Q3 2021 Alaska Air Group Inc Earnings Call

October 21, 2021

Yeah.

Okay.

Good morning, My name is Thea and I will be the conference operator today at this.

This time I would like to welcome everyone to the Alaska Air Group 2021 third quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback at Alaska Air Dot Com all.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

For analyst.

If you would 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 will now turn the call over to Alaska Air group's managing director of Investor Relations Emily Halverson. Please go ahead.

Thank you Dan and good morning.

Thanks for joining us for our third quarter 2021 earnings call. This morning, we issued our earnings release, which is available at Investor Day at Alaska Air Dot Com on today's call, you'll hear updates from Ben Andrew and Shane.

Others of our management team are also on the line to answer your questions. During the Q&A portion of our call.

This morning Air Group.

For the third quarter GAAP net income of $194 million.

Excluding special items and Mark to market fuel hedge adjustments Air group reported adjusted net income of $187 million.

Pre tax margins were 12% a 15 point improvement from the prior quarter. This marks our first profitable quarter on an adjusted basis.

Group risk once the pandemic began.

As a reminder, 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.

And as usual we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in todays earnings release that over to you.

Thanks, Emily and good morning, everyone Eric.

Are groups 187 million adjusted net income marks an inflection.

<unk> point on our path to recovery during our last earnings call.

<unk> fuel forecast. An example gives you a third quarter pre tax margin.

It might be impacted with lots of Kubrick Merit, we delivered.

1% pretax margin solidly might be industry and was just $6 shy of our Q3 2019 margin.

I am proud of how our company is emerging strong from the Penguin pandemic.

And then looking forward do you wanted to recovery is stable and less likely undergo with demand shocks disappearance.

Our approach from the beginning has been deliberate scaling your business back in a measured way leveraging our strong balance sheet and running our operation to produce consistent industry, leading financial performance no matter what the external.

The circumstances are.

Our third quarter results reflect the strength of the summer season, with pent up leisure demand, bringing passengers back to the skies.

Fourth of July and Labor day passenger airplanes approached 2019 levels.

Even with the dampening impact that <unk> had on demand in August and beyond.

Our third quarter load factor came in at 80% and total revenue was down just 18% on a year over two basis.

<unk> eight point improvement sequentially from the second quarter.

Our unit costs were up 9% in the third quarter, beating the better end of our guidance range with solid cost execution.

Reflects incremental progress towards our productivity goals as passengers per FTE increased 6% sequentially. Following just 12 points below 2019 levels for the quarter.

Jim will provide more detail about our cost performance and pressures, we're seeing in a few cost categories.

Looking forward our longer.

In terms of thinking about our approach to recovery remains intact.

Despite the transit Choppiness, we're experiencing from the adult of Merit. Our plan is still to return to our pre Covid size. No later than next summer and then to grow from there.

We anticipate recovery will continue to be volatile at times as we've learned to live with Covid and.

And then ultimately normalizes.

Obviously delivered consistently strong financial and operational performance no matter what of course the recovery takes in Q3 has shown us that when demand does come back our business model is tuned for success.

[noise] ahead to the fourth quarter, we plan to increase our capacity.

Until the 13% to 16% below Q4 of 2019 and given the dampening effect of the Delta brand, we expect to deliver a breakeven to slightly positive pre tax margins.

Pace of the recovery accelerates from here, there will be upside to our expectations.

This quarter's results were only.

Only possible because of the hard work of our frontline employees and crews their dedication to delivering an efficient operation with our culture of kindness and caring is at the heart of our success.

I want to thank them for their efforts and for putting air group amongst the top performers in the industry and on time arrivals and completion rates once again.

Again this quarter.

Our guests have shown their appreciation for that great service to guest satisfaction scores have exceeded internal targets every month, so far in 2021 sustaining.

Operational performance with high guest satisfaction is a remarkable achievement given how complex re ramping our operations has proven to be.

Yes.

Several quarters of improving demand and financial performance have provided the stability necessary to invest in repairing our balance sheet year to date, we have made gross debt repayments of $1 2 billion driving our debt to capitalization ratio down 10 points from year end 2020.

51% and moving within reach of our sweet spot for leverage between 40% to 50%.

Having deleverage so quickly from our pandemic borrowings makes clear to me that we made the right decision and not diluting shareholders during the depths of the crisis.

Even though that is not yet something the.

Is rewarding us for.

We are making progress each quarter on our path of single fleet. This quarter, we took delivery of two more 737 dash nine aircrafts and also exercise options for 12 incremental firm airplanes to be delivered in 2023 and 2024.

All told we.

Market 93, 737 dash nine aircraft in our fleet by 2024 with options for 52 additional airplanes. This.

This fleet order not only replaces our departing Airbus $3, 19, and 320 fleet, but positions us for significant growth when demand comes back, which we expect will be in the back half of <unk>.

<unk> thousand 22.

Importantly, we are in a financial position to take these deliveries while also maintaining our strong balance sheet.

To close I'm optimistic about the foundation, we have laid to prepare for egroups returned to growth and profitability.

We have a fantastic Boeing order by creating.

Ability for significant growth through 2025, a low cost structure that allows us to compete with low fares are supported by a strong balance sheet, a great onboard product match with industry, leading customer service and operational performance.

A powerful domestic west coast network supported with the Oneworld Alliance a brand with a fierce customer loyalty.

And most importantly, our culture rooted in kindness and Carrie I'd.

I'd like to thank our people one more time for a great quarter and with that I'll turn it over to Andrew.

Thanks, Ben and good morning, everyone.

My comments today will focus on third quarter performance.

Demand trends.

Behind us with our alliances.

And revenue guidance for the fourth quarter.

Our third quarter revenues came in at one 9 billion.

18% versus 2019.

This was on flying capacity that was also down approximately 18%, resulting in near flat unit revenues.

Probably happy with this result, especially as the impact of the Delta variant started showing up in a meaningful way at the end of July.

Our revenue performance reflects a 15 point sequential improvement from last quarter, while capacity was just three five points higher.

Load factor sequentially increased three points to 80%.

We look at the bigger revenue driver was strong sequential yields which improved 13 points from last quarter to up 4% versus 2019 on a monthly basis loads was strongest in July at approximately 88% then deteriorated to 81% in August and bottomed at 72% in September.

Yes.

In the same timeframe yield deteriorated about five points from up three 6% in July to down one 5% in September.

Both on a year over two basis.

These negative trends were all driven by the emergence of the Delta variant.

Geographically.

September Hawaii represents 16% of our capacity and was our weakest performing region during the quarter given the travel advisories for the state which damaged demand for Hawaii.

In fact, the impact to our system results was to reduce RASM by two five points considering.

Considering the headwinds in Hawaii, along with the broader.

<unk> impact of the Delta variant.

Characterize our Q3 revenue performance is strong.

Our commercial team did a fantastic job managing revenue in a volatile demand environment.

As I'll expand on momentarily the consequences from the Delta variant have not yet dissipated and we're still working to build back Q4.

<unk> bookings that will loss from the fourth Covid wave given it occurred during an important period for building Q4 traffic.

But sticking with third quarter results for a moment longer there are two bright spots that are steadily buck trends for several quarters now.

Premium product performance and our loyalty program.

On the premium product side. This quarter's paid load factor in a first class cabin was three points over 2019 and premium class cabin exceeded 2019 by nine points. We continue to see strong demand for our premium products and we believe this will only continue as business demand returns.

Along with international demand associated with our entry into Oneworld.

Regarding our loyalty program. This quarter, we received the highest level of cash compensation in our airline's history, which was up 7% from the same quarter in 2019, our loyalty program is one of our most durable competitive advantages.

And we are squarely focused on maintaining and improving this momentum over the coming quarters.

Now looking at our network, it's only it's been our priority throughout the recovery to quickly rebuild Seattle and restore the Pacific northwest capacity.

This approach is producing results as is evident from our revenue.

Performance. This quarter, we're also seizing opportunities to capitalize on demand shifts as they arise.

Reflecting on the year, we will have added 30, new markets and only discontinued three in short choices for our guests when combined with our strong relationship with American have improved significantly today, we are flying.

Approximately 85% of our pre Covid network.

Our Seattle hub capacity is fully restored with capacity above 2019, while overall Pacific Northwest flying is quickly approaching 2019 levels.

California recovery remains slow as we flew 65% of 2019 Capella.

Flying a b during the quarter.

I still expect that by the summer of next year, a California flying will be back to pre pandemic levels.

As part of the California rebuild we've recently announced that we're expanding our service from the Bay area to Mexico positioning Alaska with more nonstop flights to Mexico from the West Coast.

Passing any other U S carrier.

Now turning to the future.

Current revenue environment has certainly been challenging but as I mentioned last call. My team is focused on building a strong commercial engine that will serve this company for a long time.

One otherwise we will do this is by leveraging the unique benefits available to us as part.

Coast Oneworld I'd.

I'd like to give a shout out to the alliances team who have been working tirelessly to establish robust commercial agreements that will unlock flexibility and benefits for our guests.

So far in 2021, we've added 195 incremental codeshare routes.

Five one.

Part of <unk>, increasing our codeshare portfolio by 43% this.

This figure includes our recently announced agreements with Iberia and with Tata.

In very short order, we've seen cutoff become one of our top international partners as I efficiently connect down network with the nonstop service between Seattle San Francis.

Well, Joe and Los Angeles, with a global hub in Doha.

The Seattle, Doha, Nonstop, which was launched in January has been especially strong.

<unk> is an indication Alaska guests value, our global portfolio and are eager to see their responses to Americans upcoming Seattle route launches to Shanghai.

<unk> in Bangalore in 2022.

With American and our Oneworld partners, our potential to capture international traffic out of Seattle, and California is significant.

One world and our partnership with American have also opened the door to greater access to corporate travel and we believe a group is uniquely positioned to get more than our pre.

Covid corporate market share with the tools, we're putting in place.

On September one we activated for the first time, our preferred partner status with American Express GBT.

Enabling greater access to more corporate guests and quality traffic.

I'm really looking forward to sharing more details with you about these.

New initiatives as well as many others in the spring.

Now turning to the fourth quarter guidance, although the delta variant surge looks to be behind us its impact on bookings have left an unfavorable imprint on our Q4 expectations.

Bookings deteriorated from down 20% in July to down 35% in August.

And flirted with down 50% on a few booking days during the peak of the surge while that right of recovery since the peak has been slower than we experienced after the last surge this spring.

Over the last seven days, we've seen bookings recover to down 10% year over to ultimately we believe the delta.

<unk> has reduced fourth quarter revenues by approximately $200 million.

Although the trajectory of bookings today has improved it is not enough to fully make up for what was lost in Q4.

With this as a backdrop, we expect Q4 revenues to be down 16% to 19% on a year over two year basis.

However.

Our assumptions reflect weaker performance in October with total revenue down approximately 25%.

So just looking at November and December revenue is expected to be down between 13, and 16% right in line with our capacity reduction.

From a unit revenue perspective October RASM is shaped.

Up to be down about 10% versus 2019, while November and December could improve to nearly flat versus 2019.

Filling out planes as a top priority, but we are using discounts cautiously with an eye on preserving yields, especially in a rising fuel environment, while we aren't making any predictions about what awaits us around the corner.

Proving rights of vaccination.

<unk> ability of booster shots the expected near term approval for vaccine for children and opening of international borders could have a positive impact on our recovery and the economy.

However, the recovery unfolds I'm very optimistic that our commercial model will deliver relative outperformance.

As we saw in Q3 and that our work to date has positioned us well.

As Ben just shared we expect our efforts to lead to a breakeven quarter with upside potential.

A positive Shang.

Thanks, Andrew and good morning, everyone as we've highlighted today another quarter of sequential improvement and strong.

<unk> underscore the durability of Alaska business model.

Underlying our industry, leading results for July and August performance that came within about two points of 2019 margin levels.

I'm impressed by our team's execution and the results they delivered in such an unpredictable environment.

And my commentary today I will provide insights on these results.

Margins cash flows and liquidity cost performance and our expectations going forward.

I'll begin with cash flow and liquidity, we ended the quarter with $3 $6 billion in total liquidity inclusive of on hand, cash and Undrawn lines of credit, which is down from $4 $4 billion of total liquidity in June as we paid down nearly 550.

R&D dollars in debt and made $100 million volte.

Voluntary pension contribution that.

Debt repayment included retiring our $425 million 364 day loan in our pension contribution brings our funded status to 94% and also allowed us to capture a onetime permanent tax benefit of 14 million.

$50.

Q3 cash flows from operations were essentially breakeven excluding pension funding the sequential.

The decline from Q2 to Q3 was expected due to the absence of PSP grants inflows this quarter and the normal seasonal drawdown of ATL. However, as Andrew described in his commentary the Delta variant stalled.

Strong demand recovery in the quarter and as a result, the ACL drawdown was higher than originally forecast.

Fourth quarter cash flows from operations are expected to be between negative $100 million and $0 exclusive of tax refunds and payments, which we expect to net to a positive $100 million in the quarter depending.

Otherwise when we receive our anticipated 2020 tax refund this forecast factors in the reduced cash and takes due to the impact on bookings or the delta variant.

Planned debt service for the remainder of the year is approximately $120 million.

And we have no plans for further pre payments through the end of the year.

With this quarter's debt.

Depending on our debt to cap is dropped to 51%, placing us just shy of our intended range has been shared today.

Today, our outstanding debt bears a relatively low weighted average effective rate of three 3% and our 2022 debt service is very manageable at about $375 million for the year roughly a quarter of that of 2021.

Moving beyond 2022 annual debt service is in the range of $250 million to $400 million.

With a sustained return to profitability I expect our net debt to EBITDAR levels to move to approximately two times or less in 2022.

Our liquidity and balance sheet are in great shape, and we plan to leverage both as we fund our fleet order.

And essentially look forward to reactivate and shareholder distributions, which we can do towards the end of next year.

As of now I expect our total liquidity to move to approximately $2 5 billion in 2022.

Moving to costs I will touch briefly on our Q3 performance and then focus on our cost trajectory over the next several months.

As we prepare for a return to growth.

This quarter non fuel costs were $1 $3 billion with unit costs up nine 3% versus 2019 better than the guidance. We issued in September our teams have continued to do a superb job, beating their internal cost plans and we also saw lower than expected medical costs in the quarter.

Fuel costs Rose again, this quarter to $2 <unk> per gallon up approximately 25% from where we started the year with crude at $70 per barrel for the quarter, our fuel hedges provided a $21 million benefit or <unk> <unk> per gallon.

Currently have 50% of our planned fuel consumption hedged for the next six months.

At an average strike price of $61 in Q4 and $69 in Q1.

The current spot prices of oil we expect to continue to realized hedge benefits in Q4 and into 2022, meaning we also expect to see fuel cost headwinds impact absolute margin performance in the near term.

Looking forward.

Months continue to make steady progress on getting costs back to pre COVID-19 levels that remains of expectation and priority of the leadership team.

Dressing through 2021 has been solid with mainline CASM X compared to the same month in 2019 up 19% in June up 7% in September and likely to be up 4% to 5% in December.

Third we can sember.

Capacity in December compared to 2019 levels is expected to still be down 13%.

Capacity pressures more acute for our horizon operations as aggressive pilot hiring across the industry is expected to lead to abnormal attrition levels, creating lower capacity capability and consequently also pressuring.

Their unit costs in the near term.

We're also seeing modest pressure in entry level wages, which we believe is both an industry and general trend in the economy at large and wage adjustments in this category are adding approximately $7 million for the fourth quarter.

Additionally, as we ramp to 100% of pre Covid capacity we are.

And boarding more employees earlier than we normally would given our given our training throughput capacity costs associated with additional training and carrying employees for the quarter or approximately $5 million.

The costs associated with ramping capacity will normalize by next summer.

In 2022, we will continue to reduce unit costs as.

If the returns doing so it's not without its challenges as we have two particular headwinds to offset one is airport related costs at our airport partners run through cares Grant and returned to fully charging airlines for both operations and capital expenses. The other areas of step up and transition costs related to the returning our Airbus fleet to lessors the costs.

<unk>, turning aircrafts were fully contemplated in our decision to return to a single fleet and the.

Economics of doing so are strongly favorable long term as we stepped squarely into the return window, we wont be recognizing these expenses through the P&L in earnest.

The largest impact in 2022 with a significant step down from there into 2023 and a final.

<unk> went down in 2024, which will provide a nice tailwind to our CASM ex trajectory as we exit 2022 and move through 2023.

Final a realization of productivity savings as well as the efficiencies of now 70, $737 nine aircrafts flying for our mainline fleet.

As a result of the headwinds and tailwind as I've described our expectations for Q4 unit costs is that they will be up 7% to 9% versus 2019 on roughly 15% lower capacity.

I close I would just say again that our underlying business model is strong while demand is choppy and we hate that we don't get to have the fourth quarter that we think we were set up to have because of the delta there and we're confident that when reasonably strong demand returns we are poised to deliver strong financial performance. We're.

We're looking forward to re scaling to our pre COVID-19.

And demand, allowing growing from there as we do this we will be continuing to deliver on our cost restructuring and fleet transition and unlocking commercial levers to drive additional value to our bottom line.

And with that let's go to your questions.

Okay.

At this time I would like to invite analysts who would like to ask a question. Please press.

And then number one on your telephone keypad again, Thats star one for any questions well pause for just a moment to compile the Q&A roster.

Okay.

And the first question will come from Savi <unk> with Raymond James. Please go ahead.

Hey, good morning, everyone.

And can you talk about kind of rebuild.

Building the network here I was just kind of curious.

No.

This isn't a big airports, Seattle, Portland, San Francisco L. A and he built those back this is kind of a mission, but the strategy behind those airports or how you operate them change kind of post crisis versus before.

Hi, Savi good morning, it's Andrew.

I wouldn't say, it's changed but we have actually made some refinements and tweaks.

Obviously, Seattle, we serve.

Everywhere from there in Portland to a lesser extent.

I think some of the pivots, you've seen us make and given the country.

Who is.

Is especially Los Angeles, you're going to see more leisure flying brought out of there we do very very well and I think in San Francisco.

We built out a pretty good network and I think what youre going to see us style or more focused on is the largest one days out of there and making sure we do it.

The top 2025 businesses.

Is this market.

And so that's sort of where we're landing on all of this.

Got it and then just Andrew maybe if I could follow up on that a little bit more on the you know the other.

Our focus cities that you've tried to build in the past or kind of working so we can think about kind of San Diego at Salt Lake City Boise, how did those.

Does fit in within the network and any kind of learnings on.

Yes.

In the past trying to build those out.

Yeah.

Especially on the secondary cities, but we've done a lot of Pacific Northwest to California, we used to flow that traffic over our major hubs and just.

As demand in the loyalty strength in the evolution of those markets, we're finding nonstop service to be very good there.

I think San Jose is part of the Bay area and San Diego for US, It's all about loyalty as well and making sure. We've got utility for all of our guests. So while we focus mainly on the Seattle, Portland, San Francisco and.

Given the annulus.

Boise and the secondary cities will always be very very important to us and we're going to continue to grow those over time.

Makes sense and just one last clarification, where were his business demand in D C.

Business demand.

Is coming back and in fact, we've had the best day.

Lasalle Best week, I should say recently versus the previous one and the pandemic, which was just before somehow so what we're seeing is an increased steady forward momentum of business demand starting to return.

Okay got it thank you.

The next question will come from Andrew <unk> with Bank of America.

Please go ahead.

Hi, good morning, everyone and thanks for the questions.

So I guess a question for Andrew I know industry capacity plans are pretty fluid here, but.

But you've benefited from sort of below average competitive capacity growth through much of the pandemic and I know this has been been helping a lot of the yield performance.

You talked about earlier, but we do see some of this capacity picking up particularly into <unk> based on schedules can you maybe talk about what youre seeing in the competitive <unk>.

<unk> environment, and how you see it unfolding over the next quarter or two.

I don't know, we look at the West coast.

Performance.

<unk> looked at how the competitive environment goes I think a little bit.

The west coast as being honestly objected to weaker demand in the rest.

The rest of the country. So even though you may see that competitive capacity is not as high vis vis others I do think when you think about California, specifically.

Demand has been soft there, but at the end of the day, we feel really good about all our network mix and how it's structured and we feel really good as you can see by the third quarter and that our network is configured for a good performance.

And.

Shane maybe Ben I mean, Shane you mentioned in your.

Our prepared remarks, and I think you are the first airline to say this is that you were looking forward to shareholder return returns. This time next year your balance sheet can certainly handle it but I guess, Shane or bad I guess when you're allowed when you think about your capital return policy do you think.

Do you think it will be as high up on your priority.

<unk> list as it was pre pandemic and the way you're thinking about it now do you think there'll be a little bit more focused on on sort of a buyback or dividend. Once you are allowed to and thanks for the question.

Yeah, Thanks, Andrew I think.

Yeah.

Our sort of thinking here is that we want to put ourselves into a position to be able.

Shareholder returns.

We're not committing to any particular time frame today to do that.

Well, obviously sort of get together with our board and make decisions about what the best Avenue is and at what levels, but I don't think a lot about our sort of.

Capital deployment and capital allocation philosophy is.

Has changed.

You have to sort of understand what our go forward environment with Covid looks like and how stable demand and returns are but.

But I think our philosophy that we had going into the pandemic is going to be very very consistent with the one we have coming out in terms of shareholder distribution and returns I will say that our first priority is.

But it is making sure we have a stable business enough liquidity on hand to manage the ups and downs and to grow the airline.

But shareholder shareholder returns are also super important to us.

Thank you.

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

Hey, good morning.

So you you echoed what other airlines have said.

This season about premium demand.

To the extent that this phenomenon is permanent.

And growing.

Do you need to do anything differently to continue capitalizing on it or are you optimized for this.

Yes.

Mixed demand leg up however, you want to describe it.

Hi, Jamie.

Our cabins I believe I'm very well configured with first class and premium class. So I don't see any product changes, but to your point, we are going to definitely especially with business demand and our ability to play.

Watch out a place there is our booking curves and how many seats, we hold out and when I think historically, we've probably deny business traffic that Kevin historically, and I think we're going to get more fine tuned on that so I think that would be the sort of the largest change and then the other part of that too is just making sure that out network.

We're going to be a little bit more disciplined about timing out flights for that business demand. So I see just increased demand coming for that premium cabin going forward.

Okay, that's helpful and second.

<unk> for pivoting to the model did you say the Delta very SaaS fourth quarter revenue by $200 million was that right.

I'm not sure that's correct okay.

Okay. It's on the tape that it was 400 million. So I just wanted to make sure I wasn't wrong. So even if we allow for some variable costs associated with that if we were to just tack that 200 million to today's guide.

It implies that you'd be back in the double.

Digit pretax margin territory in the fourth quarter and I know, that's where the fourth quarter plan was in July because you said, so but that was on cheaper fuels. So I guess my question is whether.

One is there anything wrong with my math, hopefully not but if not it feels like your ex Delta.

So fourth quarter plan actually strengthened over this summer despite the rise in fuel is that.

Fair, albeit mangled interpretation.

If anything.

The one thing you can never do is go backwards.

Redo things over again and know what it turns out if there wasn't a variance.

But.

But I think what we had going for US were very very strong load factor builds we were above this call in July we were sitting on load factor builds that were above 2019 levels almost every forward months.

And on yields that were above 2019 levels in every single month and so.

So.

Yeah, I mean, I think we were feeling quite optimistic if that demand pattern.

Laid out and wasn't interrupted that we could add a really strong fourth quarter.

Hard to exactly know if <unk>.

Strengthen over between then and now is the right way to think about it but yes. It would have been.

A strong quarter for sure I.

I think Jamie just yeah, sorry go ahead.

I think this is and we've said in our prepared statements. I think this is why we're confident about our business model I think it's a business model that when recovery comes back we're going to produce returns in.

I think it just goes down this quarter that but go ahead.

A follow up.

Yes, and that's certainly my modeling interpretation as well just a real quick labor clarification, a clarification excuse me do I recall correctly that you are the only airline of size in the U S.

Still doesn't have a preferential bidding system is that right.

We don't with our pilot group.

We do with our flight attendant group that is true.

Okay, just checking thank you.

Thanks, Jamie.

The next question will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Hi, Thanks, good morning, all.

I can just follow up on the last two questions are are you.

You guys surprised at all.

The mix is so strong coming out of the pandemic again is that something that you expected given people's preference of travel.

Our front of the plane kind of given everything that's going on or is that a surprise and second on the competitive side.

Given the concentration of travel kind of are you surprised at all.

All of that that the industry has pulled back on traveling a certain lanes and it's not a free for all up there.

Hi, Ravi.

You know I can't speak for the rest of the industry, but what I can speak to.

Alaska is knowing business demand was where it was we materially reduced space in the front of the cabin.

At first class fares were coming down, but they were way made up plus much on the volume side.

So I feel the team did an outstanding job at lowering fares and driving net net incremental value through volume and so that's part of what we're gonna have to measure going forward.

Let's.

To be clear.

Who doesn't want to travel and physical premium class I mean, I don't believe there's anybody salto.

So it's a matter of out price and volume so the demand that's the first place people want to see it and so we've been working well there I think on the industry capacity again I don't know you all look at the network in the system, we look at the West Coast.

Hum.

As I look across the West coast, you see a lot of adjustments by.

By other carriers coming down closer in.

And I think one of the things that I'm, particularly proud of especially.

With our operations folks and Bens leadership here is that we have not been volatile, adding back reducing adding back reducing capacity.

We've been on a steady path. It's allowed for really good cost control really good selling and inventory and minimal gas disruption. So I feel like all of that has been working for us.

Alright.

Lisa.

Go ahead go ahead.

I was going to say just with the leisure traveler I think with this.

The environment of Covid.

They are looking for more space in the half.

More comfort and when they fly and we have competitive fares up on our premium class and first class.

I do think we're seeing we're seeing the benefit of that sorry. Go ahead you have another question, yes, so just to follow up on.

That specific point, so how do we think about this going into 'twenty, two and 'twenty three or would you be are you going to be looking to keep this elevated mix of premium cabin fares at current levels or are you going to be looking to return fares to where they used to be even if that kind of.

If you see this mix shift back a little bit domain Kevin.

The only thing I'll comment on that is it's not so much the fans that we're focused on but of course as business travel returns.

Now Road Warriors return and loyalty returns, we are still committed to having robust opportunity for our guests to upgrade into the first class cabin. So we're gonna be balancing.

<unk> with first class upgrade occupancy rights and that.

That's going to be our challenge going forward, but it's a good problem to have.

Perfect. Thank you.

The next question is from Dan Mckenzie with Seaport Global Please go ahead.

Hey, Thanks, guys. Just a question here with respect to the American partnership.

What is the aggregate wallet that Alaska.

We can now tap into that it couldnt previously.

What I'm really I'm really referring pardon me to just to a normalized backdrop. So corporate travel managers that for the first time, you can consider flying in Alaska and American as an alternative to their to their current program.

Yes, Hi, Dan.

I'll answer your second one first I think but essentially really the the unlock here is a couple of things to your point we've had overwhelming.

<unk> from our corporate clients wanting joint contracts with Alaska, and American providing much more competitive fares and much bigger options.

We've also just to be Frank being more generous now without big corporate accounts, we're opening up you know.

Priority seating for them are handling on Iraq.

So the whole day.

<unk> has and you know really improved on the first part of your question could you repeat that Dan I'll take it actually this.

Is that in and speaking to the value of the American partnership I think a couple of places initially when we announced the WC I E. The focus was on Americans nonstop flights out of Seattle to London to Shanghai into Bangalore, and obviously with international travel a bit suppressed those haven't taken off as actively as we want.

We're excited about the potential there, but what has really come to pass is linking our domestic networks via codeshare and having the ability to out of Los Angeles San Francisco.

And over the Chicago hub for American offering unique destinations that we can't get.

But messengers too and so think the des Moines to Grand Rapids, Codeshare behind O'hare and behind the American hubs has really been valuable and lets us tap into demand streams that before we really couldn't.

Yeah helpful. Okay.

And then one of the comments in your prepared remarks, you know you're looking to get.

Our past structure of 2019 sooner rather than later.

Do you have to get to a 100% of of 2019, our capacity to get to a CASM X. That's similar or you know can you achieve a CASM ex U now of 2019 with less than 2019 flying.

Two a clear yes. Thanks, Dan is saying no. We don't I don't think that we would have to get back to full 100%. We've got a pretty large cost restructure program and commitment that we're executing on a big piece of that is movement to single fleet and that takes a couple of years to get done.

And so it's likely that we will actually.

Be about a 100% of pre COVID-19 sort of coinciding with the full capture of those cost restructure.

Actually our order book and with what we see.

Think about the opportunities in front of us up and down the west coast and with our business model. It it's likely we'll be growing.

Above the pre COVID-19 ties in at about the same time getting to the pre COVID-19 cost structure.

And then just perfectly Scott.

And since we're focused on is productivity.

Pivoting now we're getting back to our.

With.

Pre merger productivity targets and that goes hand in hand, with a single play and Thats where were squarely focused on when we get back there.

That's going to be the sweet spot for us.

And we will see a big benefit to CASM as well.

That's perfect. Thanks for the time guys.

Thanks, Dan.

The next question is from Duane <unk> with Evercore ISI. Please go ahead.

Hey, Thanks, good morning.

Youre, probably not the best airline to ask this because your plan has been appropriately conservative in your schedule hasn't whipped around as much.

But on labor availability airports staffing ground handling.

Are you seeing any early signs of clouds parting on that front are you seeing any any relief.

Thanks for the question Duane this is constant.

Our performance has shown in the third quarter.

But we've really delivered among the top performers.

The industry. Despite all the challenges we have and that's for two reasons. One you mentioned, which is disciplined return to capacity and secondly, really resilient proactive team at solving all the many challenges we have some listed.

In your conversations.

Those are true across the industry I think our leadership team has done a great job addressing those as we as we see them I'm confident we will continue to do just that through the fourth quarter and beyond.

[noise] affair, all very fair comments, which we agree with I guess the question is I guess the effort.

<unk> higher or to the extent you're trying to.

Acquire airport staffing is that getting any easier or is it just as difficult as it was.

I would say consistently difficult.

Perhaps.

The acquisition is one thing and then B kind of.

The retention piece.

<unk> consistently staffing on an everyday it continues to be a challenge I think that's true across the industry. So we do put an inordinate amount of effort into that relative to what we may have done in 2019 is Wayne let me just quickly because we wanted to tighten that interesting real quick but.

I think everybody's dealing with it certainly the Seattle region. Its been tough to get you know entry level workers, just that pool of labor hasn't been what it used to be but I will say, it's improving I think as we've gotten through the summer and.

And into the fall.

Our need for staffing is a little bit less and I think.

The labor pool is starting to expand a bit so I think the things are going in the right direction, but one thing I know constants would also say as we so appreciate the employees who.

Came to work every single day put everything that happens the operation where tons of overtime to keep our guests moving and really minimize operational disruption and they did a phenomenal job.

That's super helpful and.

It's just for my follow up and I apologize. If you mentioned this but how are you thinking about capex in 'twenty, two and 'twenty three and again thanks again.

Capex right now.

Duane we're in it for 22, we're looking at about 1 billion five with.

With airplanes obviously.

And then Jim midst of our fleet growth and then a little bit north of that in 2023 as well.

Based on our liquidity forecast based on our conservative pre tax margin forecast. The plan is to pay cash for all of those airplanes and still be well above our minimum liquidity value at year end 'twenty.

Three.

Okay. Thank you.

Thanks Duane.

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

Yeah, Hey, good morning, everyone, Hey, two questions here, Shane you talked about the headwind with respect to re delivering the Airbus.

I think you said 'twenty two 'twenty three 'twenty.

<unk> 2022, and 2023, how many airplanes are we are we looking at here and what is it like a 1 million to $2 million an aeroplane I'm just trying to size. This this cost headwind that will go away.

Few years.

Yeah.

Airplane, it's it's well north of that these are full engine restorations and airframe restorations as a condition of the lease. It's work. We would have had to do had we extended the leases or really all of these aircraft are due for heavy maintenance cycle.

The number of aircraft.

Specifically by your I think Chris Mike.

We've got about.

About 24 operating Airbus <unk> hundred Twenty's that'll all be gone by the end of 2023. So that's what that's really the number youre looking at and to change point. These are we've had some history of returning these these are anywhere between $6 million to $12 million of tail.

On the return costs and so that's that's kind of what the bubble youre looking at for the next couple of years.

There's different Mike we've got major sneakers for a lot of this.

That's the P&L expense portion everybody knows that and negotiate.

No. That's it that's actually super helpful. Because it gives us a good sense of what's going to kind of go away and then just to Mike <unk>.

Question.

I guess just to Andrew.

Theres been some comments about some.

<unk> there were some very good qualitative commentary about you know your relationship with American and one world.

Interestingly you know American on their call. They said that the benefit that they were getting from U N jetblue.

Was accretive to revenue thus far by I think they throw out a half to 1%. They said something on the order of about 700.

Some comments on passengers and obviously we'd have to see.

Split sort of figure out what's your piece and what's kept blues piece, but the fact is you know there are five times bigger than you are so I'm curious if anything that you can throw out as it relates to what you've seen on the revenue front.

Just a couple of percentage points accretion to revenues since it's.

50, <unk> any anything quantitative would be helpful. Thank you.

Yes, that's a great question.

Probably.

Make a whole lot of comment here other than to say that we're going to unpack. This for you on Investor Day, and I think we will.

Going to give you a lot more transparency than in <unk>.

Mike.

<unk> been up.

We're seeing a lot.

On the value of this partnership with American and one world again, it's not totally unlike because of Covid, but we do see upside.

I won't give you more details.

On Investor Day, and what his investor day by the way.

It is going to be in March.

Very.

It will be sent out March we promise it won't be raining, although we're going to do in New York Alright.

Very good thank you.

The next question is from Helane Becker with Cowen. Please go ahead.

Thanks, very much operator, hi, everybody and thank you very much for the time, just a couple of questions.

It's been actually shifting gears completely to ESG, you've made a number of changes I guess to the board over the last couple of years, so as youre thinking about that or is the board, where you want it to be or their retirements coming off that gives you a chance or to.

To change.

More diverse or.

Are you, okay with that and then the other part of my question is with respect to Atlassian Star ventures, what's what's the focus for that what are you hoping for it to do is that you know focused on SaaS acquisition or.

Maybe you can unpack.

Questions that thank you.

Hey, good morning, It's Cai I'll take the first question and Diana will take the second I think.

Board is so fantastic and we just added a new board member, bringing bringing us to 12 independent directors Adrienne laughter, destroying last week, bringing really fantastic marketing and branding.

From a variance to our board of I'll also just note I think currently we're at 50% gender diversity and about 40% plus ethnic diversity, we're super proud of that and we're very happy with the board composition right now.

How long what I'll say is our board is squarely focused on ESG and sustainability.

It's a big strategic driver for us.

They're really excited about our path forward on this which will dovetail into answering your second question here on <unk>.

And there we're excited about is Alaska Star Ventures, Diana Yeah. Thanks, Mike.

Specifically, our Alaska start ventures is right now focused on the five parts of our path to.

Zero, which we announced earlier this year. So just briefly those are operational efficiency, obviously, the fleet evolution, which serve inches enough Exxon, but a sustainable aviation fuel novel propulsion incredible carbon offsets to close the gap to our target the were looking specifically for technologies or in the case of our first investment specifically sector focused.

It can help us to accelerate those path that path and bring technologies into the system that can help us do that in the next three to five years.

That's very helpful. Thank you very much I just I just have a question your indigo and maybe then for you I don't want you to see anything you can say with respect to the pilot negotiations.

But what what's up with them.

First I want to say, we have a fantastic group of pilots there.

Skilled professionals, they keep us safe and on time, and we probably have their contribution size. They do a great job for us.

You know, where where we've got some sticky issues, we're working our way through and.

We've asked the National mediation board for some help and we're comfortable we're going to get to a deal we have a history of getting deals with our unions and so where we know we're going to get there, but I'll say is we have an exciting future for our pilots you know and you heard our growth plans.

We plan to grow the airline a lot over the next three or four years. So this will be a phenomenal place for our pilot.

Spend their career. So so we will get there I appreciate the question.

Thanks, Mike Thanks, everybody. Thank you.

The next question will come from Conor Cunningham with MK M Partners. Please go ahead.

Hi, everyone. Thank you for the time.

I might be wrong, but I think your credit card agreement is up soon.

Pilots the.

The market has been reset a little with the recent agreement from another carrier.

I was wondering if you could just provide some details around how many sign ups you've had since closing on the Virgin America acquisition or maybe just how spend has evolved in the current over the past couple of years.

Yeah, Hi, Tom.

We've still got a little bit of time on Al agreement that said, we are very aware of other agreements done and we are working very closely with bank of America.

Who we have a 30 year relationship with and.

Things are changing and they're working to change with us, but I think as I said in my prepared remarks, I think since that time, we've got a compounded.

Impounded annual growth rate of 9% on both a portfolio of members and Spain. Now. This program has done nothing but deliver and return and as I also shared we've had the highest cash receipts we've ever had so more to come there and as we get into 'twenty. Two we've got a lot of exciting things claimed that I think it's only going to fuel growth in our loyalty.

The program.

Okay, Great and then.

<unk> been in the past, you've talked about making Alaska and national brand.

And I assume that would involve some further investments in markets that are off the west coast.

I saw that you put in for slots at Newark, and clearly that would be big for the brand in the northeast just wondering.

How you may benchmark that success of just brand awareness outside of the West coast outside of where you guys are already pretty dominant.

Thank you for the time.

Yeah no. Thanks, Colin I know this is a big strategic initiative for us it won't be just a six month or 12 month initiative. This will span the next three or four years and it's really linked.

Andrew was saying and how we build back our network from 80% to 100% in growth from there. So there will be a focus first on the west coast and making sure people understand.

Understand who Alaska is and the strength, we bring with our network and with our brand and with our loyalty and our products. So we're.

We're going to focus first on the west.

Two words, and then move up move east from there.

Okay. Thank you.

The next question will come on it.

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

Hey, everyone. Thanks for the time.

Hum.

Yes.

Coasting so it sounds like you laid out a path of capacity.

For 2022, I mean, I guess correct me if I'm wrong.

But and then from some earlier comments it sounds like in that scenario, we should be expecting unit cost down versus 2019 I guess.

Is there anything wrong, there and if that's right are there any larger tailwind.

Thanks.

Thanks, Katie Hey, I I just.

I'm going to stop short of giving guidance for next year, because we don't want to be doing that today and we do totally.

Recognize that there's an appetite to understand what our view on 2022 capacity and cost is for the full year and I think when we have our earnings call in January.

Jonathan strongly consider giving full year guidance instead of just quarterly guidance, but the essential thing is get back to pre COVID-19 size by summer of next year and we've got planes coming in in the second half that could allow us to grow if demand is there and we are.

Configured to do it.

And you know as we go along that capacity trajectory, we'd see our unit.

Unit cost.

Intimately step back to.

Hopefully flatten them down, but not I don't want to commit to a timing for that right now.

Okay, that's fair enough.

And then it sounds like you've already locked in either some new contracts with corporate clients are perhaps a bit adjustments that gives you greater wallet share with existing account.

Accounts.

That have occurred since the onset of the pandemic with your American and Oneworld partners can you help us frame. The upside you have on the books as of now if you were to assume that all else equal you are pre pandemic corporate volumes returned 100% I'm sure you can't give like an exact number but just like.

You know is it 110 is it 150 like that's really how it will be helpful. Thanks, guys.

But what I will say is that.

You know how these things go they have rfps I cycled through every few years I think.

Rapidly in the process of changing that al agreements.

For joint contracting.

Being agreements Rfps plentiful and we've just found an overwhelming engagement and we were also being more and more competitive on businesses and working with big Big TMC is like GBT.

Just going to only help us propel that more so I think that's what our share and again on invested.

We will share more about our strategy around that.

Thanks, so much for the time.

Thanks Katie.

The next question is from Myles Walton with UBS. Please go ahead.

Thanks, good morning or afternoon.

I was wondering maybe I'll follow up on Casey's question, and it's a little bit a cart before the horse but.

But is it reasonable to think 'twenty two is a double digit margin year and maybe.

Some of the frustration you sensed the market not recognizing your performance is simply that everybody is losing money when everybody is losing money, losing glasses aren't necessarily a big deal, but maybe the market isn't differentiating you're uniquely higher gearing on the volume.

The drop through from a pre tax basis.

Yeah.

I appreciate it.

It's really hard to say I, just if you look at the <unk>.

Revenue impact that we mentioned from this one wave.

A couple of hundred million for Q4 alone it was more than that if you added in Q3 impacts so.

If there are no.

As it paves and demand comes back and you know.

The economy is strong and yet were configured to deliver really strong financial performance.

But I think what we've been saying all along and been open with as we expected choppy recovery, that's what we're sort of mentally prepared for them.

Oil prices are spiking right now that's gonna be a headwind.

No more what's hard to give you. Some exact you know confidence that we're headed towards those types of margins, we would love it if everything stabilized and we could deliver that but.

I think the environment is really too choppy to be able to predict that right now.

One detailed one through your head Count's down about 16% roughly in line with capacity as you get back.

So it's gonna 19 capacity, where will your your head count be relative to 2019.

Thanks.

Yeah, Great question are there as well it should be you know down ish as we really execute on the productivity targets that we've got probably not.

A huge amount but.

As.

To achieve the productivity targets.

We will on an average basis do a little bit better so.

That's that's our expectation going forward.

And the other thing that I would just as we've got.

Really we've done a really nice job of managing overhead of the company and we'll grow overhead back at a much slower rate overtime.

Relative to capacity.

Yeah.

Okay.

Thanks, Bob.

Thank you.

The next question is from Chris <unk> with Susquehanna. Please go ahead.

Hey, good afternoon. Thanks for.

My question. So appreciate.

The comments you just gave on your.

S M a per FTE, but if you you spent a lot of time going through the productivity initiatives. I was wondering could you could you put a finer point on that.

And if there are two or three metrics that we should.

About <unk> <unk> per FTE.

As we think about this next stage of the recovery here.

2019 was around 3.3 or is it perhaps something.

Block hours per month per crew.

Just a finer point on some of the metrics here that.

We should consider as we look at this next leg of the recovery. Thanks.

Hey, Chris Yeah. Appreciate it the two that I think are most easily consume externally or passengers per FTE, which obviously has a demand component to it.

And then the others departures per FTE, we do manage a lot of the business from that perspective.

In terms of the labor inputs her departure internally, we track more than that sort of about the specific employee group level and certainly block hour production for our crews is something that we look at closely.

That is probably something that can be derived externally, but not as easily as it goes on the two numbers.

Okay, and just a follow.

Follow up question here so in your prepared remarks.

On your signaling.

Signaling capital returns here as we think about 2022.

Cash flow from operations on a lot of moving pieces here you have the partnership we have concerns around inflation higher fuel, but if there's any sort of detail.

Finer point, you could put up how we should be thinking about yields or more specifically CASM ex.

The back half of next year, I think you've said that.

You're expecting to fly 2019.

2019 book for next summer and then what would that imply for CASM X as we.

In the second half of 2022, thank you.

Yeah. Thanks, Chris.

I appreciate the question I'm going to kind of stand by my earlier comment that I'm I don't want to give guidance for next year I totally appreciate that there's a desire to hear more about our you know our full year expectations and I do think on our next call.

Think about we'll consider.

Given you guys annual guidance for both CASM and ASM for.

For all of 2022, so you can get a better sense of the shape of what that looks like quarter by quarter.

Okay. Thank you shared all the questions from everyone Krishna all the questions. We're out of time, Thank you and we'll talk.

Well on the next call thanks, everybody.

Thanks, everyone.

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

[music].

Good morning, My name is Thea and I will be the conference operator today at this time I would like to welcome everyone to the Alaska Air Group 2021 third quarter earnings release Conference call today's call is being.

And will be accessible for future playback at Alaska Air Dot Com.

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

After the Speakers' remarks, there will be a question and answer session for analysts.

If you would wish to ask a question. Please press star one on your telephone keypad, if he would like to withdraw the question press.

A recording.

Thank you I will now turn the call over to Alaska Air group's managing director of Investor Relations Emily Halverson. Please go ahead.

Thank you Deanna and good morning, Thanks for joining us for our third quarter 'twenty 'twenty. One earnings calls. This morning, we issued our earnings release, which is available at Investor day at Alaska.

<unk> Dot com on today's call, you'll hear updates from Ben Andrew and Shane several others of our management team are also on the line to answer your questions. During the Q&A portion of our call.

This morning Air Group reported third quarter, GAAP net income of $194 million.

Excluding special items and mark to market fuel hedge adjustments.

Eric or adjusted net income of $187 million pre.

Pre tax margins were 12% a 15 point improvement from the prior quarter. This marks our first profitable quarter on an adjusted basis since the pandemic began.

As a reminder, our comments today will include forward looking statements about future performance, which may differ materially.

Aircraft for summer 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.

Over to you.

Thanks, Emily and good morning, everyone.

Air Group's 187 million adjusted net income marks an inflection point on our path to recovery.

Our last earnings call, we forecasted double digit third quarter pre tax margin.

Despite the impact of the topic of Covid Merit, we delivered.

Our 12% pre tax margin solidly might be industry and was six points shy of our Q3 2019 margin.

I'm proud of how our company is emerging strong independent pandemic.

Looking forward if you wanted to recovery is stable and less likely to undergo with demand shocks disappearance.

Our approach from.

It's been deliberate scaling our business back in a measured way.

Our strong balance sheet and running our operation to produce consistent industry, leading financial performance no matter, what the external circumstances.

Our third quarter results reflect the strength of the summer season, with pent up leisure demand, bringing passenger.

In fact in the skies.

Fourth of July and Labor day passenger employments approached 2019 levels.

Even with the dampening impact that <unk> had on demand in August and beyond our third quarter load factor came in at 80% and total revenue was down 18% on a year over two basis.

A 15 point improvement sequentially from the second quarter.

Our unit costs were up 9% in the third quarter, beating the better end of our guidance range.

Solid cost execution reflects incremental progress towards our productivity goals as passengers per FTE increased 6% sequentially.

Following just 12 points below 2019 levels for the quarter.

Shane will provide more detail about our cost performance and pressures, we're seeing in a few cost categories.

Looking forward our longer term thinking about our approach to recovery remains intact. Despite the transient choppiness, we are experiencing from the adult <unk> R.

<unk> is built to return to our pre Covid size no later than next summer and then to grow from there.

We anticipate recovery will continue to be volatile at times as we've learned to live with Covid and until demand ultimately normalizes.

Our job is to deliver consistently strong financial and operational performance no matter what.

Our plans to recovery takes in Q3 has shown us that when demand does come back our business model is tuned for success.

I head to the fourth quarter, we plan to increase our capacity to 13% to 16% below Q4 of 2019 and given the dampening effect of the DARPA Grant we expect.

Core levered breakeven to slightly positive pre tax margins.

If the pace of the recovery accelerates from here.

Will be upside to our expectations.

This quarter's results were only possible because of the hard work of our frontline employees and crews their dedication to delivering an efficient operation with our culture of.

Kindness and carrying is at the heart of our success.

Want to thank them for their efforts and for putting air group amongst the top performers in the industry and on time arrivals and completion rates once again this quarter.

Our guests have shown their appreciation for that great service to guests.

Guests satisfaction scores have exceeded internal targets.

<unk> every month, so far in 2021.

Sustaining operational performance with high guest satisfaction is a remarkable achievement given how complex re ramping our operations has proven to be.

Several quarters of improving demand and financial performance have provided the stability necessary.

<unk> and repairing our balance sheet year to date, we have made gross debt repayments of $1 2 billion driving our debt to capitalization ratio down 10 points from year end, 2020% to 51%.

Moving within reach of our sweet spot for leverage between $40 to 50%.

Having deleverage so quickly from our pandemic borrowings makes clear to me that we made the right decision and not diluting shareholders. During the depths of the crisis, even though that is not yet something the market is rewarding thus far.

We are making progress each quarter on our path of single fleet. This quarter, we took.

Delivery of two more 737 dash nine aircrafts and also exercise options for 12 incremental firm airplanes to be delivered in 2023 and 2024.

All told we will have 93 737 dash nine aircraft in our fleet by 2024 with options for 52 additional.

<unk> airplanes.

This fleet order not only replaces our departing Airbus $3, 19, and 320 fleet, but positions us for significant growth when demand comes back, which we expect will be in the back half of 2022.

Importantly, we are in a financial position to take these deliveries while also maintaining our strong balance sheet.

Okay.

To close I'm optimistic about the foundation, we have laid to prepare for egroups returned to growth and profitability.

We have a fantastic Boeing order by creating flexibility for significant growth through 2025, a low cost structure that allows us to compete with low fares supported by a strong balance sheet.

<unk>, a great onboard product match with industry, leading customer service and operational performance.

A powerful domestic west coast network supported with the Oneworld Alliance a brand with a fierce customer loyalty behind it and most importantly, our culture rooted in kindness and Carrie.

I'd like to thank our people one more time for a great quarter.

With that I'll turn it over to Andrew.

Thanks, Ben and good morning, everyone.

Our comments today will focus on third quarter performance.

Demand trends.

Yes, with our alliances and revenue guidance for the fourth quarter.

Our third quarter revenues came in at one nine.

$9 billion down 18% versus 2019.

This was on flying capacity that was also down approximately 18%, resulting in near flat unit revenues. We were very happy with this result, especially as the impact of the Delta variant started showing up in a meaningful way at the end of July.

Our revenue.

New performance reflects a 15 point sequential improvement from last quarter, while capacity was just three five points higher.

I would factor sequentially increased three points to 80%.

Bigger revenue driver was strong sequential yields, which improved 13 points from last quarter to up four.

Percent versus 2019.

On a monthly basis loads was strongest in July at approximately 88% then deteriorated to 81% in August and bottomed at 72% in September.

In the same timeframe yield deteriorated about five points from up three 6% in July.

<unk> is down one 5% in September.

Both on a year over two basis.

These negative trends were all driven by the emergence of the Delta variant.

Geographically, Hawaii represents 16% of our capacity and was our weakest performing region during the quarter given the travel advisory.

<unk> for the state, which damage demand for Hawaii.

In fact, the impact to our system results was to reduce RASM by two five points.

Considering the headwinds in Hawaii, along with the broader impact of the Delta variant.

I'd characterize our Q3 revenue performance is strong our.

Our commercial team did a fantastic job.

Managing revenue and a volatile demand environment.

As I'll expand on momentarily the consequences from the Delta variant have not yet dissipated and we're still working to build back Q4 bookings that will loss from the fourth Covid wave given it occurred during an important period for building Q4 traffic.

But sticking with third quarter results for a moment longer there are two bright spots that have steadily buck trends for several quarters now.

Premium product performance and our loyalty program.

On the premium product side. This quarter's paid load factor in a first class cabin was three points over 2019.

Premium class cabin exceeded 2019 by nine points, we continue to see strong demand for our premium products and we believe this will only continue as business demand returns along with international demand associated with our entry into Oneworld.

Regarding our loyalty program this quarter we received.

And highest level of cash compensation in our airline's history, which was up 7% from the same quarter in 2019.

A loyalty program is one of our most durable competitive advantages and we are squarely focused on maintaining and improving this momentum over the coming quarters.

Now looking at our network.

It's only it's been our priority throughout the recovery to quickly rebuild Seattle and restore the Pacific northwest capacity.

This approach is producing results as is evident from our revenue performance. This quarter. We're also seizing opportunities to capitalize on demand shifts as they arise.

Reflecting on the year.

The 30, new markets and only discontinued three in short choices for our guests when combined with our strong relationship with Americans have improved significantly today, we're flying approximately 85% of our pre Covid network now.

Our Seattle hub capacity is fully restored with capacity above 2009.

<unk>, while overall Pacific Northwest flying is quickly approaching 2019 levels.

California recovery remains slow as we flew 65% of 2019 capacity during the quarter.

I still expect that by the summer of next year, our California flying will be back to pre pandemic levels.

Part of the California rebuild we've recently announced that we're expanding our service from the Bay area to Mexico positioning Alaska with more nonstop flights to Mexico from the West coast than any other U S carrier.

Now turning to the future.

Current revenue environment has certainly been challenging but as I mentioned last call.

Coal my team is focused on building a strong commercial engine that will serve this company for a long time.

One otherwise we'll do this is by leveraging the unique benefits available to us as part of one world.

Like to give a shout out to the alliances team who have been working tirelessly to establish robust commercial agreements that will.

Inflexibility and benefits for our guests.

So far in 2020, one we've added 195 incremental codeshare routes with five Oneworld partners, increasing our codeshare portfolio by 43%. This figure includes our recently announced agreements with Iberia and with.

<unk>.

In very short order, we've seen cutoff become one of our top international partners as I efficiently connect down network with nonstop service between Seattle, San Francisco, and Los Angeles with a global hub in Doha.

The Seattle, Doha, Nonstop, which was launched in January has been especially strong.

This success is an indication Alaska guests value, our global portfolio and are eager to see their responses to American upcoming Seattle route launches to Shanghai in Bangalore in 2022.

With American and our Oneworld partners, our potential to capture international traffic out of Seattle, and California is significant.

One world and our partnership with American have also opened the door to greater access to corporate travel and we believe a group is uniquely positioned to get more than our pre COVID-19 corporate market share with the tools, we're putting in place.

On September one we activated for the first time, our preferred partner status with American.

Breast GBT, enabling greater access to more corporate guests and quality traffic.

Really looking forward to sharing more details with you about these new initiatives as well as many others in the spring.

Now turning to the fourth quarter guidance, although the delta variance surge looks to be behind us its impact.

<unk> bookings have left an unfavorable imprint on our Q4 expectations.

<unk> has deteriorated from down 20% in July to down 35% in August and flirted with down 50% on a few booking days during the peak of the search while that rate of recovery since the peak has been slower than we experienced after the loss.

Last search this spring.

Over the last seven days, we've seen bookings recover to down 10% year over to ultimately we believe the Delta variant is reduced fourth quarter revenues by approximately $200 million.

Although the trajectory of bookings today has improved it is not enough to fully make up for what was lost.

On people.

With this as a backdrop, we expect Q4 revenues to be down 16% to 19% on a year over two year basis.

However, our assumptions reflect weaker performance in October with total revenue down approximately 25%.

So just looking at November and December.

And <unk> is expected to be down between 13, and 16% right in line with our capacity reduction.

From a unit revenue perspective October RASM is shaping up to be down about 10% versus 2019, while November December could improve to nearly flat versus 2019.

Filling out planes as a top priority but.

But we're using discounts cautiously with an eye on preserving yields, especially in a rising fuel environment, while we aren't making any predictions about what awaits us around the corner improving rates of vaccination availability a booster shots the expected near term approval for vaccine for children and opening of international borders could have a positive.

Positive in fact on a recovery in the economy.

However, the recovery unfolds I'm very optimistic that our commercial model will deliver relative outperformance as we saw in Q3 and that our work to date has positioned as well.

As Ben just shared we expect our efforts to lead to a breakeven quarter with upside.

Potential.

That a pathogen shedding.

Thanks, Andrew and good morning, everyone as we've highlighted today another quarter of sequential improvement and strong margins underscore the durability of Alaska business model.

Underlying our industry, leading results for July and August performance that came within about two points of 2019 margin.

Levels Island.

I'm impressed by our team's execution and the results they delivered in such an unpredictable environment.

In my commentary today I will provide insights on these results our cash flows and liquidity cost performance and our expectations going forward.

I'll begin with cash flow and liquidity, we ended the quarter with $3 6 billion.

And total liquidity inclusive of on hand, cash and Undrawn lines of credit. This is down from $4 $4 billion of total liquidity in June as we paid down nearly $550 million in debt and made a $100 million voluntary.

Voluntary pension contribution that.

Debt repayment included retiring our $425 million 360.

Today alone and our pension contribution brings our funded status to 94% and also allowed us to capture a onetime permanent tax benefit of $14 million.

Q3 cash flows from operations were essentially breakeven excluding pension funding the sequential.

The decline from Q2 to Q3 was expected.

<unk> for the absence of PSP grants inflows this quarter and the normal seasonal drawdown of ATL. However, as Andrew described in his commentary the Delta variant stalled the otherwise strong demand recovery in the quarter and as a result, the ACL drawdown was higher than originally forecast.

Fourth quarter cash flows from operations are expected to be between.

The negative $100 million and $0 exclusive of tax refunds and payments, which we expect to net to a positive $100 million in the quarter, depending on when we receive our anticipated 2020 tax refund.

This forecast factors in the reduced cash and takes due to the impact on bookings of the Delta variant.

Plan.

We never for the remainder of the year is approximately $120 million.

And we have no plans for further pre payments through the end of the year.

With this quarter's debt retirements or debt to cap is dropped to 51%, placing us just shy of our intended range as been shared.

Our outstanding debt bears a relatively low weighted average.

That surf rate of three 3% and our 2022 debt service is very manageable at about $375 million for the year roughly a quarter of that of 2021.

Moving beyond 2022 annual debt service is in the range of $250 million to $400 million.

With a sustained return to profitability I expect our.

Effectively EBITDAR levels to move to approximately two times or less in 2022.

Our liquidity and balance sheet are in great shape, and we plan to leverage both as we fund our fleet order and essentially look forward to reactivate and shareholder distributions, which we can do towards the end of next year.

As of now I expect our total liquidity to move to approximate.

Approximately $2 5 billion in 2022.

Moving to costs I will touch briefly on our Q3 performance and then focus on our cost trajectory over the next several months as we prepare for a return to growth.

This quarter non fuel costs were $1 $3 billion with unit costs up nine 3% versus 2000.

Net debt is better than the guidance we issued in September our teams have continued to do a superb job, beating their internal cost plans and we also saw lower than expected medical costs in the quarter.

Fuel cost rose again, this quarter to $2.05 per gallon up approximately 25% from where we started the year with crude at $70.

In 19 barrel for the quarter, our fuel hedges provided a $21 million benefit or <unk> <unk> per gallon.

We currently have 50% of our planned fuel consumption hedged for the next six months at an average strike price of $61 in Q4 and $69 in Q1.

Given the current spot prices of oil we expect to.

Probably realized hedge benefits in Q4 and into 2022, meaning we also expect to see fuel cost headwinds impact absolute margin performance in the near term.

Looking forward, we continue to make steady progress on getting costs back to pre COVID-19 levels that remains an expectation and priority of the leadership team.

Our.

Continuing into 2021 has been solid with mainline CASM X compared to the same month in 2019 up 19% in June up 7% in September and likely to be up 4% to 5% in December and December.

Capacity in December compared to 2019 levels is expected to still be down 13%.

Capacity pressures.

Progressive acute for our horizon operations as aggressive pilot hiring across the industry is expected to lead to abnormal attrition levels, creating lower capacity capability and consequently also pressuring their unit costs in the near term.

We're also seeing modest pressure in entry level wages, which we believe is both an industry and general trend.

<unk> is more on me at large and wage adjustments in this category are adding approximately $7 million for the fourth quarter.

Additionally, as we ramp to 100% of pre Covid capacity, we are onboarding more employees earlier than we normally would given our given our training throughput capacity costs associated with additional training and.

And the <unk> for the quarter or approximately $5 million.

The costs associated with ramping capacity will normalize by next summer.

In 2022, we will continue to reduce unit costs as capacity returns doing so it is not without its challenges as we have two particular headwinds to offset one is airport related costs at our airport partners.

Carrying them through cares grant and return to fully charging airlines for both operations and capital expenses.

Other areas of step up and transition costs related to the returning our Airbus fleet to lessors the.

The cost of returning aircraft were fully contemplated in our decision to return to a single fleet and the economics of doing so are strongly favorable long term.

As we stepped squarely into the return window, we wont be recognizing these expenses through the P&L and Ernest I expect the largest impact in 2022.

<unk> stepped down from there into 2023, and our final wind down in 2024, which will provide a nice tailwind to our CASM ex trajectory as we exit 2022 and move through 2023.

Notwithstanding the headwinds we will emerge as an airline with a cost structure equal to or better than 2019 in short order our cost restructuring targets are intact and this quarter's results reflect increased utilization our realization of productivity savings as well as the efficiencies of now 70, 737 dash nine aircrafts flying for our mainline fleet.

As a result of the headwinds and tailwind as I've described our expectations for Q4 unit costs is that they will be up 7% to 9% versus 2019, and roughly 15% lower capacity.

To close I would just say again that our underlying business model is strong while demand is choppy and we hate that we don't.

Get to have the fourth quarter that we think we were set up to have because of the delta there and we're confident that when reasonably strong demand returns we are poised to deliver strong financial performance.

We're looking forward to re scaling to a pre COVID-19 size and demand, allowing growing from there as we do this we will be continuing to deliver on our cost restructuring and fleet transition.

And unlocking commercial levers to drive additional value to our bottom line.

And with that let's go to your questions.

At this time I would like to invite analysts who would like to ask a question. Please press star and the number one on your telephone keypad again that star one for any questions well pause for just a moment to compile the Q&A.

Roster.

Okay.

And the first question will come from Savi <unk> with Raymond James. Please go ahead.

Hey, good morning, everyone.

As you talk about kind of rebuilding the network here I was just kind of curious.

You know it.

Big airports, Seattle Portland, San.

<unk> built those back this is kind of a mission, but the strategy behind those airports or how you operate them change kind of post crisis worsens.

Sure.

Hi, Savi good morning, it's Andrew.

I wouldn't say, it's changed but we have actually.

<unk> made some refinements and tweaks.

Obviously, Seattle, we serve.

Everywhere from there in Portland to a lesser extent.

I think some of the pivots, you've seen us make and given the come to us.

<unk> is especially Los Angeles, you're going to see more leisure flying for us out of there.

We do very very well and I think in San Francisco.

We built out a pretty good network and I think what youre going to see us style or more focused on is the largest ond's out of there and making sure we drove the top 2025 business market.

And so that's sort of where we're landing on all of this.

Got it.

Just Andrew maybe if I could follow up on that a little bit more on the you know the other focused cities that you've tried to build in the past or kind of working so we can think about kind of San Diego, our Salt Lake City Boise, how do those fit in within the network and any kind of learnings on.

In the past trying to build those out.

Yeah we've.

Especially on the secondary city, but we've done a lot of Pacific Northwest to California, we used to flow that traffic over out major hubs and just given the demand and the loyalty strengths in the evolution of those markets. We're finding non stop service to be very good there.

I think.

And then as I as part of the Bay area and San Diego for US, It's all about loyalty as well and making sure. We've got utility for all of our guests. So while we focus mainly on the Seattle, Portland, San Francisco and Los Angeles.

<unk> in the secondary cities will always be very very important to us and we're going to continue to grow those over time.

Okay.

And just one last clarification.

His business from RBC.

He is coming back and in fact, we've had the best day.

This week I should say recently versus the previous one and the pandemic, which was just before summer. So what we're seeing is an increase.

Santa at a forward momentum business demand starting to return.

Okay got it thank you.

Thanks Savi.

The next question will come from Andrew <unk> with Bank of America. Please go ahead.

Hi, good morning, everyone and thanks for the questions.

So I guess a question for Andrew I know indices.

<unk> the capacity plans are pretty fluid here, but.

But you've benefited from sort of below average competitive capacity growth through much of the pandemic and I know this has been helping a lot of the yield performance that you talked about earlier, but we do see some of this capacity picking up particularly into <unk> based on schedules can you maybe talk about.

Industry Youre seeing in the competitive competitive environment, and how you see it unfolding over the next quarter or two.

I don't know, we look at the West Coast, Andrew and we've looked at how the competitive environment goes I think a little bit the west coast as being honestly.

What's your directed to weaker demand in the rest.

The rest of the country. So even though you may see that competitive capacity is not as high vis vis others I do think when you think about California, specifically.

Demand has been soft there, but at the end of the day, we feel really good about our network mix and how it's structured and.

<unk> I feel really good and as you can see by the third quarter that our network is configured for a good performance.

Yep.

Shane maybe Ben I mean change you mentioned in your prepared remarks, and I think you were the first airline to say this is that you were looking forward to shareholder returns. This time next year.

We balance sheet can certainly handle it but I guess, Shane or bad I guess when you're allowed when you think about your capital return policy do you think.

When you think it will be as high up on your priority list as it was pre pandemic and the way you're thinking about it now do you think there'll be a little bit more focused on on sort of a buyback or dividend.

You were allowed to and thanks for the questions.

Yeah, Thanks, Andrew I think yeah.

Yeah.

Our sort of thinking here is that we want to put ourselves into a position to be able to do shareholder returns.

We're not committing to any particular time frame today to do that well.

And once you, obviously sort of get together with our board and make decisions about what the best Avenue is and at what levels, but I don't think a lot about our sort of.

Capital deployment and capital allocation philosophy has changed we do have to sort of understand what our go forward environment with COVID-19 looks like and how stable demand and returns are but.

Making sure we have a stable business enough liquidity on hand to manage the ups and downs and to grow the airline.

But shareholder shareholder returns are.

Super important to us.

Thank you.

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

Hey, good morning, everybody. So you you echoed what other airlines have said.

This season about premium demand.

<unk>.

I also think that this phenomenon is permanent and is growing.

Do you need to do anything differently to continue capitalizing on it or are you optimized for this.

Mixed demand leg up however, you want to describe it.

Hi, Jamie.

Our cabins.

To be accretive out very well configured with first class and premium class.

To see any product changes, but to your point, we are going to definitely especially with business demand and our ability to play a much larger place there is our booking curves and how many since we hold out and when I think historically, we've probably.

I believe <unk> business traffic that Kevin historically, and I think we're going to get more fine tuned on that so I think that would be the sort of the largest change and then the other part of that too is just making sure that out network, we're going to be a little bit more disciplined about timing of flights that business demand. So I see just increased.

Demand coming for that premium cabin gone for.

Okay, that's helpful and second.

Apologize for pivoting to the model did you say the Delta variant SaaS fourth quarter revenue by $200 million was that right.

That's correct okay.

Okay. It's on the tape that it was 400 million. So I just wanted to make sure I wasn't wrong. So.

Even if we allow for some variable costs associated with that.

If we were to just tack that 200 million to today's guide.

It implies that you'd be back in the double digit pre tax margin territory in the fourth quarter and I know, that's where the fourth quarter plan was in July because you.

So.

But that was on cheaper fuels. So I guess my question is whether one is there anything wrong with my math, hopefully not but if not it feels like your ex Delta fourth quarter plan actually strengthened over this summer despite the rise in fuel is that.

Fair.

So mangled interpretation.

Hey, Jamie.

The one thing you can never do is go backwards.

Redo things over again and know what it turns out if there wasn't a variance but.

But I think what we had going for us were very very strong load factor builds we were above.

This call in July we were sitting on load factor builds that were above 2019 levels almost every forward months.

And on yields that were above 2019 levels in every single month and so.

Yeah, I mean, I think you know we were feeling quite optimistic if that demand pattern sort of played out.

It wasn't interrupted that we could have had a really strong fourth quarter.

Hard to exactly know if.

Strengthen over between that.

And now is the right way to think about it but yeah. It would have been a strong quarter for sure I.

I think Jamie Joseph Spak, Yes, sorry go ahead.

I think this is and we said in our prepared.

And I think this is why we're confident about our business model I think it's a business model that when recovery comes back we're going to produce returns in.

I think it just goes to have a score that but go ahead I think Kevin a follow up yes.

That's certainly my modeling interpretation as well just a real quick labor Claire.

Clarification excuse me.

Recall correctly that you are the only airline of size in the U S that still doesn't have a preferential bidding system is that right.

We don't with our pilot group, we do with our flight attendant group that is true today.

Just checking thank you.

Thanks, Jamie.

The next.

Statements will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Hi, Thanks, Good morning, Al if I can just follow up on the last two questions are are you guys surprised at all that.

The mix is so strong coming out of the pandemic again is that something that you expected given people's preference.

Travel in the front of the plan kind of given everything that's going on or is that a surprise and second on the competitive side.

Given the concentration of travel kind of are you surprised at all that that.

The industry has pulled back on traveling a certain lanes and it's not a free for all out there.

Hi.

Hey, Ravi.

I can't speak for the rest of the industry, but what I can speak to for.

Alaska is knowing business demand was where it was we materially reduced phase in the front of the cabin.

First class fares were coming down, but they were way made up plus much on the volume side.

So I feel the team did an outstanding job at lowering fares and driving net net incremental value through volume and so that's part of what we're going to have to measure going forward, but let's be clear.

Who doesn't want to travel and physical premium class I mean, I don't believe there's anybody.

So it's a matter of that price.

So the demand that's the first place that people want to see it and so we've been working well there I think on the industry capacity again I don't know you all look at the the network in the system, we look at the West Coast.

And as I look across the West Coast, you you see a lot of adjustments.

By other carriers coming down closer in.

And I think one of the things that I'm, particularly proud of especially.

With our operations folks and Bens leadership here is that we have not been volatile, adding back reducing adding back reducing capacity we've been on a steady path. That's allowed for really good cost control really good selling and inventory and minimal.

So involved guest disruption so I feel like all of that has been working for us.

Alright.

Lisa.

Go ahead go ahead.

No sorry go ahead.

I was going to say just with the leisure traveler I think with this the environment.

Environment of Covid I think they are looking for more space in.

More comfort and when they fly.

We have competitive fares up on our premium class and first class.

I do think we're seeing we're seeing the benefit of that sorry, I'm glad you and another question. Yes. So just to follow up on that specific point. So how do we think about this going into 'twenty two and 'twenty. Three are you be are you going to be looking to keep this elevated.

<unk> mix of premium cabin fares at current levels or are you going to be looking to return fares to where they used to be even if that kind of if you see this mix shift back a little bit demand Kevin.

The only thing I'll comment on that is it's not so much the fares that we're focused on but of course as business travel returns.

As our road Warriors return.

Turn and loyalty returns, we are still committed to having robust opportunity for our guests to upgrade into the first class cabin. So we're gonna be balancing.

As with first class upgrade occupancy rates and that's going to be our challenge going forward, but it's a good problem to have.

Perfect. Thank you.

The next.

Question is from Dan Mckenzie with Seaport Global Please go ahead.

Oh, Hey, thanks, guys.

Just a question here with respect to the American partnership.

What is the aggregate wallet that Alaska can now tap into that it couldnt previously.

And I guess, what I'm really I'm really referring pardon me to just to a normalized backdrop. So.

So corporate travel managers that for the first time can consider flying in the Alaskan American as an alternative to their to their current program.

Yes, Hi, Dan.

I'll answer the second one first I think but essentially really the unlock here is a couple of things to your point.

We've had overwhelming response from our corporate clients wanting joint contracts with Alaska, and American providing much more competitive fares and much bigger options.

We've also just to be Frank being more generous now without big corporate accounts, we're opening up.

You know priority seating.

For them are handling on Iraq.

And so the hull.

Dynamic there.

You know really improved on the first part of your question could you repeat that Dan and I will take it actually this is Matt and speaking to the value of the American partnership I think a couple of places initially when we announced the WCS.

See I E. The <unk>.

Focus was on Americans nonstop flights out of Seattle to London to Shanghai into Bangalore, and obviously with international travel a bit suppressed those haven't taken off as actively as we want but we're excited about the potential there, but what has really come to pass is linking our domestic networks.

Via Codeshare and having the ability to out of Los Angeles San Francisco.

And over the Chicago hub for American offering unique destinations that we can't get our passengers too and so think the des Moines to Grand Rapids, Codeshare behind O'hare and behind the American hubs.

There's really been valuable and lets us tap into demand streams that before we really couldnt.

Yeah helpful. Okay.

And then one of the comments in your prepared remarks, you know you are looking to get to a cost structure of 2019 sooner rather than later.

Do you have to get to a 100% of 2019.

Our capacity to get to a CASM X. That's similar or you know can you achieve a CASM X you know of 2019 with less than 2019 flying.

Yeah, Thanks, Dan it's Shane.

We don't I don't think that we would have to get back to full.

100%, we've got a pretty large cost restructure program and commitment that we're executing on.

Big piece of that is movement to a single fleet and that takes a couple of years to get done.

And so it's likely that we will actually be above 100% of pre COVID-19 sort of coinciding with the full capture of those.

Cost restructure.

Adams, but but if we for whatever reasons at a 90 or 95% of our pre COVID-19 capacity for a long time, our commitment will be to get back to 2019 cost levels. It just I think the trajectory is going to be a bit different with our order book and with what we think about the opportunities in front of us up and down the west coast and with our business.

So it's likely we'll be growing above the pre COVID-19 size and at about the same time getting to the pre COVID-19 cost structure.

That's perfect.

And since we're focused.

One is productivity now we're getting back to our.

Right.

Pre merger productivity targets and that goes hand in hand with a single player.

And Thats, where were squarely focused on when we get back there.

That's going to be the sweet spot for us.

And we will see a big benefit to CASM as well.

That's perfect. Thanks for the time guys.

Thanks, Dan.

The next question is from Duane <unk> with Evercore ISI. Please go ahead.

Hey, Thanks, good morning.

Youre, probably not the best airline to ask this because your plan has been appropriately conservative in your schedule hasn't whipped around as much.

But on labor availability airports staffing ground handling.

Are you seeing any early signs of clouds parting on that front are you seeing any any relief.

Thanks for the question Duane this is constant.

Our performance has shown in the third quarter, we've really delivered amongst the top performers.

Industry, despite all the challenges.

As we have and that's for two reasons. One you mentioned, which is disciplined return to capacity and secondly, really resilient proactive team at solving all the many challenges we have some that you listed.

In your conversations those are true across the industry I think our leadership team has done a great job.

Interesting, though that we as we see them I'm confident we'll continue to do just that through the fourth quarter and beyond.

They're all very fair comments, which we agree with I guess the question is you know I guess the effort for higher or to the extent you're trying to acquire airport staffing is that getting any easier.

Or is it just as difficult as it was.

I would say consistently difficult.

The acquisition is one thing and then be a kind of a retention piece and.

Consistently staffing on an everyday it continues to be a challenge.

So I think that's true across the industry. So we do put a an inordinate amount of effort into that relative to what we may have done in 2019 as Wayne Let me just quickly because we wanted to tighten that interesting real quick but.

I think everybody's dealing with it certainly the Seattle region, I mean, it's been tough to get.

You know entry level workers, just that pool of labor hasn't been what it used to be but I will say, it's improving I think as we've gotten through the summer and into the fall.

Our need for staffing is a little bit less and I think the labor pool is starting to expand a bit. So I think that things are going in the right direction, but one thing I know constants would also say as we.

So appreciate the employees who.

Came to work every single day put everything they have into the operation word tons of overtime to keep our guests moving and really minimize operational disruption they did a phenomenal job.

That's super helpful. And then just for my follow up and I apologize. If you mentioned this but how are you thinking about capex.

<unk> and 'twenty, two and 'twenty three and again, thanks again.

Capex right now.

Duane we're in it for 22, we're looking at about 1 billion five.

With airplanes, obviously in the midst of our fleet growth and then a little bit north of that in 2023 as.

And.

Again based on our liquidity forecast based on our conservative pre tax margin forecast. The plan is to pay cash for all of those airplanes and still be well above our minimum liquidity value at year end 'twenty three.

Okay. Thank you.

Thanks Duane.

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

Yeah, Hey, good morning, everyone, Hey, two questions here, Shane you talked about the headwind with respect to re delivering the Airbus airplanes.

I think he said 'twenty two 'twenty three.

<unk> 2022 and 2020.

How many airplanes are we are we looking at here and what is it like a 1 million to $2 million in airplane I'm just trying to size. This this cost headwind that will go away.

In a few years.

Yeah. They like it's it's well north of that these are full engine restorations and airframe restoration.

<unk> is a condition of the lease. It's worked we would have had to do had we extended the leases or really all of these aircraft are due for heavy maintenance cycle.

The number of aircraft.

Specifically by your I think Chris Mike.

We've got about 24 operating Airbus <unk> hundred Twenty's, it'll all be gone by the end of 2023.

<unk>, that's really the number youre looking at and to change point. These are we've had some history of returning these these are anywhere between $6 million to $12 million a tail on.

On the return cost and so that's kind of what the bubble youre looking at for the next couple of years.

There's different Mike we've got maintenance reserves for a lot of this so that's the P&L expense portion every month.

That's what you negotiate.

No. That's it that's actually super helpful. Because it gives us a good sense of what's going to kind of go away and then just to my second question.

I guess just to Andrew.

Theres been some comments about some commentary some very good qualitative commentary about your relationship with American and one world.

Interestingly American on their call. They said that the benefit that they were getting from U N jetblue.

<unk> was accretive to revenue, thus far but I think they throw out a half to 1%. They said something on the order of about 750000 passengers and obviously, we'd have to split sort of figure out what's your piece and what's.

Let's get blues piece, but the fact is there are five times bigger than you are so I'm curious if if anything that you can throw out as it relates to what you've seen on the revenue front. You know is it a couple of percentage points. Some accretion to revenue since it's been up and running any anything quantitative would be helpful. Thank you.

Yeah, that's a great question.

<unk> and <unk>.

We're not probably <unk> make a whole lot of comment here other than to say that we're going to unpack. This for you on Investor Day, and I think we're going to give you a lot more transparency than that.

Mike It's Ben.

Seeing a lot.

The value of this partnership with American and one world.

Again, it's not totally unlike because of COVID-19, but we do see upside.

To give you more details.

On Investor Day.

Investor day by the way.

It's going to be in March.

It will be sent out in March we price it wont be raining, although we're going to do in New York Alright.

Yeah.

Good thank you.

The next question is from Helane Becker with Cowen. Please go ahead.

Thanks, very much operator, hi, everybody and thank you very much for the time, just a couple of questions actually shifting gears completely to ESG you've made.

<unk> changed.

Is I guess to the board over the last couple of years, so as you're thinking about that or is the board, where you want it to be or their retirements coming up that gives you a chance or.

To change.

Get more diverse or.

Are you, okay with that and then the other part of my question.

She is with respect to what Lascar Star ventures, what's what's the focus for that or what are you hoping for it to do is that you know focused on SaaS acquisition or.

Maybe you can unpack some of that thank you.

Hey, good morning, it's Cai I'll take the first question of.

Diana will take the second I think our board is so fantastic and we just added a new board member, bringing bringing us to 12 independent directors Adrienne Loftus, destroying last week, bringing really fantastic marketing and brand experience to our board.

I'll also just note I think currently we're at 50% gender.

Diversity and about 40% plus ethnic diversity, we're super proud of that.

We're very happy with the board competition right now.

What I'll say is our board is squarely focused on ESG and sustainability, it's a big strategic driver for us.

They are really excited about our.

<unk> on this which will dovetail into answering your second question here on that and are excited about is Alaska Star ventures, Diana Yeah. Thanks, Brett So specifically our Alaska start ventures is right now focused on the five parts of our path to net zero, which we announced earlier. This year. So just briefly those are operational efficiency, obviously the fleet evolution.

It's sort of interesting.

But sustainable.

Sustainable aviation fuel novel propulsion incredible carbon offsets to close the gap to our target. So we're looking specifically for technologies.

Or in the case of our first investment specifically sector focused funds that can help us to accelerate those path that path and bring technologies into the system that can help us do.

The next three to five years.

That's very helpful. Thank you very much I just have a question youre integrate maybe then for you I don't want you to see anything you can say with respect to the pilot negotiations but.

What's up with them.

Hello.

First I.

That and then we have a fantastic group of pilots. They are highly skilled professionals, they keep us safe and on time and we value their contribution side, they do a great job for us.

We've got some sticky issues, we're working our way through and we've asked the National mediation Board for some help and we're comfortable we're going to get to a deal we have a history of getting deals.

And so we know we're going to get there what I'll say is we have an exciting future for our pilots.

Our growth plans.

Plan to grow the airline a lot over the next three or four years. So this will be a phenomenal place for our pilots and spend their career so.

So we will get there I appreciate the question.

Thanks, Thanks, Brian.

Returned to everybody. Thank you.

The next question will come from Conor Cunningham with <unk> partners. Please go ahead.

Hi, everyone. Thank you for the time.

I might be wrong, but I think your credit card agreement is up soon.

The market has been reset a little with the recent agreement from another carrier I was.

Thank for you if you could just provide some details around how many sign ups you've had since closing on that.

The Virgin America acquisition, or maybe just how spend has evolved on the card over the past couple of years.

Yes, hi.

We've been we've still got a little bit of time on our agreement that said, we are very aware of other agreements done and we are working very.

Was wondering with bank of America.

Who we have a 30 year relationship with <unk>.

Things are changing and they're working to change with us.

But I think as I said in my prepared remarks, I think since the team we've got a compounded annual growth rate of 9% on both our portfolio of members and Spain.

Close program has done nothing but deliver and return and as I also said we've had the highest cash receipts we've ever had so more to come there and as we get into 'twenty. Two we've got a lot of exciting things claimed that I think it's only going to fuel growth in our loyalty program.

Okay great.

Ben.

You've talked about.

Now this Alaska and National brand.

And I assume that would involve some further investment in markets that are off the west coast.

I saw that you put in for slots at Newark, and clearly that would be big for the brand in the northeast just wondering how you may benchmark that success of just brand awareness outside of the west coast outside of where you.

Mkay already pretty dominant.

And thank you for the time.

Yeah, no. Thanks Cotter I know this is a big strategic initiative for us it won't be just a six month or 12 month initiative. This will span the next three or four years and it's really linked to what Andrew was saying and how we build back our network from 80% to 100% in growth from there. So there.

Is there a focus first on the west coast and making sure people.

Understanding who Alaska is in and the strength, we bring with our network and with our brand and with our loyalty and our products. So.

We're going to focus first on the West Coast, and then move move east from there.

There will be a okay. Thank you.

The next question will come from it.

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

Hey, everyone. Thanks for the time.

So.

So it sounds like you laid out a path of capacity flat up for 2022, I mean, I guess correct.

Tom.

But and then from some earlier comments it sounds like in that scenario, we should be expecting unit cost down versus 2019 I guess.

Is there anything wrong, there and if that's right are there any larger tailwind going to flag.

Yeah.

Thanks, Katie Hayes.

I want to stop short of giving.

Just one more for next year, because we don't want to be doing that today and we do totally.

Recognize that there is an appetite to understand what our view on 2022 capacity and cost is for the full year and I think when we have our earnings call in January we will strongly consider giving full year guidance instead of just quarterly guidance, but yes. They essentially.

Got him to get back to pre Covid size by summer of next year and we've got planes coming in in the second half that could allow us to grow if demand is there and were configured to do it.

And you know as we go along that capacity trajectory, we would see our unit cost ultimately step back to hopefully flatten them down, but not I don't want to.

Central Bank, a timing for that right now.

Okay, that's fair enough.

And then it sounds like you've already locked in either some new contracts with corporate clients are perhaps a bit adjustments that gives you greater wallet share with existing accounts.

That have occurred since the onset of the pandemic with your American and Oneworld partners.

To help us frame the upside you have on the books as of now if you were to assume that all else equal you prevent diamond corporate volumes returned to 100% I'm sure you can't give like an exact number but just like you know.

Is it 110 is it 150 like that's really how it will be helpful. Thanks, guys.

But what I will say is that you know.

You know how these things go they have rfps I cycled through every few years I think we are rapidly in the process of changing that al agreements for.

For joint contracting agreements Rfps plentiful and we've just found an overwhelming.

<unk>.

And we're also being more and more competitive on businesses and working with a big Big TMC like GBT just.

Just going to only help us propel that more so I think that's what I'll share and again on Investor day, we will share more about our strategy around that.

Thanks, so much for your time.

Thanks Katie.

The next question is from Myles Walton with UBS. Please go ahead.

Thanks, good morning or afternoon.

I was wondering maybe I'll follow up on Casey's question, and it's a little bit cart before the horse, but is it reasonable to think 'twenty two is a double digit margin year and maybe.

Some of the.

The frustration you sensed the market not recognizing your performance is simply that everybody is losing money when everybody is losing money, losing glasses and necessarily a big deal, but maybe the market isn't differentiating you're uniquely higher gearing on the volume as it drops through from a pre tax basis.

Yeah, Myles I appreciate it.

Really.

Hard to say I, just if you look at the revenue impact that we mentioned from this one wave.

A couple of hundred million for Q4 alone it was more than that if you add in Q3 impacts so.

If there are no more waves and demand comes back and you know.

The economy is strong and yet were configured to deliver really.

Strong financial performance.

But I think what we've been saying all along and been open with as we expected choppy recovery, that's what we're sort of mentally prepared for them.

Oil prices are spiking right now that's going to be a headwind. So it's hard to give you. Some exact confidence that we're headed towards those types of margins we would love.

If everything stabilized and we could deliver that but.

I think the environment is really too choppy to be able to predict that right now.

One detailed one through your head count's down about 16% roughly in line with capacity.

Get back to 2019 capacity, where will your your head count be relative to 2019.

<unk>.

Great question are there as well it should be you know down ish as we really execute on the productivity targets that we've got probably not.

A huge amount, but you.

As we achieve the productivity targets.

We will you know on an average basis do a little bit better so.

That's our expectation going forward.

And the other thing that I would just as we've got.

Really we've done a really nice job of managing overhead of the company and we'll we'll grow overhead back at a much slower rate overtime relative to capacity.

Yeah.

Thanks, Bob.

Thank you.

Next question is from Chris <unk> with Susquehanna. Please go ahead.

Hey, good afternoon. Thanks for.

Taking my question. So appreciate the comments you just gave on your.

S M a per FTE, but if you.

You spent a lot of time going through the productivity initiatives I was wondering could you put a finer point on that.

And if there are two or three metrics that we should.

Think about it its ASM per FTE.

<unk>.

As we think about this next stage of the recovery.

Here.

2019 was around 3.3 or is it perhaps something.

Block hours per month per crew.

Just a finer point on some of the metrics here that we should consider as we look at this next leg of the recovery. Thanks.

Hey, Chris Yeah.

Yeah no appreciate it the two that I think are most easily consumed externally or passengers per FTE, which obviously has a demand component to it.

And then the others departures per FTE, we do manage a lot of the business from that perspective in terms of the labor inputs. Her departure internally, we track more than that sort of at the specific employee group.

And certainly block hour production part cruise is something that we look at closely.

That is probably something that can be derived externally, but not as easily as it goes out.

The two numbers.

Okay, and just a follow up question here so in your prepared remarks.

On your signaling capital returns here as we.

We think about 2022.

Cash flow from operations on a lot of moving pieces here you have the partnership we have concerns around inflation higher fuel, but if there's any sort of detail.

Finer point, you could put up how we should be thinking about yields or more specifically CASM ex.

Next in the back half of next year, I think you've said that.

You're expected to fly 2019.

2019 book for next summer and then what would that imply for CASM X as we think about the second half of 2022. Thank you.

Yeah. Thanks, Chris.

The question.

I'm going to kind of stand by my earlier comment that I'm I don't want to give guidance for next year I totally appreciate that there is a desire to hear more about our.

Full year expectations and I do think on our next call, we'll we'll consider giving.

Given you guys annual guidance for both CASM and ASM problem.

2022, so you can get a better sense of the shape of what that looks like quarter by quarter.

Okay. Thank you share at all the questions from everyone Christian all the questions. We're out of time. Thank you and we will talk to the next call. Thanks everybody.

Thanks, everyone.

Thank you for participating in today's conference call.

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