Q1 2022 Alaska Air Group Inc Earnings Call
Good morning, My name is Charlie and I will be conference operator today at this time I would like to welcome everyone to the Alaska Air Group's 2022 first quarter earnings release Conference call. Today's call is being recorded and will be accessible for future playback at Alaskaair Dotcom all lines have been placed on mute to prevent any.
<unk> background noise, how should we be speakers remarks, there will be a question and answer session for analysts if you wish to ask a question. Please press star one on your telephone keypad. If you would like too big for your question press the pound key.
I would now like to turn the call over to Alaska Air Group's Vice President of Finance Emily Halverson.
Thank you operator and good morning, Thank you for joining us for our first quarter 2022 earnings call. This morning, we issued our earnings release, which is available at Investor Dot Alaska Air 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 the call.
This morning Air Group reported a first quarter GAAP net loss of $143 million, excluding special items and mark to market fuel hedge adjustments Air group reported an adjusted net loss of $167 million.
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 measures such as adjusted earnings and unit costs, excluding fuel and as usual we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release over to you Ben.
Thanks, Emily and good morning, everyone.
Despite a slow start to the year in January and February March results were very strong.
In March Rerecorded Air group's highest ever cash sales, 13% above our prior best months.
And for the first time since the pandemic began march revenues exceeded their 2019 comp.
This was driven by strength in both leisure and business demand with leisure currently more than 100% recovered in business demand now at 70% of 2019.
As demand strength has carried into the second quarter and throughout the summer we issued guidance today, indicating that we expect to deliver double digit percentage increases in both unit revenues and yields versus 2019, and the second quarter guidance reflects a line of sight to double digit pre tax margin for the quarter.
Given we expect to deliver profits in Q2 and for the remainder of the year. We are reiterating our full year pre tax margin guidance of 6% to 9% for 2022, even with the higher fuel prices we are experiencing today.
To provide more context about our expectations I wanted to speak to you today about three topics what air group is doing well.
Where we are experiencing challenges and why our team is optimistic about our future.
I'll start with what we're doing well.
Scaling capacity back rapidly as proved challenging I'm proud of all the work being done at the company today are people have persevered through a lot. These past two years.
Every day I ask our people to focus on what we can control and where we need to do better but I also wanted to say thank you to every one of our employees and leaders to our frontline.
It is because of their hard work that Alaska was recognized as the 2022 airline of the year by Air Transport World. It's an incredible affirmation of the hard work and results. This team has produced in a very challenging environment.
We are also progressing on many aspects of our long term strategy extremely well, including our one world and West Coast International Alliance partnerships that continue to strengthen and provide more value to our guests into our results.
Our new long term materially enhanced co brand agreement with our partner Bank of America.
Being recognized as one of the 100, most influential companies by time magazine for our climate efforts underscored by our commitment to net zero by 2040.
Returning our balance sheet to within our target leverage range and continuing to post financial results that we believe will lead the industry. This year.
And as we discussed extensively at Investor day in late March positioning Alaska to outperform the industry over the next several years, given our cost profile and tangible commercial roadmap to grow revenue by $400 million.
Moving on to where we are experiencing challenges we have faced more operational disruptions than is acceptable as we scale our business back with the primary issue being staffing levels. We have been successful attracting new people to Alaska. We have hired 2600 employees to date in 2022 with many of our work groups progressing as we expected.
Against staffing plans.
<unk> throughput in our pilot training Department fell short of our plan at the end of the quarter.
And our teams are now working to accelerate throughput to get us back on track for the year for this reason coupled with our commitment to accelerate the exit of the Airbus <unk> hundred 20 fleet plus persistent high oil prices, we have reduced our planned capacity growth by a modest amount in the short term and now expect full year capacity.
To be flat to down 3% versus 2019, Alaska at its core is a company that is rooted in operational excellence and the productive and efficient use of our resources.
Returning to our historic levels of excellence in these areas is the primary focus of our teams going forward.
Despite these challenges I have full confidence that we have a phenomenal future ahead of us because of our people our culture and our business model.
The key elements are now in place to build a solid foundation to profitable growth.
We have deepened our expansive network and global connections from the West Coast.
We've reshaped our network over the past few years seizing profitable flying opportunities as the pandemic shifted the competitive landscape.
We are deepening the spokes of our network with efficient low risk growth primarily in existing markets.
And we continue to build our global presence via one world benefiting from international recovery as our global partners launch New nonstop flights and we start service.
We have accelerated our move to single fleet to drive cost savings and operational efficiency. This week, we welcomed our 20th Max aircraft into the fleet.
Last month, we announced plans to retire our Q4 hundred aircrafts and move our regional operation to a single fleet of modern E 175 regional Jets.
The economics are clear and compelling in executing this strategy as quickly as possible is a top priority.
We're leveraging our compelling product brand and powerful loyalty program to strengthen our performance.
A renewed credit card agreement with Bank of America expands the value of our program and speaks to the incredible partnership we have and the potential to grow the program further.
Finally, we are delivering on our resilient business model supported by our competitive advantages, including our low cost high productivity mindset.
Operational excellence and a remarkable service and culture of care.
We have a track record of delivering industry, leading pretax margins on top of this we have restored our balance sheet that pre pandemic strength and continue to focus on our commitment to sustainability.
Together, our business model and the initiatives, we have undertaken will enhance our ability to produce superior results even in volatile times.
As we navigate the remainder of the year I've asked my team to prioritize three critical work streams.
First to pursue our transition to a single mainline fleet by no later than early 2023, we know and understand the benefits. This brings for our company and the faster we get there the better.
Second the deliver on the $400 million and commercial initiatives, we outlined at Investor Day, and third to return Air group to operational excellence for our people and guests.
Air Group has done well over 90 years, because we are committed to learning from and adapting to our ever changing environment. It.
It is no small feat that we grew our airline 32% over the same period in 2021, and we have the ability to deliver future growth plans with our commitment to excellence.
We will adjust our plans where needed to ensure safety quality and our long term success, while also meeting our financial commitments in the near term, including our 6% to 9% pretax margin this year.
I'm very excited for the bright future. We have ahead of us and with that I'll turn it over to Andrew.
Thanks, Ben and good morning, everyone today, I'll provide a recap of our Q1 results and trends.
With a specific focus on March which is indicative of what we see going forward.
I'll also touch on our Q2 guidance along with longer term commercial drivers.
Total first quarter revenues came in at $1 $7 billion.
Nearly a $1 billion more than the first quarter of last year and down just 10% versus the same period in 2019 on 11% less capacity.
This marks continued sequential improvement in our revenues up five points from the fourth quarter of last year.
That said the most exciting aspect of Q1 was just how remarkable the return in demand has been from February we went from bookings down 40% versus 2019 in early January to above 2019 levels by the end of February .
We have now settled into a booking levels in line with our capacity, but at very strong yields and load factors followed this booking trend and continued to strengthen as case counts declined.
And people return to travel.
January's load factor was 69%.
February improved to 75% and March came in at over 85%, that's one point stronger than 2019.
This positive progression contributed to our March revenues exceeding 2019 levels by one 5%, even though capacity was down 8% versus 2019.
Let me give you three main contributors to these results first returning corporate demand we've continued to see strength in leisure demand, but overall demand has also been buoyed by the return of business travel.
Corporate travel has been improving at a rate of two to three points for some time now and today, we are down just 30% in corporate bookings when compared to 2019.
Strong yields in the first quarter yield was up three 5% versus 2019.
March was up 9%, we expect to continue to see yields improve through Q2 as spring break travel hits in full strong summer bookings maintain their trajectory and corporate travel continues to recover.
And our premium product outperformance Q1 was another strong premium product, Florida, but March was exceptional.
First class revenues were up 19% with paid load up 15 points versus 2019.
And for the first time ever.
Our regional fleet fluids paid first class load factor on par with mainline with a 22 point improvement from 2019.
Additionally, premium class revenues across our network were up eight 6% with paid load up nine seven points.
Moving to Q2 guidance with the continuation of strong bookings.
I'm confident in our Q2 capacity setup and planned returned to growth in the back half of the year.
In Q2, we expect total revenues to be up.
5% to 8% on capacity that will be down 6% to 9% versus 2019.
Resulting as Ben said in double digit yields double digit unit revenues and double digit pre tax margins for the quarter.
Hello shared our near term outlook and what sets us up to produce solid financial results. This year more importantly air group is configured to grow profitably over the longer term driven by revenue initiatives.
As outlined at Investor Day, we have identified $400 million in incremental revenue that will build through 2025, driven by three categories.
Product and loyalty.
<unk> and network.
First product and loyalty this represents a $195 million driven primarily by a renewed credit card deal with bank of America.
Loyalty program continues to be a very strong performer with cash remuneration from the bank up 34% versus first quarter of 2019. This new agreement offers a powerful source of continued cash flow growth and I expect it will remain a resilient revenue sources, we continue to grow the airline.
Second fleet accounts for about $70 million of the 400 million.
Representing the revenue opportunity from up gauging and incremental premium mix.
<unk> for premium products has outperformed throughout the recovery and without longer average stage length than all of our major competitors are increasing premium mix will be well suited for our network as well as our financial performance.
And then finally network and alliances that will drive about $135 million in incremental revenue.
Our growth will be highly efficient over the next few years, 90%, which will be driven by frequency gauge and stage length in existing markets with the Pacific northwest restored to 2019 levels of flying in California to be restored by year's end, we have the full breadth of our network back in play now we can prioritize.
<unk> depth across our network with 70% of growth in the Pacific Northwest and 30% in California.
We are focused on lower risk growth, competing where we can win and adding value to our network.
Building on our own network, our alliance partnerships exponentially expand our reach and enable seamless global travel for our guests, which in turn only further strengthens the value proposition of our loyalty program.
As business and international travel return, we are set to leverage our west coast hubs as gateways to the rest of the world.
This global access for our guests only continues to grow as partners at new and returning service off the West coast, such as Seattle, Helsinki, Portland, London, and San Francisco Madrid.
As Seattle continues to grow as a destination and gateway. We're excited to begin the first phase of our terminal transformation. This spring.
The renovation will modernize the guest experience and double capacity throughput, making it a more smooth and seamless experience.
What I hope you take away and what I am most excited about for the future is that the foundation for profitable growth is in place for Alaska, and we are well positioned to capitalize on the return of travel demand and with that I'll pass it to Shane Thanks, Andrew and good morning, everyone. While losses are not ever the goal the $167 million.
Adjusted net loss for the quarter was a reasonable result, given the omicron backdrop. We operated in we are of course encouraged by our financial performance in the month of March where we turned to profit and by the strength of demand. We are seeing this spring and summer as you heard from both Ben and Andrew We expect Q2 to perform at double digit pre tax margins and have reiterate.
Our full year margin range of 6% to 9% even with higher oil prices.
While we will be focused on restoring operational excellence and ensuring our teams have the resources they need to do so I remain excited about our position in the industry and about the initiatives. We are executing on to set ourselves up for strong performance over the long term.
Let me start with the near term focus we are placing on ensuring we have the required staffing to run a more reliable operation.
Our teams have done a solid job delivering absolute costs in line with our plans and targets and our people have been resilient and consistently deliver care to our guests. However, we have been challenged and stepping up capacity as quickly as we would like to as Ben mentioned, we've reduced our full year capacity by approximately three five points at the midpoint to flat.
Down 3% versus 2019. This is primarily driven by staffing that is short of our plan and simply put we're going to fix that problem before we kick growth into a higher gear or.
Our CASM ex guidance directly reflects this capacity change and we now expect full year CASM ex to be up 6% to 8%.
For the second quarter CASM ex is expected to be up 16% to 19% on capacity down 6% to 9% versus 2019, the reduction in capacity adds approximately eight points to CASM ex in the quarter.
Also we expect fuel prices for the second quarter to be between $3 25.
And $3 30 per gallon up 40% from the beginning of the year inclusive of hedge benefits.
At current prices our hedging program is expected to provide a net benefit of approximately $200 million for the full year.
Reflecting on Q1, we were profitable in March and produced first quarter results in line with our guidance, our non fuel costs totaled $1 $5 billion inclusive of approximately $35 million and lease return costs and $36 million and incentive pay accruals for our employees.
Beginning in Q2 lease return costs will be reflected as special as we accelerate our fleet transition CASM ex was up 17% versus first quarter 2019 coming in slightly better than our latest guide our balance sheet and liquidity remain healthy and we ended the quarter with $3 $3 billion in total liquidity inclusive of on hand cash.
And undrawn lines of credit.
Our Q1 cash flows from operations were approximately $285 million driven by the strong booking trends that began in February we continue to feel comfortable with our liquidity position and our ability to generate positive cash flows on a sustained basis as our business returns to normal, which together will support cash payments for the 55.
Mainline aircraft deliveries, we have scheduled through 2023.
We ended the quarter with a debt to cap ratio of 50% within our target range and among the best in the industry for the rest of 2022, our contractual debt repayments are roughly $200 million with $52 million due in the second quarter, we expect our debt to cap to decline within our target range over the remainder of the year.
During our Investor day in late March we guided full year pre tax margins to between 6% to 9% and as we've indicated we are not changing this expectation today.
<unk> has remained strong our capacity modifications will be focused on our least profitable flying and with oil prices, where they are currently capacity reductions can drive better margins in the near term, even though they pressure near term unit costs. Our profit guidance also includes expected continued accruals towards incentive bonuses for our employees this year.
We have returned our performance base pay program focus back to the achievement of profitability goals a shift from the focus on cash flow generation in 2021. This year, 70% of our bonus program will be tied to pretax profitability, while 30% remains linked to other important goals, including ESG safety and unit costs. We've.
Also built ingalls related to outperforming the industry on pretax margin, which is ultimately what we're focused on achieving over the long term.
And over the long term I believe we have the right structure and business model in place we have a strong balance sheet. We have a solid fleet plan and fleet order with Boeing our network position has improved coming out of the pandemic and our growth will be primarily focused in geographies of strength, we have a solid $400 million commercial roadmap that is already in motion with the recently signed co brand agreement.
Extension and with the fleet up gauging, which is underway and we have line of sight to improving unit costs relative to the industry. It is this combination of initiatives that should enable us to continue to improve our relative position versus industry peers as we progress through the next few years 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 to please press Star then the number one key on your Touchtone telephone, we'll pause for just a moment to compile the Q&A roster.
Your first caller is Jamie Baker of Jpmorgan. Your line is open.
Hey, good morning, everybody.
So recognizing that the government has gotten involved in the past when the industry has required some form of assistance.
Is that something that we should start thinking about vis vis the pilot shortage.
I'm thinking about the 500 hour rule maybe.
Maybe making I don't know low cost government loans available for flight school.
Another way of asking the question is.
Whether you think the pilot shortage.
Is severe enough or will become severe enough.
The solution may not entirely be in the hands of the industry you might need some outside help if you will.
Jamie that's a great question you know one person has just been doing a lot of work for US is Joe Sprague on the on the original side because you know thats.
Firstly the clinics open up so Joe do you want to jump in here Hi.
Hi, Jamie it's Joe.
It's an interesting question and certainly there is a few in a.
A few issues hitting the entire industry right now more strongly than the <unk>.
<unk> situation.
Trade groups in D. C have been focused on how we can boost financial aid for new students starts for flight training and that's an important piece at the very beginning of the pipeline and something that will help not only produce a greater supply of pilots, but help with improving the diversity of the pilot workforce as well so.
We're certainly supportive of those efforts.
Beyond that it is something that will take a bit of time, but there's really strong training programs in place at horizon in Alaska, and we feel comfortable about being able to produce pilots over the next several months and several years.
We have a pilot development program that we have five pilots in that.
Our program right now.
That have signed up with some financial assistance.
We've teamed up with a school in Hillsboro, Oregon, that's going to train 200 policy year for horizon with pathways. So I think your question is or could be an industry initiative that addresses some structural things and I think as Youre seeing is all airlines are taking destiny in their own hands to create a pipeline and through their regional and mainline main.
<unk> fleets, but you bring up a great point I think this is going to be one of the biggest constraints for the industry going forward.
<unk> alright, well, thanks for that and second just.
On the premium emphasis at Alaska, One question I get from clients is whether youre inadvertently creating a vacuum there.
That ultra low cost carriers can backfill I certainly have my own answer to that question, but how would you answer that if posed by a current shareholder.
Jamie.
I Couldnt quite catch the first word in there that is quite important to your question. What did you what was your first sentence, yes, sorry about that.
The premium strategy chasing premium demand, which is something Alaska clearly he's doing does that create a vacancy sign if you will in markets for ultra low cost carriers to backfill, which in turn potentially hurts you down the road, possibly I have my own views on this topic, but it's a.
A question that I.
<unk> gotten quite a bit as it relates to your premium strategy, how do you respond to the question.
Yes. It is.
What's interesting about that is I think just to be clear, we're seeing obviously the premium cabin has upgrades in it as well I think.
As we grow the fleet, we're seeing demand for the premium cabin to be sure with people paying to get in there.
But we're also seeing strong demand for al.
Teva or basic fare structure and as we shared on Investor day, we are very focused on having a cabin.
That is works for our premium fliers.
Our regular Flyers, and those who want to be discount Flyers. So I think as we up gauge the fleet as we grow the fleet, we're going to create more seats more room. So I think it's a great question, but I think that's why I love our fleet strategy and our product strategy got it. Thank you for that take care gentlemen.
Jamie Jamie.
Your next caller is Helane Becker of Cowen Your line is now open.
And thanks, very much operator, hi, everybody. Thank you for the time.
So just on.
And now you're talking about strong business travel.
You parse that out by group and by geography are you seeing improvements in California.
West Coast in General, California.
Typically and then.
In terms of like tech companies or are they coming back because they feel like they were.
The first to kind of work from home and seem to be the last to want to come back.
Yes, Thanks Helane.
Actually quite fascinating to watch and Youre exactly right I think the small medium business is back to full strength.
They have been for a little bit what I have literally seen in the last two weeks is a staggering increase.
The increase in flying for the large tech companies are some of the big ones have come back at the end of March and early April where that traffic was down.
80 plus percent.
I just in the last week, one of the largest high tech companies was only down 25%. So.
I think we're going to be a little lag on Alaska on the west coast because of the high Tech as you say, but.
But I see that coming in quite strongly so that's where we stand.
Okay and then my other question maybe for Ben.
Youre talking about having to hire pilots and there's a huge pilot shortage and we just heard United talk about.
Therefore for the industry, having to hire 13000 pilots.
Forecast for somewhere between actually 10, and 12000 for the year.
But it seems like.
Why why do people come to Alaska like what's your selling point to get pilots to come to Alaska Air versus American Delta or United who are hiring.
These 200 pilots a month each.
Helane, it's a great question.
This is what the pilot supply issue I think pilots have a choice in pilots will have a choice on what they want to fly and where they want to fly. So they have a choice I think for US. We've always had a brand that's been differentiated in the industry a brand where people could come in it's we're a bigger company, but we still have a small tight culture and we're.
Based on the West Coast, we fly all across the country, we have a great network.
And so I do feel there is a just a lot of appeal about about who we are and how we operate so I can tell you to date and our plan is to hire 600 mainline pilots in a couple of hundred regional pilots. We're on track on our regional side, which is fantastic on the mainline side. We're halfway through we've hired 300 net pilot so far this year.
But it's a huge trained on our training systems, which is one of the issues that we're working through is how do we get pilots through the schoolhouse in an efficient manner and get them out on the line.
Got it thank you.
Thank you very much.
Thanks Helane.
Your next caller is Scott Group Wolfe Research your line is open.
Hey, Thanks, good morning so.
The guidance implies a pretty massive inflection in capacity growth relative second quarter in the second half of the year. So is that just the pilot situation getting better for you is that aircrafts and then maybe just talk about what you think the exit rate will be on capacity exiting the year and your confidence in getting.
Sure.
Yes, Hey, Scott, it's Shane Thanks for that question.
It it does imply a pretty <unk>.
Significant upturn in capacity and growth above 2019 in the back half of the year.
I think it really does assume that we get.
Back to where we want to be on the pilot throughput in the training house.
I'll just say is we're committed to.
This exit of the Airbus fleet on a very expedited basis.
As we begin to do that we may continue to move capacity around a bit I don't think we have a strong appetite to as.
As an example hire a new pilot onto the Airbus aircraft have them fly it for one month, and then put them back into training to transition. So as that comes into the window, we're just going to look to optimize.
The transition.
That fleet out of the business over to the Max So there'll probably be some more changes it's hard to predict what's going to happen in Q4, right now, but that's where we stand.
Okay, and then I wanted to just ask about the fuel hedges.
I understand you hedge oil and not the.
The crack spread so at current.
Jet prices is this what we should assume that the guidance you gave for second quarter is this what we should assume for now for the rest of the year if that stays where it is right now and do you reconsider the way you hedge to maybe.
Do a better job.
Cover and crack spreads.
I don't think the second one first.
Or.
Our hedge program is really consistent with the way we run our company for 90 years financially Conservative and frankly, it's auto pilot as we talked about at Investor day buying calls, 20% out of the money 18 months in advance 10% strips.
And just continuing to layer them on as Shayne mentioned in his script, we value that 2022 remaining order book at 200 million for hedging benefit it's basically 50% at 78 Bucks for the remainder of the year, 50% at 71 for the quarter.
Okay. Thank you guys.
Thanks Scott.
Your next caller is Duane <unk> with Evercore ISI. Your line is open.
Hey, thanks.
Just with respect to your loyalty card extension.
Can you talk about.
How ratable that is versus amounts paid upfront oftentimes when we see these things.
The industry there'll be kind of a hedge.
<unk> weighting in the in the first part of the agreement maybe the first quarter or two and then it tails off can you talk about how this was.
Designed and agreed to.
Hey, Duane it's Shane in terms of the cash I think the cash youre going to see right away I think.
That's something that we saw in the first quarter, we saw very strong increase in cash from our bank partner. The recognition is going to be at a slower pace as you know.
Good amount of this gets deferred and recognized over time, so I think through the P&L, you'll see this build throughout the rest of this year and even into next year.
As the.
As we get to start to recognize the cash that we're deferring today. So so cash flow come pretty quick recognition will take some more time.
Okay, Great and then I guess, just going back to your Investor Day, you were.
And one of the first to really tease out this kind of more constructive.
Our revenue outlook for the year, certainly relative to where we were and where the street was at that time.
Wondering if you could just mark to market for us relative to Investor day.
Whats changed since that time that has sort of further improve your forecast, what specifically has gotten better since investor day.
Hey, good morning, Duane I think.
Firstly corporate business travel I, just think there was just a real step change over the last few weeks on that side and as we've shared certainly on the Fas side.
Just to be Frank as we close up the buckets in the inventory the demand didn't stop and so the FAA has kept going up but the demand kept coming so I think since investor day, we've just seen a more sustained and in fact, increasing strength in the demand as we booking now into summer and later spring break.
Very clear answer thank you.
Thanks Duane.
Your next caller as Ravi Shanker of Morgan Stanley . Your line is open.
Thank you good morning, good afternoon, everyone.
Just to follow up on the corporate commentary in the deck.
Group coming back.
Is it fair to say that much of the corporate normalization that you're seeing so far and what do you expect to see in the coming weeks and months.
Just a return of the kind of historical Alaska corporate customer or are you seeing new.
Customers as well kind of given the American airlines, and maybe new destination that outreach.
Yes, Thanks, Ravi I think.
A little bit about just to be Frank, but certainly new <unk> agreement.
With Amex GBT as well as our joint contracting with American has opened up a lot of doors for us.
And we'll get a clearer picture of that as we move forward into Q2, and three and as we start to see the tech travel.
More and more but I do believe and just seeing our fair share of fair market share of corporate travel just the reports I just was looking at last week, we're actually seeing a positive movement in our share gap. So I feel like that's good and that sort of new traffic for us.
Great and just a follow up and I apologize if I missed this in your commentary I know, it's only been a few days, but are you seeing any uptick in interest in your forward booking curve now that the mass mandate has been dropped at least temporarily or permanently.
It's very difficult for us.
To tell that what I will tell you is.
Is that just even looking at yesterday's bookings that were even better than the day before so.
I'm, just still seeing very strong momentum here.
It sounds good thank you.
Thanks, Rob.
Your next caller is Andrew Deidre.
Bank of America. Your line is open.
Hey, good morning, everyone, maybe sticking on the corporate theme, we've been hearing from a few hotel owners that they are seeing sort of a.
Change in the corporate booking curve, it's shortening pretty pretty dramatically just curious kind of Andrew what youre seeing on.
On the corporate side, I guess, particularly as maybe some more of these tech heavy.
Corporates come back on the road or are you seeing any changes in the way they either book are they travel and the early parts of the recovery here.
Ali.
Only sort of.
Color I could give you there is it just feels like there was this pent up demand and then Theres just been as material as in 50 point change in booking levels for some of these big guys. In the last few weeks. So I think what I'm, saying right now is a very big step change and I think over the especially on the tech side and I think over the next month I'll have a much better.
Feeling about if there's any other changes going on there, but that's what I see today.
Got it and then Ben sorry, if I missed this in your prepared remarks, but just I guess.
Big picture when it comes to the kind of some of the operational issues that have popped up here.
And kind of the change in capacity.
Outside of pilot hiring or training like what else can you do to fix this and just just curious like how much is it going to cost to finally get back towards <unk>.
Normal utilization levels.
Hi, Andrea Yes, it's a great question, Andrew you've known us for a long time. This company is rooted in operational excellence and.
What I can say and I've been with the operational longtime as and I look at it closely the root causes essentially been staffing and.
And not staffing because we werent hiring people, but staffing because we werent able to produce the people and time to go execute the schedule.
So when I look at the core operation. We are still very process focused somewhat focus metric focused but you've got to have the people there and what happened to us early part of the month as pilots respecting the schoolhouse and 60 pilots going to make it out on the line to go execute the schedule. So.
We're derisking the operation a little bit to give our pilot school house.
Just a little bit of breathing room as we train them again. This Airbus transition is a big strain as well as we exit the Airbus. So we're just putting we're just putting a little more.
Conservatism until the plan and making sure that what we're what we're known for we're recognized for our customers can count on us our employees can count on us.
Making sure that we operate reliably so I appreciate the question Andrew.
Thank you.
Thank you. Your next caller is Mike Lindenberg of Deutsche Bank. Your line is open.
Okay.
Good morning, everyone.
I want to go back to <unk> question just on on the pilots I know you said that you are sort of halfway through.
Sure.
300, net obviously theres attrition, there, but maybe even retirements.
Whatnot has have you actually seen a pickup in your pilot attrition rate in Britain is that this is the first time in my career.
What we're hearing is that you can move up to a captain's seat fairly quickly for a major carrier.
Much shorter than historically and that definitely is attractive feature anything any color on that.
On the nutrition.
Yes, Mike.
It's a great. It's a great question look if you look at what happened in the last two years the industry early out at 10000 pilots and so as we're trying to I'll get back to 2019 levels, you've got to backfill that that 10000 Tucker early out and plus growth. So really pilots have a choice.
On what equipment, they want to fly where they wanted to live in I think the acceleration from right to left seat is really quick, especially depending on.
Who you're with so again, we look at our plan and I feel good about the pilot pipeline, but is it a risk for.
Yes.
For our growth plans going forward definitely so that's why like I was mentioning to L. A and we're putting a ton of time and a ton of energy to make sure. The pipeline is full and yes, it's not something that we've historically done because there was there's always a huge resource of pilots, but now you've got to take destiny in your own hands you have to go to high schools and encourage young kids.
From diverse backgrounds.
It's expensive to become a pilot so it was exclusive to a certain group of people and now we're trying to expand it by offering financial assistance and grow that pie for people, who want to be pilots to get into this industry. So I'm feeling good through the bad thing with this pilot shortage I think it might be a good thing because a lot of airlines are really reaching out to the.
Communities, where this wasn't a viable option and now with these financial opportunities, where we're tapping into a lot of people were interested like I said, we have 500 people in our pilot development program, we're part of or the school and so but this is going to be an ongoing issue for everyone in a little bit like I said, you've got to take that stay in your own hands.
Great. That's helpful. My second question just to Andrew.
Andrew when I look at some of the markets that you've been paring back end and you highlighted earlier.
Go to.
The operation started.
Integrity integrity back to sort of what it was.
But I have seen you pull down a decent amount of Hawaii and I've seen other carriers also pull down a decent amount of Hawaii and some of it may be that.
Taking down one of those.
Flight screens up maybe.
Ordinate amount of resources or maybe some of it is just these longer haul flights, especially ones that are predominantly leisure focus become more difficult to justify when fuel prices are $3 50, plus what is there anything specific to the Hawaii market, maybe availability of fuel on the islands or is it just that economically.
The incremental or utilization flying long haul utilization flying just makes a lot less sense. Thank.
Thank you yeah.
Thanks for the question I think what you've seen US do is maybe take a.
Fourth Nowy down to what.
You've seen us cut back on.
Some of the la <unk> and La <unk>.
I think right now.
I don't know if for whatever reason, Hawaii lagged a little bit just to be Frank It's also very expensive.
Vacation there, having just come back from there last week.
So there's just.
Accommodations, the rental cars I think there's confusion as it related to pre clear and getting tested and that just went away as well, but what I am seeing as we head into June and the summer period as sort of that traditional Hawaii strength, but I think just as we looked at the network and we had to make decisions.
I think we felt like a few flights coming out of Hawaii, and then we cut across sort of die of weeks the choose days the Wednesdays Saturdays high frequency markets, we took down a few.
And a little bit more where we're doing a little bit more aggressive growth, we sort of called it back. So we've tried to spread this across our network and Hawaii. We felt like had a couple of slides coming out would be fine.
Andrew do you think that with international long haul, it's really starting to come back, especially Trans Atlantic that Hawaii was kind of that go to exotic destination, maybe a year ago. After they opened you saw a flood of people. So there is that you think theres some of that where theres just now displacement by other exotic.
Destinations that are now international but because they've lowered their restrictions, it's just easier to get to any of that maybe.
Yeah.
I, probably don't have firsthand knowledge to that except to say that you are very correct that the choice of where folks can vacation now has expanded massively I also I think Costa Rica's and believes is and the Florida and the Mexico's I mean, we're just seeing a lot of demand across all of these locations. So I think.
Historically, where Hawaii was sort of the go to I think there's just more options, but travel is right now.
Okay very good thank you.
Thanks, Brian .
Your next caller is sadly.
Raymond James Your line is open.
Hey, good morning.
And Shanghai it.
It seems like maybe Ben.
Our stretch goal here.
Hearing it correctly, because I think the single fleet type return with slated for 2023, but maybe kind.
Kind of early 2023, and I know you still have the April 21. Thank you 400 so.
What could you talk about what you need to still accomplish two to hit that target and what that means in terms of maybe how should we shouldn't be thinking about in terms of kind of cash flow, even though some of that might be considered special items.
Yeah, Yeah, Yeah, Emily might jump in with sort of the remaining lease return cash costs, but just functionally in the operation. We've got a trained 600 700 Airbus pilots over to the Boeing and we've got to do that in a way that is ratable as possible and doesn't sort of impact the network.
Two two larger degree and.
And we also have to sort of decide or long term basing strategy for the Boeing so theres. Some important decisions that we have to make that are important to pilots as well.
I think we have said by early 2023 for the Airbus <unk> hundred 20, what I can tell you is Ben and I and others are the <unk>.
Sooner the better we like this behind US we cant wait to be through it we know it's going to be a little challenging to get through it and.
We'll put a good plan together and I'm sure it'll shift around a little bit.
And then we're executing now are sort of thinking about the <unk> hundred 21 fleet. We've got 10 of those were committed to.
Moving beyond those by the end of 2023 and Thats actively working that we don't really have anything else to share there but.
Maybe on the cash for lease return, yes, Hey, Savi. So in terms of the lease return costs you got it right that the special items that will be taking going forward will include the acceleration of those lease return costs. So we had previously shared with folks that that was probably going to be in the range of around $250 million.
The cash, though we will not be accelerated because of the contractual lease return dates for those aircraft to sell.
What it was before so we'll park those planes earlier, we will continue to do the work as we move towards those lease return dates and that cash will be spread over the original period. The only caveat I would share is that as we go through this exercise we are continuing to have conversations with <unk> and of course as we do less flying on those aircrafts that could impact the amount of cash that we have.
Actually incur so.
Hopefully that's helpful and Savi, just just a little more color on that is.
One of the things we have to work through right now that will impact how we think about capacity going forward is what I've told the teams I don't want to train up pilot. We spent 90 days in training only to produce them in September and October at the transitioned in January . So we really have to think about when we stopped actually training on Airbus and <unk>.
Transition to all Boeing and that will really decide how much capacity, we have with the Airbus fleet going.
Going forward from from the summer on so that's something we're still going to work through it and we'll give you guys more color on that soon.
Okay.
That's helpful and then maybe.
Maybe just a little bit tied to that.
And as I think this question was asked a little bit earlier on the second half capacity.
I guess, how much cushion have you built into that.
You might not have to kind of put meaningful amounts down and how should we think about like <unk> with a focus because I'm guessing some of this.
Thus aircrafts coming happens more in <unk> than <unk>.
Summer demand.
Some color around that.
Yeah, I mean, it's I think it's sort of a middle of the road.
<unk> estimate.
Abbvie.
It's really until we.
Begins.
We make decisions around how much higher and we want to do onto the Airbus and when it is hard to give you more precision I think get these numbers right. There's 10 ish thousand Airbus hours, a month that we fly give or take.
Obviously that cannot go to zero I think we fly 80000 ish 75 to 80000 total Airbus hours just to give you some context around.
How much Airbus fine is of the total.
So theres probably.
We'd like to do do the eight 910000, Airbus hours and see that meter down towards zero as we get to the end of the year.
But it could come down a little quicker than what we're currently planning, but I don't think it'll be super material in the short term.
Yes, Savi just on the you mentioned the.
There'll be a little clean up on the schedule here in the next weekend also but the summer capacity is you're going to see it through the <unk>.
Titan is going to be pretty solid and schedule, there and to <unk> point.
About 4000 of that 9000 hours is actually the $3 21.
So we're going to really stop that transitioned to change point in the fourth quarter, which is why that's probably the softest part of our capacity guide right now, but we're going to get real tight on that soon.
That's super helpful. Thank you.
Thanks, Kevin.
Your next caller is abandoned glinski of Barclays. Your line is open.
Hey, good morning, everyone and thanks for taking my question.
Andrew I guess as you guys have expectations coming off the back of that question too.
Really ramp up.
In the second half of the year.
It looks like to get to your guidance, we would take RASM down a little bit from maybe where you are in the second quarter, but does that necessarily the outcome that has to happen.
Not on the on the RASM side, I, obviously have pretty much no visibility into the fourth quarter there.
But my expectation is as we get.
Get surgical and shop and smart about capacity I think if anything it's going to boost our ability to maintain good solid unit revenues into the fourth quarter.
Okay. I mean is there anything about the flying that would be new markets or developing markets that could set that back a little bit.
I mean, I can safely say to you right now you pretty much see what we're gonna be flying this year as far as markets and as I shared on Investor day, 90% of all of that growth is going to be in existing markets and pretty much what you see already the miami's and such are at new markets for this year. So we're sort of done.
Okay I appreciate it guys. Thanks for the confidence here.
Thanks Brandon.
Your next caller is Conor Cunningham with <unk> partners. Your line is open.
Okay, everyone. Thank you.
And just in terms I know you talked a little bit about the corporate recovery in California, but just wanted to see if you could give some color around just the entirety of that market I would think that California, the California network really dramatically outperformed relative to the Pacific northwest as demand snapped back. So just wanted to see where you are in terms of that recovery.
Those markets and your expectation for a full recovery there.
As California dilutive to RASM at this point or is that actually.
Back in line with the system.
Thanks Scott.
We're not going to probably get into the habit of providing that level of detail, but what your observations are correct, especially with the snapback.
Looking at March and April , but the California demand is extremely strong and we are seeing very very solid unit revenue performance, especially on the yield side out of California, and our current bookings.
So if anything just given we have less capacity there than we do in the Pacific Northwest I think.
What I'm seeing right now is there's a very very solid recovery out of California.
Okay.
And then.
You guys financials of recovering a lot quicker than others and your balance sheet as you know.
In great shape.
The one thing that is kind of outstanding as the pilot contract that has been a lot of discussion on this call about pilots in general.
I would imagine is that now your number one priority of getting done.
Like I'm not asking you to negotiate right now, but it seems like it would be front and center.
And in terms of priorities for you.
It's an absolute priority for us Conor we're focused on getting a deal with our pilots going to recognize their contributions.
A deal that makes sense for our business model. So we are entirely focused on getting a deal with our pilots.
Okay. Thank you.
Thanks Kannan.
Your next caller is Myles Walton with UBS. Your line is open.
Thanks, Good afternoon.
I was wondering as an operator, an airline you could comment or weigh in on the benefits and risks of requiring the Max 10 to include a new flight crew alerting system.
If that were to come about.
What it would.
What would the cost benefit trade off to you be given some of your fleet expansions, obviously reliant on on moving into the Max 10.
Myles good good question, it's not where obviously observing the certification of the program really closely.
Clearly safety is first and that whole process and why it's so important but to reinforce we are really bullish on that airplane. We think it's got the potential to have the best seat cost of any airplanes in our fleet.
But obviously that assumes a level of pilot commonality that runs through all of the models and.
Hard to say and forecast where that goes but should that not be the case its something.
Would reassess and obviously the dash nine is a great airplane for US we have 20 of them so far and we'll have good optionality with Boeing.
Okay.
And then in terms of just the cleanup on the ATL can you just level set us as to what is set for expiry. This year from the holdover, maybe during COVID-19 from from travel credits.
Yeah. This is Emily so we.
Look at that ATL kind of historical trend in terms of breakage rate every quarter. So from an accounting perspective, we've been updating us over time and I would say that generally there has not been a massive change in terms of the breakage and experience that we've been having.
Separately, though kind of on the gas front the number one priority for the company is to make sure that we're meeting guests, where they are and making sure that we're.
Honoring the flight that they want to have with us. So I think overtime. If we start to see guys come back and look to redeem some of those tickets will be generous in the way that we handle those things.
Okay. Thanks.
Your next caller escape O'brien of Goldman Sachs. Your line is open.
Thanks for the time.
So I guess would be the first one is from that took a bit of a follow up on the Airbus discussion discussion.
No you're working on a solution for the <unk> hundred 20 ones, but is there a potential for someone to maybe look to buy you out of your AC 20 leases given air aircraft supply constraints, mostly been focused on wide bodies, but we've heard more about aircraft constraints again this earning season.
Understanding you even for your capacity plans for this year, but if you did not get bought out like maybe that changes the cash costs.
Over the life of the lease and potentially the recognition on your P&L over the rest of this year, realizing that special out of CASM.
Nested question. So I appreciate the help.
It's a great question I'll tell you initially that the ratio of calls I get on the <unk> hundred 20 ones to the <unk> hundred Twenty's is about 10 to one so it tells you from a market perspective that folks are much more focused on those airplanes and part of it is there.
There are two to four years old Airbus is delayed in delivering new ones and so folks are interested in trying to take 10 young airplanes and grow their fleets that way on the <unk> hundred twenty's the leases there it all expire by the end of 'twenty five and so as we answered earlier in a question we're focused on that return plan.
And I'm always run our numbers to focus on that but there are opportunities with lessors to buyout of those leases early especially if the lessor has a prospect on the other side and so it can be actually a win win certainly for us and it helps us get the airplane out of our fleet more quickly and maybe.
Not have to do all the return conditions for then the lessor to modify the airplane for the new operator, so theres some gains that are potentially there and we're working those really hard.
Got it and then one for Andrew.
You called out some of the new partner flights into your West coast hubs. During your prepared remarks, but could you maybe just give us broad strokes on how much partner capacity is up into your hubs as we look through the rest of the year and I guess, just any high level read through from your partners on how demand and yields are looking on those routes and then lastly, how could that.
Translate into incremental revenue for Alaska, Thanks for all the time.
Yeah. Thanks, Kevin I think the largest as it relates to partners is international and in our prepared remarks.
Youre starting to see that come back I mean, Japan Airlines is in it is one is certainly still significantly down so the long haul carriers starting to come back Tyre, obviously is sort of up.
And so I think as we get beyond this summer and going forward I think more and more there.
I think some of our other comments that we shared on Investor day is really taking a key city from Alaska flying into.
Another key city of American and connecting beyond that that continues to work the vast majority obviously of our passengers.
Travel across our own network.
But as we get into the Q2 Q3.
We're going to have much better visibility on that part of the traffic as demand fully returns. There. So we'll give you more color on that in the next couple of quarters.
Okay great.
Time for one more question.
Sure. Your next caller is Dan Mckenzie of Seaport Global your line is open.
Oh, Hey, Thanks for squeezing me in here couple of questions I guess first for you Andrew.
What forward data are you tracking to give you confidence on unit revenues through year end and if you can talk about fair searches on Alaska Dotcom, how are they trending versus 2019.
And are the searches tying into the or are they are the searches tied into the revenue management systems to inform how you're sort of thinking.
About.
The revenue trends.
Yes, we are.
One of the beauties I suppose of Covid, but every day, we're looking at bookings and searches and all of those.
What I will tell you is that.
Even as the yields are going up the conversion rates are not going down so the conversion rates are staying strong.
<unk> is not technically connected to the booking schedule and I S dot com per se the searches I would say.
But we stay extremely close and as I've shared earlier, we look every day at what was sold in which month at what yield and we are seeing across the board at least the next four to five months strength across all of it all the regions.
At those high percentages every week.
No.
Very good going back to the ULC sees.
What percent of revenue does this impact this summer. So I guess the question is isn't material.
And then if you can just help us balance that with what the growth rate in premium seats is this summer, but say versus 2019, and I guess I didn't catch this earlier, but.
Just tied to the premium seats this summer versus 19.
What's the rate of our corporate recovery here in the first quarter and whats the expectation on the corporate recovery. This summer and I apologize if you shared that earlier I joined late on the call here.
No no I think on the LCC.
Respective of what happens in the marketplace, we don't.
The U LCC overlap in our markets has not really changed its not significant a lot of it is really east coast focused in the Midwest. So nothing's really changed on that front on the <unk> side.
I think on the premium seats, we have given no color into the Ah <unk>.
Specifics in the second or third quarter other than to say is that as I said in the first quarter. We saw revenues for first class up 19%.
We're going to continue to watch the yields but I think as business travel continues to come in I think there's going to be continued strength in the premium cabin.
Okay. Thanks for the time you guys.
Thank you Dan and thanks, everyone for joining us and we'll talk to you next quarter.
Thank you for participating in today's conference call. This call will be available for future playback at Alaskaair dotcom.
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