Q2 2022 Alaska Air Group Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen and welcome to the Alaska Air Group 2022 second quarter earnings call.
Speaker 2: At this time, all participants have been placed on mute to prevent background noise.
Speaker 2: Today's call is being recorded and will be accessible for future playback at AlaskaAir.com.
Speaker 2: After our speakers remarks, we will conduct a question and answer session for analysts.
Speaker 2: I would now like to turn the call over to Alaska Air Group's Vice President of Finance.
Speaker 3: Emily Halverson. Thank you, operator, and good morning. Thank you for joining us for our second quarter 2022 earnings call. This morning we issued our earnings release, which is available at investor.alaskayer.com.
Speaker 3: 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.
Speaker 3: This morning, Air Group reported second quarter gap net income of $139 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $280 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.
Speaker 3: 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, Ben. Thanks, Emily, and good morning, everyone. Our performance this quarter continues to demonstrate the underlying strength of our business model and ability to adapt to a rapidly evolving external environment.
Speaker 4: We are in a period of record-breaking demand, which is reflected in the solid Q2 results we reported this morning. Our 14% second quarter pre-tax margin lands us near the top of the industry. A remarkable achievement given the fact that fuel expense is up 65% versus the same period in 2019.
Speaker 4: June especially was a phenomenal month as revenue surpassed one billion, the highest monthly revenue recorded in our history and we achieved this on capacity still below 2019 levels.
Speaker 4: Bank cash remuneration increased 40% in June , demonstrating the power of our renewed credit card deal and the strength of our terrific partnership with Bank of America. And lastly, we generated record revenue from our airline partnerships during the month, representing over 8% of coupon revenue, and exciting results given that international and business travel haven't fully unlocked yet. Meeting these historic levels of demand is both exciting and challenging. The
Speaker 4: and we are rising to the occasion. June is proof of this. Marking an important turnaround in our operation as we were at or near the top of the industry in both on-time performance and completion rate for the month. With this train continuing into July , our fundamental commitment to our guests and our people is to run a safe, reliable on-time airline. It's that simple, and we will continue to prioritize those requirements as we move forward.
Speaker 4: I'm very proud of the turnaround our team of 23,000 has delivered over the past two months, and I want to extend my thanks to all of them. This is a complex industry that has become more challenging likely. Our team has persevered, met new challenges with professionalism and care, and continues to put their best into the company and operation each day.
Speaker 4: This year we are celebrating our 90th year as an airline, which is a remarkable accomplishment for any business, but especially in this industry. To celebrate our remarkable people, we issued 90,000 miles to air group employees that they can use to fly with us or anywhere our one world and other partners fly. For anywhere our one world and other partners fly.
Speaker 4: Now let me briefly outline some areas that are going well for us along with the challenges we continue to manage through. Of course, demand is a bright spot as guests take summer vacations and get out to visit friends and family and business travel continues to return.
Speaker 4: Andrew will talk more about demand, including what we're seeing into Q3, and growing revenue contribution from our credit card, as well as our domestic and international partners, which is great to see.
Speaker 4: We continue hiring at our rapid pace and are consistently meeting our hiring goals. We are currently at our target staffing levels across most work groups and locations.
Speaker 4: Our transition towards a single fleet remains on track. Our max fleet continues to grow while the A320s and Q400s will be fully retired by early 2023, followed by the A321s at the end of 2023.
Speaker 4: This quarter, we also reached a tentative agreement with the International Association of Machinists who represent 5,000 customer service, stores, reservations, ramp and clerical agents. The TA is undergoing ratification voting and provides raises for our people and an extension of the current contract by two years to 2026.
Speaker 4: We look forward to reaching new contracts with both our Alaska and Horizon pilots as well.
Speaker 4: Finally, our relative financial performance is strong, which is our commitment to owners. Year to date, we've generated 1.2 billion in cash flow from operations with 600 million in free cash flow. From operations with 600 million in free cash flow.
Speaker 4: On the challenge front, fuel costs remain an issue for the industry. Our hedges continue to dampen the impact for us, and we expect our full-year hedge benefit to be at approximately 200 million based on the 4-curve as of July 18.
Speaker 4: Pilot attrition is another challenge we are attentive to across Alaska, Horizon and SkyWest. Attrition is most acute at our regional carriers and is a constraint across the industry. This is evidenced by industry regional capacity that is down 20 to 30% versus 2019 as mainline carriers hire pilots at unprecedented levels. And lastly, as is the case for the entire economy, supply chains remain disrupted by the pandemic.
Speaker 4: We are working with key partners closer than ever before and will be more conservative in planning our operation and capacity until we see higher levels of stability and predictability. Our aircraft, engine, and component partners are working extraordinarily hard and will continue to support them in their efforts.
Speaker 4: As we look forward, we are committed to producing strong financial results this year, while also priming our company for success in 2023 and beyond. I am excited about what we can deliver on this front over the next few years. We are growing our fleet with new, efficient aircraft, within an improved competitive network, and we are expanding global connections through our partnerships.
Speaker 4: Our relative cost advantage remains intact, despite industry headwinds overall, and our focus on enabling structural cost improvements and our move to single fleet will be a powerful enabler for us going forward. And finally, we've unlocked commercial levers that are already materializing and are set to drive incremental benefit for us over the next few years.
Speaker 4: We have all the elements in place to continue to drive sustainable and profitable growth here at Air Group, and we are setting ourselves up to continue to deliver industry leading financial results as we have done so for so many years.
Speaker 4: To wrap up, the man in the short-term remains robust despite real headwinds that exist in the economy and our industry today. Headwinds like the war in Ukraine.
Speaker 4: stubbornly high fuel prices.
Speaker 4: high inflation, and a potential recession. And even with these negative factors, we still expect to deliver strong financial performance this year with double-digit pre-tax margins in the third quarter, as well as our 6-9% full-year pre-tax margin.
Speaker 4: As anyone who has been in the airline industry for a period of time learns, long term success only comes from taking one step at a time.
Speaker 4: The strategic steps we've taken, streamlining our business, moving to a single fleet, and capitalizing on commercial opportunities are set to make air group a stronger company, positioning us well in any environment. And with that, I'll turn it over to Andrew.
Speaker 5: Thanks Ben and good morning everyone.
Speaker 5: My comments today will focus on second quarter results.
Speaker 5: our third quarter guidance, as well as progress on commercial initiatives.
Speaker 5: I want to start with a tremendous revenue result for the quarter. This was the highest revenue generating quarter in our history.
Speaker 5: Second quarter revenues totalled $2.7 billion, demonstrating the swift change in environment compared to how we started the year. Second quarter revenue was up 16% on capacity that was down 8%, leading to an impressive 26% increase in unit revenues.
Speaker 5: Very strong demand coupled with reduced industry capacity resulted in air group flying record load factors for all three months of the quarter. April at 87%, May at 87.5% and June finishing at 89.6%.
Speaker 5: Yields increased over 20 points from April to June , and we outperformed our own midpoint guidance for the quarter by 3 percentage points. I'm also excited to share that May marked the first-time revenues from our business channels exceeded pre-pandemic levels, a testament to our partnership with Amex GBT, American Airlines, and the resilience of our small and medium business customers. We saw revenue strength across all regions, including Wall CAN, Battle
Speaker 5: and from a product perspective premium revenues continue to accelerate from the first quarter.
Speaker 5: For this quarter, both first class and premium class revenues were up 30% with paid load factor up 8 points in first and 16 points in premium versus 2019. We offer a fantastic premium product which aligns well with our long average state length for our domestic carrier.
Speaker 5: Today, premium seats account for about one quarter of our total seats and this mix will only continue to improve as we retire the A320s and bring on the MAX 9 which will have 11% more premium seating.
Speaker 5: As we shared with you at Invest Today, our loyalty program and Bank of America card was going to be a revenue and profit accelerant. Q2 is proof of this.
Speaker 5: Cash remuneration from the bank this quarter was up 43%, while total loyalty revenues were up 58% versus the second quarter of 2019, both primarily driven by strong bank commissions and mileage plan redemptions.
Speaker 5: As we've shared, approximately 195 million of my team's 400 million commercial initiatives relates to product and loyalty. We expect to recognize approximately 70% or 135 million of the revenue from this initiative in our PML this year. From this initiative in our PML this year.
Speaker 5: Lastly, we get to talk about meaningful results from our one-world membership. As global travel restrictions of ease and international travel rebound strongly, we've been encouraged by the incremental revenue we saw this quarter.
Speaker 5: In June , our Alliance Relationship Drove a record amount of revenue representing approximately 8% of total coupon revenue is $1.
Speaker 5: As Ben mentioned earlier, this is a full two-point increase over 2019. We are currently revisiting our revenue estimates from One World and our partners because if June volumes are indicative of what we will see going forward, we will need to revise our internal forecasts upward.
Speaker 5: Looking ahead, we are well positioned to produce another solid financial quarter.
Speaker 5: Undoubtedly, we are in an exceptional demand period and the moderated capacity outlook sets a strong backdrop for our revenue performance.
Speaker 5: Considering current trends, which I will expand on in a minute, we expect third quarter revenues to be up 16 to 19% on capacity that is down 5 to 8% versus 2019. This implies unit revenues up approximately 26%. Flat sequentially versus the second quarter, but a strong result on slightly high up capacity. Flat capacity.
Speaker 5: With that guidance provided, I do want to offer more color on the trends we're seeing today, which are factored into these estimates.
Speaker 5: For clarity, demand remains very strong. Leisure demand continues to sit well about 2019 levels while our business channels have now recovered fully, with the live criminal neutral. enterprises areides are exempted and not within your????,
Speaker 5: While corporate business travel volumes have been a little choppy, we do expect these volumes to continue to recover from their approximate 75-80% levels today.
Speaker 5: That said, we do recognise that there are significant pressures on consumers, including rising interest rates, high oil prices and inflation, which if persists, is a significant invest.
Speaker 5: I like to put downward pressure on demand and therefore pricing from where we are today as we enter the fall There was a very aggressive run-up in yield during the second quarter and while we look to have peaked in yields you booking remain at historically high yields just not as high as the past few weeks
Speaker 5: Touching on capacity for a moment, our regional partners, like all others across the industry, continue to face pilot staffing and training challenges.
Speaker 5: Compared to 2019, approximately 35% of our CPA block hours have been removed from the rest of 2022, impacting our second half capacity by approximately three points. We expect these headwinds to persist well into 2023.
Speaker 5: Apart from accelerating the retirement of our Q400 fleet, we've also taken several proactive network steps to mitigate the impact of this lost capacity. First, we've pivoted to mainline flying, where we've had previously operated regional aircraft. Second, by reducing day-of-week capacity in long, stage-length regional markets. And in third, in a limited number of markets, suspending service through next spring.
Speaker 5: In no instances have we exited any cities.
Speaker 5: Touching on Mainline with the delivery of our 28th MAX last month, our MAX aircraft now represents 16% of Mainline capacity. As our fleet grows, we're ready to take advantage of the up-gauging opportunities by putting more seats into core hubs like Seattle, where we now offer 100 non-stop destinations, which is two times that of our competitors. We've worked hard over the last several years in transitioning our company to enable profitable growth.
Speaker 5: that I'll pass it to Shane.
Speaker 6: Thanks, Andrew, and good morning, everyone. Our second quarter results highlight a dramatic turnaround in our financial performance, especially given the significant losses we experienced to start the year. Our adjusted profit this quarter, an absolute dollar terms, was higher than 2019 on record revenue for Air Group. Our teams have done a great job managing the revenue side of the ledger as the man returned quickly after this winter's film across the wave.
Speaker 6: More importantly, our operation has stabilized and we have returned to running an airline with high completion factors and high on-time performance. Operational reliability and performance will remain our priority as we move forward into 2023 and towards single fleets at both Alaska and Horizon. Turning to second quarter results, our financial performance and strength remain solid. We ended the quarter with $3.8 billion in total liquidity, inclusive of on-hand cash and undrawn lines of credit.
Speaker 6: Year-to-date cash flows from operations are $1.2 billion including tax refunds and free cash flow is approximately $600 million.
Speaker 6: Debt-to-cap end of the quarter at 50% within our target leverage range. Debt payments are very manageable with approximately $100 million scheduled for Q3 and $50 million in Q4.
Speaker 6: CASM X was up 19% versus 2Q19. Sequentially, we increased capacity by 13% from Q1, while non-fuel operating costs rose 6%. Aside from performance-based pay accruals, which as you know is a program we believe strongly in, there are two primary cost pressure areas, wages, both for our employees and from our third-party partners, and airport rents and related expenses, as large capital improvement projects are completed across our system.
Speaker 6: These pressures, we believe, are consistent throughout the industry and not unique to Alaska.
Speaker 6: Obviously our unit costs are also highly sensitive to our capacity. And the lower capacity levels we are deploying this year are headwind that will ultimately reverse. But provide capability.
Speaker 6: Despite these and continued high fuel prices, which are up over 50% versus the start of the year, we have line of sight to another double digit pre-tax result in Q3, and are reiterating our expectation to deliver on our full year pre-tax margin guidance of 6% to 9%.
Speaker 6: Speaking of capacity, this spring we made adjustments to give us the necessary breathing room to get back to running a reliable operation, which is a requirement before we attempt to more aggressively grow. The primary driver of the schedule pulldown was lower output of new pilots from training versus what we needed. We have much improved visibility into our training throughput and will continue to more conservatively plan capacity in the near term to ensure staffing shortages are not driving an inability to operate the schedule we've sold. For more information, visit www.fema.gov
Speaker 6: Additionally, as you know, we are committed to exiting the Airbus fleet and will begin retiring our 29 A320s in the fourth quarter. Given a more conservative approach to capacity for staffing reasons, better clarity on our Airbus retirement plan, and the regional capacity reduction Andrew shared, we expect third quarter capacity to be down 5% to 8% versus 2019 and full year capacity to be down 8% to 9%. The capacity outlook reductions from prior guidance are roughly one third from regional capacity reductions and two thirds from slower mainline growth.
Speaker 6: As Ben mentioned, we're excited to have recently reached a tentative agreement with IAM, and if it ratifies, we expect it to add $13 million in COF in the second half of 2022 and approximately $30 million on an annualized run rate. Overall wage increases are expected to add approximately three points of pressure to the COSIM Act this year versus 2019.
Speaker 6: Second, training and ramp-up costs. As we continue to bring up staffing levels, elevated training and related costs will persist through 2022 and 2023. For the full year, we expect these incremental training costs to add approximately $50 million or about one point of CASM-X. Thank you for your attention.
Speaker 6: Third, performance space pay. We're proud of our incentive program, which is included in our CASIMax. And for the full year, we expect the incremental expense to add nearly one point to CASIMax.
Speaker 6: Additionally, the 90,000 mile bonus for employees that Ben shared earlier is adding another $30 million or two points in the third quarter.
Speaker 6: Lastly, we expect fuel price per gallon to be $379 to $389 for the third quarter. Despite some of the headwinds our industry is currently facing, I believe we continue to have the right structure and low cost business model in place to strengthen our competitive advantages and fortify our relative position within the industry. This company has succeeded on running a disciplined operation with a long-term view for 90 years and we're not losing sight of that now. All the elements to drive profitable growth remain intact in our underlying business model.
Speaker 7: At this time, we're ready for the tuning.
Speaker 2: At this time, I would like to invite analysts who would like to ask a question to please press star than the number one on your telephone keypad.
Speaker 2: We'll pause for just a minute to compile the Q&A roster.
Speaker 2: And our first action comes from Ravi Shankar.
Speaker 2: Your line is open.
Speaker 8: Thanks, morning everyone. I want to follow up on the yield commentary. I think your random guidance from 3Q is still pretty strong, but I think there was some indication that maybe in recent weeks, there's been some slowing in trend. So can you just help us quantify that? And you said you're still going to run well ahead of 2019, but compared to the mid-20s, where's that looking at the very tail end of the booking group?
Speaker 5: Yeah, thanks for the question, Robbie. I think, you know, what we're starting to see now, obviously, is that bookings that are coming in are now coming in progressively for the fall period, which, you know, as we move out of the peak summer period. But just to reiterate, the man is still extremely strong for July , August and September . Our load factors are on average one to two points ahead of 2019. So we're just saying the last few weeks that these very peak yields.
Speaker 5: They're just starting to flatten out and come down just a small tad. But again, it's still extremely strong. And as per our guidance, we expect a very strong third quarter unit revenue performance. And would you say that that's different from normal seeded reality or is that consistent?
Speaker 5: Yeah, I think as seasonality, as the get away from the peak summer period in the fall, that wouldn't be unexpected.
Speaker 8: So then just one follow up kind of on the, at the analyst day, I think you guys have spoken about line-up site to resuming cash return. Obviously, very choppy environment out there, but do you have any any of the sub-get on that? Thank you. Thank you.
Speaker 9: Robbie, it's not paper. Regarding that, long term with the Alaska strategy, we're committed to generating returns on capital that exceed industry average. We think it's critical to run a successful business as well as attract and retain the high quality owners that we want. As you know, with the pandemic, with CARES funding, we're restricted from doing shareholder returns until October of 22. And our plan is to discuss that with our board, once those restrictions roll off.
Speaker 10: Very good, thank you.
Speaker 2: and our next question comes from
Speaker 2: Jamie Baker.
Speaker 2: Your line is open.
Speaker 11: Hey, good morning, everybody. Any update on tech?
Speaker 11: Sector, contribution, corporate travel.
Speaker 5: Yeah, Jamie, I would say for us at least, that the tech has probably been the weakest, just to be frank, given our network. But as I also have shared in our prepared remarks, we're very excited about the restructuring of our distribution channels for business, you know, with MXGBT as well as joint contracting with American Airlines. But the tech sector still has a ways to go to recover, and so we look forward to seeing that happen.
Speaker 11: Okay, and second, and bear with me, it's a bit of a throwback. I remember pre-bankruptcy, American used to say, if we had Continental's pilot contract, our earnings would have been, you know, whatever, X.
Speaker 11: I'm just wondering if you've run the pay rates from the American and United TAs through your model. I'm not suggesting the work rules in those TAs would be applicable for Alaska, but if you simply ran the max wage rates from the American and United TAs through your model,
Speaker 11: Through your earnings model, what's the impact on margins or actual chasm?
Speaker 11: if you've done the analysis.
Speaker 6: Yeah, hey, Jamie, it's Shane. Thanks for the question. We obviously are aware of sort of movements at other properties. When it comes to this, we are at the table regularly, almost weekly, with our pilots we're looking forward to getting a TA with them as soon as we can. Yeah, we understand the economic impact on the business and it's totally fine. Our employees across the most companies need to be at market and that's where we're ultimately going to take folks.
Speaker 6: I'm not going to share anything about the impact because that sort of gets into like guidance that we haven't provided, but we're well aware of what it will mean in terms of the cost structure of the business. Okay, it's worth a shot. Thanks everybody.
Speaker 12: Thanks kev?? HA.
Speaker 2: Our next question is from Andrew Dedore. Your line is open. Your line is open.
Speaker 4: Hey, good morning, everyone. Shane made two quick questions on costs here. One more housekeeping. Just what was the fuel hedge benefit in 2Q and what is implied in your 3Q fuel guide? And then just on 2023 potential chasm, if you're on track for being basically, well, fully staffed next year, if your capacity is up to 10% in 2023 versus 2019.
Speaker 4: kind of where do you think Kasmex shakes out in that type of scenario.
Speaker 9: Yeah, thanks Andrew. I'll have Nat take the field hedge water and then I'll follow back with the CASM question. Hey Andrew, the 2Q impact with our hedge book is about 90 million and then for third quarter it's about 50 and again that's based on we snapped the curve on the 18th so on Monday.
Speaker 6: Great. Yeah, and on Casm into sort of next year, and we're not gonna talk a lot about like potential growth rates next year, I think we're still in the middle of trying to plan for that. But as I mentioned in the script, the real pressure areas are wages and then productivity. We're carrying the same amount of FTs or maybe slightly more today than we had in 2019, but we're a smaller company. And so there's a lot of opportunity as we move forward to recover sort of more traditional productivity levels.
Speaker 6: which will help us. I think, Andrew, the big structural change is likely to be labor costs and wages across the industry. It's not unique to us. And we'll participate in that. And so, you know, that will probably be the headwind in the next year. Certainly we're flying less capacity today than we had prepared for and have costs for. And I think in 2022, it's sort of a one-for-one exchange. Had we flown 1% more ASMs, we would have seen 1% lower unit costs give or take. If there's a plan for maybe one game, then another one come out. Uh.
Speaker 4: there. I guess if I'm doing my math correct this morning, it looks like kind of your 4Q revenue growth might be sell a little bit from 3Q to hit your margin outlook. So yeah, with all that said, and what's going on in the macro, kind of just how are you thinking about kind of, you know, the demand trajectory from here between, you know, across your network and then sort of your thoughts about broken down between corporate and leisure. Thanks.
Speaker 5: Yeah, I think again Q2 had a very strong run up. You know, Rasn was up 15 in April , 25 in May and 35 in June . I think we've sort of flattened out again as we're nearly done with July and I'm looking at August as very, very strong. And even September as we sit here today, we're very pleased with what we see coming in. I think corporate, you know, is a very strong run up.
Speaker 5: They're a little bit choppy, but I think we've seen good strength there, relatively speaking. And so, again, where I sit today, demand and pricing environment, we're still very, very good about the third quarter, and that's what reflected in our guide. Andrew, I might just say, because I know you're sort of inferring the pre-tax guide reiteration, but I think...
Speaker 6: We don't know exactly what will happen with revenues in Q4 and it wouldn't be prudent to assume that what we just experienced in July is the new normal. And so we're just sort of being thoughtful about how we look at the rest of the year. But hopefully the man's day is super robust and we can outperform this. And we can outperform this. And we can outperform this.
Speaker 4: That's perfect. Thanks so much.
Speaker 12: Thank you, Andrew.
Speaker 2: Thank you. We have a question Mike Lindenberg. We have a question Mike Lindenberg.
Speaker 5: Oh yeah, hey, good morning everyone. And you're all gonna get back to just these significant yield increases. You know, I sort of think back, you know, in years past when the demand environment was strong, we'd see lots of fair increases. You know, the industry would put through and there'd be good successes. And my sense is that we really haven't seen, you know, meaningful increases. It seems like it's a lot more about, you know, just harnessing the power of, you know, we'll call it next generation revenue management systems. And maybe, you know,
Speaker 5: tell us on how things have evolved and maybe this is sort of a pandemic consequence. So let's talk to that.
Speaker 13: Yeah, that's a very interesting question. The thing that come to mind are two things. Excuse me, yeah, we've seen, you know, pricing increases here or there, but I think, you know, the team is leveraged heavily on inventory bucket closure and being very, very active with that. I think secondly, just to be frank, the one good thing about the pandemic is we are way more dialled in and way more granular on how we manage revenue.
Speaker 13: connection to the demand in the marketplace. So I think those are all good things.
Speaker 5: okay great and then just a second question and and then maybe this is to you um... you know given your exposure in california relative to your system um... curious about maybe any initial thoughts about that uh... state court ruling as it pertains to you know duty times and and and rest requirements for flight attendance and you know again historically i always thought the deregulation act sort of meant that federal rule would trump state rule and you're kind of opening up a pandora's box uh... it looks like at least for now it's prevailing
Speaker 5: any thoughts on that and and and i guess you know the dust hasn't yet settled but you know potential impact and unintended consequences maybe initial take thanks thanks for answering my questions of
Speaker 6: Thanks, Mike. I think we're going slow on that, Mike, and we're going to see how we head towards compliance on that. And so we'll take that step by step. And, Kyle, I don't know if you have anything to add on that. I know you've been working it. Thanks, Mike. Hey, you're preaching to the choir about the deregulation act. We had the same hope as you. The Supreme Court didn't see it that way. So our legal options are up. And as Ben mentioned, we need to figure out what happens next.
Speaker 2: And we have a question from Dwayne.
Speaker 2: felon went quote
Speaker 2: Your line is open.
Speaker 9: Hey, thanks.
Speaker 9: As you look at your plan,
Speaker 9: and your recovery trajectory and your competitors' plans.
Speaker 9: You know, when do you think assuming a stable macro, like when do you think supply catches back up with demand? It certainly doesn't feel like the third quarter. You've already gotten a couple questions about the fourth quarter and my guess is that's just a plug at this point. But as you just think supply, demand, and stable macro, when is the earliest shot at sort of supply catching back up with demand?
Speaker 6: You know, Dwayne, for us at Alaska, right now, what we're focused on is getting our singly transition done. And I think what we're trying to do is set ourselves up for 2023 and beyond. So that is job one for us, both on the mainline side and the regional side. We want to be really well configured, heading into 2023. We talked about some headwinds in the economy, so we're not sure right now we're really happy with the man in yields.
Speaker 6: but we really want to configure our company to withstand whatever external shocks are out there, but also set ourselves up for growth. So, once we get to single fleet, then the opportunity for growth is going to be there for us. And so, that's how we're looking at it.
Speaker 9: Okay, it was a minute. I'm going to wait and I would just wait and I would just
Speaker 6: I would just add, I think it all depends on how much demand is, you know, is it 120% of normal today in capacity's negative 10? It's probably several quarters before it catches up. But it's...
Speaker 6: you know, if it's 100% of sort of normal demand in 2019 demand and over negative 10 capacity, it's probably a couple quarters. So it seems like it's to the right before we sort of fully catch up assuming a stable economic backdrop. Yep.
Speaker 9: And then just could you comment a little bit on Hawaii, the level of recovery that you've seen there, what the booking curve looks like, and maybe just the competitive environment, what level of industry capacity has been restored there. Thank you for taking the questions.
Speaker 13: Edwin, I think um...
Speaker 13: You know, Hawaii, while we don't specifically talk a huge amount about regions, we feel very good about how we've constructed that. Obviously, the industry has pumped more seats into that marketplace. So, relatively speaking, there's some headwinds there, but I'll also say, as I said in my prepared remarks, our premium cabin is off the chart in performance and Hawaii is one place where our premium cabin is really performing and helping mitigate some of those.
Speaker 14: of that company and you mentioned that you know you're seeing issues with your regional providers as most other airlines are as well. So how should we think about Horizon's future over the next phase?
Speaker 14: No, no, no, one to three years given the constraints.
Speaker 14: that regional airlines have.
Speaker 6: Hey Helen, it's Ben. Hey, thanks for the question. It's a great question. Well, first, what I'll say is, our regional network is critical to our success. So all the Pacific Northwest markets we serve are just integral to our entire domestic network. So one, it's needed and it required. I think secondly, there's no doubt there's a pilot shortage in the industry. And where you see it is in the regional industry, it's down like I said, 20 to 30%. So we're working again.
Speaker 6: This path to single fleet for us is one of our strategies to really try and mitigate that. And we've got a lot of plans with pipelines and pathways to mitigate the pilot shortage on the regionals, but we're working on it. And I think honestly, I learned this thing is gonna evolve. It continues to evolve every quarter, which changes in the industry, and we're gonna stay close to it. Joe, did you want to add anything? No, I think Colleen, this is Joe with Horizon. There is some optimism. We have a new fleet order for Horizon.
Speaker 15: and things that we're doing at the top end of the funnel to encourage people to come into the industry and they're definitely as interesting.
Speaker 14: That's good to hear. And then my other question, my fellow of question, has to do with the decline. And I don't know maybe Andrew, this is for you. Airline traffic tends to be good until it's not good. And I'm just wondering, when would you see a decline in... And I'm just wondering, when would you see a decline in...
Speaker 14: in bookings related to an economic slowdown.
Speaker 14: And bring with extra command assessor talks.
Speaker 13: You know, why is Janelle Halein, we look at this every day, I think sometimes it can get confusing here because demand is obviously a really a big part of pricing as well, I mean, just to be clear. And so demand right now, as I've said, is very strong at very high yield increases over 19. So I think the first thing we'll see is maybe a slowdown in demand if and when it comes and then we'll start to obviously play with the yield level.
Speaker 1: Thank you.
Speaker 2: And our next question comes from the Savi Sith.
Speaker 2: Your line is open.
Speaker 16: Hey, good morning, everyone. First off, I wonder if I could just clarify a previous answer on the 2023 potential. I know at an investor day, I think you mentioned 2023 could be up 9% capacity type of outlook, not that you gave specific guidance. But I'm curious given the moves that you made here in the second half and just kind of building in this course and then you have this transition going on in the early part, and then you have this transition going on in the early part of the year.
Speaker 16: could be kind of a realistic range for 2023 or, what do you think you can deliver in terms of capacity for 2023?
Speaker 6: Demand sending obviously. Hey, you know, 1 thing that we've all learned over the last 2 years is most of our ability to forecast what's going to happen is not very not as good as it used to be. Pre pandemic. Yeah, so take take some of this, you know, with a grain of salt. I think the 2. 2 things that are going to be sort of critical absent whatever the economy is doing is just our fleet transition. Ben mentioned that we're totally committed to that our ability to get.
Speaker 6: and you just, you know, that was probably a two aggressive set of assumptions. So I think in terms of aircraft units, you know, we're going to...
Speaker 6: We're going to have enough planes ultimately to grow, quite a bit next year. I think what we decide to do with those is still up in the air. And that's a discussion we're going to be having over the next couple of months internally. And obviously folks are interested and we'll say more as we get clarity on what our 2023 growth plans are. But they're probably somewhat moderated from what we were talking about in the end of the day. That's a social thank you, and somewhat related. You know, one of the things that I'm going to do.
Speaker 16: basically, you know, there's a regional airlines that are in-house, and one of your competitors who got pretty big pay increases. And I know, as you pointed out, the regional capacity at Alaska is down quite a bit, and you're doing a fleet transition there as well that's kind of bringing that regional fleet down. I was just kind of curious, you know, if Horizon kind of had to match some of those rates.
Speaker 16: What does that mean for a regional lift economics from a longer term perspective? Because it's pretty much where you can almost fly these with the mainline pilot.
Speaker 15: Yes, Abby, it's Jill again. I think no question there's. I think no question there's. I think no question there's.
Speaker 15: cost pressure for regional airline pilots. The American deal certainly stood out. I think there's a lot of folks sort of watching to see what else transpires. We are working with our pilots to find some ways to improve retention at Horizon, but it's definitely a changing dynamic for the industry right now, and I bet Shane will have some additional thoughts.
Speaker 6: Yeah, and I number 1, I just a shout out to Joe. He's done a phenomenal job leading horizon. You may you've been with us a long time. We actually had spent a lot of time in the regional business model. Pre pandemic. We had gotten it back to be a profitable contributor to the, to the whole. So it's, you know, it's. It's just the reality that it's going a different direction that the cost of operating regionals are going to go up in terms of what that means for a long term strategy. I think it's way too early to sort of tell or to share anything.
Speaker 6: to make that a reasonable part of our network from economic standpoint.
Speaker 17: Thank you.
Speaker 18: Thank you. Thanks, Abby.
Speaker 2: Our next question is from Dan McKenzie.
Speaker 2: The one who's on the floor...
Speaker 4: Oh, hey, thanks. Good morning, guys. So my question is sort of similar to SAVI's. It's really a flex-up, flex-down question on supply next year. And I'm just curious, what percent of the fleet is fully paid for? Or if you're looking to flex on supplies, the easier move simply to accelerate the Airbus retirement. And I guess I'm just trying to get some sense of the ability that flex-down, flex-up under sort of a tougher economic backdrop.
Speaker 6: Yeah, man, a couple things, some color give or take, I think Q4, air must capacity is about 8% of total air group capacity. Half of that is the A320 fleet that we're drawing down and the remainder is the A321 fleet, which will be with us next year. It's about 4% of capacity. You could potentially move to retire that more quickly. And that's...
Speaker 6: roughly the amount of ASM's you'd be talking about. I think the flexup thing, that's really a utilization question. And it gets back to how much stress we want to put into the operation. And as I said a couple of questions ago, I think we were too aggressive. In the spring, we're going to be a little more conservative for the next couple of quarters. So I would suspect we work the utilization level a little more next year, but not try to maximize it. And so that will we show you a little bit.
Speaker 9: You know, I think there's a pretty tight range of capacity that we're going to end up in next year Hey Dan, and now one other point to just on your question aircraft paid for unencumbered etc etcetera, we've got
Speaker 9: large parts, 60, 65 airplanes that are fully paid for, you know, should capacity really go south because of the economy, et cetera, we could pull aircraft down with no problem at all and not have to pay leases on that on any of those, fully depreciated and owned.
Speaker 4: Yeah, well, thanks guys. Next question here, I know Seattle is solid. I can see the competitive dynamic in that market. And just following up on an earlier question, on Hawaii and Inter-California, the pre-tax margin outlook is really solid. But in the back of my mind, I'm thinking that you have a couple entities here that are still a drag on the system margins. So I'm just wondering if you could elaborate a little bit more on some of these entities.
Speaker 13: Yeah, Dan, I think in generally what you've seen us do is obviously bring back capacity the quickest and the fastest to Seattle and obviously exceeds. As far as the rest of our network, and I presume you're alluding to California, I think again the good news there is that our capacity has been down significantly and we're working to sort of bring that back.
Speaker 13: We have new corporate deals, we have new credit card programs, we have our vice president in the Bay Area now whose full-time job it is is to make sure other parts of our network continue to get better. So we feel very good. We think there's sort of only up from where we've been just to be quite frank as we continue to work it. The last thing I will mention just because it's becoming a theme here. I think for me personally what 2022 has taught me is the best economic.
Speaker 13: driver for Alaska air group. It's loyalty and it's gifts is to set a financial plan and capacity and hit it. It's loyalty and it's gifts is to set a financial plan and capacity and hit it.
Speaker 13: The amount of economic, you know, frustration and guest frustration when you set plans and don't do it is very, very large. So I think that's why we feel very confident that whatever we grow next year, that we will hit it and we will execute extremely well and that will be the best cost and revenue answer for Air Group.
Speaker 4: Thanks guys, great job
Speaker 18: Thanks again.
Speaker 2: Our next question is from Chris Sathapopoulos.
Speaker 2: is from Chris Stathopopoulos. You are open.
Speaker 19: Okay, thanks for taking my questions. So, shame the floor to 8% targeted growth of 2025 you outlined a few months ago.
Speaker 19: In light of everything that's happening right now, operational issues for the industry, labor tightness, likely economic slowdown.
Speaker 19: In the new market still makes sense or the 70% from frequency and you know, as peers as you know are taking down out your capacity guides, but the moving parts at least for me.
Speaker 19: still are a bit murky. So any color on what's moving, or what could move around with respect to that before buckets of growth you outlined a few months ago, thank you.
Speaker 6: Yeah, no, I think thanks Chris. I think yeah, the, you know, the idea of of. And I'm not not saying we wouldn't get into new markets, but. But obviously we're most focused on recovering the pandemic network, even though it's been reshaped, but getting our California network back our Portland network back, they're going to remain the priorities. That's where the incremental capacity from here for the will go. And, you know, if there's a smart market opportunity in there, that's new. We'll definitely take advantage.
Speaker 20: Thank you.
Speaker 6: Sorry, Chris, that was on CAFIM exit rate.
Speaker 19: Yeah, well, we think about the Casimax we hear. We have a Casimax guy, we have your pre-tax margin guide. I think a lot of investors here are looking at exit rates and the setup for next year and the extent how are you thinking about the weight or the split between volume and yield. What are you emphasizing here in your projections? Thank you.
Speaker 6: Gotcha, yeah, in terms of like the pre-tax sort of, yeah, I think what we'll see and what we anticipate, we're going to fly marginally more capacity in Q3 relative to Q2. And then I think Q4, you know, it's, there's an implied guide out there based on a full year, but it's still a little bit up in the air based on the economy and ultimately the Airbus and Q400 drawdown. And I think those are going to be meaningful.
Speaker 6: sort of determinants of how we exit the year on Casim X. As I had said before, I think there's kind of a one-to-one relationship right now. If we can fly the capacity, we'll, you know, one point of capacity should equal something like a point of reduced Casim X.
Speaker 6: I think, you know, right now, as it stands here today, our plan is to hit those guides that we set forth and, you know, it would take a pretty dramatic economic and demand turnaround for us to think differently about that right now. Because we're still smaller than we were in 2019 and we think demand is higher than 2019. So, I just think, like, right now, there's not a lot of bias to try to take further capacity down in Q4. We're going to go and execute what we've just shared in terms of.
Speaker 11: verse 22.
Speaker 6: I think assuming we get labor deals done that it very likely could be up.
Speaker 6: I think assuming we get labor deals done, it very likely could be up. Verse 22.
Speaker 6: Oh, I was thinking versus 2019. Versus 22, I don't know. It's probably, it's gonna be highly levered against the growth rate, but there's a chance it could be up. And I do anticipate us getting my birthday all done. We're not sharing sort of guidance around that, but let hope is that they are not in our cost base next year. But let hope is that they are not in our cost base next year.
Speaker 19: All right. Thank you guys. Thanks Scott. Thanks Scott. And thank you for joining us and we'll talk to you next quarter.
Speaker 2: This concludes today's comment poll. Thank you for attending.
Speaker 21: The host has ended this call. Goodbye.
Speaker 1: I have you.
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