Q1 2023 Alaska Air Group Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen and welcome to the Alaska Air Group 2023 first quarter earnings call. At this time all participants have been placed on mute to prevent background noise.
Speaker 2: Today's call is being recorded and will be accessible for future playback at alaskare.com.
Speaker 2: After our speakers remarks, we will conduct a question and answer session for analysts.
Speaker 2: I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Planning and Investor Relations, Ryan St. John .
Speaker 3: Thank you, operator, and good morning. Thank you for joining us for our first quarter 2023 earnings call. This morning we issued our earnings release, which is available at investor.alaskare.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call.
Speaker 3: This morning Air Group reported a first quarter gap net loss of 142 million dollars
Speaker 3: Excluding special items in mark-to-market field hedge adjustments, Air Group reported an adjusted net loss of $79 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings.
Speaker 3: We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs excluding fuel.
Speaker 3: 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 3: Hello and good morning everyone. Before I begin, I want to welcome Ryan St. John as our new head of Investor Relations.
Speaker 3: Ryan is a 15-year veteran of Alaska and also leads our financial and resource planning groups.
Speaker 3: I'm excited to see Ryan step into this role and know he will do a great job in it. I also must acknowledge Emily Halverson, who Ryan is replacing. Emily stepped into the IR role at the onset of the pandemic, not the easiest time to learn how to do this important and challenging work.
Speaker 3: Emily has been fantastic as our head of IR, but this change will allow her to fully focus on leading our accounting and financial reporting functions as our controller. So now turning to our results.
Speaker 3: Despite our first quarter loss, I am pleased to report that our operational and financial performance trended positively as we progressed throughout the quarter. We are actively driving improvements in our business and I believe we are well positioned to capitalize in the second and third quarters.
Speaker 3: It's important to note that Alaska, along with the entire industry, historically experiences weaker results in the first quarter, and our loss is primarily a reflection of our current network seasonality.
Speaker 3: In the past, Alaska has found ways to break even or earn a small profit in the first quarter. Therefore, we are setting a target to reduce our first quarter profit seasonality over the next few years.
Speaker 3: That's the right goal for us to have in the future, and it will have a meaningful impact on our full year results.
Speaker 3: The start of this year has presented more challenging weather conditions than we've seen historically.
Speaker 3: Persistent storms, regular snow, and elevated icing conditions throughout January and February across all our geographies, including California, led to higher cancellation rates than normal. Additionally, volcanic ash in Alaska and the Pacific Northwest recently disrupted our operations for several days.
Speaker 3: Despite these challenges, we still operated with one of the best on-time rates, and we are second in completion rate year-to-date.
Speaker 3: We will continue to prioritize operational performance, and we remain committed to delivering a reliable experience for our people and our guests.
Speaker 4: especially as we move into peak demand periods.
Speaker 4: Although we can't control what Mother Nature throws at us, I have set a goal for our teams to significantly harden our operational resiliency before next winter and to reduce cancels and customer impacts from weather to the greatest extent possible. The total impact of storms in Q1 were in the order of $13 million.
Speaker 4: But most importantly, this quarter we delivered on metrics that were squarely within our control. First quarter capacity, revenue, and unit cost excluding fuel all landed within our originally guided ranges.
Speaker 4: I am particularly encouraged to see less close-in variability and greater stability when forecasting company performance than we've seen in the past three years.
Speaker 4: As stability returns, our ability to execute on our cost and commercial initiatives improves.
Speaker 4: Looking ahead, our outlook and priorities remain unchanged as we continue to execute on our strategic initiatives.
Speaker 4: Our teams remain focused on returning us to the foundational strengths that have served Air Group well for decades.
Speaker 4: These strengths, including operational excellence, disciplined cost management, high productivity, and low overhead, will continue to be the primary drivers of consistent, profitable growth and we are making good progress on several fronts.
Speaker 4: Our productivity trends are improving.
Speaker 4: Total passengers per FTE is up 6% compared to last year, and we have increased total aircraft utilization by 14%.
Speaker 4: In fact, our mainline utilization has exceeded 2019 levels.
Speaker 4: absentee and attrition rates have declined across all workgroups.
Speaker 4: including pilot attrition rates after the ratification of our new contract back in October .
Speaker 4: With several labor contracts signed last year, we are looking forward to reaching a deal with our flight attendants and aircraft technicians soon to complete the cycle.
Speaker 4: Our move to a single mainline fleet is driving better economics.
Speaker 4: We have improved fuel efficiency by 4% year-over-year this quarter, or the equivalent of $25 million in 7 million fuel gallons saved as a direct result of the superior MAX aircraft in our fleet.
Speaker 4: This is equivalent of taking 15,000 cars off the road each year.
Speaker 4: Additionally, our up-gaging strategy, which adds 28 more seats per aircraft than the A320s we replaced, allows us to unlock growth efficiencies without adding departures within an already constrained operating environment.
Speaker 4: As a result, we are now producing 20% more ASMs per aircraft than we did at this time last year.
Speaker 4: Finally, our balance sheet continues to be a pillar of strength. Our trailing 12-month return on invested capital has continued to improve, reaching double digits for the first time since the pandemic began. Our financial strength has also allowed us to support a long history of shareholder returns, and during the first quarter, we officially restarted our share repurchase program to offset dilution.
Speaker 4: and remain on target to spend at least $100 million this year.
Speaker 4: As we approach our busy Q2 and Q3, we are well prepared for peak summer flying.
Speaker 4: We have taken proactive steps to prepare our airline, including doubling our pilot training throughput compared to the same period last year and providing a one-day immersive care retreat to 14,000 guest-facing employees.
Speaker 4: This retreat emphasized our core values of being kind-hearted and doing the right thing, as well as focus on self-care, team-care and guest-care, which are essential to our culture.
Speaker 4: This has become even more important and necessary in leadership's view post-pandemic.
Speaker 4: Our people are integral to our success and I am proud of the work they do preparing our airline to meet demand while performing at a high level of operational excellence.
Speaker 4: We have taken deliberate steps to build momentum coming out of this recovery and to fortify our ability to deliver on our targets.
Speaker 4: As we look forward, we have line of sight to returning to strong double-digit adjusted pre-tax margins this quarter. And assuming a stable economy, we remain confident that we will deliver our full year adjusted pre-tax margin of 9-12% in 2020.
Speaker 4: and earnings per share of $5.50 to $7.50, which we believe will be at or near the top of the industry.
Speaker 4: Despite the potential for a recession and softening in some sectors of the economy, travel demand remains strong. And while our industry and business may face continued economic volatility in 2023, it seems to be seeing if there will be any negative impact on revenue.
Speaker 4: At Alaska, we have a proven track record of adapting and navigating challenging environments. As we progress on our roadmap to profitable growth, we are already seeing the benefits of restoring our historical strengths as a single fleet operator and unlocking new commercial initiatives.
Speaker 4: This positions us well in any environment to continue to deliver on our financial commitments and drive our long-term success. And with that, I'll turn it over to Andrew.
Speaker 5: Thanks Ben and good morning everyone. My comments today will focus on our first quarter results and in particular on March which I believe is more indicative of what we see going forward.
Speaker 5: I'll also share our thoughts on second quarter trends and guidance.
Speaker 5: First quarter revenues totaled $2.2 billion and that's up 31% versus the first quarter of 2022.
Speaker 5: with capacity up 14% over the same period. This marked a significant milestone for us as we finally restored capacity to pre-pandemic levels. A three-year journey.
Speaker 5: Load factor came in at 80%.
Speaker 5: exceeding last year's load by three points as we lapped the effects of Omicron in early 2022.
Speaker 5: Even when comparing our results for 2019, we delivered strong revenue progression throughout the quarter, with January unit revenues up 13%, February up 15%, and March up 19%.
Speaker 5: The strong results in March are a good indication of where we're headed as we look to the second quarter.
Speaker 5: Total March revenue came in above our record-breaking March last year on both higher capacity and on the low to middle revolutionary Capstone.
Speaker 5: higher yields while our pre-tax margin was nearly two points better despite higher fuel prices.
Speaker 5: Throughout my tenure at Air Group this airline has been solidly profitable 10 months of the year with January and February always being the most difficult due to our network configuration and predominantly leisure consumer base.
Speaker 5: layer in business travel that hasn't fully recovered plus exceptionally high fuel prices and it made for a tough quarter. As Ben mentioned we are committed to driving improvements in these months to accommodate seasonally low demand with an aim to return to break even or better in the first quarter in future years.
Speaker 5: Moving to business travel, nearly all of our core hubs are in geographies where business has not returned as quickly as in other major economic centres throughout the country. Corporate layoffs and a heavy concentration in the tech sector being major contributors. Yet despite the lagging tech sector which is roughly 50-60% restored.
Speaker 5: We have not factored into our revenue forecasts.
Speaker 5: There may be opportunity ahead as corporate travel budgets increase given some companies begin returning to the office and move into new fiscal periods later this year.
Speaker 5: We see continuing strength this year in premium and loyalty performance.
Speaker 5: First and Premium Class revenues were up 35% and 33% year-over-year respectively on higher payload factors and fares.
Speaker 5: This front cabin preference has persisted and I expect this trend to continue. Bank cash remuneration also remains strong as we lap the anniversary of our renewed credit card deal with Bank of America. For the quarter, it was up 17% year over year.
Speaker 5: And with the launch of our new card benefits, acquisitions have exceeded our expectations.
Speaker 5: with the highest quarterly sign-ups in our history, surpassing 100,000 new cards during the quarter. Regarding network and alliances, we are progressing nicely on our plan to unlock selling capabilities for 10 airline partners on our website this year.
Speaker 5: with the goal of making alaskarea.com a gateway to the world for our guests.
Speaker 5: Since our last call we've turned on sailing capabilities for Iberia, partner number 5, and work is currently underway to launch three more airlines by summer.
Speaker 5: While we know partner-enabled selling drives positive yield contributions to our network, direct sales also offer a low-cost distribution channel that not only supports our partners, but reinforces to our guests that Alaska Airlines can deliver on their global travel needs, which in turn keeps our guests within our network and loyalty program.
Speaker 5: I am excited to see this area of our commercial initiatives continue to grow and drive incremental benefit in line with our goals to enable 8-10% of our total revenues through alliance partners.
Speaker 5: Turning to second quarter guidance, we have line of sight to delivering strong results above and beyond the record quarter we produced last year during the demand surge our industry experienced. For Q2, we expect total revenue to be up 2.5% to 5.5% year over year on capacity that is up 6% to 9%.
Speaker 5: While we experience softness in close-in bookings in January and February , which is understandable given the lack of business travel that usually materializes during this period,
Speaker 5: We exited March seeing improved performance across the booking curve. Near term we continue to see strength in demand with held yields sitting above both 2019 and 2022 levels as we move into the second quarter.
Speaker 5: My team is doing a great job optimizing the load and yield equation as capacity and demand remains more stable this year compared to last.
Speaker 5: I'm very excited to have Tristan Amrine step into a new VP role overseeing both revenue management and network planning.
Speaker 5: Kirsten has spent her 16 years at Air Group in various roles in revenue management. Her deep knowledge and expertise have been an asset as we constantly learn how to manage our inventory to account for new shifts in booking patterns and make network adjustments going forward.
Speaker 5: Brett Catlin has done a fantastic job at managing our network for the last four years and he will be taking on direct responsibility for our loyalty and credit card programs, corporate sales and continuing his alliance responsibilities.
Speaker 5: These leadership changes will ensure that the commercial organisation stays laser focused and coordinated on these critical revenue generating levers.
Speaker 5: As Ben mentioned, our growth this year is primarily being driven by gauge and stage, a highly efficient form of expansion.
Speaker 5: Having returned to pre-pandemic levels of capacity at a system level, we are focused on building network depth in Portland and working to fully restore our network in many California markets.
Speaker 5: Looking to the remainder of the year we are poised to produce strong results as we rebuild our network, up gauge efficiently and refine our revenue capabilities within this evolving demand environment. Importantly we are performing in line with our internal targets and remain confident in delivering on our full year goals.
Speaker 5: We have proven product initiatives in place and they will continue to drive value for our business as we move forward.
Speaker 5: And with that, I'll pass it over to Shane. Thanks Andrew, and good morning everyone.
Speaker 3: As Ben mentioned, we experienced improved stability to the business this quarter, which was good to see. In my experience, the biggest challenge to operational and cost management historically has been volatility. And as that volatility subsides, our ability to drive consistent operational and cost improvements is enhanced. For more information, visit www.fema.gov
Speaker 3: I'm encouraged that we were able to start the year with financial performance absent fuel price impacts within our original guidance ranges. Alaska has a long history of delivering on our commitments and guidance, and we are focused on doing so again in the second quarter and for the full year.
Speaker 3: Turning to our balance sheet and liquidity, we remain well positioned with both. Our debt-to-cap finished the quarter at 48% and our net debt-to-EBITDA stood below one turn at 0.8 times.
Speaker 3: Both of these metrics are within our long-term target ranges. Debt payments were approximately $100 million for the quarter and are expected to be $50 million and $100 million in the second and third quarters, respectively.
Speaker 3: We generated $222 million in cash flow from operations during the quarter, while total liquidity inclusive of on-hand cash and undrawn lines of credit was a healthy $2.8 billion at quarter end.
Speaker 3: As our business normalizes and we continue to pay for aircraft deliveries, we will anchor toward the higher end of our target liquidity range of 15 to 25 percent of revenue, or around $2 to $2.4 billion inclusive of lines of credit.
Speaker 3: Our trailing 12-month return on invested capital surpassed double digits and closed the quarter at 10.6%. The last time we achieved double-digit trailing 12-month ROYC was, not surprisingly, February of 2020.
Speaker 3: It's nice for this metric to once again be well above our cost of capital, and our goal is to now remain above 10% and grow from there.
Speaker 3: We also restarted our share repurchase program this quarter and have spent approximately $23 million year to date, a marker on our way to returning to our long-term capital allocation goals.
Speaker 3: Turning to the performance of the business, we executed to our plan in the quarter, again, absent fuel price. First quarter CAASAMX was down 1% year-over-year on capacity up 14%, both within our guided ranges. Our teams did an excellent job delivering on their internal targets, with the only source of significant variance being the cost of challenging winter weather that's been mentioned.
Speaker 3: which was approximately $8 million of cost of the $13 million total impact.
Speaker 3: Our completion rate exceeded our goal, while daily aircraft utilization increased 14% year-over-year, helping us return to pre-pandemic capacity.
Speaker 3: With the retirement of our A320s and Q400s in January , our total aircraft count was down 29 aircraft, yet ASMs were up 14% versus Q1 2022, demonstrating the impact of both utilization and the benefits of our upgaging strategy.
Speaker 3: It's worth acknowledging that our capacity was at the high end of our guide and our Casimex fuel was just below our midpoint. I would like to see us return to our historical pattern of matching capacity outperformance with commensurate cost outperformance, and I'm confident we will ultimately see this. We are wholly focused on continuing to rebuild this muscle over the next several quarters.
Speaker 3: Our first quarter fuel price was $3.41 per gallon versus our original guidance midpoint of $3.25 and versus $2.62 last year. This added more than $30 million of cost versus our guide, which equated to approximately 150 basis points in margin impact. For the second quarter, we estimate our price per gallon will be between $2.00 and $2.50
Speaker 3: with any additional price favorability contributing direct upside opportunity to our results. Turning to capacity and cost guidance, we expect capacity to be up 6% to 9% versus Q2 2022 and CASMx to be up 1% to 3%. We saw lower than the 14% year-over-year capacity increase in the first quarter.
Speaker 3: of lease return costs rolling off while this is not the case for the second quarter. Along with lower sequential year-over-year growth, we have a slightly tougher cost comparison set up this quarter.
Speaker 3: For the full year, we still expect to reduce unit costs 1% to 3% as we drive productivity improvements, leverage the restoration of our full network, and lap labor deals in the back half of the year.
Speaker 3: Regarding our fleet transition, September 2023 will be the final month we operate the Airbus fleet, at which point we will retire the last 10 A321s from what was at one point a 72 aircraft fleet.
Speaker 3: This cements our future as a single fleet operator by 2024, and as a result of this acceleration, we expect to incur approximately $300 to $350 million in special fleet transition charges through the end of the year.
Speaker 3: By fully retiring the Airbus fleet at the end of the third quarter, we expect all of our pilot training and associated transition costs should now be completed by year-end with very little spillover into 2024.
Speaker 3: We will plan to transition the remaining Airbus pilots in the fourth quarter of this year, which will set us up for a clean 2024 from a pilot training and dual fleet cost headwind standpoint. We still expect to deliver 8 to 10 percent capacity growth this year. As we've mentioned before, following the setbacks we experienced last year, we will
Speaker 3: We de-risk our 2023 capacity plan considerably and will remain conservative in our capacity commitments as we protect stability and prioritize reliability in our operation.
Speaker 3: which essentially means that we may continue to perform at the higher end of our guided capacity range if our completion rate continues to be strong.
Speaker 3: In closing, our management team has been very intentional in setting targets and ensuring we execute the steps necessary to deliver on them. We know we still have work to do, but we are encouraged by our recent results and are optimistic about the second and third quarters, which are our peak performance periods. We remain at the belief that we have core competitive advantages.
Speaker 3: the right business model, and the right strategic initiatives to continue to drive out performance versus our peers in whatever economic backdrop we encounter. And with that, let's go to your questions.
Speaker 2: Thank you. At this time, I'd 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.
Speaker 2: And our first question today will come from Sabi Seif with Raymond James.
Speaker 6: Hey, good morning everyone. I wonder if you could talk about a little bit about what you're seeing in terms of kind of passenger travel changes versus pre-pandemic being in terms of booking curve, seasonality, day of week, or destination.
Speaker 5: Just curious on how that's progressing and how that's impacting how you're forecasting things. Hey Savi, good morning. You know we're still working and observing as we build back but a couple of things I will share is that number one, I think the booking curve is back sort of to 2019 levels.
Speaker 5: So we're sort of seeing leisure booked further out again, so that's the first thing. I think second thing on the big day of week changes, Friday and Sunday are still krasm kings. They generate the highest unit revenues of the week, but we've seen Saturday take a step change.
Speaker 5: And that's been one of the strongest increase in unit revenue days of week and so flying a bit more on Saturdays I think Wednesday, you know Tuesday are the weakest and then sort of Thursdays and Mondays another big change It's occurred is sort of the advanced booking window. I think in my career. I've never seen 30-day advanced purchase
Speaker 5: barriers that have gone up and we're seeing that across our network which sort of leads me to believe that essentially business travellers are actually booking further out than they have historically. And then the last thing I would mention that's been as well articulated is we need to do a much better job at matching supply and demand in what's...
Speaker 6: Seems to be a week of January and February with business traffic essentially down 25% at this time That's helpful color thanks and then if I might on the the fleet transition the The special charge that you talked about is any of that cash this year and and just if you could talk a little bit more about
Speaker 6: how that transition went in the first part with the A320s and it you know how that's informing how you do the A321 transition. Hey, Savi, this is Emily. I will start on the cash and then I'll hand it over to Nat to talk more about the fleet transition itself. Some of the cash will hit this year. I expect most of it.
Speaker 7: incurred in 2023.
Speaker 3: And Savi on the A321s, it's it's not we're really excited as you gather from Shane from Ben from Andrew Really everybody at air group to get this fleet transition done and get the single fleet as as fast as we can The op plan is in motion and now the last hurdle we've got to get over
Speaker 8: is to come up with an A321 exit plan. And we're getting close. Late-stage discussions with a bunch of parties, lessors, financial firms, other airlines. And our objective is to paper the transaction for the 10 aircraft by the end of the second quarter. And we're confident the way we've structured it that will come out on an NPV and cash flow positive basis.
Speaker 8: versus parking the aircraft to maturity and just making lease payments until then.
Speaker 6: That's all. All right. Thank you. Thanks Abbie, Danny.
Speaker 4: Our next question comes from Connor Cunningham with Melius Research. Hi, everyone. Thank you. So the implied exit rate on cost is obviously awesome. But can you just speak to how you get to the high and low end of the full year guide? The reason why I ask is that the ARC seems, the ARC improvement seems pretty steep from you up to the...
Speaker 4: I think you're implying basically like down six in the fourth quarter. So I just want to understand the puts and takes and how you get there. Thank you.
Speaker 3: Hey, Connor. Thanks. It's Shane. Yeah, I think the biggest driver of the second half performance trend is going to be the lapping of labor deals. I think we've talked about this the last couple of quarters. We've got about 75, 80 million dollars of structural cost increase due to the six labor deals we signed last year. They start to last.
Speaker 3: over the fourth quarter of last year. We held extra resources to do that. We typically go down in capacity Q4 to Q1. We stressed the operation a bit and we made sure we had ample additional sort of resource to ensure that we didn't take a hit on completion rate or operational performance, which we didn't. We did a really good job on the operation.
Speaker 3: I think as we go forward, we'll get a little more productive with our resources and then we'll start to lap these large labor deals. Okay, and then on the, I think last quarter. There was like, endless discussion between the link of fuel and revenue today. Obviously. A lot lower than where it was in January , so.
Speaker 3: You're reiterating your unit revenue assumptions, I think, for the full year. So I'm just trying to understand. Now, why wouldn't we be at the lower end of the range if if Jeff feels here? I know that you have a lot going on. So maybe you could just talk a little bit about the revenue drivers that you have that could offset some of that. Thank you. Yeah, hey, Connor, I'll start on the fuel. I think what.
Speaker 3: I mean, I think we've always sort of felt like. You know, unit revenue is going to be more a function of capacity. Capacity may be more function of economic sort of backdrop that economic backdrop probably is what drives fuel, but I think our sort of for your expert.
Speaker 3: expectation for fuel was in the 315 range or 320 range. We haven't decided that it's going to be materially below that yet. You can see our Q2 guide is a little bit below that but certainly above what we're paying today. If we sort of felt like there was a lot of confidence that fuel was trending below 290 or something, yeah I think then we might you know have a slightly different perspective on unit revenues but...
Speaker 3: Right now we think, you know, it's too early to tell. Fuel's been super volatile. Refining margins have moved around a lot in the 1st quarter. So we just our sort of baseline expectation is what we originally got it to in the 1st part of the year, which is fuel in the 310 and change in unit revenues roughly flat for the full year. Thank you.
Speaker 4: Thanks, Connie. Our next question will come from Brandon Ogolinsky with Barclay's. Hey, good afternoon or good morning, everyone. Thanks for taking the question. Andrew, I was wondering if you could come back to your comments about sequential rasm here and looking at it year over year as well. Looks like you're going to be up sequentially but maybe down from where you were in 2Q22. Can you tell us a little bit about that?
Speaker 5: 9 plus percent as we move forward and so essentially our goal is to bring in traffic in line with our capacity growth at higher, you know at essentially revenue unit revenues that were essentially at the same level we achieved last year. So you're going to see them start to come down a little bit. We have obviously very tough...
Speaker 4: And then can you give us any detail on business travel, you know, trends in your network, especially given, you know, Silicon Valley Bank in March.
Speaker 5: Yeah, I think on a macro level, and again, I just went back and look at the ARK data as well as our own data, you know, around the weeks of all of that. And essentially, the booking levels, you know, there's blips here and there, but they've sort of really been stuck at this back in our network, at least 75%, with revenues, you know, closer to 85 and 90%.
Speaker 5: I think, you know, as we look forward, we're, you know, not forecasting it, but we're hoping to see, as we move past some of these little shocks to the system, that business travel comes back a little bit better than the 75% it's been at, but we're not expecting it.
Speaker 5: you know, as we look forward, we're, you know, not forecasting it, but we're hoping to see as we move past some of these little shocks to the system that business travel comes back a little bit better than the 75% it's been at, but we're not expecting it. All right, thank you.
Speaker 9: We'll hear next from Ravi Shankar with Morgan Stanley . The last response, you said in your prepared remarks that West Coast corporate travel is an opportunity for you, and I completely agree. But at what point do you kind of say that, hey, that's taking too long, or maybe that's not the right place to go?
Speaker 5: That's actually a really good question, Robbie. I think where we are for now is that the close-in volumes aren't there, and so we're gonna be biasing towards building the volumes outside of the typical business window. Actually, right now, leisure revenues are up about 130% versus 2019, very, very strong. And so we're gonna continue to capitalise on that.
Speaker 5: and watch that and I think on the network side, some of the hub to hub, heavy, you know, traditional business traffic markets, we're gonna sort of trim back and maybe put that capacity elsewhere. So again, we're watching it. But I think that's going to be a big question as we move forward through this year. Got it, that's helpful. And maybe as a follow up, can I've given you a West Coast alliance?
Speaker 8: Great question on China and can't speak specifically to that as we're kind of watching that with all of our alliance partners. What I can say is that we're really optimistic and bullish with the One World feed and linking our West Coast network to our partners, whether it's nonstop flights into Seattle.
Speaker 8: Japan Airlines to Tokyo, San Eroda Helsinki, and then Los Angeles with Iberia. We're really seeing a lot of pickup and a lot of incremental revenue that's getting there. So as China opens over time, we'd expect to participate in that through our partners.
Speaker 9: Thanks, Ed. Much appreciated.
Speaker 2: Thanks, Robbie. We'll move next to Andrew Dodora with Bank of America.
Speaker 3: Hey, good morning everyone. Andrew, can you talk to how recovered your California market is right now? How do you think about the buildup here? And we've actually heard anecdotally over the last few days from several folks and seeing trans-con fares pretty weak. What kind of dynamic do you think is going on? What kind of dynamic is going on there from your seat?
Speaker 5: Yeah, I think, you know, we talk in macro levels about our growth and getting back flat with 2019. The reality is Seattle is actually healthily above 2019 and the rest of the network, and specifically California, is still below 2019.
Speaker 5: In some respects, I think that's the right place to be. I think on a year-over-year basis, we've actually, in our network, at least, been very happy with our unit revenue performance in the California market because we are building ourselves back to a stronger place. And so at the highest level, your comments are actually absolutely true. I think for us internally, we feel good that our California network is actually improving.
Speaker 3: Got it. And then thoughts on TransCon?
Speaker 5: California Transcon? Yes. Yeah, again, I think, you know, especially with our partnership with American and part of One World, we've got code on these on these flights, especially out of the Bay Area. That's really helping. And I think, you know.
Speaker 5: We'll see what happens this summer, although it's not specifically West Coast, but I think that general New York areas, some of the slots are being pulled down a little bit. But again, I think we're in a better position than we were certainly last year as it relates to the Transcon markets.
Speaker 3: Got it. Understood. And then Shane, what would have to happen for you to consider buying back more stock than just for dilution purposes? Thanks.
Speaker 4: Hey, thanks, Andrew. I might just add one thing. I think your sort of implication of the question is California is somewhat weaker in terms of recovery than a lot of the rest of the country. And I think that's generally true. We've done a good job putting the right supply in there, but it's all upside for us. And I think.
Speaker 3: we're feeling good because we've got a chance to still be other, you know, industry's top margin producer and further upside when California does recover. It's the sixth largest economy in the world. It's going to come back. Yeah, I wasn't saying, I wasn't saying that it was, you know, unexpectedly weak. I was just curious where it was in the recovery. Gotcha. No, I appreciate that. Yeah, I think, you know, we're, um,
Speaker 3: I think if we continue to trade at prices that we believe are a really good value, which is what we believe about our stock price today, we'll have a bias to do more than just dilution throughout the year. So we'll continue to talk about that internally with our board, but I think if prices are where they are today, we'll probably be more aggressive in the 2nd quarter.
Speaker 10: Thank you.
Speaker 2: Thanks Andrew. And your next question will come from Catherine O'Brien with Goldman Sachs.
Speaker 11: Hey everyone, thanks so much for the time. So maybe just one more on the revenue. You know, your guidance is implying a reacceleration in RASM in 2Q from 1Q on a, you know, versus 19 basis to help us test for seasonality there. Can you just walk us through what drove the deceleration from year end into 1Q and what you're seeing today that gives you confidence in a better 2Q?
Speaker 5: Is that just higher leisure mix or is there anything else driving that improvement? Thanks. Hey Katie, just to touch on Q2 first. We're actually, we have 63% of the second quarter's revenues in the books right now and I think as I look forward looking at what we've been booking in the last few weeks both on the yield side and the traffic side.
Speaker 5: it's sitting very nicely in our guide. I think from Q4 to Q1, obviously, growth in the first quarter was very significant at 14%. Also, obviously, in what is our weakest quarter being January and February . I think, as it relates to January and February , I do think that, and this is on me, that we need more growth when we're looking at of THREE questions being asked in this way. That number again I'm not sure the following process works.
Speaker 5: had we known differently, we probably would have structured and shaped the network a little differently in January and February . And of course we had some very difficult weather and issues there as well that didn't help. But that's really, you know, a big part of the deceleration. But again, as you can see in the graph, we're back on up. We're accelerating back into March, April , May and June , and I think we're on a good trajectory.
Speaker 11: Great, thanks so much. And then maybe one for Shane. So, you know, based on your commentary around two-half capacity growth and then your comments on being considered on completion, sounds like there's a decent chance you're going to come in at the higher end of capacity guide. Should that inform our view on how CAS and multiplying comes in or are there offsets to that higher capacity where we shouldn't assume...
Speaker 3: you know, coming at the higher end of capacity moves us towards the better end of the down 1 to 3, you know, similar to what we just saw in the first quarter. Thanks so much. Yep, yeah, thanks, Katie. And I tried to address this a bit in my script. We were at the high end in Q1 of capacity. We have built conservatism into the capacity guide. We certainly have more planes and more resources that we could fly harder if we wanted to put more capacity into the system.
Speaker 3: We're going to continue to prioritize operational reliability and stability and we're going to watch the economy closely So I you know I think I said in the script that if we continue to complete Flights at a high level we could easily be at the high end of that range and I think that's a absolute True statement. That's kind of where we would expect to be at this point I don't think we should infer too much in terms of a change in our posture on unit costs
Speaker 3: Our goal long term would be to be on the high end of the capacity range and the low end of the Casimex range. That's where we want to get back to. We didn't do that in Q1. I think we'll get there. It's just a matter of rebuilding this muscle. We need stability in the operation, which we now have. We need to lap some of the headwinds that we've got, which we're going to do.
Speaker 3: And I don't think we've forgotten how to work the cost muscle. We just need some time to go do it. And that's what we're going to focus on this year. And by the end of the year, I think we'll be in a position to outperform capacity and be on the better end of our chasm guides as well.
Speaker 2: That's great. Thanks so much. Thanks, Katie. Thanks, Katie. Your next question comes from Dwayne Fenigworth with Evercore ISI.
Speaker 8: Hey, thank you. Good morning. Just on the technology corporate recovery status, one we've been looking for for a while. I think you said 50 to 60 percent.
Speaker 12: Is that a revenue or a volume comment? Maybe you could just put it in context. Was it at a higher level than that at any point last year? In other words, are you seeing any incremental weakness in tech business travel or is it kind of bouncing along the bottom where it has been for some time?
Speaker 5: Yeah, Diane and Andrew, that's a volume metric that I just gave you and there are some technology companies that are way worse than that and some that are actually way better than that. I think just going off memory, I think back in the third quarter of 22, I think we saw a resurgence a little bit of tech and then we started to see it collapse by the back end of the year again. Just
Speaker 5: It just really has not changed and my personal view is that literally this is driven by the CFOs and a constraint on travel and budgets and until that gets released. I don't think we're going to see an improvement. Dwayne, it's been just on that, just being here on the West Coast and watching some of these big tech companies mandate return to office.
Speaker 4: new fiscal budgets coming. It's not in our forecast, but I think we just see a lot of upside going forward in the future. I think we're out of the trough to answer your question and we're hopeful that it gets better as these tech companies recover and get stable and then move forward with their business. Thank you.
Speaker 12: here and now versus how you thought about the world in 2019. Thank you.
Speaker 5: Yeah, that's, you know what, for Kirsten and I, the load and yields tradeoff is what keeps us up at night. It is a critical question. And I think really what we wrestle with on a daily basis is how much do we rely on the close in both yields and volume and to date we've seen them, you know,
Speaker 5: be a little weaker versus 2019, well certainly versus 2019. So I think, you know, as we continue to watch this, but I think, you know, when you go back to 2019, you know, unit revenues were up a couple of points, you know, capacity was up a couple of points. It was a pretty stable, non-exciting year per se, but I think the volatility that we've got going on...
Speaker 5: and looking at how we manage these ebbs and flows is key. So I think as we go closer into summer and we are a high-leisure carrier and that's where Q2 and especially 3 is where we really do well, we're going to have to really wrestle with that question.
looking at how we manage these ebbs and flows is key. So I think as we go closer into summer and we are a high leisure carrier, and that's where Q2 and especially 3 is where we really do well, we're gonna have to really wrestle with that question. Okay, thank you.
and flows is key. So I think as we go closer into summer and we are a high leisure carrier and that's where we, Q2 and especially three is where we really do well, we're gonna have to really wrestle with that question. Okay, thank you. Thanks, Dwayne. Thanks, Dwayne.
And our next question will come from Jamie Baker with JP Morgan. Well, speaking of return to office mandates, here I am. So it's typically better to take local yields over connecting yields, you know, just sort of a broader industry comment. And the question is, is ROU going to be able to, you know, trying to Clone those yogis to K Po too, or are we getting ideas to what depends on the previous kind of F ignorant net zero EU and calculate beautiful markets,
sort of overstating, you know, the portion of the international jury that you take. I mean, are you still better off chasing local yields? In other words.
You know, Jamie, it's a question that we're actually focused on right now. I will and I think we share this on previous calls, but the traffic and the prorates and the connecting and even the local from American is actually better than our system average. So this is...
highly valuable traffic, especially with the surge in international. We have hired some international pricing folks as well. So as an RM team, we're getting more and more focused on this. As we shared at the highest level, you know, 8 to 10 percent of all revenue coming from partners, you know, international is obviously a subset of that. The domestic is...
or anticipating was the industry brain drain that has taken place. And maybe brain drain isn't the best term. I don't mean that in a derogatory sense, but you know, gyrations in the C-suite, whatever you want to call it.
as we think about your bench, but also the broader industry, and I apologize, I'm just kind of thinking out loud here, but is this a topic...
that your team gives much consideration to internally? And if it's a stupid question, just say so. I'm sure my competitors will be thrilled. No, Jamie, I would never say that's a dumb question. No, actually, it's a topic we talk about at the board. You know, as I look around the table here at my executives and my officers, we've had very we were fortunate. We've had very little turnover.
at the executive level at Alaska. But I think what you're talking about is an important topic, is how do you create a bench, how do you create succession? And it's something we're focused on and working on as we speak. So your question is valid. Again, short term, we're fortunate here. We haven't had that brain drain, but it's something to be aware of in the next three to five years. OK, thank you very much, everybody.
But I think what you're talking about is an important topic. How do you create a bench? How do you create succession? And it's something we're focused on and working on as we speak. So your question is valid. Again, short-term, we're fortunate here. We haven't had that brain drain, but it's something to be aware of in the next three to five years. Okay. Thank you very much, everybody. Thanks, Jamie.
Our next question will come from Stephen Trent with Citigroup. Yes, good morning everybody and thanks for taking my question. I was just curious what your thoughts are on US infrastructure. So I know you guys and your competitors have done a lot of good work to I guess another plug in here.
Make sure for example a smoother summer travel period, you know, what are you seeing on the government side and in terms of appropriately staffed TSA traffic control, you know, infrastructure investment that looks like the house of rep on the White House can't seem to agree on budget. So I'm wondering.
You know, how you're seeing all that on a on a high level. Thank you. Steven, thanks for your question. You know, so maybe the best way I can contrast that is back to 2019. So when I look at. The capacity of the airline industry visa v today, it's roughly the same. So we have roughly the same amount of capacity than we did in 2019.
I think the pinch point is air traffic controllers. As you see some of the actions that need to be taken in New York, I think in Florida. I think we've seen some in California and our L. A. market. So I think staffing on the federal side is the key pinch point and again, we're.
We're talking with our government counterparties and making sure that they hire and train appropriately. Infrastructure is another one. I think that airlines and government have to work on together to make sure the airspace is efficient. There's a lot of things that we can do in terms of technology to facilitate that. And I think that going forward, like I said, we're back to 2019 levels where we were already constrained. But going forward, we're back to 2019.
I think we really need a solid plan to really facilitate this next generation of aerospace management. Okay, that's super. I really appreciate that. Let me leave it there. Thank you. Thank you. Thanks, Steven. We'll move next to Mike Linnenberg with Deutsche Bank.
Hey, good morning everyone. Andrew, your subjective about reducing the seasonality of the company in the March quarter, or at least finding a way to get to profitability, it seems like no management team at Alaska has really ever been able to crack the code in that regard. It's been like maybe a year here or there where...
we've seen profitability, but it was usually sort of peak. I guess, you know, absent, I don't know, building a hub in Cabo, is it network? Is it just scaling back frequency in some of these corporate markets and maybe running airplanes, more airplanes through maintenance? Maybe your utilization goes down, but that's better. Or is it more on the cost side, just moving to a single fleet type and you get a nice tailwind there? I mean, I'm just trying to figure out.
what you're thinking about, it's interesting. Mike, it's Ben. Hey, Ben. It's a great question. So, you know, if you look at, for us, March was very profitable. We almost hit a double-digit pre-tax margin. It was January and February that were the issues. So for us, like I gotta be honest, I just set the mandate for my team and say, look, leaders change outcomes.
We don't like the outcome in January and February and we don't know the exact answer Mike to be honest Okay, the mandates were given to the commercial team to say look there are things that we know if we dissect the data You know airplanes can be moved, you know, we can do things with our network manage capacity But you have to do that not only you know, right before the quarter You got to start thinking about it nine months before which is why we're
Where we're setting, we're setting the goal now. So Andrew needs to think about what he does in the 2nd and 3rd quarter as he builds capacity. So he can manage the 1st quarter of next year. And so a lot of work to do Mike. And hopefully we can show that at least we've closed the gap. To next year, as we work on this thing and. And to your point, it's not, it's not been consistently done, but at Alaska, we just like taking big audacious challenges and says, let's change the narrative. I know very good.
Now, just one more on just watching American sort of shift in on their distribution. And I'm sure you've been following the reports closely where it does look like that they're now focusing on their larger corporate accounts. And given that you guys have gotten closer and
as part of the partnership, you obviously want to grow and build on that and obviously bring in more corporate travel. Does that have an impact on you? And I guess specifically, I'm saying where American has said that they're going to sort of back away at some of the smaller accounts, corporate accounts that maybe do less than a million, five or two million of sales. And I know that may be an area that you play in. I mean, obviously you have big corporates that you do business with.
it's well documented some of the significant changes that American are doing specifically around NDC and the impact with GDS and all the rest of it. I think for us we obviously have good and a lot of joint contracting with American and our larger corporates and they've been working extremely well. One of Brett Catlin's priority one objectives is I think we under...
up and running next year with OTAs and all that connected. And I think there's a good cost story there, and there's a good product story there, and more to come. Very good. Thanks, Andrew. Thanks, Ben. Thanks.
And we'll hear next from Scott Group with Wolf Research. Hey, thanks afternoon. I want to just go back to the chart on the monthly RASM. So I think you said 63% of revenue is booked for the quarter. How much of June is booked at this point because there's obviously a big
further step up and assumed in June and how do I think about that further acceleration in June relative to some of your comments about RASM following fuel prices? Yeah, so I think you know June I'm gonna just even on a load factor I think we still got a good 45 plus points to go so to your point Scott It is the lowest book of the summer, but I'll also say it is one of the you know strongest and
8 to 10 percent revenue growth for the year and then the fuel hedges I know I've asked this before but I'll ask it doesn't feel like they're helping any thoughts about either changing how we hedge or just getting rid of hedges?
Scott, it's Nat. Consistent with the Alaska you know, we play it for the long run. And hedging costs in the quarter was about $12 million. Long term, it was $170 million to the good last year. So we didn't get a lot of questions last year about changing the hedge program, as you might expect.
Since we've had this program specifically in place since 2015, buying calls 20% out of the money 18 months in advance, the program has been positive for us. It's all about limiting volatility and really trying to just put a box around it. So one quarter doesn't cause us necessarily to change a multi-year process.
But I think we're going to be intelligent about it and look at it over the long run. And if there's smart changes to be made, we'll make them. Okay, and then the 8 to 10% revenue that's still the right number. Oh, yeah, sorry, Scott didn't mean to not answer that question. Yes, that is still the right number for us for sure.
So I have two questions. My first question is in February this year. I think you lost a lawsuit.
and in the Virgin America case, number one, or A, have you taken accruals for that, and B, will you appeal that decision, or is it not appealable? Hi, Helene, it's Kyle. Thanks for the question. You know, this litigation is a long road. We've been fighting this for about seven years. It's the Virgin Group royalty license.
see additional disclosures in our 10Q in a couple weeks.
Okay, that's very helpful. Thanks Kyle. And then my follow-up question or another question. You guys announced recently, I think within the last week or so, that you're eliminating kiosks at the airport. And I'm just wondering...
how you're thinking about that. I know most people come to the airport with their boarding pass in hand but how are you thinking about the acceptance rate of that among your clients? Thanks. Thanks for bringing that up, Elaine. Actually, this is very exciting and the reality is our lobbies are hugely congested.
And we've actually started rolling these out. We've had about seven or eight stations done, including Portland. And what we're finding is at least a 10-point increase in people coming prepared to the lobby, checked in already, even paid for their bag. And so what it's going to do is there's a little bit of, you know, change management, of course, but we've seen hugely positive results, both from our guests...
and our agents and I think what you're going to see in the future is people only needing to check bags that are going to be milling around in the lobby. Only half of all passengers check bags, the rest need to go straight to security. We've had about a quarter of those be in the lobby using kiosks to do all sorts of things and now we're fully mobile and we can do that outside. So I think you're going to...
or have an electronic bag tag, which we've already introduced, go to a self backdrop, drop your bag, and get the security within under five minutes is the goal. So really make it a wonderful, easy customer experience. So these are the things that we're rolling out in the next 12 to 18 months. It's really exciting for us on the innovation front. That's really helpful, Ben. Are you able to lower facility costs, Ben?
Well, I think what we would do as we're growing as my CFO here is on my right side, he would say, keep the same footprint, but process more people. And I think that's that's the goal, right? Is to increase the productivity of the real estate footprint. We have, which is what we're all about. Thank you.
I think what we would do as we're growing as my CFO here is on my right side, he would say, keep the same footprint, but process more people. And I think that's that's the goal, right? Is to increase the productivity of the real estate footprint. We have, which is what we're all about. Thank you. Thanks, Elaine.
And our next question will come from Chris with Susquehanna International. Good morning. Thanks for taking my questions. Ben, could you comment on the procedures in place to navigate, let's say, less than ideal operating conditions versus periods of strong demand? Meaning how confident are you in Alaska's operational resiliency and ability to keep your completion factors north of, let's say, 95% when conditions are tough? Hey, Chris. Great question. I would say right now as we head to the summer, I'm extremely confident in the
and all of our hubs. So I'm quite confident in our operations team, and I think we're going to have a great summer.
Okay, thank you. And my follow up on the staging gauge focus this year, as we think about the cadence of second half casamax, should we expect this benefit to flow through evenly through the second half or is this something that would be more fully realized as we exit 4Q and spe Declaration?
I realize there's also implicitly some type of macro assumption around stage and certainly as it relates to gauge and any order book risk that you've contemplated there. Thank you. Yeah, hey, Chris yeah, the Casa Mexican. I think we tried to. We issued some slides that may help if you take a look at them.
Certainly the Q4 exit rate is the best rate of the year, but it's actually pretty rateable as you get through Q2 to Q3 then Q4. It's not like all of the benefit comes in Q4. So we'll have a chance to see how we're doing against that in the next quarter and a half or so. But yeah, I think given that we're lapping the labor deals primarily.
The host has ended this call. Goodbye.
No.
Good morning ladies and gentlemen and welcome to the Alaska Air Group 2023 first 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 speakers 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, Planning and Investor Relations, Ryan St. John .
Thank you, operator, and good morning. Thank you for joining us for our first quarter 2023 earnings call. This morning we issued our earnings release, which is available at investor.alaskare.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call.