Q3 2020 Alaska Air Group Inc Earnings Call

October 22, 2020

[music].

Good morning, My name is FIA and I will be your conference operator today at this time I would like to welcome everyone to the Alaska Air Group third quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback and Alaska Air Dotcom all lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session for analyst. If you wish to ask a question. Please press star one on your telephone keypad. If you would like to withdraw the question press. The pound key. Thank you at this time I would like to turn the call over to Alaska Air Group's director Investor Relations Emily Halverson. Please go ahead.

Good.

Yeah. Good morning, and thank you for joining us for our third quarter 2020 earnings call on today's call, you'll hear updates from Brad Ben 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.

Well health and economic crises continue to significantly impact our business outlook. This morning, Alaska Air Group reported a third quarter GAAP net loss of $431 million, excluding special items and Mark to market adjustment Air Group reported an adjusted net loss of $399 million special.

Special items. This quarter includes 322 million associated with employee separation 121 million of asset impairment charges that were triggered as a result of certain older aircrafts being permanently parked and a $398 million benefit related to the care that payroll support program wage off that our average daily cash.

For the quarter was approximately $4 million.

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. We will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel and as usual we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release and.

And now I'll turn the call over to Brad for his opening remarks.

Thanks, Emily and good morning, everyone.

It's been eight months since the initial moments that this crisis, when all airlines, including Alaska soft bookings fall off shore.

Air travel virtually ground to a halt and as they always do the people of Alaska and Horizon Rose to meet the challenge we have.

We identified eight critical work streams covering areas of our business needed to change rapidly. We built plans for each of these areas and we got to work executing the plans.

The work streams included the safety of our people and our guess the size of our fleet network workforce.

Cost and overhead reduction as well as liquidity management.

Yes, and employee communications, a whole host of commercial activities.

And working with the government and other airlines on the cares Act.

These efforts were coordinated by our project management team under the direction Sandys doing and individual work streams were executed by people throughout the company.

I'd like to share some data points with you demonstrate the remarkable progress our people have achieved to date.

First and most importantly, our TDE sprinted into action to ensure the safety of our employees and our guess we made over 100 changes to our operation as part of our next level care programs, including enhancements to aircraft cleaning social distancing mandatory mass open middle seats and guest service.

With reduced contact.

Our data shows that our employees as well as customers, who have flown have very high confidence and our safety.

Second our network team called flying from 1300 daily flights prior to the pandemic to just 350 nearly overnight.

We're back to 760 points today and will soon be at 840.

Third we have historically carried about 130000 people per day maybe.

In April that number dropped to 5000.

Our commercial team took decisive action to block middle seats dropped change fees extended lead status and communicate with guests in new and innovative ways. All in an effort to build confidence with folks who have not yet come back there.

Their efforts are working as we've seen a month by month steady uptick in the number of passengers were hearing and its future bookings are trending trending at even higher levels.

[noise] ports parking aircraft and putting them into storage is more complex than most people would yes.

The Alaska and Horizon main seems park 177 of our 329 aircraft and they've now seek we brought 110 to be back into service.

Fifth getting our employee resource levels rise has been an all consuming effort for company leaders Union leaders and our employees.

Columns here step forward to support our fight for survival nearly 7000 employees to have short term leases of absence and we've now had over 4000 employees volunteer for long term lease incentive lines and early retirements.

Six to our finance team has led our work to rightsize, our operation and reduced spending and we've reduced our cash burn from approximately $13 million per day to $4 million per day.

Heroic efforts along with the money received from the U.S. Treasury means that our debt levels net of cash are unchanged from prior to the crisis.

This is an incredible achievement and one that we believe few of our peers will replicate.

Seventh our finance legal and treasury team tapped into nearly $4 billion in new liquidity, well and well in excess of our two and half billion dollar goal and finally, we continue to fight to maintain jobs for our people and we've been extremely proud to work with labor leaders and other airlines in the effort to secure further payroll support from the Guy.

Permanent.

Government Affairs team has been highly engaged and they continue to be as we speak.

Hey, Ben will provide more detail on several of these areas in a moment.

In today's environment, the sequential trends from month to month tell the clear a story of progress, but I do want to share a bit about our quarterly results in the third quarter. Our groups capacity was down 55% and Assembly said, our adjusted net loss was $399 million. Our total revenues were down 71.

<unk> percent for the quarter, which is sobering, but it's up 11 points from last quarter and we believe that we believe it will be amongst amongst the best result in the industry.

As I mentioned over 4000 employees volunteered for probe for programs that were designed to reduce our need for low as we right size.

Turning October 1st these individuals' began their early retirements extended lease and incentive lines.

I want to recognize and thank each of them for their contributions and for their dedication to Alaska. Many of these people have been with Alaska for decades, and they are the folks who truly built Alaska. They did nothing to caused this crisis and yet they have made a substantial personal sacrifice to contribute to our future and.

Save a job for someone else.

I'm very proud of our finance team, who is doing a terrific job managing liquidity today, we have $3.7 billion in cash on hand, and another $1.8 billion in standby liquidity for total liquidity of $5.5 billion, having there.

Having this in place has allowed us to get through the initial phases of our response and shift our focus from survival to recalibrating and restructuring for long term prosperity.

A former leader here used to remind that running a business is like designing and building a house.

No one knows what kind of weather will have but we can build a house to withstand the worst storms and also to take maximum maximum advantage of the good weather when it comes.

We believe we've done this at Alaska, No airline would choose the crisis, we're experiencing today, but with our strong balance sheet, our low cost and low reliance on high fares and our great service and highly loyal customers. We believe we're better positioned than any other airline to survive this storm and to capital.

Relies on the good weather when it comes.

I want to again, thank our people for everything they are doing with that I'll pass this over to Ben.

Thanks, Brad to start off I too would like to add my appreciation for the employees to when we have segment by two this month.

A large portion of my career, leading our operations team. So I know the passion and dedication of our frontline workers.

We will miss them and we truly want to thank them for their incredible careers that help shape the values of our company and I look forward to the day when we're able to ask all those were on furlough to return.

Typically our third quarter call assures guidance for the fourth quarter and lays out plans for the following year, while volatility has come down relative to Q2, Theres little additional clarity about the nature and speed of the demand recovery. Despite that we will continue to communicate candidly about where we know including the planning assumptions are shaping our thinking about the next.

Last year.

A major driver of demand recovery will be whether our customers believe that Mike is sales our operational experience in the last eight months has shown that the transmission rate of close to 19 and the air travel environment is lower than in the general population.

It's been said, but it's worth repeating that hospitals rate help us alters our airplanes removed 99.9% of airborne particulates and fresher is re circulated through the cabinet every three minutes.

The results of recent scientific studies bolsters, our confidence that air travel is safe for the large portion of the population, especially with the additional layers of safety we have implemented studies.

Studies published this month determined that Kevin design of airflow systems create the equivalent of over six feet of social distance between passengers even on a full flight when mass sort of war.

The study showed that given air flow and filtration systems, only 0.003% airborne contaminants can reach any one person or another study showed that it would take 54 hours of sitting next to mask wearing cobot positive passenger to catch the virus.

He also concluded that the risk of contracting COVID-19 during air travel is extremely low compared to typical daily activities. We are.

We are very encouraged by what our own experience and the scientific work suggest that it is safe to fly.

We continue to work with our guests everyday to educate them about the health precautions that are in place and why those were not considered high risk can be confident to return to air travel.

Last week, Hawaii lifted quarantine requirements for visitors with a negative covert test we have seen recent strength in bookings for the islands I personally through there to meet with local officials and experienced a program for myself. It was fantastic feedback in the items. Our flight was full except for open wheel seats and guess had done their pre arrival coded test to ensure they are now.

Although the arrival of screening process still have hiccups that need to be resolved meetings with government and state officials give me confidence that Hawaii traffic will steadily return over the coming months.

Despite the evidence that flying as safe, we must acknowledge that many customers are not flying because they are not comfortable doing so.

To boost guest confidence in the near term, we will continue to black middle seats through January six. However, we are currently mapping a framework that will set the stage for the own blocking of seats as conditions support doing so we expect to bring back middle seat occupancy in early 2021, beginning with shorter haul.

Right and geographies like Hawaii required testing is already reinforcing traveler confidence.

Our decision to move forward, we'll be responsive and calibrated to changing conditions things like rising coded cases or more restrictive state postures that could change our plans so.

Similar to how we got it back capacity seen higher loads and incrementally brought back more onboard service, we recognize we have to be thoughtful and deliberate in creating confidence for our guests throughout this transition.

Typical load factors were middle seats block should be in the 45% to 55% range, which is equivalent to 65% to 80%, 80% when adjusting for available seats only.

Blocked middle seats will continue of course to act as a headwind towards our goal of achieving cash breakeven results.

Turning to our planning center scenarios for the coming months, our assumption is unchanged from the last quarter and expect to be about 80% of 2019 capacity by the summer of 2021 would flow treat cobot recovery to be well into 2022.

As we demonstrated in Q3, our mindset to sustain nimble and to modify these plans the circumstances evolve.

We plan to fly 50% of prior year Q3 capacity the pace of recovery was slower than expected. So we adjusted our flying down to 55% given.

Given what we're seeing in demand today, we are prepared for our operation to be for our fourth quarter capacity to be approximately 40% below prior year levels with October about 45%.

Remains the case that 70 to 80000 passengers per day or about 60% of normal levels as the threshold at which we can achieve cash burn zero we've.

We believe the factors we believe the following factors are relevant for continued near term improvements as we move into 2021.

The scientific studies released will help both public confidence and understanding the safety of air travel.

As expected there is strong correlation between the reopening of destinations and demand Hawaii and other warm destinations are strengthening as guest look for work from anywhere locations and vacation destinations more.

More recently, we've seen that marketing and promotional efforts can be effective in today's environment and.

In August we launched our first by the road promotion, which offered buy one get one pricing, allowing guests to secure a full wrote to themselves with middle seats bar. This promotion.

This promotion was well received and demonstrated to us that marketing to Aspirationally travelers reinforcing our safety messaging and offering the right price. This habit stimulative effect at today's environment and.

And lastly, the upcoming holiday travel season, coupled with a permanent removal of change fees appears to be driving more advanced bookings.

Business travel remains under more pressure than leisure, but we're talking with our corporate partners about our future with one world and other ways to support the return of business travel.

Today, we are honored to join Microsoft and Scott energy to introduce a partnership focused on making business travel greener with sustainable aviation fuels, we admire Microsoft's leadership and we are grateful to partner with them to bring travel back in a way that cares of both individual guests and the environment as we.

As we progress forward. We know there is significant work still to be done to ensure we have a thriving postcode network and a business model that can drive us to and then beyond our pre covance size.

Eco brass thanks to the individuals and teams at Alaska and Horizon, we're working so hard to control that can be controlled at this moment for them.

For the reasons I've shared today I'm optimistic that we will see our way through this crisis and emerge stronger for it and with that I'll pass it to shape.

Thanks, Ben and good morning to everyone on the call today.

My comments. This morning, I'll provide brief updates on our liquidity cash burn performance and cost restructuring efforts.

Last quarter I shared details with you about the $3 billion of liquidity that we had added to our balance sheets since march including the $1.2 billion.

WTC, we completed in early July we have since secured an additional $1.9 billion in allocation under the cares Act loan program. The terms of this program were ultimately attractive to us the loan comes at a reasonable cost with maximum flexibility, which we viewed as a priority we.

We don't want to add long term embedded debt and interest costs. If we can avoid it especially if we ultimately find we do not need it to finance losses, all of US at Alaska want to think Secretary Ms. nutrition and his team at Treasury for their efforts to develop and move this loan program forward in a very short period of time.

The Cures Act loan program allows for incremental drop through March of 2021. After required initial drop 10% of our allocation our $3.7 billion of cash balance today includes $135 million from an initial draw we plan to make final decisions on how much to draw sometime after the new.

A year.

We added the entire remaining care that loan allocation available to us to the 3.7 billion. We have on hand, our total effective liquidity as $5.5 billion, which occurred burn rates as approximately four years of liquidity, while we have some remaining assets. We can borrow against as we sit today, we don't foresee any additional liquidity efforts being required.

Right now the next decision in front of us is whether to pay down or refinance our credit facility and 364 day term loans due in March and April of next year ill.

Ill reemphasize, a data point, Brad highlighted which is that we actually closed the third quarter with adjusted net debt of approximately $1.7 billion, which impressively as flat with the year end 2019.

In very round dollars, we did burn 1 billion since the onset of Covance. However, we paid down $250 million of debt and the PSP Graham provided $750 million to fund most of our payroll over this period. This underscores the importance of the PSP Grant program, which was instrumental in protecting jobs.

Ops and helping us to bridge the extreme financial deterioration we saw in the first six months of this pandemic that deterioration continues of course today and only continued PSP support can reliably help avoid balance sheet distraction for the industry balance sheets that will be needed to fuel future industry recovery and growth.

Which would we believe support and accelerate the broader economic recovery and growth needed in our country.

Turning to cash burn on a company size adjusted basis, our $4 million of cash burn per day compares well to others in the industry.

As a reminder, our burn figure has thus far included cash revenues and most cash outlays, including debt service and Capex.

However, now that we have fantastic liquidity, and we've reduced and stabilized our spending we will increasingly focus on cash flow from operations trends as our primary cash metric total cash remains important but as we incur more onetime outlays, such as severance and lump sum payments to employees and potential large debt payoffs our mindset is.

That watching total liquidity net debt and operating cash flows is more appropriate than an all in number that will be lumpier, and therefore potentially less meaningful.

Very early in the pandemic, we haven't articulated a goal to reach cash burn breakeven by year's end, well I'm happy with our progress on cost reduction and believe we may have the best results on this metric in the industry. We do not expect to hit our target by December for three primary reasons first we are bringing capacity back into Seattle somewhat faster.

Than originally planned second as mentioned previously blocking middle seats caps the effect of load factor, we can achieve to a level slightly under what's required for cash breakeven and third.

While trending consistently positive the return of demand has been slower than our original guess back in April which admittedly we developed with very little to go on at the time.

Given what we know today I do expect our cash burn to continue to improve during Q4.

For the next several months, we expect our monthly cash outflows to be about $450 million to $475 million per month, given the amount of capacity, we are planning to deploy and required debt payments.

Month to month, there will be some timing effects, but that is a decent range for the next quarter or two.

I do anticipate that that as we've done to date, our cash burn progress towards breakeven will be ahead of the industry. At this point it will require further recovery of demand and likely the removal of middle seat blocks in order to achieve.

Turning back to costs in July we initiated early out programs and extended leave options for all of our front line teams. We had over 700 employees take advantage of permanent early outs and over 3300 individual take extended leaves our voluntary furloughs. This allowed us to reduce the number of involuntary sorry voluntary furloughs.

This allowed us to reduce the number of involuntary furloughs necessary in October to around 400. In addition to the 350 management positions that were permanently eliminated.

As a result of these programs we recorded a one time special item in the third quarter of $320 million.

Temporary payroll savings from these decisions are extinct expected to be $375 million in total and permanent annual savings from the early out programs and our management reduction enforce will be $132 million annually. The tempur.

The temporary cost savings begin to taper down in April 2021, and Sunset in late 2022.

Our lead programs allow us to recall employees to support the operation should we need to which would bring cost back more quickly as those employees returned to full pay and benefits. Although I will say our goal is to bring back offline and our people as soon as demand allows us to.

Beyond the actions we've taken to reduce payroll costs. We are also making progress on the structural cost reductions we discussed on the last call I shared previously that we were targeting initially at least $250 million of permanent structural cost savings to help return us to pre coded CASM ex levels, even if we were to remain at 20% smaller company.

Several initiatives underway to help meet this goal the largest of which include.

First the aforementioned permanent payroll savings of $130 million annually second our efforts to improve the ownership costs and cost efficiency of our fleet over the next three years, we will see the exploration of 42 of our 61, Airbus leases, which represents an opportunity to either extend those leases that far lower rates to what we pay today or Pos.

If we replace them with larger more efficient aircraft.

Third given payroll is 35% of our cost structure, we intend to return to our pre Virgin acquisition productivity levels, which were the highest we've ever achieved this will require bold leadership and also commitment of our people as we work to restore this has historical competitive advantage.

Fourth we've completed the elimination of at least $35 million of non wage overhead spend.

Fifth we have identified $50 million in supply renegotiations of which we have achieved over $25 million to date from hotels health care providers software licensing and changes to airport vendors in rates.

And there are several other initiatives, including real estate cost savings and moving Eone hundred 70 fives into markets in the state of Alaska, where demand cannot support continued mainline flying.

I believe that these initiatives are the right first steps to begin restoring our cost structure.

Theres one thing we have learned and are committed to and the leadership team and is that low cost discipline is simply a requirement of this industry. If you want to be able to survive in the downturn and thrive in the EPS.

So 90 days ago, we were hoping for a better quarter brought on by the end of this health crisis and a return to carry in our guests around the country that didnt fully happen, but each month has improved since March and despite how intently focused we are on weathering. This downturn, we are ultimately optimistic our guests want to travel.

No we have superb liquidity as Brad outlined we have unmatched competitive advantages and we have an amazing group of 22000 people dedicated to making this company successful and with that let's go to your questions.

At this time I would like to invite analysts you would like to ask a question. Please press Star then the number one on your telephone keypad again, Thats star one for any questions well pause for just a moment to compile the QD roster.

Yes.

The first question will come from Helane Becker with Cowen. Please go ahead.

Thanks, very much operator, and thanks for your time, everybody. So I just have one question.

Well when you talked about bringing capacity back on faster than you intended.

But you are still not able to reach.

No positive or breakeven cash flow or cash burn well why would you bring that capacity back sooner when it makes sense to not bring that capacity back just yet and we are on that.

Yes, maybe I'll start Atlanta that I'm sure Andrew will want to chime in I think one of the very.

Variables in that is the fact that we locked middle East and decided to continue to do so through the end of the year and I think what we're seeing in some of the more peak periods is there is a potential with the Middlesex locked we would be spilling demand, which we really are in a position to so want to do and and so it made sense for us to build out.

More of our pre Covance, Seattle network, a much much quicker a little bit quicker than we had originally planned to do but Andrew for that too as well yes.

Yes, Hi, Elaine I think and again the key word there from Shane was sort of planned at the beginning but.

But you know we're quite confident in what's happening in the fourth quarter and our percentage of flying and leisure markets in the fourth quarter is.

Is significantly more than it was last year and we're seeing a lot of good.

Flying in out leisure destinations some destinations and of course with Hawaii opening up.

We we were actually down 88% in Hawaii capacity in the quarter were going.

We're going to be down only half that in the fourth given the.

Given the opening and the testing going on so we feel pretty good about the type and nature about flying in the fourth quarter to continue to grow this and generate.

New revenue.

Okay, and then for my follow up.

For my follow up Andrew while I have you can can you talk about credit card spending and sign ups and what you're seeing there in this environment.

Yes, I think you know I just went back to last 10 weeks up about bookings and actually new credit card accounts actually.

And Alan Alan you credit card accounts have been increasing every week on average by 5%.

Given the economy and everything like that my personal view is that our credit card is performing quite well.

Okay. Thanks, very much thanks, Tim Thanks online thankfully.

The next question will come from Andrew Didora with B. Riley. Please go ahead.

Hi, Good morning, everyone and thank you. Thank you for the questions. My first question is for other center Andrew.

With the leisure driven demand in embedded in your comments.

You mentioned that promotional activity is stimulating some some travel for you can you maybe comment a little bit on the types of competitive actions that you're seeing out there in the market, particularly on on pricing given that leisure is so sensitive to the sales.

Yes.

You say the normal pricing activities.

We have.

Just in the normal marketplace competitors doing things with Fas I think overall the business stanza away most stable I think mostly right now.

For us at least is focusing on bringing the people back in my mind just on older people I talk was once someone has flown their confidence in falling again is materially stronger.

So we believe that getting passengers to fly is really really important I think overall, our average fan was down about 17% in the.

In the quarter.

Again, im not potentially seeing anything out.

Out of the usual as it relates to pricing actions and Andrew spend I think like a sum of the script I think we're seeing the ability to stimulate traffic with lower fares and we have this great thing with Russell Wilson, which I didn't mention that Everytime Russell Wilson pose a touchstone or two or three.

As you get a 10% discount furby touched on it and we're seeing we're seeing good good reaction to that so.

Thanks for your question.

Sure. Thank you for that and then just like a second second one just for Shane but some great color on some of the structural cost savings maybe any initial thoughts on how you're thinking about your unit costs and once you get through the crisis, maybe perhaps relative to 2019 levels. That's it for me. Thanks.

Yes, Thanks, Andrew and I'll follow on with that I'm I'm, a big supporter of running the ball. This year was yes.

Revenue, we've got 19 touched on this with a lot of discount, but we're happy happy that customers are getting good discount right now.

Yes, Andrew I know everybody's interest in that we are anxious to sort of come out.

With something.

So in terms of a target with a date attached to it but we're not going to do that today on this call I think we need a little more time to really understand where we think that the sort of capacity is going to go over the next 12 to 18 months.

Then really lock in some of these savings initiatives. So I think I total about 190 million that were very confident we've got line of sight in capturing and Weve got significantly more than that that we're working on cost restructure and will continue to come to you all with more clarity and more specificity as the as the.

Earnings call to go buy over the next couple of quarters right now we are really.

Really really focused on getting you know within.

A handful of percentage points of our pre cobot CASM ex sometime next year, but we're not we're not at a point, where we can totally forecast and give you a date on that yet.

Fair enough. Thanks.

Your next question.

The next question will come from Sandy CES with Raymond James. Please go ahead.

Hey, good morning.

Regarding your comment comment about the 450 to 470, a noncash appfluent could you.

Gives us an idea of what that was in the third quarter and if it includes the cost reductions that you've outlined and also just along with that when do you expect in terms of debt that rents in like fourth quarter and 2021, just just so we can have an appreciation for for the other types of cash outflows.

Yes, having so in Q3, it was less than that we had a little bit less capacity deployed.

I believe our total operating expenses were 1.1 X or something like that so I think with that it was probably 400.

Hundred for 15 or something like that so its up a bit with the incremental capacity.

So what was the second part of the question.

Yes, I do realize that that includes the debt I was just wondering what are the if there is any severance cash component are the cash outlays, that's not part of that core component that we should be mindful of it.

Oh, yes, so we had about $30 million and a one time.

Of severance lump sum that hit October.

Theres, we don't expect any more than that at this point, so that will be in our Q4 results and it's part of that number.

In terms of.

Q4 sort of 450 to 475 of it includes cost restructure items.

Recall that on our our Q2 call. We had said our goal is to hit exit rate.

Savings of $250 million. So the what 90 I just gave you.

And.

Exit rate basis would be in that number and any more.

And any more we can do between now and the end of the year I could improve that a little bit.

And then any in are they just a follow up on that the cash breakeven comment that you made about.

About 60% of passengers for.

Is that.

At flattish sales than any kind of what kind of 88 Tilbury now you are assuming in there.

Yes ill, let Chris give some color on ATM.

As we prepared for this question and you've got a lot of money.

Got it.

Great, Yes, we are assuming lower yields.

Maybe I'm not sure what the specific planning assumption is but we are assuming pricing is depressed for a bit.

And Savi on 80, all I mean, most folks I think on the call no air traffic liability, it's really that okay.

Cash we collect in advance of of Citi.

Turning someone on it on a trip rate so.

Over over time that mix has changed dramatically. So if you look at where we were pre cobot about 95% of our total $1.2 billion of ATM was related to tickets with a definitive departure date.

5% for related to credits like refunds and things like that will that that mix has changed a lot more about 50 50, now so that $600 million of our $1.1 billion air traffic liability is related to these refunds that we provide to customers over the past few months.

So thats a lot more difficult to forecast when thats going to be used versus the true ticket LTL. That's what we're looking at that right now entering the same or doing some promotions to entice people to use those credits, maybe a little bit differently, but.

To give you some color in Q3.

About 15% to 20% of all new bookings were you by using these credits versus cash and typically that's about a 2% total bookings as using these credits so where we are seeing a cash headwind because of that.

But we're doing a lot of things on the promotional side to make sure that customers have a choice whether.

Whether to use those credits are you something else or convert those to Myles I, just giving our customers more options as we look at that so that we can avoid sort of a run on the bank and that credit Chris. It. This loan you were saying that its roughly $50 million of revenue in a month. The it's not a bookings a month, that's certainly not getting cash that's right.

Thats right pulling away from credits right.

That helped us.

Super helpful color. Thank you.

Thanks.

The next question will come from Jamie Baker with JP Morgan. Please go ahead.

Hey, good morning.

A follow up on Cibers question and I recognize that.

Well as part of the equation, but could you simply express.

Cash breakeven on a revenue basis.

That's how southwest and others are doing it.

Sorry, I want to make sure I understand the question Jamie.

Well you were discussing it.

Great either on a passenger on a volume basis, but with lower yields I'm. Just wondering are you know.

Just just put some goalposts around the actual revenue figure or expressed as a percentage of 29 to get that gets you in the ballpark of zero cash burn.

Yeah, It's it's close to 60, 62%.

And that is going to be about and that is not negative 60 to 62, that's 660 to 219 correct.

Correct, Okay perfect perfect.

Second question and thank you very much for that can you give us some more color on demand trends to Hawaii in particular, how quickly do they react to the recent headlines and also what level of revenue are you running into fourth quarter as a percentage of last year, you know American made the comment today that some of the.

Short haul.

International each markets or or sort of minus 30, I recognize that your capacity are going to be down about 50% from garments, but how should we think about the revenue component there.

Jamie its Andrew because it seems like everything is pretty favorable you know at the moment.

Yes, I think.

What I can tell you what what I've seen personally is that once Hawaii announced.

This program in the opening up we started to see bookings, obviously increase materially and we continue to see everyday higher bookings than than the day before in Hawaii I would just say, though that we're sort of going to be having about 19 flights a day starting in November and going into December when we used to have like the 33.

So there's a long way to go but I think the us as you know.

It used to be double digit percentages of our capacity in revenues why wasn't it dropped down to like 2%. So that at least for US as that revenue recovery goes is a good story as it relates to bookings in general I think what's encouraging a little bit is that the close in bookings on what they've always been in getting a little bit better, but what we are seeing.

People willing and more comfortable to booked further out and that trend has been increasing week to week to week.

So all that being said we are headed in the right direction on those fronts, although it's slow going.

Would that imply positive Hawaiian RASM in the first quarter then.

Possibly.

That's a great question, which we will not be answering thank you.

Okay fair enough old habits diehard, Thank you everybody take care.

[music].

The next question will come from Joseph Denardi with Stifel. Please go ahead.

Hi, Thanks, good morning.

Shane or Brad when you think about your capital structure post covert how much more conservatively do you think it needs to be as a result of kind of what's transpiring to this.

All this not change that you just kind of hope it doesn't happen again or do you think you need to run the business with some sort of significant net cash position.

Any thoughts there.

Yes, it's a great question, Joe I think we are we really feel supported our long term strategy of keeping a conservative balance sheet, we've actually kept a pretty sizable cash position the old sort of financial profile on the PML side, our low cost low low reliance on payers, we sort of feel like a time like this.

Ill dates that strategy as we look forward.

Would that change would we want a higher percentage of cash to revenues are lower and lower.

Adjusted debt to cap I think that.

Something we sort of Watson look to I. I will tell you as we said in the script I personally in really really heartened by the fact that we are sitting here at September thirtyth and they're not taking on net debt as a result of this crisis, it's sort of an amazing statistic and the government gets credit for that I mean, the $725 million of comps definitely definitely.

He helped us but that helps us most in April and May when it was bad we are doing much better sort of on our own now so I I personally.

Well you guys as you make a smarter with your questions and it's something we should think about but if myself I think what we're seeing today sort of validated alaska's profile going into this thing I think it was a pretty good cash position to pretty good balance sheet excellent sort of set up.

Set up for the marketplace in terms of low fares and low costs and.

I'm not thinking at the moment, we'd have a lot of changes coming out of this crisis shame, what what's what do you think actually totally agree with Brad I think we might carry a little more cash for a little while until we get.

I'm really confident in the recovery, but once we do I think we had a really nice position going into this that.

And it's worked out well for us over the last six or eight months.

Okay. That's helpful and then Andrew can.

Can you talk about when you or when you have a thinks spend on the co brand card, we will get back to where it was in 2018 and can you remind us the status of the contract between you and bank of America. Thank you.

Yes, we have we have a number of years left on that contract. We don't really disclose the exact date, but there is there is a few years left on that.

You know as we've said historically about a 1.1 billion.

Cash generated by the program.

You know what I would as I shared in my early remarks. The economy is obviously going to have an impact and you can do your own modeling on credit card impacts of negative GDP.

I think the best thing I would share with you today is that our program has continued to grow we've been flattish spend on outside holders for the last four weeks, but.

But again, its et cetera, a level that is that is okay. It's not really bad no like Andrew.

If I'm wrong, but I would like if you look at spending in the economy. This card the vast majority of the spending is not on airline tickets on some things other than airline tickets and I would expect that our current is completely doing isn't as good as any other credit card out there probably better. It's people are spending less money on trips and go into shows and going.

The movies and so credit card spending is down but I would think that our card spending is right in line with credit activity in the army Laurie well I will say, we know from speaking to the bank and others that outcome is performing very well. This is of the comic cons that luxury statements are you want to trend to get back there sometime next year or is that way too.

Thank you.

I don't plan on commenting on that I think.

Just roll holdings, commenting that the whole cash flow discussion that we've been having and the economy is sort of like how the economy doing and whats the form of credit card form of payment in relation to economic activity. It's I'm not sure we have unique insight on this one.

Thank you.

Yes, the next.

The next question is from Hunter Keay with Wolfe Research. Please go ahead.

Hi, everybody good morning.

The PSP extension if it's passed in the next few weeks, we would you contemplate.

Bringing these folks back on to the payroll, but just telling them to stay home until demand recovers to the point, where they are needed or would you just bring them back and put them to work at just burn the cash like PSP.

Is designed to be burned.

Yes, Hey, Hunter good morning, a shame.

Yeah, I think we are mindset, if we want the right level of staffing for the amount of volume we've got today and I think.

There is some provisions in the program that we have to and of course would follow so some of that is that the choice of the employee but.

You know what we have done previously is really offered.

Leaves and we had enhance some of those leaves I don't know who would go back to enhance lease structures, but.

Are we want to get back to having the right headcount for the volume that we've got and so that's our focus we've got targets for every division I mentioned in the script, we'd like to get back to pre Virgin productivity levels over time.

Thats really where our mindset is right now.

The tough thing I don't we don't there are different types of lead programs is based on the complexity of each of the professions that we have here.

Generally have a mindset that is one where we want to pay a lot of money to people to not be working.

It's a really unique sort of.

Approach that that's kind of had to happen just given everything that's going on right now, but thats not where our our basic mindset would be so we we would try to get people to come.

To continue to take leaves that they can do that and just have the right number of ft ease on staff that we need to run the operation.

Okay and as a follow up I mean are you sure that you'd have enough folks I mean, you'd have minimum service requirements through recently restored as part of PSP you probably have to you said in the 8-K, you probably recall. These four people relatively quickly are you going to pull some of the 4000 back from voluntary leaves as well.

And and two that like if it becomes a day for the question is are you going to have to rehire that bring back. The 400 folks to then bring back another 500 folks from early leave and then what sort of other costs would you incur in addition to just obviously labor costs.

To use PSP, what other friction costs arise you know I mean, we're pulling planes out of storage and incurring we're landing fees and things like that.

Well, what sort of incremental cost how do we know that getting PSP is actually a good thing for the cash balance yes six months later.

Yes, really good question I don't connect the two in terms of the recall relative to PSP. During the first PSP program. We had thousands of people on leave stirring that have an unpaid leaves during that.

Period of months as well so I really think our staffing is going to be a function as I said of the capacity we're planning to fly.

I think the downside case would be if there was another sort of.

Really.

Negative trend on demand or something in forward.

Forward months, where we currently have more aircraft than we would find that we needed at the time that.

That's something that we're cognizant could happen, it's not what we think is likely to happen right now and so.

There's not a lot of incremental friction cost due to PSP, if we want to bring planes out it's going to be because we've decided we want to offer.

Operate that capacity were well within our current requirements for.

Service right now with the currently we have so we don't need incremental airplanes to do that nor do we need incremental people right now to meet that minimum conditions.

Alright chain. Thank you very much.

Thanks.

The next question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Hi, Thanks, just.

Just with regard to fleet.

I appreciate the lease returns that you've outlined here.

What is the primary factor you're trying to solve for is it is it operating cost or is it capital and should we be positioning Alaska has like a very very disciplined capital story at this point or you just sort of biding your time to put into it.

Big order on the Max.

Hey traded Shane Thanks for the question you know, we're going to make that decision. There's a lot of factors that are going to go into it but we are going to make a base on an MPV in a return perspective.

We think we can do it in a way ultimately that also helps the piano.

And that is totally responsible.

In terms of how we manage capital I'm, there's and we've talked about this very openly there's there's a case to be made that we can replace lease content with new lease content. So.

And I know you all look at that as it is a commitment over a long term, but it's less.

Media cash out the door. So I think there's a lot of flexibility here on how we do this.

Strangely enough I think we're just we're sort of myself in that in the Treasury and fleet teams are very anxious.

To be able to go and get out of some of these pretty onerous leases that we have on the athree hundred twentys and get into better aircraft or much better weakness for us. So it's a couple three years still to fully see its way through.

But we're going to be very cognizant of how much cash are using we're going to be very cognizant of debt to cap.

Those sorts of metrics, we're not we're not giving up on any of those sort of.

Sort of historical ideals that we've had but it's both its return on invested capital.

Return story is going to be there the ROI C store has got to be yeah.

It's definitely appreciate an opportunity and I appreciate that I guess for now how should investors be thinking about the annual capex over the last over the next few years, thanks for taking the questions.

Yes, no. That's another great question I put that in sort of with Andrews in terms of forward look on unit cost as well where we are.

We we know we that folks want to know kind of what our appetite for capitalism over the next little bit we're not in a position to give you a strong forecast today and it's just because it's still in flux. It. It's we haven't made decisions yet so as soon as we do make decisions, we'll be very transparent about those and we're just not at that point, yet I guess.

I guess you have made comments, though about deposits that you have out there and no more cash would go out the door until those deposits herbs are absorbed is that still the case or has that changed.

No no.

Totally consistent with our thinking today.

We intend to draw those down before use fresh capital.

Thank you.

Excellent Thanks, Michael.

The next question will come from Catherine O'brien with Goldman Sachs. Please go ahead.

Hey, everyone. Thanks, so much for the time.

Yes, actually I have a quick follow up is doing question. So on the fleet decision what is what's the gating factor do we do we need for the Max to be flying again, you guys make the decision is it just you know less source another handful so either.

You don't have a great line of sight on what on what the new leaf cost will be what what's the gating factor for you guys to kind of pull the trigger on this.

Hey, Todd.

Peter Thanks for the question.

I think as we've been clear and consistent all along.

We love all of our airplanes, but the Athree 19, Dimitri twenty's or or uneconomic relative to others.

It's a logical time as we're recycling our fleet getting it to to best match demand.

Really figure out how do we get the best economic aircraft on the field and with the Athree hundred Twentys.

Can either shrink that upswing, we can extend leases or we can replace them with something better.

We're talking to both Boeing and Airbus, We're talking to leasing companies no surprise, Shane and I have a lot of friends. These days.

On the phone and I think what we're looking for excuse me.

Is the right set of of opportunistic.

Just to come into play of course, the mat sales to be recertified for that to be a viable candidate airplane and everything we're hearing from Boeing is positive on that front. So it certainly factors into our thinking as does the supply demand balance for aircraft in the market.

Got it and then maybe just a follow up on demand.

One of your competitors noted noted that the correlation between bookings and Kobe cases, CMP breaking down I guess first are you seeing the same thing and then if so is that is that driven by purely like parts of the country that aren't subject to travel quarantine or are you seeing more momentum on demand.

Innovation like your pilot.

Pilot test here in terms of getting people tested before flying to why any kind.

Any color there would be helpful. Thanks.

Yes, Thanks, Katy and why we think about it is really were in wave three it was like one of the beginning life to hit in the summer life three right now and we have we're very much seeing everything that outcome.

Our competitors are saying as it relates to that I think a couple of things I think number one and you hit on it is that it's really occurring more in the middle of the country will actually outside of our core network Southern coast.

Hiring a decent shape all things being equal so we're not.

So we're not seeing the impact there and I also think that there is just.

As we talked more and all the more layers of safety more people fly and when they fly they're okay to fly again I. Just think there is a little bit of positive momentum and that out you know again, we are just seeing out guests grow every single week for the last 10 weeks and.

And we have not seen that momentum slow.

Yes, thank you very much.

Okay I'm sure. This is available in public sources I.

Industry sources, as well, but bookings the bookings the last three months have definitely been increasing at a higher rate than enplanements and so I think I first there is a.

Greater disconnect between what currently.

Current Myers cases, and so forth I think as Andrew said earlier people that have flown are having a good experience are willing to come back. These data sources that are out there. The department of defense studied the I ought to study. They are it is safe to apply we totally believe that it's safe to fly and I think our customers are increasingly having more confidence fine.

So I think I don't have it.

It's it all bodes well for the future.

That's great color. Thank you so much Brad.

Yes.

The next question is from Mike Linenberg with Deutsche Bank. Please go ahead.

Hey, good morning.

Just a couple of quick ones here actually really a two part question just.

Respect your decision to block.

Black middle seats into January.

Ben you spend a little bit of time talking about the science and suggested just based on what you said that maybe there was less of a need to do it and then chain you even talked about spilling traffic. So I'm curious.

Decision to extend it is that all.

Also driven by competitive reasons, and then sort of.

Sort of a follow up on that.

Blocking that middle seat, maybe this is more to Andrew just.

Just your ability to yield manage up my sense is that you know with loads, where they were across the industry. Many carriers have really struggled to push fares up and it's true your yields are better, but I'm, just curious anecdotally or even if you can give us something more tangible about your ability to.

Hold out inventory for for a longer period to get that higher fare.

Thanks for taking my questions.

Yes, Mike. Thank you. It's a great question. So the way we look at it as we know it's safe to fly think after eight months of being in this thing ARPU.

Our personal experience and these latest scientific studies have just proven what what our experience has shown us that it's safe to fly. So the issue is that we know that I'm sure. If you talk to your family and friends and you talked to other folks that society as a whole probably is not in the same place where they are believing that it's safe to fly.

So our view is that we've got the next couple of months, where we can educate even our own employees educate customers that it is safe to fly as we slowly ease into the end of the year and so thats, how we were thinking about it I mean, it's.

Is it safe to fly right now, but we've got some some work to do just given the information out there and as we get into the new year like we said, we're going to calibrate how we're going to open up the middle seats. I think we have a good plan really early into the new year, if again given that things don't change radically from where we are today.

Awards.

The first and second quarter.

And would you consider you know if Christmas bookings are strong would you consider on some flights removing that pre January 1st week of January.

You know what I would say with everything Mike as we want to be nimble, we want to look at all the information you want to look at what's going on there right now we made a decision that we're going to block through the end of the year.

And that's been our our thinking.

But again, what will gather all the information and we'll make the.

Right right decisions every step of the way with but.

You know with our customers and with our employees in mind.

Okay, and then just the Andrew piece on ability to yield up.

Yeah I think.

A couple of things as we said we're going to be bought into January six thats, what we tell our guests and I should have confidence when they book that will be bucking those seats, but to Ben's point, we're going to be revisiting that going forward.

Our team will do what they will do and yield up on peak flights, but at the end of the day. It is a fixed prices cost the flying an aircraft and Mike.

We see the economics of the business, we much prefer to have low fares and put more people on the same departure then to add more departures. So I think you know as we go into the new yet and we continue to watch this environment.

This will be an important part of our economics and how we bring cash flows in and so more to come on that great. Thank you everyone.

Thanks, Mike. Thanks. The next question is from Brandon Oglenski with Barclays. Please go ahead.

Hey, good afternoon, good morning, everyone and thanks for heavy on sales.

Shane I just wanted to come back to the structural cost opportunities and you know I think.

I think getting back to a 2019 CASM ex just.

Just to clarify is that structured around being roughly 20% smaller and I think there was a follow up as well there will be revenue breakeven around 60% to 62% of where you are in 2018 is that also assuming roughly 20% smaller airlines.

Yes, Brian and so the way we try to articulate this is even if were smaller by 20% we want to reach those.

Unit cost goals.

I'm, not saying, we're going to be smaller by 20% our assumption for next summer as we are.

We want to get back to our pre covert levels and then grow from there and we think we've got a business model that can do that but we're going to be smart about it and we've got to see the returns in order to get there.

To the degree that we are able to approach our pre co bid size it will be incrementally easier to get to our pre co that CASM ex with the structural cost reductions that were idle.

Identifying and executing and so there could be some upside overtime as we approach sort of are pretty common size.

62 to 60% to 62% is simply.

[music].

The percent of revenue, we need to get back to relative to 2019 that any size.

In order to get the cash breakeven.

Well I appreciate that and I think you clarified as well that you're targeting $250 million in savings and we are confident on the Oneninety could you go over those last few bucket the savings because it went really fast p. Mike.

Yes, sorry, the ones that I said in the script that hadn't sort of actual.

Actual dollars attached for wages it really from the early outs in the management reduction in force.

Non wage overhead categories of at least 35 million.

Supplier rates, we have $50 million 25 of which we've already.

Secured and Thats hotels, some of our software licensing health care. Some other areas and then fleet.

It's a big one and that might be a little longer in terms of the timing productivity.

And some real estate.

Savings as well our couple of the other categories I mentioned.

Okay. Thanks, guys appreciate it thanks.

Thanks Brandon.

Time for one more question yes.

Yes. So the final question will come from Myles Walton with you. Yes. Please go ahead.

Thanks, Good afternoon.

Just one clarification one question on a clarification so the the mainline fuel efficiency up 12%.

It's been trending that direction Im just curious from a sleep.

Fleet perspective.

Can you just clarify on the sustainability of that level of efficiency and secondly on the regional as a percent of the network as you reconstitute here should we think about it going back to 10% of the network versus the 20.

20% you've been running.

Or is there any difference in changes to reconstitute the network, how you're thinking about the regional composition as well thanks.

Hey, Myles maybe I'll take both of those just abused superefficient on the fuel efficiency thing. Those three drivers. One is were relatively flying more fuel efficient aircraft. So the ones that we have part tend to be some of our least fuel efficient aircraft. Two there's just no well, they're starting to come back, but there weren't taxi right.

Really lines up for a long period of time, so were not burning fuel sort of waiting for clients to get onto the runway.

And taken lightly yeah, and then like load is the third contributor and so I don't you know as as as flights come back as people come back I would in our hopefully comes back or more off roughly comes back you'll see that.

Not perform as well and then I think you know long term in terms of what the network shakeout is it's a bit up in the air I think our focus right now is getting our mainline operation back to pre coven levels, which would put us back to the 90 10 split that we had prior weve.

We've got a couple of regional aircraft on order several years from now.

And we don't really we're not actively working on something right now different than that but the regional flying will be pretty much back to pre committed level.

Like November December so that percentage change is going to be moving around as we bring more mainline back.

Okay. Thanks, so much.

In cloud.

Already I think that concludes the time that we've got today. We appreciate everybody's interest in us and we look forward to talking with you all in 90 days time. Thank you.

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

[music].

HM.

[music].

Good morning, My name is Steve and I will be your conference operator today at this time I would like to welcome everyone to the Alaska Air Group third quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback at Alaska Air Dotcom all lines have been placed on mute to prevent any background.

<unk> after the speakers remarks, there will be a question and answer session for analyst. If you wish to ask a question. Please press star one on your telephone keypad. If you would like to withdraw the question press. The pound key. Thank you at this time I would like to turn the call over to Alaska Air Group's director Investor Relations.

Hello <unk>. Please go ahead.

Yeah. Good morning, and thank you for joining us for our third quarter 2020 earnings call on today's call you'll hear updates from Brad that 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 glut.

The global health and economic crises.

Kelly impact our business outlook. This morning, Alaska Air Group reported a third quarter GAAP net loss of $431 million X.

Excluding special items and Mark to market adjustment Air Group reported an adjusted net loss of $399 million, especially.

Special items. This quarter includes 322 million up associated with employee separation.

21 million of asset impairment charges that were triggered as a result of certain aircrafts being part of a $398 million benefit related to the care that payroll support program wage off our average day.

Our average daily cash burn for the quarter was approximately $4 million as.

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 FCC filing.

On today's call, we will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel and as usual we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in todays earnings release.

And now I'll turn the call over to Brad for his opening remarks.

Thanks definitely good morning, everyone.

It's been eight months since the initial moments that this crisis, when all airlines, including Alaska saw bookings fall off sharply Eric.

Aircraft will virtually ground to a halt and as they always do the people of Alaska and horizon rose to meet the challenge.

We identified eight critical work streams covering in areas of our business needed to change rapidly. We've built plans for each of these areas and we got to work executing the plans.

The work streams included the safety of our people and our guess the size of our fleet network in workforce.

Cost and overhead reduction as well as liquidity management.

Yes, an employee communications.

Oh, a host of commercial activities.

And working with the government and other airlines on the Cures Act.

These efforts will coordinate our project management team under the direction of Sandy.

And individual workstreams were executed by people throughout the company.

I'd like to share some data points with you demonstrate the remarkable progress our people have achieved to date.

First and most importantly, our genes sprinted into action to ensure the safety of our employees and our guess we made over 100 changes to our operation as part of our next level care program, including enhancements to aircraft cleaning social distancing mandatory mass open middle seats and guest service.

With reduced contact.

Our data shows that our employees as well as customers, who blown have very high confidence and our safety.

Second our network team called flying from 1300 daily flights prior to the pandemic to just 350 nearly overnight.

We're back to 760 points today and will soon be at 840.

Third we have historically carried about 130000 people per day you Nate.

In April that number dropped to 5000.

Our commercial team took decisive action to block middle seats drop change fees extend the lease status and communicate with guests in new and innovative ways. All in an effort to build confidence with folks who have not yet come back there.

Their efforts are working as we've seen a month by month steady uptick in the number of passengers work hearing and its future bookings are trending trending at even higher levels.

For parking aircraft and putting them into storage is more complex than most people wouldn't yes.

The Alaska and Horizon main seems park 177 of our 329 aircraft and they've now think we brought 100 and cannot be back into service.

Fifth getting our employee resource levels rise has been an all consuming effort for company leaders Union leaders and our employees.

Alan fears step forward to support our fight for survival nearly 7000 employees to short term leases of absence.

Now has over 4000 employees volunteered for long term lease incentive lines and early retirements.

Thanks to our finance team letter work to rightsize, our operations to reduce spending we reduced our cash burn from approximately $13 million per day to $4 million per day.

These heroic efforts along with the money received from the U.S. Treasury mean that our debt level net of cash are unchanged from prior to the crisis.

This is an incredible achievement and one that we believe few of our peers will replicate.

Seventh our finance legal and Treasury team captain to nearly $4 billion in new liquidity, well and well in excess of our two and a half billion dollar goal and finally, we continue to fight to maintain jobs for our people we've been extremely proud to work with labor leaders and other airlines in the effort to secure further payroll support from the Guy.

Our government affairs team has been highly engaged and they continue to be as we speak.

Hey, Ben will provide more detail on several of these areas in a moment.

In today's environment, the sequential trends from month to month Talbot clear a story of progress, but I do want to share a bit about our quarterly results in the third quarter Air group's capacity was down 55% and as he said our adjusted net loss was $399 million.

Total revenues were down 71% for the quarter, which is sobering, but it's up 11 points from last quarter and we believe that we believe it will be among the best result in the industry.

As I mentioned over 4000 employees volunteer for profit for programs that were designed to reduce our need for low as we rightsize.

Morning October 1st these individuals began their early retirements extended lease and incentive lines.

I want to recognize and thank each of them for their contributions and for their dedication to Alaska. Many of these people have been with Alaska for decades, and they are the folks who truly built Alaska. They did nothing to caused this crisis and yet they made a substantial personal sacrifice to contribute to our future.

Save a job for someone else.

I'm very proud of our finance team is doing a terrific job managing liquidity today, we have $3.7 billion in cash on hand, and another $1.8 billion and standby liquidity for total liquidity of $5.5 billion having.

Having this in place has allowed us to get through the initial phases of our response and shift our focus from survival to recalibrating and restructuring for long term prosperity.

A former leader who are used to remind running a business is like designing and building a house.

No one knows what kind of weather will have but we can build a house to withstand the worst storms and also to take maximum maximum advantage of the good weather when it comes.

We believe we've done this at Alaska nowhere like would choose the crisis, we're experiencing today, but with our strong balance sheet, our low cost and low reliance on high fares and our great service and highly loyal customers. We believe we're better positioned than any other airline to survive. This storm at the capital.

Lies on the good weather when it comes.

I want to again, thank our people for everything they're doing you with that I'll pass this over to Ben.

Thanks, Brad to start off I too like that my appreciation for the employees. When we have segment by two this month I suppose.

I spent a large portion of my career, leading our operations team. So I know the passion and dedication of our profit might workers.

We will miss them and we truly want to thank them for their incredible careers that helped shape the values of our company and I look forward to the day when we're able to ask all those work furlough to return.

Typically our third quarter call shares guidance for the fourth quarter and lays out plans for the following year, while volatility has come down relative to Q2, Theres little additional clarity by the nature and speed up the demand recovery.

Spike that we will continue to communicate candidly about what we know including the planning assumptions are shaping our thinking about the next year.

A major driver of demand recovery will be whether our customers believe that's why it's sales our operational experience in the last eight months has shown that the transmission rate quoted my team and the air travel environment is lower than in the general population.

Been said, but it's worth repeating that hospital, great help us alters our airplanes removed, 99.9% back airborne particulates and pressure as we start coming into the cabin every three minutes.

The results of recent scientific studies bolsters, our confidence that air travel is sales for the large portion of the population, especially with the additional layers of safety we have implemented.

Studies published this month determined that cabin design and airports systems, great the equivalent of over six feet of social distance between passengers, even a full flight when masks our warrant once.

One study showed that given our flow and filtration systems, only 0.003% airborne contaminants can reach any one person and.

Other studies show that it would take 54 hours of sitting next to mask wearing cobot positive passenger to catch the buyers.

They also concluded that the risk of contracting COVID-19 during air travel is extremely low compared to typical daily activities.

We are very encouraged by what our own experience and the scientific work suggests that it is safe to fly.

We continue to work with our guest every day to educate them about the health precautions that are in place and why those were not considered high risk can be confident to return to air travel.

Last week, Hawaii lifting quarantine requirements for a business with a negative covert tests, we have seen recent strength in bookings for the islands I personally either to meet with local officials and experienced a program for myself. It was fantastic feedback in the aisle. Our flight was full except for open till seats and get that done their pre arrival koby test to ensure they are in that.

Despite the evidence that flying as safe, we must acknowledge that many customers are not flying because they are not comfortable doing so.

Boost guest confidence in the near term, we will continue to block middle seats through January six. However, we are currently mapping a framework that will set the stage for the on boarding of seats as conditions support doing so we expect to bring back middle seat occupancy in early 2021, beginning with shorter haul flight.

And geography is like Hawaii required testing is already reinforcing traveler confidence.

The decision to move forward, we'll be responsive and calibrated to changing conditions things like rising cobot cases, or more restrictive state postures that could change our plans similar.

Similar to how we got it back capacity seeing higher losses, and incrementally brought back more onboard service. We recognize we have to be thoughtful and deliberate in creating Commons for I guess throughout this transition.

The load factors with middle seat block should be about 45% to 55% range, which is equivalent to 65% to 80%, 80% when adjusting for available seats only.

Blocked middle seats will continue of course to act as a headwind towards our goal of achieving cash break even results.

Turning to our planning scenarios for the coming months, our assumption is unchanged from the last quarter and expect to be about 80% of 2019 capacity by the summer of 2021 would fall pre cobot recovery to be well into 2022.

As we demonstrated in Q3, our mindset to sustain nimble and to modify these plans the circumstances of all why.

While we plan to fly 50% of prior year Q3 capacity the pace of recovery was slower than expected. So we adjusted our flying down to 55%.

Given what we're seeing in the man today, we are preparing for our operation to be for our fourth quarter capacity to be approximately 40% below prior year levels.

Corporate about 45%.

[noise] remains the case that 70 to 80000 passengers per day or about 60% of normal levels as the threshold at which we can achieve cash burn zero we've.

We believe the factors we believe the following factors are relevant for continued near term improvements as we move into 2021.

Scientific studies released will help public confidence and understanding the safety of air travel Isaac.

As expected there is strong correlation between the reopening of destinations and demand Hawaii and other warm destinations are strengthening as guest looked for work from anywhere locations and vacation destinations.

More recently, we've seen that marketing and promotional efforts can be effective in today's environment.

August we launched our first by the road promotion, which offered by one get one pricing, allowing guests to secure a full rota themselves with middle seats blocked.

Promotion was well received and demonstrated to us that marketing to Aspirationally travelers.

Forcing our safety messaging and offering the right price does have a stimulant effect in today's environment.

And lastly, the upcoming holiday travel season, coupled with a permanent removal of change fees appears to be driving more advanced bookings.

Business travel remains under more pressure than leisure, but we're talking with our corporate partners about our future with one world and other ways to support the return of business travel today.

Today, we are honored to join Microsoft and scatter Angie to introduce a partnership focused on making business travel greener, what's sustainable aviation fuels, we admire Microsoft's leadership, and we are grateful to partner with them to bring travel back in a way that cares about individual guests and the environment.

As we progress forward. We know there is significant work still to be done to ensure we have a thriving post cobot network and a business model that can drive us too and then beyond our pre corporate size I want to echo Brad Thanks to the individuals and teams at Alaska Horizon, We're working so hard to control that can be controlled at this moment, but.

With respect share today I'm optimistic that we will see our way through this crisis and emerge stronger for it and if that I'll pass it to shape.

Thanks, Ben and good morning to everyone on the call today.

My comments. This morning, I'll provide brief updates on our liquidity cash performance and cost restructuring efforts.

Last quarter I shared details with you about the $3 billion of liquidity that we have added to our balance sheets since march including the $1.2 billion.

We don't want to add long term embedded debt interest costs. If we can avoid it especially if we ultimately find we do not need it to finance losses, all of us at Alaska I want to thank Secretary Manoogian and his team at Treasury for their efforts to develop and move this loan program forward in a very short period of time.

Cares Act loan program allows for incremental drops through March of 2021 after required initial drop 10% of our allocation our three.

Our $3.7 billion of cash balance today includes $135 million from an initial draw we plan to make final decisions on how much to draw sometime after the new year.

We added the entire remaining care that loan allocation available to us to the 3.7 billion. We have on hand, our total effective liquidity as $5.5 billion, which at current burn rate is approximately four years of liquidity.

While we have some remaining assets, we can borrow against as we sit today, we don't foresee any additional liquidity efforts being required right now the next decision in front of us is whether to pay down or refinance our credit facility and 364 day term loans due in March and April of next year I'll read.

Ill reemphasize the data point, Brad highlighted which is that we actually closed the third quarter with adjusted net debt of approximately $1.7 billion, which impressively as flat with the year end 2019.

Very round dollars, we did burn 1 billion since the onset of coated however, we paid down $250 million of debt and the PSP Graham provided $750 million to fund most of our payroll over this period. This underscores the importance of the PSP Grant program, which was instrumental in protecting jobs and helping us to bridge the extreme financial detail.

Creation, we saw in the first six months of this pandemic.

Deterioration continues of course today and only continued PSD support can reliably help avoid balance sheet distraction for the industry balance sheets that will be needed to fuel future industry recovery and growth, which would we believe support and accelerate the broader economic recovery and growth needed in our country.

Turning to cash burn on a company sides adjusted basis, our $4 million of cash burn per day compares well to others in the industry. As a reminder, our burn figure has thus far included cash revenues, most cash outlays, including debt service and Capex.

However, now that we have fantastic liquidity, and we produced and stabilized our spending we will increasingly focus on cash flow from operations trends as our primary cash metric telecasts remains important but as we incur more onetime outlays, such as severance and lump sum payments to employees and potential large debt pay offs our mindset.

Is that watching total liquidity net debt and operating cash flows is more appropriate than an all in number that will be lumpier, and therefore potentially less meaningful.

Very early in the pandemic, we haven't articulated a goal to reach cash burn breakeven by years end, well I'm happy with our progress on cash burn reduction and believe we may have the best results on this metric in the industry, we do not expect to hit our target by December for three primary reasons.

First we are bringing capacity back into Seattle somewhat faster than originally planned sales.

As mentioned previously Balky middle seats caps the effect of load factor, we can achieve to a level slightly under what's required for cash breakeven and third while trending consistently positive. The return of demand has been slower than our original guess back in April which admittedly we developed with very little to go on at the time.

Given what we know today I do expect our cash burn to continue to improve during Q4.

The next several months, we expect our monthly cash outflows to be about $450 million to $475 million from up given the amount of capacity, we are planning to deploy and required debt payments.

Month to month, there will be some timing effects, but that is a decent range for the next quarter or two.

Turning back to costs in July we initiated early out programs and extended leave options for all of our front line team. We had over 700 employees take advantage of permanent early outs and over 3300 individuals take extended leaves or voluntary furloughs. This allowed us to reduce the number of involuntary sorry voluntary furloughs.

This allowed us to reduce the number of involuntary furloughs necessary in October to around 400. In addition to the 350 management positions that were permanently eliminated as it.

As a result of these programs we recorded a one time special item in the third quarter of $320 million temporary payroll savings from these decisions are expected to be $375 million in total and permanent annual savings from the early out programs and our management reduction enforce will be $132 million and.

Annually the Tempur.

The temporary cost savings begin to taper down in April 2021, and Sunset in late 2022.

Our lead programs allow us to recall in place to support the operation should we need to which would bring cost back more quickly as those employees returned to full pay and benefits. Although I will say our goal is to bring back offline and our people as soon as demand allows us to.

Beyond the actions we've taken to reduce payroll costs. We're also making progress on the structural cost reductions we discussed on the last call I shared previously that we were targeting initially at least $250 million of permanent structural cost savings to help return us to pre cobot CASM ex levels, even if we were to remain at 20% smaller company.

Several initiatives underway to help meet this goal largest of which include.

Simply replace them with larger more efficient aircraft.

Fourth we've completed the elimination of at least $35 million of non wage overhead spend.

Fifth we have identified $50 million in supply renegotiations of which we have achieved over $25 million to date from hotels healthcare providers software licensing and changes to airport vendors in rates.

And there are several other initiatives, including real estate cost savings and moving Eone hundred 70 fives into markets and the state of Alaska, where demand cannot support continued mainline flying.

I believe that these initiatives are the right first steps to begin restoring our cost structure.

So 90 days ago, we were hoping for a better quarter brought on by the end of that health crisis and carrying our guests around the country that didnt fully happen, but each month has improved since March and despite how intent. We are on weathering. This downturn, we are ultimately optimistic our guests want to travel.

We have superb liquidity as Brad outlined we have unmatched competitive advantages and we have an amazing group of 22000 people dedicated to making this company successful and with that let's go to your questions.

At this time I would like to invite analysts who would like to ask a question. Please press Star then the number one on your telephone keypad again, Thats star one for any questions well pause for just a moment to compile the QD roster.

Yes.

The first question will come from Helane Becker with Cowen. Please go ahead.

Thanks, very much operator, and thanks for your time, everybody. So I just have one question.

When when you talked about bringing capacity back faster than you.

Faster than you intended.

But you are still not able to reach.

Positive or breakeven cash flow or cash burn well why would you bring that capacity back sooner when it makes sense to not bring that capacity back just yet and we are on that.

Yes, maybe I'll start Atlanta that I'm sure Andrew will want to chime in I think one of the variable.

Variables and that is the fact that we locked middle East and decided to continue to do so through the end of the year and I think what we're seeing in some of the more peak period is there is a potential with the middle seats block, we would be spilling demand, which we really aren't in a position to so what to do and so it made sense for us to build out.

More of our pre Covance, Seattle network, a much much quicker a little bit quicker than we had originally planned to do but Andrew could add too as well yes.

Yes, Hi, Elaine I think and again the key West African Shane was sort of planned at the beginning and but.

But.

Quite confident in what's happening in the fourth quarter, and our percentage of flying and leisure markets in the fourth quarter.

Significantly more than it was last year and we're seeing a lot of good flying.

Flying out leisure destinations some destinations and of course with Hawaii up coming up.

We we were actually down 88% in Hawaii capacity in the quarter were going to.

We're going to be down only half that in the fourth given.

Given the upcoming and the testing going on so we feel pretty good about that type and nature about flying in the fourth quarter to continue to grow this and generate.

You revenue.

Okay, and then for my follow up.

For my follow up Andrew while I have you can can you talk about credit card spending and sign ups and what you're seeing there in this environment.

Yes, I think you know.

I just went back to last 10 weeks about bookings and actually new credit card accounts actually.

And Alan Alan you credit card accounts have been increasing.

Every week on average by 5%.

And as far as our overall credit card spend goes it's been stable I don't think we only disclose what percentage that is down but I will say that it's significantly better than pathogens and bookings right now about town given the economy and everything like that my personal view is that our credit card is performing quite well.

Okay. Thanks, very much thanks, Tim Thanks.

Okay.

The next question will come from Andrew Didora with B. Riley. Please go ahead.

Hi, Good morning, everyone and thank you. Thank you for the questions. My first question is for other center Andrew.

The leisure driven demanding embedded in your comments.

Yes.

You say the normal pricing activities.

You know we have just.

Just in the normal marketplace competitors doing things with Fas.

I think overall the business in a way more stable I think mostly right now.

Yes at least is focusing on bringing.

Bringing people back in my mind, just on all the people I talk with once someone has flown.

Continents in falling again materially stronger so we believe that getting passengers to fly is really really important I think overall, our average fan was down about 17%.

In the quarter, but again im not potentially seeing anything.

Out of the usual as it relates to pricing actions and Andrew spend I think like I said in the script I think we're seeing the ability to stimulate traffic with lower fares and we have this great thing with Russell Wilson, which I didn't mention that every type of vessel will suppose a touchstone or two or three.

You get a 10% discount I've heard you touched on it. So we're seeing we're seeing good good reaction to that so.

Thanks for your question.

Sure. Thank you for that and then just my second second one just for Shane but not some great color on some of the structural cost savings maybe any initial thoughts on how you're thinking about new unit costs. Once you get through the crisis, maybe perhaps relative to 2019 levels. That's it for me. Thanks.

Yes, Thanks, Andrew and I'll follow on with that I'm I'm, a big supporter of running the ball this year was.

We've got 19, that's a lot of discount, but we're happy happy that customers are getting good discounts right now.

Yes, Andrew I know everybody's interest in that we are anxious to sort of come out with.

With with something you know in terms of a target with a date attached to it but we're not going to do that today on this call I think we need a little more time to really understand where we think that the sort of capacity is going to go over the next 12 to 18 months.

And then really lock in some of these savings initiatives. So I think I total about 190 million that were very confident we've got line of sight in capturing and Weve got significantly more than that that we're working on cost restructuring will continue to come to you all with more clarity and more specificity as the as the.

Earnings call to go buy over the next couple of quarters.

Right now we are real.

Really really focused on getting you know within.

A handful of percentage points of our pre cobot CASM ex sometime next year.

We're not we're not at a point, where we can totally forecasts and give you a date on that yet.

Fair enough. Thanks.

Your next question.

The next question will come from savvy fit with Raymond James. Please go ahead.

Hey, good morning.

Regarding your comment.

And about the 450 to 470, a month cash outflows could you give us an idea of what that was in the third quarter and if it includes the cost reductions that you've outlined and also just along with that when do you expect in terms of debts in severance and like fourth quarter and 2021, just just so we can have an.

Appreciation for for the other types of cash outflows.

Yes, having so in Q3 it was less than that we have a little bit less capacity deployed.

I believe our total operating expenses were 1.1 X or something like that so I think with that it was probably 400.

Hundred for 15 or something like that so its up a bit with the incremental capacity what was the second part of the question.

Yes, I do realize that that includes that I was just wondering what are the basically.

Is any severance cash components are the cash outlays, that's not part of that core component that we should be mindful of it.

Oh, yes, so we had about $30 million and a one time.

Sort of severance lump sum that hit October.

We don't expect any more than that at this point, so that will be in our Q4 results and it's part of that number.

In terms of.

The Q4 sort of 450 to 475 and that includes cost restructure items recall.

Recall that on our our Q2 call. We had said our goal is to hit exit rate.

Savings of $250 million. So the 190 I just gave you.

Pardon me.

No exit rate basis would be in that number and anymore.

And any more we can do between now and the end of the year I could improve that a little bit.

That's helpful and maybe in other just to follow up on that the cash breakeven comment that you made about.

About 60% of passengers for and is that the.

At flattish sales than any kind of what kind of 88 hilburn are you assuming in there.

Yes ill, let Chris give some color on that.

As we prepared for this question is you've got a lot of color on it but great. Yes, we are assuming lower yields maybe.

Maybe I'm not sure what the specific planning assumption is but we are assuming pricing is just a press for a bit.

And Savi on 80, all I mean, most folks I think on the call no air traffic liability, it's really that cash.

Cash we collect in advance of of.

Sending someone on it on a trip right so over or time that mix has changed dramatically. So if you look at where we were pre cobot about 95% of our total $1.2 billion of HDL was related to tickets with a definitive departure date at 5% for related to credits like refunds and things like that well that's that mix has changed.

Just a lot more about 50 50, now so that $600 million of our $1.1 billion air traffic liability as it related to these refunds that we provide to customers over the past few months.

So thats a lot more difficult to forecast when that's going to be you. This versus the true ticket LTL. That's what we're looking at that right now Andrew and his team are doing.

Promotions to entice people to use those credits, maybe a little bit differently, but to give you. Some color in Q3 about 15% to 20% of all new bookings were you by using these credits versus cash and typically that's about a 2% total bookings as using these credits so where we are seeing a cash.

Headwind because of that.

But we're doing a lot of things on the promotional side to make sure that customers have a choice whether.

Whether to use those credits are you something else or convert those to Myles I, just giving our customers more options as we look at that so that we can avoid sort of a run on the bank and that credit Chris. It is this like you were saying that it roughly $50 million of revenue in a month. The it's not a bookings a month thats going we're not getting cash that's right.

That's right.

So that helped us.

Super helpful color. Thank you.

Thanks.

The next question will come from Jamie Baker with JP Morgan. Please go ahead.

Hey, good morning.

Follow up on top of his question and I recognize that.

Well as part of the equation, but could you simply express.

Cash breakeven on a revenue basis I don't know that.

That's how southwest and others are doing it.

Sorry, I want to make sure I understand the question Jamie.

Well you were discussing it.

Great either on a passenger on a volume days, but with lower yields I'm. Just wondering are you know.

Just put some some goalposts around the actual revenue figure or expressed as a percentage of 29 to get that gets you in the ballpark of zero cash burn.

Yeah, It's it's close to 60, 62%.

And that is going to be about and that is not negative 60 to 62 that 660 to 219 correct.

Correct, Okay perfect perfect and then second question and thank you very much for that can you give us some more color on demand trends for Hawaii in particular, how quickly do they react to the recent headlines and also what what level of revenue are you running in the fourth quarter as a percentage of last.

Year to get an American made the comment today that some of their short haul.

International each markets are sort of minus 30, I recognize that your capacity are going to be down about 50% from garments, but how should we think about the revenue component there.

Thank you Dan good because it seems like everything is pretty favorable you know at the moment.

Yeah, I think what I can tell you what what I've seen personally is that once Hawaii announced.

This program and the opening up we started to see bookings, obviously increase materially and we continue to see everyday higher bookings than than the day before in Hawaii I would just say, though that were sort of going to be having about 19 flights a day starting in November going into December only used have like 30 33.

So there is a long way to go but I think the us as you know.

It used to be double digit percentages of out capacity in revenues why wasn't it dropped down to like 2% so that.

So that at least for us as that revenue recovery goes it's a good story as it relates to bookings in general I think what's encouraging a little bit is that the close in bookings on what they've always been in getting a little bit better, but what we are seeing is people willing and more comfortable to further out and that trend has been increasing week to week to week.

So all that being said we are headed in the right direction on those fronts.

It's slow going.

Would that imply positive Hawaiian RASM.

First quarter then.

Possibly that's a great question, which we will not be answering thank you.

Fair enough old habits diehard, Thank you everybody take care.

The next question will come from Joseph Denardi with Stifel. Please go ahead.

Hi, Thanks, good morning.

Shane or Brad when you think about your capital structure post covert how much more conservatively do you think it needs to be as a result of kind of what's transpiring does this all this not change that you just kind of hope it doesn't happen again or do you think you need to run the business with some sort of significant net cash position and any.

And any thoughts there.

Yes, it's a great question, Joe I think we are we really feel supported our long term strategy of keeping a conservative balance sheet actually kept a pretty sizable cash position the old sort of financial profile and the PML side, our low cost low low reliance on payers, we sort of feel like a time like this balance.

That strategy as we look forward.

Like what would that change would we want a higher percentage of cash to revenues are lower and lower.

Adjusted debt to cap I think that that's something we would.

That's something we we sort of Watson look to I. I will tell you as we said in the script I personally am really really heartened by the fact that we are sitting here at September Thirtyth and has now taken on net debt as a result of this crisis, it's sort of an amazing statistic and the government gets credit for that I mean, the $725 million of comp definitely death.

He helped us but that helps us most in April and May when it was bad we're doing a much better sort of on our own now.

I I personally.

Excellent sort of set.

Set up for the marketplace in terms of low fares and low costs and <unk>.

Im not thinking at the moment, we'd have a lot of changes coming out of this crisis, saying, what what's what do you think actually totally agree with Brad I think we might carry a little more cash for a little while until we get.

Really confident in the recovery, but once we do I think we had a really nice position going into this that.

And it's worked out well for us over the last six or eight months.

Okay. That's helpful and then Andrew can.

Can you talk about when you or when you have a thinks spend on the co brand card, we will get back to where it was in 2019 and can you remind us the status of the contract between you and bank of America. Thank you.

Yeah, we have a we have a number of years left on that contract. We don't really disclose the exact date, but there is there is a few years left on that.

You know as we've said historically about a 1.1 billion cash.

Cash generated by the program.

You know what I would as I shared in my early remarks. The economy is obviously going to have an impact and you can do your own modeling on credit card impacts of negative GDP.

But I think the best thing I would share with you today is that our program has continued to grow we've been flattish spend on out Todd holders for the last four weeks, but.

But again, its et cetera, a level that is that is okay. It's not really bad no like Andrew.

If I'm wrong, but I would like if you look at spending in the economy. This card the vast majority of the spending is not on airline tickets on it's something other than airline tickets and I would expect that our current is completely doing isn't as good as any other credit card out there probably better. It's people are spending less money on trips and go into shows and going on.

Movies and credit card spending is down but I would think that our card spending is right in line with credit activity in the economy at large well site. We now speaking of the bank and others that Alcott is performing very well. This is Scott, yes, that's true statement.

You want to trend to get back there sometime next year or is that way too soon thank you.

I don't plan on commenting on that I think I would.

Just roll these comments in that the whole cash flow discussion that we've been having and the economy is sort of like how the economy doing and whats the form of a credit card form of payment in relation to economic activity.

Sure we have unique insight on this one.

Thank you.

Yes, the next.

The next question is from Hunter Keay with Wolfe Research. Please go ahead.

Hi, everybody good morning.

PSP extension, if it's passed in the next few weeks, we would you contemplate.

Bringing these folks back on to the payroll, but just telling them to stay home until demand recovers to the point, where they're needed or would you just bring them back and put them to work at just burn the cash like PSP is designed to be burned.

<unk>.

Hey, good morning, a shame.

Yeah, I think we are mindset, if we want the right level of staffing for the amount of volume we've got today and I think.

There is some provisions in the program that we have to and of course, what follow so some of that is that the choice and the employee but.

[music].

What we have done previously is really offered.

Leaves and we had enhance some of those leaves I don't know if we would go back to enhance these structures but.

Thats really where our mindset is right now.

The tough thing I don't we don't there are different types of lean programs just based on the complexity of each of the professions that we have here.

We don't generally have a mindset that is one where we want to pay a lot of money to people to not be working I mean, it's a really unique sort of.

So that's kind of had to happen just given everything that's going on right now, but thats not where our our basic mindset would be so we would try to get people to come.

To continue to take leaves that they can do that and just have the right number to use on a staff that we need to run the operation.

Okay and as a follow up I mean are you sure that you'd have enough folks I mean, you'd have minimum service requirements recently restored as part of PSP.

Probably have to you said in the 8-K, you probably recall these foreign people relatively quickly or you're going to pull some of the 4000 back from voluntary leaves as well and and two that like if it becomes a day for the question is are you going to have to rehire the bring back of 400.

Bring back the 400 folks to then bring back another 500 folks from early leave and then what sort of other costs would you incur in addition to just obviously labor costs.

To use PSP, what other friction costs arise you know I mean pulling planes out of storage and incurring we're landing fees and things like that.

What sort of incremental cost how do we know that getting PSP is actually.

Good thing for the cash balance, yes, six months later.

Yes, really good question I don't connect the two in terms of the recall.

Onto the PSP during the first PSP program, we had thousands of people on on leave stirring that have an unpaid leaves during that.

Period of months as well so I really think our staffing is going to be a function as I said of the capacity we're planning to fly.

I think the downside case would be if there was another sort of you know really.

Negative trend on demand or something and you know forward months, where we currently have more aircraft than we would find that we needed at the time that.

That's something that we're cognizant could happen, it's not what we think is likely to happen right now and so there is not.

Theres not a lot of incremental friction costs due to PSP, if we want to bring planes out it's going to be because we've decided we want to.

Operate that capacity were well within our current requirements for service.

Service right now with the current fleet, we have so we don't need incremental airplanes to do that nor do we need incremental people right now I mean does minimum conditions.

Alright chain. Thank you very much.

Thanks.

The next question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Hi, Thanks, just.

Just with regard to fleet.

I appreciate the lease returns that you've outlined here.

What is the primary factor you are trying to solve for is it is it operating cost or is it capital and should we be positioning Alaska has like a very very disciplined capital story at this point or you just sort of biding your time to put into it.

Big order on the Max.

Hey, Shane Thanks for the question you know, we're going to make that decision there's lot of factor.

Theres a lot of factors that are going to go into it but we are going to make it based on an MPV and a return perspective.

We think we can do it in a way ultimately that also helps the piano.

And that is totally responsible in sales.

In terms of how we manage capital I'm, there's and we've talked about this very openly there's there's a case to be made that we can replace lease content with new lease content. So we and I know.

And I know you all look at that as it is a commitment over a long term, but it's less immediate cash out the door. So I think there's a lot of flexibility here on how we do this.

Strangely enough I think we're just we're sort of myself in that in the Treasury and fleet teams are very anxious to be able.

To be able to go and get out of some of these pretty onerous leases that we have on the athree hundred twentys and get into a better aircraft or much better leases for us. So it's a couple three years still to fully see its way through but we're going to be very cognizant of how much cash are using we're going to be very cognizant of debt to cap.

Those sorts of metrics, we're not we're not giving up on any of those sort of.

Sort of historical ideals that we've had but it's both its return on invested capital.

Return story is got to be there the ROI C store has got to be there yet.

Yes, no. That's another great question I put that in sort of with Andrews in terms of forward look on unit costs as well, we're where we are.

We are we know we that folks want to know kind of what our appetite for capitalism over the next little bit we're not in a position to give you a strong forecast today and it's just because it's still in flux. It. It's we haven't made decisions yet so as soon as we do make decisions, we'll be very transparent about those and we're just not at that point, yet I guess.

I guess you have made comments, though about deposits that you have out there and no more cash would go out the door until those deposits are UBS are absorbed is that still the case or has that changed.

No no that's.

Totally consistent with our thinking today.

We intend to draw those down before use fresh capital.

Thank you.

Excellent Thanks, Michael.

Next question will come from Catherine O'brien with Goldman Sachs. Please go ahead.

Hey, everyone. Thanks, so much for the time.

Actually I have a quick follow up is blamed question.

On the fleet decision what is what's the gating factor or do we do we need for the Max to be flying again, you guys make the decision is that Joe you know less source another handful so either.

You don't have a great line of sight on what on what the new leaf cost will be what what's the gating factor for you guys to kind of pull the trigger on that.

Hey.

Peter Thanks for the question.

I think as we've been clear and consistent all along we will.

We love all of our airplanes, but the athree, 19th century, 20 or uneconomic relative to others.

It's a logical time as we're recycling our fleet getting it to to best match demand.

Really figure out how do we get the best economic aircraft on the field and with the Athree twenties.

And either shrink the upswing, we can extend leases or we can replace them with something better.

We're talking to both Boeing and Airbus, We're talking to leasing companies no surprise, Shane and I have a lot of friends. These days.

On the phone I think.

I think what we're looking for excuse me.

Is the right set of of opportunistic.

Just to come into play but of course, the Max rates to be recertified for that to be a viable candidate airplane and everything we're hearing from Boeing is positive on that front. So it's certainly factors into our thinking as does the supply demand balance for aircraft in the market.

Got it and then maybe just a follow up on demand.

One of your competitors noted noted that the correlation between bookings and Koby cases, CMP breaking down I guess first are you seeing the same thing and then if so is that is that driven by purely like parts of the country that aren't subject to travel quarantine or are you seeing more momentum on demand.

The vacation like your pilot.

Pilot test here in terms of getting people tested before fine why any color.

Any color there would be helpful. Thanks.

Yes, Thanks, Katy and why we think about it is really were in wave three despite one of the beginning life to it and the summer life's three right now and we have went very much seeing everything that outcome.

Hiring a decent shape all things being equal so we're not.

So we're not seeing the impact there and I also think that there is just.

As we talked more and all the more layers of safety more people fly and when they fly there I would hate to fly again I. Just think there is a little bit of positive momentum and that out again, we are just seeing out guests grow every single week for the last 10 weeks and we have not seen that momentum slow.

Yes, thank you very much.

Yes, I'm sure. This is available in public sources I it is.

Industry sources, as well, but bookings the bookings the last three months have definitely been increasing at a higher rate than enplanements and so I think I first there is a greater just.

Greater disconnect between what currently.

Current Myers cases, and so forth I think as Andrew said earlier people that have flown are having a good experience are willing to come back. These data sources that are out there in the department of defense studied the I ought to study. They are it is safe to fly we totally believe that it's safe to fly and I think our customers are increasingly having more confidence fine.

So I think it's it all bodes well for the future.

That's great color. Thank you so much Brad.

Yep.

The next question is from Mike Linenberg with Deutsche Bank. Please go ahead.

Hey, good morning, just a couple of quick ones here actually really a two part question just.

Respect your decision to block.

Black Middle seats into January you know Ben you spend a little bit of time talking about the science and suggested just based on what she said that maybe there was less of a need to do it and then Shane you even talked about spilling traffic. So I'm curious you made the decision to extend it is that.

Also driven by competitive reasons, and then I'm sorry.

Sort of a follow up on that.

Blocking that middle seat, maybe this is more to Andrew just.

Hold out inventory for for a longer period to get that higher fare.

Thanks for taking my questions.

Yes, Mike. Thank you. It's a great question. So the way we look at it as we know it's safe to fly I think you know after eight months of being in this thing ARPU.

Our personal experience and these latest scientific studies have just proven what what our experience has shown us that it's safe to fly. The issue is that we know that I'm sure. If you talk to your family and friends and you talked to other folks that society as a whole probably is not in the same place where they are they are believing that it's safe to fly.

Is it safe to play right now, but we've got some some work to do and just getting the information out there and as we get into the new year like we said, we're going to calibrate how we're going to open up the middle seats. I think we have a good plan really early into the new year again, given that things don't change radically from where we are today.

Awards.

The first and second quarter.

Would you consider you know if Christmas bookings are strong would you consider on some flights removing that pre January 1st week of January.

And and that's been our our thinking.

But I guess, what will gather all the information and well make the.

Right right decisions every step of the way with but.

You know with our customers and with our employees in mind.

Okay, and then just the Andrew piece on ability to yield up.

Yes, I think so.

A couple of things as we said we're going to be bought into January six thats, what we tell our guests and I should have pump and its when they book that will be bucking those seats, but to Ben's point, we're going to be revisiting that going forward.

We will do what they will do and yield up on peak flights, but at the end of the day, there's a fixed basis cost of flying an aircraft and Mike.

We see the economics of the business side, we'd much prefer to have low fares and put more people on the same departure then to add more the patches. So I think you know as we go into the new yet and we continue to watch this environment.

This will be an important part of our economics and how we bring cash flows in and so more to come on that great. Thank you everyone.

Thanks, Mike like the next question is from Brandon Oglenski with Barclays. Please go ahead.

Hey, good afternoon, good morning, everyone and thanks for having me on.

I just wanted to come back to those structural cost opportunities and you know I think getting back to a 2019 CASM ex <unk> just.

Just to clarify is that structured around being roughly 20% smaller and I think there was a follow up as well you'll be right.

Revenue breakeven around 60% to 62% of where you are in 2018 is that also assuming roughly 20% smaller airlines.

Yeah, Brian and so the way we try to articulate this is even if were smaller by 20% we want to reach those unit costs.

Unit cost goals.

I'm, not saying, we're going to be smaller by 20% our assumption for next summer as we are we want to get back to our pro pre coven levels and then grow from there and we think we've got a business model that can do that.

But we're going to be smart about it and we've got to see the returns in order to get there.

The degree that we are able to approach our pre cobot size it will be incrementally easier to get to our pre co that CASM ex with the structural cost reductions that were idle.

Identifying and executing and so there could be some upside overtime as we re approach sort of are pretty common size.

62 to 60% to 62% of simply.

You know the percent of revenue, we need to get back to relative to 2019 at any size.

In order to get the cash breakeven.

Well I appreciate that and I think you clarified as well that you are targeting $250 million in savings and we are confident on the Oneninety could you go over those last few buckets of savings because it went really fast p. Mike.

Yes, sorry, the ones that I said in the script that hadn't sort of actual.

Actual dollars attached for wages it really from the early outs in the management reduction in force.

Non wage overhead categories of at least 35 million.

Supplier rates, we have $50 million 25 of which we've already.

Secured and Thats hotels, some of our software licensing health care. Some other areas and then fleet.

It's a big one and that might be a little longer in terms of the timing productivity.

Some real estate savings as.

Savings as well our couple of the other categories I mentioned.

Okay. Thanks, guys appreciate it thanks.

Thanks Brandon.

Time for one more question yes.

Yes. So the final question will come from Myles Walton with you. Yes. Please go ahead.

Thanks, Good afternoon.

Just one clarification. One question is on the clarification. So the the the mainline fuel efficiency up 12%.

It's been trending that direction and just curious from a sleep.

Fleet perspective.

Can you just clarify on the sustainability of that level of efficiency and secondly on the regional as a percent of the network as you reconstitute here.

Should we think about it going back to 10% of the network versus the 20.

20%, you've been running or is there any.

Or is there any difference in change as your reconstitute the network, how you're thinking about the regional composition as well thanks.

Hey, Myles maybe I'll take both of those just to be Super efficient I'm as fuel efficiency things three drivers. One is were relatively flying more fuel efficient aircraft. So the ones that we have part tend to be some of our leased fuel efficient aircraft. Two there's just no well, they're starting to come back but they weren't taxi.

Really lines up for a long period of time, so were not burning fuel sort of waiting for clients to get onto the runway.

And taken lightly yeah, and unlike loads is the third contributor and so I don't you know as as as flights come back as people come back I would and our hopefully comes back or more off roughly comes back you'll see that I'm not perform as well and then I think you know long term in terms of what the network shakeout is it a bit up in the air I think.

Our focus right now is getting our mainline operation back to pre coven levels, which would put us back to the 90 10 split that we had prior we've got.

We've got a couple of regional aircraft on order several years from now and we don't.

And we don't really we're not actively working on something right now different than that but the regional flying will be pretty much back to pre covered level.

Like November December so.

Any change is going to be moving around as we bring more mainline back.

Okay. Thanks, so much.

Well.

Already I think that concludes the times that we've got today, we appreciate everybody's interest in us and we look forward to talking with you all in 90 days time. Thank you.

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Q3 2020 Alaska Air Group Inc Earnings Call

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