Q3 2022 Alaska Air Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 third quarter earnings call.
At this time all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at Alaska Air Dotcom.
After our speakers remarks, we will conduct a question and answer session for analysts.
I would now like to turn it turn the call over to Alaska Air Group's Vice President of Finance Emily Halverson.
Okay.
Thank you operator, and good morning, and thank you for joining us for our third quarter 2022 earnings call. This morning, we issued our earnings release, which is available at Investor day at Alaska Air Dot Com.
On today's call you will 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 third quarter, GAAP net income of $40 million, excluding special items and mark to market fuel hedge adjustments Air group reported adjusted net income of $325 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.
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.
Today, we released our third quarter results closing out the busiest travel period since the pandemic began demand was resilient planes were full our people we're busy and our results were strong.
Our 15, 6% pre tax margin is likely to top of the industry and came within two points of our 2019 margin. Despite the impact of exceptionally high fuel prices and multiple new labor contracts.
We ran the best operation this summer leading the industry with the number one.
On time performance from June through September .
Our $2 8 billion in revenue marked the highest quarterly revenue ever recorded in our history.
Our unit revenue was up 27% versus 2019, which we also believe is best in the industry and underscores that our commercial initiatives are delivering and last but not least we ratified three major labor contract, becoming the first major airline to reach a deal with our mainline pilot group.
Our leadership team has been very deliberate about our priorities this year and setting ourselves up for continued success.
We are seeing results as we focus on moving rapidly to a single fleet delivering operational excellence, securing labor contracts and configuring our business for profitable growth.
Our financial results are strong and our underlying business model is resilient to put it simply we are poised to continue to outperform.
Excited about what the future holds.
Now let me give you a quick update on our top priorities are fleet transition is progressing well and we are closing in on getting back to a single fleet.
<unk> <unk> hundred 20, and Q4 hundred aircraft will be out of the fleet by January of 2023, and the 10 <unk> hundred 20 ones will follow by the end of 2023 today, we have 35 Max aircraft that are 25% more fuel efficient per seat than the smaller <unk> hundred <unk> they are replacing.
Expect to have 78, Max aircraft by end of next year, representing over 30% of our mainline fleet.
As we focus on Reconfiguring, our business back to a single fleet transition training for nearly 500 of our pilots will continue through may of next year after which we expect to begin to ramp towards the $75 million single fleet savings, we outlined at Investor day.
Our operation is also back on track. This summer we returned to delivering a reliable operation with a completion rate over 99% each month of the quarter. Despite flying record high load factors throughout the summer <unk>.
Horizon has also posted its fantastic operating results with the number one completion rate in the industry at 99, 5% and importantly, our guests have noticed with our guest satisfaction score improving and exceeding our target for the quarter.
We locked in three major labor deals a huge milestone for us that has been a primary focus of ours for several months.
Following the ratification of a contract extension with Iam in September we are excited to have reached ratify deals with both our horizon and Alaska pilots as well.
Securing a new contract with our horizon pilots provides us a strong foundation for our efforts in attracting retaining and building a robust pilot pipeline.
Also Monday of this week, our Alaska mainline pilots represented by ALPA ratified a new three year agreement that recognizes their contributions to our success and the market for pilots in the industry.
We are excited for the stability and alignment this brings our organization and we will prioritize getting our upcoming labor agreements done as well.
We have a lot to be positive about here at air group, we are delivering on our goals and demand remained strong. We also realized there are challenges our industry is facing including in an uncertain economic backdrop and a structural step up in wages.
Going forward, we are uniquely positioned to offset this pressure by leveraging initiatives. We already have in place one of the most impactful it will be harnessing the structural efficiencies that come with a return to single fleet, a tailwind that will be unique to Alaska.
This includes increasing productivity as we eliminate cross training events more efficient scheduling by moving to a preferential bidding system for our mainline pilots and cost effective growth through up gauging, we are not immune to the challenges of the industry, but remain committed to keeping our cost advantage relative to our competitors as we move forward.
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We are fortunate to be on solid footing as we look to finish out the year and build on our performance into 2023 or.
Our priorities not only this year, but throughout the pandemic have centered on preparing our airline for profitable growth and we are taking strategic steps to bolster our competitive advantages.
As these initiatives continue to fully ramp up they will support our results both in the near and long term near term. This is already evident in our unit revenue outperformance and the fact that we are still tracking to deliver a 6% to 9% full year adjusted pre tax margin unchanged despite now including.
The impact from our new labor deals.
Longer term the foundational strength of our balance sheet, coupled with our commercial roadmap and commitment to operational excellence will continue to support strong financial performance.
To close I am excited to see all of our hard work begins to come to fruition and for the opportunity that we have ahead of us over the coming quarters and years.
Lastly, before I hand things over to Andrew I want to thank all of our Air group employees for a great summer and everything that they do.
Running a safe reliable operation is critical to our success on all fronts and serving our guests connecting our communities and delivering on our financial performance and our success would not be possible without the tremendous effort and the care. They continue to show day in and day out and with that I'll turn it off.
Over to Andrew.
Well, thanks, Ben and good morning, everyone.
My comments today will focus primarily on our third quarter results, along with fourth quarter guidance.
In the third quarter, we achieved our highest recorded revenue in our history.
$2 8 billion.
This revenue performance up eight.
18% versus 2019 on 7% less capacity resulted in very strong unit revenue performance unit revenues were up 27% versus 2019, a sequential improvement versus an already exceptional second quarter.
Despite yields having peak from the level seen back in June and July .
Load factors also remained strong exceeding 2019 levels every month of the quarter and coming in at 86, 5% for the full quarter.
Our network revenue teams did a fantastic job partnering together to maximize revenue performance, which was also fueled by revenues generated from the commercial team's initiatives.
These factors coupled with capacity constraints across the industry. During a period of elevated demand has translated into a strong pricing environment.
Moving to product categories, our premium products continue to show strength as I have all year first class and premium class revenue were both up approximately 28% versus 2019.
Paid load factors continue to exceed 2019 levels with first class up full points and premium class up nine points.
On higher average fares.
The strong cash flow generation from our loyalty program has also continued throughout the year cash remuneration from the bank was up 37% versus the third quarter of 2019.
While total royalty revenues finished the quarter up 34% year over three.
Recently voted the number one best airline rewards program by U S News and we'll report we believe that credit card and our loyalty program offer exceptional value to our guests.
And in a continued source of growth for our business. These strong results are included in our product and loyalty initiatives. This year.
We are tracking ahead of plan and are set to recognize approximately $135 million in incremental revenue on a long term goal of $195 million.
This initiative is one of the key reasons for our unit revenue outperformance.
Turning to corporate travel trends after taking a step earlier this year business travel volumes have remained around 75%, 80% recovered from 2019 levels. While revenue is approximately 10 points better than this given the yield environment.
Notwithstanding a slow recovery of corporate demand across the West Coast. We believe our business recovery is in line with the majors underscoring the improved business offering we have versus pre COVID-19. Additionally, while some of our corporate partners have been slower to return to travel.
We believe we are benefiting from employees at these companies, taking more personal and hybrid travel as they move around and work remotely.
I fully expect that we can restore 100% of business revenue.
Year to date, we've improved our CAGR from 2019 levels through our corporate distribution channels because of the increased opportunities we have from working with Amex GBT and joint contracting with American and finally at one World and international partnerships have continued the positive momentum from what we shared last quarter sustain.
In a high single digit contribution to our total coupon revenue for the quarter as we sit today international and business travel have not fully recovered, which we believe only offers more revenue upside from these partnerships.
It will take a few more quarters to get a more complete sense for the impact, but there is no doubt that the strength of these partnerships is real and that this is an accretive revenue source for our business going forward.
Looking ahead to guidance for the fourth quarter, we expect total revenue to be up 12% to 15% on capacity that is down 7% to 10% versus 2019.
By a wide margin our go forward capacity will be most constrained in the fourth quarter.
As we retire 45 aircraft across our mainline and regional fleets by the end of January and execute training events in preparation for 2023 growth starting in the first quarter.
This guidance implies fourth quarter unit revenue performance of approximately 24% versus 2019.
As we look to the fourth quarter bookings remained healthy as guests continue to book holiday travel.
As has been the case throughout the summer we are booking solidly ahead of 2019 load factors through the end of the year and are on track to fly a record load factor for the fourth quarter we.
We are currently holding yields at approximately 20% higher versus Q4 2019.
On the network side, we will continue to focus on deepening the spokes of our system as we fully restore our capacity to 2019 levels by spring and grow from there as we look at our network. The competitive backdrop is still favorable as the west coast remain the least recovered with competitive capacity down over 20% versus 2019.
As we move into 2023, we are looking forward to taking more max deliveries to up gauging grow efficiently and some of our strongest and capacity constrained markets such as Seattle.
And to wrap up we remain in a remarkable demand environment and we look forward to closing out a strong year of revenue performance.
We've configured our business for incremental improvement and already seeing the benefits from joining oneworld, our partnership with American and a new credit card deal.
More importantly, the commercial drivers we have in place are poised to unlocking even greater way as we move into 2023 and I look forward to sharing more details during our year end call.
At $400 million of commercial initiatives has proven intangible and we will continue to support our revenue performance over the coming quarters and years and with that I'll pass it over to Shane.
Thanks, Andrew and good morning, everyone.
Our $325 million adjusted net profit this quarter reflects both the strong demand backdrop, we are experiencing and the strength of the Alaska business model. We are encouraged by the return to operational stability and reliability of this quarter and we are also encouraged by the absence of the extreme COVID-19 related volatility that are challenged us for.
More than two years.
Our results largely landed within previously guided ranges with no major disruptions, causing significant and unanticipated revisions, which seems like a small thing, but it's actually quite refreshing.
Not only did we deliver a very strong quarter operationally and financially, but as Ben mentioned, we ratified three key labor deals as well completing these deals is an important step in ensuring we have contracts that recognize the contributions of our people and also allow us to fully focus on running a great operation taking care of guests and <unk>.
<unk>, our growth and financial performance Roadmaps.
I'll briefly walk through highlights of our third quarter performance before discussing cost and labor contracts that are incorporated in our results and our fourth quarter guidance.
On the back of the continued strong demand environment, we generated $174 million in cash flow from operations during the third quarter, bringing our year to date operating cash flow to $1 4 billion.
Total liquidity inclusive of on hand, cash and Undrawn lines of credit remains at a healthy $3 6 billion.
Providing us two times the cash we need to run our business and ample funds to pay for our Boeing aircraft deliveries over the next year.
Our balance sheet remains strong with debt to cap at 49%.
Debt payments during the quarter were approximately $100 million.
<unk> payments for the year, our $50 million.
And as you know shareholder restrictions associated with our cares funding also officially rolled off at the end of September with our strong operational and financial performance and solid balance sheet. We look forward to discussing potential shareholder returns with our board next month.
Turning to costs CASM ex increased 19, 3% in the third quarter versus 2000 1930 basis points above our guidance range. As a reminder, our practice is not to include new contract impact in our guidance until ratified a.
Our new labor agreements added $35 million of costs that were not in our original guidance and excluding these our CASM ex would have been up 16, 8%, which would have been below the midpoint of our guidance range.
Other transient cost drivers in the quarter include $30 million associated with issuing each of our employees 90000 mileage plan miles and recognition of all of their extraordinary work during the pandemic and our 90 <unk> anniversary as an airline.
And approximately $15 million and costs associated with carrying higher staffing complements relative to offline that we believe will need in the future. These two items represent a three point impact to CASM ex in the quarter.
Turning to fourth quarter guidance and our longer term thinking into 2023, let me begin by saying that our Q4 capacity remains artificially constrained as we focus on transition training our pilots to meet our deadline for retiring Q4, hundreds and <unk> hundred <unk> in January we will have both the added cost of these training events and have fewer pilots available to <unk>.
<unk> revenue service during the quarter and into the first quarter of next year.
We expect fourth quarter capacity to be down 7% to 10% versus 2019, approximately two points sequentially worse versus the third quarter, where we were down six 7%.
We expect full year capacity to be down 8% to 9% versus 2019.
Our absolute costs will increase from the third to fourth quarter entirely driven by our new labor agreement and expected strong payouts for performance based pay program as we continue to expect to meet a number of our strategic and financial goals, including being amongst the top margin producers for the full year.
We expect CASM ex to be up 20% to 23% in the quarter approximately four points of this our structural costs related to our new labor agreement too.
Two points are related to anticipated strong Pvp program payout and lower capacity and higher staffing complements our an approximate four point headwind during the quarter.
Turning to fuel while oil prices have moderated some over the quarter. They remain elevated and crack spreads continue to be both elevated and volatile we expect fuel price per gallon to be $3 50 to $3 70 for the fourth quarter.
Our hedging program is expected to provide a significant benefit this year of around $170 million.
For the full year, we now expect CASM ex to be up 19% to 20%. However, we are reiterating our full year adjusted pre tax margin guide of 6% to 9% and we continue to expect to close the year with a months the top pretax results industry wide.
Last quarter, we outlined that we were prioritizing securing labor deals and returning to a reliable operation above other considerations as those are foundational to the long term success and financial performance of the company. They are also the foundation of being able to deliver higher levels of productivity and cost leverage going forward, having solidified our operational.
Reliability, our focus will now shift to leveraging growth in 2023 to reduce unit cost across air group.
While there will be some continued productivity and capacity drag from fleet transitions in the first half of the year. Our business plan for next year will include a return to our our 2019 sites. During the first half of 2023 and will also include a reduction in unit costs year over year.
While we won't share specifics on 2023 guidance until our Q4 call. We are very much looking forward to leveraging the benefits of single fleets at Alaska and horizon higher levels of aircraft utilization and the significant benefits of up gauging from $83 20 to 737 Dash Nines and ultimately 737 Dash 10. These are all.
Consistent with the roadmap, we shared at Investor day back in March and along with our commercial roadmap that is already producing and has further upside from here I believe we are well positioned for continued improvement in our business in 2023 and beyond.
And with that let's go to your questions.
At this time I would like to invite analysts who would like to ask a question Press Star then the number one on your telephone keypad now.
Just for a moment to compile the Q&A roster.
And our first question comes from Michael Lindenberg from Deutsche Bank. Please go ahead Mike.
Yeah, Hey, good morning, everyone can you kind of give us an update now that you have both of your pilot contracts done.
And this is to you Ben what you have seen on the attrition side has it completely sort of down a 180 and where are you with respect to having an appropriate number of both check airmen and trainers.
You did mentioned that theres going to be a lot of training.
Let's move on after the Q4 hundred 70 <unk> hundred <unk>.
Are you ready as we as we enter into the new year.
Hey, Mike Good morning, Yes.
We're really pleased with both contracts on both the regional side on the mainline side.
These are really great deals for us on the attraction retention side of the business.
In terms of what we're seeing for attrition, it's a little early to tell but early indications are we're seeing some benefit on both the regional and mainline side. So I think this is really pivotal for us.
It's going to really help us long term in terms of growth plans in terms of chairman in terms of the training output.
We have we've seen a lot of improvements since the spring, we're producing about 65 pilots out of the schoolhouse a month with the goal of being 100.
We're increasing the number of Czech government to help us improve that throughput, but we are on track right now to deliver our pilots the pilots we need per month on both the regional and the mainline side and we're pretty confident on.
In executing that plan going forward and I'm sure you want to add or.
Okay.
Mike Go ahead, if you have a follow up do you have a follow up Mike.
I'm, sorry, Mike we took them out of the queue.
Mike If you wanted to.
Asked another question in queue up again, please in the meantime, our next question comes from Duane <unk> from Evercore ISI. Please go ahead Duane.
Hey, Thanks I appreciate it.
There was there was a lot in there.
In terms of guidance points can you just refresh us on what you said about the first half and kind of the rate of capacity recovery in the first half is it sort of comprehensively.
First half.
Back to 100% or is that something like you'd hit in <unk>.
Yes, Thanks, Duane good morning, too, yes, I think it's likely to be sort of in the middle of the first half of the year I am not.
We're still finalizing our gen fab plans, but we'll be back to 2019 sized confidently sometime in the latter half of first quarter or early second quarter.
With the transition training it'll be a little bit sort of choppy in terms of how the capacity comes back online, but we're excited to get there and we've got a lot of aircraft coming in the first half of the year that can then take us.
Ultimately above 2019 sites and we feel like there is demand for it to the second half of the year.
Thanks, Shane and on that delivery stream can you just walk us through what you expect.
Next year and your line of sight or confidence.
On those deliveries just given the environment I appreciate you taking the questions.
Hey.
Good morning, Duane it's Nat Pieper.
We've got 35, Max airplanes, now and we think by the end of next year, we're projecting to have 78.
Boeing obviously has five miles down the road and we meet with them weekly to understand delivery constraints et cetera.
Confident that they're going to deliver and give us the airplane capacity, we need to hit our targets.
Thank you.
Thanks, Brian .
Our next question comes from Savi <unk> from Raymond James. Please go ahead Sami.
Hey, good morning. Thanks.
Just on the just to follow up on some of the pilot.
Training and.
Cost and the elevated staffing cost.
How much is.
Much of the drag is that still in Q1I am guessing the pilot training cost will continue will kind of drop off after kind of the <unk> are early QQ and just kind of curious how much of what size of the drop off there will be and then kind of the elevated staffing when do you see that moderating back to kind of historical levels.
Yes, hey, thanks, Savi good morning.
It's about just just to put context around it for Q4, the Overstaffing and transition training is about one five points of our Q4 year over year CASM year over three CASM guide.
<unk> to be similar ish in Q1, and then it will start to taper and be completely gone by the end of Q2.
Those costs will be gone.
Correct correct, yes, okay.
Got it.
And then just that.
With the on the Boeing deliveries and thanks for that just any revised thoughts on Capex I know the Capex came down a little bit here in 2022 and you.
You can view on 2020, three 'twenty, four capex and the financing of that.
Yes, I'll have Emily sort of update one thing I would just say in it.
<unk> and I know youre hearing it from everybody, but not only on aircrafts on every capital item or buying things are shifting to the right. I think supply chain is everywhere are elongated still new Sims are taking a little bit longer GSE equipment is taking longer so.
Things, what we plan to buy it just seems like they are taking longer to get in right now, but Emily can give you some more on the totals I think Shane covered it pretty well you saw that our guide for 2022 came down about $100 million you should expect most of that to shift into 2023, and when we gave our full year 2023 guidance well refresh you guys from the numbers. We gave you at <unk>.
We had originally thought it was around $2 billion for 2023, so I expect that to go up a little bit.
And as a financing Emily is that that cash or any thoughts on the financing side.
Hey, Savi, it's not it'll all be cash we still continue to hold more than two X the amount of liquidity, we need to run the airline.
So best thing, we can possibly do is pay cash for airplanes.
Alright, thank you.
Thanks Anthony.
Our next question comes from Andrew D. Dora from Bank of America. Please go ahead Andrew.
Hey, good morning, everyone.
<unk>.
A lot to unpack on the CASM front in <unk> and for the for the year.
Stepping back when we think of 2022 CASM up 19% versus.
Versus 2019 can you kind of breakout for us all of that up 19 like what are the kind of the onetime items that you feel like we will not repeat as we move into 2023 and how much of your.
Of your CASM. This year is just not having your network fully restored just trying to get a good run rate potential for 2023 give me pause.
Yes, no I appreciate the question Andrew number one I just want to remind folks that in terms of the updated cost guide. The only thing that's changed for full year for US is the new labor deals everything else is tracking exactly as we expected it to and then Andrew you hit on it the biggest drag to CASM or headwind for us This year is not pretty.
Sumit ASM is that we had wanted to originally.
We made a very deliberate obviously in Q1, we were all impacted by Covid waves in the entire industry had to take capacity out we had a big snowstorm here in Seattle that drug into January .
We made a deliberate decision to pull down the schedule by 678 points during the summer and to hold it lower during Q4 as well as we prioritize operational stability.
Now that we're stable we've got terrific completion rates, we've got great on time performance, we feel really good about our staffing complement levels and our ability to do classes across every role in the company.
Ready to get more.
Much more growth minded and begin to leverage sort of.
The goodness that comes with a growing and getting back to productivity next year.
One data point I think we're still 10 points below our historical norm for productivity I don't know that well get all of that back next year, but we're going to make a big.
Big sort of we'll get a big chunk of that back coming next year. So that's really the biggest thing everything else.
The only structural real change is the labor deals I think.
Unique right now having been the first to get the mainline pilot deal done I suspect we won't be unique for very long.
And so that is something that the entire industry will ultimately have to do and on a relative basis will be in really good position versus versus everybody as we have been historically.
Got it thanks for that.
Just second question for Ben or Andrew.
Yes, I think look having the scale that you have in your hubs in the Pacific Northwest.
Really I think really solid driver of your overall margin portfolio.
I know youll never get to get to the share in L. A X or a step below that you have in Seattle are important.
But I guess, how long do you think it will take to build out those geographies, although I think as you build up their your margin. So you should see a tailwind.
<unk> scaled up there over time any thoughts on kind of the timeframe of those California markets.
Yes, Thanks, Andrew.
How I would answer that is that.
As we move into next year, and we give better guidance on our growth we are returning more growth.
Back to California, I think we feel really good about where we are the markets, we serve and as we've shared all along it's about frequency and.
And depths of those markets, it's about unlocking global connections with both at Oneworld partners and with American and I think we have a head of California, Neil flights down there I meet with them every month and I'm really excited about the focus and the discipline.
That we have down there where traditionally the Pacific Northwest company, we focus a lot up here. So overall I don't think youre going to see a material change overall in the scheme of things but.
But what we do do down there I fully expect to get better and stronger over the next few years.
Thank you.
Thanks, Andrew and our next question comes from Dan Mckenzie from Seaport Global. Please go ahead Dan.
Oh, Hey.
Good morning, Thanks, guys.
Shane 'twenty 'twenty three capacity is choppy as it comes back online just going back to I think an earlier comment does that tie to a choppy earnings recovery from here and I guess related to this we are seeing some of your peers lay out pretty big earnings goals in 2023, and setting aside the 11% to 13.
Percent pretax margin goal.
What's your conviction that you can at least improve on your 2022 pre tax margin as we move into next year.
Yeah, Hey, Thanks, Dan I don't think it portends, a choppy earnings recovery a lot of the sort of choppiness will be the base comp.
On a year over year basis, we've just had so much unexpected scheduled pull down this year and by the way next year, we're going to comp.
2022.
And so I think it'll be fine.
I don't think the earnings trajectory necessarily will follow the return of capacity trajectory.
Im really confident we can improve our margins next year really strong demand backdrop I think the commercial team is doing.
Really good job of of participating in that backdrop and currently outperforming the industry and then we've got a lot of things that we need to do on the cost side to take advantage of the strategic decisions, we made around single fleet and getting back to.
Historical norms on productivity and so I think.
No.
If the <unk>.
Absent a major economic pullback I think we feel really good about our ability to get improved margins next year.
Terrific.
Andrew Second question here, I guess, turning to U $400 million in revenue initiatives outlined at the Investor day, So loyalty network alliances fleet up gauging what percent of the revenue from what is the percent of revenue from premium products today.
Versus discounted leisure.
And how can we think about that premium revenue target as we move into 2023, given the the fleet transformation.
Okay.
Yes, I think.
Off the top of my head I think both premium and <unk>.
First all in coupon and Upsells.
1 billion plus businesses each.
Just to give you a rough size of magnitude I think.
<unk> has always given the strong demand, we believe and we continue to believe the importance of taking care of our leads and upgrades, but we're also recognizing there is opportunity.
To continue to get more out of our premium products.
We're opening up new distribution channels.
And most importantly, as we up gauge our fleet and we get.
25, plus percent increase in first class seats from the transition we still see significant upside. So we're looking at some other things, which I won't go into today, but overall my expectation as we continue to show good things in the premium product space.
Thanks for the time guys.
Thanks, Dan.
Our next question comes from Scott Group from Wolfe Research. Please go ahead Scott.
Hey, thanks.
Afternoon, I guess now.
Can you just clarify the do we have the full impact of these of the pilot deal in Q4 costs or is it from the date of ratification and then just you.
You made a comment that the only changes with CASM as this new pilot deal, but I thought you said, it's a four point headwind from the pilot deal in the fourth quarter, but the full year CASM guidance coming up three points. So it feels like it's more than just labor, maybe just I'm not sure I'm following.
Yeah sure. Thanks, Scott.
Yes.
I would say labor deals not just the mainline pilot deal.
What we've been sort of speaking to that.
Those are fully baked into the fourth quarter Ratably.
So that four point headwind is the structural sort of number that we're going to go forward with at this point.
No I think in terms of the full year CASM ex guide.
The real change between prior guidance and current guidance is the labor deals being incorporated as you know we don't.
We don't guide to labor deals as we're negotiating and so we closed three this quarter and that's what we had to bring through our full year CASM ex guide there was one other category that went up a bit and it is our performance based pay.
Because we do expect to be on the.
The better end of many of our financial targets that we had set forth in that program. So we took a larger we expect to take a larger accrual for that in Q4 as well.
Okay and then so when we think about next year.
I guess three more quarters of labor.
We will have capacity up which should help.
Maybe some of the inefficiencies go away when you add it all up would you think that.
CASM ex is up or down 23 versus 22.
Yes no.
It will be down as I said in my script, our business plan will be to have a.
A reduction in CASM ex in 'twenty three versus 22.
Okay, Great Alright, Thank you guys.
Thanks Scott.
Our next question comes from Jamie Baker from Jpmorgan. Please go ahead Jamie.
Hey, good morning, So Shane following up on that last question.
Pilot impact in the fourth quarter. So there is a look back to September one on wages, and then the 33% and $22000 bonuses for captains and first officers respectively.
So that's that's in the guide you are not going to take that as a one timer in the fourth quarter is that correct.
So the look back to September one as in the third quarter result.
Got it through the P&L.
The ratification bonus sort of lump sum payments those were special in the quarter as well.
Okay Alright.
And the adjusted but not in the adjusted number yes, Okay got it so the fourth quarter guide is clean and that and then second.
It's a question on a preferential bidding system and I really hate asking stupid questions, but here we go.
Why does it take until April of 2024 to go live I mean isn't it just like software.
Yeah, Yeah, it maybe before that so that.
Sure.
Exhaustive reader of our agreement.
That is the outside drop dead date, we need we have to go live by that we have to negotiate a timeline and just agree with our union counterparts, what the last day.
Would go live our hope is to do it much sooner I know Ben we'd like to do it much sooner.
Only the real drivers there was only a couple of.
Providers for these systems and they have.
Other demand on them as well so you have to get in mind and then Jamie you just try to avoid the peak season. So there's only a handful of months in the year that you actually want to go live you don't want to be doing it in December you don't want it to be doing it in peak summer so.
That's why these end up taking a little bit longer than everybody would they should okay. I haven't thought about the peak season aspect.
Do you expect final question apology.
When it does go along do you think it's something we would be able to identify.
Well on a margin basis, but on an ex fuel CASM basis.
I'm sure it matters to you guys and I'm sure that was a win.
I'm just wondering if it rises to the material level of materiality for those modeling the company.
Yes, I think it's it's something you'll probably have to ask a detailed question about.
Okay. Thank number when we get there, but it's not going to be inconsequential and I'm sure you'll hear us at least.
Speak to the benefit of it once it is live and we're starting to see the benefit.
It really cleans up that transitions month to month and sort of the conflict drops as you know and that can be a significant benefit both for pilots in for the company on a productivity basis. Okay. I. Appreciate it. Thank you very much everybody.
Thanks, Jamie.
Our next question comes from Brandon <unk> from Barclays. Please go ahead Brandon.
Hey, good afternoon, and good morning, everyone and thanks for the question.
Can we go back to your analyst meeting targets.
You said pretax margin of 11% to 13 long term and above industry peers can you guys just remind us I am assuming that inflation is coming in a little bit higher than that so assuming that's still relevant.
Some of the favorable commercial offsets that you guys are envisioning here.
Yes, I think.
As we've talked about all along on the $400 million.
Of course inflation has has its impact certainly on credit cards for instance, the mean.
We get paid for every swipe and those swaps are up 7% just on inflation alone give or take.
I think what I would say commercially and shine and been a hit on it is what I'm. Most excited about is that as we work really hard to reconfigure this business airplanes labor.
But we're going to set ourselves up next year to really operate this airline like.
Like a Swiss watch and I can tell you that revenue goodness that comes from that the efficiencies that come from that.
All the good things that come from that versus what we struggled with this year is really going to come into being we're going to give you an update on as we continue to look at our initiatives, but but overall I think outside of that operating <unk> line efficiently is going to be huge.
Okay, I appreciate that Andrew and I guess, along those lines you guys did talk about earning above your cost of capital. Obviously that has moved higher this year. How do you think about the long term growth of the business. Then is it right to still target, 4% to 8%, especially with the higher cost base and higher cost of capital as well.
Yeah, Ben can jump in on this I think Brandon.
We're sort of fortunate I think the equity valuation, we'll have to see over time, what the cost of equity is on the debt side, we still have a very very low cost of capital and because of our cash position.
We don't need to access capital markets anytime soon.
So I think on the debt side, we feel incredibly.
Sound in terms of the ability to finance ourselves going forward you know our balance sheet story, if anybody should and can be investing it's us.
And I think there's still a lot of like.
Demand that we feel like we could be taking.
In our core markets that are highly accretive in terms of.
Returns above cost of capital, but then can speak to the longer term sort of plan, yes, I think.
Our long term plan is still to grow until 2025, we have a great order book from Boeing which we plan to execute.
So I.
I think exactly would change that I think we're on track for that and feel good about the long term growth.
Thanks, guys.
Okay.
Thank you.
Our next question comes from Conor Cunningham from Melius Research. Please go ahead Connor.
Hi, everyone. Thank you.
And <unk>, you talked a fair bit about.
The alliance initiatives and I don't think I heard much about that this quarter and I would just assume that from one world in particular, you would see a huge benefit.
Give me like international is coming back in a major way. So if you could just kind of update us where you are at with that.
Conor Thanks for the question, it's Nat Pieper.
I think I'll, let you.
You go back to why Alaska joined Oneworld and why we were so eager to do that sure.
Sure. It is to participate in international flows and be able to offer.
Guests the ability to.
Carry their loyalty benefits carry their status.
Our mileage program and get any place on the globe that they wanted to go either on our airplanes are on somebody else's and so as international traffic has come back Europe , especially we're seeing real tangible benefits from that year over year were up 40% from a contribution perspective from these partnerships.
And I think the second benefit to it which is harder to see in the P&L is really keeping our most important guests within the Alaska family, whether it's on our airplanes domestically or it's using their oneworld partners that have their loyalty status.
Not losing those those passengers are most important guests.
Two our critical competitors here in the Pacific Northwest anymore, because we've got a global network that we can sell and market as our own.
Great.
And then.
Just on the cost structure.
A lot of noise going on in this and I kind of get the labor the labor stuff, but when you think about Alaska historically, its always about really highly productive employees.
The world is different now.
Productivity has probably changed in the last one so I'm just curious on how you get back to high productivity levels.
Storage.
I mean is it really just a function of capacity or is there something else that playback. Thank you again.
Yes.
Kind of things a couple of things that I think we are.
Unique to Covid and transient and time will tell if there's a new normal or not but one as we were re ramping we were having to hire.
Larger volumes than we've ever had and get those folks through training that is all a sort of.
Relative drag to our normal.
Staffing posture.
We had incredibly high attrition, which every airline has seen and every industry has really seen and so.
Two things I think stabilize over time for the economy and for US we're in a much more stable place today.
I think youll go back to the sort of more normalized training.
A compliment in terms of overall staffing as we get through 2023 and beyond and then as I had mentioned sort of in my script, we carried.
We didnt reduce our staffing levels at all even though we took six or seven or eight points of capacity out of the system for the second half of the year.
So we've got the people we need to do a lot of this growth next year Theres still a lot of hiring that has to happen because of attrition.
But we're in a really good place, whereas last year, we were trying to hire just in time to meet the new capacity.
Then we get hit with the Covid wave and people would be sick and absent and we can operate and so.
We like others in the industry are totally.
Then on 180 on that we're now carrying more people than we need and it's time to go get the growth in the <unk> in the air and enjoy the productivity benefit from that I don't know, if we'll get back to pre 2019 productivity.
I don't know if there is like a new normal of absenteeism, but we're going to be much better than we are today as we get into next year and beyond.
I just wanted to add content like this company has a low cost mindset, we're building budgets now, but we're going to build productivity targets into the budgets.
And we just we're setting the company up for 2023, I mean, the labor deals we got five labor deals done. This year, we're getting the single fleet done and behind US where there is a capacity drag on us but heading into 2023 of this company is going to go back to where we were in terms of this low cost high productivity lower low overhead.
Mindset.
I appreciate it thank you.
Thanks Connor.
Our next question comes from Helane Becker from Cowen and company. Please go ahead Helane.
Thanks, very much operator, hi, everybody.
So sooner than you think.
You think about the record revenue that you are reporting in your guidance for the.
The fourth quarter and maybe how you are thinking about 'twenty three how are you thinking about where revenue can go.
Over the next few years like do you have a new.
Target for where you think you can.
You can see that that number.
Yeah, Helane I think.
I've shared on previous calls I think we can learn a lot about revenue as much as we thought we did we learn a lot more during COVID-19.
And I think.
My team specifically.
I think just the way our network and our EM team works together is at a different place I think on the corporate side. We are in a different place I think on the alliances and partnerships. We are in a different place where we're kind of luck on the distribution.
And again, we are very very focused on initiatives and generating more revenue I think al natural we're going to be a growth airline that's what we do and we're going to be well positioned to do that both on the capacity side, but I still believe.
I personally look at all of this that there is upside on our products our types of products and especially I don't think we fully untapped loyalty in the card growth and I think theres a lot of goodness. There. So all these things we know going forward that there will be a step change in costs on an absolute basis, mostly because of labor and.
We're going to go get that on the revenue side.
And what I'll add is regardless of what the revenue environment does and I do think it will change for the better we're still need to focus on what we've done so well for two decades is a highly efficient low cost operation highly productive those things benefit you and a good revenue environment or not so good revenue environment. So those are things that we're getting.
Back to.
And Andrew of course, everything you said makes sense so.
Yeah.
Okay.
You have another question.
No I'm good thank you.
Okay. Thanks Alan.
And our last question comes from Chris Bethel Lopolith from Susquehanna Financial Group. Please go ahead Chris.
Hey, good afternoon. Thanks for taking my questions. So I just wanted to the 6% to 9% pre tax margin guide with the new pilot contract or these three new deals so.
Could you help us square that versus the moving pieces of the four to eight ASM guide and also any it sounds like you're fairly confident around the order book, but if there are delays.
How does that change in mix that you outlined last year, 70% frequencies, 5% stage or perhaps more importantly, the 10% new markets are you just planning right now with these new deals at six to nine or some level of sustained momentum in yields or the benefit of the <unk>.
Operating leverage you referenced as your utilization returns in the first half.
Next year.
Yeah. Thanks, Chris So make sure I try to answer each of those on the delivery stream I'll tell you. When we do give you guys guidance on capacity for next year. It will it will be appropriately buffered for what.
Boeing Bill.
Believes they can deliver versus what we may plan for them to deliver and so we'll build upside in if they actually hit the delivery dates they are telling us that would be a benefit to us and would give us the ability to add some incremental ASM. So we're not going to.
Overstress the system and assume every delivery comes on the exact day, even though we know that they are trying hard to do that so.
So we will we'll be really confident in our ability to operate the schedule that we tell you guys. We're going to next year.
I think it's both.
I think primarily we look to.
Get the cost structure moving in the right direction get unit costs coming back down, which will be a big sort of tailwind to margin.
Yes, I think right now we do expect the revenue environment to be different than pre COVID-19 for a period of time I think structurally.
There is.
Relative to the size of GDP or demand I think supply continues to be constrained and our teams continue to do a good job.
Understanding the revenue environment and getting.
Appropriate yields and pricing in it. So I think both are going to help drive us but really.
We were sort of talking to you guys at Investor day prior to a lot of this inflation stuff coming in and.
We knew that labor was going to reset we knew where we were in the market. We had a sense of where it was going in.
When we laid out our long term targets, we specifically.
Put together a strategy on both the cost and the commercial side to make sure we could get into those ranges long term. So nothing has changed for us from that perspective, we're going to deliver what we told you guys at Investor day and get to these margin targets.
Okay, and just a follow up here the four points on the structural labor side is that just the <unk>.
Base rate piece, I think you said that the ratification bonus and look back for September and <unk> in that.
Part D should we assume that we would see elevated pvp accruals.
For full year 2023, thank you.
Yes, the four points represents all the labor deals we've done.
To date.
And just as a reminder in <unk>.
The wage rate increase back to September one for our mainline pilot deal is in Opex.
<unk> sort of lump sum bonus is in special.
What was the second part of the question.
Pvp next year too soon to tell I mean I think.
We have a.
Strong.
<unk> commitment to being one of the best margin producers in the industry and we believe if we do that our employees should benefit.
Benefit through Pvp Pvp program, we do think it drives a lot of alignment I think thats been proven out over a number of years and it's appropriate to recognize folks win when they are working hard and achieving.
But the board sets those goals they do that.
As we get through the end of the year. So it's too early to know where we'll come out on that for next year My strong inclination as the goals there will be a little tougher next year than they were this year and we will have we will have to work harder to get to them.
Thank you. Thank you everyone that mark.
That marks the end of our third quarter earnings call.
Thanks, everybody.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.
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