Q2 2021 Alaska Air Group Inc Earnings Call
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Okay.
Good morning, My name is Sia and I will be the conference operator today at this time I would like to welcome everyone to the Alaska Air Group 2021 second quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback and Alaska Air Dot Com all lines have been placed on mute to per.
And any 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 1 on your telephone keypad. If you would like to withdraw the question press the pound key.
I would now like to turn the call over to Alaska Air Group's managing director of Investor Relations Emily Halverson. Please go ahead.
Thank you Sarah and good morning, Thank you for joining us for our second quarter, 2020, 1 and earnings call. This morning, we issued our earnings release, which is available at Investor Day, and Alaska Air Dot Com on today's call, you'll hear updates from Ben Andrew and Shane and several others of our management team are also on the line to answer your questions during the Q&A portion.
And of the call.
Our financial results published this morning reflect a clear step forward and the recovery of our business and our second quarter Air Group reported and adjusted pretax loss of 3 per cent.
For the first time since February of 'twenty, and 'twenty monthly adjusted pretax margins turned positive in June at approximately 14%.
These results exclude any cares act payroll support program benefit.
The pace of recovery during the quarter drove approximately $840 million and cash flow from operations inclusive of the $489 million of cares Act payroll support program grants received.
Our comments today will include forward looking statements about future performance, which may differ materially from our actual result.
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 and today's earnings release or where do you plan.
Thanks, Emily and good morning, everyone.
Results were published this quarter showed and we are successfully rebuilding our company and returning to profitability.
Our second quarter pretax loss was 3% my name is close to breakeven and as we had initially forecast during our Q1 call.
Margins improved significantly during the quarter as we exited March with a 41 per cent loss and close to pre tax income.
And 2%.
Q2, adjusted pre tax margin is the best and the industry amongst carriers, who have reported so far.
This quarter, we hit several milestones that validate our strategy is working.
This milestone was our return to profitability exiting the quarter with solid double digit margins.
Is that our business returned to positive cash flow generation of $351 million, excluding any PSP grant funding.
Third we use our strong liquidity position to begin to delever, bringing debt to cap down 6 points from the prior quarter to 56% and lastly, with a strong return of passenger demand our productivity productivity levels rebounded to near 20 and 19 levels.
Underlying these achievements is a dramatic return and leisure demand and it began to gain momentum and March to a lesser extent business travel demand has been increasing more recently as well air.
The other groups passenger and plan has progressed from down 34% and April to down 18% in July we are consistently flying and about 110000 passengers per day and forward bookings are approximately 85% of 2019 normalized levels This progress and our second.
Quarter results give us confidence that the worst of the downturn is behind us, but the impact of the Delta variants may pose some risk and the recovery trajectory to date, we are seeing no signs of demand slowing, but we will continue to watch booking trends carefully so that we can appropriately matched capacity with demand.
With that in mind, our plan is to return to 100% of 2019 flying levels by no later than the summer of 2022, however, given that the recent surge and demand has been consistently strong and has not shown signs of slowing and we may accelerate a return to pre COVID-19 levels Accordingly.
To create flexibility for that faster ramp up and capacity, we are planning to reactivate approximately 10 Airbus aircraft and begin flying them. This fall and winter. This temporary return of several Airbus airplanes and allows us to create capacity quickly and protects against unforeseen events that could be outside of our control such as.
And as supply chain disruptions.
Last quarter, we spoke about deleveraging our cost structure fleet plan and commercial payer wants to move back to a path of sustained profitability quickly.
It's clear from this quarter's financial results that our approach to managing the business is working.
For Q2, we expect our pre tax margin load factor and unit revenues to be near the top of the industry as a result of our disciplined approach to capacity.
With growing passenger counts our productivity has increased 1.5 times between March and June and is expected to be within a few points of 2019 levels and July and beyond this sets us up well to further close the gap on 2019 CASM ex levels.
As we look forward to the next 6 months, we expect to deliver double digit margins throughout the third quarter and high single digit margins and the fourth quarter. It's also worth noting that the gap between our 2021 and 2019 margins as closing each quarter I'm proud of how quickly we return to profitability.
And how as Shane will detail, we have begun reinforcing the fortress balance sheet that has been a hallmark of our business for many years.
Our financial strength sets us up well for sustainable growth in the future.
Impressively, our operation performed near the top of the industry and on time arrivals and completion rates, even with the rapid return and traffic during the quarter.
And our Seattle hub, where our flying is essentially back to 2019 levels already we have found and entry level labor pools are limited, making hiring a challenge, particularly for ramp workers.
And this staffing pressure along with record breaking heat waves during the quarter have put stress on our operations get through these challenges we delivered for our guests with carrying service creative solutions and teamwork and want to recognize the incredible efforts of our employees across the operation, including airports round handling contact centers.
And flight flight operations and maintenance team, many of whom have covered extra shifts to keep our operation and guests moving as peak summer travel got underway, even our back office management employees and all levels have jumped in to help the operation and the past couple of months.
1 other things I truly love about this company is our culture and how our employees support each other and take care of our guests no matter what it takes.
While it is inevitable and we will encounter new challenges and uncertainty as the recovery advances our momentum continues to build our measured deployment of capacity allows us to maximize financial results, while allowing our operations to scale up successfully.
It's exciting to see air group's progress as we rebuild our network and operation.
And with savings from cost and productivity initiatives and reinforce our strong balance sheet.
I'm confident that this is exactly the strong foundation and we need to further grow our partnerships with non world and American literature, and $730.37, and see order and launch upcoming commercial initiatives and with that.
I'll turn it over and Andrew.
Thanks, Ben and it's great to be with you all again.
And my comments. This morning are going to center around 3 areas first we're gonna be talking about our second quarter revenue performance.
And I'll focus on a sequential monthly improvement and revenue versus quarter over quarter. So that the trajectory of that revenue recovery is clear.
And that will provide capacity and revenue guidance for the third quarter and and lastly, I'll be touching on revenue initiatives that are getting ready to take effect or will be rolled out and the future to further enhance our revenue performance.
Starting with revenue this quarter, our second quarter revenues were $1.5 billion down 33 per cent from 2019, but nearly double the revenue we generated in the first quarter.
And that's been share this reflects material increases and passenger volumes as well as sequential improvement in yields this.
And this quarter, we flew 21% below 2019 capacity levels with load factor is climbing from 70% and April 75% in May and 86% and June this acceleration and put us just above and load factor guidance range for the quarter and we expect load factors in the mid eighties for the rest of the summer.
And more of our guidance and a few minutes, our RASM was down 15, and a half per cent for the quarter, but the improvement from the beginning of the quarter. This is the and it was dramatic and RASM was down 25 per cent and April 18 per cent in may and only 5.5% in June.
Much of this improvement was driven by passenger volumes, but yield also played an important role, which improved 8 and a half points during the quarter from down 14% and April to down 5 and a half per cent in June.
Mileage plan revenues, including Commission revenues from our co brand credit card program and award redemption revenue showed particular strength during the quarter collectively mileage plan revenues represent nearly 20% of total revenues and were down just 9% versus the second quarter of 2019 with June down just 9.
Tenths of a point.
Bank Commission revenues were particularly strong for the quarter up 7% versus 2019. Additionally.
Additionally, we saw credit card acquisitions for the quarter exceed those of 2019, we're encouraged by our loyalty program performance and it's clear that our guests are excited to engage with that program as they return to travel.
So turning to our network and strong sequential revenue performance was enabled by our network teams rebuild strategy.
Air Group has returned to approximately 80% of its pre Covid network size, but we prioritize Seattle garlic and.
Given the strength of demand here, our Seattle hub capacity and Q2 was approximately 2% higher and in the second quarter of 2019.
And it came also restructured the Seattle hub to gain access to greater flow traffic, which has helped fuel this growth.
As of July our Pacific Northwest Flying is only down 4% from 2019.
We expect to continue to grow and Pacific northwest capacity from here.
And Hawaii capacity has also been being returned more quickly than system average and was only down 7% and the second quarter from 2019.
We've reallocated from Hawaii flying across different markets, which includes adjustments to frequencies and both California, and the Pacific Northwest, which has proven to be a positive move.
Our California capacity was down 40% and the second quarter, reflecting the reality that demand and the status as being amongst the weakest in the nation.
As we shared last quarter, we will add back capacity to California as demand returns, which we believe has now started.
During the first half of the year. There was an 8 point load factor gap that existed between out of California, and non California flying and with the state. We are in mid June I can report a GAAP is fully closed and the past several weeks.
California, and load factors, improving we're experiencing relative stronger pricing and yields on flights that touch, California, and now better than the rest of the system on a year over 2 basis.
And with our entire network our priority is to continue to match supply with demand and we fully expect to have returned 100 per cent of pre COVID-19 capacity to California sometime in the first half of 2022.
Even though system capacity remains below 2019 levels, we have been adding new markets to air network to maximize revenues as the recovery takes hold and we've seen a shift in demand during the pandemic to getaway destinations and cities with lower cost of living and a recent focus on growth and places like Boise Austin and floor.
And due to this reality.
The beginning of the pandemic, we will have either commenced or announced over 50 net new markets, which reflects the shifting demand landscape you know and that work.
Bookings momentum remains strong and stabilizing at about 85 per cent of pre COVID-19 levels. This level of demand is consistent with our capacity plans, which are also approximately 85 per cent of pre COVID-19 levels and support our objective of returning to 80% plus load factors and pre pandemic yields.
On the business travel and front, we've been encouraged at what appears to be and acceleration of the return of business travel and in fact over the past 3 weeks out indirect corporate bookings have reflected 40% to 50% recovery of 2019 levels and we're optimistic this will continue to improve similar.
Similarly, direct corporate bookings that utilized easy b's were over 50% recovered and the second quarter ebay's users generally skew geographically and towards the Pacific Northwest and state of Alaska customers up from.
A good indicator of recovery trends and small and medium businesses.
We mentioned on our prior call that we expected business to recover to about 50% by the end of the year, but with recent trends, we expected to reach sustained 50% better ahead of that.
And I also mentioned last quarter, 1 world and our partnership with American have opened the door to greater access to corporate travel just to give you a sense of our progress against that opportunity to date over 90% of Alaska is top tier corporate accounts have either executed or are expected to execute a joint contract with Alaska and.
Oregon, which will also they travel is greater access to flight options more competitive fares and seamless elite guests benefits. Additionally, we will soon be working with several PMC and a much deeper way. We've spent a fair amount of time over the last few quarters getting ready to fully leverage this distribution channel, which will ensure we are well positioned.
And to get at least our fair share of corporate traffic and business travel recovers.
And sure we will be competing on a more level, playing field and I'll have more to share on that soon.
With this backdrop I'll turn to our third quarter guidance.
Capacity, we plan to fly 17% to 20% below 2019 levels given the strength, we see and summer demand passengers are expected to be down just 15% to 18% and load factors will improve to 82% to 85% revenue is expected to be in line with capacity down 17% to 20%.
2019, which means our unit revenues will be close to flat.
Looking beyond this year I've shared that our largest share of corporate travel you.
And your revenue management system, along with unique benefits available to us as part of 1 world.
Critical to our return to sustained and profitable growth.
Our team has and the process of sizing these and new commercial opportunities with a directive to deliver at least $300 million of incremental annual revenue to our pre COVID-19 revenue baseline we plan to provide a deeper look into these initiatives and our expected delivery timeline at a future best day event.
And the next stages of this recovery play out and I look forward to bringing clarity to our investors who are eager to hear about our growth plan.
June was a turning point for us and delivering and an adjusted pre tax margin of over 14% gives me great confidence that our airlines revenue and cost model is configured to return us.
And the industry, leading margins as we climb out of this pandemic and with <unk>.
That I'll pass it over to Shane.
Thanks, Andrew and good morning, everyone.
And as our results this quarter indicate the initial recovery of our business has been rapid and strong.
After a deep loss in Q1, we saw margins improved substantially throughout the quarter, posting and the double digit margin and June that Ben mentioned non.
And fuel cost increase just 9% versus Q1, while capacity increased 29% and our revenues increased 191 per cent.
Our results are solidly amongst the best and the industry, which is worth noting particularly given the California was relatively later to reopen and then the rest of the country.
Our results underscore the strength of Alaska business model and our ability to execute other company.
My comments will focus on our financial performance cash flows and liquidity cost performance and our plan for the rest of the year.
Beginning with cash flows and liquidity, we generated $840 million of cash flow from operations this quarter, which is inclusive of $489 million and payroll support grants.
Excluding PSP grants, we generated $351 million of cash flow from operations of the business.
Most of the cash flow improvement was driven by E mail growth, which ended the quarter at $1.5 billion.
$385 million of R. A T. L represents travel credits, which guests continue to utilize for purchasing tickets in the quarter 100, and the $85 million of travel was booked using credits versus our normal $40 million a quarter pre pandemic.
Our on hand liquidity at June 30 was $4 billion up from $3.5 billion in March we shared last quarter that we had plans to begin retiring debt and the second half of the year, but accelerated that plan given the pace of recovery of cash inflows.
Debt retirement, and the quarter totaled approximately $570 million, including the repayment of our $135 million balance under our cares Act loan. We have now closed that facility and the underlying collateral that originally secured the facility has once again unencumbered.
Or just a which is our mileage plan and program.
We expect to end 2021 with around $3.5 billion and on hand liquidity, but will continue to reduce this balance throughout 2022.
Not yet determined a new normal level of on hand, cash and the future and I do expect it will be somewhat higher than what we held pre pandemic.
The debt repayments. This quarter has been shared improved our debt to cap by 6 points from 62% to 56%.
Worth, noting that our adjusted net debt levels dropped to approximately $725 million this quarter given the excess cash we have on the books today, if we were and if we reduced cash by $1.5 billion to retire debt our debt to cap would be at 47%, which is equivalent to when we entered the pandemic.
I share this only to give a sense of how strong our balance sheet is as we move into the recovery.
We do plan to use cash to pay down more debt this quarter, including our $425 million 364 day term loan.
Going forward, we will move from focusing on adjusted net debt, which was an important metric for us during the depths of the pandemic back to focusing on debt to cap and net debt to EBITDA.
Turning to cost our cost execution was solid this quarter as productivity levels ramped.
Adjusted non fuel operating expenses were $1.2 billion for the quarter up 9% from Q1, while capacity increased 29% sequentially as I mentioned a moment ago.
We saw productivity levels rise from 42% below 2019 levels in March to 15% below 2019 levels and June and we expect July to be within a few points of 2019 levels.
Our Q2 unit costs were up 10, 4% versus 2019, which was better than our mid June guidance and was helped by $15 million and 1 time favorable adjustments to wage and benefit related expenses.
During the quarter, we also accrued 300 or excuse me $34 million and expenses related to our performance based pay incentive plan.
As many of you know our approach to incentives is unique and the industry and we continue to see about the value it has and driving clarity and alignment throughout our business on the goals, we need to achieve to produce strong results and the company over the long term.
Also during the quarter, we were able to finalize 3 labor agreements, including the new wage agreement with our horizon pilots and 1 year contract extensions with Alaska's flight attendants, and dispatchers and I'd like to thank our employees and their IV T. A S. A and tw representatives for their diligent work to develop and ratify these agreements.
Looking ahead to be and of the year I expect that our CASM ex will continue to progress towards 2019 levels, even though we're not fully back to 2019 capacity by year end with mainline approaching 2019 levels as we exit the year.
To recap our expectations for the third quarter, we plan on flying 17% to 20% below 2019 capacity revenue should be down in line with capacity, resulting in unit revenues that are approximately flat to 2019, we expect unit costs to be up 10% to 12% similar to our Q2 performance given the relatively modest capacity increase quarter on.
And for quarter.
Given these ranges, we expect to achieve double digit margins for the third quarter.
Cash flow from operations is expected to be between zero and $100 million for the quarter.
Sequential decline and cash flow from operations is primarily driven by no PSP grant inflows and normal seasonality that we expect to see and ACL, which tends to decline and the third quarter.
Before we move onto questions, we want to express our appreciation for all the employees, who have tirelessly contributed to our success and recovery as you've heard today folks and our operation and have been working incredibly hard.
<unk> financial results that we are excited to be sharing with you today would not be a reality without the hard work of the 22000 employees, who bring our airlines to life each day and.
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 press star and the number 1 on your telephone keypad again, ladies and gentlemen that star 1 for any questions. We'll pause for just a moment to compile the Q&A roster.
Yeah.
Okay.
And our first question will come from Catherine O'brien with Goldman Sachs. Please go ahead.
Hey, everyone and thanks, so much from the time.
Hum.
Hey, guys.
So your June <unk> cash flow came in quite a bit better than initial expectations in part driven by better forward bookings, but your capacity cut from the third quarter is only like 2 and a half points narrower and second quarter.
Is that the Max capacity you could produce given the fleet changes you've made over the last year or is the demand uptick we're going to see that more and higher loads and yields.
Hi, Katy and yeah way out capacity is sort of where it's going to be for the third quarter and so the loads and the yields and what's going to drive the revenue performance.
And so when you say the capacity is where it's going to be does that mean, that's kind of the Max in terms of head count and and fleet availability.
Yeah. That's that's that's correct al capacity guide because what we've tried to do when we set this up cost neuro I certain revenue does not so much that we've set this up so that we've got a very solid handle on air costs with a good level of capacity because there is room for growth on the yield front and the load factors and so that's why we're gonna be from the third quarter in that range.
And I share their kidney.
And I'd, just add and I think we've talked about this before we do want to get back to 80% plus load factors on a sustained basis, we're not looking to see a lot of variation as we've moved from peak the shoulder and.
And of this pent up demand and that were seen in the summer. It was we didn't know how much of that would fall and follow into the fall. So I think we've been pretty methodical about capacity and that's how we've set up head count for the third quarter, but we are going to reactivate. These 10, Airbus and if a if they come on line and it looks like there is opportunity to use them the demand and there we will deploy them, but it'll probably be.
Fourth quarter from that.
Okay very clear and then and then just from my follow up and like most of the industry. It's reported so far.
<unk> capacity cuts to narrow a little bit and the third quarter versus to Q, but CASM ex inflation to pick up a little bit sequentially is that all just ramp up cost tied to bringing on more capacity.
Or what's driving that and how should we think about maybe some of those ramp up costs flowing or not falling into the fourth quarter. Thanks. So much for the time guys.
Yeah, no. Thanks, Katie I'll and I'll speak to that a little bit I think there's a there's a little bit of Q3 cash.
Cost that is ramp up getting ready for a Q4 and next year.
But a couple of notes we outperformed our Q2 guide handily and we did have this benefit of $15 million and 1 time items and they're all the also other areas like medical came in way under our original forecast, that's a little bit hard to forecast right now with when people are going to go in and to the Doctor So volumes were down.
So some of that isn't in our Q3 guide we don't expect 1 time items were sort of expecting medical to normalize, but the biggest driver for us sequentially and selling expenses are now coming back and a big way.
Asm's were only up a few points quarter over quarter, but but passengers and revenue are up $25.30 per cent quarter over quarter. So we're starting to see commissions and credit card expenses rise also and the third quarter. We will have our full catering complement onboard so more people getting more food and beverage and <unk>.
Similar to where we were pre COVID-19. So we've got those are all variable costs are not structural and I'm not worried about them at all but they're coming back with with demand and then.
All coming back and the third quarter pretty strong.
Makes sense. Thanks, so much.
Okay.
The next question will come from Helane Becker with Cowen. Please go ahead.
And thanks, very much operator, hi, everybody and thank you very much for the time I'm sorry. My first question is related to something you said chain and thank you said that you were seeing bookings and.
And then about $185 million worth of bookings are using credits.
Versus 40 million pre pandemic.
As you think about going into the third and fourth quarter and and that would.
And working out those travel credits are you going to get back to that 40 million level or is there a new level that we should think about.
Hey, Ali this is Chris.
Yeah that $40 million level. This year, because obviously the remaining travel credits are much more elevated over where they were pre pandemic. We've got about 25 per cent of our total ATL and Shane mentioned and travel credits and store may and most of those do expire at the end of next year. So we expect those to be you.
And at a pretty heavy pace the remainder of this year and then as we get into 2020..2 we would expect those to start to normalize that.
Okay, and then it normalizes back to around $40 million.
Well I mean, that's hard to tell I mean, that's just what it was and yeah. We do have we do have the element of no change fees anymore, and so it may be higher than it has historically been but it will definitely level off from where it is now.
Okay and then just for my follow up question.
I think.
And then you mentioned.
That.
You're having a hard time hiring.
Ramp workers and I guess other non union or maybe they are part of the union, but other.
Other workers, so how should we think about like attracting people to the profession.
To the airline industry in general.
And if they are unionized and you can't really starting pay or can you raise starting pay so that you can attract people.
And does that lead to wage inflation for Ya.
Yeah, Good morning, Helen and it's a great question I think our I think this is a national issue had hearing a lot of companies talk about about this about this labor shortage.
I'd say the only place we're seeing it now and we're not saying with pilots or flight attendants are a lot of labor groups are where we're seeing it is really at the entry level.
<unk>, particularly and Seattle, there are spots across the country, but particularly in Seattle So.
And so what we're doing is really looking at the market I think we want to be prudent about this and we're looking at the market. We're looking at but what it might be in September and October when the stimulus and unemployment runs out this thing needs to find its water level. So we're going to approach slowly what we've done now and our operations team has done just a phenomenal job with some incentives.
To to attract workers and so we're doing fine now, but and it's just something that's on our windshield and you know I don't.
We know where our where that number is going to be for just a few more months.
Okay. That's helpful. Thanks, guys.
Thanks, and why the net.
Question will come from Duane <unk> with Evercore ISI. Please go ahead.
Hey, Thanks and and.
Congrats on this.
Outlook only because you gave it and I apologize for asking you this because.
You know you you gave good disclosure, but just just on June 14% can you can you put that in context like what is it June.
Typically looked like relative to kind of the rest of the second quarter.
Alright.
Yeah, and so are going out and give you some context and maybe look back at 2019.
And the June 14 per cent at this time.
About 10 points lower than say it was and 2019. So June July August tend to be our highest margin months and there theyre typically and the twenties.
Got it I guess I was.
Asking relative to the other months of the quarter because it just it sounds like you're saying you saw much better kind of trajectory much better kind of sequential build in.
And margin you know then than you normally do.
Yeah, Duane it's Andrew excuse me I think the best way to describe that as the capacity was fairly even in April may and June but what you saw with load factor is going from 70% to 86% and yield declines from down 25 to 5 and a half so the revenue and volumes and really make the difference there.
Quarter.
That's great and then just just with respect to <unk> and and this might just relate to what you. Just said maybe you can speak a little bit to kind of the visibility.
And coming in and and kind of the advanced kind of the advanced book yields because it felt like.
You know the industry needed to overcome.
The advanced book yields coming into <unk>.
But they are and a much better place coming into <unk> and maybe you could just comment on like your stage changes because this is listen this is not a massively long haul network. This that's contorting to be short haul like flat RASM and <unk> feels like a great outcome.
Yeah. Thanks Duane.
No.
And I don't know ask stage, but that's not really the story I think to your point and what we're saying is and and honestly as I look out and that's why we share flat RASM.
From what we've seen today al you possession position looks good and and a much better than it was and the second quarter and then and the bookings are coming in well I think on the business fast side the environment is still weak.
Just to be Frank the leisure is much better, but I suspect as business travel demand returns I think we might see a strengthening there, but as I look forward right now I feel pretty good about how we're positioned.
And from both a load factor and a yield perspective and incremental improvement from the second quarter and.
And all of it I think we're just being disciplined and how we deploy capacity I think thats. The big story for US we've been very we've been very thoughtful from a year ago, and how we're going to deploy capacity and bring people back and scale up the operation and I think we're going to do that for the third quarter and the fourth quarter and into next year as we as we ramp up to 100%, we're going to watch what's going on watch demand and.
And react appropriately.
Because a lot of sense. Thank you.
Okay.
The next question will come from Savi <unk> with Raymond James. Please go ahead.
Hey, good morning, everyone and just.
And just to follow up on <unk> question has he bring those and kind of 10 Airbus back and this year and and.
And given your fleet order and just where do you think not not looking for guidance, but what's the kind of the high level and a low level.
He can go and in 2020.2.
Hi, Savi, it's Andrew.
Yes. So if you look out these Airbus and cross docks returned by the end of the year, but if we flew them all and at normal utilization. So summer of 'twenty, 2 we could increase summer of 'twenty twos capacity up to 8%.
Versus where we are in 19, so and as a stance that we've talked about getting to flat, but if we really needed to or wanted to we could get up 8%.
That's helpful. Thank you and and then E and Ryan and you teased that there's a little bit on that on the 300 million.
Incremental I was just kind of wondering is.
And if that's related to items that you have put in place today or if there is you know things that you have to actually turn on to to start achieving that at some point I realize it's not $300 million next year, but just from a execution standpoint.
Related to that.
And Savi I'll start with that and then hand over to Andrew So you know.
And when we put our 2025 strategic plan in place prior to the pandemic.
We built it up with a lot of strong commercial initiatives that have that $300 million index.
And then the pandemic hit and we kind of put everything on ice.
Cash burn and and get back on a path of profitability. So you know are at a recent offsite. All these initiatives are being refreshed and I can tell you and Andrew is Stoke them on.
And getting going so maybe Andy and maybe just I just wanted to give you. Some background that these things are just not new these are things that have been and the hopper for for at least 18 to 24 months and Andrew maybe just a little color on thanks, Thanks, Ben Yeah, sorry.
7 categories and yeah, some of them with their pre pandemic there was ready, but theres also been big changes and our business like corporate contracts TMC American 1 world merchandising and we've got some network restructuring and changes so.
I think as we roll this out but I feel very confident that it's almost like we're on the runway barreling down at full speed and then the pandemic hit and and we were so close to stopped and the role of some of these out and now that demand is returning and our business is reestablishing and we're gonna get to rolling these out and Saturday and I'm going to jump into so you'll get all 3 of them.
And I, just want to reiterate and as sort of a 4 or 5 year plan. So we'll we'll talk more about specific timing you know added and investor event, which will hold at some point and the next quarter or 2.
But the the whole the cost restructuring plan and the commercial plan is really predicated on 2025, ultimately getting there. So I just don't want people to get too excited about you know next quarter on this stuff, but we are excited about the initiatives that we're gonna be undertaken.
Makes sense, that's all very helpful. Thank you.
Thanks, Ed.
The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hey, Hi, and <unk>.
Andrew.
And Andrew if you have you ever contemplate are you and your team ever contemplated like a fully transparent or predictable revenue management strategy basically non dynamic.
Reising.
Hi Hunter.
I think no [laughter] my short answer to that but if you want to expand on your question happy to give you more color.
Well that's fine if the answer is no then that's now let me talk about some other time, but.
I would say like.
I think we do try to be simpler and a lot of other folks I mean, it is a come even though I mean, you know this well, it's complicated and sort of discipline, but we were I think the first domestic airline and go to 1 way fares, we have had a pretty small number of buckets relative to others. We've had sort of caps at the high end historically and <unk>.
We have tried to be fair and simple with a lot of other stuff but.
But sort of a 1 price fits all or something like that I don't and I think it's probably revenue negative. So we haven't really looked at that.
And after so nice to hear it I mean, all assimilate our thinking so maybe and I'll. Following this weekend, we can hear more.
Let's talk about it some other time.
I have some ideas, but anyway.
1 other question for you for you Shane you talked about a pull and the Airbus It out do.
You mentioned supply chain disruptions are you, suggesting there's some risk to the Max delivery schedule.
Uh huh.
Mentioned that.
We just met with our product.
And I am 100% confident and boeing's ability to deliver.
Our view is that there are things right now and the economy with supply chains that some of us can't even see out of our control out of Alaska is control out of Boeing's control and these Airbus what it does it just gives us dry powder to either backfill any issues that we may experience because of it or like Andrew said, we can grow up to 8% from.
Our next summer of 2022, so you know again with a prudent approach to capacity discipline. So I'm sorry, it's just just or is it just more arrows in our quiver for us.
To manage going forward.
Okay, Yeah, Thanks, and I appreciate it everybody.
Thanks Anna.
The next question is from Joseph de Nardi with Stifel. Please go ahead.
Okay.
And.
And just following up on earlier question it is capacity and summer.
2022, and is up 8% what does the CASM ex look like and that environment.
Well.
And just trying to be careful if it were up by 8% as the question I don't know that it will be but you know what.
Thank God. Our view is you know by the middle of next year with sort of the full ramp up of our cost structure and restructuring initiatives.
We're gonna be and a really good place, we do expect to be at or below.
Pre COVID-19 CASM ex ultimately, we've said that from the very beginning.
I don't know if we would hit it by by next summer, but but we should be.
There are getting very close to there.
But I don't think I'll be more specific than that it's it's I think we're gonna have a really good cost structure..1 thing. We know we're going to not do is lose sort of relative advantage to others and the industry. So we're super focused on this cost discipline and execution and the productivity stuff that we're seeing right now and makes it very well.
It makes us feel very good about how we've executed to date.
Okay.
And then Andrew can you just talk about kind of customer behavior, you're seeing like our folks flying more are they spending more than they did in 2019 or is it just kind of compressing normal behavior and do it a tighter window and I'm just curious kind of what changes in behavior, maybe beyond that you're seeing and the degree to which.
That speaks to kind of the sustainability of this leisure demand strength. Thank you.
Yeah. Thanks, Joe was just talking to my team yesterday about this.
You know looking out you know into the fourth quarter I think what we're actually saying at least from al and networks perspective is actually people are booking earlier and further out and they were in 2019. So as we sit here today, we're seeing good and intake volumes for the fourth quarter and if you just take a look at.
Credit card spend and and all royalty portfolio. In fact, we have had we had the highest spend and this company's history.
This quarter on a credit card portfolio. So we just we're just seeing sustained strength and honestly as I look further out it's it's still maintaining so that's what I see today.
Thank you.
Okay.
The next question is from Jamie Baker with J P. Morgan. Please go ahead go ahead.
Hey, good morning, everybody so Ben.
Not so long ago, you and I were talking about.
When you might reintroduce pretax or you know longer term pre tax margin targets and and whether it would simply be the pre COVID-19 and 13% to 15% or possibly.
Something even better.
And your prepared remarks today I kind of thought that's where you're going but you stopped short.
What else do you need to see.
Is it the macro environment is at Alaska specific maybe it's related to future labor economics, I dunno before you're comfortable replanting your margin flags so to speak.
Jay its a great question and quickly we need to.
And it's just a little more stability.
And the economy and our like for example, you've got this delta there that might create some choppiness and the recovery. So I think we just wanted to be cautious.
I mean, just from my perspective, I feel pretty confident that the worst is behind US I think we started with with with a strong pre tax profit and Jim and I think we should easily sustain it going forward, but I think we want a little more certainty closer to the windshield and see what's going on out there with with with labor markets with the return of it.
The strength of the economy and Theres inflation, there's all these things and just wait and see the stuff settled down a little bit and and I think come Investor Day, I think we'll give you more information on that and give you more visibility.
Got.
It's like you said, we're slowly getting there and I think today is as far as we want to go.
And then Matt and thank you for that and as a follow up I think it was Joe's ex fuel CASM question can you just review for us what the headwinds and tailwind Saar.
Because on my list I have more entries and the tailwind category.
But of course, not every entry is equally weighted.
And just having a hard time coming up with anything that would prevent you from having you know.
Modest and materially better ex fuel CASM.
Bye Bye next summer. So so just looking for a little more color headwind tailwind and thanks.
No.
Jamie I do think its capacity at the end of the day and our fixed costs are kind of stable, we like where they are at a lot of the cuts that we did.
During the pandemic and helm and.
And we'll be very disciplined on that the variable costs are coming back as we would expect.
Ratably.
You know its capacity is the biggest thing and just getting the essence back out there to cover and fixed costs over there is not a major headwind.
We will see about theirs.
And there's going to be another sort of round of labor deals at some point I don't know when those will happen, but a lot of a lot of groups were open across the industry pre pandemic and.
It's hard to say when all of that stuff will get going again, but my guess is that that's going to be relatively equalize throughout the industry. So.
It's just you know.
Once we get back to a pre pandemic level, we're gonna be and a really good position I think from a unit cost.
Okay. Thank you gentlemen, appreciate it take care.
Thanks.
The next question will come from Dan Mckenzie with Seaport Global. Please go ahead.
Yeah, Hey, Thanks, guys. Good morning, So I wanted to follow up on that question as well returning to industry, leading margins and the next cycle. That's that's what caught my ear and the the prepared remarks. It sounds like from the last question that you can get back to your historical margins Big.
Big Picture you know what are the biggest drivers for getting there what are the biggest pieces to the Alaska story for achieving that and I'm. Just wondering maybe you could rank the revenue and commercial initiatives versus the cost initiatives I mean, theres a lot of new things and play for you guys and this next cycle that didn't exist and are in the lifecycle.
Yeah No I appreciate it you know 1 thing I'll just.
And just wanted to sort of go back to our performance this quarter and I know, it's all sort of recovery driven but I do think posting and the industry's best margins very close to breakeven.
And a quarter that started with very thin demand and very very poor pricing.
And just underscores the strength from the business and our ability to execute and so.
We've got a lot of confidence as we go forward.
I think Dan we laid out $265 million and cost reduction initiatives that we are well on our way to capturing.
And then 300 million and revenue initiatives that we just talked about today from.
And that was contemplated because we thought maybe the demand environment like past downturns it'd be a little dampened.
Out of Covid and it was and the last 2 big sort of industry downturns.
And we wanted to be able to get back to pre COVID-19 margins irrespective of whether demand was down a bit and it.
Proved not to be down a bit and thats, just more upside for the company and so.
I think that those 2.
565 million or so and improvement to the business over the next few years relative to our pre COVID-19 baseline that's what's going to drive. This ultimately we've got a great product, we have phenomenal employees, great customer service and we're on a good part of the country and growing part of the country.
So we're excited for things to stabilize like Ben said normalized business get back out there and we're ready from the recovery.
Understood. Okay. Thanks second question here, you know 1 of the industry's strongest balance sheets. You know how are you thinking about using that and the next cycle is you know capital returns on the table sooner rather than later or does it make sense potentially to you know accelerate.
Further accelerate some of the the fleet replacement retirement up gauge to more efficient aircraft. How are you thinking about that balance sheet.
Hey.
And it's it's Matt and thanks for the question I think from a balance sheet perspective has been and Shayne said, we're in pretty good shape from our historical debt to cap measures. We've got the $425 million facility, we'll look to repay in the next 90 days or so and then I think going forward it becomes and.
A dilemma against repaying and other debt, which really and our situation.
It was pretty cheap rates further investment and our business and then as you know we've got the restriction on shareholder repayment and until the end of September next year do some of the government aid. So we'll balance all 3 of those things as we move forward.
Mhm, Okay. Thanks for the time you guys.
And if that makes sense.
The next question will come from Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks morning, everyone. So maybe kind of a follow up to that question and maybe it is also linked to the revenue initiatives, but just.
Just how far piece are you willing to ask piece are you willing to go.
And kind of with some other new revenue initiatives and kind of deploying that balance sheet kind of where we are looking at just sticking.
Sticking to the existing mousetrap, and and and and try to maximize opportunity or are you looking at completely different things.
This is sorry, and the revenue initiatives and Ravi I think I think most of it is stuff that you would expect you.
And Andrew mentioned and he can jump in again, but new RM system, which you know ours was 20 years old and we're excited to have the new and in place.
There's a few things I mean, they're just they're not super exciting to talk about but distributing a premium economy cabin.
And indirect channels, we only distribute and prior and direct channels and the American Oneworld that'd be sad stuff. Those are all sort of on the list of things and they're going to contribute.
I don't think we want and talk a whole lot about.
Things that are new that we might be looking at a difference today, but if.
And as we get closer to that and Investor event will lay out sort of more clarity on all of these areas.
Got it I think and you guys are doing a really good job of ramping up the the excitement here. So looking forward to that and maybe as a follow up kind of how would you describe the competitive environment out there right now I'm purely theres a lot of demand still concentrated and relatively narrow regions and there's a lot of capacity.
Going into that region and sort of how would you characterize the pricing environment is here.
I'll start and then the hub and.
And a chunk and I.
I think we always expect competition in our markets and the West coast.
They are very competitive markets, our mindset again as you see from where we were last year. How we brought back capacity, it's always been and a disciplined and prudent approach and I think that's the approach and we're going to take a we have dry powder. We can we can we can scale it up or scale. It back we have a strong.
Regional airline and horizon.
That was just a fantastic throughout this pandemic to fill and a lot of holes. So.
Our view is just again, a disciplined and measured approach over the next 12 and 18 months Andrew anything.
That makes sense.
Yes.
Yeah.
Yes.
Thanks, Rob Thanks Robyn.
Thank you.
The next question will come from Conor Cunningham with MK and partners. Please go ahead.
Hello, everyone and thanks for the thanks for the time.
The revenue stops great I did have a question and I feel like you guys basically every quarter.
I mean, there has been a big push from a from a premium perspective, but from other carriers and you had some recent changes and JFK. So it seems somewhat topical what's your focus just on higher yielding passengers and corporate and general has there been any consideration on revisiting the product in terms of dedicating more space to premium products or maybe even.
And moving towards Wi Fi, but I would just imagine that but corporates are asking for it again and the reason why I bring it up is you mentioned that <unk> hundred 20, some set of aircraft and it seems like you could ask something like that are there I know you have money I know I know that will cost money, but it seems like you have the balance sheet to do it just just curious on your thoughts.
Hi, It's Andrew a couple of quick things just just to be clear on the L. A movement.
We just re distribute at JFK slots across the western around net what we're still in Newark. So we still fight and New York City from L. A and we've just reallocated dollars I think on the product side of course, we're always looking at product.
You know I think you know, we've got 12, and 16 states and the front cabin and if we did lie flat seat, we'd probably still be 12 and 16 seat.
But we have big airplanes to fill and so I think where we're at right now is just to get back and the recovery stage and we still feel really good about our front cabin product that we continue to improve we have the best pitch in the industry on traditional seat bar, none and then our premium class cabin is also very generous and I think a big thing for corporates to is.
And our network utility and I did touch on net wasn't I'll say, we've done a lot of expansion on breath over the years, we're going to focus more on depth.
Frequency.
Okay great.
And then on the American partnership so I've been thinking a little bit about this a little bit more but are you expecting your customers to build points and loyalty on your network and then bring them on Americans or maybe it's vice versa and.
And where it doesn't even matter I'm just curious like like how that dynamic may play out when that starts to really ramp.
You know I think you know we.
We have a lot of experience with its actually we've had big relationships for decades.
And I think at the end of the day that the customers will choose where they redeem and accrue miles on the individual programs and again, we just feel really confident and good about our west coast net.
Network and footprint, and then American as big National and global footprint, and I think that worked very well together and I think both customers and advantaged and mileage plan and I've done a lot of opportunity and choice.
Okay, great. Thank you.
It does.
The next question will come from Mike Lindenberg with Deutsche Bank. Please go ahead.
Oh, Yeah, Hey, good morning, everyone, Hey, Shane just a quick 1 right here.
I can tell it seems like your and the best position to get back to investment grade mix is it a stated objective.
Of the company to get to an <unk> rating where are you on that.
It's the it's a stated annoyance that were not.
Yeah.
Yeah, No Mike it's.
And that and Theyre going to be talking about this we need to go back and that direction and it.
It's we've got to figure out how to engage the agencies and you know.
Differently, but.
It's probably probably a ways away and.
They ultimately make all those decisions, but yes, we haven't publicly put it out there, but we certainly wanted to get there over time.
Look the reason why I bring it out and there's a lot of carriers that they will tell you that they wanted to get back to investment grade like metrics, and then they'll go out and lever up and airplane and borrow at a single a credit but never actually really do the work that they need to work to do on their balance sheet and so it doesn't scale and level of discipline that you know I think many of us.
Our hats off to the carrier like Delta, who wants to get to the I D rating. So I'm just I'm throwing out there.
And then just a second question here too Andrew.
Andrew.
Guys have done a fantastic telling me I don't want to beat a dead horse on this revenue, but when I think about the fact that you know your entire carrier relies disproportionately on on coastal hubs, which have underperformed a lot of the mid con hubs, so you're already and you.
You know from a difficult position revenue wise and yet you're right up there among among the best and the industry now I know you'd throw out you made the comment that theres been recalibration to the network you talked about 50 net new city pairs I'm curious how much of the revenue improvement is just a function of.
You know withdrawing from those markets that works that were underperforming. So I know you gave us a net number but is there anything that you can give us to give us a sense of you know what markets that maybe you backed away from that just what they weren't working and I know you mentioned like you know depth over breadth and doubling down on Seattle, So maybe I'm answering your question, it's a combination of.
And all of that but any additional color on that front would be great. Thank you.
Yeah.
And you know every CEO.
And then and before have held this strong belief and and I was just going to be very transparent with you on this 1.
Is its loyalty I will tell you that never in my career. When you look at your network and specifically your areas of strength and there is unlimited seats given demand and when you look at the T 100 data and you see your load factor as compared to your competitors load factors when there's.
Unlimited seats to choose from and you see youll loads of multiples you know loyalty is powerful and I'm just gonna be transparent. These moving networks around is good it's needed but.
The strength of our loyalty and our guests and their commitment to us and what we hope to continue and invest in them on service.
Loyalty program and meeting their needs has just proven to be very very strong for us.
Great great. Thank you. Thank you for that.
The final question is from Myles Walton with UBS. Please go ahead.
Thanks. Good afternoon, I was hoping you could just clarify I think you said for Q you'd hope the mainline CASM ex would be in line with 2019 can you give us color on regional and then and the fleet side and that 8% higher 2022, potentially if the exercise.
Is that similar to the number.
And the fleet as well, 8% higher than.
And then where you were or are you getting there through are still.
Still down relative to the prior fleet levels.
Yeah. So net you can maybe a fleet level, the 8% that was really and.
Enabled primarily by the reactivation of these and Airbus for.
A short additional period of time.
And I just don't have the seat count in my head for next year and then on Q4.
I just want to make sure we got it right miles that we're talking about December exit rate are really focused on mainline getting to very close within a few points of our pre pre COVID-19.
Unit costs and I think we don't expect to have.
You know pre COVID-19 mainline capacity back yet retail side is a little bumpy.
And sort of very very rapid.
Re growth and hiring of pilots around the industry.
It's a little bit more pressure on both the ability to deploy capacity on the regional side and and also needing to get out and starting the hiring for the funnel for regional sooner. So we're still working through that.
Those numbers in terms of how many pilots airlines are going to hire and have been changing a bunch.
But but that's going to be.
A headwind for the regional side of the business for a little bit here.
Myles on the aircraft side.
We've got a net.
2022 is a big delivery year for us with 31, and 737 Dash nines coming and 13 regional jets as well and so as we look forward with that and then start to phase out the <unk> hundred Twenty's. We think those are all gone by the end of 2023 and <unk>.
And with more 737 dash nines coming in there too so you've got some some replacement and naturally that's going to happen and then some some growth as well.
Okay. Thanks, guys.
Yes.
Excellent.
And at this time there are no further questions I would like to turn the conference over to Ben Minicucci for any closing comments.
Well. Thank you so much for everyone. Joining us this morning, and we will talk to all of you soon thank you so much.
Thank you for participating in today's conference call the call will be available for future playback and Alaska Air Dot Com, ladies and gentlemen, you may all disconnect.
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