Q4 2022 Alaska Air Group Inc Earnings Call

Speaker 2: The.

Speaker 3: Four.

Speaker 4: Good morning ladies and gentlemen and welcome to the Alaska Air Group 2022 fourth quarter earnings call.

Speaker 5: At this time, all participants have been placed on mute to prevent background noise.

Speaker 6: Today's call is being recorded and will be accessible for future playback at alaskare.com.

Speaker 7: After our speaker's remarks, we will conduct a question-and-answer session for analysts.

Speaker 8: I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Emily Halverson.

Speaker 9: Thank you, operator, and good morning. Thank you for joining us for our fourth quarter 2022 earnings call. This morning we issued our earnings release, which is available at investor.alaskaair.com.

Speaker 10: 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

Speaker 11: This morning, Air Group reported fourth quarter gap net income of $22 million.

Speaker 12: Excluding special items in mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $118 million.

Speaker 13: 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 within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs excluding fuel.

Speaker 14: 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.

Speaker 15: Thanks, Emily, and good morning, everyone. Despite another volatile year, we closed out 2022 with solid results. With our continued focus and the incredible dedication of our employees, we are well positioned to build on this success as we move into 2023 and beyond.

Speaker 16: This year, we generated full year revenue 10% above 2019 levels, doing so on 9% less capacity.

Speaker 17: Our 7.6% full year adjusted pre-tax margin led the industry, proving that our business model is resilient. Air Group's pre-tax margins have now ranked number one in the industry for 11 of the last 13 years.

Speaker 18: Additionally, our employees earned the largest performance bonus payout in our company's history, on average adding 10.5% on top of our employees' salaries or nearly six weeks worth of pay. Our people did a fantastic job delivering care and want to thank all of them for the work they do to ensure Air Group outperforms.

Speaker 19: even during turbulent times.

Speaker 20: Earlier this year we identified three key priorities to strengthen our competitive advantage and prepare for future growth.

Speaker 21: Our team's delivered on each of these priorities, including one, completing our labor deals. We signed five labor contracts in 2022, all of which include significant improvements for our people and create stability and clarity for our company and employees.

Speaker 22: With these in place, we are well positioned to fully focus on our future.

Speaker 23: Two, fortifying our operational reliability.

Speaker 24: Despite challenges throughout the year, we finished 2022 with one of the industry's best completion and on-time performance rates.

Speaker 25: Operational integrity is the foundation of a healthy airline, and we remain focused on balancing our growth aspirations with consistent delivery of the operational excellence Alaska is known for.

Speaker 26: And three, executing our single fleet transitions at both Alaska and Horizon.

Speaker 27: On January 8th, we flew our last A320 revenue service flight and today marks the final Q400 flight, leaving only 10 A321s in the fleet through year-end.

Speaker 28: We have retired over 60 aircraft the last few months, paving the way to more cost-efficient and productive operations in both our regional and mainline business.

Speaker 29: As we take off 2023, we're taking with us many lessons learned. We closed out a solid year and we are committed to make 2023 even better.

Speaker 30: Our leadership team has a clear set of strategic initiatives that will support our growth aspirations, expand margins, and improve operational excellence.

Speaker 31: For the full year, we expect to achieve adjusted pre-tax margins of between 9 and 12 percent.

Speaker 32: This morning, we introduced an earnings guide of $5.50 to $7.50 per share, which implies restoration to 2019 EPS levels at the midpoint.

Delivering on these targets will be challenging and will require us to leverage our competitive strengths.

Undoubtedly, there have been structural shifts within the industry.

But history has proven time and again that cost discipline and a strong balance sheet are required to win in the airline business.

This is the heart of Air Group's DNA, and we continue to believe low-costs and high-productivity matter, and that pursuing both benefits all stakeholders.

Productivity is not where it used to be in this post-pandemic era, and it can be debated what is structural and what is temporary. But our leadership team is dedicated to driving down unit costs in 2023 as we restore flying and begin to close the productivity gap.

This strategy is largely enabled by our single fleet transition and the up gauge benefits that come with our new max fleet.

Two critical factors to successful capacity growth in 2023 will continue to be staffing and aircraft availability.

We had success in hiring nearly 8,000 people in 2022 and are confident in our plans to hire 3,500 more in 2023.

And as it relates to aircraft, we remain in close communication with Boeing and have a high degree of confidence in our fleet planning assumptions as well.

Having factored in the appropriate buffer in both these areas, we are confident in our 2023 plans to grow 8 to 10% versus prior year, so long as demand and the economic environment continue to support it. Lastly, the revenue roadmap we outlined at our March investor day will provide valuable contributions and Hello.

Our goal throughout the pandemic has been to emerge a stronger, more competitive airline and the steps we've taken to date ensure we're on that path. We have the people, the resources, the knowledge and the discipline to drive performance. I am proud of the results we achieved in 2022, but even more so.

I'm looking forward to the opportunities ahead of us as we deliver on our financial and strategic initiatives in 2023 and beyond.

And with that, I'll turn it over to Andrew. Thanks, Ben, and good morning, everyone.

My comments today will focus on our fourth quarter and full year results along with first quarter guidance. So keep posted to ME

Fourth quarter revenues totaled 2.5 billion dollars.

That's up 11.3% versus the fourth quarter of 2019. Notwithstanding our capacity was down nearly 10%.

These strong results included the impact of severe winter conditions that we experienced over the peak holiday travel period in December .

The storm reduced revenue by approximately 45 million dollars.

Notwithstanding this, we achieved unit revenue increases of 23% for the quarter with robust loads which exceeded 2019 levels and came in at 85.5%.

More impressively, as Ben mentioned, our full year revenues came in at $9.6 billion.

And that's up 10% versus 2019 on 9% less capacity.

This resulted in industry leading full year unit revenues, which were up 21% versus 2019, dropping off a strong year of outperformance.

and demonstrating the leverage of our commercial initiatives, power of our network and a constructive pricing environment.

Turning to product and loyalty, as has been the case all year, we continue to benefit from strong demand in our premium products.

First class was up 19% and premium class up 14% versus the fourth quarter of 2019, with paid load factors up six points and two points respectively.

As we reflect on the full year of 2022, we were able to drive an increase in premium revenues of nearly half a billion dollars, or 20% above 2019.

Our loyalty program has also been a significant revenue driver given our renewed credit card deal with Bank of America.

cash remuneration from the bank was up 42% versus the fourth quarter of 2019, and 39% for the full year. As a reminder, product and loyalty represented roughly half of our 400 million commercial initiatives, and we expect to achieve product and loyalty's full run rate in 2023.

Regarding network and alliances, we are encouraged by the results we've seen through our partnerships in one world.

through increased opportunities that we simply did not have before the pandemic, including joint contracting with American and working with AmEx GBT. We have meaningfully improved our corporate share gap and continue to experience higher traffic volumes facilitated by our alliance partnerships.

And we are stepping up our airline partner selling capability in 2023, which will have us offering full partner inventory for 10 global carriers on alaskare.com by year end. These partners include American Airlines, IAG, Japan Airlines, Qatar and Qantas.

An expanded global network that we can sell and market as our own is compelling for our guests and we expect our airline partner revenue to reach 8 to 10% of total air group revenues by 2025.

Turning to corporate travel, we experienced a softening in bookings during the fourth quarter from those in the late summer picks.

exiting 2022 at approximately 75% recovered on a volume basis and 85% recovered on a revenue basis.

West Coast business remains less recovered, which is not surprising, given the significant workforce reductions happening across large technology companies located up and down the coast, where we primarily operate. Despite the choppiness we've seen in this segment, business travel has trended in a positive direction in the last few weeks.

While we don't expect continued recovery to be linear, over time we do still expect to fully restore our business revenue based on our improved opportunity set.

Looking ahead to guidance for the first quarter, we expect total revenue to be up 29% to 32% year over year on capacity that is up 11 to 14% as we lap weak comps when Omicron reached its peak in the first quarter of 2022.

Q1 is always our weakest quarter of the year but leisure travel remains healthy and yields are holding steady.

For the full year, we expect revenue to be up 8-10% on flat unit revenue.

Our 8 to 10 percent growth in 2023 will continue to focus on deepening the connections of our network while growing the Pacific Northwest and restoring California.

Approximately two-thirds of our growth will be focused in the Pacific Northwest and one-third in California, and will not be overly diluted to our yields as much of it will be added to our strongest markets where demand exceeded supply in 2022.

will be focused in the Pacific Northwest and one-third in California and will not be overly dilutive to our yields as much of it will be added to our strongest markets where demand exceeded supply in 2022. Importantly...

85% of growth comes from increased gauge and stage. This is the most efficient capacity growth of any year that I can recall at Alaska Airlines.

In closing, my team and I are squarely focused on 2022 as our baseline year which represented industry-leading unit revenue and profitability. From that base, we look forward to building an even stronger result for 2023.

The economics of our renewed credit card will continue to build this year. Our alliances and partnerships are set to gain further momentum as we improve our corporate share and international travel continues to unlock. Our premium seat mix and upgaging opportunities will also grow as we take 37 max deliveries Indeed, commodity markets the world needs are now getting stronger Its grey SUMM Nanto

where 22% of seats are premium. This combination drives further unit revenue momentum that we believe will be a differentiator for us going forward.

I'm excited for what our commercial team is set to deliver in 2023. And with that, I'll pass it over to Shane.

Thanks Andrew and good morning everyone. As you heard from Ben, our full year 7.6% adjusted pre-tax margin led the industry and is a great result for us given how the year started and the challenges we experienced rescaling our company in the face of incredible demand for travel.

We are especially proud that all of our people will receive significant performance-based bonuses in February , given their achievements this year. We are looking forward to further building towards our long-term financial goals in 2023 by remaining focused on running a reliable operation, driving unit costs and productivity improvements, and delivering on our commercial roadmap.

Turning to Q4 results and an update on our balance sheet, we ended the year with debt to cap of 49%, within our target range of 40 to 50%, and still among the strongest in the industry.

Debt payments during the fourth quarter were approximately $50 million. For full year 2023, debt repayments are modest, totaling approximately $280 million with $100 million in the first quarter.

Cash flow from operations totaled $1.4 billion for full year 2022, and total liquidity, inclusive of on-hand cash and undrawn lines of credit, ended the year at $2.8 billion. A great result given that we continue to pay cash for our capex in 2022.

which was one of the highest CapEx years in our history. In addition to top of industry margins and our balance sheet strength, our trailing 12 month return on invested capital reached 9% in 2022, above our cost of capital and approaching our long term target range.

Our balance sheet strength, our cash position, and our margin and return on capital results allowed us to take two other important steps towards the end of 2022.

First, we announced in December our plan to restart share repurchases in the first quarter of 2023, initially focused on offsetting dilution.

And second, we secured an expanded order book with Boeing, now having firm and option aircraft positions through the rest of this decade.

Given overall aircraft and engine demand and ongoing supply chain challenges, having access to positions for the next seven plus years will, we believe, prove to be beneficial strategically as it provides us maximum fleet flexibility on great terms.

Turning to costs, in Q4, CASMX increased 24% versus 2019, approximately one point above our guide, driven entirely by lost capacity and incremental costs as a result of the severe winter weather in November and December .

Absent this impact, our Q4 chasm X would have slightly beat our guide.

our full year chasm X in capacity end of the year within our guided ranges at up 20% and down 9% respectively versus 2019.

And as a reminder, we do continue to include the cost of our performance-based bonus and incentive pay programs in our unit costs.

For the full year, this represented approximately two points of unit cost pressure versus 2019 and was materially more impactful on our unit cost than at other airlines.

Our beliefs about what will drive long-term success and value in the airline industry remain largely intact and consistent with what we believed pre-pandemic. We firmly believe a strong balance sheet and low relative costs will be the ultimate drivers of business stability and success.

We remain focused on and confident in both of these areas. Our balance sheet is strong and based on 2023 guides, Alaska is positioned to achieve the best unit cost result within the industry this year, helping us maintain or improve our pre-pandemic relative cost position.

Looking ahead to 2023, our current schedule has us returning to pre-pandemic levels of capacity during the first half of the year.

Maintaining operational safety and reliability remains our top priority, and we will have continued modest cost headwinds as we complete the transition training related to our fleet transitions. However, we are planning for solid improvements to our overall fleet utilization and levels of productivity during 2023.

and are focused on reducing unit costs on a year-over-year basis. For the first quarter, we expect capacity to be up 11% to 14%, with CASMEX down 0 to 2% year-over-year. And for the full year, we continue to expect capacity to be up 8 to 10%, with CASMEX down 1 to 3% on a year-over-year basis.

Touching on fuel, oil prices have moderated from 2022 levels but remain elevated. Refining spreads also remain volatile. We currently expect fuel price per gallon to be $3.15 to $3.35 for the first quarter and $3.10 to $3.30 for the full year.

Our significant 2022 benefit from hedging, which was approximately $170 million, will likely turn to a net cost in 2023.

As a reminder, our heading program uses 20% out of the money call options only, and our strike prices are above what we anticipate oil prices will be during the year.

Taken all together, as Ben mentioned, we expect margins to improve this year with our full year adjusted pre-tax margin guide of 9% to 12%.

This incorporates the full structural impact of our ratified labor contracts, contributing approximately three points to our full year CASM-X.

And while we are optimistic about demand for travel this year, we are also cognizant of the uncertain economic backdrop we are operating in and will adjust capacity accordingly this year if we need to.

One of our primary strengths over the years has been to execute our plans. In 2022, we certainly experienced volatility and some setbacks, but overall we executed on the major components of our recovery plan and have a strong foundation to work from in 2023. We have most of our labor deals completed. We are through the majority of our fleet transition.

we were one of the most reliable airlines in the industry. We've got a solid balance sheet and a great aircraft order book, and we are now focused on improving utilization, productivity, and delivering on more of our commercial roadmap as we attempt to lead the industry again in financial performance in 2023. And with that, let's go to your questions..

At this time, I would like to invite analysts who would like to ask a question to please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

And our first question today will come from Andrew Dodora with Bank of America Global Research.

Good morning, everyone. Andrew, just you got the RASM premium last year, even with kind of the West Coast corporate tech travel not showing as much growth as other areas. Based on guides out of other airlines, and your guide this morning, doesn't seem like you're assuming much of a further RASM growth premium here.

Just curious, what are you baking into your guide in terms of corporate travel recovery here in 2023? And do you think there's the opportunity for that RASM premium to kind of maintain throughout this year?

Yeah, good morning. Thanks, Andrew. So a couple of things. I think, firstly, and to your point, we did have the hire benchmark last year. If you look at the industry's guide for this year, I think we're all saying unit revenue is about flat. So we're in line with that.

I do think, as I shared in my prepared remarks, that we may have more upside in the corporate side than perhaps others on a relative basis. So I do see that there is opportunity there. And of course, as you're well aware, we really peak in the second and certainly the third.

quarter and again industry capacity is not back to where it was in 2019. So again there could be upside here but right now we're in a pretty good place.

Got in the question for Shane just in regards to that kind of peaking in 2Q and 3Q. We think about capacity and chasm for the rest of the year. Do you expect these to be fairly consistent across the quarters going forward here?

Or is there any lumpiness that we should build into our models? Thanks. Yeah, hey, good morning, Andrew. Thanks. You know, from a capacity perspective, it's pretty sequentially modest. Q4 to Q1, Q1 to Q2, Q2 to Q3. There is a step up in the second half of the year.

But it's, it's very reasonable. I think in terms of unit costs, I think, flattish for the 1st, half of the year consistent with our Q1 guide obviously and then a little bit of momentum in the back half of the year. It's not exaggerated. It's sort of flattish 1st, half the year and then, you know.

single digits ish in the second half of the year. So I don't think there's a big swing quarter to quarter that you guys need to expect from us this year.

That's helpful. Thank you.

helpful. Thank you. Thanks Andrew.

And our next question will come from Jamie Baker with JP Morgan.

Hey, good morning, everybody. I know your pilot contract has a snap up or a, you know, a me too clause. But as I recall, it's a little complex. Can you remind us of the mechanics?

of that mechanism, when do look backs occur, what's the group of airlines that you comp against, and I can obviously do my own analysis, but if you have a Alaska estimate based on Delta becoming the market, I'm all ears, but we can do that work on our end.

Yeah, Jamie, I'll give you the very top.

There's a, there's a, I'll give you the, the complicated formula and then you guys can do the math. It's the simple average of the. For larger airlines than us and jet blue, and we look at it on September 1st, so you can make sort of estimates about what you think.

the industry would have ratified by that point in time and pretty easily back into to you know what you think the impact might be relative to the scheduled 4% downline raise. So we're happy that we have this by the way in the contract we don't want our pilot stuff fall behind and we knew going first that we had to

the goal you gave right?

Eight to 10%. Eight to 10. Okay. So, you know, I've always assumed that connecting revenue or alliance revenue is less profitable than local revenue. Obviously, if the connecting revenue is entirely incremental, it's highly accretive.

I know, and maybe my assumption is flawed, I know you've been really bulled up on your one-world membership, but on a margin basis, how do you deal with that?

How does that 8 to 10% compare to your core flying?

Well I think, so a couple of things and again just what we've seen this year especially with American Airlines and not just international but domestically connecting over their hubs and even some local market co-chair we have. We've participated in American's strong revenue environment as well where their corporate travel is.

or leisure travellers or connecting beyond need to utilise our network to help make for a better, shorter trip. So overall, I've been very happy with the yields that have been produced. And again, as we go into this year with international travel and the proration of these strong international fares, again, from what we had last year, I think these are all...

So in December you got hit with some really unusual weather that drove the operational issues you saw. Not saying that preparing for an ice storm on Christmas should be the operational base case, but some of your peers are talking about the need to have permanently higher buffers to protect the operation. Do you believe that you already had the appropriate buffers in place for your 8 to 10 percent capacity guy for 2023?

buffers in our capacity plan and our staffing plan to ensure that we're not over stressing the network. If you look at the second half of the year, once we sorted out our April issues with pilot training, we were amongst the best in the industry of both on time and completion rate.

Yeah, this was a although.

It's becoming the norm because it happened last year as well. This was a pretty unique event that lasted multiple days and did ice over our aircraft here in Seattle and in Portland and actually in other parts of the Pacific Northwest. So it was a pretty unique event. And I think it's probably not.

We're not going to assume that it happens to us every single year, but we do have to build some more resiliency and irregular ops for sure.

Yeah, Katie, it's been, you know, having done operations, you know, my whole career, I mean, you can look at it a couple of ways. You can create a massive amount of buffer for an event that might not happen. Or you can go in with, you know, the appropriate level of staffing with some additional cushion to deal with winter events.

Things like ice storms are massive events that cripple a city and there's not a lot you can do no matter how much buffer you put in. There's nothing you can do to operate in an ice storm. So, you know, what our mindset is create a robust schedule that we can operate.

in the peak periods or peak periods where there's, you know, where we're susceptible to weather, create additional buffers, but it's got to be, it's got to be, you know, managed appropriately. So, we were good. This was just a, you know, a big event and I'm pretty proud of the team and how we dug out of it and got back on track.

or foliar or chasm X guidance. You know, I know you mentioned some elevated training, you're prepared to mark shame, but anything else we should be thinking about that you know, as go forward might roll off that's unique to the sleep transition Alaska. Thanks.

Yeah, I don't I don't think there's anything sort of major a lot of the. Expenses related to returning the least aircraft we took through special last year, so we don't expect a lot of noise.

this year in the P&L related to the fleet transition. The biggest cost piece is that we're completing the transition training of pilots by and large in the first quarter, slipping a tiny bit into the second quarter, but that's really it in terms of fleet transition related specific costs in the P&L.

I don't think anything else is different than what you've seen across most of the industry. We have airport costs that remain an area of growth in terms of the P&L. I think that's consistent with the entire industry. And then certainly labor costs have gone up structurally, and as we grow they're going to continue to go up as we hire more people.

and in company. In my Catholic history, I even had clumsiness right before my install,

Thanks very much, operator. Hi, everybody, and thank you very much for the time. Just one quick clarification on that last point, Jane. The $120 million in the fourth quarter, then is that the end of the transition cost? Is that the way we think about that?

Elaine, this is Emily. So the $120 million that you saw in special charges in Q4 should be most of the remainder because we've put all of our estimates in for returning all the A320s. We've done all the accelerated depreciation and other charges that we're going to take on both the Q4s and the A320s.

Those aircraft actually leave our property over the next 12 to 18 months. So there could be some minor trips that come through there The last remaining thing that you're going to see coming through special charges in 2023 is going to be Whatever we end up doing with the a 321 which are still on our books So there will be some dollars there, but there should not be much more for a 320

Okay, that's very helpful. Thanks for clarifying that. And then just on the mileage plan, I think there was an announcement that there are new benefits that are accruing to your members beginning, like, I want to say around now. Maybe, Andrew, can you talk about that and how that should benefit your revenue line?

and even if you hold Bank of America accounts, you'll get bonuses there. So there's a lot of good things there. I think specifically for AirGroup, a couple of things for new card holders, there's gonna be some minimum spend thresholds, which we've never had before. So I think that will add to some of the quality. And then the other thing, we did have a fee increase this year.

I understand what you're saying about it being...

a better quality customer, but do you think that you get fewer?

applications because you're putting that in? Do people get turned off by that?

No, I think again this is just on the forward book, Helene, not the back book. But again, obviously this is something that we'll watch, but at the end of the day, knowing what our average card spend is and all the rest of it, our guests get a lot of value from our card and the spend on the card is very, very healthy. So we think this is a good thing.

And our next question will come from Duane Fenigworth with Evercore ISI.

In terms of the pacing benefits, the pacing of benefits of moving to a single fleet.

What are we seeing in the first quarter here, if any, and can you just remind us what are the hurdles you need to clear to realize further benefits?

Yeah, hey, good morning doing really it's just getting into the pilot training and getting the dash 9 that replace the 320 here on property. We are at low 40s of dash 9 relative to the 60 ish a, 319 and a 320 we had. So.

The planes are coming. We've got a bunch more coming this year. We'll have, you know, full restoration of the fleet size as we get through the year. We'll be through all of the transition training on Horizon here in the first half of the year, mostly in the first quarter.

Similar on main line, although we'll have these 10 a, 321. I think we can pretty. Pretty easily get those into 1, 1 hub 1 base and manage that. So I think the way the unlock is basically going to start in the 2nd. A quarter and ramp to the rest of the year.

And we should be at close to full run rate as we get through the fourth quarter dependent upon what we do with the A321 transition because we still have 150 pilots we've got to transition off of that equipment ultimately.

Great answer, thank you. And then, you know, Ben, you were a, or at least our recollection, you were a process guy historically. Alaska was very good at, you know, identifying variability, measuring variability, and driving it out of your processes.

Certainly this is a different and more difficult operating environment, but do you think you still have those opportunities to drive out variability? You know, what are the one, two, three kind of productivity initiatives you can go attack this year, or is that just outdated thinking from a bygone era? Thanks for taking the questions.

Hey, Dwayne, thanks for the question. It's a great question. And, you know, we, we talk about that a lot. Like, what I'm going to tell you is that type of thinking is in our DNA. It's been in our DNA for I've been here for 20 years. And that's how we think and that's how we wired in terms of, you know, has it structurally changed and that's

It could be debated, but my view is that the airline industry isn't even back to 2019 levels of capacity. So, if you talk about airspace itself, now, of course, you've got to have ATC staffing in place. We're not flying the same amount we're flying in 2019. So, if you look at block times, if you look at

you know, departures, we're still less than we were in 2019. So the airspace is essentially the same, it's got to work from an FAA perspective. And how we look at it internally is we can still have improvements in asset utilization and people productivity, and we have already the processes and the mechanism in place to get to a better place.

Is it changed a little bit? Yes. Are we going to bring it back to the left? Absolutely.

a little bit? Yes. Are we going to bring it back to the left? Absolutely. Thank you very much.

It takes away.

And we'll move next to Michael Lindenberg with Deutsche Bank.

Oh, hey. Good morning, everyone. Shane, congrats on getting the ROIC. I guess congrats to you and the whole team of getting your return on invested capital trailing 12 months better than your cost. You're one of the few out there who can actually have achieved that objective. You did highlight the return of a share repurchase program. Again, this is

to offset just the dilution and then the, you know, amping up the part of the deliveries of some maxes. Where is your thinking on, you know, bringing back the dividend? Is that something that we see in 2023? Is that later this year? Is that a next year phenomenon? Thanks. Mike, thanks. Thanks for picking up the.

You know, I mean, I think a dividend is something that you do when you have a lot of confidence in the outlook, you know, for a multiyear period. We're really optimistic, but we want to see how this year shapes up, especially with the economic backdrop. So we're actively discussing it with the board.

still in our long-term sort of thought process in terms of, you know, capital allocation and shareholder returns, but nothing to say right now on it.

Okay, great. Fair enough. And then just second, my question on loyalty to Andrew, you know, to see the, you know, 1.5 billion of remuneration and I think, you know, just a few years back it was 1, 1.1 billion. I think you had mentioned something like 39% going back to 2019 and 1,assis, special word.

You know, maybe we're looking at, you know, a 10 or 12% type kegger here. Is that the right rate going forward? I mean, or, you know, do we see, you know, maybe you talked about a step up in fee, but do we see a step up in maybe rate? Are there any, you know, sort of, you know, milestones that we hit over the next year or two where that one five could say jump to two? How should we think about the growth of the

But I think what we're really excited about now is we've got this behind us is growing the program, growing the portfolio, growing the spend, top of wallet, and that's what my team is squarely focused on now. So I do personally see

continued momentum and it's going to be a very big focus for us as we continue to move forward.

momentum and it's going to be a very big focus for us as we continue to move forward. Okay, very good. Thanks everyone.

Thanks, Mike. I did want to mention as well, that was a great answer, Andrew, because it is Andrew's birthday today, which I forgot to mention at the start. And I just want to ask the analyst not to be too hard on Andrew. I'm kidding, you can be as hard on him as you like. Happy birthday, Andrew. Thank you, Ben.

And our next question today will come from Sabi Seif with Raymond James Financial.

Hey, good morning. And I guess as a follow-up on Andrew Jara's question, and it's probably a question to Andrew, so I apologize if this is mean, but I was kind of curious if you could give a little bit more color on the business recovery in terms of...

You mentioned maybe getting eventually kind of getting back to 2019 levels, but because you have some of these other initiatives that should help you get there. Do you get there this year? Particularly, I guess what I'm focused on is you have a lot of headlines about job cuts in the West Coast-based tech companies.

Is that having any incremental impact on the tech business demand or is it just more you're not seeing the recovery yet?

Yeah, hi, Savi, thanks for that and I think it's a great question because the first thing I will say is that even though the headlines are recent on these job cuts, we've been experiencing especially some really large tech companies.

their corporate travel has already been severely depressed for some time now. So the corporate numbers that you see from us already include a lot of high-tech companies that already in some cases nearly turned off their travel, but have severely depressed. So as we move forward, I don't think these cuts personally impact the technology side.

portfolio wise business is somewhat stable that the you know 85 75 85 percent

range, but again, I hope with our share movement and continued strength over time that we do get back there. Savvy, I might just add that the one thing not to lose sight of is these tech companies, while they haven't been traveling for quite a while, these are like the most valuable companies on earth, and at some point they are going to expand again.

and productivity.

trying to understand again, you know, then you talked about the airspace is, is what it is, and we're still below and yet you're seeing everybody, you know, struggling with and then questioning if we get back to kind of the previous productivity.

What's kind of controllable on Alaska's side and the timing around that versus what's kind of out of your control?

No savvy, just let me start with a couple of things. I think for us, well, coming back from a pandemic and getting the inertia up for the operation. I think that's where. Not just Alaska, but the entire industry struggle getting back up to a certain level of of capacity. So there was some.

There was a lot of issues there. As I look forward now to 2023, when I look at the benefits of single fleet and having the majority of your fleet Boeing and the majority of your fleet Embraer 175, that just drives massive efficiency in terms of cruise, in terms of swapping airplanes.

getting reserve crews. So just there alone for us is a major, major improvement. Secondly, again, getting through a little bit of the volatility with staffing and training, that goes away. So that volatility goes out. So our focus is purely on every part of the operation.

where we see volatility in staffing, where we see volatility in performance is to go and zero in on those issues and snuff them out. And that's what good airlines do and operational reliability is just critical in doing that right. Now there will be things that will never go back to the way they were in 2019.

But I think a lot of this is in our control and we just don't give up on those type of things. It's savings that you can go after and we're going to go after them.

Just to clarify, but just on the staffing side of staffing and training, the training is related to the fleet transition, right? Is it fairly caught up in just being able to source the pilots for the capacity?

Right, yeah, we're going through a lot of the A320 Airbus pilot transition right now, so we'll be through it by the end of the 1st quarter. And so that's going through all through all our schoolhouse right now. Same thing with the Q400s on the Airbus 175. So we'll be largely done that big bow wave.

Yeah, we're going through a lot of the A320 Airbus pilot transition right now, so we'll be through it by the end of the first quarter. And so that's going through all through all our schoolhouse right now. Same thing with the Q400s on the Airbus 175. So we'll be largely done that big bow wave. Thank you.

Thanks, Debbie. And we'll go next to Scott Group with Wolf Research....

Hey, thanks. I just want to go back to the revenue guide. So it looks like

RASM decelerating from, when I look at versus 19, decelerating from fourth quarter to first quarter and then re-accelerating the rest of the year. Just help us understand that. Is that a market view? Is that something specific to you guys? Just any color there.

Yeah, good morning Scott. So a couple of things and we've talked about this before obviously, but our first quarter is always the weakest and a little bit business travel certainly in January has been highly choppy and did not return as much as we had hoped.

But I think if you take a step back and look at our revenue in general, and you even go back to 2019, our unit revenue guides for the first quarter are right in line with the industry's unit guides. And they also have very big international travel coming back, which I think will be a big tailwind for them.

And again, for the year we're about right where industry is. But again, for us, we've got work to do again on January and February on the network side. We do need to make sure that we construct our network to handle these lulls in our demand. But again, March and forward is very solid.

Okay, and then Shane, I think you said that there's a fuel hedging loss embedded in the guide for this year. How much is that? Maybe just a bigger picture. The issue has been crack spreads, not so much crude. Any thoughts on revisiting how you guys hedge? I know it's more complicated, but it seems like it would be a much more complicated issue.

back in 2015, broke even basically 2015 to 2021. And then as you cited, and as we said in the script, 2022, it turned out to be a profitable thing. But as you know, we're not hedging to make money. We're hedging just to eliminate volatility.

we think it's a good way to use our strong balance sheet and it just gives us some better insights in our planning as we move forward. We have spent a considerable amount of time with investment banking friends back on the East Coast about ways to potentially to hedge the crack spread, you're right, and that's been the main source of frustration.

And what is the hedge loss so you've got factored in? We're looking at about 10 million in the first quarter and then as you can imagine it snaps to something different every day the forward curve moves.

Okay.

OK. All right, thank you guys.

Thanks, Scott.

And our next question will come from Dan McKenzie with Seaport Global.

Oh, hey, good morning guys. Thanks. Andrew, of course, we want to help you celebrate your birthday with a couple questions here. Happy birthday. Thank you. So, you know, I guess the question is the state of California was pretty slow to come out of the pandemic and you know, I guess my question is, is what?

big picture, then our growth, two-thirds of it is going to be Pacific Northwest and a third of it is going to be California. Just as it relates to recovery, if you look at our growth in 2023, the Pacific Northwest is now in the double-digit territory higher.

than 2019. But California was still down 23% last year and it'll be you know close it'll be 10 points better than that. So our California network will still be down about 10 to 12 points this year versus 2019 but recovering. And I would say again very high level you know a third.

of our revenues is somewhat tied to California.

Wow, that's big. On the prior comment that Alaska has more upside on corporate revenue versus peers, so I guess on premium revenue, I believe the stat was to have 62% more premium seats this year versus 2019. And I guess I'm wondering if that stat is still correct or if that's right. And I'm not sure if you can share with the audience.

Yeah, so I think a couple of things and you maybe saw in my prepared remarks that we were able to increase our premium revenues by nearly half a billion dollars and as Shane has shared, we're sort of trading out 12 first class seats.

you know, 320s for 16 first class seat, you know, maxes. So there's real upside there. I think overall, I think first class revenues were up about 21%. So there is a significant opportunity there. The other opportunity we're working on, Dan, is our regional fleet, and we're actually...

We're all 175 now which have first and premium and we're really happy with the progress we've made on filling those seats at good fares and we continue to work that. And then on the last question you had was on corporate, could you repeat that one again sorry? Yeah the corporate travel budget.

a little higher, a little lower, or you know, given the tech exposure. Yeah, I think you know, some of the budgets when I last spoke to my team were still being finalised for this year. I think

Budgets or no budgets, I think what we're really seeing is a little bit here, Dan, in some cases is the on-off switch. You've got to go to your Vice President to ask for travel and so people are not going. So we either see very deep cuts in travel or more to the average mean. So I think the real question is, will high tech, high-tech, high-tech, high-tech, high-tech

start to give permission for their people to start traveling again. And as you know, it's not just it's hotels, it's cars, it's airfares. So anyway, that's where we're at.

permission for their people to start traveling again and as you know it's not just it's hotels, it's cars, it's airfares, so anyway that's where we're at. Thanks for telling me guys.

Thanks for having us, Dan. And our next question will come from Connor Cunningham with Melius Research. Everyone, thanks for the time. Happy birthday, Andrew. Just on the capacity outlook, this would be an easy one. Just can you provide some context on what's new versus core.

You know utilization stage gauge. It just feels like a lot of the growth is going to be utilization gauge based this year within your core markets, but if you could just clarify that that would be great.

Yeah, I mean, you're exactly right. At the end of the day, very, very few new cities. This is essentially all core restoration, and 85% of all of our growth is stage engaged, so it's very efficient growth.

Is that mostly around the Pacific Northwest and California? I mean I feel like you mentioned that in a prior. Yes, yes that's correct. All right and then hate to ask a cost question because I know you got a bunch but it seems like there's some confusion just you know prior to the 1q Casa Mexican I would have thought

first half or second half would just look a lot, a lot different than it kind of seems like it's shaping up to be. And when I think about it, high level second half's benefiting from just easier comps, fleet transition, improved productivity, all that stuff. Maybe the offset is more on like profit share accruals.

and then another increase in the pilot. I'm just struggling with the idea. Are you being ultra conservative or is it just, there's just a lot of uncertainty right now on the second half cost side?

Thanks, Connor. I think if you're implying that you might have thought it would be down more in the second half.

I'm not sure if that's what your sort of question was but yeah, yeah, yeah, there's not okay. Gotcha. Yeah, there's not

There's not a lot of noise as I think, you know, Katie had asked earlier, sequentially throughout the quarters. I will say, like, with respect to our profit sharing accruals, we had a very significant. Result in Q4 2022, because of our 1st place performance on the margin side.

And, you know, while we are still anticipating to leave the industry next year, I think, you know, you'll see those accruals come in differently this year. And it's significant enough to create a little bit of noise. But no, I think, look, we, we need to get through the 1st quarter, all the transition training, make sure the planes come. And we've got to make some decisions about the A321.

and ambitious in our plans and had a lot of setbacks. We don't anticipate those this year, but I think some of that's informing, you know, some conservatism in our capacity and other guides.

Sorry, just one clarification. I mean, you did have like the least return expense in the first quarter of last year. Maybe that...

Sorry, I'll take it offline. I'll ask. Yeah. Yeah, we're happy to I mean, we're not going to obviously get into like a lot of the specific details, but we're happy to give you more color for sure. The year progression.

All right, thank you. Thanks. And our next question will come from Robbie Schenker with Morgan Stanley .

So another follow-up on corporate, Mufred. I think you said that the tech customers of yours are giant corporations and they're eventually going to come back, which I guess it's true, but then we can't be 100% sure of that given the way they do business. So are you happy to wait for them to come back on the corporate side or…

Are you looking to maybe expand your corporate customer footprint, maybe chase some more SMB customers? Is there anything you need to do from either a marketing or a network standpoint differently if your corporate customer base is likely to change going forward?

Andrew can speak quickly to the composition. I just, one thing I'd say, tech tends to have some of the best discounts. It's the lower yielding business traffic. I think the point we were trying to make is they haven't been traveling much all of last year. So there's not.

Even though you have these headlines of layoffs, it doesn't really mean that there's like another downward step in terms of their travel. And I do think that historically low travel volumes. They may never go back to where they were Pre pandemic. I think they're going to be above where they are today. I'm very confident about that. Just don't know when.

to relook about who we're selling our seats to and when and where and we will manage through this.

Got it. And maybe as a quick follow up, I mean, obviously you guys have come a long way kind of in the last couple of years and kind of with where your balance sheet is right now. And with kind of the biggest boxes checked on the cost side and the fee transition side and everything else. How are you thinking of the pace of shareholder returns or cash returns through the year?

maybe as your confidence in your own numbers and the cycle maybe kind of builds through the year.

Yeah, hey, Robbie, I think so we announced the sort of dilution offset program. I think we, we ranged it from 75 to 100Million. We'll put a grid in place assuming the stock. Sort of price is somewhat consistent throughout the year. It should be rateable.

throughout the year, but we'll buy more if the stock goes down and obviously a little bit less if the stock goes up. But we'll get through the entire hundred million by the end of the year. My guess is it's fairly rateable across the quarters. And that's sort of our plan at this point.

All right, great. Thank you. Thanks everybody. Thanks. Thank you. Robbie. Thanks everyone. Thanks for joining us for our 1st quarter call. Look forward to following up with anybody out there and we'll talk to you on the 2nd quarter. Everyone have a nice day. Thanks.

And this concludes today's conference call. Thank you for attending. The host has ended this call. Goodbye.

The P.

I.

Good morning ladies and gentlemen and welcome to the Alaska Air Group 2022 fourth 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 alaskare.com.

After our speaker's remarks, we will conduct a question-and-answer session for analysts.

I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Emily Halverson.

Thank you, operator, and good morning. Thank you for joining us for our fourth quarter 2022 earnings call. This morning we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions.

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 within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben. DOCTOR

Thanks, Emily, and good morning, everyone. Despite another volatile year, we closed out 2022 with solid results. With our continued focus and the incredible dedication of our employees, we are well positioned to build on this success as we move into 2023 and beyond.

This year, we generated full year revenue 10% above 2019 levels, doing so on 9% less capacity.

Our 7.6% full year adjusted pre-tax margin led the industry, proving that our business model is resilient.

Air Group's pre-tax margins have now ranked number one in the industry for 11 of the last 13 years. Additionally, our employees earned the largest performance bonus payout in our company's history, on average adding 10.5% on top of our employees' salaries or nearly six weeks worth of pay.

Our people did a fantastic job delivering care, and I want to thank all of them for the work they do to ensure Air Group outperforms, even during turbulent times.

Earlier this year we identified three key priorities to strengthen our competitive advantage and prepare for future growth.

Our team's delivered on each of these priorities, including one, completing our labor deals. We signed five labor contracts in 2022, all of which include significant improvements for our people and create stability and clarity for our company and employees.

With these in place, we are well positioned to fully focus on our future.

Two, fortifying our operational reliability. Despite challenges throughout the year, we finished 2022 with one of the industry's best completion and on-time performance rates.

Operational integrity is the foundation of a healthy airline, and we remain focused on balancing our growth aspirations with consistent delivery of the operational excellence Alaska is known for.

And three, executing our single fleet transitions at both Alaska and Horizon.

On January 8th, we flew our last A320 revenue service flight, and today marks the final Q400 flight, leaving only 10 A321s in the fleet through year-end.

We have retired over 60 aircraft the last few months, paving the way to more cost-efficient and productive operations in both our regional and mainline business.

As we take off 2023, we're taking with us many lessons learned. We closed out a solid year and we are committed to make 2023 even better.

Our leadership team has a clear set of strategic initiatives that will support our growth aspirations, expand margins, and improve operational excellence. For the full year, we expect to achieve adjusted pre-tax margins of between 9 and 12 percent.

This morning, we introduced an earnings guide of $5.50 to $7.50 per share, which implies restoration to 2019 EPS levels at the midpoint.

Delivering on these targets will be challenging and will require us to leverage our competitive strengths.

Undoubtedly, there have been structural shifts within the industry.

But history has proven time and again that cost discipline and a strong balance sheet are required to win in the airline business.

We remain focused on and confident in both of these areas. Our balance sheet is strong and based on 2023 guides Alaska is positioned to achieve the best unit cost result, within the industry. This year, helping us maintain or improve our pre pandemic relative cost position.

Looking ahead to 2023, our current schedule has us returning to pre pandemic levels of capacity during the first half of the year.

Maintaining operational safety and reliability remains our top priority and we will have continued modest cost headwinds as we complete the transition training related to our fleet transitions. However, we are planning for solid improvements to our overall fleet utilization and levels of productivity during 2023, and our focus on reducing unit costs on a year over year base.

<unk>.

For the first quarter, we expect capacity to be up 11% to 14% with CASM ex down zero to 2% year over year and for the full year. We continue to expect capacity to be up 8% to 10% with CASM ex down 1% to 3% on a year over year basis.

Touching on fuel oil prices have moderated from 2022 levels, but remain elevated refining spreads also remain volatile.

Currently expect fuel price per gallon to be $3 15 to $3 35 for the first quarter and $3 10 to $3 30 for the full year.

Our significant 2022 benefit from hedging, which was approximately $170 million will likely turn to a net cost in 2023.

As a reminder, our hedging program uses 20% out of the money call options only and our strike prices are above what we anticipate oil prices will be during the year.

Taken altogether as Ben mentioned, we expect margins to improve this year with our full year adjusted pre tax margin guide of 9% to 12%.

This incorporates the full structural impact of a ratified labor contracts contributing approximately three points to our full year CASM ex and while we are optimistic about demand for travel. This year. We're also cognizant of the uncertain economic backdrop, we are operating in and we will adjust capacity. Accordingly. This year, if we need to.

One of our primary strengths over the years has been to execute our plans in 2022, we certainly experienced volatility and some setbacks, but overall, we executed on the major components of our recovery plan and have a strong foundation to work from in 2023, we have most of our labor deals completed we are through the majority of our fleet transition we were.

One of the most reliable airlines in the industry, we've got a solid balance sheet and a great aircraft order book and we are now focused on improving utilization productivity and delivering on more of our commercial roadmap as we attempt to lead the industry again in financial performance in 2023.

And with that let's go to your questions.

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

Please press Star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Sure.

And our first question today will come from Andrew <unk> with Bank of America Global Research.

Sure.

Hi, good morning, everyone.

Andrew.

You've got the RASM premium last year, even with kind of west coast corporate Tech travel not showing as much growth in other areas.

Based on you guys out of other airlines in your guide this morning doesn't seem like you're assuming much further RASM growth premium here just curious what are.

What are you baking into your guide in terms of corporate travel recovery here in 2023.

Do you think there is the opportunity for that RASM premium to kind of maintain throughout throughout this year.

Yes, good morning, Thanks, Andrew.

So a couple of things I think.

Firstly into your point, we did have the higher benchmark last year. If you look at the industries guide for this year I think we're all saying unit revenues about flat somewhere in line with that I do think as I shared in my prepared remarks that we might have more upside in the corporate side than perhaps others on a relative.

So I do see that there is opportunity there and of course as you're well aware, we really peak in the second and certainly the third quarter and again industry capacity is not back to where it was.

In 19, so again, there could be upside here, but right now we're in a.

A pretty good place.

Got it.

A question for Shane just in regards to that kind of peaking in <unk>.

We think about capacity and CASM for the rest of the year do you expect each to be fairly consistent across the quarters going forward here or is there any lumpiness that we should build into our models. Thanks.

Yeah, Hey, good morning, Andrew.

From a capacity perspective, it's pretty sequentially modest Q4 to Q1 Q1 to two Q2 to Q3, there is a step up in the second half of the year.

But it's very.

Reasonable I think in terms of unit cost I think flattish for the first half of the year consistent with our Q1 guide obviously.

And then a little bit of momentum in the back half of the year, it's not exaggerated.

It's sort of flattish first half of the year then.

Single digits ish in the second half of the year. So I don't think there is a big swing quarter to quarter.

Need to expect from us this year.

Okay. That's helpful. Thank you.

Thanks, Andrew.

Your next question will come from Jamie Baker with Jpmorgan.

Hey, good morning, everybody.

I know Youre pilot contract has a snap up for me two clubs.

But as I call. It is a little complex can you remind us of the mechanics of that mechanism. When do look backs occur what's the group of airlines that you comp against them.

Can obviously do my own analysis, but if you have Alaska estimate.

Based on Delta will be coming to market.

I'm all ears, but we can do that work on our end.

Yes, Jamie I'll give you the very top.

Okay.

You bet.

Yes.

Complicated.

Formula and then you guys can do the math, it's the simple average.

The.

For larger airlines than us and Jetblue.

And we look at it on September one so you can make sort of estimates about what you think the industry would have ratified by that point in time.

And pretty easily back into.

What you think the impact might be relative to the scheduled 4% downland raise so we're happy that we have this by the way in the contract we don't want our.

Pilots to fall behind in.

We knew going first that we had to have some mechanism to make sure that we kept up with the market. If it if it went to a different place than we were expecting.

Okay perfect I appreciate the color and then on one world.

You said.

10% of group revenue by 2025, that's the goal you gave right.

8% to 10%.

Okay. So.

Always assumed that connecting revenue or alliance revenue is less profitable than local revenue.

Obviously, the connecting revenue is entirely incremental.

<unk> highly accretive.

And maybe my assumption is flawed I know you've been really bold up on your one rolled membership, but on a margin basis.

How does that 8% to 10% compare to your core flying.

Well I think so.

A couple of things and again, just what we've seen this year, especially.

With American Airlines, and not just internationally, but domestically connecting over their hubs and even some local market codeshare we have.

We participated in American strong revenue environment, as well where their corporate travelers.

Or leisure travelers or connecting beyond.

Need to utilize our network to help make for a better short trip.

So overall.

I've been very happy with the yields that are being produced and again as we go into this year with international travel and the proration of the strong international fares again from what we had last year I think these are all positive momentum for us.

Okay. That's helpful. I appreciate it take care everyone.

Thanks, Jamie.

And our next question will come from Catherine O'brien with Goldman Sachs.

Hey, good morning, everyone hope you're doing well.

So.

In December you guys have some really unusual weather that drove the operational issues you saw nothing that preparing for an ice storm on Christmas should be the operational base case, but some of your peers are talking about the need to have permanently higher buffers to protect the operation.

Do you believe that you already had the appropriate buffers in place for 10% capacity guide for 2023 in December .

December didn't really change anything.

Color there would be great. Thanks.

Okay.

You want to maybe I'll just speak to $23.

To the.

In December of that by the way welcome back it's good to hear from you I think we do have sufficient.

Sufficient buffers and our capacity plan.

And our staffing plan to ensure that we're not overstress, even the network.

If you look at the second half of the year once we sorted out our April issues with pilot training, we were amongst the best in the industry are both on time and completion rate.

This was a.

Although.

It's becoming the norm because it happened last year as well this was a pretty unique event that lasted multiple days and did ice over our aircraft here in Seattle, and Portland, and actually in other parts of the Pacific Northwest. So it was a pretty unique.

That said I think it's probably not.

We're not going to assume that it happens to us every single year, but we do have to build some more resilient C&I irregular ops for sure.

Yeah, Katy it's Ben.

Having done operations my whole career.

You can look at it a couple of ways you can create a massive amount of buffer for an event that might not happen or you can go in with the appropriate level of staffing with some with some additional cushion to deal with winter events, but things like.

Ice storms are massive events.

Cripple Cripple a city and Theres not a lot you can do no matter how much buffer you put in there is nothing you can do to operate in an ice storm. So.

But our mindset is create a robust schedule that we can operate in the peak periods are peak periods, where there is.

Where we're susceptible to weather create additional buffers, but it's got to be it's going to be.

Managed appropriately so.

We were good this was just the.

A big event and I'm pretty proud of the team and how we've dug out of it and got back on track.

Totally understandable I mean, just seeing some of the scenes in Seattle.

It definitely seems like you need to that.

So maybe just one then.

Great to have most of the fleet transition behind you can you help us think about some of the moving pieces on the P&L for this year underlying your full year CASM ex guidance.

You mentioned some elevated training in your prepared remark shame, but anything else, we should be thinking about that.

Go for it might roll off that's unique to this fleet transition Alaska.

Yes.

I don't think Theres anything sort of major a lot of the.

Expenses related to <unk>.

Turning the leased aircraft, we took through special last year. So we don't expect a lot of noise. This year in the P&L related to the fleet transition the biggest key.

Cost piece is that.

We're completing the transition training our pilots by and large in the first quarter slipping a tiny bit into the second quarter, but.

But that's really it in terms of fleet transition related specific costs in the P&L I don't think anything else as you know.

Different than what you've seen across most of the industry, we have airport costs that remain.

In the area of growth in terms of the P&L I think thats consistent with the entire industry and then certainly labor costs.

Have gone up structurally and as we grow there going on.

They are going to continue to go up as we hire more people to fund that growth, but everything else looks pretty normal I would say in terms of trend nothing to really point out.

Okay. Thank you.

Thanks, Katy Thanks Keith.

And we'll go next to Helane Becker with Cowen and company.

Thanks, very much operator, hi, everybody and thank you very much for the time.

Just one quick clarification on that last point Jane.

The $120 million in the fourth quarter, then is that the end of the transition costs is that the way we think about that.

Helane. This is Emily so the $120 million that you saw in special charges in Q4 should be most of the remainder because we've put all of our estimates and for returning all the <unk> hundred <unk>, we've done all the accelerated depreciation and other charges that we're going to take on both the Q4 and the <unk> hundred 20.

Those aircraft actually leave our property over the next 12 to 18 months. So there could be some minor trups that come through there. The last remaining thing that youre going to see coming through special charges. In 2023 is going to be whatever we end up doing with the <unk> hundred 20 ones, which are still on our books. So there will be some dollars there, but there should not be much more for <unk> hundred 20.

Okay. That's very helpful. Thanks for clarifying that and then just on the mileage plan I think.

There was an announcement that there are new benefits that are accruing to your members beginning like I wanted to say around now.

Maybe Andrew can you talk about that and how that should benefit your revenue line.

Yes, Thanks, Helane, sorry, two things certainly al loyalty.

Loyalty guests members, there's some really cool incremental benefits.

As it relates to bonus smiles for subscription.

<unk> priorities.

And even if you hold bank of America accounts Youll get bonuses. There. So there's a lot of good things there I think specifically.

For Air Group, a couple of things for new cardholders, theres going to be some minimum spend thresholds, which we've never had before so.

So I think that will add to some of the quality and then the other thing we did have a fee increase this year, which we havent done forever and we still.

One of if not the lowest card membership fee, but again thats that went from 275 to $95. So we will participate in that goodness.

Okay. That's very helpful. Just on that minimum spend just to clarify.

That that so youre talking about it I understand what youre, saying about it being.

A better quality customer, but do you think that you get fewer.

Applications, because youre, putting that and do people get turned off by that.

No I think again this is just on the forward book, allowing not the back book.

But again, obviously this is something that we'll watch but at the end of the day, knowing what our average card spend is and all the rest of it.

Get a lot of value from Alcon and the spend on the card is very very healthy. So we think this is it.

Well within industry in fact, it's probably low versus the industry, but we don't have any concerns about Andrew since we've launched it you've seen a lot of credit card sign ups, sorry, yes, exactly in a lot of positive comments.

Okay. That's helpful. Thanks, Tim.

Thanks Helane.

And our next question will come from Duane <unk> with Evercore ISI.

Okay.

In terms of the pacing benefits the pacing of benefits of moving to a single fleet.

What are we seeing in the first quarter here if any.

And can you just remind us what are the hurdles you need to clear.

To realize further benefits.

Yeah, Hey, good morning Duane.

Really it's just getting through the pilot training and getting the dash nines that replace the <unk> hundred Twenty's here on property.

We are at low forties of dash nines relative to the 60.

<unk> hundred 19, <unk> hundred <unk>, we add so the planes are coming we've got a bunch more coming this year, we will have.

Full restoration of the fleet size as we get through the year.

We will be through all of the transition training on horizon here in.

In the first half of the year, mostly in the first quarter are.

Similar on mainline, although we will have these <unk> hundred 20 ones.

I think we can pretty pretty easily get those into one one hub one base and manage that so I think the way the unlock has basically you're going to start.

In the second quarter and ramp through the rest of the year.

We should be at close to full run rate as we get through the fourth quarter dependent upon what we do with the <unk> hundred 21 transition because we still have 150 pilots, we've got a transition off of that equipment ultimately.

Great answer thank you and then.

Ben you worry or at least our recollection you were a process Guy historically historically, Alaska was very good at.

Identifying variability measuring variability in driving out driving out of your processes.

Certainly this is a different and more difficult operating environment.

But do you think you still have those opportunities to drive out variability.

What are the 123 kind of productivity initiatives you can go attack this year or is that just outdated thinking from a bygone era. Thanks for taking the questions.

Hey, Duane Thanks for the question, it's a great question and.

We talk about that a lot I like what I'm going to tell you is that type of thinking is in our DNA and our DNA for I've been here for 20 years.

That's how we think and that's how we're wired in terms of.

Is it structurally changed.

It could be debated, but my view is that the.

The airline industry is isn't even back to 2019 levels of capacity. So if you talk about aerospace itself.

Of course, you've got to have ATC staffing in place we're not flying the same amount we're flying in 2019. So if you look at block times, if you look at.

Departures, we're still less than they were in 2019. So the aerospace is essentially the same it's got to work from an M&A perspective, and how we look at it internally is we can still have improvements in asset utilization and people productivity and we have already the processes and the mechanism in place to get to a better place.

Is it has it changed a little bit yes, we're going to bring it back to the left absolutely.

Thank you very much.

Thanks Duane.

And we will move next to Michael Lindenberg with Deutsche Bank.

Oh, Hey, good morning, everyone Shane.

Grant's on getting.

The ROIC I guess, congrats to you and the whole team and getting your return on invested capital trailing 12 months better than your cost.

One of the few out there who can actually.

That objective you did highlight there.

The return of share repurchase program again, this is to offset dilution and then.

The.

Amping up the part of the deliveries have some access.

Where is your thinking on bringing back the dividend is that is that something that we see in 2023 is that does that later this year or is that a next year phenomenon.

Mike Thanks.

Thanks for picking up the ROIC comment in the script.

That's nice that you did.

We are.

That that question on dividend is that 2023 conversation item with the board.

Cited last year to prioritize.

Offsetting dilution first.

As you know I mean, I think the dividend is something that you do when you have.

A lot of confidence in the outlook for a multiyear period.

We're really optimistic, but we want to see how this year shapes up, especially with the economic backdrop. So we're actively discussing with the board still in our long term sort of thought process in terms of.

Capital allocation and shareholder returns, but nothing nothing to say right now on it.

Okay, Great Fair enough and then just second my question on loyalty to Andrew.

See the $1.5 billion of remuneration and I think just a few years back. It was one $1 1 billion. I think you had mentioned something like 39% going back to 2019, and maybe we're looking at a 10 or 12% type CAGR here.

Is that the right rate going forward.

Or do we see maybe you talked about a step up in speed, but do we see a step up and maybe right are there any sort of.

Milestones that we hit over the next year or two where that one five could say John how should we think about the growth of that program.

Yes, I think so a couple of things and again <unk> seen a significant step change from the new contract in that.

This morning, there'll be more goodness there.

And.

There is also.

Changes over time, but I think what we're really excited about now is we've got this behind us.

As you know growing the program growing the portfolio growing the spend top of wallet and that's what my team is squarely focused on now and so I do personally see continued momentum and it's going to be a very big focus for us as we continue to move forward.

Okay Gary.

Good thanks, everyone.

Thanks, Mike I did want to mention as well that was a great answer Andrew because it is Andrew his birthday today, which I forgot to mention that the start and I just wanted to ask the analysts not to be too hard on Andrew.

During the I'm kidding, it can be kind of messy.

That'd be birth, Andrew Thank you Ben.

And our next question today will come from Savi <unk> with Raymond James Financial.

Hey.

Good morning.

And I guess as a follow up.

Andrew <unk> question, and then probably a question to Andrew So I apologize. If this is Neil but I just kind of curious if you could give a little bit more color on the kind of the business recovery in terms of.

You mentioned, maybe getting essentially kind of getting back to 2019 levels that because you have some of these other initiatives that should help you get there do you get there this year.

And.

I guess, what I'm focused on is you have a lot of headlines about kind of job cuts and kind of the west coast based tech companies and is that having any incremental impact on the business.

Business demand or is that is it just more.

Seeing the recovery yet.

Yes, hi.

Savi, thanks for that and I think it's a great question because the first thing I'll say is that even though the headlines of recent on these job cuts.

<unk> been experiencing and especially some really large tech companies that their corporate travel has already been severely depressed for some time now so the corporate numbers that you see from US already include a lot of high Tech companies.

But already in some cases nearly turned off they travel but have severely depressed so.

As we move forward I don't think these cuts personally impacted the technology side, because I think we've already seeing them and the question is will they come back I am more bullish and confident certainly on the non tech side of corporate travel and continued to share there I will say the jury's a little bit out on where tech does go.

But I think overall portfolio wise business is somewhat stable.

80 $575, 85%.

Range, but again I hope without share movement and continued strength over time that we do get back there.

Savi I might just add that the one thing not to lose sight of is these tech companies, while they haven't been traveling for quite a while these are like the most valuable companies on Earth and at some point they are going to expand again theyre going to get traveling again, so it's probably future.

For us we just don't know when it's going to really come back it could be it could be a year away or more.

Makes sense.

And then just getting.

Getting back to.

Utilization and productivity.

Trying to understand again.

You've talked about the aerospace is is what it is and we're still below and yet youre seeing everybody.

I'm just struggling with and then questioning if we get back to kind of the.

Previous productivity.

What's kind of controllable on on the Alaska side, and the timing around that versus what.

What's kind of out of your control.

No Savi just let me start with a couple of things I think for us well.

Coming back from a pandemic and getting the ownership for the operation I think that's where.

Alaska, but the entire industry struggled getting back up to a certain level of capacity. So there was some.

There was a lot of issues there.

As I look forward now into 2023, when I look at the benefits of single fleet.

Having the majority of your fleet Boeing and the majority of your fleet Embraer 175 that just drives massive efficiency in terms of crews in terms of swapping airplanes.

Getting reserve crews. So just there alone for us is a major major improvement.

Secondly.

Again.

Getting through a little bit of the volatility.

With staffing and training that goes away so that volatility goes out. So our focus is purely on every part of the operation, where we see volatility in staffing where we see volatility in performance is to go in zero.

Those issues and snuffed them out.

That's what good airlines do an operation reliability is just critical and doing that right and other there will be things that will never go back to the way they were in 2019.

But I think.

I think a lot of this is in our control and.

And we just don't give up on those type of things its savings that you can go after and we're going to go after them.

Just to clarify that and just on the staffing side and staffing and training.

The training is related to the fleet transition right fairly caught up Brian just being able to source the pilots for the capacity.

Right now we're going through a lot of the <unk> hundred 20, Airbus pilot transition right now so we'll be through it by the end of the first quarter.

And so thats going through all through all our schoolhouse right now same thing with the Q4 hundreds on the Embraer, 175%. So we will be largely done that big by wave.

Thank you.

Thanks, Jeremy.

Okay.

And we will go next to Scott Group with Wolfe Research.

Hey, thanks.

I just want to go back to the revenue guide so it looks like.

<unk>.

Decelerating from.

Look versus 19 decelerating from fourth quarter to first quarter, and then Reaccelerate. The rest of the year just help us understand that is that a market view is that something specific to you guys just any color there.

Yes, good morning, Scott.

So a couple of things and we've talked about this before obviously, but our first quarter is.

Always the weakest end.

Little bit business travel certainly in January .

Being highly choppy and did not return as much as we had hoped but I think if you take a step back and look at our revenue in general.

And you even go back to 2019, our unit revenue guide for the first quarter are right in line with the industry's unit guides.

And they also have very big international travel coming back, which I think will be a big tailwind for them.

And again for the year were about right where industry is but again for US. We've got work to do again on January and February on the network side, we do need to make sure that we construct our network to handle these lulls in demand.

But again March and forward is very solid.

Yeah.

Okay, and then Shane I think you said that there is a fuel hedging loss embedded in the guide for this year just how much is that and then maybe just bigger picture like the issue has been crack spreads not not so much crude like any thoughts on revisiting how you guys hedge I know its more complicated, but it seems like it would be a much more effective way.

If you want to hedge at all.

Hey, Scott, it's Nat Pieper. Thanks for the question on on fuel I think first on just our hedging program.

We started this 20% out of the money calls very straightforward formulaic back in 2015 broke even basically 2015 to 2021 and then.

As you cited and as we said in the script 2022.

It turned out to be a profitable thing, but as you know we're not hedging to make money. We're hedging just as to eliminate volatility. We think it's a good way to use our strong balance sheet and it just gives us some better insights in our planning as we move forward.

We have spent a considerable amount of time with.

Investment banking friends back on the east coast about ways to potentially to two.

Hedged the crack spread youre right in that that's been the main source of frustration volatility et cetera.

And something we're looking at but I'd underscore we're only going to do it again, it's consistent with our core values as a company use our strong financial Foundation and.

And just keep it on auto pilot.

And what is the hedge loss, though you've got factored in.

We're looking at about $10 million in the first quarter and then as you can imagine it snaps does something different every day the forward curve moves.

Okay.

Alright, Thank you guys.

Thanks Scott.

Yes.

And our next question will come from Dan Mckenzie with Seaport Global.

Oh, Hey, good morning, guys. Thanks.

Andrew of course, we want to help you celebrate your birthday with a couple of questions here.

Happy birthday.

Thank you.

So I guess the question is the state of California was pretty slow to come out of the pandemic.

My question is is what percent of the revenue growth. This year, it's just simply getting markets back to 2019 levels of revenue and then related to this what percent of Alaska's revenue touches the state of California.

Yes.

So just on the big picture.

Then al growth two thirds of it is going to be Pacific northwest and a third of it is going to be California.

Just as it relates to recovery.

If you look at our growth in 2023, the Pacific Northwest is now in the double digit territory higher than 2019, but California was still down 23% last year.

And it'll be close it'll be 10 points better than that so our California network will still be down about 10 to 12 points.

This year versus 19, but recovering and I would say again very high level.

Good.

So about revenues is somewhat tied to California.

Wow.

That's fair.

On the prior comment that Alaska has more upside on corporate revenue versus peers.

So I guess on premium revenue I believe the stat was to have 62% more premium seats. This year versus 2019, and I guess I'm wondering if that stat is still correct or if that's right and I'm not sure. If you can share what the mix is today or but what it is today versus where you might expect to exit the year, but if you can.

That's helpful and then related to this.

The corporate travel budgets are they come in at a little higher than last year, a lot higher or lower just given the the tech exposure.

Yeah.

Yes.

A couple of things.

And maybe you saw in my prepared remarks.

We were able to increase our premium premium revenues by nearly half a billion dollars.

As Shane is shared we're sort of trading out.

<unk> first class seat.

2016 first class seat.

Max's so there's real upside there I think overall I think first class revenues were up about 21%.

So there is a significant opportunity there.

The other opportunity we're working on Dan is that regional fleet and we actually brought 175 now which have first in premium and we're really happy with the progress we've made on filling those seats at good fares and we continue to work that.

And then on the last question you had was on corporate could you repeat that one again, sorry, yes, the corporate travel budgets, a little higher a little lower or given that the tech exposure.

Yes, I think.

Some of the budgets when I last spoke to my team was still being finalized for this year I think.

Budget, so no budgets I think what we're really seeing it a little bit here Dan in some cases as the on off switch you've got to go to your vice President to us for travel and so people are not going so we either see very deep cuts in travel or more to the average means so I think the real question is will <unk>.

Hi Tech start to give permission for the people to start traveling again and as you know it's not just it's hotels. It's cause is so anyway, that's where we're at.

Thanks for the time you guys.

Thanks, Dan.

And our next question will come from Conor Cunningham with Melius research.

Yes.

Everyone. Thanks for the time had been growth Andrew.

Just on the capacity outlook.

Should be an easy one just could you provide some context on whats new versus core.

Utilization stage gauge it just feels like a lot of the growth is going to be utilization engaged base. This year within your core markets, but if you could just clarify that that would be great.

Yeah, I mean, you're exactly right. The end of the die very very few new cities. This is essentially all coal restoration and 85% of all of our growth stage engaged so it's very efficient growth.

Is that mostly.

Okay.

Pacific Northwest and California, I mean, I feel like you've mentioned that prior yes, yes, that's correct.

Alright, and then hate to ask a cost question because I know you've got a bunch, but it seems like there is some confusion just prior to the <unk> CASM ex guide of I would've thought.

First half versus second half, we're just look a lot different than kind of it seems like it's shaping up to be and when I think about it high level second half benefiting from just easier comps fleet transition improved productivity all of that stuff, maybe the maybe the offset.

As more on like profit share accruals and then another increase in pilot.

Everyone with the idea are you being ultra conservative or is it just there's just a lot of uncertainty right now.

On the second half cost side.

Thanks, Kevin I think if youre, implying that you might have thought it would be down more in the second half.

I'm not sure if thats, what youre sort of question was but yes, yes, yes, it does not.

Got you, yes, there is not.

Theres not a lot of noise as I think Ken you had asked earlier sequentially throughout the quarters I will say like.

With respect to our profit sharing accruals, we had a very significant.

Results in Q4 of 2022 because of our first place performance on the margin side.

While we are still anticipating to lead the industry next year, I think youll see those accruals come in differently.

This year and it's significant enough to create a little bit of noise, but.

No I think look we need to get through the <unk>.

First quarter all of the transition training to make sure of the planes come in we've got to make some decisions about the <unk> hundred 21.

I think what we've shared is something we're highly confident we can get to.

We tend to target internally to do a little bit better and that's what we're going to drive towards but theres a lot of year ahead of us a lot of execution to do and I think the last couple of years.

We've been ambitious in our plans.

Lot of setbacks, we don't anticipate those this year, but but I think some of that's informing.

Some conservatism in our capacity and other guidance.

Sorry, just one one clarification I mean, you did have like.

The lease return expense in the first quarter of last year.

Maybe that.

Yes, I'm, sorry, I'll take it offline.

Yes, yes, we are happy to I mean, we're not going to obviously get into like a lot of the.

Specific details, but we're happy to give you more color for sure the progression.

Alright, thank you.

Thanks.

And our next question will come from Ravi Shanker with Morgan Stanley .

Yeah.

So another follow up on corporate and then Fred I think you said that you are.

The tech customers of yours are giant corporations and they are eventually going to come back, which I guess, it's true, but then we can be sure of that given the way. They do business. So are you happy to wait for them to kind of come back on the corporate side or.

Are you looking to maybe expand your corporate customer footprint, maybe just some more SMB customers and is there anything you need to do from either a marketing or a network standpoint differently.

Your corporate customer base is likely to change going forward.

Andrew can speak quickly to the.

Sort of composition I, just really one thing I would say Ed tech tends to have.

Some of the best discounts.

Laura yielding business traffic and I think the point, we were trying to make is they haven't been traveling much all of last year. So there is not.

Even though you have these headlines of layoffs. It doesn't really mean that there's like another downward step in terms of their travel and I do think they are at historically low travel volumes. They may never go back to where they were pre pandemic I think theyre going to be above where they are today I'm very confident about that just don't know when.

And then maybe Andrew or on the sort of pursuing SMB.

Thank you.

We will obviously adjust.

We obviously would love high tech to get back to where they were but at the end of the day. This is about using your channels and the timing and when we sell them. We don't sell and I think there's just a lot of opportunity to re look about who we are selling out seats too and when and where and we will we will manage through this.

Got it and maybe as a quick follow up I mean, obviously you guys have come a long way kind of in the last couple of years and kind of with where your balance sheet is right now.

And where it's kind of the biggest box is checked on the cost side and the fleet transition side and everything else. How are you thinking of the pace of shareholder returns or cash returns through the your.

Maybe as your confidence in your own numbers on the cycle maybe.

Both through the year.

Yeah, Hey, Ravi I think so we announced the sort of dilution offset program I think we ranged it from $75 million to $100 million.

We'll put a grid in place assuming the stock.

Prices somewhat.

Consistent throughout the year it should be ratable.

Throughout the year, but what we will buy more if the stock goes down and obviously a little bit less if the stock goes up but we'll get through the entire $100 million by the end of the year. Mike My guess is it's fairly ratable across the quarters.

And that's sort of our plan at this point.

Alright, great. Thank you thanks, everybody.

Thank you Ravi thanks, everyone. Thanks for joining us for our first quarter call look forward to following up with anybody out there and we'll talk to you on the second quarter, everyone have a nice day.

And this concludes today's conference call. Thank you for attending.