Q3 2023 Alaska Air Group Inc Earnings Call

October 19, 2023

Today's call is being recorded and will be accessible for future playback at Alaska Air Dot 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 Brion St. John .

Thank you operator and good morning, Thank you for joining us for our third quarter 2023 earnings call. This morning, we issued our earnings release, along with several accompanying slides detailing our results which are available at Investor Dot Alaska Air Dot Com on today's call you will hear updates from Ben Andrew and Shane several others of our.

Yes.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 third quarter earnings call.

Management team are also on the line to answer your questions during the Q&A portion of the call.

This morning Air Group reported third quarter, GAAP net income of $139 million.

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

Today's call is being recorded and will be accessible for future playback at Alaska Air Dot Com.

Excluding special items and Mark to market fuel hedge adjustments Air group reported adjusted net income of $237 million.

After our speakers remarks, we will conduct a question and answer session for analysts.

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.

I would now like to turn the call over to Alaska Air Group's Vice President of Finance planning and Investor Relations Brion St. John .

Thank you operator, and good morning, Thank you for joining us for our third quarter 2023 earnings call.

This morning, we issued our earnings release, along with several accompanying slides detailing our results, which are available at Investor Dot Alaska Air Dot Com on today's call, you'll hear updates from Ben Andrew and Shane <unk>.

And as usual we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release over to you Ben.

Thanks, Ryan and good morning, everyone.

Others of our management team are also on the line to answer your questions. During the Q&A portion of the call.

Before getting to our results I'd like to start by acknowledging the human aspect of the work we do.

This morning Air Group reported third quarter, GAAP net income of $139 million.

This past quarter close to home, we saw wildfires being devastation to the west Maui community.

Excluding special items and Mark to market fuel hedge adjustments Air group reported adjusted net income of $237 million.

Recently, we have been horrified by the terrorist attacks in Israel, and we mourn for the innocent lives lost I want to acknowledge that people are hurting and while we share in the privilege of connecting families and communities. We also share in that pain of seeing those around the world suffer.

Now turning to our results our third quarter performance continues to demonstrate the underlying strength of our business model and our commitment to drive consistent measured progress against our goals.

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.

During the quarter, we ran the best operation in the country, delivering a 99, 7% completion rate and on time rate of over 80%.

Thanks, Ryan and good morning, everyone.

On September 30th we retired our last Airbus aircraft from service, marking our official return to single fleet.

We're getting to our results I'd like to start by acknowledging the human aspect of the work we do.

This past quarter close to home, we saw wildfires bring devastation to the west Maui community.

We drove unit costs down nearly 5% year over year, a strong performance that stands alone versus our peers and achieving year over year unit cost reductions.

And our 11, 4% adjusted pre tax margin nearly led the industry. Despite our lower direct exposure to record international demand as well as significant fuel cost headwinds given our geographic exposure to the west coast.

Now moving to where we are today.

Having been in this industry, a long time, I know as well as anyone how volatile it can be and we are seeing this now.

During the quarter, we ran the best operation in the country, delivering a 99, 7% completion rate and on time rate of over 80%.

Crude oil has risen 12% from last quarter, while <unk> refining margins have increased 70% overall and 60% over Gulf coast levels disproportionately, increasing our economic fuel cost compared to peers given the majority of our purchasing happens on the west coast.

On September 30th we retired our last Airbus aircraft from service, marking our official return to single fleet.

We drove unit costs down nearly 5% year over year, a strong performance that stands alone versus our peers and achieving year over year unit cost reductions.

While we expect this divergence to be temporary it is nonetheless, a near term headwind.

Absent this $50 million cost in Q3, we would have led the industry in adjusted pre tax margin.

Demand remains strong in peak periods, but shoulder periods are becoming more susceptible to lower demand without a full return of corporate travel.

Despite these near term headwinds that will likely make the next quarters more challenging I continue to believe we have a strong fundamental long term setup for several reasons.

Now moving to where we are today.

Having been in this industry, a long time, I know as well as anyone how volatile it can be and we are seeing this now.

One our teams continued to deliver reliability, we now have two solid quarters in a row of industry, leading performance and I can confidently say, we have our operational muscle back I want to thank all our employees for their hard work and effort. They have done an amazing job prioritizing and delivering a safe and reliable operations for our guests.

Crude oil has risen 12% from last quarter, while L. A a refining margins have increased 70% overall and 60% over Gulf coast levels disproportionately, increasing our economic fuel cost compared to peers given the majority of our purchasing happens on the west coast.

Our completion rate not only led the industry, but set 20 year company records in all three months of the quarter during peak summer flying continuing to surpass our planning expectations.

While we expect this divergence to be temporary it is nonetheless, a near term headwind absent this $50 million cost in Q3, we would have led the industry in adjusted pre tax margin.

Two our relative cost advantage comes from decades of disciplined and became a highlight in the third quarter, but.

Demand remains strong in peak periods, but shoulder periods are becoming more susceptible to lower demand without a full return of corporate travel.

With visibility to another quarter of unit cost improvement year over year, we expect full year CASM ex to be down 1% to 2% likely the only carrier to achieve unit cost reductions for the year.

Despite these near term headwinds that will likely make the next quarters more challenging I continue to believe we have a strong fundamental long term setup for several reasons.

Having retired our last Airbus aircraft in September we brought our dual fleet chapter to a close and are poised to fully recognize the power of a single fleet efficiencies as we move into 2024.

One our teams continued to deliver reliability.

Now have two solid quarters in a row of industry, leading performance and I can confidently say, we have our operational muscle back I want to thank all our employees for their hard work and effort. They have done an amazing job prioritizing and delivering a safe and reliable operation for our guests our completion rate not only led the industry, but said 'twenty.

Three we have the most diversified revenue of domestic focused airlines generating 45% of our revenue outside the main cabin our.

Our investments in fleet and premium seating have given us a domestic product that rivals any in the industry, including first and premium class lounges, and global partnerships that will continue to serve us well going forward.

Year Company Records in all three months of the quarter during peak summer flying continuing to surpass our planning expectation.

Two our relative cost advantage comes from decades of disciplined and became a highlight in the third quarter, but visibility to another quarter of unit cost improvement year over year, we expect full year CASM ex to be down 1% to 2% likely the only carrier to achieve unit cost reductions for the year.

And for our growth is rational and disciplined having closed out a strong summer operation. Our teams are turning their focus to winter preparedness and continuing to deliver strong operational performance for our guests throughout the holidays capacity discipline is the most relevant lever our industry has will be necessary to support.

We retired our last Airbus aircraft in September we brought our dual fleet chapter to a close and are poised to fully recognize the power of a single fleet efficiencies as we move into 2024.

Short off peak periods going forward.

We are focused on optimizing our flying and moderating growth as a prudent measure to deliver results for 2024, we are actively discussing where it within our long term, 4% to 8% target growth range is most optimal given the higher fuel environment.

Three we have the most diversified revenue of domestic focused airlines generating 45% of our revenue outside the main cabin.

To close we produced solid third quarter results without our refining margin headwind. We would have had the best result in the industry are products that competes with the best and as the international versus domestic demand mix and business travel ultimately normalize over time, we have the right business model to deliver strong results in <unk>.

<unk> well into the future.

Now more than ever we are focused on extracting efficiencies from both sides of the profitability equation with all the elements in place to drive strong relative results within our evolving industry.

To support off peak periods going forward.

We are focused on optimizing our flying and moderating growth as a prudent measure to deliver results for 2024, we are actively discussing where within our long term, 4% to 8% target growth range is most optimal given the higher fuel environment.

And with that I'll turn it over to Andrew.

Thanks, Ben and good morning, everyone. Today, My comments will focus on third quarter results.

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Our outlook for the rest of the year.

Third quarter revenues reached $2 8 billion up four tenths of a percent year over year on 13, 7% more capacity, which was approximately one point below our revenue guidance midpoint.

To close we produced solid third quarter results without our refining margin headwind, we would've had the best result in the industry are products that competes with the best and as the international versus domestic demand mix and business travel ultimately normalize over time, we have the right business model to deliver strong results in <unk>.

Revenues were down 11, 7% versus 2022 and up 12, 2% versus 2019.

We have three sources of headwinds impacting third quarter revenue performance first the strong closing revenue performance. We saw from April through most of August moderated as we moved into September close in demand for leisure looks to have normalized and without further return of business demand shoulder periods are more challenged than I.

<unk> well into the future.

Now more than ever we are focus on extracting efficiencies from both sides of the profitability equation with all the elements in place to drive strong relative results within our evolving industry.

And with that I'll turn it over to Andrew.

Thanks, Ben and good morning, everyone. Today, My comments will focus on third quarter results.

Have been the past couple of years.

Second we plan down network for relatively strong demand from summer into September as we experienced last year. However that did not fully materialize. This led to modest load factor weaknesses in areas of our network, where we deployed more capacity than we normally would during the shoulder.

<unk> trends.

Our outlook for the rest of the year.

Third quarter revenues reached $2 8 billion up four tenths of a percent year over year on 13, 7% more capacity, which was approximately one point below our revenue guidance midpoint.

Third the devastating Maui wildfires impacted third quarter revenue and therefore profit by approximately $20 million for reference Hawaii represents nearly 12% of our capacity.

Revenues were down 11, 7% versus 2022 and up 12, 2% versus 2019.

We had three sources of headwinds impacting third quarter revenue performance first the strong close in revenue performance. We saw from April through most of August moderated as we moved into September close in demand for leisure looks to have normalized and without further return of business demand shoulder periods are more challenged than that.

With one third of that deployed to Maui.

Following the wildfires in early August bookings turned negative with high rates of cancellation.

This reversed at the end of August as bookings to Maui began recovering however September bookings was still down 45% versus last year as.

Have been the past couple of years.

As we move into the fourth quarter, we are seeing continuing recovery in Mali. However, we expect revenues to be negatively impacted by approximately $18 million and anticipate it will be several quarters before demand returns to normalized levels.

Second we planned down network for relatively strong demand from summer into September as we experienced last year. However that did not fully materialize. This led to modest load factor weaknesses in areas of our network, where we deployed more capacity than we normally would during the shoulder.

A full frequency from Seattle and trimmed capacity from other hubs, we will continue capacity adjustments to match supply with demand, while serving the people of Maui during the recovery process.

Third the devastating Maui wildfires impacted third quarter revenue and therefore profit by approximately $20 million for reference Hawaii represents nearly 12% of our capacity.

Lastly, although not a part of our baseline we saw no upside benefit from corporate travel as revenue continues to hold at about 85% of 2019 levels.

With one third of that deployed to Maui.

Following the wildfires in early August bookings turned negative with high rates of cancellation.

Having covered our headwinds, though there was several positive results in the quarter as well.

This reversed at the end of August as bookings Tomorrow. We began recovering however September bookings was still down 45% versus last year as.

With respect to product our premium cabins continue to materially outperformed the main cabin with first and premium class revenues up 10% and 6% year over year, respectively.

Alaska is the only primarily domestic carrier to have both first class and premium economy across 100% of our mainline and regional fleets. These premium seats represent 25% of our total seats and continue to be an area of opportunity for us in sustaining higher yields and other domestic phone.

A full frequency from Seattle and trimmed capacity from other hubs, we will continue capacity adjustments to match supply with demand, while serving the people of Maui during the recovery process.

Because competitors.

Lastly, although not a part of our baseline we saw no upside benefit from corporate travel as revenue continues to hold at about 85% of 2019 levels.

Especially as travel preferences continue to move in a more premium direction.

Total premium paid load factor was up three points year over year, but has increased over 10 points on 12% more seats versus 2019.

Having covered our headwinds, though there were several positive results in the quarter as well.

Today premium revenue represents 31% of our total revenue contributing to the 45% of total revenue we generate outside the main cabin.

With respect to product our premium cabins continue to materially outperformed the main cabin with first and premium class revenues up 10% and 6% year over year, respectively.

Putting aside premium for a moment.

We are also seeing success with more guests buying out from Saba into our main cabin product. This by App has occurred at 22% higher fares versus last year.

Alaska is the only primarily domestic carrier to have both first class and premium economy across 100% of our mainline and regional fleets. These.

Loyalty remains a strong driver of revenue performance as well.

These premium seats represent 25% of our total seats and continue to be an area of opportunity for us in sustaining higher yields and other domestic focused because competitors.

Bank cash remuneration was up 11% versus the third quarter of 2022.

Outpacing system revenue that was only up four tenths of a point.

Especially as travel preferences continue to move in a more premium direction.

We continue to make solid progress on our strategy of being able to directly sell at one world and other partners on Alaska Air Dot Com, We launched 13 patents this year, bringing our total to 18 partners with over 500 destinations worldwide now being sold direct on our website.

Total premium paid load factor was up three points year over year, but has increased over 10 points on 12% more seats versus 2019.

Today premium revenue represents 31% of our total revenue contributing to the 45% of total revenue we generate outside the main cabin.

These efforts will continue as we enable selling all cabins on our partners and continue to upgrade the digital guest experience on our website and within our native App.

Putting aside premium for a moment.

We have also seen success with more guests buying out from Saba into our main cabin product does buy up has occurred at 22% higher fares versus last year.

This is another area, where we are clearly differentiated from other domestic focused carriers.

The only primarily domestic carrier that offers access to a portfolio of global partners, where we offer elite status recognition accrual in redemption and airport lounge access.

Loyalty remains a strong driver of revenue performance as well.

Cash remuneration was up 11% versus the third quarter of 2022.

Pacing system revenue that was only up four tenths of a point.

This capability along with our premium cabin offerings gives me confidence that we will have built the right commercial offerings to meet our guest's preferences and drive long term value to a group.

We continue to make solid progress on our strategy of being able to directly sell at one world and other partners on Alaska Air Dot Com, We launched 13 partners. This year, bringing our total to 18 partners with over 500 destinations worldwide now being sold direct on our website.

As we shared on our last call. We have continued to see our guests take advantage of our global partner network with total accrual and redemptions on our long haul partners up 26% for the third quarter versus last year.

These efforts will continue as we enable selling old cabins on our partners and continue to upgrade the digital guest experience on our website and within our native App.

Taking a step back and as illustrated in our supporting slides, we published today when comparing our unit revenue performance versus a 2019 baseline it's clear that the differentiation of our products, including our premium offering and international connectivity is a very positive story.

This is another area, where we are clearly differentiated from other domestic focused carriers.

We are the only primarily domestic carrier that offers access to a portfolio of global partners, where we offer elite status recognition accrual in redemption and airport lounge access.

Which has resulted in unit revenues up 12% on capacity growth of 6%. This is a testament to the soundness of our business model and the success of changes we've made since 2019.

This capability along with our premium cabin offerings gives me confidence that we will have built the right commercial offerings to meet our guest's preferences and drive long term value to a group.

Now turning to fourth quarter guidance, we expect revenue to be up 1% to 4% on capacity that is up 11% to 14% year over year.

As we shared on our last call. We have continued to see how guests take advantage of our global partner network with total accrual and redemptions on a long haul partners up 26% for the third quarter versus last year.

In terms of bookings holidays are in line with our expectations with load factors up a couple of points and yield up double digits versus 2019, as I mentioned nonpeak shoulders are weaker than 2020 twos historic demand levels in part driven by a return to more normal seasonality and a continued but we believe temporary.

Taking a step back and as illustrated in the supporting slides, we published today when comparing our unit revenue performance versus a 2019 baseline it's clear that the differentiation of our products, including our premium offering and international connectivity is a very positive story, which has resulted.

Erie demand shift towards international travel.

Today, we have approximately 58% of November and 35% of December revenue booked.

And unit revenues up 12% on capacity growth of 6%. This is a testament to the soundness of our business model and the success of changes we've made since 2019.

Given our fourth quarter outlook and current demand backdrop, we are narrowing our full year revenue guide up seven to eight.

Our guide implies that our unit revenue trajectory is improving sequentially in the fourth quarter versus 2022 up three points and we believe the gap to legacy unit revenue performance is also closing sequentially.

Now turning to fourth quarter guidance, we expect revenue to be up 1% to 4% on capacity that is up 11% to 14% year over year.

In terms of bookings holidays are in line with our expectations with load factors up a couple of points and yield up double digits versus 2019.

Our most significant step up in capacity occurred during the third quarter as we work to restore our pre pandemic network. However, in the fourth quarter and into the first quarter of 2024 hour growth follows more in line with normal seasonal patterns after growing 6% above 2019 levels in Q3.

As I mentioned Nonpeak shoulders are weaker than 2020 twos historic demand levels in part driven by return to more normal seasonality and a continued but we believe temporary demand shift towards international travel.

Our growth moderates to less than 3% above 2019 levels from the fourth quarter through February of 2024, which we believe should better support supply and demand dynamics in our market versus the industry.

We have approximately 58% of November and 35% of December revenue booked.

Looking ahead, we remain confident in our commercial plan and cognizant of our environment.

Our team has taken a hard look at our first quarter network amidst high fuel prices as part of our commitment to improving Q1 profitability.

We are focused on managing capacity prudently, including capitalizing on leisure destinations, including 15, new routes, such as Seattle, and Los Angeles to <unk>, which will bring in new revenue, while also constraining our total capacity growth to low levels.

And reducing business heavy routes and frequencies for example, we've trimmed our higher frequency Pacific Northwest and California business seats, 22% versus January and February of last year.

To wrap up we have a solid commercial plan that is producing results our combination of premium products valuable loyalty program and global offerings through our partnerships and Oneworld allows us to provide guests with what they want while producing strong financial results and we're looking forward to building on that moving forward.

With that I'll pass it over to Shane.

Thanks, Andrew and good morning, everyone as we discussed on previous calls for the past year, we have prioritized returning Alaska to operational excellence.

This is what our guests deserve and it allows us to have more predictability across the company, which we can ultimately leverage to improve efficiency and cost performance. It.

It was encouraging to see during the quarter that as we've delivered the industry's most reliable operation our teams have begun to turn the corner on our cost profile as well.

And while we acknowledge a more challenged near term setup with temporary by elevated west coast jet fuel refining margin costs and a more typical demand profile in shoulder periods. We remain confident our business has the right configuration to deliver financial performance over the long term.

For the third quarter, adjusted EPS was $1 83 and.

And we delivered an adjusted pre tax margin of 11, 4% unit costs were down four 9% in economic fuel cost per gallon was $3 26.

Which was materially impacted by refining margins on the west coast that averaged 30 cents higher than the rest of the country.

Which we believe will prove to be an anomaly, but materially impacted our performance relative to others.

Absent this refining margin differential or the $20 million of lost profit due to the tragedy in Maui allows.

Alaska would've led the industry in margin despite not enjoying the current surge in international demand or a further rebound of corporate traffic.

Our balance sheet and liquidity longtime pillars of strength for us through many cycles remains stable and healthy we generated approximately $270 million in cash flow from operations during the quarter, while total liquidity inclusive of on hand, cash and Undrawn lines of credit stood at a healthy $3 billion.

Debt payments for the quarter were approximately $93 million and are expected to be $45 million in the fourth quarter.

Our debt to cap remains at 48% unchanged from last quarter, while net debt to EBITDAR finished the quarter at one one times, both within our target range.

We have also revised our full year capex expectation to $1 7 billion for 2023 and fully expect 2024 to be below this amount as we are currently reshaping our near term delivery stream with Boeing to accommodate a more conservative 2024 capacity plan.

Speaker 1: noise.

We're further rebound of corporate traffic.

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.

Our share repurchase program has as intended offset dilution year to date with spend reaching $70 million, while our trailing 12 month return on invested capital ended at 10, 7% this quarter.

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 third quarter 2023 earnings call. This morning, we issued our earnings release along with several accompanying slides detailing our results, which are 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 during the Q&A portion of the call.

Moving to costs, the third quarter marked a turning point for us in terms of our performance CASM ex ended down four 9% year over year coming in below our guided range of down 1% to 2%.

Payments for the quarter were approximately $93 million and are expected to be $45 million in the fourth quarter.

Our debt to cap remains at 48% unchanged from last quarter, while net debt to EBITDAR finished the quarter at one one times, both within our target range.

This result includes the impact of a larger than initially anticipated market rate adjustment for our pilots, which added approximately $20 million to the third quarter and will annualize at $90 million.

Speaker 3: This morning, Air Group reported third quarter gap net income of $139 million.

Speaking of labor deals during the quarter. We also reached a tentative agreement with our aircraft technicians and we are in the process and looking forward to reaching a deal with our flight attendants.

Speaker 3: Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $237 million.

Our unit cost performance was the result of nearly every department of the company coming in on our below their plan, which has been no easy feat to do over the past three years as we have re ramped our operation.

Our share repurchase program has as intended offset dilution year to date with spend reaching $70 million, while our trailing 12 month return on invested capital ended at 10, 7% this quarter.

Speaker 3: 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 filing.

We saw productivity improved 2% year over year and will continue to work toward returning to 2019 levels.

Speaker 3: We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit cost excluding

Moving to costs, the third quarter marked a turning point for us in terms of our performance CASM ex ended down four 9% year over year coming in below our guided range of down 1% to 2%.

Other areas, we saw good performance relative to our plan included maintenance aircraft ownership and selling expenses.

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.

Asm's were slightly ahead of guidance on the continued outperformance in our completion rate, providing a small additional benefit to unit costs.

Speaker 4: Thanks Ryan and good morning everyone. Before getting to our results, I'd like to start by acknowledging the human aspect of the work.

And lastly, we have lowered our anticipated performance based pay accruals given the tougher setup in Q4, which also benefited CASM ex fuel this quarter. However.

Speaker 4: This past quarter, close to home, we saw wildfires bring devastation to the West Maui community.

However, absent both of these last two impacts unit cost would have still closed below our guide.

Speaker 4: More recently, we have been horrified by the terrorist attacks in Israel, and we mourn for the innocent lives lost. I want to acknowledge that people are hurting, and while we share in the privilege of connecting families and communities, we also share in the pain of seeing those around the world suffer.

As Ben mentioned, we crossed a significant milestone to end the third quarter as we retired our last Airbus from service.

Our unit cost performance was the result of nearly every department of the company coming in on our below their plan, which has been no easy feat to do over the past three years as we've re ramped our operation.

And in wrapping up our Airbus era, we announced this morning that we reached an agreement to sell the <unk> hundred 20 ones to our partner American Airlines and expect deliveries to occur over the next two quarters.

Speaker 4: Now turning to our results. Our third quarter performance continues to demonstrate the underlying strength of our business model and our commitment to drive consistent, measured progress against our goals.

We saw productivity improved 2% year over year and will continue to work toward returning to 2019 levels.

Lastly, as I mentioned fuel became a significant headwind during the third quarter la refining margins diverged materially from Gulf coast levels, moving from less than eight cents difference on average for the first half of the year to 30 during the third quarter and at times exceeding 90.

Other areas, we saw good performance relative to our plan included maintenance aircraft ownership and selling expenses.

Speaker 4: During the quarter, we ran the best operation in the country, delivering a 99.7% completion rate and on-time rate of over 80% complete.

Asm's were slightly ahead of guidance on the continued outperformance in our completion rate, providing a small additional benefit to unit costs.

Speaker 4: On September 30th, we retired our last Airbus aircraft from service, marking our official return to single-fiber.

And lastly, we have lowered our anticipated performance based pay accruals given the tougher setup in Q4, which also benefited CASM ex fuel this quarter. However.

While we have every expectation. This divergence is temporary it has created a material headwind to our near term profitability.

Speaker 4: We drove unit cost down nearly 5% year over year, a strong performance that stands alone versus our peers in achieving year over year unit cost reduction.

However, absent both of these last two impacts unit costs would have still closed below our guide.

Our economic fuel cost increase from the midpoint of our original guide, adding approximately $110 million of total cost to the quarter with $50 million coming from refining margin disparity or an approximately two point margin headwind for the quarter.

As Ben mentioned, we crossed a significant milestone to end the third quarter as we retired our last Airbus from service.

Speaker 4: and our 11.4% adjusted pre-tax margin nearly led the industry.

And then wrapping up our Airbus era, we announced this morning that we reached an agreement to sell the <unk> hundred 20 ones to our partner American Airlines and expect deliveries to occur over the next two quarters.

Speaker 4: our lower direct exposure to record international demand, as well as significant fuel cost headwinds given our geographic exposure to the West Coast.

For the fourth quarter, we expect fuel price per gallon to be between $3 30, and $3 40 per gallon, which is an approximate four point impact to margin compared to our expectations back in July .

Speaker 4: Having been in this industry a long time, I know as well as anyone how volatile it can be, and we are seeing this now.

You all combined with pricing moderation have led us to revise our full year adjusted pre tax margin to 7% to 8% approximately three points lower than the midpoint of our prior guide.

Speaker 4: Crude oil has risen 12% from last quarter. While L.A. refining margins have increased 70% overall and 60% over Gulf Coast levels, disproportionately increasing our economic fuel cost compared to peers, given the majority of our purchasing happens on the West Coast.

We expect CASM ex to be down 3% to 5% year over year in the fourth quarter and our full year CASM ex to now be down 1% to 2% on capacity up 12% to 13%.

While we have every expectation. This divergence is temporary it has created a material headwind to our near term profitability.

To close we have run an excellent operation for several quarters, our pre tax margin exceeded peers with greater international tailwind, Despite our refining margin disadvantage and sizable impacts from the mere wildfires. We delivered a strong unit cost result for the quarter and have visibility to another strong result next quarter, we remained focus.

Speaker 4: While we expect this divergence to be temporary, it is nonetheless a near-term headwind. Absent is $50 million cost in Q3. We would have led the industry in adjusted pre-tax margin.

Speaker 4: The man remains strong and peak periods, but show the periods are becoming more susceptible to lower demand without a full return of corporate triumph.

For the fourth quarter, we expect fuel price per gallon to be between $3 30, and $3 40 per gallon, which is an approximate four point impact to margin compared to our expectations back in July .

On and very intentional about setting targets and ensuring we take the right steps to deliver against them, our commercial offering with premium cabins and global access through our alliances is configured to compete in a way other domestically focused carriers cannot our operational strength has returned and our cost management is outperforming the industry all of which.

Speaker 4: Despite his near term headwinds that will likely make the next quarters more challenging, I continue to believe we have a strong fundamental long term setup for several reasons.

You all combined with pricing moderation have led us to revise our full year adjusted pre tax margin to 7% to 8% approximately three points lower than the midpoint of our prior guide.

Speaker 4: One, our teams continue to deliver reliability. We now have two solid quarters in a row of industry leading performance, and I can confidently say we have our operational muscle back. I want to thank all our employees for their hard work and effort. They have done an amazing job, prioritizing and delivering us safe and reliable operation for our guests.

We expect CASM ex to be down 3% to 5% year over year in the fourth quarter and our full year CASM ex to now be down 1% to 2% on capacity up 12% to 13%.

Our fundamental drivers of sustained long term success 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 press Star then the number one on your telephone keypad.

To close we have run an excellent operation for several quarters, our pre tax margin exceeded peers with greater international <unk>, Despite our refining margin disadvantage and sizable impacts from the Maui wildfires, we delivered a strong unit cost result for the quarter and have visibility to another strong result next quarter, we remained focus.

Speaker 4: Our completion rate not only led to industry but set 20 year company records in all three months of the quarter during peak summer flying. Continuing to surpass our planning expects.

Pause for just a moment to compile the Q&A roster.

And our first question today comes from comes from Duane <unk> with Evercore ISI.

Speaker 4: Two, our relative cost advantage comes from decades of discipline and became a highlight in the third quarter. With visibility to another quarter of unit cost improvement year over year, we expect full year chasm X to be down one to 2%. Likely, the only carrier to achieve unit cost reductions for the year.

Yes.

Hey, Thanks, good morning.

So you gave an update I think.

So into September can you just talk about what shifted over though over the latter part of the month.

Speaker 4: Having retired our last Airbus aircraft in September , we brought our dual fleet chapter to a close and are poised to fully recognize the power of single fleet efficiencies as we move into 2024.

How that played out relative to kind of what you thought what September 9th.

Hey, Duane it's Andrew Yeah, I think it was like at the beginning of September I think.

Our fundamental drivers of sustained long term success and with that let's go to your questions.

We had reiterated our guide I think two things.

Speaker 4: We have the most diversified revenue of domestic focused airlines, generating 45% of our revenue outside the main cabin. Our investments in fleet and premium seating have given us a domestic product that rivals any in the industry, including first in premium class, lounges, and global partnerships that will continue to serve us well going forward.

We were still getting our hands around Hawaii, which was deeply negative bookings and we're trying to get clarity about where that was going to end up and I think the other part was there was also right around that time with sort of that transition coming off the back end of a peak summer demand and also close in moving into the more traditional business season, and I think those couple of things.

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

Pause for just a moment to compile the Q&A roster.

And our first question today comes from it comes from Duane <unk> with Evercore ISI.

And bind.

I think on $2 8 billion. It was probably like $15 million were off so that's the main reason, but fundamentally the business.

Yes.

Hey, Thanks, good morning.

Speaker 4: And four, our growth is rational and disciplined. Having closed out a strong summer operation, our teams are turning their focus to winter preparedness, and continuing to deliver strong operational performance for our guests throughout the holidays.

So you gave an update I think a week or so into September can you just talk about what shifted over the over the latter part of the month.

It was where we thought we were going to be.

Okay.

And just.

To segue too to Hawaii can you maybe playback some history and talk about the current picture and maybe delineate between Maui and and non Maui bookings that would be very helpful.

How that played out relative to kind of what you thought what September 9th.

Speaker 4: Capacity discipline is the most relevant lever our industry has and will be necessary to support off-pick periods going forward.

Hey, Duane it's Andrew Yeah, I think it was like at the beginning of September I think.

Speaker 4: We are focused on optimizing our flying and moderating growth as a pretty measured to deliver results. For 2024, we are actively discussing where within our long-term, 4 to 8 percent target growth range is most optimal given to higher fuel environment.

We had reiterated our guide I think two things we were still getting our hands around Hawaii, which was deeply negative bookings and we're trying to get clarity about where that was going to end up and I think the other part was there was also right around that time with sort of that transition coming off the back end of a peak summer demand and also close.

Yes, I think like Maui, obviously stands out significantly different and we're making some of the capacity adjustments. There. We did see during this horrible period of time.

Some bookings continue to move to other islands, but as you know Hawaii booked well in advance so essentially pretty much the rest of the year for Maui was sort of reset but as we go into next year. We don't see any reason that we won't continue to recover and we won't see traditional.

Speaker 4: To close, we produce solid third quarter results. Without our refining margin headwind, we would have had the best result in the industry. Our product set competes with the best, and as the international versus domestic demand mix and business travel ultimately normalize over time, we have the right business model to deliver strong results and upperform well into the...

Moving into the more traditional business season, and I think those couple of things combined.

I think on $2 8 billion. It was probably like $15 million were off so that's the main reason, but fundamentally the business.

Good solid demand to Hawaii, Hawaii franchise.

It was where we thought we were going to be.

Okay, sorry, sorry to be delivered there.

Okay and then just.

Speaker 4: Now more than ever, we are focused on extracting efficiencies from both sides of the profitability equation with all the elements in place to drive strong relative results within our evolving industry. And with that, I'll turn it over to Andrew.

Hawaii bookings ex Maui would you characterize that as stable slash normal.

To segue to <unk>.

Hawaii can you maybe playback some history in and talk about the current picture and maybe delineate between Maui and and non Maui bookings that would be very helpful.

They are a little softer.

And historical but we've seen that for some time I think just as.

The capacity into the islands and of course some of the pricing.

Speaker 5: Today, my comments will focus on third quarter results, recent trends, and our outlook for the rest of the year.

Yes, I think like Maui, obviously stands out significantly different and we're making some of the capacity adjustments. There. We did see during this horrible period of time, some bookings continue to move to other islands, but as you know Hawaii books, well in advance so essentially pretty much the rest of the year.

Presses in Hawaii, the cost of going to Hawaii, but overall, we feel pretty good about it being somewhat stable.

Speaker 5: Third quarter revenues reached $2.8 billion, up 4 tenths of a percent year over year, on 13.7% more capacity.

Thank you very much.

Thanks Duane.

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

Speaker 5: which was approximately one point below our Revenue Guidance mid-

Hey, good morning.

Speaker 5: Unit revenues were down 11.7% versus 2022, and up 12.

If the Maui was sort of reset but as we go into next year. We don't see any reason that we won't continue to recover and we won't see traditional.

I was wondering if you could talk about the revenue trend, where you are seeing kind of a better improvement than some of the peers that have reported and you talked about some of the components like how your capacity is developing but.

Speaker 5: We had three sources of headwind impacting third quarter revenue.

Good solid demand to Hawaii, Hawaii franchise.

Okay, sorry, sorry to be delivered there.

I was curious if you can kind of provide a little bit more color on the contributors of that sequential improvement and.

Speaker 5: First, the strong close-in revenue performance we saw from April through most of August moderated as we moved into September . Close-in demand for leisure looked to have normalized and without further return of business demand, shoulder periods are more challenged than they have been in the past couple of years.

Hawaii bookings ex Maui would you characterize that as stable slash normal.

And how we should think about it then as you go into the.

They're a little softer.

The first quarter and you make more adjustments as well.

And historical but we've seen that for some time I think just as a you know just the capacity into the islands and of course some of the pricing.

Yeah. Thanks, So I mean, it's very interesting I think.

Speaker 5: We planned our network for relatively strong demand from summer into September as we experienced last year. However, that did not fully materialize. This led to modestly factor weaknesses in areas of our network where we deployed more capacity than we normally would during the shoulder.

What's really positive and some of the sequential improvement as you just look at our capacity.

Presses in Hawaii that cost of going to Hawaii, but overall, we feel pretty good about it being somewhat stable.

In the third quarter and how much higher it was.

Thank you very much.

This is <unk> 19 versus the fourth quarter and then some of the as I shared in my prepared remarks, where we had pushed some capacity out into the fall and some of these mid con markets and some of these other key areas. We brought that capacity back down starting in October and we are already seeing the positive effects of doing that.

Thanks Duane.

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

Speaker 5: Third, the devastating Maui wildfires impacted third quarter revenue and therefore profit by approximately $20 million. For reference, Hawaii represents nearly 12% of our capacity with one third of that.

Hey, good morning.

Yes.

Got it that's a big driver.

I was curious if you can kind of provide a little bit more color on the contributors of that sequential improvement and in how we should think about it then as you go into.

Speaker 5: Following the wildfires in early August , bookings turn negative with high rates of cancellation.

If I might.

Ed.

Growth plans that you cannot have mentioned for next year.

Speaker 5: This reversed at the end of August as bookings to Maui began recovering. However, September bookings were still down 45% versus last year.

It sounds like you're still kind of evaluating between four and 8% first half kind of maybe on the lower end of that 4%. It seems like or how should we think about maybe early indications I know youre, probably not ready to give a full guide.

The first quarter and you make more adjustments as well.

Yeah. Thanks, So I mean, it's very interesting I think.

Speaker 5: As we move into the fourth quarter, we are seeing continuing recovery in Maui. However, we expect revenues to be negatively impacted by approximately $18 million and anticipate it will be several quarters before demand returns to normalize level.

What's really positive and some of the sequential improvement as you just look at our capacity.

Yes, I mean, thats correct and we've been clear as we go into the first quarter, we're going to be around 3% or so over 19 levels and again, we've looked really hard at al.

In the third quarter and how much higher it was versus 19 versus the fourth quarter and then some of the as I shared in my prepared remarks, where we had pushed some capacity out into the fall and some of these mid con markets and some of these other key areas, we brought that capacity back down starting in October .

Speaker 5: Having cut a full frequency from Seattle and trimmed capacity from other hubs, we will continue capacity adjustment to match supply with demand while serving the people of Maui during the recovery.

Lowest demand period for Alaska at least in the January February time period, and we feel like we've made some pretty good reduction there and we made debt well ahead.

Of the bookings of those.

Speaker 5: Lastly, although not a part of our baseline, we saw no upside benefit from corporate travel as revenue continues to hold at about 85% of 2019.

We are already seeing the positive effects of doing that.

Flight. So we feel really good about the setup as we go into the first quarter.

Got it so that's a big driver.

Helpful. Thank you.

If I might.

Thanks Savi.

Yeah.

Speaker 5: Having covered our headwinds though, there were several positive results in the quarter as well.

We'll move next to Andrew <unk> with Bofa Global research.

Growth plans that you cannot have mentioned for next year.

It sounds like you're still kind of evaluating between four and 8% first half kind of maybe on the lower end of that 4%.

Hey, good morning, everyone.

Speaker 5: With respect to product, Al Premium Cabins continue to materially outperform the main cabin with first and premium class revenues up 10% and 6% year-over-year respect.

Andrew.

In your prepared remarks, you said you are it seems like you're booked well ahead for November then another airline that reported earlier today.

It seems like or how should we think about maybe early indications I know youre, probably not ready to give a full guide yes.

The 8% booked sort of a normal cadence for you or is it more of how youre looking at close and trending today and just wanting to book more of that a little bit further out than usual.

Yeah, I mean, that's correct and we've been clear as we go into the first quarter are we going to be around 3% or so of a 19 levels and again, we've looked really hard at al.

Speaker 5: Alaska is the only primarily domestic carrier to have both first class and premium economy across 100% of our mainline and regional

I think <unk>.

Speaker 5: These premium seats represent 25% of our total seats and continue to be an area of opportunity for us in sustaining higher yields and other domestic foescas competitive.

Lowest demand period for Alaska at least in the January February time period, and we feel like we've made some pretty good.

Comments were a little bit related to when you compare it back to say 2019.

Thanksgiving sort of falls within the month, so but.

Reductions in we made debt well ahead.

But if you average it out between thanks.

The bookings of those.

Speaker 5: especially as travel preferences, continue to move in a more premium direction.

Thanks, giving and Christmas sort of in November and December .

Flight. So we feel really good about the setup as we go into the first quarter.

A little higher on the bookings, but not very much and right now, we're just making sure that we manage that coming in with good solid yield.

Speaker 5: Total premium paid load factor was up 3.0 over a year, but has increased over 10 points on 12% more seats versus 29.

Okay. Thank you.

Thanks Savi.

We'll move next to Andrew the Dora with Bofa Global research.

Out of the year.

Okay understood and then also Andrew on the last call I thought you shared some good statistics on the shift you're seeing two international bookings on your on your partners over the summer.

Speaker 5: Today, premium revenue represents 31% of our total revenue, contributing to the 45% of total revenue we generate outside the main camera.

Hey, good morning, everyone.

Andrew.

In your prepared remarks, you said you are it seems like you're booked well ahead for November and another airline that reported earlier today is that 58% booked sort of a normal cadence for you or is it more of how youre looking at close in trending today and just wanting to book more of that.

Speaker 5: Putting aside premium for a moment, we have also seen success with more guests buying out from Saver into our main cabin product.

Curious if you've begun to see more of a normalization, there and maybe share shift back to.

Domestic or do you continue to see that elevated.

Speaker 5: Biop has occurred at 22% higher fares versus last year.

That elevated international demand booking on your partners. Thank you.

Further out than usual.

Speaker 5: Loyalty remains a strong driver of revenue performance as well. Bank cash remuneration was up 11% versus the third quarter of 2022. Outpacing system revenue that was only up for a tenth of a point.

I think our comments were a little bit related to when you compare it back to say 2019 sort of Thanksgiving falls within the month so.

Hi, Thanks, I think we're seeing exactly actually what we saw on the domestic front, whereas last year pushed well into the.

Shoulder season, I think that's what we're seeing at least from our members on the international So just to remind folks in the summer.

But if you average it out between Thanksgiving.

Thanks, giving and Christmas sort of in November and December .

Speaker 5: We continue to make solid progress on our strategy of being able to directly sell our one world and other partners on Alaska Air.com. We launched 13 partners this year bringing our total to 18 partners with over 500 destinations worldwide, now being sold direct on our website.

Probably a little higher on the on the bookings, but not very much and right now we're just making sure that we manage that coming in with good solid yield.

We reported that we were up sort of 50% of our members year over year accruing and redeeming internationally that number is only 26% for the fourth quarter. So we're certainly seeing it coming down.

Out of the year.

Okay understood and then also Andrew on the last call I thought you shared some good statistics on the shift you're seeing two international bookings on your on your partners over the summer.

And so of course the question will be will that get normalized by next year. What we're seeing right now is it's on its way to normalization.

Speaker 5: These efforts will continue as we enable selling all cabins on our partners and continue to upgrade the digital guest experience on our website and within our native app.

Great. Thank you.

Curious if you've begun to see more of a normalization, there and maybe share shift back to.

Thanks, Andrew.

Speaker 5: This is another area where we are clearly differentiated from other domestic focus carriers.

And we'll move next to Helane Becker with TD tailing.

Domestic or do you continue to see that elevated.

And thanks, very much operator, hi, everybody.

That elevated international demand booking on your partners. Thank you.

Speaker 5: We are the only primarily domestic carrier that offers access to a portfolio of global partners where we offer elite status recognition, a cruel and redemption, and airport lounge access.

Two questions one when.

Thanks, I think we're seeing exactly actually what we saw on the domestic front, whereas last year pushed well into the you know.

When you talk about maybe this is for Andrew when Youre talking about optimization of the <unk>.

At work.

Can you just describe maybe more fully what you are talking about I know.

The shoulder season, I think that's what we're seeing at least from our members on the international So just to remind folks in the summer.

Speaker 5: This capability, along with our premium cabin offerings, gives me confidence that we will have built the right commercial offerings to meet our guests' preferences and drive long-term value to a...

Some of it is not flying as much in the first quarter in 2004 as you did in 'twenty three because of the shifts in the way people are flying and the fact that corporate probably back as far as it's going to go right I can't imagine that there are a lot of day trips between Seattle, and Portland or Seattle.

We reported that we were up sort of 50% of our members year over year accruing and redeeming internationally that number is only 26% for the fourth quarter. So we're certainly seeing it coming down.

Speaker 5: As we shared on our last call, we have continued to see our guests take advantage of our global partner network with total of cruel and redemption on our long haul partners, up 26% for the third quarter versus last.

So of course, the question will be will that get normalized by next year. What we're seeing right now is it's on its way to normalization.

In San Fran San Fran L anymore, given the unreliability.

Speaker 5: Taking a step back as illustrated in the supporting slides we published today, when comparing our unit revenue performance versus a 2019 baseline, it's clear that the differentiation of our products, including our premium offering and international connectivity, is a very positive story, which has resulted in unit revenues up 12% on capacity growth of 6%. This is a testament to the soundness of our business model and the success of changes we've made since 2019.

As an exogenous pressures right. So how should we think about what optimization exactly mean.

Great. Thank you.

Thanks, Andrew.

And we'll move next to Helane Becker with TD, telling.

Yes, Helane I think.

What I would say when I talk about optimization look we're at a place now where we see where fuel is at elevated and has been for some time.

Thanks, very much operator, hi, everybody.

Two questions one.

When you talk about maybe this is for Andrew when Youre talking about optimization of the network.

The whole industry has a new set of structural unit costs and we're also seeing sort of the sort of the settling down of overall capacity across the country.

Can you just describe maybe more fully what you are talking about I know some of it is not flying as much in the first quarter and 24 as you did in 'twenty three because of the shifts in the way people are flying and the fact that corporate probably back as far as its gonna go right I can't imagine that there are a lot of data.

Speaker 5: Now turning to fourth quarter guidance. We expect revenue to be up 1 to 4% on capacity that is up 11 to 14% year over year.

So given those things.

Looking much harder at where we end business as you raises another point.

We are looking much harder about where we're putting our airplanes and high frequency routes leisure versus business time of year.

Speaker 5: In terms of bookings, Holidays are in line with our expectations, with load factors up a couple of points and yield up double digits versus 29.

Trips between Seattle, and Portland, or Seattle and.

And San Fran San Fran L anymore, given the unreliability.

Just to be Frank we probably been less concerned about being more surgical during summer.

Speaker 5: As I mentioned, non-pick shoulders are weaker than 2022's historic demand levels. In part, driven by a return to more normal seasonality and a continued, but we believe temporary, demand shift towards international travel.

As an exogenous pressures right. So how should we think about what optimization exactly means.

But the reality is this.

This past summer you can certainly see as we get back to normalized booking patents. There is definitely between July and September very significant changes in demand profile. So we're going to do a much better job going forward and we're already on it is just to realigning our supply of aircraft. So I think thats, what im basically signing and I think theres only goodness.

Yes, Helane I think.

What I would say when I talk about optimization look we're at a place now where we see where fuel is at elevated and has been for some time.

Speaker 5: Today we have approximately 58% of November and 35% of December revenue books.

Speaker 5: Given our fourth quarter outlook and current demand backdrop, we are narrowing our full year revenue guide to up 7 to 8.

The whole industry has a new set of structural unit costs and we're also seeing sort of the sort of a settling down of overall capacity across the country.

I'm doing that.

Okay. That's that's sort of helpful and until things kind of revert to more normalized behavior and you have to fix it again, but.

Speaker 5: Our guide implies that our unit revenue trajectory is improving sequentially in the fourth quarter versus 2022 up three points and we believe the gap to legacy unit revenue performance is also closing sequentially.

So given those things way looking much harder at where we end business as you raises another point.

It's not a new problem.

My other follow up question on that <unk> hundred 20 ones that are being.

We are looking much harder about where we're putting our airplanes and high frequency routes leisure versus business time of year.

I thought those are actually going to be leased in aircraft, but they are being transferred over to American.

Speaker 5: Our most significant step up in capacity occurred during the third quarter as we work to restore our pre-pandemic network. However, in the fourth quarter and into the first quarter of 2024, our growth follows more in line with normal seasonal patterns.

Just to be Frank we probably been I'm less concerned about being more surgical during summer, but the reality is this past summer you can certainly see as we get back to normalized booking patents there is definitely between.

I didn't see it in the press release that that doesn't mean anything it just means I didn't see it.

Can you talk about the accounting for that can you comment on the cost of what they are paying you or any information that would help us think about that for you guys.

Speaker 5: After growing 6% above 2019 levels in Q3, outgrowth moderates to less than 3% above 2019 levels from the fourth quarter through February of 2024, which we believe should better support supply and demand dynamics in our market.

July and September very significant changes in demand profile. So we're going to do a much better job going forward and we're already on it is just to realigning our supply of aircraft. So I think that's what I'm, basically, saying and I think theres only goodness from doing that.

Hey, Helane, it's Matt Thanks for the question.

This transaction was probably one of the more complicated ones that I've seen in my 25 years of doing this but I was thinking on it is really simple we've been public in the six to eight years left on.

Speaker 5: Looking ahead, we remain confident in our commercial plan and cognizant of our environment.

Okay, that's that's sort of helpful.

Until things kind of revert to more normalized behavior and you'll have to fix it again, but.

Speaker 5: Our team has taken a hard look at our first quarter network amidst high fuel prices as part of our commitment to improving Q1 profitability.

On these above market leases that Alaska acquired as part of the Virgin transaction and our objective was just to find a transaction and build it that economically offset those remaining obligations. We have been working it for 12 to 18 months.

That's not a new problem and my other follow up question on the <unk> hundred 20 ones that are being.

Speaker 5: We are focused on managing capacity prudently, including capitalizing on leisure destinations, including 15 new routes such as Seattle and Los Angeles to Nessaow, which will bring a new revenue while also constraining our total capacity growth to low levels and reducing business

I thought those are actually going to be leased in aircraft, but they are being transferred over to American.

Just happy to get this process to a close because as you know this is the last unlocked to truly get us to a single fleet.

So I didn't see it in the press release that that doesn't mean anything it just means I didn't see it.

Just like we don't comment on pricing on any airline I'm not going to comment on pricing and what American is paying us, but we feel good about the economics and again covering what our PV.

Can you talk about the accounting for that can you comment on the cost of what they're paying you or any information that would help us think about that for you guys.

Speaker 5: For example, we've trimmed our high-frequency Pacific Northwest and California business seats 22% versus January and February of last

Hey, Helane, it's Matt Thanks for the question.

Obligations was through the extended period of those leases and then I'm going to kick at the MLP on the accounting side.

This transaction is probably one of the more complicated ones that I've seen in my 25 years of doing this but I was thinking on it is really simple we've been public in the six to eight years left on.

Speaker 5: To wrap up, we have a solid commercial plan that is producing results. Our combination of premium products, valuable loyalty program and global offerings through our partnerships in one world, allows us to provide guests with what they want while producing strong financial results, and we're looking forward to building on that moving forward.

Just where that is.

Thanks, Matt.

Helane, we have taken.

Vast majority of it.

Alright.

These above market leases that Alaska acquired as part of the Virgin transaction and our objective was just to find the transaction and build it that economically offset those remaining obligations. We have been working it for 12 to 18 months.

These transitions.

Already you've seen us in special charges over the last 12 to 18 months as Matt noted cash wise, we're about two thirds of the way through the cash that we're going to incur with us of course, as we've purchased the leases or the plans from the <unk> and then we saw the planes to American there'll be cash inflows and outflows. So that that two thirds of the $300 million to $350 million total cash exposure.

Speaker 6: Thanks Andrew and good morning everyone. As we discussed on previous calls, for the past year we have prioritized returning Alaska to operational excellence.

Just happy to get this process to a close because as you know this is the last unlocked to truly get us to a single fleet.

Speaker 6: This is what our guest deserves and it allows us to have more predictability across the company, which we can ultimately leverage to improve efficiency and cost performance.

Or that we've shared with you guys previously we've already incurred that and then the remaining one third will happen over the next two quarters.

Just like we don't comment on pricing on any airline I'm not going to comment on pricing and what American is paying us, but we feel good about the economics and again covering what our PV of lease.

Great. That's very helpful. Thanks, Emily Thanks Nat.

Speaker 6: It was encouraging to see during the quarter that, as we've delivered the industry's most reliable operation, our teams have begun to turn the corner on our cost profile as well. And while we acknowledge a more challenged near-term setup, with temporary but elevated West Coast jet fuel refining margin costs, and a more typical demand profile in shoulder periods, we remain confident our business has the right configuration to deliver financial performance over the long term.

And Andrew Thanks Helane.

<unk> was through the extended period of those leases and then I'm going to kick it to Emily on the accounting side.

And we will hear next from Conor Cunningham with Melius research.

Hi, everyone. Thank you Helane, maybe you could send me those notes on the account.

Just where that is.

Thanks, Matt.

We have taken a dip.

Good morning.

The majority of it.

It seems like an unprofitable business.

Alright.

These transitions.

Could you just talk about the moving parts as you think about headwinds maybe fine tune that.

Already you've seen nothing special charges over the last 12 to 18 months is not noted cash wise, we're about two thirds of the way through the cash that we're going to incur with that is of course as we've purchased the leases or the plans from the <unk> and then we saw the planes to American there'll be cash inflows and outflows. So that that two thirds of the $300 million to $350 million total cash exposure.

So our productivity.

Speaker 6: But a third quarter, adjusted EPS, was $1.83, and we delivered an adjusted pre-text margin of 11.4%. Unit costs were down 4.9%, and economic fuel cost per gallon was $3.26, which was materially impacted by refining margins on the West Coast that averaged 30 cents higher than the rest of the country.

But you are clearly in the cost structure now thank you.

Hey.

Thanks, It's Shane you were breaking up a tiny bit I think you were asking about 2024 sort of puts and takes on costs.

Or that we've shared with you guys previously we've already incurred that and then the remaining one third will happen over the next two partners.

The high level I think we're not quite ready to fully discuss.

24, our cost guidance or anything like that but.

Great. That's very helpful. Thanks, Emily Thanks Nat.

The areas that we will have headwinds won't be a surprise I think there is continued investment in airport infrastructure that we'll see come into the P&L next year.

Speaker 6: which we believe will prove to be an anomaly, but materially impacted our performance relative to others.

And Andrew Thanks Ali.

We will hear next from Conor Cunningham with Melius research.

Speaker 6: Absent this refining margin differential or the $20 million of lost profit due to the tragedy in Maui Alaska would have led the industry in margin despite not enjoying the current surge in international demand or further rebound of corporate traffic

Across all of our major hubs and.

Hi, everyone. Thank you Helane, maybe you could somebody those notes on the account right.

And that's just a generational reinvestment that is needed in these airports.

Good morning.

Still be some labor cost headwinds, we've got to annualize the market rate adjustment, we did with the pilots we're really hopeful we get.

It seems like on the prospect side.

Speaker 6: Our balance sheet and liquidity, long time pillars of strength for us through many cycles, remain stable and healthy.

Could you just talk about the moving parts as you think about headwinds you know, maybe it's finance and accounting.

The ta with our mechanics fully ratified we'll have that in the cost base next year, and then pretty much the entire industry needs to get contracts done with flight attendants, which were really anxious to do an actively in the process of negotiating I think on the other side. We've now got truly a single fleet. We should have almost every Airbus pilot trained over to the Boeing by the end.

Speaker 6: We generated approximately $270 million in cash flow from operations during the quarter, while total liquidity, inclusive of on-hand cash and undrawn lines of credit, instead of the healthy $3 billion.

So our productivity offsets.

That are calling and the cost structure now thank you.

Hey, Connor.

Thanks, It's Shane you were breaking up a tiny bit I think you were asking about 2024 sort of puts and takes on costs.

Speaker 6: debt payments for the quarter were approximately $93 million and are expected to be $45 million in the fourth quarter.

The high level I think we're not quite ready to fully discuss.

For the year.

And really we need to start looking at leaning out the operation and focusing again on productivity.

24, our cost guidance or anything like that but.

Speaker 6: Our debt to cap remains at 48%, unchanged from last quarter, while net debt to EBITDA are finished the quarter at 1.1 times, both within our target range.

The areas that we will have headwinds won't be a surprise I think there is continued investment in airport infrastructure that we'll see come into the P&L next year.

That we started to do this quarter I think we've got a good trend through the end of the year. We've been waiting for these trends, we're happy to see them now and we just need to leverage them into next year. So it's really about making them more efficient taking some of the buffers that we've got in there today, we will go slow on it we're not going to risk operational resilience.

Speaker 6: We have also revised our Fully Your CapEx expectation to $1.7 billion for 2023, and fully expect 2024 to be below this amount as we are currently reshaping our near-term delivery stream with Boeing to accommodate a more conservative 2024 capacity plan.

Across all of our major hubs and that's just a generational reinvestment that is needed in these airports are there.

They'll still be some labor cost headwinds, we've got to annualize the market rate adjustment, we did with the pilots we're really hopeful we get.

It all it took us a lot to get to where we are on the operation, we're going to we're going to keep operating well but.

The ta with our mechanics fully ratified we'll have that in the cost base next year.

Lots of opportunity to get more productive over the next couple of years.

Speaker 6: Our share repurchase program has, as intended, offset dilution year-to-date with spend reaching $70 million, while our trailing 12-month return on invested capital ended at 10.7% this quarter.

Then pretty much the entire industry needs to get contracts done with with flight attendants, which were really anxious to do an actively in the process of negotiating I think on the other side. We've now got truly a single fleet. We should have almost every Airbus pilot trained over to the Boeing by the end of the year.

Okay. That's helpful and then.

Guys are being pretty rational in 'twenty four it seems there are some industry thats really not.

Current moment like when you think about.

Speaker 6: Moving to costs, the third quarter marked a turning point for us in terms of our performance. Kazemex ended down 4.9% year over year, coming in below our guided range of down 1 to 2%. This result includes the impact of a larger than initially anticipated market rate adjustment for our pilots, which added approximately $20 million to the third quarter, and will annualize at $90 million.

Our potential share losses versus protecting margins does that matter to you in the near term if it's potentially just a temporary thing just curious how you think about it given the fact that you're pulling that so much growth relative to some of the others out there. Thank you.

We need to start looking at leaning out the operation and focusing again on productivity.

That we started to do this quarter I think we've got a good trend through the end of the year. We've been waiting for these trends, we're happy to see them now and we just need to leverage them into next year. So it's really about making me a lot more efficient taking some of the buffers that we've got in there today, we will go slow on it we're not going to risk operational resilience.

Conor it's been of course market share matters to us, especially in our key hubs. So we will protect our key hubs fiercely and maintain the market share of course, we're going to look at areas where.

Speaker 6: Beaking of labor deals, during the quarter, we also reached a tentative agreement with our aircraft technicians, and we are in the process and looking forward to reaching a deal with our flight attendants.

There won't be such an impact to us but again.

<unk> at all it took us a lot to get to where we are on the operation we're going to we're going to keep operating well, but lots of opportunity to get more productive over the next couple of years.

This industry is very capacity dependent and and it has a huge leverage on profitability. So we're going to take a hard look.

Speaker 6: Our unit cost performance was the result of nearly every department of the company coming in on or below their plan, which has been no easy feat to do over the past three years as we have re-ramped our operation.

Okay. That's helpful. And then you guys have been pretty rational in 'twenty four it seems there are some industry that's really not at the current moment like when you think about.

The teams are out there looking at next year's capacity and like like Andrew said, we're going to look at Q1 really hard fringing on days, where we have to fringe and flying hardware, we can fly hard so.

Speaker 6: We saw productivity improve 2% year over year and will continue to work toward returning to 2019 levels.

Potential share losses versus protecting margins does that matter to you in the near term if it's potentially just a temporary thing just curious when you said, how you think about it given the fact that you're pulling out so much growth relative to some of the others out there. Thank you.

It's it's a delicate balance.

Speaker 6: Other areas we saw good performance relative to our plan included maintenance, aircraft ownership and selling expense.

But we are determined to get as close to right as we can on this.

Speaker 6: ASMs were slightly ahead of guidance on the continued out performance in our completion rate, providing a small additional benefit to unit costs.

I appreciate it thank you.

Thanks, Thanks, so much garner.

Conor it's been of course market share matters to us, especially in our key hubs. So we will protect our key hubs fiercely.

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

Speaker 6: And lastly, we have lowered our anticipated performance base pay accruals given the tougher setup in Q4, which also benefited Casamax fuel this quarter. However, absent both of these last two impacts, unit costs would have still closed below our guys.

Okay.

Thanks, everyone.

So I know, we're all chasing what normal seasonality is in there already been a couple of questions on the call, but I'm wondering to what extent do you think gets the return to office.

Maintain the market share of course, we're going to look at areas where.

There won't be such an impact to us but again.

That's kind of impacted shoulder season compared to the last couple of years.

This industry is very capacity dependent and and it is a huge leverage on profitability. So we're going to take a hard look at.

Speaker 6: Then mentioned, we crossed a significant milestone to end the third quarter as we retired our last Airbus from service.

And maybe that's.

<unk> the ability of the so-called leisure travel if you will and that.

Speaker 6: And in wrapping up our Airbus era, we announced this morning that we reached an agreement to sell the 10-A-321s to our partner, American Airlines, and expect deliveries to occur over the next two quarters.

It actually sets up for peak your peaks.

And in the next couple of Gaurav.

Hey, Ravi.

Speaker 6: Lastly, as I mentioned, fuel became a significant headwind during the third quarter. LA refining margins diverged materially from Gulf Coast levels, moving from less than 8 cents difference on average for the first half of the year to 30 cents during the third quarter. And at times exceeding 90 cents.

So I just did you mentioned.

It's a delicate balance.

But we are determined to get as close to right as we can on this.

Turning to office and I think we will see the public statistics sort of sort.

Sort of slowly climbing its way back, but still a long way off.

I appreciate it thank you.

What I would share is that we have seen between September and October , especially in our high Tech where we've started to see.

Thanks, so much garner.

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

Speaker 6: But we have every expectation this divergence is temporary. It has created a material headwind to our near-term profitability. Our economic fuel cost increased from the midpoint of our original guide, adding approximately $110 million of total cost to the quarter, with 50 million coming from refining margin disparity, or an approximately two point margin headwind for the quarter.

In some places with some accounts a decent uptick in travel, albeit overall general yields are not where we havent seen them. Historically, so I think this is still a moving subject but.

Thanks, everyone.

So I know, we're all chasing what normal seasonality is and they've already been a couple of questions on the call, but I'm wondering to what extent do you think gets returned to office, that's kind of impacted shoulder season compared to the last couple of years.

But I think if you just look at the macro sides of our network and traditional business versus leisure.

And maybe that's restricting the ability of the so-called leisure travel if you will and that actually sets up for a peak year peaks and in the next couple of Gaurav.

For us specifically.

Speaker 6: For the fourth quarter, we expect fuel price for gallon to be between $3.30 and $3.40 for gallon, which is an approximate four point impact to margin compared to our expectations back in July .

I think it's just beyond more some of these believes that traveler.

Conversation, but what we are seeing is beginning to see a little more strength come in on the corporate side and again, we just have a lot of opportunity.

Hi, Ravi.

Just did you mentioned.

Our core high frequency, Ralph it's getting those to a place where they can support the current demand as well as the new unit cost.

Speaker 6: Fuel combined with pricing moderation have led us to revise our full year adjusted pre-tax margin to 7 to 8%. Approximately three points lower than the midpoint of our prior guide.

We turned office and I think you know, we all say that public statistics that sort of thing sort.

Sort of slowly climbing its way back, but still a long way off.

What I would share is that we have seen between September and October , especially in our high Tech where we've started to see.

The production that the industry faces.

Speaker 6: We expect Casimax to be down 3 to 5% year over year in the fourth quarter, and our full year Casimax to now be down 1 to 2% on capacity up 12 to 13%. To close, we have run...

Got it and maybe as a follow up kind of view.

In some places, but some accounts a decent uptick in travel, albeit overall general yields are not where we havent seen them. Historically, so I think this is still a moving subject.

You spoke about how you are being more rational eliminating opioids on capacity growth for next year, but he also gonna have mentioned a few headwinds. So if you were to rank.

The current softness in the domestic demand environment.

Speaker 6: 3-Tax margin exceeded peers with greater international tailwinds, despite a refining margin disadvantage and sizable impacts from the Maui wildfires. We delivered a strong unit cost result for the quarter and have visibility to another strong result next.

But I think if you just look at the macro sides of our network and traditional business versus leisure.

Extreme capacity growth plans by our competitors or fuel headwinds like what's the order of those three headwinds that would make you kind of question your capacity growth plans next year relative to what you currently have in mind.

For us specifically.

I think it's just beyond more some of these you know believes that traveler.

Conversation, but what we are seeing is beginning to see a little more strength come in on the corporate side and again, we just have a lot of opportunity.

Speaker 6: We remain focused on and very intentional about setting targets and ensuring we take the right steps to deliver against.

I think I would I think fuel for us is a big one.

Speaker 6: Our commercial offering with premium cabins and global access through our alliances is configured to compete in a way other domestically focused carriers cannot. Our operational strength has returned and our cost management is outperforming the industry, all of which are fundamental drivers of sustained long-term success. And with that, let's go to your questions.

On our core high frequency, Ralph it's getting those to a place where they can support the current demand as well as the new unit cost.

Ravi, especially with like we talked about DLA refining margins on the West Coast, we're praying.

<unk> <unk>, a gallon more than everyone else across the country. So it is a huge headwind for us in terms of capacity.

Production that the industry faces.

Got it and maybe as a follow up kind of view.

We can't control, what our competitors do what I can say is we're confident with our business model and you talked about in the prepared remarks, we have a remarkable premium product. We are not we may be low cost, but were premium brand airline.

You spoke about how you are being more rational eliminating opioids on capacity growth for next year.

Speaker 2: 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 comply.

But he also gonna have mentioned a few headwinds so if you were to rank.

The current softness in the domestic demand environment.

And I believe that we can always extract the higher revenues because of the brand we have our premium offerings lounges in.

Extreme.

Capacity growth plans by our competitors or fuel headwinds like what's the order of those three headwinds that would make you kind of question your capacity growth plans next year relative to what you currently have in mind.

Speaker 2: And our first question today comes from Duane Fenneg Wirt with Evercore ISI.

Global access so.

So I would say fuels is the biggest headwind the other thing I would say even with cost.

Speaker 7: So you gave an update, I think, a week or so into September . Can you just talk about, you know, what shifted over the, you know, over the latter part of the month? How that played out relative to kind of what you thought, what September 9th.

We have cost discipline in our DNA, we've shown this year that.

I think I would I think fuel for us is a big one.

We brought in unit costs down this is something that we're wired for wired for high productivity of resources and assets and so I feel confident we're going to get back to the place that we've been in single fleet I'm just ecstatic.

Ravi, especially with like we talked about DLA refining margins on the West coast, we're paying.

<unk> 30, a gallon.

Speaker 5: Hey, do I need to say Andrew? Yeah, I think, um, it was like at the beginning of September , I think, uh,

More than everyone else across the country. So it is a huge headwind for us in terms of capacity.

Starting October one that we're now back to an all Boeing fleet and I think youre really going to start seeing those synergies come in so those are the things I think for us.

Speaker 5: We had reiterated our guide, I think two things.

We can't control, what our competitors do what I can say is we're comfortable with our business model and you talked about in the prepared remarks, we have a remarkable premium product. We are not we maybe low cost, but where premium brand airline.

Speaker 5: We were still getting our hands around Hawaii, which was deeply negative bookings and we're trying to get clarity about where that was going to end up. And I think the other part was there was also right around that time was sort of that transition coming off the back end of a peak.

That we can control and.

And I think we have the right set up in the business model to go execute.

Excellent thanks, guys.

And I believe that we can always extract the higher revenues because of the brand we have our premium offerings lounges and.

Thanks Randy.

Speaker 5: some of demand and also close in moving into the more traditional business season. I think those couple of things combined, I think on 2.8 billion it was probably like $15 million were off. So that's the main reason, but fundamentally the business was where we thought.

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

Oh, Hey.

Global access so.

Good morning, everyone, Hey, I'm, Andrew you talked about.

So I would say fuels is the biggest headwind the other thing I would say even with cost.

Look out towards holiday travel you mentioned that low <unk> a couple of points yields are up double digit. So obviously that looks very good for the latter part of the year does that hold or do you think some of that also reflects the shifting of the booking curve or maybe in the past we saw people booking closer end and maybe this holiday season.

We have cost discipline in our DNA, we've shown this year that.

Speaker 7: Okay, and then just to segue to Hawaii, can you maybe play back some history and talk about the current picture and maybe delineate between Maui and non-Maui bookings? That would be very helpful.

We brought costs down this is something that we're wired for wired for high productivity of resources and assets.

And so I feel confident we're going to get back to the place that we've been in single fleet I am just ecstatic.

As <unk> said before.

Seasonality is returning booking curves are becoming more elongated how much of that is possibly going to shift or change because of those factors.

Starting October one that we're now back to an all Boeing fleet and I think you're really going to start seeing those synergies come in so those are the things I think for us.

Speaker 5: yeah i think uh... like mowie obviously stands out uh... significantly different and we're making some of capacity adjustments there we did see during you know this horrible period of time uh... some bookings continue to move to other islands but as you know who i pukes well in advance

Yeah. Thanks, Mike just for clarity the comments that you just shared that I had made.

That we can control and.

I think we have the right set up in the business model to go execute.

It was versus 2019, Okay, I think yes.

Excellent thanks, guys.

Last year, obviously, it was very different very different fare environment capacity set up. So we just wanted to anchor back in 2019, which is a very stable normalized and so we've been very encouraged.

Thanks Randy.

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

Speaker 5: So essentially, pretty much the rest of the year for Maui was sort of reset. But as we go into next year, we don't see any reason that Maui won't continue to recover and we won't see traditional, you know, good solid demand to our Hawaii franchise.

Oh, Hey.

Good morning, everyone, Hey, I'm, Andrew you talked about you know as you look out towards holiday travel you mentioned that low <unk> a couple of points yields are up double digit so obviously.

What we've seen and I think.

We've seen I think when you look at the industry right now.

Looks very good for the latter part of the year does that hold or do you think some of that also reflects the shifting of the booking curve or maybe in the past we saw people booking closer in and maybe this holiday season.

Speaker 7: okay sorry sorry to be delivered there um... why bookings x-maui would you characterize that as as stable flash normal

When you look at 2019, our unit revenues sequentially flat Q3 to Q4.

Where the industry is down anywhere from one to five points and then if you look at 'twenty three as we shared we're up three points, where the industry is sort of flat to up one so we feel like.

Speaker 7: They're a little softer than historical, but we've seen that for some time. I think just as the capacity into the islands and of course some of the pricing pressures in Hawaii, the cost of going to Hawaii, but overall we feel pretty good about it being somewhat stable. Thank you very much.

As he said before.

Seasonality is returning booking curves are becoming more elongated how much of that is possibly going to shift or change because of those factors.

Number one I would say that what we are seeing at least in our network is outside of this business.

Yeah. Thanks, Mike just for clarity the comments that you just shared that I had made.

Travel matter.

Back to sort of normal booking curves normal demand environment.

It was versus 2019, Okay, I think yeah 'cause.

And I think some of the reduced capacity and re allocation of capacity is serving us very well.

Last year, obviously was very different very different fare environment capacity set up. So we just wanted to anchor back in on 2019, which is a very stable normalized and so we've been very encouraged.

Okay, Great and then just a quick second one I don't know if you mentioned this or it was Shane who said look the Golar next year's to return back to 2019 levels on a productivity basis, a little bit different than sort of a network optimization, but.

Speaker 8: Hey, good morning. I wonder if you could talk about the revenue trend where you are seeing kind of a better improvement that some of your peers that have reported. And you talked about some of the components, like how your capacity is developing. As curious as you can kind of provide a little bit more color on the contributors of that sequential improvement and how we should think about it than as you go into the first quarter and you make more adjustments as well.

What we've seen and I think you know as we've we've seen I think when you look at the industry right now.

If we get back to 2019 productivity.

When you look at our 2019, how our unit revenues sequentially flat Q3 to Q4.

Help me translate that into like a CASM benefit is that like a point or two of CASM tailwind and how long does it take to actually get.

The industry is down anywhere from one to five points and then if you look at 'twenty three.

Get to 2019 productivity is that through the year or is that a 2025 type objective.

As we shared we're up three points, where the industry is sort of flat to up one so we feel like.

Speaker 5: Yeah, it's, uh, thanks. So it's very interesting. I think, um,

Any color on that would be great. Thanks.

Number one I would say that what we are seeing at least in our network.

Speaker 5: you know, what's really positive and some of this sequential improvement is you just look at our capacity in the third quarter and how much higher it was versus 19 versus the fourth quarter. And then some of the as I shared in my prepared remarks where we had pushed some capacity out into the fall in some of these mid-con markets and some of these other key areas, we brought that capacity back down starting in October and we're already seeing the positive effects of doing this.

Hey, Mike, It's Shane Yeah patient one.

Outside of this business.

One thing let me, yes, hi, I'll clarify I think it is going to take US a couple of years, Okay 2019.

Travel matter back to sort of normal booking curves normal demand environment.

We're going to work it.

And I think some of the reduced capacity and re allocation of capacity is serving us very well.

Methodically and like I said, a couple of answers ago, we're not going to overly stress the operation now that we've got it working really well.

Okay, Great and then just a quick second one I don't know if you mentioned this or it was Shane who said look you know the goal next year is to return back to 2019 levels on a productivity basis, a little bit different than sort of a network optimization, but.

Worth at least a couple of points all else equal of unit costs.

There were no other puts and takes I mean, I would say minimally it's worth that I think we sized single fleet alone at $75 million of benefit.

Speaker 8: that's a big driver. And if I might on the

If we get back to 2019 productivity helped.

Help me translate that into like a CASM benefit is that like a point or two of of CASM tailwind and how long does it take to actually get.

And we have we have less productivity in many areas, whether it's aircraft utilization or other work groups.

Speaker 8: growth plans that you can have mentioned for next year. It sounds like you're still evaluating between 4 and 8% the first half kind of maybe on the lower end of that 4%. It seems like or how should we think about maybe early indications? I know you're probably not ready to give a full guide.

And all of those are opportunities to get better from where we are I think we're doing better than.

Get to 2019 productivity is that through the year or is that a 'twenty 'twenty five type objective.

The rest of our competitors generally and I think.

Any color on that would be great. Thanks.

Our focus has been will continue to be to come out of all of this with the best relative change in cost structure and I think.

Hey, Mike It's Shane Yeah patient one one thing let me Yeah, Hi, I'll clarify I think it's going to take US a couple of years to 2019.

Speaker 5: Yeah, I mean, that's correct. And we've been clear as we go into the first quarter, we're going to be around 3% or so over 19 levels. And again, we've looked really hot it out.

I think we're well on our way to doing that.

We're going to work it.

Great Great. Thanks, James Thanks, Andrew.

Methodically and like I said, a couple of answers ago, we're not going to overly stress. The operation now that we've got it working really well, but it's worth at least a couple of points all else equal of unit costs. If there were no. Other puts and takes I mean, I would say minimally it's worth that I think we sized single fleet alone at 75.

Speaker 5: you know, Roller's Demand period for Alaskar at least in the January February time period and we feel like we've made some pretty good reductions there and we made that well ahead of the bookings of those, you know, flights so we feel really good about the setup as we go into the first quarter.

Thanks, Mike.

Your next question will come from Jamie Baker with Jpmorgan.

Hey, good morning, everybody. So the 45% of our revenue outside of main cabin can you break that down into various buckets.

Is it as simple as premium being 31% and then the rest is just loyalty and cargo also as part of the main cabin. So as part of the 55% any color on how basic.

And as a benefit.

And then we have we have less productivity in many areas, whether it's aircraft utilization or other work groups.

Speaker 2: We'll move next to Andrew D'Dora with B of A Global.

Speaker 9: a good morning everyone um... andrew uh... in your preparing marks you said your your book to well ahead for November and another airline reported earlier today is that fifty eight percent book to sort of a normal cadence for you or is it more of how you're you're looking at close in trending today and just wanting to book more of that you know a little bit further out than usual

And all of those are opportunities to get better from where we are I think we're doing better than the.

Sorry, Savr contribution has changed year on year.

The rest of our competitors generally and I think.

Thanks, Jamie we're not going to go into the details of that obviously I think you've heard other airlines quote we don't have the MRO is and other things, but we feel.

Our focus has been and will continue to be to come out of all of this with the best relative change in cost structure and I think.

Very diversified.

I think we're well on our way to doing that.

As it relates to what is not the main cabin.

Alright, great. Thanks, James Thanks, Andrew.

Speaker 5: I think our comments were a little bit related to when you compare it back to say 2019, sort of Thanksgiving sort of falls within the month. But if you average it out between Thanksgiving and Christmas, sort of the November and December , we're probably a little higher on the bookings, but not very much. And right now we're just making sure that we manage that coming in with good solid yield to close out the year.

I think in our slides, we provide some of that breakdown there are about 35%.

Thanks, Mike.

Your next question will come from Jamie Baker with Jpmorgan.

If it is premium cabins and some carriers have zero percent. So I think as we've shared all along.

Hey, good morning, everybody. So the 45% of our revenue outside of main cabin can you break that down into various buckets.

We feel like we live more.

In the group right now that has premium product.

Is it as simple as premium being 31% and then the rest is just loyalty and cargo also as part of the main cabin and so it was part of the 55% any color on how basically.

And global reach as it relates to our business model versus those that do not yes, I think Jamie I think the point here with those statuses.

Speaker 9: Okay, understood. And then also, Andrew, on the last call, I thought you shared some good statistics on the shift you were seeing to international bookings on your partners over the summer. Curious if you've begun to see more of a normalization there and maybe share shift back to domestic or do you continue to see that elevated, that elevated international demand booking on your partners. Thank you.

Just to differentiate us among domestic carriers, we are the only domestic carrier with that suite of offerings with.

Alright sabre.

Contribution has changed year on year.

Thanks, Jeremy we're not going to go into the details of that obviously I think you've heard other airlines quote we don't have MRO is and other things, but we feel.

With the premium again lounges, the global access.

This accrual and redemption of miles, we do separate ourselves from.

Very diversified.

What do you call them low.

As it relates to what is not the main cabin.

Areas low margin airlines.

Speaker 5: Thanks, I think we're seeing exactly actually what we saw on the domestic front Whereas last year push well into the you know the shoulder season I think that's what we're seeing at least from our members on the international so just to remind folks

I think in our slides, we provide some of that breakdown there are about 35%.

You came up with a new acronym I like my point here is we are not in that group based on the offerings.

If it is premium cabins and some carriers have zero percent. So I think as we've shared all along.

We invested heavily in our product 100, we have over 300 airplanes in our fleet.

Every airplane our fleet, including original has a first class has a premium product.

We feel like we live more.

Speaker 5: In the summer, we reported in that we were up sort of 50% of our members year over year, accruing and redeeming internationally. That number is only 26% for the fourth quarter. So we're certainly seeing it coming down. And so of course the question will be, will that get normalized by next year? What we're seeing right now is it's on its way to normalization. and

In the group right now that has premium product.

And again.

When you add our one world membership our global access our lounges.

And global reach as it relates to our business model versus those that do not yes, I think Jamie I think the point here with those taxes.

It is a compelling product to be honest, Jamie it's why our margin is equivalent to delta and United in Q3, despite not having the international tailwind and having the headwinds of Maui and the refining margin. So the business model is resilient.

Just to differentiate us among domestic carriers, we are the only domestic carrier with that suite of offerings with.

The premium again lounges, the global access.

Last Jimmy you asked about saver, it's doing quite well too.

You know this accrual and redemption of miles, we do separate ourselves from.

Up.

Strong double digits year over year.

I think what do you call them low myeloma areas low margin airlines.

Speaker 10: Thanks very much operator. Hi everybody.

And I think it also speaks to and you've heard this from other airlines, we can access the price sensitive part of the market really well too. So that we're able to that was one reason I asked yeah.

Speaker 10: Two questions. One, when you talk about, maybe this is for Andrew, when you talk about optimization of the network.

Him up with a new acronym I like my point here is we are not in that group based on the offerings.

Speaker 10: Can you just describe maybe more fully what you're talking about? I know some of it is not flying as much in the first color in 24 years you did in 23 because of the ships and the way people are flying and the fact that corporate is probably back as far as it's gonna go. I can't imagine that there are a lot of day trips between Seattle and Portland or Seattle and...

We invested heavily in our product 100, we have over 300 airplanes in our fleet every airplane or fleet, including original has a first class has a premium product.

No listen I appreciate the color but.

So let me press.

On premium site.

Sited.

And again.

You are obviously enthusiastic about it it's an area for growth you've leaned into this when you answered <unk> question.

At our one world membership our global access our lounges.

A couple of moments ago should we think about premium growth more ad yield upside or as you think about that 4% to 8% capacity number.

Speaker 10: and San Fran or San Fran LA anymore, given the unreliability of exogenous pressures, right? So how should we think about what optimization exactly means?

Are you considering possibly expanding the cabin I ask in part because American.

Jimmy you asked about saver, it's doing quite well to its up.

Spoke to this just a couple of hours ago.

Speaker 5: Yeah, Elaine, I think what I would say, when I talk about optimization, look, we're at a place now where we see where fuel is that elevated and has been for some time. The whole industry has a new set of structural unit costs and we're also seeing sort of the

Strong double digits year over year.

Top of mind.

Yes.

And I think it also speaks to and you've heard this from other airlines, we can access the price sensitive part of the market really well too.

I'll take that I think.

I don't think youre going to see like a wholesale.

Refurbishment of the interiors I will say that.

<unk> been able to that was one reason I asked yeah.

So working on our Max eight interior and we would love to get 16 first class seats and that our eats carry 12 today.

No listen I appreciate the color but.

Speaker 5: sort of the settling down of overall capacity across the country.

So let me press.

Rest of the mainline fleet carrying <unk>.

On premium.

Speaker 5: So given those things, we're looking much harder at where we, and business as you raises another point, we're looking much harder about where we're putting out airplanes in high frequency routes, leisure versus business, time of year. You know, just to be frank, we've probably been less concerned about being more surgical during summer.

Sighted.

It's relatively small but could have airplanes, yes, 59 airplanes and it could have a.

You are obviously enthusiastic about it it's an area for growth you leaned into this when you answered <unk> question.

A couple of moments ago should we think about premium growth more ad yield upside or as you think about that 4% to 8% capacity number.

A good impact.

Obviously for us once we get there, but that's a couple of years off if we end up getting it done.

Okay cool. Thanks, gentlemen, appreciate it take care thanks, Jamie.

And we'll hear next from Scott Group with Wolfe Research.

Are you considering possibly expanding the cabin I ask in part because American.

Speaker 5: But the reality is, this past summer, you can certainly see as we get back to normalize booking patterns, there is definitely between...

Hey, Thanks, So I just wanted to go back to this fourth quarter RASM Reacceleration just given the implied September trends. So I just want to understand are you seeing this already show up in October or is this more of a <unk>.

Spoke to this just a couple of hours ago.

Top of mind.

Speaker 5: July and September , very significant changes in demand profile. So we're going to do a much better job going forward and we're already on it, um, is just to realigning our supply of aircraft. So I think that's what I'm basically saying, and I think there's only goodness from doing that.

Yes.

I'll take that I think.

I don't think you're going to see like a wholesale.

A refurbishment of the interiors I will say that we're still working on our Max eight interior and we would love to get 16 first class seats and that our eats carry 12 today.

November December and I guess so.

That's a great question, just philosophically like if we're slowing capacity.

Speaker 10: Okay, that's sort of helpful until things kind of revert to more normalized behavior and you have to fix it again, but that's not a you problem. My other follow-up question on the A321 that are being

We're seeing sort of an immediate RASM benefit like why are you even think about four to eight for next year why isn't it like we're not going to grow until we actually start.

The rest of the mainline fleet carrying 16 in.

It's relatively small but could have airplanes, yes, 59 airplanes and it could have a you know a good impact.

Grow at all until we see positive RASM again.

Yes.

Obviously for us once we get there, but that's a couple of years off if we end up getting it done okay.

Andrew Yes, no no I think it's a good question Scott.

Speaker 10: I thought those were actually going to be least in aircraft, but they're being transferred over to America. And so I didn't see it in the press release, but that doesn't mean anything. It just means I didn't see it. Can you talk about the accounting for that? Can you comment on the cost of what they're paying you or any information that would help us think about that for you guys?

Andrew can speak to the.

Okay cool. Thanks, gentlemen, appreciate it take care thanks, Jamie.

Where we're seeing the sequential improvement if it's already on the books or sort of to come I think on the capacity.

We'll hear next from Scott Group with Wolfe Research.

I think the.

Way to think about it is we've been pretty.

Clear about our first quarter capacity being relatively modest certainly versus 2019.

Speaker 11: Thanks for the question. I'd say this transaction is probably one of the more complicated ones that I've seen in my 25 years of doing this, but I was thinking on it is really simple. We've been public in that there's six to eight years left.

Andrew mentioned in the script, where we were up six points versus 2019 in Q3 two points in Q4.

So that's a direct question just philosophically, if we're slowing capacity and we're seeing sort of an immediate RASM benefit like why are you even think about four to eight for next year why isn't it like we're not going to grow until we actually start.

So at least from our view Scott I think what you're asking is exactly what we're doing.

We're not ready to talk about full year next year, yet, but right now given fuel and where we see pricing, we're making the right.

Speaker 11: on these above-market leases that Alaska acquired as part of the Virgin transaction. And our objective was just to find a transaction and build it that economically offset those remaining obligations. We've been working it for 12 to 18 months and...

Grow at all until we see positive RASM again.

Decisions in terms of capacity management.

Yes.

The only other thing I would add to Scott and you don't see this obviously in the details.

Andrew Yes, no no I think it's a good question Scott Andrew can speak to the.

Speaker 11: just happy to get this process to a close, because as you know, this is the last unlock to truly get us to single-free. Just like we don't comment on pricing on in the airline, I'm not gonna comment on pricing of what American is paying us, but we feel good about the economics, and again, covering what our PV of lease obligations was through the extended period of those leases. And then I'm gonna kick it to Emily on the accounting side, just where that is.

Even the reduction in growth.

Where we're seeing the sequential improvement if it's already on the books or sort of to come I think on the capacity.

Relatively speaking has been helpful for sure. We also had some regions with some very significant growth.

I think the.

Very significant I think we have abated those back down to more normalized levels and Thats where were seeing the greatest upside.

Way to think about it is we've been pretty clear.

Clear about our first quarter capacity being relatively modest certainly versus 2019.

Some of this slowing capacity, so there's micro regions, which we've really dialed it back and we're seeing immediate help from that.

Andrew mentioned in the script, where we were up six points versus 2019 in Q3 two points in Q4.

Yes.

So you are seeing some of it already in October .

Yes.

So at least from our view Scott I think what you're asking is exactly what we're doing.

Speaker 12: Thanks, Matt. Haling, we have taken the vast majority of the...

Okay and then.

Shane.

You talked about.

Speaker 12: are associated with these transitions. Through you know already you've seen those in special charges over the last 12 to 18 months is not noted. Cash wise we're about two thirds of the way through the cash that we're going to incur with as of course as we've purchased the lease or the planes from the less or and then we sell the planes to America and there will be cash inflows and outflows. So about two thirds of the 300 to 350 million dollar total cash exposure that we've shared with you guys previously we've already incurred that and then the remaining one third will happen over the next two quarters. Great that's very helpful.

Working on some pushing out some deliveries what does that mean for overall.

We're not ready to talk about full year next year, yet, but right now given fuel and where we see pricing, we're making the right.

Capex next year.

Yes, Thanks Scott.

Decisions in terms of capacity management.

Yes.

The only other thing I would add to Scott and you don't see this obviously in the details but.

For color. So you guys sort of understand and I've mentioned this high level in the in the prepared remarks, we're going to be at $1 $7 billion. This year down from our original.

Even the reduction in growth.

Relatively speaking has been helpful for sure. We also had some regions with some very significant growth.

Thoughts about Capex in 2023.

And it is going to be under that next year I think we're not quite ready to say how much but I would think in a couple of hundred million dollars range minimally.

Very significant I think we have abated those back down to more normalized levels, and that's where we're seeing the greatest upside.

Speaker 13: and Andrew. Thanks, Ellie. I'm going to hear Nick.

Well, we will say more about that.

Some of this slowing capacity, so there's micro regions, which we've really dialed it back and we're seeing immediate help from that.

In the January call.

That can just very briefly speak to what we're doing with Boeing are great partners in this and it speaks to the flexibility that we were able to build into this order book with them.

Yes.

So you are seeing some of it already in October .

Speaker 14: Everyone, thank you. How many of you could send me those notes on the account?

Yes.

Okay and then.

Shane.

We are working with Boeing just to reshape 'twenty, four and even into 'twenty five a bit to a capacity level that we think maximizes profitability.

Speaker 14: Pointing before I'm talking for a few years, things like on cost-based side. Could you just talk about the moving parts? As you think about headwinds, maybe provide them a contact to men. So a productivity offset that you are coiling in the cost structure now, thank you.

You talked about.

Working on some pushing out some deliveries what does that mean for overall.

Capex next year.

One of the other variables that we're managing as the Max 10 certification. So that airplane originally scheduled to come to US next year certification, obviously has its own story and pushing out to the right. So.

Yes, Thanks Scott.

For color. So you guys sort of understand and I'd mentioned this high level in the in the prepared remarks. So we're gonna be at $1 7 billion. This year down from our original.

Speaker 6: Hey Connor, thanks for the change. You're begging about a tiny bit. I think you were asking about 2024, sort of puts in takes on cough.

Thoughts about Capex in 2023.

Speaker 6: I'll be high level, I think we're not quite ready to fully discuss, you know.

Good common ground with us and Boeing to sort through windows that airplane come the economics, we've been really clear on how much we like the Max 10, and we wanted to take as many of those as we can so it gave us to join impetus to then let's reshaped 24.

And it's gonna be under that next year, I think we're not quite ready to say how much but I would think in a couple of hundred million dollars range minimally.

Speaker 6: 24 or cost guidance or anything like that. But the area that we'll have headwinds won't be a surprise. I think there's continued investment in airport infrastructure that we'll see come into the P&L next year, really across all of our major hubs. And that's just a generational reinvestment that is needed in these airports. There'll still be some labor cost headwinds. We've got to annualize the market rate adjustment we did with the pilot.

Well you know, we will say more about that.

In the January call.

That can just very briefly speak to what we're doing with Boeing are great partners in this and it speaks to the flexibility that we were able to build into this order book with them Hey, Scott.

And as a result manage our capacity down a little bit.

You've heard us talk before we leverage the proximity with Boeing we talk to them all the time.

We are working with Boeing just to reshape 'twenty, four and even into 'twenty five a bit to a capacity level that we think maximizes profitability.

And it really good partnership with with great flexibility.

Speaker 6: We're really hopeful we get the TA with our mechanics fully ratified. We'll have that in the cost base next year. And then pretty much the entire industry needs to get contracts done with flight attendants, which we're really anxious to do and actively in the process of negotiating.

Thank you.

Thanks Scott.

And we will take our next question from Brandon <unk> with Barclays capital.

Hi, Thanks for taking my question. So I heard some comments earlier about trying to be disciplined around growth and I know you guys had mentioned that youre going to try to slow growth in the first quarter next year, but I guess just thinking through some of these trends that you are talking about with lower corporate.

Speaker 6: I think on the other side, we've now got truly a single fleet. We should have almost every airbots pilot trained over to the Boeing by the end of the year.

Good common ground with us and Boeing to sort through windows that airplane com. The economics, we've been really clear on how much we like the Max 10, and we wanted to take as many of those as we can so it gave us the joined impetus to then let's reshaped 24.

Speaker 6: And really, we need to start looking at leaning out the operation and focusing again on productivity. That we started to do this quarter. I think we've got a good trend through the end of the year. We've been waiting for these trends. We're happy to see them now. We just need to leverage them into next year. So it's really about making the AI more efficient, taking some of the buffer out that we've got in there today. We'll go slow on it. We're not going to risk operational resilience at all. It took us a lot to get.

Shoulder demand being a little bit less than you would have thought is this just.

Looking forward should we expect margins at Alaska are just going to be lower in <unk> than <unk> structurally I mean, they have historically, but should we expect even more volatility in the future and does that reshape your commercial focus I guess during their peak periods do you take more price than I mean, how do you reshape the formula to get the prior margin targets that you got.

And as a result manage our capacity down a little bit.

You've heard us talk before we leverage the proximity with Boeing we talk to them all the time.

And it really good partnership with with great flexibility.

Had set out.

Thank you.

Speaker 6: to where we are on the operation, we're gonna keep operating well, but lots of opportunity to get more productive over the next couple of years.

Yeah. Thanks Brendan.

Thanks Scott.

I actually think about it a little bit the opposite I think the.

And we will take our next question from Brandon Oh, Glinski with Barclays capital.

Work that Andrew is doing and his team are doing in the first quarter is meant to improve the margin profile of the first quarter. I think we talked two calls ago that Ben had given the commercial team are challenged to over the course of a few years move back towards breakeven in the first quarter. We are the most seasonal airline the sort of peak.

Speaker 14: Okay, that's helpful. And then you guys are being pretty rational in 24 scenes for a swim industry that's really not at the current moment. Like when you think about...

Speaker 14: potential share losses or is protecting margins, but it does that matter to you in the near term if it's potentially just a temporary thing just curious on how you think about it given the fact that you're pulling that so much growth relative to some of

Shoulder demand being a little bit less than you would have thought is this just.

<unk> airline we have been through basically all cycles.

Looking forward should we expect margins at Alaska are just going to be lower in <unk> than <unk> structurally I mean, they have historically, but should we expect even more volatility in the future and does that reshape your commercial focus I guess during your peak periods, you take more price than I mean, how do you reshape the formula to get the prior margin targets that you got.

So we understand.

Speaker 4: You know, Connor has been, of course, market share matters to us especially in our key hub. So we will protect.

When and where we make all of our money and I think we're really good at managing capacity in the peak environments Q.

Q4 honestly I think this Q4 is a bit of an aberration I think the results are really a consequence of this refining margin differential.

Speaker 4: our key hubs fiercely and maintain the market share. Of course, we're going to look at areas where, you know, there won't be such an impact to us. But again, you know, this industry is very capacity dependent and it has a huge leverage on profitability. So we're going to take a hard look.

Had set out.

In fuel price and.

Yes, Thanks, Brandon I I actually think about it a little bit the opposite I think the.

The continued but normalizing surge in international demand and I think once that normalizes, we're set up really well to do good in Q4 will probably.

Speaker 4: The teams are out there looking at next year's capacity and like Andrew said we're gonna look at Q1 really hard fringing on days where we have to fringe and flying hardware we can fly hard so It's it's a delicate balance But we're determined to get as close to to right as we can on this

Be somewhat lower than some of the other carriers, who tend to have less peaking us and theyre in the year, but but I think we'll be more competitive on a relative basis as we move forward.

Okay. I appreciate that response, but I guess as you reshape the first quarter, that's kind of at odds with the prior view that long term CASM could actually decline in the out years right is that why I heard you say, it's going to take a couple of years to get back to those productivity targets.

<unk> airline we have been through basically all cycles.

So we understand.

When and where we make all of our money and I think we're really good at managing capacity in the peak environments Q.

Speaker 2: Our next question will come from Robbie Shanker with Morgan.

Q4 honestly I think this Q4 is a bit of an aberration I think the results are really a consequence of this refining margin differential.

Speaker 15: uh... thanks to everyone uh... so i know we're all chasing what normal season out there and then already a couple questions the call but i'm wondering to what extent you think it's returned office uh... that's kind of impacted shoulder season compared to the last couple of years uh... and can maybe that uh... restricting the ability of uh... the so-called bleager travel if you will uh... and that actually sets up for pique your piques uh... in in in the next couple of uh... go out

Well look I think it's very.

Correct to think that there is a correlation between capacity deployment and unit costs. The more we deploy capacity the easier. It is to see unit cost decline, but we haven't lifted it off of the idea of of.

And fuel price and the continued but normalizing surge in international demand and I think once that normalizes as we're set up really well to do good in Q4 will probably.

Cost ultimately going down over time.

We will say more about 2024 and the trajectory when we were talking about guidance for next year Brandon, but this is something we're thinking about a lot I just reiterate that.

Be somewhat lower than some of the other carriers, who tend to have less speaking us in there and their year, but but I think we'll be more competitive on a relative basis as we move forward.

As we come out of all of this we're going to have exposure to all segments of demand, including premium we're going to increasingly be attractive from an international perspective through our partners and I think we're going to have the best relative cost structure story of <unk>.

Speaker 5: Hey Ravi, so I just, you mentioned, we turned office and I think, you know, we'll see the public statistics sort of, I think sort of slowly climbing its way back, but still a long way off.

Speaker 5: What I would share is that we have seen between September and October , especially in a high tech where we've started to see, you know, in some places, but some accounts are decent uptick in travel, albeit overall general yields are not where we, you know, have seen them historically. So I think this is still a moving subject.

Anybody in the industry.

And so I think that was set up is really good to continue to be a.

Margin and financial performance leader over the long term.

Well look I think it's very.

Correct to think that there is a correlation between capacity deployment and unit costs. The more we deploy capacity the easier it is to see the cost.

Alright, Thank you sure.

Thanks, Brian .

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

Speaker 5: But I think if you just look at the macro size of our network and traditional business versus leisure, I think for us specifically, I think it's just beyond more some of this, you know, bleager travel, you know, type conversation, but where what we are seeing is beginning to see a little more strength come in on the corporate side. And again, we just have a lot of opportunity on our core high frequency rally.

But we haven't lifted it off of the idea of of.

Hey, good afternoon, everyone and thanks for your time.

Unit cost ultimately going down over time.

So we've heard from to your peers, so far that the tech sector in San Francisco in particular, we've seen a recent uptick in corporate travel it sounds like you didn't see that in the third quarter I think.

We will say more about 2024 and the trajectory when we were talking about guidance for next year Brandon, but this is something we're thinking about a lot I just reiterate that.

Stable, but then just mentioned hereof, either Simpson momentum in October can you just help us size order magnitude.

As we come out of all of this we're going to have exposure to all segments of demand, including premium we're going to increasingly be attractive from a international perspective through our partners and I think we're going to have the best relative cost structure story of anybody in the industry.

<unk> seen is that coming from Sam Brian attack or or anything else you'd want to highlight the recent improvement.

Speaker 5: getting those to a place where they can support the current demand as well as the new unit cost of production that the industry now faces.

Thanks Katie.

Yes, I mean, and certainly excuse me some of the larger technology companies have seen.

And so I think that was set up is really good to continue to be.

Speaker 15: got it and maybe as a follow-up uh... kind of you can have only you spoke about how you're being more rational in the new period of capacity for next year uh... but you also have mentioned a few headwinds if you were to rank you know the current softness and the domestic demand environment uh... extreme

Quite a significant movement in volume.

Margin and financial performance leader over the long term.

Of course, it depends where they fly.

As I said some of the yield environment right now is offset some of those volumes but.

Alright, Thank you sure.

Thanks, Brian .

For sure there has been positive movement in California Pacific Northwest These big Tex Cabo both regions actually.

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

Hey, good afternoon, everyone and thanks for your time.

So.

Speaker 15: capacity growth plans by our competitors or fuel headwinds like what's the order of those three headwinds that would make you Kind of question your capacity growth plans next year relative to what he currently haven't mind

So we've heard from two of your peers, so far that the tech sector in San Francisco in particular have seen a recent uptick in corporate travel it sounds like you didn't see that in the third quarter I think.

Some promising signs there.

Okay great.

And then maybe for Shane.

Pardon the modeling question, but just trying to get a sense.

Stable, but then just mentioned there's been some momentum in October can you just help us size order of magnitude.

The aircraft rent tailwind into next year is there further downside for <unk> $48 million in aircraft, France, and some of those aircraft as in September can you just help us think about what the right exit rate for this year on that line item.

Speaker 4: You know, I think I would, I think fuel for us is a big one. Rather, especially with like we talked about the LA refining margins on the West Coast, we're praying.

You've seen and is that coming from San Fran attack or or anything else you'd want to highlight the recent improvement. Thanks.

Speaker 4: you know thirty cents a gallon uh... more than uh... everyone else across the country thought is a huge headwind for us you know in terms of the capacity

Are there any additions on leased aircraft, we should be thinking about into next year. Thanks. So much.

Thanks Katie.

I mean, and certainly excuse me some of the larger technology companies have seen.

Hey, Katy this is Emily.

Speaker 4: We can control what our competitors do. What I can say is we're confident with our business model and you talked about it in prepare remarks.

Quite a significant movement in volume.

What you saw this quarter in terms of aircraft rent was at pretty good normalized now.

Of course, it depends where they fly.

As I said some of the yield environment right now is offset some of those volumes but.

Now removed all the Airbus leased aircraft from the box, so you're not seeing that rent come through we've taken delivery of all the macs leased aircrafts that were going to have which is the <unk> I believe 13.

Speaker 4: We have a remarkable premium product. We are not, we may be low cost, but we're a premium brand airline. And I believe that we can always extract the higher revenues because of the brand we have, our premium offerings, lounges, and...

For sure there has been positive movement in California Pacific Northwest you know these big Tex Cabo both regions actually.

Over the last year. So that's pretty normalized now you will start to see from an ownership perspective, depreciation well tick up to offset some of that as we've taken on so many new Max aircraft and those will start depreciating through the box.

So you know some promising signs there.

Okay great.

Speaker 4: you know, global access. So, you know, I would say fuel is the biggest headwind.

And then maybe for Shane.

Pardon the modeling question, but just trying to get a sense.

Speaker 4: The other thing I would say even with cost up, we have cost discipline in our DNA. We've shown this year that we brought in a cost down. This is something that we're worried for, we're worried for high productivity of resources and assets. And so I feel confident we're gonna get back to the place that we've been. And single fleet, I am just ecstatic.

Very helpful. Thank you.

The aircraft rent tailwind into next year is there further downside for <unk> $48 million in aircraft, France, and some of those aircrafts.

Thanks Lee.

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

Or can you just help us think about what the right exit rate for this year on that line item.

Oh, Hey, thanks, good morning, guys.

Andrew when I look at Alaska's network in California, It looks like the state is only about 80% recovered relative to the footprint that was there in 2019, so it looks like a pretty big revenue hold it has yet to recover and if I'm not mistaken I believe it accounts for about 23% of Alaska seats. So my question really is is that part of the network.

Are there any additions on leased aircraft, we should be thinking about into next year. Thanks. So much.

Speaker 16: starting October 1st, they were now back on all Boeing fleet and I think you're really going to start seeing those images come in. So those are the things I think for us that we can control and I think we have the right set up in the business model to go execute. Excellent, thanks guys.

Hey, Katy this is Emily.

What you saw this quarter in terms of aircraft rent was at pretty good normalized level.

Now removed all that Airbus leased aircraft from the Bucks, So you're not seeing that rent come through we've taken delivery of all the Macs leased aircrafts that were going to have which is the 13 I believe 13 over the last year. So that's pretty normalized now you will start to see from an ownership perspective, depreciation well tick up to offset some of that is we've taken.

We're fully restored at what is the size of that revenue hole that could eventually go away or however, you can size it would be helpful.

Well I think if I'm understanding your question, Dan I think again, we're not going to put seats into a state where there is no demand so.

Speaker 17: oh hey um... morning everyone and you talked about uh... you know if you look at what's holiday travel you mentioned that load up a couple points yield truck double digit so obviously uh... very good for the latter part of the year that hold or do you think some of that also reflects the shifting of the booking curve or maybe in the past we saw people booking closer in and maybe this holiday season as you said before you know

On so many new Max aircraft at muscle start depreciating through the box.

Your observations are absolutely correct as far as our capacity and we're down on a and I think other carriers are down as well.

Very helpful. Thank you.

Thanks, Good evening.

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

I think what I'm still seeing here is even on tech and non tech.

Oh, Hey, thanks, good morning, guys.

And Ah repeat non tech business recovery.

Has not been as good at all versus what's happening in the Pacific Northwest So we're going to.

Speaker 17: booking curves becoming more and more elongated. How much of that is possibly gonna shift or change because of those facts?

Again, we talked about the network, where we're going to be very disciplined and thoughtful.

Speaker 5: Thanks Mike, just to for clarity the comments that you just shared that I had made was versus 2019. Okay. I think, yeah, because, you know,

How we maintain and work and where we fly assets, but again as we've spent time for some time.

The network were fully restored you know what.

I don't think that's going to be forever, and we're going to be very prepared and.

Is the size of that revenue hole that could eventually go away or however, you can size it would be helpful.

In a good position as demand begins to strengthen and crawl back up that demand curve.

Speaker 5: last year obviously was very different, very different fair environment capacity set up. So we just wanted to anchor back in on 2019, which is a very stable, normalized year. And so we've been very encouraged what we've seen. And I think, you know, as we've seen, I think when you look at the industry right now, when you look at 2019, our unit revenues sequentially flat Q3 to Q4.

Well I think if I'm understanding your question, Dan I think again, we're not going to put seats into a state where there's no demand. So I think your observations are absolutely correct as far as our capacity and we're down on a and I think other carriers are down as well.

2019 levels to be able to serve that demand.

Yes understood.

And then Shane I think I'm at risk of kicking the dead horse here. My question is really the same as others here and that's just too I really just to close the circle on the path back to low double digit pre tax margin I think you touched on fleet commonality at $75 million it looks like Maui annualize might be close to $80 million or so.

I think you know what I'm still saying here is even on tech and non tech.

Speaker 5: where the industry is down anywhere from one to five points. And then if you look at 23, as we shared, we're up three points where the industry sort of flat to up one. So we feel like number one, I would say that what we are seeing at least in our network is outside of this business travel matter back to sort of normal booking curves, normal demand environment. And I think some of the reduced capacity and reallocation of capacity is serving us very well.

And Ah repeat non tech business recovery has not been as good at all versus what's happening in the Pacific Northwest. So we're gonna again, we talked about the network, where we're going to be very disciplined and thoughtful about how we maintain and work and where we fly out states, but again as we've spent time for some time.

So it looks like maybe one five points to pretax margins there.

Or please correct me, but from where you sit.

What are the biggest revenue and cost opportunities that get you where you want to be.

Thanks, Dan I want to underscore what Andrew said, a second ago. Just so we don't lose the 0.1 of the things I think you all should be thinking about in terms of of Alaska setup is we're still in the least recovered portion of the country and.

I don't think that's going to be forever, and we're going to be very prepared and are in a good position.

Position as demand begins to strengthen and crawl back up that demand curve.

Speaker 17: Okay, great. And then just a quick second one, I don't know if you mentioned this or it was Shane who said, look, you know, the goal next year is to return back to 2019 levels on a productivity basis. So a little bit different than sort of a network optimization. But if we get back to 2019 productivity.

2019 levels to be able to serve that demand.

Yeah understood and then Shane I think I'm at risk of kicking the dead horse here. My question is really the same as others here and that's just too really just to close the circle on the path back to low double digit pre tax margin I think you touched on fleet commonality at 75 million it looks like Maui annualize might be.

And still fighting for industry's best margin. So I just think there's goodness to come overall for the company in terms of your question.

Speaker 17: Help me translate that into like a chasm benefit. Is that like a point or two of chasm tailwind and how long does it take to actually get...

Yeah.

The cost side is really leaning out the company getting rid of.

Not all of the buffer we've put in but but starting to work that back getting closer to the 2019 productivity levels.

Speaker 17: get to 2019 productivity, is that through the years, that a 2025 type of objective? Any call on that would be great, thanks.

Close to $80 million or so so it looks like maybe one five points to pretax margins there.

Or please correct me, but from where you sit you know what are the biggest revenue and cost opportunities that get you where you want to be.

I think there is opportunity to.

Other leverage technology at <unk>.

Speaker 6: Hey Mike, it's Shane. Yeah. Hey Shane. One one thing. Let me. Yeah. Hi. I'll clarify. I think it's going to take us a couple of years to. Okay. 2019.

Automate more of what the guests do and we're certainly going to be working on that over the next few years.

Thanks, Dan and I want to underscore what Andrew said, a second ago. Just so we don't lose the 0.1 of the things I think you all should be thinking about in terms of of Alaska setup is we're still in the least recovered portion of the country and.

Speaker 6: We're gonna work it methodically. And like I said a couple of answers ago, we're not gonna overly stress the operation now that we've got it working really well. It's worth at least a couple of points all else equal of unit costs. If there were no other puts and takes, I mean, I would say minimally, it's worth that. I think we cite seamlessly the loan at 75 million of benefit.

Every company is going to be doing.

On the revenue side Mike.

Once we see sort of where demand normalizes.

And in addition to this the recovery we expect in the international demand.

And still fighting for industry's best margin. So I just think there's goodness to come overall for the company in terms of your question.

International domestic demand mix in the west coast recovery in business recovery.

Yeah.

A lot more that Andrew and his team are starting to think about and look at from a commercial.

Speaker 6: And then, you know, we have, we have less productivity in many areas, whether it's air-capitalization or other work groups.

The the cost side is really leaning out the company getting rid of.

Initiative perspective, they've done a great job delivering and we don't get to talk about them on the calls but delivering on many initiatives this year.

Not all of the buffer we've put in but but starting to work that back getting closer to the 2019 productivity levels.

Speaker 6: and all of those are opportunities to get better from where we are. I think we're doing better than the rest of our competitors generally. And I think our focus has been we'll continue to be to come out of all of this with the best relative change in cost structure. And I think we're well on our way to doing that. Great, great, thanks Shane.

I think there is opportunity to.

Selling things like exit rows seats now that we've not done before.

Further leverage technology yeah.

And.

Uptick in first class and premium class load factors, while yields in those cabinets are going up that is both demand and things that the e-commerce and distribution and pricing team are doing.

Automate more of what the guests do and we're certainly going to be working on that over the next few years as I think every company is going to be doing.

On the revenue side like.

Speaker 2: Your next question will come from Jamie Baker with JP Morgan.

And theres more of those types of things that we're thinking about for the next year or two and we'll talk more about that as we firm plans up and include them in our guidance.

Once we see sort of where demand normalizes.

Speaker 7: hey good morning everybody so the the forty five percent of revenue outside of main cabin can you break that down into various buckets uh... it is simple as premium being thirty one percent and then the rest is just loyalty and cargo also as part of the main cabin so as part of the fifty five percent any color on how basically urban site saver uh... contribution has changed your on here

And in addition to this the recovery we expect in the international demand.

<unk> get to an Investor day at some point in 2024.

Our international domestic demand mix in the west coast recovery in business recovery.

Very good thanks for the time guys.

A lot more that Andrew and his team are starting to think about and look at from a commercial.

Thanks, Dan and thank you everyone for joining us for our call. We will see you next or talk to you next quarter for those we didn't get to our IR team will be it will be in contact with you. Thanks everybody.

Initiative perspective, they've done a great job delivering and we don't get to talk about them on the calls but delivering on many of the initiatives. This year, we're selling things like exit rows seats now that we've not done before.

This concludes today's conference call. Thank you for attending.

Speaker 5: Thanks, Jamie. We're not going to go into the details of that. Obviously, I think you've heard other airlines quote, we don't have MROs and other things, but we feel very diversified as it relates to what is not the main cab.

Huge uptick in first class and premium class load factors, while yields in those cabinets are going up that is both demand and things that the e-commerce and distribution and pricing team are doing.

Speaker 5: I think in our slides, we provide some of that breakdown there, about 35% of it is premium cabins, and some carriers have zero percent. So I think as we've shared all along, we feel like we live more in the group right now that has premium products.

And theres more of those types of things that we're thinking about for the next year or two and we'll talk more about that as we firm plans up and include them in our guidance.

And or get to an investor day at some point in 2024.

Yeah very good thanks for the time guys.

Speaker 4: and global reach as it relates to our business model versus those that do not. Yeah, I think Jamie, I think the point here with those stats is just to differentiate us among the mystic carriers.

Thanks, Dan and thank you everyone for joining us for our call. We will see you next or talk to you next quarter for those we didn't get to our IR team will be will be in contact with you. Thanks everybody.

Speaker 4: We are the only domestic care with that suite of offerings with the premium. Again, lounges, the global access, you know, this cruel and redemption of miles.

This concludes today's conference call. Thank you for attending.

The host has ended this call goodbye.

Speaker 4: We do separate ourselves from, I think, what do you call them low, low margin airlines? Low margin airlines. You came up with a new acronym. Like my point here is we are not in that group based on the offerings. You know, we invest the heavily in our product. We have over 300 airplanes in our fleet.

Speaker 4: Every airplane airplane including original, as a first class, as a premium product.

Speaker 4: And again, when you add our one world membership, our global access, our lounges.

Speaker 4: it is a campaign telling product and it to be honest jaymy it's why our margin is equivalent to delton united

Speaker 4: and Q3 despite not having the international tailwinds and having the headwinds of Maui and the refining margins. So the business model is resilient.

Speaker 6: And last, Jimmy, you asked about Saver. It's doing quite well to its up.

Speaker 4: strong double digits year over year. And I think it also speaks, and you heard this from other airlines, we can access the price sensitive part of the market really well too. So yeah, and that was one reason I asked. Yeah, yeah.

Speaker 18: no listen i appreciate the color but uh... it is so so let me press it on premium you cited you know you're obviously enthusiastic about it in area for growth you leaned into this when you enter robby's question a couple moments ago should we think about premium growth

Speaker 18: more as yield upside or as you think about that four to eight percent capacity number you know are you considering possibly expanding the cab and i ask in part because you know american you know spoke to this just a couple of hours ago so it's you know top of mind

Speaker 6: I don't think you're gonna see like a wholesale, you know, refurbishment of the interiors. I will say that.

Speaker 16: We're still working on our max eight interior and we would love to get 16 first class seats and that our eights carry 12 today. The rest of the main line fleet carry 16. And you know, it's relatively small but could have 59 airplanes. Yeah, 59 airplanes. And it could have a good impact, obviously for us once we get there, but that's a couple years off if we end up getting it done. Yeah. Okay, cool. Thanks gentlemen. Appreciate it. Take care. Thanks, Jimmy.

Speaker 19: Hey, thanks. So I just want to go back to this fourth quarter, Rasm re-acceleration, just given the implied September trend. So I just want to understand, are you seeing this already show up in October or is this more of a November , December ? And I guess...

Speaker 19: That's a direct question, just philosophically. Like if we're slowing capacity and we're seeing sort of an immediate raz and benefit, like why even think about 48 for next year? Why isn't it like we're not going to grow until we actually start grow at all until we see.

Speaker 6: Yeah, I'll always add to it. That's an injury. Yeah, no, no, no. I think it's a good question, Scott. Andrew can speak to the, you know, where we're seeing the sequential improvement if it's already on the books or sort of to come. I think on the capacity.

Speaker 6: I think the way to think about it is we've been pretty clear about our first quarter. A capacity being relatively modest, certainly versus 2019. Andrew mentioned in the script where we were up six points versus 2019 and Q3, two points and Q4. So at least

Speaker 6: From our view, Scott, I think what you're asking is exactly what we're doing. We're not ready to talk about fully your next year yet, but right now, given fuel, and where we see pricing, we're making the right.

Speaker 5: decisions in terms of capacity management. And the only other thing I would add to Scott, and you don't see this obviously in the details, but

Speaker 15: Even the reduction in growth relatively speaking has been helpful for sure. We also had some regions with some very significant growth. And I mean, very significant. And I think we've abated those back down to more normalized levels. And that's where we're seeing the greatest upside with some of this slowing capacity. So there's micro regions which we've really dialed up back and we're seeing immediate help from that.

Speaker 19: And then Shane, you talked about...

Speaker 19: working on some pushing out some deliveries. What does that mean for overall cat-backs?

Speaker 6: Yeah, thanks. I, uh, just, um, the color. So you guys sort of understand and I'd mentioned this high level in the, in the prepared remarks. So we're going to be at 1.7 billion this year down from our original, um, thoughts about CapEx in 2023.

Speaker 6: And it's going to be under that next year. I think we're not quite ready to say how much, but I would think in the couple hundred million dollar range minimally.

Speaker 6: We'll, you know, we'll say more about that in the January call.

Speaker 6: Nat can just very briefly speak to what we're doing with Boeing, the great partners in this, and it speaks to the flexibility that we were able to build into this order book with them. Hey Scott.

Speaker 11: We are working with Boeing just to reshape 24 and even into 25 of that, to a capacity level that we think maximizes profitability.

Speaker 11: One of the other variables that we're managing is the max 10 certification. So that airplane originally scheduled to come to us next year. Certification obviously is its own story and pushing out to the right. So...

Speaker 11: Good common ground with us and Boeing to sort through. When does that airplane come? The economics we've been really clear on how much we like the Max 10 and we want to take as many of those as we can. So it gave us the joint impetus to then, let's reshape 24.

[music].

Speaker 11: and as a result, manage our capacity down a little bit. You've heard us talk before. We leverage the proximity with Boeing. We talk to them all the time. And it's really good partnership with great flexibility.

Speaker 2: We'll take our next question from Brandon Oglinski with Barclays Cap-

Speaker 3: Hi, thanks for taking the question. So, you know, I heard some comments earlier about trying to be disciplined around growth, and I know you guys have mentioned that, you know, you're gonna try to slow growth in the first quarter next year, but.

Speaker 3: i guess just thinking through some of the trend that you're talking about with lower corporate you know uh... shoulder demand being a little bit less than you would have thought is this just you know looking forward should we expect margins at last car just going to be lower in poor q and one q structurally i mean they have historically but so we expect

Speaker 4: even more volatility in the future. And does that reshape your commercial focus I guess during your peak periods? Do you take more price then? I mean, how do you reach...

Speaker 3: The formula to get the prior margin target that you guys set out.

Speaker 6: Yeah, thanks, Brendan. I actually think about it a little bit, the opposite. I think...

Speaker 6: The work that Andrew is doing and his team are doing in the first quarter is meant to improve. The margin profile of the first quarter, I think we talked to calls ago that then had given the commercial team a challenge to over the course of a few years move back towards break even in the first quarter. We are the most seasonal airline, the sort of peakiest airline we have been through basically all cycles.

Speaker 6: So we understand when and where we make all of our money. And I think we're really good at managing capacity and the peak environment.

Speaker 4: Q4, honestly, I think this Q4 is a bit of an aberration. I think the results are really a consequence of this refining margin differential in fuel price. And the continued, but normalizing surge in international demand. And I think once that normalizes, we're set up really well to do good. And Q4 will probably...

Speaker 6: you know, be somewhat lower than some of the other carriers who tend to have less speakingness in their year, but I think we'll be more competitive on a relative basis.

Speaker 3: I appreciate that response, but I guess as you reshape the first quarter, that's kind of at odds with the prior view that long-term chasm could actually decline in the outhairs. Is that why I heard you say it's going to take a couple of years to get back to those productivity targets?

Speaker 6: Well, look, I think it's very correct to think that there's a correlation between capacity deployment and unit cost. The more we deploy capacity, the easier it is to see unit cost decline.

Speaker 6: But we haven't lifted it off of the idea of, you know, unicost, ultimately going down over time.

Speaker 6: We'll say more about 2024 and the trajectory when we're talking about guidance for next year, Brandon, but this is something we're thinking about a lot.

Speaker 6: I just reiterate that as we come out of all of this, we're gonna have exposure to all segments of demand, including premium, we're gonna increasingly be attractive from an international perspective to our partners.

Speaker 4: And I think we're going to have the best relative cost structure story of anybody in the industry. And so I think that setup is really good to continue to be a margin and financial performance leader over the long term.

Speaker 2: Our next question comes from Catherine O'Brien with Goldman Sachs.

Speaker 2: So, you know, we've heard from through your peers so far that the tech sector is...

Speaker 20: It sounds like you didn't see that in the third quarter. I think your comment was a stable. But then just mentioned to Ravi, there's been some momentum in October . Can you help us size order magnitudes?

Speaker 5: Thanks, Katie. Yeah, I mean, and certainly, excuse me, some of the larger technology companies have seen quite a significant movement in volume. And of course, it depends where they fly. As I said, some of the yield environment right now has offset some of those volumes, but for sure there has been positive movement in California, Pacific Northwest. These big techs cover both regions actually. So, you know, some promising signs there.

Speaker 20: And then maybe for Shane pardon the modeling question, but just trying to get a sense of the aircraft's run tailwind into next year. Is there further down side for 3Q48?

[music].

Speaker 20: Can you just help us think about what the right exit rate is for this year on that line item? And, you know, are there any additions on Lee Saircraft which is...

Speaker 12: Hey Katie, this is Emily. What you saw this quarter in terms of aircraft current was a pretty good normalized level. We've...

Speaker 12: Now, removed all the Airbus Least aircraft from the book. So you're not seeing that rent come through. We've taken delivery of all the max Least aircraft that we're going to have, which is the 13, I believe, 13 over the last year. So that's...

Speaker 12: pretty normalized now. You will start to see from an ownership perspective, depreciation will take up to offset some of that as we've taken on so many new MACS aircraft and those will start depreciating through the book.

Speaker 2: their next question will come from Dan McKenzie with C-Port Global. so I hope they are available.

Speaker 9: Andrew, when I look at Alaska's network in California, it looks like the state is only about 80% recovered relative to, you know, the footprint that was there in 2019.

Speaker 9: So it looks like a pretty big revenue hole that has yet to recover. And if I'm not mistaken, I believe it accounts for about 23% of Alaska seats. So my question really is that that part of the network were fully restored. You know, what is the size of that revenue hole that could eventually go away? Or however you can size it would be helpful.

Speaker 5: Well, I think if I'm understanding your question, Dan, I think again, we're not gonna put seats into a state where there's no demand. So your observations are absolutely correct as far as a capacity and we're down and I think other carriers are down as well. I think what I'm still seeing here is even on tech and non-tech, and I repeat, non-tech business.

Speaker 5: has not been as good at all versus what's happening in the Pacific Northwest. So we're going to, again, we talked about the network where we're going to be very disciplined and thoughtful.

Speaker 5: about how we maintain our network and where we fly out seats. But again, as we've spainting for some time, I don't think that's going to be forever and we're going to be very prepared and in a good position as the man begins to strengthen and crawl back up that demand curve.

Speaker 5: back to 2019 levels to be able to serve that demand.

Speaker 9: Yeah, understood. And then Shane, I think I might risk kicking a dead horse here. My question is really the same as others here. And that's just to...

Speaker 9: I really just to close the circle on the path back to low double digit pre-tax margin. I think you touched on fleet commonality at 75 million. It looks like Maui annualize might be close to 80 million or so.

Speaker 9: So it looks like maybe one and a half points to pre-tax margins there. Or please correct me. But from where you sit, what are the biggest revenue and cost opportunities that get you where you want to?

Speaker 6: Thanks, Dan. And I want to underscore what Andrew said a second ago just so we don't lose the point. One of the things I think you all should be thinking about in terms of Alaska setup is

Speaker 6: We're still in the least recovered portion of the country and still fighting for industry's best margins. So I just think there's goodness to come overall for the company in terms of your question.

Speaker 6: Yeah, the cost side is really leaning out the company, getting rid of...

Speaker 6: not all of the buffer we've put in but starting to work that back getting closer to the 2019 productivity levels.

Speaker 4: I think there is opportunity to further leverage technology and

Speaker 6: automate more of what the guests do and we're certainly going to be working on that over the next few years as I think every company is going to be doing. I'm a revenue side, like once we see sort of where demand normalizes.

Speaker 6: And in addition to the recovery we expect in the international demand, international domestic demand mix in the West Coast Recovery and Business Recovery.

Speaker 6: There's a lot more that Andrew and his team are starting to think about and look at from a commercial initiative perspective. They've done a great job.

Speaker 6: Delivering and we don't get to talk about them on the calls, but delivering on many initiatives this year, we're selling things like exit roads seats now that we've not done before. A huge uptick in first class and premium class load factors, wild yields in those cabins are going up.

Speaker 6: That is both demand and things that the e-commerce and distribution and pricing team are doing.

[music].

Speaker 11: And there's more of those types of things that we're thinking about for the next year or two and we'll talk more about that as we firm plans up and include them in our guidance. And or get to an investor day at some point in 2024.

Speaker 16: Thanks, thanks Dan and thank everyone for joining us for our call. We'll see you next or talk to you next quarter for those we didn't get to. Our IR team will be it will be in contact with you. Thanks everybody.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 third quarter earnings call.

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

Today's call is being recorded and will be accessible for future playback at Alaska Air Dot 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 Brion St. John .

Thank you operator and good morning, Thank you for joining us for our third quarter 2023 earnings call. This morning, we issued our earnings release, along with several accompanying slides detailing our results which are available at Investor day at Alaska Air Dot Com on today's call, you'll hear updates from Ben Andrew and Shane several others of our man.

There's been team are also on the line to answer your questions during the Q&A portion of the call.

This morning Air Group reported third quarter, GAAP net income of $139 million.

Excluding special items and Mark to market fuel hedge adjustments Air group reported adjusted net income of $237 million.

And as usual we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release over to you Ben.

Thanks, Ryan and good morning, everyone.

Before getting to our results I'd like to start by acknowledging the human aspect of the work we do this.

This past quarter close to home, we saw wildfires spring devastation to the West Maui community.

More recently, we've been horrified by the terrorist attacks in Israel, and we mourn for the innocent lives lost I want to acknowledge that people are hurting and while we share in the privilege of connecting families and communities.

So sharing the pain of seeing those around the world suffer.

During the quarter, we ran the best operation in the country, delivering a 99, 7% completion rate and on time rate of over 80%.

On September 30th we retired our last Airbus aircraft from service, marking our official return to single fleet.

We drove unit costs down nearly 5% year over year, a strong performance that stands alone versus our peers and achieving year over year unit cost reductions.

Now moving to where we are today.

<unk> been in this industry, a long time, I know as well as anyone how volatile it can be and we are seeing this now.

While we expect this divergence to be temporary it is nonetheless, a near term headwind absent this $50 million cost in Q3, we would have led the industry in adjusted pre tax margin.

Demand remains strong in peak periods, but show the periods are becoming more susceptible to lower demand without a full return of corporate travel.

Despite these near term headwinds that will likely make the next quarters more challenging I continue to believe we have a strong fundamental long term setup for several reasons.

One our teams continued to deliver reliability.

Now have two solid quarters in a row of industry, leading performance and I can confidently say, we have our operational muscle back I want to thank all our employees for their hard work and effort. They have done an amazing job prioritizing and delivering a safe and reliable operations for our guests our completion rate not only led the industry, but said 'twenty.

Year Company Records in all three months of the quarter during peak summer flying continuing to surpass our planning expectations too.

Our relative cost advantage comes from decades of disciplined and became a highlight in the third quarter, but visibility to another quarter of unit cost improvement year over year, we expect full year CASM ex to be down 1% to 2% likely the only carrier to achieve unit cost reductions for the year.

Having retired our last Airbus aircraft in September we brought our dual fleet chapter to a close and are poised to fully recognize the power of a single fleet efficiencies as we move into 2024.

Three we have the most diversified revenue of domestic focused airlines generating 45% of our revenue outside the main cabin.

Our investments in fleet and premium seating have given us a domestic product that rivals any in the industry, including first and premium class.

Lounges, and global partnerships that will continue to serve us well going forward.

Off peak periods going forward.

<unk> well into the future.

Now more than ever we are focus on extracting efficiencies from both sides of the profitability equation with all the elements in place to drive strong relative results within our evolving industry.

And with that I'll turn it over to Andrew.

Thanks, Ben and good morning, everyone. Today, My comments will focus on third quarter results.

<unk> trends.

Our outlook for the rest of the year.

Third quarter revenues reached $2 $8 billion up four tenths of a percent year over year on 13, 7% more capacity, which was approximately one point below our revenue guidance midpoint.

Revenues were down 11, 7% versus 2022 and up 12, 2% versus 2019.

<unk> been in the past couple of years.

Third the devastating Maui wildfires impacted third quarter revenue and therefore profit by approximately $20 million for reference Hawaii represents nearly 12% of our capacity.

With one third of that deployed to Maui.

Following the wildfires in early August bookings turned negative with high rates of cancellation.

This reversed at the end of August as bookings Tomorrow. We began recovering however September bookings was still down 45% versus last year as.

Curt I full frequency from Seattle and trimmed capacity from other hubs, we will continue capacity adjustments to match supply with demand, while serving the people of Maui during the recovery process.

Lastly, although not a part of our baseline we saw no upside benefit from corporate travel as revenue continues to hold at about 85% of 2019 levels.

Having covered our headwinds, though there were several positive results in the quarter as well.

With respect to product our premium cabins continue to materially outperformed the main cabin with first and premium class revenues up 10% and 6% year over year, respectively.

Alaska is the only primarily domestic carrier to have both first class and premium economy across 100% of our mainline and regional fleets. These.

These premium seats represent 25% of our total sites and continue to be an area of opportunity for us in sustaining higher yields and other domestic focused competitors.

Especially as travel preferences continue to move in a more premium direction.

Total premium paid load factor was up three points year over year, but has increased over 10 points on 12% more seats versus 2019.

Today premium revenue represents 31% of our total revenue contributing to the 45% of total revenue we generate outside the main cabin.

Putting aside premium for a moment.

We are also seeing success with more guests buying out from Saba into our main cabin product.

<unk> has occurred at 22% higher fares versus last year.

Loyalty remains a strong driver of revenue performance as well.

Cash remuneration was up 11% versus the third quarter of 2022.

Pacing system revenue that was only up four tenths of a point.

We continue to make solid progress on our strategy of being able to directly sell at one world and other partners on Alaska Air Dot Com.

We launched 13 patents this year, bringing our total to 18 partners with over 500 destinations worldwide now being sold direct on our website.

These efforts will continue as we enable selling all cabins on our partners and continue to upgrade the digital guest experience on our website and within our native App.

This is another area, where we are clearly differentiated from other domestic focused carriers.

We are the only primarily domestic carrier that offers access to a portfolio of global partners, where we offer elite status recognition accrual in redemption and airport lounge access.

This capability along with our premium cabin offerings gives me confidence that we will have built the right commercial offerings to meet our guest's preferences and drive long term value to a group.

As we shared on our last call. We have continued to see our guests take advantage of our global partner network with total accrual and redemptions on a long haul partners up 26% for the third quarter versus last year.

And unit revenues up 12% on capacity growth of 6%. This is a testament to the soundness of our business model and the success of changes we've made since 2019.

Now turning to fourth quarter guidance, we expect revenue to be up 1% to 4% on capacity that is up 11% to 14% year over year.

In terms of bookings holidays are in line with our expectations with load factors up a couple of points and yield up double digits versus 2019.

As I mentioned Nonpeak shoulders are weaker than 2020 twos historic demand levels in part driven by a return to more normal seasonality and a continued but we believe temporary demand shift towards international travel.

We have approximately 58% of November and 35% of December revenue booked.

Given our fourth quarter outlook and current demand backdrop, we are narrowing our full year revenue guide up seven to eight.

The most significant step up in capacity occurred during the third quarter as we work to restore our pre pandemic network. However, in the fourth quarter and into the first quarter of 2024 hour growth follows more in line with normal seasonal patterns after growing 6% above 2019 levels in Q3.

Looking ahead, we remain confident in our commercial plan and cognizant of our environment.

The team has taken a hard look at our first quarter network amidst high fuel prices as part of our commitment to improving Q1 profitability.

We are focused on managing capacity prudently, including capitalizing on leisure destinations, including 15, new routes, such as Seattle, and Los Angeles to Nessa, al which will bring in new revenue, while also constraining our total capacity growth to low levels.

And reducing business heavy routes and frequencies for example, we've trimmed out higher frequency Pacific Northwest and California business seats, 22% versus January and February of last year.

To wrap up we have a solid commercial plan that is producing results are combination of premium products valuable loyalty program and global offerings through our partnerships in one world allows us to provide guests with what they want while producing strong financial results and we're looking forward to building on that moving forward.

With that I'll pass it over to Shane.

Thanks, Andrew and good morning, everyone as we discussed on previous calls for the past year, we have prioritized returning Alaska to operational excellence.

This is what our guests deserve and it allows us to have more predictability across the company, which we can ultimately leverage to improve efficiency and cost performance. It.

It was encouraging to see during the quarter that as we've delivered the industry's most reliable operation our teams have begun to turn the corner on our cost profile as well.

For the third quarter, adjusted EPS was $1 83 and.

And we delivered an adjusted pre tax margin of 11, 4% unit costs were down four 9% in economic fuel cost per gallon was $3 26.

Which was materially impacted by refining margins on the west coast that averaged 30 cents higher than the rest of the country.

Which we believe will prove to be an anomaly, but materially impacted our performance relative to others.

Absent this refining margin differential or the $20 million of loss profit due to the tragedy in Maui allows.

Alaska would have led the industry in margin despite not enjoying the current surge in international demand or further rebound of corporate traffic.

Debt payments for the quarter were approximately $93 million and are expected to be $45 million in the fourth quarter.

Our debt to cap remains at 48% unchanged from last quarter, while net debt to EBITDAR finished the quarter at one one times, both within our target range.

We have also revised our full year Capex expectation to one 7 billion for 2023 and fully expect 2024 to be below this amount as we are currently reshaping our near term delivery stream with Boeing to accommodate a more conservative 2024 capacity plan.

Our share repurchase program has as intended to offset dilution year to date with spend reaching $70 million, while our trailing 12 month return on invested capital ended at 10, 7% this quarter.

Moving to costs, the third quarter marked a turning point for us in terms of our performance CASM ex ended down four 9% year over year coming in below our guided range of down 1% to 2%.

We saw productivity improved 2% year over year, and we will continue to work toward returning to 2019 levels.

Other areas, we saw good performance relative to our plan included maintenance aircraft ownership and selling expenses.

Asm's were slightly ahead of guidance on the continued outperformance in our completion rate, providing a small additional benefit to unit costs.

And lastly, we have lowered our anticipated performance based pay accruals given the tougher setup in Q4, which also benefited CASM ex fuel this quarter. However.

However, absent both of these last two impacts unit cost would have still closed below our guide.

As Ben mentioned, we crossed a significant milestone to end the third quarter as we retired our last Airbus from service.

Lastly, as I mentioned <unk> became a significant headwind during the third quarter la refining margins diverged materially from Gulf coast levels, moving from less than eight cents difference on average for the first half of the year to 30 during the third quarter and at times exceeding 90.

While we have every expectation. This divergence is temporary it has created a material headwind to our near term profitability.

For the fourth quarter, we expect fuel price per gallon to be between $3 30 and.

And $3 40 per gallon, which is an approximate four point impact to margin compared to our expectations back in July .

Fuel combined with pricing moderation have led us to revise our full year adjusted pre tax margin to 7% to 8% approximately three points lower than the midpoint of our prior guidance.

We expect CASM ex to be down 3% to 5% year over year in the fourth quarter and our full year CASM ex to now be down 1% to 2% on capacity up 12% to 13%.

To close we have run an excellent operation for several quarters, our pre tax margin exceeded peers with greater international tailwind. Despite our refining margin disadvantage and sizable impacts from the Maui wildfires, we delivered a strong unit cost results for the quarter and have visibility to another strong result next quarter, we remain focused on.

And very intentional about setting targets and ensuring we take the right steps to deliver against them, our commercial offering with premium cabins and global access through our alliances is configured to compete in a way other domestically focused carriers cannot our operational strength has returned and our cost management is outperforming the industry all of which are.

Fundamental drivers of sustained long term success 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 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 comes from it comes from Duane <unk> with Evercore ISI.

Yes.

Hey, Thanks, good morning.

So you gave an update I think a week or so into September can you just talk about whats shifted over the over the latter part of the month.

How that played out relative to kind of what you thought what September 9th.

Hey, Duane it's Andrew I think it was like at the beginning of September I think.

We had reiterated our guide I think two things.

And bind.

I think on $2 8 billion. It was probably like $15 million were up so that's the main reason, but fundamentally the business.

Was where we thought we were going to be.

Okay and then just.

To segue to <unk>.

Hawaii can you maybe playback some history and talk about the current picture and maybe delineate between Maui and and non Maui bookings that would be very helpful.

The Maui was sort of reset but as we go into next year. We don't see any reason that we won't continue to recover and we won't see traditional.

Good solid demand to Hawaii, Hawaii franchise.

Okay, sorry, sorry to be deliberate there.

Hawaii bookings ex Maui would you characterize that as stable flash normal.

They are a little softer than historical but we've seen that for some time I think just as.

Just the capacity into the islands and of course, some of the pricing pressure.

Presses in Hawaii, the cost of going to Hawaii, but overall, we feel pretty good about it being somewhat stable.

Thank you very much.

Thanks Duane.

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

Hey, good morning.

I was curious if you can kind of provide a little bit more color on the contributors of that sequential improvement and.

And how we should think about it then as you go into the.

The first quarter and you make more adjustments as well.

Yeah. Thanks, So I mean, it's very interesting I think.

Whats really positive and some of the sequential improvement as you just look at our capacity.

In the third quarter and how much higher it was versus 19 versus the fourth quarter and then some of the as I shared in my prepared remarks, where we had pushed some capacity out into the fall in some of these mid con markets and some of these other key areas.

We brought that capacity back down starting in October and we are already seeing the positive effects of doing that.

Yeah.

Got it so that's the big driver.

If I might.

Ed.

Growth plans that you mentioned for next year.

Yes, I mean, thats correct and we've been clear as we go into the first quarter are we going to be around 3% or so over 19 levels and again, we've looked really hard at al.

Lowest demand period for Alaska at least in the January February time period, and we feel like we've made some pretty good reduction there and we made debt well ahead.

The bookings of those.

Flight. So we feel really good about the setup as we go into the first quarter.

Helpful. Thank you.

Thanks Savi.

And we'll move next to Andrew <unk> with Bofa Global research.

Hey, good morning, everyone.

Andrew.

In your prepared remarks, you said you are it seems like you're booked well ahead for November then another airline that reported earlier today is that 58% booked sort of a normal cadence for you or is it more of how youre looking at close in trending today and just wanting to book more of that.

A bit further out the unusual.

I think our comments were a little bit related to when you compare it back to say 2019.

Thanksgiving sort of falls within the month.

But if you average it out between Thanksgiving.

Thanks, giving and Christmas sort of in November and December .

A little higher on the on the on the bookings, but not very much and right now we're just making sure that we manage that coming in with good solid yield.

Out the year.

Okay understood and then also Andrew on the last call I thought you shared some good statistics on the shift you're seeing two international bookings on your on your partners over the summer.

Curious if you've begun to see more of a normalization, there and maybe share shift back to.

Domestic or do you continue to see that elevated.

That elevated international demand booking on your partners. Thank you.

Hi, Thanks, I think we're seeing exactly actually what we saw on the domestic front, whereas last year pushed well into the.

The shoulder season, I think that's what we're seeing at least from our members on the international So just to remind folks in the summer.

We reported that we were up sort of 50% of our members year over year accruing and redeeming internationally that number is only 26% for the fourth quarter. So we're certainly seeing it coming down.

So of course, the question will be will that get normalized by next year. What we're seeing right now is it's on its way to normalization.

Great. Thank you.

Thanks, Andrew.

And we'll move next to Helane Becker with TD, telling.

And thanks, very much operator, hi, everybody.

Two questions one.

When you talk about maybe this is for Andrew when you're talking about optimization of the network.

Can you just describe maybe more fully what you're talking about I know some of it is not flying as much in the first quarter and.

<unk> 2004, as you did in 'twenty three because of the shifts in the way people are flying and the fact that corporate probably back as far as it's going to go right I can't imagine that there are a lot of day trips between Seattle, and Portland, or Seattle and <unk>.

In San Fran San Fran L anymore, given the unreliability.

Exogenous pressures right. So how should we think about what optimization exactly means.

Yeah, Helane I think.

What I would say when I talk about optimization look we're at a place now where we see where fuel is at elevated and has been for some time.

The whole industry has a new set of structural unit costs and we're also seeing sort of the.

Sort of a settling down of overall capacity across the country.

So given those things way.

Looking much harder at where we end business as you raises another point.

We are looking much harder about where we're putting out airplanes and high frequency routes leisure versus business time of year.

Just to be Frank we probably been less concerned about being more surgical during summer.

But the reality is this.

Net.

Okay, that's that's sort of helpful.

Until things kind of revert to more normalized behavior and you have to fix it again, but.

That's not a new problem.

My other follow up question.

On the <unk> hundred 20 ones that are being.

I thought those are actually going to be leased in aircraft, but they are being transferred over to American.

So I didn't see it in the press release that that doesn't mean anything it just means I didn't see it.

Can you talk about the accounting for that can you comment on that.

Cost of what they are paying you or any information that would help us think about that for you guys.

Hey, Helane, it's Matt Thanks for the question.

I'd say this transaction is probably one of the more complicated ones that I've seen in my 25 years of doing this but our thinking on it is really simple we've been public in the six to eight years left.

On these above market leases that Alaska acquired as part of the Virgin transaction and our objective was just trying to transaction and build it that economically offset those remaining obligations. We have been working it for 12 to 18 months.

Just happy to get this process to a close because as you know this is the last unlocked to truly get us to a single fleet.

Just like we don't comment on pricing on any airline im not going to comment on pricing of what American is paying us, but we feel good about the economics and again covering what our PV of lease obligations was through the extended period of those leases and then I'm going to kick at the MLP on the accounting side.

Just where that is.

Thanks, Matt.

Helane, we have taken.

Vast majority of it.

With these transitions.

Already you've seen us in special charges over the last 12 to 18 months as Matt noted cash wise, we're about two thirds of the way through the cash that we're going to incur with us of course as we've purchased the leases or the plans from the lessor is and then we saw the planes to American there'll be cash inflows and outflows. So that that two thirds of the $300 million to $350 million total cash exposure.

That we've shared with you guys previously we've already incurred that and then the remaining one third will happen over the next two quarters.

Great. That's very helpful. Thanks, Emily Thanks Nat.

And Andrew Thanks Helane.

And we will hear next from Conor Cunningham with Melius research.

Hi, everyone. Thank you Helene maybe you could send me those notes on the account.

Good morning, before our first clean year, it seems like on an <unk>.

Thank you.

<unk> side could you just talk about the moving parts as you think about headwinds, maybe finance and accounting treatment, so our productivity offsets.

That are clearly in the cost structure now thank you.

Hey.

Thanks, It's Shane Youre, breaking up a tiny bit I think you were asking about 2024 sort of puts and takes on costs.

The high level I think we're not quite ready to fully discuss.

24, our cost guidance or anything like that but the areas that we will have headwinds won't be a surprise I think there is continued investment in airport infrastructure that we'll see come into the P&L next year.

Across all of our major hubs and Thats just the generation no reinvestment that is needed in these airports.

Will still be some labor cost headwinds, we've got to annualize the market rate adjustment, we did with the pilots we're really hopeful we get.

The ta with our mechanics fully ratified we'll have that in the cost base next year, and then pretty much the entire industry needs to get contracts done with with flight attendants, which were really anxious to do an actively in the process of negotiating I think on the other side. We've now got truly a single fleet. We should have almost every Airbus pilot trained over to the Boeing by the.

End of the year.

Really we need to start looking at leaning out the operation and focusing again on productivity.

At all it took us a lot to get to where we are on the operation we're going to we're going to keep operating well, but lots of opportunity to get more productive over the next couple of years.

Okay. That's helpful. And then you guys have been pretty rational in 'twenty four it seems there are some industry that's really not.

At the current moment like when you think about.

Potential share losses versus protecting margins does that matter to you in the near term if it's potentially just a temporary thing just curious how you think about it given the fact that you're following that so much growth relative to some of the others out there. Thank you.

Conor it's been of course market share matters to us, especially in our key hubs. So we will protect our key hubs fiercely.

Maintain the market share of course, we're going to look at areas where.

There won't be such an impact to us but again.

This industry is very capacity dependent and.

And it has a huge leverage on profitability. So we're going to take a hard look.

The teams are out there looking at next year's capacity. Unlike like Andrew said, we're going to look at Q1 really hard fringing on days, where we have to fringe and flying hardware, we can fly hard so.

It's a delicate balance.

But we are determined to get as close to right as we can on this.

I appreciate it thank you.

Thanks, Thanks, so much garner.

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

Yeah.

Thanks, everyone.

So I know, we're all chasing what normal seasonality is and they've already been a couple of questions on the call, but I'm wondering to what extent do you think gets the return to office.

That's kind of impacted shoulder season compared to the last couple of years.

And kind of maybe that's restricting the ability of the so-called leisure travel if you will and that actually sets up for peak your peaks.

And the next couple of grounds.

Hi, Ravi.

Did you mentioned.

We turned to office and I think we will see the public statistics that sort of thing.

Sort of slowly climbing its way back, but still a long way off.

What I would share is that we have seen between September and October , especially in our high Tech where we've started to see.

In some places with some accounts a decent uptick in travel, albeit overall general yields are not where we havent seen them. Historically, so I think this is still a moving subject but.

But I think if you just look at the macro sides of our network and traditional business versus leisure.

For us specifically.

I think it's just beyond more some of these believes that traveler.

Conversation, but what we are seeing is beginning to see a little more strength come in on the corporate side and again, we just have a lot of opportunity.

Our core high frequency, Ralph it's getting those to a place where they can support the current demand as well as the new unit cost.

Production that the industry faces.

Got it and maybe as a follow up kind of view.

You spoke about how you are being more rational eliminating opioids on capacity growth for next year.

But he also kind of mentioned a few headwinds so if you were to rank.

The current softness in the domestic demand environment.

Extreme capacity growth plans by our competitors or fuel headwinds like whats the order of those three headwinds that would make you kind of question your capacity growth plans next year relative to what you currently have in mind.

I think I would I think fuel for us is a big one.

Especially with like we talked about DLA refining margins on the West Coast, we are paying.

<unk> <unk>, a gallon more than everyone else across the country. So it is a huge headwind for us in terms of capacity.

And I believe that we can always extract the higher revenues because of the brand we have our premium offerings lounges.

Global access so.

So I would say fuels is the biggest headwind the other thing I would say even with cost.

We have cost discipline in our DNA, we've shown this year that.

We Brian and unit costs down this is something that we're wired for wired for high productivity of resources and assets and so I feel confident we're going to get back to the place that we've been in single fleet I am just ecstatic.

Starting October one that we're now back to an all Boeing fleet and I think you're really going to start seeing those synergies come in so those are the things I think for us.

That we can control and.

And I think we have the right set up in the business model to go execute.

Excellent thanks, guys.

Thanks Randy.

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

Oh, Hey.

Good morning, everyone, Hey, Andrew.

Andrew you talked about.

As you look out towards holiday travel you mentioned that loads are up a couple of points yields are up double digit. So obviously that looks very good for the latter part of the year does that hold or do you think some of that also reflects the shifting of the booking curve or maybe in the past we saw people booking closer in and maybe this holiday season as you've said before.

Seasonality is returning booking curves are becoming more elongated how much of that is possibly going to shift or change because of those factors.

Yeah. Thanks, Mike just for clarity the comments that you just shared that I had made was.

It was versus 2019.

I think yes.

Last year, obviously, it was very different very different fare environment capacity set up. So we just wanted to anchor back in on 2019, which is a very stable normalized and so we've been very encouraged.

What we've seen and I think.

We've seen I think when you look at the industry right now.

When you look at 2019, our unit revenues sequentially flat Q3 to Q4.

Where the industry is down anywhere from 1% to five points and then if you look at 'twenty three as we shared we're up three points, where the industry is sort of flat to up one so we feel like.

Number one I would say that what we are seeing at least in our network is outside of this business.

Travel matter.

Back to sort of normal booking curves normal demand environment.

And I think some of the reduced capacity and re allocation of capacity is serving us very well.

Great and then just a quick second one I don't know if you mentioned this or it was Shane who said look the goal next year is to return back to 2019 levels on a productivity basis, so a little bit different than sort of a network optimization, but.

If we get back to 2019 productivity help.

Help me translate that into like a CASM benefit is that like a point or two of CASM tailwind and how long does it take to actually get.

Get to 2019 productivity is that through the year or is that a 'twenty 'twenty five type objective.

Any color on that would be great. Thanks.

Hey, Mike It's Shane Yeah.

One one thing let me, yes, hi, I'll clarify I think it's going to take US a couple of years, Okay 2019.

We're going to work it.

Methodically and like I said, a couple of answers ago, we're not going to overly stress the operation now that we've got it working really well.

Worth at least a couple of points all else equal of unit costs.

There were no other puts and takes I mean, I would say minimally.

With that I think we sized single fleet alone at $75 million of benefit.

And then we have we have less productivity in many areas, whether it's aircraft utilization or other work groups.

And all of those are opportunities to get better from where we are I think we're doing better than the.

The rest of our competitors generally and I think.

Our focus has been will continue to be to come out of all of this with the best relative change in cost structure and I think.

I think we're well on our way to doing that.

Great Great. Thanks, James Thanks, Andrew.

Thanks, Mike.

Your next question will come from Jamie Baker with JP Morgan.

Hey, good morning, everybody. So the 45% of our revenue outside of main cabin can you break that down into various buckets.

Is it as simple as premium being 31% and then the rest is just loyalty and cargo also as part of the main cabin. So as part of the 55% any color on how basic.

Alright saver.

Contribution has changed year on year.

Thanks, Jamie we're not going to go into the details of that obviously I think you've heard other airlines quote we don't have MRO is and other things, but we feel.

Very diversified.

As it relates to what is not the main cabin.

I think in our slides, we provide some of that breakdown there are about 35%.

If it is premium cabins and some carriers have zero percent. So I think as we've shared all along.

We feel like we leave more.

In the group right now that has premium product.

And global reach as it relates to our business model versus those that do not yes, I think Jamie I think the point here with those statuses.

Just to differentiate us among domestic carriers, we are the only domestic carrier with that suite of offerings with.

With the premium again lounges, the global access.

No this accrual and redemption of miles, we do separate ourselves from.

What do you call them low.

Areas low margin airlines.

You came up with a new acronym I like my point here is we are not in that group based on the offerings.

We invested heavily in our product 100, we have over 300 airplanes in our fleet.

Every airplane our fleet, including original has a first class has a premium product.

And again.

When you add our one world membership our global access our lounges.

It is a compelling product to be honest, Jamie it's why our margin is equivalent to delta and United in Q3, despite not having the international <unk> and having the headwinds of Maui and the refining margins. So the business model is resilient.

Last Jimmy you asked about saver, it's doing quite well too.

Up.

Strong double digits year over year.

And I think it also speaks to and you've heard this from other airlines, we can access the price sensitive part of the market really well too so.

Yes, that's been able to that was one reason I asked.

No listen I appreciate the color but.

So let me press.

On premium site.

Sited.

You are obviously enthusiastic about it it's an area for growth you leaned into this when you answered <unk> question.

A couple of moments ago should we think about premium growth more ad yield upside or as you think about that 4% to 8% capacity number.

Are you considering possibly expanding the cabin I ask in part because American.

Spoke to this just a couple of hours ago.

Top of mind.

Yes.

I'll take that I think.

I don't think youre going to see like a wholesale.

Refurbishment of the interiors I will say that.

Working on our Max eight interior and we would love to get 16 first class seats and that our eats carry 12 today.

The rest of the mainline fleet carrying <unk>.

It's relatively small but could have airplanes, yes, 59 airplanes and it could have a.

A good impact.

Obviously for us once we get there, but that's a couple of years off if we end up getting it done.

Okay cool. Thanks, gentlemen, appreciate it take care thanks, Jamie.

And we'll hear next from Scott Group with Wolfe Research.

Hey, thanks.

I just wanted to go back to this fourth quarter RASM Reacceleration, just given the implied September trends. So I just want to understand are you seeing this already show up in October or is this more of a.

November December and I guess.

So that's a direct question just philosophically.

If we're slowing capacity.

And we're seeing sort of an immediate RASM benefit like why are you even think about four to eight for next year why isn't it like we're not going to grow until we actually start.

Grow at all until we see positive RASM again.

All right Andrew.

Andrew Yes, no no I think it's a good question Scott Andrew can speak to the where.

Where we're seeing the sequential improvement if it's already on the books or sort of to come I think on the capacity.

I think the.

Way to think about it is we've been pretty clear.

Clear about our first quarter capacity be.

Relatively modest certainly versus 2019.

Andrew mentioned in the script, where we were up six points versus 2019 in Q3 two points in Q4.

So at least from our view Scott I think what you're asking is exactly what we're doing.

We're not ready to talk about full year next year, yet, but right now given fuel and where we see pricing, we're making the right.

Decisions in terms of capacity management.

And the only other thing I would add the Scott and you don't see this obviously in the details.

Even the reduction in growth.

Relatively speaking has been helpful for sure. We also had some regions with some very significant growth.

Very significant I think we have abated those back down to more normalized levels and that's where we're seeing the greatest upside from some of this slowing capacity. So there's micro regions, which we've really dialed it back and we're seeing immediate help from that.

Yes.

So you are seeing some of it already in October .

Yes.

Okay and then.

Shane.

You talked about.

Working on.

Some pushing out some deliveries what does that mean for overall.

Capex next year.

Yes, Thanks Scott.

Just for.

For color. So you guys sort of understand and I'd mentioned this high level in the in the prepared remarks, so we're going to be at $1 7 billion. This year down from our original.

Thoughts about Capex in 2023.

And it is going to be under that next year I think.

Quite ready to say, how much but I would think in a couple of hundred million dollars range minimally.

Well, we will say more about that.

In the January call.

Just very briefly speak to what we're doing with Boeing are great partners in this and it speaks to the flexibility that that we were able to build into this order book with them Hey, Scott.

We are working with Boeing just to reshape 'twenty, four and even into 'twenty five a bit to a capacity level that we think maximizes profitability.

And as a result manage our capacity down a little bit.

You've heard us talk before we leverage the proximity with Boeing we talk to them all the time.

And it really good partnership with great flexibility.

Thank you.

Thanks Scott.

And we will take our next question from Brandon <unk> with Barclays capital.

Hi, Thanks for taking the question. So I heard some comments earlier about trying to be disciplined around growth. I know you guys had mentioned that youre going to try to slow growth in the first quarter next year, but I guess just thinking through some of these trends that you are talking about with lower corporate.

Shoulder demand being a little bit less than you would have thought is this just.

Had set out.

Yes, Thanks Brendan.

I actually think about it a little bit the opposite I think the.

Work that Andrew is doing and his team are doing in the first quarter is meant to improve the margin profile of the first quarter. I think we talked two calls ago that Ben had given the commercial team a challenge to over the course of a few years move back towards breakeven in the first quarter. We are the most seasonal airline the sort of peak.

<unk> airline we have been through basically all cycles.

So we understand when and where we make all of our money and I think we're really good at managing capacity in the peak environments.

Q4 honestly I think this Q4 is a bit of an aberration I think the results are really a consequence of this refining margin differential.

In fuel price and.

The continued but normalizing surge in international demand and I think once that normalizes as we're set up really well to do good in Q4 will probably.

Be somewhat lower than some of the other carriers, who who tend to have less peaking this.

Our year, but but I think we'll be more competitive on a relative basis as we move forward.

No.

Look I think it's very.

Cost ultimately going down over time.

We'll say more about 2024 and the trajectory when we're talking about guidance for next year Brandon, but this is something we're thinking about a lot.

Ill just reiterate.

Anybody in the industry.

And so I think that was set up is really good to continue to be a.

Margin and financial performance leader over the long term.

Alright, Thank you sure.

Thanks, Brian .

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

Hey, good afternoon, everyone and thanks for your time.

So we've heard from to your peers, so far that the tech sector in San Francisco in particular have seen a recent uptick in corporate travel. It sounds like you didn't see that in the third quarter I think you called out.

Stable, but then just mentioned hereof, either Simpson momentum in October can you just help us size order magnitude that improvement you've seen is that coming from Sam Brian attack or or anything else you'd want to highlight the recent improvement. Thanks.

Thanks Katie.

Yes, I mean, and certainly excuse me some of the larger technology companies have seen.

Right a significant movement in volume.

Of course, it depends where they fly.

As I said some of the yield environment right now is offset some of those volumes but.

Sure There has been positive movement in California Pacific Northwest These big Tex Cabo both regions actually.

So.

Some promising signs there.

Okay great.

And then maybe for Shane.

Pardon the modeling question, but just trying to get a sense.

Of the aircraft rent tailwind into next year is there further downside for <unk> $48 million in aircraft, France, and some of those aircraft exit September can you just help us think about what the right exit rate for this year on that line item.

Are there any additions on leased aircraft, we should be thinking about into next year. Thanks. So much.

Hey, Katy this is Emily.

What you saw this quarter in terms of aircraft rent was at pretty good normalized by law.

Now removed all that Airbus leased aircraft from the box, though you're not seeing that rent come through.

Taken delivery of all the Macs leased aircrafts that were going to have which is the 13 I believe 13.

Over the last year, so thats pretty normalized now you will start to see from an ownership perspective, depreciation well tick up to offset some of that as we've taken on so many new Max aircraft and those will start depreciating through the box.

Very helpful. Thank you.

Thanks, Larry.

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

Oh, Hey, thanks, good morning, guys.

The network were fully restored in a what is the size of that revenue hole that could eventually go away or however, you can size it would be helpful.

Well I think if I'm understanding your question, Dan I think again, we're not going to put seats into a state where there's no demand so.

Your observations are absolutely correct as far as our capacity and we're down on a and I think all the carriers are down as well.

I think what I'm still seeing here is even on tech and non tech.

And I repeat not in tech business recovery.

He has not been as good at all versus what's happening in the Pacific Northwest So we're going to.

Again, we talked about the network, where we're going to be very disciplined and thoughtful about how we maintain and work and where we fly out seats, but again as we've spent time for some time.

Don't think that's going to be forever, and we're going to be very prepared and.

Good position as demand begins to strengthen and crawl back up that demand curve.

Back to 2019 levels to be able to serve that demand.

Yes understood.

And then Shane I think I'm at risk of kicking the dead horse here. My question is really the same as others here and that's just too really just to close the circle on the path back to low double digit pre tax margin I think you touched on fleet commonality at $75 million it looks like Maui annualized might be close to $80 million or so so.

It looks like maybe one five points to pretax margins there.

Or please correct me, but from where you sit.

What are the biggest revenue and cost opportunities that get you where you want to be.

Thanks, Dan and I want to underscore what Andrew said, a second ago. Just so we don't lose the 0.1 of the things I think you all should be thinking about in terms of of Alaska setup is.

We're still in the least recovered portion of the country.

And still fighting for industry's best margin. So I just think there is goodness to come overall for the company in terms of your question.

Yeah.

It.

The cost side is really leaning out the company getting rid of.

Not all of the buffer we've put in but but starting to work that back getting closer to the 2019 productivity levels.

I think there is opportunity to.

Further leverage technology.

And.

Automate more of what the guests do and we're certainly going to be working on that over the next few years as I think every company is going to be doing.

On the revenue side Mike.

Once we see sort of where demand normalizes.

And in addition to this the recovery we expect in the international demand.

Our international domestic demand mix in the west coast recovery in business recovery.

A lot more that Andrew and his team are starting to think about and look at from a commercial.

Initiative perspective, they've done a great job delivering and we don't get to talk about them on the calls but delivering on many initiatives. This year, we're selling things like exit rows seats now that we've not done before.

Huge uptick in first class and premium class load factors, while yields in those cabinets are going up.

That is both demand and things that the e-commerce and distribution and pricing team are doing.

And theres more of those types of things that we're thinking about for the next year or two and we'll talk more about that as we firm plans up and include them in our guidance.

<unk> get to an Investor day at some point in 2024.

Very good thanks for the time you guys.

Thanks, Dan and thanks, everyone for joining us for our call. We'll see you next or talk to you next quarter for those we didn't get to our IR team will be will be in contact with you. Thanks everybody.

This concludes today's conference call. Thank you for attending.

Q3 2023 Alaska Air Group Inc Earnings Call

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