Q1 2021 Alaska Air Group Inc Earnings Call
[music].
Good morning, My name is Thea and I will be your conference operator today at this time I would like to welcome everyone to the Alaska Air Group 2021 first quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback at Alaska Air Dot Com all lines have been placed on mute to prevent it.
The background noise. After the Speakers' remarks, there will be a question and answer session for analysts if you wish to ask a question. Please press star one on your telephone keypad, if he would like to withdraw the question press. The pound key. Thank you I would now like to turn the call over to Alaska Air Group's managing director of Investor Relations. Emily Halverson. Please go ahead ma'am.
Thank you good morning.
Thanks for joining us for our first quarter 2021 earnings call. This morning, we issued our earnings release, which is available at all of the Investor about Alaska Air.
On today's call you'll hear updates from bad.
As CEO and he will be joined by Andrew and Shane for commercial and financial update.
The others of our management team are also on the line to answer your questions. During the Q&A portion of the call.
Our business and outlook continue to be significantly impacted by the global health and economic crises that are underway in the first quarter of Air Group reported an adjusted net loss, excluding special items and mark to market adjustments of $436 million.
And we went from burning approximately $4 million of day last quarter to cash generation of approximately $1 billion of day in March under the same definition. We believe we are among the first in the industry two of achieved this milestone and it marks a critical point and recovery of that enables us to turn our attention to the future our.
Our comments today will include forward looking statements about 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.
We will also 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.
Thanks, John and good morning, everyone. I appreciate all of you joining us today for an update on it.
Yes.
This is my first call as CEO and I'm sure some of them.
My thinking of work.
I'll spend my time energy and focus over the next several years.
For the Alaska for 17 years I've come to know.
For a company with all of them are.
People and our culture our book.
Our safety and operational excellence.
Mutations for customer service.
National discipline and track record.
Over the years, we have truly embraced the approach to delivering for all stakeholders.
We will continue to nurture this approach and bill coming out of legacy.
We also need to grow and do better in other areas and I look forward to developing.
We managed to reduce our climate impact.
Ensuring that Alaska is the place where everyone feels they belong.
Unlocking the power of our brands and the.
Short term however, our primary focus is on the rebuilding our business pre COVID-19.
Covid levels returning to profitable growth.
While Q1 results are far below normal levels.
That inflection point during this pandemic and it appears that we have turned the corner in several key areas I will touch on.
And the moment.
Before I dive into results I wanted to welcome Constance My view on her role as Chief operating Officer for Alaska Air.
<unk> Gary Beck.
Hostess has been with the company for 10 years and is an incredible leader.
I know that she will do a fantastic job and the simple rule.
Onto the quarter recap.
As momentum with vaccines has picked up and travel restrictions of east there has been a strong return of leisure demand. We've seen p<expletive>enger employments moved from being down 65% in January debt down 35 per cent and April today's sustained future bookings are roughly 80% of.
Pre COVID-19 levels.
On the strength of these increased bookings and solid cost management against our plan, we posted positive cash flow in March excluding the impact of the PSP funding.
Fourth quarter operating cash flow inclusive of funds received under the PSP was positive $167 million.
I'd like to take a moment to thank the employees at Alaska and horizon for helping us get to this point they've handled this long downturn with an incredible determination to keep our company moving and ready for a strong return of guess protecting the health and safety of our guests and employees. While also protecting the financial health of our business has only been per.
Possible because of the collaborative efforts of our employees and Labour leadership.
During the quarter our teams of advanced several strategic efforts that are important to shaping our future.
First on March 31, we celebrated our official entry into one world. It was the culmination of a year of work by over 400 people across our company and I want the specifically thank the.
T and e-commerce teams for their incredible efforts to make this possible.
The other teams spend months working on this as well, including our crews and frontline teams, we're helping guests navigate the changes we put in place.
Second we received for 737 Dash nine Max aircraft in our play.
Moving to operating service, despite the temporary grounding, which we expect to be resolved in the next week or two these aircrafts have been very well received by our guests and our crews by the end of 2022, we won't have another 39, Max nines, replacing the Airbus <unk> hundred 19, and <unk> hundred Twenty's never retired.
From service last year.
The Max is 25% better fuel efficiency, lower maintenance cost and significant revenue opportunity with its higher gauge the.
Fuel efficient given the Max will also help us reduce our climate impacts of lowering emissions.
And on that note. We've recently made newest the screen ability commitments, particularly focused on claim of impact and racial equity.
On the climate, we announced yesterday, our long term commitment and roadmap the net zero carbon emissions by $20 40, we all.
The same near term goals for 2025 focused on being the most fuel efficient use of airline building on our culture of efficiency in every part of our system and continue to electrify our GSE fleet.
In February we announced specific 10 minutes for diversity equity and inclusion including the following goals.
Ensuring the diverse representation of our front line as reflected in our senior leadership team cultivating a truly inclusive culture and continuing to support education is a critical element of equity.
We know we have not done enough in this area of the last 10 years and that we still have a lot of work ahead of us, but we're committed to making Alaska placed in which everyone feel they belong and can be their best.
And to underscore the importance of climate and the commitments, we tied a portion of the executive at risk of pay to achieve the diversity goals and our climate related goals are not part of our performance based pay program. The every employee participation.
As we look for the remainder of the year and beyond we are focused on several important areas for.
Maintaining balance sheet strength, our adjusted net debt today is $1 6 billion down from $1 7 billion at the end of 2019.
As we bring capacity and costs back on line, we will also prioritize reducing debt levels in the back half of the year.
To the extent of the recovery is choppy or Decelerates, we know having a strong balance sheet will provide foundational strength.
Second we are focused on returning capacity out of deliberate and responsible rates.
As we laid out last year, we will fly 80% of 2019 levels. This summer.
We plan to return to 100% no later than summer of 'twenty to the.
This trajectory is consistent with our preference to seek higher load factors than we're seeing today and it allows us to make progress with pilot transition training to of mostly all Boeing fleet.
Third we are developing a roadmap roadmap back the profitability our fleet plan and cost restructure program of our essential pieces of this road map. Our recent entry into the one world will be instrumental and we look forward to sharing of framework for the commercial contribution it will bring as we return to our pre COVID-19 size.
In our forecast today Q2 is approaching P&L breakeven.
We anticipate turning to profitability in Q3.
And it's worth reminding the nearly 50% of our traffic and revenues types of California on the pre Covid basis, and then as you know, California remains largely closed today so.
The state reopen there will be a powerful near term enabler for our path back.
As we manage these three important aspects of our business. We're cognizant that we may be faced with the reasons to modify our plans. Let me state unequivocally that we have the balance sheet cost structure and cash on hand to adjust our capacity trajectory and will do so if conditions merit.
For example, if we saw more robust demand for an acceleration of the business recovery. We will adapt the same is true if we see competitive threats to our network for future growth.
I know I speak for the whole management team in saying that turning the momentum we're experiencing today into earnings over the long term is imperative.
The work we are focused on and this quarter's results are steps in the right direction.
I truly believe Alaska is well positioned for the future.
And with that I'll p<expletive> it to Andrew who I know you of missed hearing from in the last few quarters.
Thanks, Ben and good morning, everyone and it is great to be back speaking with you about the commercial side of our business.
We've still got a long climb of head the momentum that we've seen in the past few months is really exciting as we've started to see demand return.
First part of revenues came in at $797 million down 57, and a half per cent from the year over to.
We also saw sequential improvement in each month of the quarter with January revenues down 63 per cent February down 15, 9% in March down 52 per cent p<expletive>enger employments, followed a similar trend of.
Our first cl<expletive> cabin performed particularly well with revenue is down 42 per cent for March which was 10 points better than system average low sales, resulting in high paid load factors were the main drivers.
Our overall revenue results looked to be amongst the strongest in the industry. Despite as been noted, California demand remaining seriously and paid to provide perspective on this the 54 per cent reduction in California of bookings during the first quarter. This is 2019 were down nearly two times that of the non.
Non California system average.
We expect California to experienced the step change in performance by mid June which is when the governor is targeted to fully open California's economy.
Capacity was 33% below 2019 levels, which was three points worse than we'd expected. This was primarily caused by cancellations from the severe winter storm across the Pacific Northwest of the Presidents' day holiday for the quarter, our load factor was 52%, which is up seven points from Q4 nine points more capacity.
Aided by a move to unblock the middle seats the game in January.
This has been really helpful. As demand returns in March 41 per cent of our mainline departure is carry over and above what a load factor of caps would've allowed if middle seat blocks had remained in place.
Taking a look at the quarter load factor of accelerated from 42 per cent in January to 49% in February and to 62% of March notwithstanding we added 20000 more daily seats in March compared to January of this momentum has continued into April where we expect to get close to a 70% load factor may is also.
Building at a higher rate in April was at the same time last month.
Turning to bookings recent data indicates employment trends should continue to improve we began the quarter in January with an average of around 60000 bookings of diet for about 43 per cent of 2019 levels bookings step to approximately 60 per cent of 2019 levels in February and then 75% in March the sequential improvement.
Movement in year over two year bookings trend has continued into April.
With demand of p<expletive>enger employments up as much as we're seeing and the opening of the middle seats I do want to highlight that air Alaska Listens survey for the first quarter continued to show.
For the 80% of guests give us excellent or very good ratings of health and safety. Additionally, our customer satisfaction scores remained higher than they were pre pandemic.
I'd like to personally thank our frontline and crews for making this happen and ensuring our guests feel safe and comfortable even though the loads of Bain, increasing and we no longer block the middle seats in the main cabin.
Touching briefly on pricing yields for 11% below 2019 levels. This quarter in part because of the promotional efforts that we used to stimulate demand for January and February which are traditionally our weakest months of the of the pandemic, making them, especially some.
Price volatility is likely an issue we will continue to face of this recovery.
As we look towards the summer, we are seeing yields improving with demand while our biases towards flying full of planes. We are clear eyed about the need to increase yields as we navigate back to a pre COVID-19 size.
The bright spot during the last year as being a loyalty program total mileage plan revenues were down just 32% during the quarter and cash brought in from the bank to compensate us for miles earned on our card surp<expletive>ed 2019 levels in March credit card holders also showed modest growth since the end of 2020.
Increasing by about half of point.
As we see demand return of our teams.
Has started to focus more acutely on the commercial opportunities in front of US we are picking up from where we left off in 2019. If you will three immediate opportunities for 2021 of them beyond have already been put in place.
Firstly tapping into the unique benefits of our American and Oneworld alliances the.
The increased breadth and depth that we can offer guests the next level, creating value from both the network revenue and loyalty revenue perspective, secondly, implementation of the new RM system, including fare cl<expletive>es that of line without Oneworld partners and affords us additional selling cl<expletive>es in the premium cabin and then thirdly greater.
Access to managed corporate accounts as we now provide much greater utility without the domestic partnership with American and our global partners with Oneworld loyalty benefits.
We finally resolved the longtime issue for our corporate guests by now having a seamless global program in place.
As we look forward, we believe the continuation of the return of demand supports our plans to add back capacity and our strongest hubs in the Pacific Northwest and Alaska, then ultimately, California as it begins to relax restrictions.
Business travel remains severely depressed during the quarter and our quarterly surveys of corporate customers reinforced our belief the business travel will ramp to about 50% of normal levels by the end of this year that said, we've seen a full 0.6 point improvement in our share GAAP in the year over two in the first two months of this year.
For our managed corporate accounts.
System with all of share we remain committed to fly approximately 80% of 2019 levels in the second quarter.
And total revenues are expected to be down 32 per cent to down 37% versus 2019 for the second quarter, we expect load factor to be between 70 and 75%.
While the pandemic has thrown a litany of challenges that why I do believe that as vaccines continue to roll.
All of which has resulted in demand being less and less impact impacted by guess case, Kansas excuse me. We have line of sights of rebuilding a business out of network product phase loyalty program and commitment to guest service and care are all configured to bring us out of this even stronger than we went in and with that of pocket of any share.
Yeah.
Thanks, Andrew and good morning, everyone.
I will touch on our cash flow of liquidity and our balance sheet as well as cost and expectations for the second quarter.
This quarter has felt very much like a turning point away from purely trying to survive.
In total in rebuilding our business, bringing people in flying back and beginning to chart a path back to profit and growth.
While we reported an adjusted net loss this quarter of $436 million, we were able to generate positive GAAP operating cash flows for the quarter.
And positive adjusted cash flows in March even excluding cares payroll support grants.
Our air traffic liability increased by $224 million for 21%, reflecting the step change improvement of demand. The industry is currently seen travel credits now represent 37 per cent of our ACO down from 53% at year end.
We exited the quarter with an improved adjusted net debt result, which was down from $1 7 billion at the end of 2020 to just under $1 6 billion and our debt to cap increased only one point to 62%, which we believe will be the high watermark for our debt to cap metrics and that we will see it reduce from here.
We also continue to hold three and a half day in dollars in on hand liquidity.
Given booking trends in our balance sheet health I anticipate that we will begin reducing our cash balance by retiring debt during the second half of the year also ultimately moving towards on hand liquidity in the range of two to $2 $5 billion.
Having heard from Andrew about the commercial progress we saw in the quarter. Let me turn the cost performance. We had several areas of good performance and some we need to drive more improvement in <unk>.
Adjusted non fuel operating expenses were $1, one 4 billion.
An increase of $43 million or three 9% sequentially versus Q4, 2020, while capacity increased 8%.
As mentioned for the quarter, we saw strong cost performance in several areas of the business as we beat the cost plan, we set out for our divisions air.
Areas of particular strength included of overhead spend productivity in our airport ramp and aircraft mechanic groups for their progress against long term structural cost savings and regional flying unit costs, which were nearly flat year over two with especially solid cost performance at horizon.
As we bring back capacity further we now need to work on improving our crew productivity, which is challenged by recall training our fleet transition and flying that is not balanced by crew base relative to our pre COVID-19 schedule.
Speaking of recalls for a second we were able to welcome 1500 additional employees back from the this quarter we.
We are excited to have our employees back and appreciate what they've done to support the company and their colleagues during the worst of most of uncertain periods of the downturn.
Our primary area of cost headwind right now our airport costs as the material share of these costs are not variable with volume in Q1 airport costs were down just two 6% and 27% of your departure of volumes and we continue to see pressure in this area in Q2.
Airport leaders worked great partnering with the industry last year to manage these costs down and given the have received additional funds under the American Rescue Plan Act. We are anxious to work with them to use these funds to offset cost again in 2021 as they were able to in 2020.
In Seattle, specifically, we have a unique $30 million cost headwind versus 2019 related to the sunsetting of our lease provision. The previously provided for sharing concession revenues as part of the lease agreement the carriers agreed to in 2018.
I also want to share some additional context on two other cost categories maintenance expense and variable pay expenses regarding maintenance, we're not actively deferring maintenance on our operating fleets and today, we are operating of our entire regional and our entire Boeing fleets due to this we won't have the pent up maintenance backlog going forward.
And as such we expect relatively smooth maintenance cost through the year.
And lastly, more as a reminder than anything we continue to utilize our longstanding performance based pay program to align employees on the goals that are key to our short and long term success. I believe me may be the only airline right now with continued incentive pay accruals and in the quarter, we accrued $33 5 billion for our monthly operational calls program.
And the potential payout under the annual Pvp plan early next year.
Looking ahead, we expect continued sequential unit cost improvement with an increase in Q2 of 15% for 17% versus 2019.
As I just mentioned our cost forecast includes an <expletive>umption that employees will continue to earn of payout under the performance based pay program and it also includes the three point headwind specific to Seattle Airport costs, we expect the sequential improvement versus 2019 to continue throughout the year as more capacity comes back and as we make gains towards the struck.
The cost initiatives, we've outlined in previous calls we do expect to return to pre Covid unit costs or better at some point in the next several quarters.
Lastly on guidance I expect Q2, GAAP operating cash flow will be approximately $450 million to $550 million, which reflects an improvement of $2 million to $300 million versus Q1 solely <expletive>ociated with the recovery of the business. This guidance is inclusive of the grant portion of the third cares Act of P. S.
P program.
To close we are proud of the work of our Alaska and Horizon teams did this past year to manage through the worst depths of the pandemic induced crisis and we are now hopeful that we can completely focus from here forward and rebuilding our network and our margin profile than growing in returning to balanced capital allocation.
We're fortunate to be well positioned coming into the initial part of recovery.
The strong balance sheet that should continue to improve throughout the year, we have a competitive advantage in our cost structure that we will continue to work to improve over this year index and we are on the path to get all of our folks back ready to welcome guests as they get fine again.
With that let's turn to your questions.
At this time I would like to invite analysts who would like to ask a question to peso and the number one on your telephone keypad now again Thats star one for any questions well pause for just a moment to compile the Q&A roster.
Okay.
And our first question will come from Andrew The Dora with Bank of America. Please go ahead.
Hi, good morning, everyone and thanks for the questions.
First question for per Andrew just wanted to.
Touch on Hawaii, and there's clearly a market opening it's all leisure, but what percentage of your ASM will be here in 2021, and do you think it will have better worse or the same margins relative to the system as compared to the pre pandemic.
Okay.
Hi, Andrew I'm, not going to comment on margins, but Hawaii for the next little bit here as you get about 15% of our capacity and what we have seen is that the and the same with Mexico, a little bit is that the testing and all the requirements. They have seem to be working fairly smoothly. So demand in Hawaii is solid.
And how does the competitive response on those on those Hawaii routes.
Yeah.
I'm not as far as competitive response.
Specifically, what are you referring to the competitive capacity.
Oh, I see well what I can tell you is is that from where we sit in L. A loyalty we've been very good we think by the summit will be up to our pre pandemic frequencies of about 32, a day and you know.
Given where we focus our flying we feel very good about the states and it's performing well Andrew This is Bert I think we of the perfect product for Hawaii to compete.
Got a strong first cl<expletive> product, we have a premium product that people love and.
Generous main cabin.
With great service and and we're starting to bring our product back so.
We are we have the perfect product to compete on our Hawaii.
Routes.
Okay, and just secondly for for Shane I know of in the past Alaska has had.
Has hedged fuel a little bit more from our using of a call option does insurance do you of any hedges on right now and are there any internal discussions on maybe stepping stepping that back up today, given where fuel is kind of thanks.
Hey, Andrew good to talk to you Yeah, we actually never did anything different with our hedging program throughout the pandemic.
So we were over hedged last year, obviously is capacity came way down and we had already put a lot of positions on for last year I think right now we're back to our normal cadence about 18 months in advance of the quarter. We start layering on hedges up to about 50 per cent of expected consumption 20 per cent out of the money.
What we've done for the past several years strangely enough. We did ask ourselves should we change our program or do something differently.
Just in the past several weeks and all of the the data that we looked at suggest that we really like our program out of it is and we don't plan to change it from here for it.
That's great. Thank you.
Thanks, Andrew.
The next question will come from Myles Walton with UBS. Please go ahead.
Thanks, Good morning.
I was hoping you could just touch on the California, reopening and I know, it's only going to capture a little bit of a for the June quarter.
But as you look to the bookings trends to the July and August are you seeing the population moving in advance of day to day kind of sitting on the hands waiting for for final confirmation and Moreover.
Moreover, what does it imply just early reads about what youre going to do with the network and into <unk>.
Yeah.
Yeah, I think Myles I think you know.
Allophone, you're slowly coming back, we're obviously seeing an improvement in bookings.
We feel pretty good about the way we've structured out network about a fifth of al I S sense in the second quarter will be in California, and we're still going to be down 50% of capacity.
So we have plenty of room on the airplanes and I think you know, we just didn't see increasing trends but.
But it'll come June will be the real tell tale about how big that step changes.
Okay and one quick.
Right.
Or maybe one quick one was on the loyalty you mentioned the one world.
We're going to lay out of an economic framework of countries from framework for you.
Date, but giving you your planted a seed I'll ask you the water at a little can you can you comment on how much of that economic contribution of framework would be.
Indirectly or directly through the royalty versus onto the network.
Yeah, we're gonna come of tight and comment on that a little light of diet of obviously international travel is basically net.
To nothing.
But we both domestic and international and I think overall certainly on the loyalty side, you're going to be that's a very very strong area for us corporate business. Another very strong area for us and then of course the incremental network.
P<expletive>engers from international and of course, just al joined the domestic partnership with American as well so good things there.
Okay.
Yeah.
The next question will come from Savi <unk> with Raymond James. Please go ahead.
Hey, good morning, everyone.
For the crisis.
Working on getting pre tax margin, 13% to 15% I wonder if he can provide an update on your kind of the ability to get there eventually and especially the business demand doesn't kind of fully recover to pre crisis levels in 2022 of 2023.
Thanks Savi.
These are some questions to get to talk about the future profit margins that reflect the sort of pre COVID-19 level I, we have it.
Ben mentioned in the script, the roadmap back to profitability and as you know.
A long time ago, we said, 10% of as a minimum threshold and we've talked a lot about 13 to 15 is a normal sort of level that we think of appropriate in the industry.
To the degree of it the economic backdrop sort of helps support those levels. We certainly expect to be one of the top margin players in the industry and we do want to get back into that range. I think it's a little early to talk about like you know when that could happen and if it is clearly going to happen.
I keep thinking we'd like to get through this sort of initial pent up demand surging into the back half of the year to see more business travel kind of shapes up to your point.
And then I think we'll have a better picture of ultimately where margins may shake out, but we're not abandoning that goal at all we think long term.
It's the place the industry can and should be and we should be amongst the leaders from a margin perspective.
That's all for Shannon and maybe if I can follow up just a little bit on your comment about kind of getting back to that and then getting to like it through to the two and a half day on liquidity target of just wondering what the logic behind kind of at that level versus most of something else.
Yeah, No. It's look it's a little bit judgment and instinct and.
You know if there was another unexpected big step back.
Don't Wanna be scrambling, so we've been talking a lot about this if if if cash flow generation continues to improve into the Q3 and Q4.
Vance book He was a good business travel comes back we could.
See ourselves going on the lower end of that I think what we've committed to internally right. Now is no lower than 2 billion coming out of this year, we have a big capital of commitment next year and so we want to be mindful of that as well savi, but but were well above our normal sort of a need for cash right now.
I don't know if will ultimately go back for one to the one five and that's something that I think will be a.
Sort of thinking about making decisions about the next six months or so.
Alright, thank you.
Thanks for having.
The next question will come from Joseph de Nardi with Stifel. Please go ahead.
Oh, Thanks, good morning.
Andrew how effective.
Is the Alaska at monetizing customers outside of the airplane you. All obviously are pretty effective with with bank of America I'm curious what do you think the opportunity is beyond the co brand partnership.
Yeah, you're talking about really merchandising and up selling that type of thing.
The growing too.
Sure. Other partnerships are just finding other ways to use data to.
Yeah kind of market your loyalty customers outside of the the credit card.
Yeah, we we we've been doing a lot of work on the digital side on the I S. Dot com, we've become experts in promotions over the last six months and the team is getting very sophisticated of how we go about doing that in the programs. We do that we also have other things like premium cl<expletive> is going to.
Become of cabin, just like first cl<expletive> and we see opportunity. There you know of first cl<expletive> product now is what we called J cl<expletive>, which historically it was air starting corporate customers are going to have greater access and I think we're working on a number of things and as <unk> shared in the script will lay more of this out.
The move deeper into the year, but we have a lot of revenue upside benefits outside of the core coupons ticket that we're working on.
And then Ben you mentioned one of the strategic priorities is maximizing the value of the brand I think is what you said that piqued my interest a shockingly. So what did what did you mean by that thank you.
Yeah, No I appreciate it Joe.
I'm, a big believer in Alaska, and if you look at the strength, we have in the Pacific northwest of instead of Alaska and the loyalty of love for our brand I. Just think there is a huge potential and.
Unlocking the brand more than we have in California and across the country. So.
This brand is powerful when people get to know and when people fly us They love us They love our people who do just the I.
Wonderful job every day and so I just think there's there's a lot. This brand can offer when once people get to know it more.
Yeah.
Thank you.
Thanks, Joe.
The next question is from Duane sending work with Evercore ISI. Please go ahead.
Hey, thanks.
Shane you talked about some accruals I think for for hitting your operations target as well as maybe some profit share.
What are the circumstances under which you would be paying for profit sharing early next year.
Hey, Duane good to hear from you, yes, so our PDP plan always has multiple multiple components profit is the typically largest component out of that program and we don't expect honestly the payout under that particular metric we didn't change the threshold target of Max. So we would have to hit our full year pre tax margin of five <unk>.
Were sent to pay out for profit but.
But we also have operating cash flow goals are in the in the program. This year, we've got carbon reduction goals, we've got cost related goals around productivity and safety goals and the the company is our folks are doing a really good job against each one of those right now so.
So those of the potential areas I think that we see of potential payout.
That's great I wanted to make sure I wasn't reading too far into it and then maybe just.
You know across the network is there anything you're seeing on a revenue basis. That's up at this point relative to 2019 and I wondered if you'd talk about bookings into the state of Alaska. Thanks for taking the questions.
Yeah. Thanks Duane.
The the network, obviously, it's stronger in some areas and others.
We're not at the prior pre pandemic load factors, we have a couple of regions now that are into the 80 percents, but of course, the phasing of the yields are not where they were back in 2019. So overall cross sell network revenues of building a.
The state of Alaska.
There's obviously incremental capacity coming in this some of that.
We feel really good about our network for the summer and we love our brand and we've been marketing it well so we see Alaska being a good story in the summer for us.
Thank you.
The next question will come from Helane Becker with Cowen. Please go ahead.
Thanks, very much operator, hi, everybody.
Thanks for the time.
So for your question Dan I'm wondering if you could tell us how you're going to measure the carbon goals for.
For your profit sharing how should we track that or how are you watch the more importantly, how are you tracking that.
So oh.
Diana.
And the second so it's really a part of the climate of Atlanta, We have two short term goal of two goals one of the long term goal of mid 2040 for <unk>.
Arbain emissions targets. These are all of the data speak to that in the second than the short term goal.
Which is being the most pure fishing airline in the next five years, which is what Shane was referring to we've tied our performance based pay program, where we're going to measure carbon impact per ASM. So that's how we're gonna measure of that short term goal of every employee of the company is going to be measured on that that'll be 10 per cent of the payout for our PPP, but Diana could you share a little.
More on the 24 day of how we're going to do that.
I'm sure I think Helane was asking.
Clarifying the line you were just asking about the PDP goal and are in the in our and play based pay plan, which is as Ben said pounds of C O two per ASM.
Right exactly like I, just trying to figure out how you're going to measure that's the that's the answer right pounds of C O two per day.
He said all of the lower.
And it's based on fuel.
So we set of target based on our I'm looking at a bunch of the day of families in our budgeted for you'll use and we are aiming to reduce the carbon emissions from the year over year from what we would predict what the flat.
Okay. That's very helpful. Thank you and then my other question is I'm wondering yeah.
Completely unrelated to environment Keith.
Andrew could you to like a bridge to how you're thinking about raising yields and I know, it's you know in part based on demand but.
How are you given the lag between bookings and pricing how should we think about you know first trending this summer.
And the bridge from maybe where you are true too where you want to be which would be say pre pandemic levels sure yeah.
Yeah, well I, a couple of things on yield debt the.
The net of facts Helane as you know you can push yield up with more volume of business travel and to date, that's really significantly down and you can push yield off when flights get full of.
And so you're exactly right, we've built our base with bookings that would during really low booking periods and stimulation of getting a good base.
So what we're seeing right now.
Is that you know as we move forward into the second quarter and certainly into the third quarter, we're bringing in new traffic and you've heard others comment and it's the same for us too that the debt the yield an average fares coming in in summer right now for our peak flights are actually higher than 2019, So I think you're going to see a show of its stable climb, but I will say.
That's a lot of this is dependent on business traffic and of course capacity. We all know what everyone's flying in May we sort of see June but beyond that we haven't seen PREPA schedules load and that will also dictate on what happens with yields.
Great. Thanks, very much Andrea Thanks Kim.
Thanks, so much.
The next question will come from Jamie Baker with J P. Morgan. Please go ahead.
Hey, good afternoon, everybody can you be a little bit more of a specific as to the milestones you need to achieve before you.
Again, returning capital to shareholders.
Obviously acknowledging the PSP restrictions that are that are in place just wondering what internal metrics for milestones youre looking for.
Hey, Jamie it's Nat Pieper.
As you know taking care of our shareholders has always been of core priority for US is as we run our business and I have to take the opportunity to remind you that we're proud of and we didn't issue equity per dilute our shareholders to raise funds through the pandemic and we want to restart shareholder returns as soon as the.
It makes sense.
Like most things here.
We have a checklist the complete before doing so and and these items won't be a surprise for your balance sheet strength, the getting debt to cap back in its target levels of positive cash flow and sustained profitability. So really once been on our board gives us an a on the checklist I'd anticipate reengagement in that era.
You're right that we've got government restrictions as well on both buybacks and dividends until September of 2022 due to the PSP.
Triumvirate and we'll balance that too.
Okay. That's helpful. I appreciate it in the second you know your comments earlier about for.
First cl<expletive> yield momentum.
I found that interesting the transcon premium market continues to improve from of p<expletive>enger perspective, you know you've got Delta of 76 for US now that are flying with the what I call sort of the pseudo suite product meant is getting the refresh is there anything happening in the premium transcon market debt.
Might make you revisit your decision to exit or are you still happier than ever with that decision.
Yeah.
So I think that's what you're referring to like the lie flat seats, but here's what I would tell you about on the first cl<expletive> cabin you know way our product is made for the conditions that we have today you know we have 12 in 16 states.
The largest pitch for in non life at the seats in the industry and we've been really focusing on selling demand into those seats and Ben mentioned before of Hawaii has been a very strong point for us on the Transcon right now you know even if you look into.
Sort of May al capacity was down 70% because the demand is not there right now so we're seeing first cl<expletive> performed.
On a Hawaii flights on our north south price and that sort of thing. So it's just been the perfect product and people are willing to buy up right now with good low fare. So lots of good news story and Jamie This is Shane all of this.
On the actual like no we're totally happy with our decision to not have moved into that market. It makes sense for certain carriers to do it it didn't make sense for us we'd have to sell three quarters of those $1000 of better it's not the model, we have and we don't really like selling thousand dollar fares anyway, we'd like to make a lot of money so selling lower fares. So we are.
We're feeling very good about our decision.
The strong answers on both topics, thanks, gentlemen take care.
And the next question will come from Catherine O'brien with Goldman Sachs. Please go ahead.
Hey, everyone. Thanks for the time.
My first one for probably for Shane on your Capex outlook I just wanted to confirm that 150 of 200 million is growth Capex and that's not net of any financing on aircrafts from Alaska. The order book and then based on the deposits. The Ari has for from Alaska, and I'm guessing some negotiations around purchase.
Price you know given the Max grounding and your new order when do you work through those deposits and what will Capex look like over the next couple of years.
Yeah, Thanks, Katy and I'm Gonna have a net help out on this but I'll I'll answer the really hard won the first yes, it's gross capex it's not.
Good day.
Net.
Awesome delegation.
I think in this year with the PDP balance in training as we talked about in previous quarter. When we made that order all of our 2021 obligations related to it are taken care of so very little if any.
The cash out for 2021 airplanes in 2022, we've been public with the Capex number of 1 billion three of billions for and that's 31 airplanes coming in 2022, we have as part of our negotiation with Boeing restructured our PDP pool of bit and so we'll be using that leverage.
Appropriately as well, so we're comfortable with where that sits.
And we're also comfortable even though that is a big requirement in 2022, we can achieve that and still get our balance sheet strength back to the levels that we want to retain.
Got it and then and then maybe one for Andrew It sounds like there's definitely more to come on this but but the question on American and Oneworld partnerships, just like a higher level of theoretical question.
As international incorporate ultimately start to recover and any potentially see your corporate share improve.
A couple of some of the new RM changes you also spoke about should we expect Alaska to just be a higher yield carrier ultimately post COVID-19 versus pre COVID-19 kind of assuming maybe all else equal on the leisure side of the business just for ease of the question.
Yeah. Thanks Katy.
My view is absolutely, yes, given the things that have been put in place of.
That give us access them on the corporate side I do believe that our share will grow even as I said already seeing even on low numbers in the first part of this year that will attract high yielding traffic in the business demand returns.
Great. Thanks.
Thanks Katie.
Your next question will come from Hunter Keay with Wolfe Research. Please go ahead.
Hey, good morning, everybody.
All of it.
So Ben the last June you made a prediction that 'twenty one 2021 revenue would be down 20 to 35 per cent, which was actually the amazingly pretty pretty good guess for today.
Day.
I don't know how you did I knew that bad but.
Given your track record are as you look at 'twenty two.
It'll be up.
Relative to 19.
You know what what I'll say that it's it's all of that the ops background of after that.
Hopefully with the with the for.
Financials.
No you know what I have done the way we've looked at stuff as we try and be realistic with what we see so you know.
As we look at the this fall it's hard to see what's exactly going to happen, but we can make some solid predictions. We know leisure demand is coming back for us pretty much of a 100%. We're at 25 per cent of business right. Now, we probably will see a step change the business demand by the end of the year as you know the vaccines rollout in business for life businesses relaxed or the restriction.
So that should double there should be 50% of is what we're predicting for business demand, but by the end of the air.
And so we should see it much higher than for the first and second quarter. So we should be getting close to where we are in.
In 2022 of them.
Not going to give you a number of but.
But but we feel good about 2022, and we're trying to set up ourselves in 2021 just to.
Solidify the road back the profitability get all of this transition of training done so that we can fire on all cylinders in 'twenty two.
Okay.
And then Shane.
Just to follow up on Jamie's question, a little bit you talked about balanced capital allocation, how do you think of.
That term is going to change from pre COVID-19 of post COVID-19, rather than paying some nominal dividend is.
Is it maybe hey, this makes more sense to think about investing in the product of a little bit more post COVID-19 or or or.
We're doubling down on the repo of I don't know whatever it might be or just paying down debt like how does the term balanced capital allocation change in two years all of it was in 2018 2019.
Yes. These are the eyes.
Always love your questions you guys, usually prompted us to go back and think about things a little bit more of this isn't something that there's a little bit of off the cuff I want you to know that.
I don't you know I'm guessing, it's gonna be a tweak more than you know overhaul in our basic approach you know historically its been get the balance sheet to our target range in.
In the make sure we're growing at an appropriate rate for it to 8% annually.
And then you know.
The fund pensions are robustly and then make sure we're returning to shareholders and we sort of likes to set up where we had of dividend and then we topped off with share repos and I think that's our default as we go forward I know, it's not like and sexy or something if you know because it's not exotic or new I do get the question, though the there.
Certain areas of the business that you know coming out of Covid.
I'll see if the the market ex the patient has changed from a customer perspective, certainly things around cleanliness and sort of a feeling of safety, where we're making investments and although none of those are things that we've been doing this past year and I'll, just stick with us and I don't really view that as necessarily the capital allocation, but.
You know I think it's it'll it'll our mindset is mostly returning to kind of where we were before.
We will adjust as the as we learn things going forward.
Anyhow, Yeah, that's kind of where my head is at on that right now yeah. No. That's great. That's helpful. Thank you everybody.
Thank you for the next time.
Oh go ahead of the net.
Question will come from Michael Lindenberg with Deutsche Bank. Please go ahead.
Hey, good morning, everyone. I guess just to hear one of Hussein where are we on the secured loan with the cares Act. The second one I may have missed it but I know you had drawn down of piece and there was like another $1 7 billion of them.
So the Este, where what's the status on that.
Yeah.
You got it you got it right Mike.
Mike and how you get to keep all of this stuff straight because sometimes we have to we struggled too but yeah. We had to take a portion of that loan down by law initially of about $135 million that remains outstanding.
And then we have access to another $1 7 billion through May.
I don't see really any scenario, where we'll tap our access that $1 7 billion.
But we Havent tell me so we havent formally made a decision on that quite yet.
Which then leads to me the asked that I think the plan was that royalty would feature into something along those lines and if you don't tap. It are you still considering loyalty or maybe I can answer the question. It sounds like you're done with everything on the financing side is that right.
You got it.
Great Great and then just the my second question for you.
Andrew.
Andrew You gave US you know of little sliver of information on your improvement in corporate share and I realize you know the March quarter of 2021 is probably not all of that representative of a normal quarter because of Covid, but the fact is either of the American agreement I believe has now been in place I think for almost a year maybe it has been a year can you just give us.
Maybe some other quick wins you know like in the past you used to talk about whether the number of p<expletive>engers connecting on a daily basis or you know in the past we've heard airlines say three to four of five load factor of points are attributable to the code share agreement et cetera anything else that maybe you saw you know in the earlier part of the agreement although again.
You realize it came into place in Covid.
Yeah.
Thank you know more to come on that Mike I think you know just the networks and the demand and everything but here's what I will say is that.
From a joint contracting perspective, there's been overwhelming engagement of corporate contracts wanting to jointly contract with us and American given the joint utility an opportunity we'd give them.
We've seen very positive and strong guest feedback from our guests around getting back of American and their ability of accrual and redeem miles we have full access back behind.
You know from the Pacific Northwest through mid connecting hubs in the U S and even California through Chicago. So there's a lot of good things, but to your point until demand in the the the water starts flowing through the pipes, we want to see the true benefit, but we're ready for it when it comes.
Fair enough great. Thanks, everyone.
Thanks, Mike.
The next question will come from Dan Mckenzie with Seaport Global. Please go ahead.
Oh, hi, Thanks for squeezing me in here I guess just.
A question on the balance sheet targets just following up on some of the prior questions I'm wondering what the timeframe is in you know in the back of your mind to get to that target and I guess I'm just trying to reconcile the step up in Capex next year with you know where you want the balance sheet to be ultimately.
Dan its Matt.
Think of as we move over the next 12 to 15 months and obviously the.
There is revenue and positive cash flow coming in as part of that and <expletive>umptions, we're making as we see it but I see US you know by the latter stages of of 20 to being in the region that we want to be from a debt to cap perspective, and that's inclusive of the capex requirements. We've discussed for 'twenty two.
Yeah.
Got it Okay, and then as we move past 2022 as you know you've got the step up in Capex, how should we think but now about what a normalized capex would look for you guys in the in the context of afford the 8% growth.
Hey, Dan that's of Great question, we let us come back to you on that I just wanted to ask for in the middle of the fleet transition I just want to make sure. We've got really really good data on how many planes are going out and coming in in 'twenty three in 'twenty for as we shift the the schedule around but I think we basically need.
Two of replace 60 aircraft over the next couple of years, and then we need to to add about 10 to 12 units of year.
Relative to our pre Covid mainline fleet types, which was $2 35.
In order to kind of maintain that that range. So I'm just I certainly know all of the math, but I don't want to make sure. We get you attack the answer on it it's a good question.
Very good okay. Thanks, Thanks for the time guys.
And at this time there are no further questions I would like to turn the conference over to Ben Minicucci for any closing comments.
Thank you everyone for joining us if you of any other questions. Please reach out through our air folks have a great day, and we'll talk to you next quarter.
Thank you for participating in today's conference call. This call will be available for future playback at Alaska Air Dotcom, Ladies and gentlemen, you may now disconnect.
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