our abilities before updating you on how we're doing that I'd like to provide some context for what we're seeing in the current environment.

By several measures it is clear that the low point in this down cycle was in April and we have now begun to slow likely uneven climb to recovery.

April load factors were 16%.

Passenger counts hit bottom early in the month at only 4% of normal levels.

Flight search as a new bookings at a low point the following week demonstrating confidence in future travel was also eroding.

Load factors, then improved to 52% for June due to both returning passenger demand.

Actions, we took to rightsize, our our capacity.

Passenger counts increase to an average of 30000 per day or 20% of normal and flight searches that allows scared dotcom responded to better than 50% of normal. These developments came as markets along the west coast, and the southwest, including Texas, Phoenix, and Las Vegas moved to reopen and People's confidence and flying group driving leisure there.

Going back to approximately 50% of normal levels.

We expect July load factors to show further improvement to approximately 55% on a sequential five point increase and capacity from June.

But as Brad mentioned, we've seen some of these upward trend stall more recently as many of the geographies, where we fly have experienced an increase in case levels, which paas many of the local reopening plans.

Demand is not something we can flow control, but we are doing our best to earn guest confidence and create the right environment for an eventual strong return and demand today, we recognize that customers fall to one of three buckets.

Those who will travel those who might travel and those who won't travel by delivering best in class health and safety policies and clear communications were connecting with those who will and those who might providing them confidence that flying is safe.

Even those who won't travel today have the potential to say they might traveled tomorrow and we believe we must be earning their trust as well.

Our safety measures include making the pre flight experience as contactless as possible and adding a health agreement during checking.

Requiring mass for both gas and employees and empowering our crews to enforce the policy with the ability to issue a formal warning to any guests who refuses to do so.

Using the latest air filtration technology, and health hospital, great filters to remove particulates and fully recycle enter the cabin every two to three minutes exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmissions on board.

And keeping middle seats open through September thirtyth, preserving our guests ability to create personal distance while flying.

In our Alaska listen survey, we surveyed thousands of guests and what they care most about our consistent mask policies, the blocking of middle seats and clean airplanes.

80% of those surveyed also reported that our Nexobrid care measures are working and they feel strongly that we've created a healthy and safe environment for flying.

I'll ask is also a strong advocate for temperature screening and we are actively lobbying for screening to be implemented at airports by TSA.

Collectively we believe these actions, we're taking will lay the groundwork for guests to confidently return to fly when they are ready.

Shifting now to our longer term plans, we are committed to doing whatever is necessary to improve our competitive position and set the stage for future growth our top financial priority remains improving our cash burn rate and progressing towards our goal to achieve cash breakeven by year end to put this in context I'll share some of our.

Yes.

When we spoke at the last quarter, we knew with very little about the crisis. We are in today. The future is still largely uncertain and volatile, but the second quarter provided some key insights that help refine our thinking today, we are planning for Q3 capacity being down by approximately 50% and Q4, we will be down by approximately.

35% at these capacity levels, we're also making a planning assumption that cash bookings will recover to 40% to 60% of normal by December.

This is not guidance, but demonstrates the parameters that we are operating within as we work to restructure our company.

We believe these are reasonable planning assumptions for a few reasons first in June we saw that traveler confidence and psychological safety are strongly connected.

As destinations move to reopen and health concerns began to subside leisure demand return quickly. This tells us that the that that desire to travel is there just below the surface unlocking this potential requires ongoing societal progress and cooperation through behaviors like mask wearing.

Better faster and more reliable testing methods and improved treatments like a vaccine.

We believe this progress will be made even if slowly together these factors with support continued leisure recovery.

Second we're in the midst of the biggest demand contraction in the history of our industry as we all know there are far too many seats flying today for the demand that currently exist, adding capacity back in a disciplined manner is important for the health of the industry and it's critical to our company's cash breakeven goals.

Planning for a business that will be 35% smaller in the fourth quarter has implications for operation and for our people we have been clear with our employees that no. One has a crystal ball to the post cobot environment, and we will adjust course on capacity, if our as our assumptions don't materialize.

Whatever demanded revenue scenario, we face maintaining a strong liquidity position. We have built is paramount and our go to achieve cash burn breakeven is a primary factor in the scenario plans were putting together Shane will share those details in a moment.

The strong showing from teams across the organization in the second quarter gives me confidence that we are prepared to manage the change and challenges we're facing.

I am so grateful for a dedicated and talented people and I know, we will emerge from this crisis stronger than we came in with that I will pass it to sing.

Thanks, Ben and hi, everyone.

Last quarter, we spoke to you about the factors we were focused on as we were getting to manage Alaska to the initial shock of the coded 19 crisis, including building, our liquidity and aggressively managing our cost profile to preserve cash today I'll provide an update on both areas as well as share initial thoughts on restructuring Alaska for the future.

On the liquidity front, we began 2020 with $1.5 billion in cash and marketable securities. Since March we have added over $3 billion to that liquidity from a 400 million draw on existing credit lines $425 million from a one year loan in March 163 million in new net financing secured by.

Aircraft approximately $1 billion in payroll support via the cares Act and in July we added $1.2 billion of cash through a double each transaction.

Accumulating this level of liquidity in about 90 days time is a superb achievement with credit due to our teams in Treasury finance and legal the WTC as a new addition to our capital structure and the team was superb and telling Alaska story, attracting new investors, including the $1.2 billion raise at reasonable rates.

I would add that while we moved quickly. We also had clear objectives, we applied to guide our thinking about how to initially add liquidity. During this crisis, which were one retaining strategic and financial flexibility to achieving a low cost of financing three maximizing cash yield from our collateral and.

For avoiding dilution of our equity base.

Our current financing mix nicely balances these objectives and leaves room for us to take further action. If we need to today, we have $3.7 billion of cash on hand, we have 1.1 billion of unencumbered aircraft and non aircraft collateral and we also have our mileage plan assets available to used as collateral for future fighting.

ANSI.

In the immediate term given the uncertainty going forward, we do intend to continue to evaluate and pursue smart ways to add liquidity. We are in ongoing discussions with the United States Treasury for participation in the cares Act loan program, which could provide an additional $1.1 billion and financing utilizing our mileage plan out.

Assets as collateral.

In July we signed a nonbinding LOI with Treasury and anticipate final terms would be reached over the next day weeks in parallel to the ongoing discussions with Treasury. We are evaluating other avenues of Collateralizing mileage plan and other assets as well.

In addition to raising capital the most important goal we have is too aggressively manage our cash burn rate as mentioned, we do believe we were successful this past quarter in managing cash burn down at the quickest rate in the industry. This progress is a testament to Alaska is low cost culture and the commitment of employees throughout our organization.

In fact in the second quarter, our adjusted operating expenses reduced by 47% on 75% less capacity, we typically view our cost as 40% variable in the near term so to achieve a 47% reduction as a good result.

Regarding the cash burn rate ours decline from over 400 million per month run rate exiting March to 120 million in June.

As a reminder, we define cash burn as all operating cash receipts or cash that will turn into revenue plus investment earnings offset by all cash expenditures, including debt service and Capex, we exclude financing raises or payroll support funding from this metric.

The improvement between.

March and June was driven by improved bookings with stabilized cancellations payroll savings of $45 million through the use of voluntary leaves reducing management schedules and flexing crews down to contractual minimums variable cost removal on reduced capacity and the immediate suspension of discretionary and.

The reduction of overhead spend.

Utilize cash burn, however will be higher than junes, driven by the slowing of forward ticket sales in the variable cost of incremental flying in the month.

As Ben mentioned, our planning assumption today as for capacity to be down 35% in Q4, and we're planning for cash booking scenarios of down 40 to down 60%.

I want to expand on what that will mean for our cash burn goals, our people and our cost structure.

To achieve cash breakeven by year end, while operating at level of 35% below 2019, we must reduce the size of our workforce today, we have approximately 23000 employees and we would likely need as.

Many of 7000 fewer active in the fourth quarter.

Our goal is to mitigate to the greatest degree possible in voluntary furloughs.

As of today over 30% of our employees are on voluntary leaves of absence, and we will continue to offer that program for the remainder of the year in July we initiated early out programs for all of our frontline workers and offered incentive leaves to pilots.

We will need to send out warn notice is on August onest to potentially impacted employees. These mitigation efforts will reduce the number that voluntary furloughs that we expect to face in the future.

Also we have made the decision to reduce our management positions by 300 or 15% effective October onest.

These are in addition to prior reductions of about 200 over the past couple of years.

It goes without saying these decisions have regrettable and meaningful impacts on employees, who invested their careers here, while extraordinarily difficult. These actions are necessary given the realities of our business going forward.

Beyond these immediate decisions impacting our payroll. We are also finalizing our plans to repair our cost structure into ensure our ability to reach cash breakeven even in a severely depressed revenue environment. It is our intent to ultimately return Alaska to pre kovac CASM ex levels. Even if we are smaller company on a sustained basis to begin that.

We are targeting to achieve structural cost reductions that would hit a 250 million savings run rate exiting the year, we'll have more to say on future calls on specifics of our restructuring plan.

As we turn to questions.

I'll close by saying that while all of this is easy to read off of my script. The truth is these are these things are very hard to do because they impact people. We are truly drawing lessons from our past were tough but balance decisions were made by those management teams, which then put Alaska on of course to achieve all it has the past 15 years and that mindset hasn't changed.

Range, we have to run a good business in order to have the future we want for our people and with that let's go to your questions.

At this time I would like to invite analysts to would like you asking question. Two please press Star then the number one on your telephone keypad, we'll pause for just a moment to capacity and a roster.

Your first question comes in that line at Joseph Denardi with Stifel.

Hey, good morning.

Nick maybe shaner Ben can you just talk about maybe some of the conversations you're having with your corporate customers you talked about maybe that kind of the three bucket of your of your customers and can you maybe speak to kind of the confidence you have at that maybe the pace at which corporate returns and maybe how much does not return and I know.

It's a difficult question, but maybe just kind of the framework you're using to approach that thank you.

Thanks terminal at Andrew Andrew has been doing some work on that so Andrew can provide some color Joe. Thanks for your question, Yes, obviously talking about corporate customers weekly.

Were seeing what I believe the whole industry seeing is at the corporate travel is massively down over 90% a big part of what the corporate account to dealing with this this concept of Judea Caf.

And so the extension of closing of office spaces.

Right now, we're not really seen any thorny in the business demand and so as Shane has been discussing we just going to be structuring our business in a way for a more prolonged come back of business that said, we've always excelled on the leisure side.

And that we continue to expect OCA.

And then seeing just on the on the loyalty program. If you use it as collateral for.

The the loan package from Treasury, how much additional I guess financing capacity do you think exists against that thank you.

Yes. Thanks, Joe appreciate the question. So as you know and I think this is one issue we are running into with the.

The cares loan program with treasury their cap and how much that they can actually allow us to finance with that program and we believe that.

They are capped at a rate thats well below the total value of mileage plan.

And so it was our intent to pursue getting additional financing at the public markets.

Recently, we've been presented with terms that would limit our ability to do that and that wasnt something we expected to be part.

The terms of Treasury 45 days ago. So we are still.

Processing that working with treasury and making sure that they understand that we think our ability to get full value for mileage plan from multiple sources, partly from them and partly from public market is in fact in everybody's best interest.

So we're working through that I think what we shared last time.

We kind of gave you guys. The roads, a math that suggests that our value that milestone value with a little over $5 billion and you can sort of apply your best guess on ltvs or how much we could we could get from it but yes. The government is capped at $1.1 billion.

We think we get raise much more on the 5 billion dollar or more base value that we have.

Got it helpful. Thank you.

Thanks, Joe.

Your next question is from RBC with Raymond James.

Hey, good morning.

Great I'll, then any color on on the Casper and everything that's kind of curious you said does this 250 million instruction program I realize it's a stretch goal, but does that gets you to cash breakeven and today, if things did not incur the way you're thinking about it.

Yeah, Thanks, Eddie I would a little bit they're totally connected and I want to make sure that everybody's clear, it's really a run rate. It's an exit rate that would annualize at 250 millions if not at.

Early structural reduction of 250 between now and the end of the year, it's definitely going to be part of the.

The formula that gets us to cash breakeven I think.

Even on the 40% to 60% revenue scenario, we would have to do this to get there, but beyond that obviously cash breakeven the waypoint on our way back to some level of profitability and paying back our debt and growing again and there's no doubt in our mind that we will have to be very aggressive on restructuring the company to ultimately.

Get back into a growth trajectory in to pay down is that that we've taken on.

That's helpful. And then my follow up on the revenue answering commentary so.

Im just trying to understand as you think curious do they can then the projection here does September at least is it fair to assume that September it doesn't do as well as August on a year over year revenue basis, because it historically realized in the line business passengers or are you based on kind of the build you're seeing in leisure.

Our et cetera, I made is that not a fair assumption.

Yes ill and I don't have any once that color I think it's a fair assumption that September would be worse than August based on what we're seeing today I don't know that I would.

You know sort of say that those are the drivers Bay as Andrew mentioned, we don't expect business travel to be back at any time soon certainly not by September.

I think we would have.

Hope than expected that had the country not having sort of go back into a shutdown mode that that we would be theme incremental gains sequentially through the quarter and that just doesn't look like it's going to happen right now and that's kind of what Brad embeddable touched on in the script.

Savvy, it's Brad I.

I think there's normally may be there is business seasonality, which would help most september's, but september still the weather still good kids are going back to school.

I really think what we're seeing is what all airlines are seeing is the.

The.

The news feed has just changed to the Corona viruses have spiked quarantines are moving from July 1st to August versus September Onest, They could go longer.

Employers are announcing basically the don't want their people traveling in that.

Return to office schedules are being delayed schools in lot of our geographies that that's the driver and yes, and we've seen that we were on a we tried to say is in the prepared remarks, but we were in sometimes you see the sub more clearly in retrospect, but we were on a really nice clips through the July 4th weekend into.

Terms of.

It seems like everyday there was a 1000 customers importance in the previous day, but as then as the narrative changed and is the headlines changed I do think every airline has seen softness in bookings for future travel and that's the thing that's making us nervous about August and September I do want to while we're on it I do want to say that.

We are.

We are committed to managing our schedule responsibly and we're committed to doing everything we can begin to cash burn of zero at or near the front of the back of the industry. So what I'm not so we're not giving these industry commentary as an out or anything like that we're going to manage what we can control as good as anybody out there I believe but I just do think folks you know.

The environment is and I think you know this already the environment is is quite a bit different than it was 30 30 days ago.

Sam I appreciate that yes.

Thanks, Ed.

Your next question is from Hunter came with Wolfe research.

Hey, good morning monitor so I think your secure enough for me to asking this question. How do you see Cove. It is a opportunity to make a lot of changes that they can't be made when times are good. So what are two or three things that you think southwest Airlines does really well that you think you can mimic for yourselves.

Well Hunter it's been.

I think right off the bat I think.

Our company respects southwest tremendously there are great company and their led by fantastic people.

I think.

When you look at southwest I think their success lies on.

On a core of having a low cost structure.

And that is something as you know we focused on our whole my whole career in Brasil career. So.

A low cost matters and good times and better so I think if theres one thing that we Bose.

Mired about southwest will continue to emulate is that a strong balance sheet chain said it is.

The less cash we burn.

The less we need to pay off and we get out of this so.

We need to get through this crisis get the cash breakeven start paying them this debt and get back to our trajectory trajectory of growth.

And then just having enough dry powder to take advantage of opportunities and that's why you're seeing southwest just fantastic growth and we we have the same mindset. So there are lot of great things about them that weve admired and we will continue to do so right on with you want to answer yes.

Okay.

And then.

Hi, Matt maybe you said, it's I'm, sorry, Jamie if not.

He said it will take two years to restore.

The scheduled plant capacity does that mean that it should take about two years to get to that the CASM ex of 2018 or better too is that fair.

Hey, Hunter yet in the script, that's a Brad mentioned that we read.

While we don't have a crystal ball, we're just we're looking out and thinking it's going to be two year process.

So that I would say, we would want to be left of that and we're not in a position to give you specific dates at this time, but I.

I think what I said in my script was our intent is to get to pre koby casmex, even if we're a smaller company on a sustained basis. So we're working through that we'll have more to talk about on the next call Im sure on this topic, but no I don't think that we're waiting to get back to pre coking capacity to reach our pre koby casmex okay.

Hi, Thanks, a lot.

Thanks Hunter.

Yes.

Your next question is from Jamie Baker with JP Morgan.

Good morning, just first just a quick follow my long with cutting in and out you were discussing eight cap at treasury.

Maybe I misunderstood what specific cap were you referring to.

Yes, hi, Jamie the Shane.

They so they are limited in how much they can loan to each of the airlines right Thats, it's at $25 billion package and it's a portion based off of capacity.

Pre cove, it and so they can only loan us up to $1.128 billion and what we were saying as we think our mileage plan assets could that's more than that in total we don't want to be limited on how much we could go do with okay.

Alright, Okay were good then because I thought maybe you are referring to some arbitrary cap that they had put on what they can accept in total in terms from the industry loyalties collateral fund.

So I apologize for that.

Getting back to you know a pre cobot ex fuel CASM level on a smaller footprint do you believe you can get better without changes in wages in work rules.

I, it's a good question, Jamie I'm not going to totally speculate on that at this point I will tell you that it will require us to reach pre sort of peak levels of utilization and productivity, which we've got to do we were I think one of the best in the industry in terms of the productivity of all of our workgroups asset.

Airport assets airplanes.

Because of growth congestion integration dual fleet. We've we've stepped off of those peaks recently in that one way to get back to where we need to get back there is to reclaim those peak. So I I totally appreciate the question I guess, where you're coming from I think it's a little premature to know exactly how we're going to go do this but.

We're going to be willing to talk about this stuff as we move forward.

Got it and if I can sneak in a final one I assume you're and possibly daily contact with officials and why do you care to hazard a guess as to whether the modified September Onest date holds and how forward bookings are looking beyond that date.

Hi, Jamie it's Andrew.

You know, we've obviously seen it extended a couple of times now.

Okay, staying in close contact I.

I don't know, where it's going to bay, but I, certainly think there's a high risk that it may slip again.

But again, we just moneta that and we take each day as it comes.

Fair enough. Thank you everybody. Thanks, Jim.

Your next question is from Catherine Brian with Goldman Sachs.

Hey, good morning, everyone. Thanks for the time okay.

Right so.

On the month of June cash burn improvement, we thought through the quarter from your initial guy back at once you learning.

I know you gave some color on what drove that better performing.

Help us think about proportionately.

Well, how that how that better warrants and driven between cost and better demand and then you know as a team it seems quite the hysteria finding incremental cost saving so.

Any ongoing project drive cash burn down 200 million thing here, you've gotten July out there, even excluding a better demand backdrop. Thanks.

Kenya, I might start to get changed shame to talk about the cost side, but I think a big driver is our network and our low fare proposition. If you actually look at our revenue line, we were down our revenues were down 82%, which I said in my script.

Bad debt, that's a bad result for any business for any industry, but it might be the best in the industry or very close to the best in the industry. So I think the combination of our route network, where we fly how we fly our fair structures. Our loyalty that was something that served us well in the second quarter, it's something that's going to serve as really really well in the future.

I do think chain the cost side of it is a bend you're talking about that that's a that's a muscle that Alaska.

As historically haven't relied upon and that's something we're going to we're going to be the gym, making them vessel work even better for US maybe you can talk about that side of things, yes, Acadian I. It's a great question I would go back to it was really.

Important that we got all of the variable cost out that we thought that we should and we did we saw it and I talked about this last quarter of one to one.

Relationship on the variable costs, which is good it's is going to prove we always think we know what variable costs are but we were able to prove that out.

There were a lot of things that we did in the immediate term that we're probably more temporary and thats why were starting to shift the conversation to structural cost reductions.

A lot of this stuff in this quarter was just suspension of all discretionary spending really aggressive offering a voluntary leaves, which as I said in the script, 30% of our folks took.

Which was a huge up on the on the payroll line.

There wasn't a lot of structural stuff that we had done in the quarter, though not that's what we've got to go start to work on a first thing that we've done is reduced the management.

Team size, which I mentioned in the script as well and we're working on that list of of ideas that we've got to go execute ought to get the rest of this this goal that we got out in front of us.

Okay, Great maybe maybe one I don't know how does that factor into your your thought process on driving a structural cost out but any update.

Please decision.

I mean are you aircraft carrier back a single fleet and then you know has anything not least rytary expenses.

This year and that obviously not as big of factors it was pretty cool that but definitely think about thanks.

Hey, Kt its snap paper.

I think no question of the fleet is a is that healthy proportion of the structural savings to the chain is talking about and academically kind of can think of it this way.

If you're going to keep a mixed fleet going forward, you better leverage that to get advantages and ownership cost.

Better lease pricing and using competition and also on the revenue side, having different airplanes to match to different markets. The counter to it is on the single fleet you better get operating efficiencies and so as part of this structural savings we've got to figure that out and as we start to narrow down.

Our bus aircraft that we have we parked all 10 of our Athree Nineteens last quarter and two of our Athree hundred Twentys. We've got 39, least Airbus Athree hundred Twentys left that have expirations over the next three to five years and we're starting to creative we've looked at ways to face some of those airplanes out so lot of of level.

Ridge in that question and a big piece of over achieving the structural savings goal we want to.

Great. Thank you so much.

Your next question is from Helane Becker with Cowen.

Thanks, very much operator, so hi, gentlemen, thank you very much and Emily Thank you for your time.

So.

Ken can you guys codeshare with Jetblue through the American co chair or or just on.

Your own.

Hey Lane, it's it's Andrew here.

You know and number one I think we don't have a relationship with obviously get blue number two we were not in a position to go into the Privia contract details without West Coast International Alliance I will say that we are very excited and very committed and discussions and you've seen the recent.

Tom one world invitation, but both American in Alaska, I think a really well positioned to grow our presence in strength off the west coast. Both on the corporate side, the leisure side and we spent a lot a month, putting together a very compelling alliance on the west coast and we're very excited to start to get that into motion yes.

People have sort of international is a top of mind for people today, understandably, but competitively being able to go into the marketplace. When corporate travel is back and have a robust solution that covers the extraordinary domestic network, but also international is important so we're going to pushing hard so that when we have international travel again, which we will.

We're really well position, we're super excited American as announced service from Seattle to Bangalore, and Shanghai in London, and the one world offering out of Seattle and the other Wesco cities is just going to be really really strong. So we're excited about this and we're going to pushing hard.

Yeah. Thank you I appreciate that and then.

For my follow up question is now as you think about.

Coming out.

Whenever we're in now this this coded [laughter] dreadful situation and you think about winning the recovery is a smaller airline deep do you think about I mean is it does this really give you a chance to pull out of markets that maybe didn't make sense before but that you were.

You know sort of flying because you'd either always flowing them or because you know Virgin America, who had been in that market and and they had kind of always slowing that Mike does this give you a chance to be more.

Thoughtful about where and when you fly.

Hello, Elena it's I think the answer is yes, but if you and Ben Andrew or May have something they want to say business as well, but I think you'd be actually look at it a lot of those changes have been made it does give us a chance to sort of read to read rack. The route network and as you've seen we're taking cities.

Through the.

And the way I sort of thinking about it anchorage, we say anything that we can fight of Anchorage, we do fly you'll see us do that Seattle, we've done a lot to fortify our position Portland, I think there's opportunities for us to solidify and grow we've got strong holds in the northwest in cities like Spokane in Boise, and Redmond, Oregon in Missoula, and Bozeman and Theres opera.

Ladies connect those northwest cities, which have a ton of mileage plan members to cities like San Jose San Francisco LTX in San Diego, We're so we're doing some of that and we've done some stuff very recently out of LTX, which.

So.

I think the answer is yes, there is a chance to sort of read reconfigure and build a network around what we do best but in terms of hold your breath for additional things I don't know that I would I think a lot of though a lot of those.

Moves that have been made but Andrew or maybe you disagree with that I don't know what you wouldn't you know I think bread spot on and I think if you look at pulled and the now network in general and even in California.

We are still in the majority in the utility of of the California network, just at a significantly reduced frequency and as Brad mentioned really some of the ally moves is really just a agenda reshaping of our network, but I will I will agree with one thing in respect of all of this is that there is a rebaselining of the nations.

Networks, and you're seeing all carriers, having to make deliberate choices about where they're going to serve and where they're going to make adjustments and I think thats going to play out over time, and we'll make sure that we are focusing on that.

As we move forward.

That's really helpful brought in and Andrew. Thank you very much for your for your help there.

Excellent. Thanks.

Your next question is from Duane painting work with Evercore ISI.

Hey, thanks.

Just just a philosophical question, maybe given that a lot of the questions were asked.

About leverage limits at the board level.

Theres. So many interesting questions right now about collateral and all the things you could potentially lever up your your mileage plan your brand office furniture Paperclips.

All of the things you could potentially lever up walk why are there are limits does it does it make sense to borrow against every last scrap of collateral that you have right now and if not why not based on the history of the organization.

Thanks Wayne.

I think that it's what's imperative for us as to whether whatever shape the downturn in sort of choppiness of recovery is.

You know I think even with all of the Raisings. We've done we're still sub 60% debt to cap and we continue to.

Go out and get $1 billion to $2 billion additional liquidity, we'd be under 70% or 75% debt to cap. So we still have the balance sheet room to where I think the question is totally valid, but a little premature because I don't think we're running up against kind of the limit.

Using what sort of non traditional assets like brand in sort of other things like that.

Go and further solidify our liquidity, but I'll tell you.

Our view is we're going to we are going to go raise the amount of cash we need to whether this and we'll manage the cost side Super aggressively.

Once we get the cash breakeven its academic we can sit there for as long as is we need to so.

We're talking about both but they're both paramount in our mind. There is not I think a limit right now in front of us where we're saying it's too much and we're going to stop once we get data, we obviously would come back and share that with you guys.

Certainly not a criticism, where you are now, but I just drawing on the long term history of the company, what's the downside of being overly burden with that.

Yes, I mean are the balance obviously and we talked about this a lot internally very very openly with our employees is anything you borrow and you actually used to finance losses, you got to payback add you've got to say that back through cash flow in the future and thats deals.

From your ability to grow and we don't want to steal her from our ability to grow. So we have a mindset about how much total net debt, we're hoping we come out of this.

No.

With that the end of the day and.

And that it's at a rate that allows us to aggressively pay it back while still growing the company you know out in 2022.

Beyond chief.

So we want to borrow we just want to use the money like one one mental model, we have as is having the finance team harder weren't borrowing.

Such as much as we can but borrowing really shoring up our liquidity and then hopefully things get better and we start paying that money off that's a that's that's kind of the mental model that I see for the finance team is did do everything we have to do to ensure our sort of staying power, but then hopefully at some point, we'll have a vaccine things will be better and as soon as we get there we start reducing those debt.

Balances.

Okay. Appreciate the thoughts thanks Duane.

Your next question is from Mike Linenberg with Deutsche Bank.

Hey, good morning, everyone.

Two here and Brad your initial comment.

With that.

Test and then your cash burn being where it is.

Probably best among the industry appropriately.

That being you know Testament to your route structure in most areas and then.

Sure I know Helanes question, you sort of text on some of the changes you're making to the network.

When you sort of look at the changes that you have made and have announced you probably need more changes to your network really in the last three to six months and I'd say the competition and I'm just curious how much of it.

As a function of responding to couldn't get 19, and maybe moving aircraft out of business markets and putting them more into leisure oriented markets or how much of this was maybe a function.

The American agreement back in February where you want to reposition airplanes. So that maybe you get better connectivity across our networks or maybe maybe talk a little bit about I'm, just curious if that sort of their thinking and what's driving.

The change to the network.

Hey, Mike I mean, just at the highest level summary, I think the most significant changes I think you're referring to.

I really boiled down into serving secondary Pacific northwest markets from California, I mean, if you looked at the vast majority of the changes in numbers at the high level. That's what they would be in I think these are markets, where we are strong we've got good regional aircraft right now produce.

Makes sense for us and that was sort of part of a strategy shift and and as we got into the it's still made sense to do those I think some of the other changes you have seen of just read tweaking and looking at for instance ally and.

You know, making sure that were positioned on the leisure side, which was solid at so I think overall, but I think at the end of the die. If you look at the network it's essentially.

Utility wise, the same except that frequencies, a significantly down right now and these massively depressed trans come out in California, and we've pretty much maintained everything in Seattle from a from a destination perspective.

Okay. Okay. That's helpful.

Maybe.

Pit to ban I'm on the airport side.

We've heard airlines as an industry talk about ways to improve peace of mind with its customers finding ways to get them to want to travel again in the concept the temperature screening by the TSA.

It's been kicked around for sometime now it feels like several months and yet I'm not sure. If it's gone anywhere what what are some of the gating issues in trying to convince that alone.

This on temperature screening Diana Youve got some work their way.

Yep.

Oh.

We are strongly advocating for the CFA to take a temperature screening we're doing a proof concept with Seattle here in the feedback airport.

You know honestly I think theres, some very science on whether or not it actually does sufficiently screen people, whether there's enough people that are caitlyn temperatures.

Hi enough to actually screen them out.

And so there's ongoing debate about whether or not it's worth putting in place across airport, but we are continuing to ask for it. It's another layer of safety and all of our next level here and like you could increase get confident like we havent here the and the building a modest everywhere. We go in I'll tell you. It's slick technology I don't know if you haven't you just put your face and literally.

Two seconds of picture temperature and we're just saying look it's just another level of confidence for customers that come into say like your temperature as normal. It's just it. It's just another step and making sure that people are getting on board airplanes that are safe. So we're going to continue advocating for it.

Likely not goes fast that we would like we're going to continue pushing on it because I think it's just part of the confidence of society and and people flying.

Okay very good thank you.

Hi.

Your next question is from Brandon Oglenski with Barclays.

Hey, good morning, everyone. Thanks for taking my question.

I guess, Brad at a high level should investors expect that you guys not only want to managed to like a cash breakeven level perfect here before full recovery or should we even expect that like at this drags on longer that you guys could tours.

And is that I guess from the Autocam as they even a prudent decision because if you expect demand come back maybe you don't want to cut cost that for you just help us out on that.

You broke up a tiny bit their brand and so.

Can you just summarize the quite the does your cell phone or something broke broke up a little bit.

Yes, sorry about that I guess I was just asking whether it's prudent for you guys be managing towards positive earnings in this environment or is that not the right mindset.

I think it's I think it's the right mindset I think there is a balance that.

That built any business would look at in terms of.

Staying power and liquidity and sort of having ever doing everything you need to do from a cash flow PNM ill fundraising perspective to be in total control your future, while seizing strategic opportunity on the other hand at nights I do think if you guys that follow the Alaska for 10 2030 years through these different prices you've seen us be.

Very contrary and you've seen us make some of our boulders bets when things are down. So I think it's a good question I think for now though demand is really really down for all airlines and so we believe the right move for Alaska at this juncture is to get our schedule right given the demand that we have and to continue to do the things that way.

There were doing on the liquidity side on the cost structure side I think I think we want to do the things that make us better and stronger coming out of this.

I don't relate it isn't that what I think what I'm trying to say, it's if we do see opportunities we want to have the balance sheet in the mentality in the will to take advantage of those opportunities right now what we see as an imperative to sort of get re size given the extraordinarily weak demand that all airlines, including Alaska are saying.

And while it on that I think when you look at our Q4 capacity down 35% I think I think around good place I don't think that overly aggressive overly conservative that allows us to flex up or down and allows us to manage costs and also take advantage of an uptick in demand. So.

I think were threading, the needle pretty well on that.

Yeah. Thank you sorry about cellphone.

Thanks.

Your next question is from they really do not easy with vertical research.

Hi, guys. Thank you.

Andrew or if not them a line I think at the time you close the Virgin America Gil you had to scale back the American Airlines relationship.

Would you just remind us what you're not allowed to do with American and whether you're waiting on any regulatory approvals to re ramp that relationship or or formulation for the one world carriers more broadly.

Yes, Daryl I think yeah that was a couple of come up components of about 50, plus markets in a little but essentially.

We would allow to cooperate on all the Virgin America overlap markets, which were essentially California.

And then secondly at a high level you know on Al Hobbs.

So Seattle, Portland, San Francisco et cetera, we would not allow to put out code on Americans flight out of our hubs and vice versa. So the best way to think about it is that the historical Virgin America network with sort of off limits, but and then secondarily really getting connections beyond Americans network and.

Beyond our network was still fine so.

We continue to operate within those parameters, obviously and and look at what options and what we may need to do going forward, but I will say it as it stands today, we still low steel given those have a lot of opportunity to work with American.

Great and journalism is high on your second question, we're totally clear regulatory requirement, we cleared those hurdles I think in early may or so yes.

Okay.

And then seeing offered up that you might our target on those structural cost takeout.

I mean is there even if you're not ready to disclose the number yet I mean is there something.

Similar similarly substantial on the topline as it relates to the one the one world membership.

Oh, yeah. So there'll yeah I don't we haven't really you know put any sort of information out in terms of what the value of that might be I don't think we're going to do that this morning, either but suffice to say, Brad I think and Andrew both in a really good summary, the opening up of the globe through our majors West coast hubs.

Focus cities.

Got to create a lot of value for customers that we think.

We're excited about and the other thing I'd just add is it just puts us on an international platform as it relates to our loyalty members and something that we've always been missing in the Pacific Northwest is a good seamless global connectivity story with ALLETE reciprocity across the globe and this is going to bring us that.

Perfect. Thanks, guys.

Thanks Darryl.

Your final question comes from Myles Walton Yes.

Hey, good morning, just a couple of cleanup question if I could.

The first on cost reduction in third quarter, 47% in the second quarter, what's the bogey that you're putting there for the third quarter.

Yeah, I I don't think we didnt.

We didn't guide to that miles and so we won't give you a specific number.

I think incremental capacity will add some cost and as mentioned there are a lot of things that we just sort of took down.

70, 80, 90% maintenance spend was an example of that.

Can't do that forever, we've got to start bringing aircraft out of storage and we will have to start maintaining though so there's there are some things that will layer back on on the cost side and that's why it's important that ultimately we see a better sort of backdrop on the oh on the national sort of public health front. So we can get some of the demand back going again, it and sort of regain.

In the trends we saw in late June early July, but I would expect.

The cost removal to be a little less and in next quarter versus that but we haven't guided to anything specific.

Okay, and then one other cleanup on the the yields in the second quarter. Obviously, you are up 30% year on year.

Can you give any.

Nuance to what was going on there and I guess the outlook for the rest of year looks more normalized normalizing to a prior trends.

Eight miles. This is Ed this is Chris Barry on the yields for the second quarter, we're a bit odd simply because we still have some residual.

Stuff from them or mileage plan program on flown miles it really related to the Virgin America acquisition years ago. So.

So that sort of stayed about level and thats why you see the yields pop in Q2, if you look at the real like raw passenger yields.

Really were not up nearly that much in meal raw passenger yields were up probably about 9% for the quarter. So you'll see that fall off as we move into third and fourth quarter and it would be more it'll be more relative year over year, it'll what it will look a little bit more real.

Sounds good thank you.

Okay, I think Thats. Our final question. Thanks, everybody for tuning in we look forward to chatting with you next quarter.

Thank you for participating in today's conference call. This call will be available for future played out at Alaska Air Dotcom you may now disconnect.

[music].

Good morning, My name is Erica and I'll be your conference operator today.

This time I would like to welcome everyone to the Alaska Air Group's second quarter earnings release Conference call. Today's call is being recorded and will be available for future play back at Alaska Air Dot Com.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be question didn't answer session for analysts.

If you wish to ask a question. Please press star one on your telephone keypad, if he would like to withdraw your question press the pound Keane. Thank you I would now like to turn the call over to Alaska Air Group's director Investor Relations Emilie Halverson [noise].

Thank you Erica good morning, and thank you for joining us for our second quarter 2020 earnings call on today's call, you'll hear updates from Brad Bend and Shane several other members of our management team are also on the line to answer your questions during the Q and a portion of the call.

A global health and economic crises continue to significantly impact our business and outlook.

Good morning, Alaska Air Group reported a second quarter GAAP, not locked up $214 million, excluding special items and Mark to market a Justin Air Group reported an adjusted net loss of $439 million special items. This quarter included approximately $69 million of lease return charges that were triggered as a result of certain error.

Craft being permanently parks and a 362 million dollar benefit related to the cares Act payroll support program wage off that as a reminder, our comments today will include forward looking statements regarding future performance, which may differ materially from our actual results.

Permission on risk factors that could affect our business can be found in our SEC filings.

On today's call will refer to certain non-GAAP financial measures such as adjusted earnings and unit cost excluding fuel and I've usual, we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release, and now I'll turn it over to Brad for his opening remarks.

Thanks, Emily and good morning, everybody.

As you all know we're now nearly five months ended the deepest in most on certain downturn in aviation history.

We've weathered many crises before this global health pandemic, an economic devastation or unlike any of the industry space before.

Geared Alaska, we're focused on two priorities first keeping our employees and guess healthy and safe.

Second ensuring our airline is here to support and serve them in the future.

I'm very confident that we're taking the right steps to get us through the crisis and to ensure our long term success.

In the second quarter, our leaders in frontline employees took dramatic action to reduce our capacity to significantly lower cost trajectory to fortify our liquidity at a moderate our cash burn rate.

The men and women of Alaska, and Horizon has always been at their best in the face of adversity and this could not be more true today.

Here are a few examples of their efforts.

Our health and safety team led by Max Ted well I've led the charge and ensuring the health and safety of our guess they partnered with infectious disease experts from the University of Washington, and other medical advisors to add layers of safety throughout the travel journey that build our guest competence in flying.

Then we'll touch on these measures in a moment and many of these are also highlighted in our press release.

Our crews and probably workers have continued to provider cast with guests with remarkable care scaling down or operation revising schedules.

And changing policies have introduced a great deal changing complexity to our operation.

Our people handled this complexity with boys and Grace educating our guess about the in airport and onboard policy changes and providing them the best and safest experience possible.

In the back office, our alliance teams and many others have continued to lay important groundwork for our future by moving our partnerships with American at one world forward.

And our financing legal teams have worked with dedication to preserve and enhance our financial strength in July the team secured new WTC debt financing of nearly $1.2 billion, increasing our already strong liquidity position to $3.7 billion today.

We entered this crisis with a strong balance sheet and this liquidity infusion gives us even more staying power.

As Emily mentioned, we reported a second quarter adjusted net loss of $439 million, which excludes the benefit of cares acts payroll support program.

These results came off flying at capacity levels that were 75% below the prior year.

This is a sobering loss, it's the largest quarterly loss in our history and it's obviously not a sustainable result.

Our adjusted operating expenses were down 47% for the quarter and excluding PSP wage offsets our wages and related costs were down 20%.

In the second quarter, we were among the fastest in the industry to bring our cash burn rate down.

During the month of June our absolute cash burn rate of $4 million per day was best in the industry on a size adjusted basis.

We expect our July cash burn rate to be up in part due to slowing ticket sales.

We're fully focused on getting our cash burn rate to zero.

As you know, it's our gold reaches objective by year end and achieving this goal will require two things one it will require us to do everything possible to manage costs and to help our customers know that they are say flying with us.

And to it will require a more positive national backdrop with respect to the virus.

The news of late has been negative with cases up returned office scheduled delayed quarantines extended and schools announcing remote learning for the fall.

Once we get beyond cash breakeven, we have confidence that our low fare low cost structure and our strong network footprint will continue to be a source of strength, but in reality, we likely phase is that a recovery to 2019 levels will take at least two years.

Flexibility is essential in this environment, but given what we know today, we're planning for our business to be smaller for the foreseeable future.

Then we'll share more details in a moment, but our current plans are to be 35% smaller than last year in October and then building gradually to 20% smaller than 2018 levels by the summer of 2021.

We've made some difficult changes to reduce management positions and we're working on programs now for our front line employees.

We've made significant progress already and I'm optimistic that we'll continue to reduce the number of furloughs required through early out programs leaves of absence and incentive lines.

Minimal Venice, and we'll talk more about these in a moment.

These two facts make these decisions incredibly difficult.

While this has a necessary step I know that everyone. Here has the resolve to set a strong new foundation from which would from which we can and will build our airline back to the size and growth trajectory, we had prior to the crisis.

Before I pass over to ban I want to recognize the heavy weight that many people on our country, including many of our employees are carrying and these trying times.

Top of the tragedy of the Corona virus, our nation is grappling with longstanding and deeply rooted racial and justice.

We all have a responsibility responsibility to do better and I want the black employees at Alaska and horizon to know that this is a responsibility that those of us and leadership embrace.

We stand for helping one another and we stand for being good to one another.

We are committed to listen to learn and to do everything we can to affect positive and lasting changes in our company in our communities and in our country.

That'll turn this over to Beth.

Thanks, Brad and good morning, everyone.

Let's just prices began our leadership team has been focused on creating plans for whatever scenario. We may encounter the candidly communicate those plans with our people and then to execute to the best of our abilities before updating you on how we're doing that I'd like to provide some context for what we're seeing in the current environment.

By several measures it is clear that the low point in this down cycle. It was an April and we have now begun to slow likely uneven climb to recovery.

April load factors were 16%.

Passenger counts hit bottom early in the month at only 4% of normal levels.

Like search as a new bookings at a low point the following week demonstrating confidence in future travel was also eroding.

Load factors, then improved to 62% for June due to both returning passenger demand and actions we took to rightsize our our capacity.

Passenger counts increase to an average of 30000 per day or 20% of normal and flight searches that allow scared dotcom responded to better than 50% of normal. These developments came as markets along the west coast, and the southwest, including Texas, Phoenix, and Las Vegas moved to reopen and People's confidence and flying group driving leisure.

Demand back to approximately 50% of normal levels.

We expect July load factors to show further improvement to approximately 55% on a sequential five point increase and capacity from June but as Brad mentioned, we've seen some of these upward trend stall more recently as many of the geographies, where we fly have experienced an increase in case levels, which Pos many of the local radio.

Putting plans.

Demand is not something we can flow control, but we are doing our best to earn guest confidence and create the right environment for an eventual strong return in demand today, we recognize that customers fall into one of three buckets.

Those who will travel.

Those who might travel and those who won't travel by delivering best in class health and safety policies and clear communications were connecting with those who will and those who might providing them confidence that flying is safe.

Even those who won't traveled to date have the potential to say they might travel tomorrow, and we believe we must be earning their trust as well.

Thank you to Warner's team has done a fantastic job implementing the program we call next level care offering layers of safety through every single stage of travel and helping our guests will compensate for flying our safety measures include making the pre flight experience as contactless as possible and adding a health agreement during checking.

Requiring mass for both gas and employees and empowering our crews to enforce the policy with the ability to issue a formal warning to any guess who refuses to do so.

Using the latest air filtration technology, and health hospital, great filters to remove particulates and fully recycled air the cabin every two to three minutes exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmissions on board.

And keeping middle seats open through September thirtyth, preserving our guests ability to create personal distance while flying.

In our Alaska listen survey, we surveyed thousands of guests and what they care most about our consistent mask policies, the blocking of middle seats and clean airplanes.

80% of those surveyed also reported that our Nexobrid care measures are working and they feel strongly that we've created a healthy and safe environment for flying.

Last because also a strong advocate for temperature screening and we are actively lobbing for screening to be implemented airports by TSA.

Collectively we believe these actions, we're taking will lay the groundwork for guests to confidently return to fly when they are ready.

Yes.

When we spoke at the last quarter, we knew very little about the crisis, we are in today.

Future is still largely uncertain and volatile, but the second quarter provided some key insights that help refine our thinking today, we are planning for Q3 capacity being down by approximately 50% and Q4, we will be down by approximately 35%.

Capacity levels, we're also making it planning assumption that cash bookings will recover to 40% to 60% of normal by December.

This is not guidance, but demonstrates the parameters that we are operating within as we work to restructure our company.

We believe these are reasonable planning assumptions for a few reasons first in June we saw that traveler confidence and psychological safety are strongly connected.

As destinations move to reopen and health concerns began to subside leisure demand return quickly. This tells us that does that that desire to travel is there just below the surface.

Locking this potential requires ongoing societal progress and cooperation through behaviors like mass squaring.

Better faster and more reliable testing methods and improve treatments like a vaccine.

We believe this progress will be made even up slowly together. These factors would support continued leisure recovery.

Second we are in the midst of the biggest demand contraction in the history of our industry as we all know there are far too many seats flying today for the demand that currently exist, adding capacity back in a disciplined manner is important for the health of the industry and it's critical to our company's cash breakeven goals.

Planning for a business that will be 35% smaller in the fourth quarter has implications for operation for our people we have been clear with our employees that no. One has a crystal ball to the post cobot environment, and we will adjust course on capacity, if our us our assumptions don't materialize.

Whatever demand in revenue scenario, we face maintaining a strong liquidity position. We have built is paramount and our go to achieve cash burn breakeven is a primary factor in the scenario plans were putting together Shane will share those details in a moment.

The strong showing from teams across the organization in the second quarter gives me confidence that we are prepared to manage the change and challenges we're facing.

I am so grateful for a dedicated and talented people and I know, we will emerge from this crisis stronger than we came in at that I will pass it to sing.

Thanks, Ben and hi, everyone.

Last quarter, we spoke to you about the factors we were focused on as we were getting to manage Alaska to the initial shock of the Kogut 19 crisis, including building, our liquidity and aggressively managing our cost profile to preserve cash today I'll provide an update on both areas as well as share initial thoughts on restructuring Alaska for the future.

On the liquidity front, we began 2020 with $1.5 billion in cash and marketable securities. Since March we have added over $3 billion to that liquidity from a 400 million draw on existing credit line $425 million from a one year loan in March 163 million in new not financing secured by.

Aircraft, approximately $1 billion and payroll support via the cares Act and in July we added $1.2 billion of cash through a double each transaction.

Accumulating this level of liquidity in about 90 days time is a superb achievement credit due to our teams in Treasury finance and legal that only Tc as a new addition to our capital structure and the team was superb and telling Alaska story, attracting new investors in closing the $1.2 billion raise at reasonable rates.

For avoiding dilution of our equity base.

Anthony.

Assets as collateral.

Back in the second quarter, our adjusted operating expenses reduced by 47% on 75% less capacity, we typically view our costs as 40% variable in the near term so to achieve a 47% reduction is a good results.

Regarding the cash burn rate hours declined from over 400 million per month run rate exiting March to 120 million in June.

As a reminder, we defined cash burn as all operating cash receipts or cash that will turn into revenue plus investment earnings offset by all cash expenditures, including debt service and Capex, we exclude financing raises or payroll support funding from this metric.

The improvement between.

March and June was driven by improved bookings with stabilize cancellations payroll savings of $45 million through the use of voluntary leaves reducing management schedules and flexing crews down to contractual minimums variable cost removal on reduced capacity and the immediate suspension of discretionary and.

The reduction of overhead spend.

July's cash burn, however will be higher than junes, driven by the slowing of forward ticket sales and variable cost of incremental flying in the month.

As Ben mentioned, our planning assumption today as for capacity to be down 35% in Q4, and we're planning for cash booking scenarios of down 40 to down 60%.

I want to expand on what that will mean for our cash burn goals, our people and our cost structure.

To achieve cash breakeven by year end, while operating at levels, 35% below 2019, we must reduce the size of our workforce today, we have approximately 23000 employees and we would likely need as.

Many of 7000 fewer active in the fourth quarter.

Our goal is to mitigate the greatest every possible in voluntary furloughs.

We will need to send out warn notice is on August onest to potentially impacted employees. These mitigation efforts will reduce the number of involuntary for lives that we expect to face in the future.

Also we have made the decision to reduce our management positions by 300 or 15% effective October onest.

These are in addition to prior reductions of about 200 over the past couple of years.

It goes without saying these decisions have regrettable and meaningful impact on employees, who invested their careers here.

I'll extraordinarily difficult these actions are necessary given the realities of our business going forward.

Beyond these immediate decisions impacting our payroll. We're also finalizing our plans to repair our cost structure and to ensure our ability to reach cash breakeven even in a severely depressed revenue environment. It is our intent to ultimately return Alaska to pre cobot CASM ex levels. Even if we are smaller company on a sustained basis to begin that.

We are targeting to achieve structural cost reductions that would hit a 250 million savings run rate exiting the year, we'll have more to say on future calls on specifics of our restructuring plan.

As we turn to questions.

Close by saying that while all of this is easy to read off of my script. The truth is these are these things are very hard to do because they impact people. We are truly driving lessons from our past where tough balance decisions were made by those management teams, which then put Alaska on of course to achieve all it has the past 15 years and that mindset hasnt changed.

Range, we have to run a good business in order to have the future we want for our people and with that let's go to your question.

At this time I would like to invite to would like you asking question. Two please press Star then the number one on your telephone keypad, we'll pause for just a moment you can have shandy roster.

Your first question comes from your line of Joseph Denardi with Stifel.

Hey, good morning.

Hey, maybe center Ben can you just talk about maybe some of the conversations you're having with your corporate customers you talked about maybe that kind of the three bucket of your of your customers.

Can you maybe speak to kind of the confidence you have at that maybe the pace at which corporate.

Returns and maybe how much does not return and I know, it's a difficult question, but maybe just kind of the framework you're using to approach that thank you.

Thanks, Tom the let Andrew Andrew has been doing some work on that so Andrew can provide some color Joe. Thanks for your question, Yes, obviously talking about corporate customers weekly.

Were saying what I believe the whole industry is seeing is is that the corporate travel is massively down over 90% a big part of what the corporate account to dealing with this this concept of duty of care.

And so as of the extension of closing of office spaces.

Right now, we're not really seen any thorny in the business demand and so as saying is being discussing we're just going to be structuring up business in a way for a more prolonged come back of business that said, we've always excelled on the leisure side.

And that we continue to expect okay.

And then seeing just on the on the loyalty program. If you use it as collateral for.

The the loan package from Treasury, how much additional I guess financing capacity do you think exists against that thank you.

Yes. Thanks, Joe appreciate the question. So as you know and I think this is one issue we are running into with the.

Medicare's loan program with treasury their cap and how much that they can actually allow us to finance with that program and we believe that.

They are capped at a rate thats well below the total value of mileage plan.

And so it was our intent to pursue getting additional financing out the public markets.

Recently Weve been presented with terms that would limit our ability to do that and that wasn't something we expected to be part.

The terms of Treasury 45 days ago. So we are still.

Assessing that working with treasury and making sure that they understand that we think our ability to get full value for mileage plan from multiple sources, partly from them and partly from public markets is in fact in everybody's best interest.

So we're working through that I think what we shared last time.

We kind of gave you guys. The road to math suggests that our values that miles by value with a little over $5 billion.

You can sort of apply your best guess on Ltvs or how much. We can we can get from it but yes. The government is capped at $1.1 billion. We think we can raise much more on the $5 billion more base value that we have.

Got it helpful. Thank you.

Thanks, Joe.

Your next question is from RBC with Raymond James.

Hey, good morning, I appreciate all that the color on on the Casper and everything kind of curious so does this 250 million structural program I realize it's a stretch goal, but does that gets you to cash breakeven.

Good day, and if things did not improve the way you're thinking about it.

Fairly structural reduction of 250 between now and the end of the year.

Definitely going to be part of the.

The formula that gets us to cash breakeven I think even on the 40% to 60% revenue scenario, we would have to do this to get there, but beyond that obviously cash breakeven the waypoint on our way back to some level of profitability and paying back our debt and growing again and there's no doubt in our mind that we will have to be very aggressive on restructuring the.

Company to ultimately.

Get back into a growth trajectory and to pay down Thats now that we've taken on.

That's helpful and then if I might follow up on the revenue answer and commentary so.

Just trying to understand as you think through that.

Traction here does September is it fair to assume that September doesn't do you as well as August on the year over year revenue basis, because it historically relies more on business passengers or are you.

Based on kind of the bill Youre seeing in leisure et cetera, I made is that not a fair assumption.

Yes ill and I don't have Andrew wants to add color I think it's a fair assumption that September would be worse than August based on what we're seeing today I don't know that I would.

You know sort of say that those are the drivers, but as Andrew mentioned, we don't expect business travel to be back at any time soon certainly not by September.

I think we would have.

Hope than expected that had the country not having sort of go back into a shutdown mode that that we would be seeing incremental gains sequentially through the quarter and that just doesn't look like it's going to happen right now and that's kind of what Brad embeddable touched on in the script.

Savvy spread I I.

I think there's normally maybe there is business seasonality, which would help most september's, but September still the weather still good kids are going back to school.

I really think what we're seeing is what all airlines are seeing is the.

The news feed has just changed to the krona viruses have spiked quarantines are moving from July 1st to August 1st of September Onest, They could go longer.

Employers are announcing basically that they don't want their people traveling and that.

Return to office schedules are being delayed schools in lot of our geographies that that's the driver and.

And we've seen that we were on a.

We tried to say is in the prepared remarks, but we were at sometimes you see this up more clearly in retrospect, but we were on a really nice clip through the July 4th weekend in terms of seems like every day. There was a 1000 customers ports in the previous day, but as that as the narrative changes the headlines changed I do think every era.

Line has seen softness in bookings for future travel and that's the thing that's making us nervous about August and September.

I do want to while we're on it I do want to say that.

We are.

We're committed to managing our schedule responsibly and we're committed to doing everything we can begin to cash burn of zero.

At or near the front of the back of the industry. So im not we're not giving these.

Industry commentary as an out or anything like that we're going to manage what we can control as good as anybody out there I believe but I just do think folks should know that the environment is and I think this already the environment is is quite a bit different than it was 30 30 days ago.

Sounds appreciate that yes. Thanks.

Your next question is from Hunter came with Wolfe research.

Hey, good morning.

Monitor.

I think your secure enough for me to asking this question I, obviously go but as a opportunity to make a lot of changes that they can't be made when times are good. So what are two or three things that you think southwest Airlines does really well that you think you can mimic for yourselves.

Well.

It's Ben I think right off the bat I think our company respects southwest tremendously, they're a great company and they are led by fantastic people.

I think.

When you look at southwest I think their success lies on.

Core of having a low cost structure.

And that is something as you know we focused on our whole career Brasil career. So.

A low cost matters and good times during bad So I think if theres one thing that we Bose.

Admired about southwest and we'll continue that related is that a strong balance sheet shame said it is.

The less cash we burn.

The last we need to pay off when we get out of this so we.

We need to get through this crisis get the cash breakeven to start picking on this that and get backtrack trajectory trajectory of growth.

And then just having enough dry powder to take advantage of opportunities and that's why you're seeing southwest just fantastic growth and we we have the same mindset. So there are a lot of great things about them that weve admired and we'll continue to do so right I don't you want to answer it's good yeah.

Okay.

And then.

Maybe you said it I'm, sorry, Shamie if not.

He said it will take two years to restore.

The scheduled printing capacity does that mean that it should take about two years to get to that the CASM ex of 2019 or better too is that fair.

And our yet in the script Thats, a Brad mentioned that we.

While we don't have a crystal ball Vernon.

Looking out and thinking it's going to be two year process.

I don't that I would say, we would want to be left of that and we're not in a position to give you specific dates at this time, but I.

I think what I said in my script was our intent is to get to pre koby casmex, even if were smaller company on a sustained basis. So we're working through that we'll have more to talk about on the next call Im sure on this topic, but no I don't think that we're waiting to get back to pre coking capacity to reach our pre govan casmex okay.

Thanks, a lot thanks.

Yes.

Your next question is from Jamie Baker with JP Morgan.

Good morning, just first just a quick follow my long with cutting in and out you were discussing eight cap at treasury.

Maybe I misunderstood what specific cap where are you referring to.

Yes, hi, Jamie the Shane.

Dave So they are limited and how much they can loan to each of the airlines right. That's it's a $25 billion package and it's a portion based off of capacity.

Cove, it and so they can only loan us up to $1.128 billion and what we were saying is we think our mileage plan assets could that's more than that in total we don't want to be limited on how much we could go do with okay.

Okay were good then because I thought maybe youre, referring to some arbitrary cap that they had put on what they can accept in total in terms from the industry young loyalty as collateral.

So I apologize for that.

Getting back to you know a pre cobot ex fuel CASM level on a smaller footprint.

You believe you can get better without changes in wages in work rules.

Airport assets airplanes.

Because of growth congestion integration dual fleet. We've we've stepped off of those peaks recently in one way to get back to where we need to get back theres to reclaim those peaks. So I I totally appreciate the question I guess, where you're coming from I think it's a little premature to know exactly how we're going to go do this but.

We're going to be willing to talk about this stuff as we move forward.

Got it and if I can sneak in a final one I assume you're in.

Possibly daily contact with officials in the why do you care to hazard, a guess as to whether it be modified September Onest date holds and how far bookings are looking beyond that date.

Hi, Jamie It's Andrew Andrew You know, we've obviously seen it extended a couple of times now.

Staying in close contact I.

I don't know, where it's going to bay, but I, certainly think there's a high risk that it may slip again.

But again, we just moneta that.

And we take each day as it comes fair enough. Thank you everybody. Thanks, Jamie.

Your next question is from Catherine Brian with Goldman Sachs.

Hey, good morning, everyone. Thanks for the time Acadia.

No.

On the month of June cash burn improvement, we thought through the quarter from your initial guide back at once you learning.

I know you gave some color on what drove that better performing well can you help us think about proportionately.

How that how that better performance and driven between cost and better demand and then you know.

As it.

You asked quite the hysteria finding incremental cost saving so.

Any ongoing projects that can drive cash burn down 200 million thing here, you've gotten July out there.

Excluding.

Better demand backdrop. Thanks.

Kenya, I might start to get change change talking about the cost side, but I think a big driver is our network and our low fare proposition. If you actually look at our revenue line, we were down our revenues were down 82%, which I said in my script.

That's it that's a bad result for any business for any industry, but it might be the best in the industry or very close to the best in the industry. So I think the combination of our route network, where we fly how we fly our fair structures. Our loyalty that was something that served us well in the second quarter, it's something that's going to serve us really really well in the future.

I do think chain the cost side of it is a band you're talking about that that's a that's a muscle that Alaska.

Has historically had an relied upon and thats something were going to we're going to be the gym, making that investment working better for US maybe you can talk about that side of things, yes, Acadian I. It's a great question I would go back to it was really.

Important that we got all of the variable cost out that we thought we shouldn't we did we saw and I talked about this last quarter of one to one.

Relationship on the variable cost, which is good. It's just get approved we always think we know what the variable costs are but we were able to prove that out.

There were a lot of things that we did in the immediate term that we're probably more temporary and that's why we're starting to shift the conversation to structural cost reductions.

A lot of this up in this quarter was just suspension of all discretionary spending really aggressive offering a voluntary leaves, which as I said in the script, 30% of our folks took.

Which was a huge up on the on the payroll line.

There wasn't a lot of structural stuff that we had done in the quarter, though not that's what we've got to go start to work on the first thing that we've got and reduce the management.

Team size, which I mentioned in the script as well and we're working on that list of ideas that we've got to go execute on to get the rest of this let's call that we've got out in front of us.

Okay, Great maybe maybe one I don't know how does that factor into your your thought process on driving the structural costs out but any update.

Decision.

Remain or two aircraft carrier back to single fleet and then.

How should we be thinking about leasing very expensive.

This year and that obviously not as big factors it was pretty Kobe, but.

Children to think about thanks.

Any its snap paper.

No question that the fleet is a healthy proportion of the structural savings to the chain is talking about.

Academically kind of can think of it this way.

We're going to keep a mixed fleet going forward, you better leverage that to get advantages and ownership cost.

Better lease pricing and using competition and also on the revenue side, having different airplanes to match to different markets. The counter to it is on the single family you better get operating efficiencies and so as part of this structural savings we've got to figure that out and as we start to narrow down.

But your cost that we have we parked all 10 of our Athree Nineteens last quarter and two of our Athree hundred Twentys. We've got 39, least Airbus Athree hundred Twentys left that have expirations over the next three to five years and we're starting to creative with looking at ways to face some of those airplanes out so lot of lever.

Rich in that question and a big piece of over achieving the structural savings goal we want to.

Great. Thank you so much.

Your next question is from Helane Becker with Cowen.

Thanks, very much operator, so hi, gentlemen, thank you very much and Emily Thank you for your time.

So.

Kim can you guys codeshare with Jeff blew through the American co chair or or just on.

Your own.

Hey line, it's Andrew here.

You know not number one I think.

We don't have a relationship with obviously jetblue number two we were not in a position to go into the pivoting a contract details with Al West Coast International Alliance I will say that.

We are very excited and very committed and discussions and you've seen the recent Tom one world invitation.

Both American and Alaska, I think a really well positioned to grow presence and stripped off the west coast folks on the corporate side, the leisure side and we spent a lot of months, putting together a very compelling alliance on the west coast and we're very excited to start to get that into motion.

People have sort of.

International is a top of mind for people today, understandably, but competitively being able to go into the marketplace. When corporate travel is back in to have a robust solution that covers the extraordinary domestic network, but also international is important so we're going to pushing hard so that when we have international travel again, which we will we're really well positioned.

At American as announced service from Seattle to Bangalore, and Shanghai in London, and the one world offering out of Seattle and the other Wesco cities is just going to be really really strong. So we're excited about this and we're going to pushing hard.

Yeah. Thank you I appreciate that and then.

For my follow up question is now as you think about.

Coming out.

Whatever we're in now this Cisco vis vis dreadful situation.

And you think about winning the recovery Elsa smaller airline deep do you think about I mean is it does this really give you a chance to pull out of markets that maybe didn't make sense before but that you were sort of flying because you'd either always flowing them or because you know Virgin America had been in.

That market and and they had kind of slowing that Mike does this give you a chance to be more.

Thoughtful about where and when you fly.

Hello Elena.

I think the answer is yes, but if you and Ben Andrew or May have some they want us say business as well, but I think you've you actually look at it a lot of those changes have been made it does give us a chance to sort of read to read racked en route network and is as you've seen we're taking cities through the were.

And the way I sort of thinking about Anchorage, we say anything that we can fight of Anchorage, We do fly you see us do that Seattle, we've done a lot to fortify our position Portland, I think there's opportunities for us to solidify and grow we've got strong holds in the northwest in cities like Spokane, and Boise, and Redmond, Oregon, and Missoula, and Bozeman and Theres opera.

Good news connect those northwest cities, which have a ton of mileage plan members to cities like San Jose San Francisco LTX in San Diego, We're so we're doing some of that and we've done some stuff very recently out of LTX, which.

So.

I think the answer is yes, there is a chance to sort of read reconfigure and build the network around what we do best but in terms of hold your breath for additional things I don't know that I would I think a lot of though a lot of those.

Moves have been may, but Andrew or maybe you disagree with that I don't know.

No I think Brad spot on and I think if you look at pulled and the now network in general and even in California.

We are still in the majority in the utility of of the California network, just at a significantly reduce frequency and as Brad mentioned really some of the ally moves is really just eight agenda reshaping of our network, but I will I will agree with one thing in respect of all of this is that there is a rebaselining of the nations.

As we move forward.

That's really helpful brought in and Andrew. Thank you very much for your for your help there.

Excellent. Thanks.

Your next question is from Duane Pfennigwerth with Evercore ISI.

Hey, thanks.

Just just a philosophical question, maybe given that a lot of the questions were asked.

About leverage limits at the board level.

Theres. So many interesting questions right now about collateral and all the things you could potentially lever up your your mileage plan your brand office furniture paper clips.

All of the things you could potentially lever up.

Why are there are limits does it does it make sense to borrow against every last scrap of collateral that you have right now and if not why not based on the history of the organization.

Thanks Wayne.

I think that it's what's imperative for us as to whether whatever shape the downturn in sort of choppiness of recovery is.

I think even with all of the Raisings, we've done we're still sub 60% that the cap and we continue to.

Using what sort of non traditional assets like brand and sort of other things like that.

Go and further solidify our liquidity, but I'll tell you.

Our view is we're going to we are going to go raise the amount of cash we need to whether this and we'll manage the cost side Super aggressively.

Once we get to cash breakeven its academic we can sit there for as long as we need to so.

We're talking about both but they're both paramount in our mind Theres not I think a limit right now in front of us where we're saying it's too much and we're going to stop once we get that we obviously would come back and share that with you guys.

Certainly not a criticism, where you are now, but I guess drawing on the long term history of the company, what's the downside of being overly burden with that.

Yes, I mean are the balance obviously and we talked about this a lot certainly very very openly with our employees is anything you borrow and you actually used to finance losses, you got to payback add you've got to say that back through cash flow in the future and thats deals.

From your ability to grow and we don't want to steel for from our ability to grow. So we have a mindset about how much total net debt are hoping we come out of this.

No.

With at the end of the day and.

That is at a rate that allows us to aggressively pay it back while still growing the company in 2022.

Beyond change.

So so we want to borrow we just want to use the money like one one mental model. We have is having the finance team harder weren't borrowing I don't know such as much as we can but borrowing really shoring up our liquidity and then hopefully things get better and we start paying that money off thats.

Yes, that's kind of the mental model that I see for the finance team is did do everything we have to do to ensure our sort of staying power, but then I hope that if someone will have a vaccine things will be better and as soon as we get there we start reducing those debt balances.

Okay. Appreciate the thoughts thanks.

Your next question is from Mike Linenberg with Deutsche Bank.

Hey, good morning, everyone.

Just to hear and.

Brad Your initial comments followed up with about.

A testament your cash burn being where it is.

Probably best among the industry appropriately.

That being are testament to restructure in most areas and then.

Your.

Next question, you sort of touched on some of it changes you're making to the network.

When we sort of look at the changes that you have made and have announced you probably need more changes to your network really in the last three to six months and I'd say the competition and I'm just curious how much of it.

As a function responding to Colgate 19, and maybe moving aircraft out of business markets and putting them more into leisure oriented markets or how much of this was maybe a function.

The American agreement back in February where you want to reposition airplanes, so that maybe.

Our connectivity across those networks are Haiti, maybe it's a little bit about I'm, just curious if that sort of the granting and what's driving it.

The change to the network.

Hey, Mike I mean, just at the highest level summary, I think the most significant changes I think you're referring to.

I really boiled down into serving secondary Pacific northwest markets from California, I mean, if you looked at the vast majority of the changes in numbers at a high level. That's what they would be in I think these are markets, where we are strong we've got good regional aircraft right now produce.

Make sense for us.

And that was sort of part of a strategy shift then and as we got into this it's still made sense to do those I think some of the other changes you have seen of just re tweaking and looking at for instance ally and.

You know, making sure that were positioned on the leisure side, which was solid at so I think overall, but I think at the end of the die. If you look at the network, it's essentially utility wise the same except that.

Frequency is a significantly down right now and these massively depressed transcon market in California, and we've pretty much maintained everything in Seattle from a from a destination perspective.

Okay. Okay. That's helpful.

Maybe.

Pit to ban on the airport side.

We've heard airlines as an industry talk about ways to improve peace of mind with its customers finding ways to get them to want to travel again in the concept the temperature screening by the TSA. It's been kicked around for sometime now it seems like several months and yet I'm not sure. If it's gone anywhere what what are some.

The gating issues in trying to convince that alone.

This on temperature screening Diana Youve got some work there.

Yep.

No.

We are strongly advocating for the TSA to take a temperature screening we're doing a proof of concept with Seattle here in the feedback airport.

Honestly I think theres, something just very science on whether or not it actually does efficiently screen well, whether there is enough people that are caitlyn temperature.

Hi enough to actually screen them out.

So there is ongoing debate about whether or not it's worth putting in place across airport, but we're continuing to ask for in its another layer of safety issues to all of our steps in next level care and like you could increase get confident Mike we havent here and the building.

Almost everywhere, we go and I'll tell you. It's slick technology I don't know if you have it you just put your face and literally two seconds. It takes your temperature and we're just saying look it's just another level of confidence for customers that come into say like your temperature as normal it's just.

It's just another step and making sure that people are getting on board airplanes that are safe. So we're going to continue advocating for it.

I would likely not goes fast that we would like we're going to continue pushing on it because I think it's just part of the confidence of society and and people flying.

Okay very good thank you.

Hi.

Your next question is from Brandon Oglenski with Barclays.

Hey, good morning, everyone and thanks for taking my question.

I guess spreads at a high level should investors expect that you guys.

Only want to manage to like a cash breakeven level perfect for full recovery or should we even expect that like at this drags on longer that you guys could tours.

And is that I guess from the Autocam as prudent decision because if you expect demand come back maybe you don't want to cut cost that far just help us out on that.

You broke up a tiny bit their brands so.

Can you just summarize the quite the.

Or cell phone or something broke broke up a little bit.

Yes, sorry about that I guess I was just asking whether it's prudent for you guys to be managing towards positive earnings in this environment or is that not the right mindset.

Hi, I think it's.

I think it's the right mindset I think there is a balance that.

Bill any business would look at in terms of.

Staying power and liquidity and sort of having ever doing everything you need to do from a cash flow PML.

Fund raising perspective to be total control your future, while seizing strategic opportunity on the other hand at nights I do think if you guys that follows Alaska for 10 2030 years through these different crisis, you've seen us be very contrary and you've seen us make some of our boulders bets when things are down so I think it's a good question I.

Thanks for now, though demand is really really down for all airlines and so we believe the right move for Alaska at this juncture is to get our schedule right given the demand that we have and to continue to do the things that were doing on the liquidity side on the cost structure side I think I think we want to do the things that make us better.

Even stronger coming out of this.

I don't know, it's what I think what I'm trying to say, it's if we do see opportunities we want to have the balance sheet in the mentality in the will to take advantage of those opportunities right now what we see as an imperative to sort of get re size given the extraordinarily weak demand that all airlines, including Allaster, saying.

Right well add on that I think when you look at our Q4 capacity down 35% I think I think we're in a good place I don't think thats overly aggressive overly conservative that allows us to flex up or down and allows us to manage costs and also take advantage of an uptick in demand. So.

I think where threading the needle pretty well on that.

Yes, Thank you sorry about cellphone.

Thanks.

Your next question is from Darryl Genovesi with vertical research.

Hi, guys. Thanks Marathon.

Andrew or if not on the line I think at the time you close the Virgin America deal you had to scale back you market on a relationship.

Would you just remind us what you're not allowed to do with American and whether you're waiting on any regulatory approvals to reramp that relationship or or simulation for the one world carriers more broadly.

Yes.

I think.

Yes that was a couple of come up components about 50, plus markets in a little bit essentially.

We won't allow to cooperate on all the Virgin America overlap markets, which were essentially California.

And then secondly at a high level.

On Al Hobbs.

So Seattle, Portland, San Francisco et cetera.

We would know led to put out code on Americans flights out of our hubs and vice versa. So the best way to think about it is that the historical Virgin America network with sort of off limits.

And then secondarily really getting connections beyond Americans network and beyond our network was still find so.

Great and journalism is high on your second question, we're totally clear regulatory requirements. We cleared those hurdles I think in early may or so yes.

Okay.

And then being offered up the $260 million target on those structural cost takeout.

I mean is there even if you're not ready to disclose the number yet I mean is there something.

Similar similarly substantial on the topline as it relates to the one the one world membership.

Oh, yes, so Darryl, yes, I don't we haven't really.

Put any sort of information out in terms of what the value of that might be I don't think we're going to do that this morning, either but suffices to say, Brad I think Andrew both than a really good summary, the opening up the globe through our majors West coast hubs and focus cities is going to create a lot of value for customers that we think.

We're excited about than the other thing I would just add is it puts us on an international platform as it relates to our loyalty members and something that we've always been missing in the Pacific Northwest is a good seamless global connectivity story with elite reciprocity across the globe and this is going to bring us that.

Perfect. Thanks, guys.

Thanks Darryl.

Your final question comes from Myles Walton.

[music].

Hey, good morning.

A couple of clean up question, if I could.

The first on cost reduction in third quarter, 47% in the second quarter, what's the bogey that you're putting there for the third quarter.

Yes, I don't think we didnt.

We didn't guide to that miles and so we won't give you a specific number.

I think incremental capacity will add some cost and as mentioned there are a lot of things that we just sort of took down.

70, 80, 90% maintenance spend was an example of that you can't do that forever. We've got to start bringing aircraft out of storage and we will have to start maintaining though so there's there are some things that will layer back on the cost side and that's why it's important that ultimately we see a better sort of backdrop on the.

On the national sort of public health front. So we can get some of this demand back going to get it and sort of regain the trends. We saw in late June in early July, but I would expect.

The cost removal to be a little less in in next quarter versus this but we haven't guided to anything specific.

And then one other clean up on the yields in the second quarter, obviously up 30% year on year.

Can you just give any.

Nuance to what was going on there and I guess the outlook for the rest of year looks more normalized normalizing to a prior trends.

Eight miles. This is Ed this is Chris very on the yields for the second quarter, we're a bit odd simply because we still have some residual.

Stuff from them, our mileage plan program on flown miles it really related to the Virgin America acquisition years ago.

So that sort of stayed about level and thats why you see the yields pop in Q2, if you look at the real like raw passenger yields they really were not up nearly that much and Neil Raul passenger yields were up probably about 9% for the quarter. So you'll see that fall off as we move into third and fourth quarter and would be more.

To be more relative year over year of what it will look a little bit more real.

Sounds good thank you.

Okay, I think Thats. Our final question, thanks, everybody for tuning and we look forward to chatting with you next quarter.

Thank you for participating in today's conference call. This call will be available for future playback at Alaska Air Dotcom you may now disconnect.

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