UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2020~~2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8957

ALASKA AIR GROUP, INC.


Delaware						91-1292054
(State of Incorporation)						(I.R.S. Employer Identification No.)


19300 International Boulevard,			Seattle,			WA			98188

Telephone:

(206)

392-5040

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Ticker Symbol

Name of each exchange on which registered

Common stock, $0.01 par value

ALK

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange

Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer
(Do not check if a smaller reporting company)

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

The registrant has ~~123,639,730~~125,232,721 common shares, par value $0.01, outstanding at July 31, ~~2020.~~2021.

This document is also available on our website at http://investor.alaskaair.com.

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, ~~2020~~2021

TABLE OF CONTENTS

As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, ~~2019, and Item 1A. "Risk Factors" of Part II of this Form 10-Q.~~2020. Please consider our forward-looking statements in light of those risks as you read this report.

PART I


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	(in millions)	June 30, 2020		December 31, 2019		(in millions)	June 30, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	1,509	$	221	Cash and cash equivalents	$	1,025	$	1,370
Marketable securities	Marketable securities	1,294		1,300		Marketable securities	2,926		1,976
Total cash and marketable securities	Total cash and marketable securities	2,803		1,521		Total cash and marketable securities	3,951		3,346
Receivables - net	Receivables - net	280		323		Receivables - net	567		480
Inventories and supplies - net	Inventories and supplies - net	56		72		Inventories and supplies - net	52		57
Prepaid expenses and other current assets		105		121
Prepaid expenses, assets held-for-sale, and other current assets						Prepaid expenses, assets held-for-sale, and other current assets	201		123
Total Current Assets	Total Current Assets	3,244		2,037		Total Current Assets	4,771		4,006

Property and Equipment	Property and Equipment					Property and Equipment
Aircraft and other flight equipment	Aircraft and other flight equipment	8,257		8,549		Aircraft and other flight equipment	7,996		7,761
Other property and equipment	Other property and equipment	1,381		1,306		Other property and equipment	1,433		1,398
Deposits for future flight equipment	Deposits for future flight equipment	591		533		Deposits for future flight equipment	402		583
		10,229		10,388			9,831		9,742
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	3,434		3,486		Less accumulated depreciation and amortization	3,703		3,531
Total Property and Equipment - Net	Total Property and Equipment - Net	6,795		6,902		Total Property and Equipment - Net	6,128		6,211

Operating lease assets	Operating lease assets	1,568		1,711		Operating lease assets	1,375		1,400
Goodwill	Goodwill	1,943		1,943		Goodwill	1,943		1,943
Intangible assets - net	Intangible assets - net	109		122		Intangible assets - net	103		107
Other noncurrent assets	Other noncurrent assets	339		278		Other noncurrent assets	336		379
Other Assets	Other Assets	3,959		4,054		Other Assets	3,757		3,829

Total Assets	Total Assets	$	13,998	$	12,993	Total Assets	$	14,656	$	14,046

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	June 30, 2020		December 31, 2019		(in millions, except share amounts)	June 30, 2021		December 31, 2020
LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY					LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	102	$	146	Accounts payable	$	159	$	108
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	284		470		Accrued wages, vacation and payroll taxes	439		527
Air traffic liability	Air traffic liability	1,131		900		Air traffic liability	1,533		1,073
Deferred payroll support program grant		361		—

Other accrued liabilities	Other accrued liabilities	327		431		Other accrued liabilities	661		424
Deferred revenue	Deferred revenue	555		750		Deferred revenue	922		733
Current portion of operating lease liabilities	Current portion of operating lease liabilities	273		269		Current portion of operating lease liabilities	263		290
Current portion of long-term debt	Current portion of long-term debt	1,087		235		Current portion of long-term debt	869		1,138
Total Current Liabilities	Total Current Liabilities	4,120		3,201		Total Current Liabilities	4,846		4,293

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	1,549		1,264		Long-Term Debt, Net of Current Portion	2,319		2,357

Noncurrent Liabilities	Noncurrent Liabilities					Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,376		1,439		Long-term operating lease liabilities, net of current portion	1,222		1,268
Deferred income taxes	Deferred income taxes	619		715		Deferred income taxes	439		407
Deferred revenue	Deferred revenue	1,519		1,240		Deferred revenue	1,424		1,544
Obligation for pension and postretirement medical benefits	Obligation for pension and postretirement medical benefits	581		571		Obligation for pension and postretirement medical benefits	660		665
Other liabilities	Other liabilities	373		232		Other liabilities	422		524
		4,468		4,197			4,167		4,408
Commitments and Contingencies	Commitments and Contingencies					Commitments and Contingencies	0		0
Shareholders' Equity	Shareholders' Equity					Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding	Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding	—		—		Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding	0		0
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2020 - 132,989,258 shares; 2019 - 131,812,173 shares, Outstanding: 2020 - 123,639,314 shares; 2019 - 123,000,307 shares		1		1
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares						Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares	1		1
Capital in excess of par value	Capital in excess of par value	350		305		Capital in excess of par value	454		391
Treasury stock (common), at cost: 2020 - 9,349,944 shares; 2019 - 8,811,866 shares		(674)		(643)
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares						Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares	(674)		(674)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(458)		(465)		Accumulated other comprehensive loss	(487)		(494)
Retained earnings	Retained earnings	4,642		5,133		Retained earnings	4,030		3,764
		3,861		4,331			3,324		2,988
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	13,998	$	12,993	Total Liabilities and Shareholders' Equity	$	14,656	$	14,046

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
(in millions, except per share amounts)	(in millions, except per share amounts)	2020		2019		2020		2019		(in millions, except per share amounts)	2021		2020		2021		2020
Operating Revenues	Operating Revenues									Operating Revenues
Passenger revenue	Passenger revenue	$	309	$	2,111	1,790		3,827		Passenger revenue	$	1,352	$	309	$	2,011	$	1,790
Mileage Plan other revenue	Mileage Plan other revenue	73		118		182		228		Mileage Plan other revenue	118		73		212		182
Cargo and other	Cargo and other	39		59		85		109		Cargo and other	57		39		101		85
Total Operating Revenues	Total Operating Revenues	421		2,288		2,057		4,164		Total Operating Revenues	1,527		421		2,324		2,057
Operating Expenses	Operating Expenses									Operating Expenses
Wages and benefits	Wages and benefits	472		567		1,084		1,124		Wages and benefits	510		472		1,003		1,084
Variable incentive pay	Variable incentive pay	16		44		23		79		Variable incentive pay	34		16		67		23
Payroll support program grant wage offset		(362)		—		(362)		—
Payroll Support Program grant wage offset										Payroll Support Program grant wage offset	(503)		(362)		(914)		(362)
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	59		502		443		922		Aircraft fuel, including hedging gains and losses	274		59		477		443
Aircraft maintenance	Aircraft maintenance	45		115		160		235		Aircraft maintenance	102		45		183		160
Aircraft rent	Aircraft rent	74		82		155		165		Aircraft rent	62		74		124		155
Landing fees and other rentals	Landing fees and other rentals	83		113		214		245		Landing fees and other rentals	144		83		273		214
Contracted services	Contracted services	30		70		102		142		Contracted services	54		30		105		102
Selling expenses	Selling expenses	4		87		59		159		Selling expenses	41		4		74		59
Depreciation and amortization	Depreciation and amortization	107		105		215		211		Depreciation and amortization	98		107		195		215
Food and beverage service	Food and beverage service	7		53		56		102		Food and beverage service	35		7		58		56
Third-party regional carrier expense	Third-party regional carrier expense	26		42		63		83		Third-party regional carrier expense	37		26		67		63
Other	Other	78		136		221		274		Other	117		78		222		221
Special items - impairment charges and other										Special items - impairment charges and other	(4)		69		14		229
Special items - restructuring charges										Special items - restructuring charges	(23)		0		(12)		0
Special items - merger-related costs	Special items - merger-related costs	1		8		4		34		Special items - merger-related costs	0		1		0		4
Special items - impairment charges and other		69		—		229		—
Total Operating Expenses	Total Operating Expenses	709		1,924		2,666		3,775		Total Operating Expenses	978		709		1,936		2,666
Operating Income (Loss)	Operating Income (Loss)	(288)		364		(609)		389		Operating Income (Loss)	549		(288)		388		(609)
Nonoperating Income (Expense)	Nonoperating Income (Expense)									Nonoperating Income (Expense)
Interest income	Interest income	7		11		16		20		Interest income	6		7		13		16
Interest expense	Interest expense	(17)		(20)		(30)		(42)		Interest expense	(39)		(17)		(71)		(30)
Interest capitalized	Interest capitalized	1		3		4		7		Interest capitalized	3		1		6		4
Other—net		6		(7)		11		(17)
Other - net										Other - net	9		6		19		11
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(3)		(13)		1		(32)		Total Nonoperating Income (Expense)	(21)		(3)		(33)		1
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	(291)		351		(608)		357		Income (Loss) Before Income Tax	528		(291)		355		(608)
Income tax (benefit) expense		(77)		89		(162)		91
Income tax expense (benefit)										Income tax expense (benefit)	131		(77)		89		(162)
Net Income (Loss)	Net Income (Loss)	$	(214)	$	262	$	(446)	$	266	Net Income (Loss)	$	397	$	(214)	$	266	$	(446)

Basic Earnings (Loss) Per Share:		$	(1.74)	$	2.12	$	(3.62)	$	2.15
Diluted Earnings (Loss) Per Share:		$	(1.73)	$	2.11	$	(3.60)	$	2.14
Basic Income (Loss) Per Share:										Basic Income (Loss) Per Share:	$	3.18	$	(1.74)	$	2.13	$	(3.62)
Diluted Income (Loss) Per Share:										Diluted Income (Loss) Per Share:	$	3.13	$	(1.74)	$	2.10	$	(3.62)
Shares used for computation:	Shares used for computation:									Shares used for computation:
Basic	Basic	123.296		123.418		123.058		123.355		Basic	124.977		123.296		124.640		123.058
Diluted	Diluted	123.965		124.301		123.685		124.179		Diluted	126.825		123.296		126.388		123.058

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020		2021		2020
Net Income (Loss)	Net Income (Loss)	$	(214)	$	262	$	(446)	$	266	Net Income (Loss)	$	397	$	(214)	$	266	$	(446)

Other Comprehensive Income (Loss):	Other Comprehensive Income (Loss):									Other Comprehensive Income (Loss):
Related to marketable securities:	Related to marketable securities:									Related to marketable securities:
Unrealized holding gain (loss) arising during the period	Unrealized holding gain (loss) arising during the period	31		13		30		27		Unrealized holding gain (loss) arising during the period	0		31		(11)		30
Reclassification of (gain) loss into Other - net nonoperating income (expense)		(6)		—		(9)		2
Reclassification of gain into Other - net nonoperating income										Reclassification of gain into Other - net nonoperating income	(2)		(6)		(6)		(9)
Income tax effect	Income tax effect	(6)		(3)		(5)		(7)		Income tax effect	1		(6)		4		(5)
Total	Total	19		10		16		22		Total	(1)		19		(13)		16

Related to employee benefit plans:	Related to employee benefit plans:									Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)		8		8		15		16
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income										Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income	9		8		17		15
Income tax effect	Income tax effect	(2)		(2)		(4)		(4)		Income tax effect	(2)		(2)		(4)		(4)
Total	Total	6		6		11		12		Total	7		6		13		11

Related to interest rate derivative instruments:	Related to interest rate derivative instruments:									Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	Unrealized holding gain (loss) arising during the period	(2)		(7)		(27)		(12)		Unrealized holding gain (loss) arising during the period	1		(2)		9		(27)
Reclassification of loss into Aircraft rent	Reclassification of loss into Aircraft rent	—		—		1		1		Reclassification of loss into Aircraft rent	0		0		0		1
Income tax effect	Income tax effect	1		2		6		3		Income tax effect	0		1		(2)		6
Total	Total	(1)		(5)		(20)		(8)		Total	1		(1)		7		(20)

Other Comprehensive Income (Loss)		24		11		7		26
Other Comprehensive Income										Other Comprehensive Income	7		24		7		7

Comprehensive Income (Loss)	Comprehensive Income (Loss)	$	(190)	$	273	$	(439)	$	292	Comprehensive Income (Loss)	$	404	$	(190)	$	273	$	(439)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(in millions)	(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total		(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2019		123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331
Balances at December 31, 2020															Balances at December 31, 2020	124.217	$	1	$	391	$	(674)	$	(494)	$	3,764	$	2,988
Net loss	Net loss	—	—		—		—		—		(232)		(232)		Net loss	—	—		—		—		—		(131)		(131)
Other comprehensive income (loss)		—	—		—		—		(17)		—		(17)
Common stock repurchase		(0.538)	—		—		(31)		—		—		(31)
Stock-based compensation		—	—		9		—		—		—		9
Cash dividend declared ($0.375 per share)		—	—		—		—		—		(45)		(45)
Stock issued under stock plans		0.123	—		—		—		—		—		—
Balances at March 31, 2020		122.585	$	1	$	314	$	(674)	$	(482)	$	4,856	$	4,015
Net loss		—	—		—		—		—		(214)		(214)
Other comprehensive income (loss)		—	—		—		—		24		—		24
Other comprehensive income															Other comprehensive income	—	—		—		—		0		—		0

Stock-based compensation	Stock-based compensation	—	—		2		—		—		—		2		Stock-based compensation	—	—		12		—		—		—		12
CARES Act warrant issuance	CARES Act warrant issuance	—	—		7		—		—		—		7		CARES Act warrant issuance	—	—		8		—		—		—		8

Stock issued under stock plans															Stock issued under stock plans	0.225	—		(2)		—		—		—		(2)
Balances at March 31, 2021															Balances at March 31, 2021	124.442	$	1	$	409	$	(674)	$	(494)	$	3,633	$	2,875
Net income															Net income	—	—		—		—		—		397		397
Other comprehensive income															Other comprehensive income	—	—		—		—		7		—		7

Stock-based compensation															Stock-based compensation	0.009	—		13		—		—		—		13
CARES Act warrant issuance															CARES Act warrant issuance	—	—		8		—		—		—		8

Stock issued for employee stock purchase plan	Stock issued for employee stock purchase plan	1.000	—		27		—		—		—		27		Stock issued for employee stock purchase plan	0.716	—		23		—		—		—		23
Stock issued under stock plans	Stock issued under stock plans	0.054	—		—		—		—		—		—		Stock issued under stock plans	0.062	—		1		—		—		—		1
Balances at June 30, 2020		123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861

Balances at June 30, 2021															Balances at June 30, 2021	125.229	1		454		(674)		(487)		4,030		3,324

(in millions) Common Stock Outstanding Common Stock Capital in Excess of Par Value Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
Balances at December 31, 2018 123.194 $ 1 $ 232 $ (568) $ (448) $ 4,534 $ 3,751
Cumulative effect of accounting changes^(a)
— — — — — 3 3
Net income — — — — — 4 4
Other comprehensive income (loss) — — — — 15 — 15
Common stock repurchase (0.215) — — (13) — — (13)
Stock-based compensation — — 12 — — — 12
Cash dividend declared
($0.35 per share)
— — — — — (43) (43)
Stock issued for employee stock purchase plan 0.391 — 20 — — — 20
Stock issued under stock plans 0.134 — (3) — — — (3)
Balances at March 31, 2019 123.504 $ 1 $ 261 $ (581) $ (433) $ 4,498 $ 3,746
Net income — — — — — 262 262
Other comprehensive income (loss) — — — — 11 — 11
Common stock repurchase (0.194) — — (12) — — (12)
Stock-based compensation — — 9 — — — 9
Cash dividend declared
($0.35 per share)
— — — — — (43) (43)
Stock issued under stock plans 0.028 — — — — — —
Balances at June 30, 2019 123.338 $ 1 $ 270 $ (593) $ (422) $ 4,717 $ 3,973


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2019	123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331

Net loss	—	—		—		—		—		(232)		(232)
Other comprehensive loss	—	—		—		—		(17)		—		(17)
Common stock repurchase	(0.538)	—		—		(31)		—		—		(31)
Stock-based compensation	—	—		9		—		—		—		9

Cash dividend declared ($0.375 per share)	—	—				—		—		(45)		(45)

Stock issued under stock plans	0.123	—		—		—		—		—		0
Balance at March 31, 2020	122.585	$	1	$	314	$	(674)	$	(482)	$	4,856	$	4,015
Net loss	—	—		—		—		—		(214)		(214)
Other comprehensive income	—	—		—		—		24		—		24

Stock-based compensation	—	—		2		—		—		—		2
CARES Act warrant issuance	—	—		7		—		—		—		7

Stock issued for employee stock purchase plan	1.000	—		27		—		—		—		27
Stock issued under stock plans	0.054	—		0		—		—		—		0
Balances at June 30, 2020	123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861

~~(a)Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six Months Ended June 30,
(in millions) 2020 2019
Cash flows from operating activities:
Net income (Loss) $ (446) $ 266
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 215 211
Stock-based compensation and other 7 16
Special items - impairment charges and other 229 —
Payroll support program grant wage offset (362) —
Changes in certain assets and liabilities:
Payroll support program grant funding 723 —
Changes in deferred tax provision (98) 62
Increase in air traffic liability 231 385
Increase in deferred revenue 84 75
Other - net (262) 18
Net cash provided by operating activities 321 1,033
Cash flows used in investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits (58) (172)
Other flight equipment (43) (83)
Other property and equipment (67) (78)
Total property and equipment additions, including capitalized interest (168) (333)
Purchases of marketable securities (1,004) (885)
Sales and maturities of marketable securities 1,038 663
Other investing activities 10 25
Net cash used in investing activities (124) (530)
Cash flows from financing activities:
Proceeds from issuance of debt 1,265 254
Common stock repurchases (31) (25)
Dividends paid (45) (86)
Long-term debt payments (125) (532)
Other financing activities 27 26
Net cash provided by (used in) financing activities 1,091 (363)
Net increase in cash, cash equivalents, and restricted cash 1,288 140
Cash, cash equivalents, and restricted cash at beginning of year 232 114
Cash, cash equivalents, and restricted cash at end of the period $ 1,520 $ 254
Cash paid during the period for:
Interest (net of amount capitalized) $ 25 $ 34
Income taxes — —
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents $ 1,509 $ 244
Restricted cash included in Prepaid expenses and other current assets 11 10
Total cash, cash equivalents, and restricted cash at end of the period $ 1,520 $ 254


	Six Months Ended June 30,
(in millions)	2021		2020
Cash flows from operating activities:
Net Income (Loss)	$	266	$	(446)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	195		215
Stock-based compensation and other	24		7
Special items - impairment charges and other	14		229
Special items - restructuring charges	(12)		0
Changes in certain assets and liabilities:
Changes in deferred tax provision	33		(98)
Increase in air traffic liability	460		231
Increase in deferred revenue	69		84
Other - net	(42)		99
Net cash provided by operating activities	1,007		321
Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(30)		(58)
Other flight equipment	(38)		(43)
Other property and equipment	(34)		(67)
Total property and equipment additions, including capitalized interest	(102)		(168)
Purchases of marketable securities	(2,524)		(1,004)
Sales and maturities of marketable securities	1,561		1,038
Other investing activities	(5)		10
Net cash used in investing activities	(1,070)		(124)
Cash flows from financing activities:
Proceeds from issuance of debt	363		1,265
Common stock repurchases	0		(31)
Dividends paid	0		(45)
Long-term debt payments	(681)		(125)
Other financing activities	37		27
Net cash provided by (used in) financing activities	(281)		1,091
Net increase (decrease) in cash, cash equivalents, and restricted cash	(344)		1,288
Cash, cash equivalents, and restricted cash at beginning of period	1,386		232
Cash, cash equivalents, and restricted cash at end of the period	$	1,042	$	1,520

Cash paid during the period for:
Interest (net of amount capitalized)	$	61	$	25
Income taxes	0		0

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	$	1,025	$	1,509
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets	17		11
Total cash, cash equivalents, and restricted cash at end of the period	$	1,042	$	1,520

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, ~~2019.~~2020. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of June 30, ~~2020~~2021 and the results of operations for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020. Such adjustments were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the ~~COVID-19~~coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would be otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and six months ended June 30, ~~2020~~2021 are not necessarily indicative of operating results for the entire year.

~~Recently Adopted Accounting Pronouncement~~

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an "expected credit loss model" on certain financial instruments. The ASU also amends the impairment model for available-for-sale debt securities, and requires the estimation of credit losses to be recorded as allowances instead of reductions to amortized cost. The ASU was effective for the Company beginning January 1, 2020, and was adopted prospectively, but it did not have a significant impact on the Company's financial statements and disclosures.

NOTE 2. COVID-19 PANDEMIC

The public health and economic ~~crises~~crisis resulting from the outbreak of ~~the novel coronavirus (COVID-19) beginning~~COVID-19 in the first quarter of 2020 ~~has had an unprecedented~~continues to have a significant impact on the Company. ~~Travel~~Although the relaxation of restrictions ~~event cancellations~~by state and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Consistent with expectations, the financial impact to the second quarter was more significant than the first quarter. There continue to be travel restrictions in place throughout the United States,local governments and the ~~resurgence in COVID-19 cases threatens~~rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result, the Company continues to ~~halt or reverse progress towards reopening in many states and cities. It is uncertain when these restrictions may lift and when demand may return.~~fly less capacity than it had pre-pandemic.

~~In response to the COVID-19 pandemic,~~Beginning in 2020, the Company implemented ~~a "Peace-of-Mind" waiver, which allows travelers~~various cost-saving initiatives, including permanently parking aircraft, restructuring the workforce through early-out and incentive leave programs, and obtaining funding available under programs offered by the U.S. Department of the Treasury (the Treasury). As demand has improved and the business has grown back towards pre-pandemic flying levels, these programs have been adjusted to ~~book tickets~~meet the needs of the airline. The impacts of these programs for ~~travel for a specified period of time that can be changed or canceled without incurring change fees. In~~ the ~~second quarter, the waiver has been extended to cover all ticketed travel purchased through September 8, 2020. Cancellations~~three and postponement of travel exceeded new bookings in March and April, and had a material impact on second quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.six months ended June 30, 2021 are described below.

Lease Return Costs

The Company ~~has taken decisive action~~removed 40 leased Aircraft from operating service in 2020, and recorded an estimate of the expected future lease return costs for the aircraft. Lease return costs include the write off of associated maintenance deposits, as the Company no longer expects to ~~reduce costs and preserve cash and liquidity.~~perform maintenance events covered by those deposits. The total net charge recorded in 2020 for aircraft that were parked amounted to $209 million. In the first quarter of 2021, the Company ~~implemented a company-wide hiring freeze,~~recorded an additional $18 million in incremental costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor, which was classified as Special items - impairment charges and other on the condensed consolidated statements of operations. In the second quarter, expected costs to return leased aircraft was reduced ~~salaries~~by $4 million. The lease return cost estimates are based on the Company's best estimate of ~~senior management and hours for management employees, suspended annual pay increases and solicited voluntary leaves~~costs to return aircraft as of ~~absence. In addition to these payroll saving measures,~~ the ~~Company has actively negotiated with vendor partners to reduce contractual minimums and spending in line with the reduction in demand.~~date of this filing.

~~With demand dramatically depressed,~~In the second quarter of 2021, the Company initiated a plan to reactivate up to twelve previously parked Airbus aircraft to support the Company's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. These reactivations create flexibility as management seeks to return capacity, mitigating against both staffing and supply chain risks that could constrain Alaska or Horizon's available capacity. Management's plans to return to 100% of pre-pandemic levels by no later than summer 2022 are consistent with previous plans, but some recovery has ~~significantly reduced its planned flying capacity. As a result, many~~been accelerated into the second half of 2021 in response to the strong demand recovery that took place in the second quarter.The first of these reactivated aircraft ~~have been parked or~~are expected to reenter revenue service beginning in the third quarter of 2021, with all reactivated by the second quarter of 2022. The Company currently anticipates these aircraft will be removed from ~~service. As of June 30, 2020, 101 mainline aircraft were temporarily grounded. The~~operating service beginning in late 2022 through the end

of 2023. At this time, the Company ~~made the decision in the first quarter of 2020~~does not anticipate material changes to ~~permanently remove 12 Airbus~~estimated lease return costs previously recorded, as leases for aircraft ~~from the operating fleet. As of June 30, 2020, all operating regional aircraft were in service.~~returning to service generally expire within a near term window.

~~Valuation of long-lived assets~~Workforce restructuring

The Company ~~reviews~~continues to expect that demand will be below pre-pandemic levels through the end of 2021, but management will continue rebuilding capacity to 2019 levels. The Company reduced its ~~long-lived assets~~workforce in 2020 to better align with the expected size of the business. To mitigate the need for ~~impairment whenever events~~involuntary furloughs, various early-out and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs, over 600 employees took permanent early-outs and over 3,300 employees took voluntary or ~~changes indicate that the total carrying amount~~incentive leaves. As of ~~an asset or asset group may not be recoverable.~~June 30, 2021, approximately 1,800 employees remain on a voluntary leave program. The Company expects all employees on leave to return to work by October 2021.

~~To determine if impairment exists,~~In 2020, as a ~~recoverability test is performed comparing the sum~~result of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.

~~Given the temporary and permanent parking of certain aircraft described above,~~these programs, the Company ~~performed impairment tests~~recorded $220 million in wage expense for those pilots and mechanics on ~~certain long-lived assets as of March 31, 2020~~incentive leaves, ongoing medical benefit coverage and ~~again as of June 30, 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in~~lump-sum termination payments. In the first quarter of ~~2020.~~

~~In the first quarter,~~2021, the Company ~~recorded an impairment charge~~refined capacity expectations and training schedules, and delayed certain recalls to a future period beyond what was anticipated in the accrual at December 31, 2020, resulting in additional expense of ~~$83 million for the 12 permanently parked Airbus aircraft, which was comprised of operating lease right of use assets, estimable return costs, and related leasehold improvements.~~$11 million. In the second quarter, demand improved at an accelerated pace, and the Company ~~identified additional estimable return costs relating~~issued recall notices to ~~those permanently parked aircraft,~~all pilots on incentive leave for return-to-work by October 2021. As a result, $23 million of incentive leave accrual was reversed and ~~recorded an additional $70 million charge.~~

Also in the first quarter, the Company recorded an impairment charge of $58 million reflecting the amount for which carrying value exceeded fair value of the Q400 fleet. The Company also recorded additional impairmentrecognized as a benefit within Special items - restructuring charges ~~relating to 2 non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.~~

~~A summary of the impairment charges recorded for aircraft and other flight equipment~~ in the condensed consolidated ~~statement~~statements of operations ~~for~~during the three months ended June 30, 2021. In total, the Company has recorded a net benefit from these adjustments of $12 million during the six months ended June 30, ~~2020 is as follows~~2021.

The table below presents a roll forward of the outstanding voluntary leave liability (in millions):

Airbus Aircraft Q400 Aircraft Total Impairment
Aircraft and other flight equipment, net $ 11 $ 58 $ 69
Operating lease assets 62 — 62
Inventory and supplies - net 2 — 2
Prepaid expenses and other current assets — 3 3
Other accrued liabilities 78 — 78
Total impairment charges - Long-lived assets $ 153 $ 61 $ 214


	Six Months Ended June 30, 2021
Total voluntary leave liability balance at January 1	$	127
Cash payments	(79)
Charges and adjustments	(12)
Total voluntary leave liability balance at June 30	$	36

The outstanding accrual is based on the Company's best estimate of capacity expectations and training schedules for 2021, as of the date of this filing. The Company will ~~continue to evaluate~~make the ~~need for further impairment of long-lived assets as expectations of future demand, market conditions and fleet decisions evolve.~~

~~Valuation of intangible assets and goodwill~~

The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.

Given strain in the general economic environment and a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types as of March 31, 2020 and again as of June 30, 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $10 million was recorded in the first quarter. No additional impairment charges were identified for definite-lived intangibles as a resultmajority of the ~~June 30, 2020 impairment test.~~

~~Other considerations~~

remaining cash payments associated with this liability in 2021. The Company also evaluated outstanding receivable balances for risk of non-payment. The Company identified a $5 million receivable from a vendor that filed for bankruptcy during the first quarter. The Company fully expects to file a bankruptcy claim but, as the notebalance is ~~unsecured, management determined that collectability is not probable. Therefore, the full $5 million~~

~~was reserved~~reflected in accrued wages, benefits and ~~charged to Special charges - impairment charges and other in~~payroll taxes on the condensed consolidated ~~statement of operations in the first quarter.~~

For the three and six months ended June 30, 2020, the Company concluded that the use of a year-to-date effective tax rate estimate was more appropriate than the annual effective tax rate method as estimates of the Company's full-year loss is not reliable at this time given the uncertainty of the travel demand environment.

Although it is not certain when the impacts of COVID-19 will subside and demand for air travel will return, the Company has implemented meaningful plans to reduce expenses, build liquidity and preserve cash. At June 30, 2020, given the balance of cash, cash equivalents and marketable securities, as well as anticipated access to liquidity and cash flows from future operations, the Company expects it will meet all cash obligations, as well as remain in compliance with the financial debt covenants in its existing financing arrangements, for the next 12 months. Refer to Note 5. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.sheet.

CARES Act Funding

During the ~~second~~first quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the ~~U.S. Department~~Treasury through an extension of the ~~Treasury through the payroll support program~~Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) ~~Act.~~Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the ~~PSP and associated~~supporting agreements, Alaska and Horizon received ~~$992~~total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska and Horizon received an additional $80 million in funds made available under PSP 2.

Also in April 2021, Alaska, Horizon and McGee finalized additional agreements with the Treasury under a third round of the PSP, made available under the American Rescue Plan Act of 2021 (PSP 3). Under PSP 3 and the supporting agreements, Alaska, Horizon, and McGee received total funds of $585 million in the second ~~quarter. Similarly, McGee entered into an agreement to receive a total~~quarter of ~~$30 million, of which $15 million was received in the second quarter, with the remainder expected to be received in two installments in the third quarter.~~2021.

Of the amounts received during the six months ended June 30, 2021, $311 million represented unsecured debt and was recorded at par, and $16 million represented warrants recorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance sheet. The remaining $892 million was recorded as grant proceeds. These amounts are inclusive of additional funding of $8 million made available to McGee under the first installment of the PSP program (PSP 1). The grant is recorded as an offset to wages, salaries and benefits as eligible expenses are incurred. During the six months ended June 30, 2021, the Company recognized $914 million of the PSP grant proceeds as a wage offset. Included within this $914 million is approximately $21 million for employee retention credits as provided for in the CARES Act. The Company does not expect to record any additional wage offset in 2021.

Total funds contracted from the Treasury under the three Payroll Support Programs are ~~to be~~allocated as follows (in millions):


	Grants		Loans		Warrants		Total Proceeds
PSP 1	$	757	$	293	$	9	$	1,059
PSP 2	457		160		9		626
PSP 3	431		147		7		585
Total	$	1,645	$	600	$	25	$	2,270

Funds are exclusively used ~~exclusively toward continuing to pay~~for payment of employee salaries, wages and benefits. Upon receipt of the funds ~~the Company is subject to various~~issued under PSP 3, certain conditions ~~including,~~and restrictions were extended. These conditions include, but are not limited to, refraining from conducting involuntary furloughs or reducing employee pay rates ~~of pay~~ through September 30, ~~2020~~2021 and placing limits on executive ~~compensation. Other conditions~~compensation and severance through April 1, 2023. Alaska Air Group also ~~prohibit~~agreed to continue the ~~Company from repurchasing common stock~~suspension of dividends and ~~from paying dividends~~share repurchases until September 30, ~~2021, and require the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation.~~

The funds received took the form of debt, warrants and a grant. The secured debt portion of $276 million was recorded at par. An additional $5 million of debt is expected to be issued in the third quarter as the remaining $15 million in funding is received by McGee. See Note 5 for further discussion. Warrants of $7 million were recorded on the condensed consolidated balance sheet at fair value determined using the Black-Scholes model. The residual amount of $723 million was recorded as grant proceeds on the condensed consolidated balance sheet as a deferred wage offset. The grant will be recognized into earnings as eligible wages, salaries and benefits are incurred. During the three months ended June 30, 2020, the Company recognized $362 million of the PSP grant proceeds as a wage offset.2022.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. In 2020, the Company eliminated ticket change fees indefinitely from its main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from ~~the Company's~~our co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The ~~details~~level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Passenger ticket revenue, including ticket breakage and net of taxes and fees $ 222 $ 1,792 $ 1,435 $ 3,231
Passenger ancillary revenue 31 147 147 271
Mileage Plan passenger revenue 56 172 208 325
Total Passenger revenue $ 309 $ 2,111 $ 1,790 $ 3,827


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,114	$	222	$	1,639	$	1,435
Passenger ancillary revenue	84		31		134		147
Mileage Plan passenger revenue	154		56		238		208
Total Passenger revenue	$	1,352	$	309	$	2,011	$	1,790

Mileage Plan™ Loyalty Program

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Passenger revenue $ 56 $ 172 $ 208 $ 325
Mileage Plan other revenue 73 118 182 228
Total Mileage Plan revenue $ 129 $ 290 $ 390 $ 553


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Passenger revenue	$	154	$	56	$	238	$	208
Mileage Plan other revenue	118		73		212		182
Total Mileage Plan revenue	$	272	$	129	$	450	$	390

Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Cargo revenue $ 28 $ 38 $ 52 $ 68
Other revenue 11 21 33 41
Total Cargo and other revenue $ 39 $ 59 $ 85 $ 109


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cargo revenue	$	34	$	28	$	61	$	52
Other revenue	23		11		40		33
Total Cargo and other revenue	$	57	$	39	$	101	$	85

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $36 million~~$484 million~~ and ~~$563 million~~net refunds from the prior year-end air traffic liability balance for the three months ended June 30, 2021 and 2020, and $175 million and $484 million for the six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

Given the ~~ongoing reduction~~increase in demand for air travel ~~stemming~~from the recovery from the COVID-19 pandemic, ~~the Company has observed unprecedented declines in~~ advance bookings and associated cash ~~receipts.~~receipts have significantly increased in relation to prior year. The Company also ~~saw significant cancellations beginning in March 2020,~~experienced increased revenue recognition from credits redeemed for travel, for which ~~has led to cash refunds or~~ the issuance of credits for future travel. Since the onset of the pandemic, the Company has issued cash refunds of $363 million and credits for future travel of $695 million. At June 30, 2020, such credits, which areremaining balance is included in the air traffic liability balance, ~~totaled $568~~and total $387 million, net of breakage. In April ~~2020,~~2021, the Company announced updated expiration terms for these credits, extending to ~~July 2021. At this time, the Company is unable to estimate how and when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demand~~December 31, 2021 for ~~air travel.~~possible travel through November 30, 2022.

Mileage Plan^TM assets and liabilities

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had ~~$42~~$61 million of such receivables as of June 30, ~~2020~~2021 and ~~$105~~$48 million as of December 31, ~~2019. Consistent with the significant cancellation activity outlined above, the Company saw a substantial number of redeposits in the second quarter. Given the uncertainty around the return in~~2020. As demand for air travel continues to increase unpredictably, the ~~Company is unable to determine how and when~~timing of recognition of mileage credits ~~will be recognized in earnings.~~may differ from current assumptions.

The table below presents a roll forward of the total frequent flyer liability (in millions):

Six Months Ended June 30,
2020 2019
Total Deferred Revenue balance at January 1 $ 1,990 $ 1,874
Travel miles and companion certificate redemption - Passenger revenue (208) (325)
Miles redeemed on partner airlines - Other revenue (21) (51)
Increase in liability for mileage credits issued 313 451
Total Deferred Revenue balance at June 30 $ 2,074 $ 1,949


	Six Months Ended June 30,
		2021		2020
Total Deferred Revenue balance at January 1		$	2,277	$	1,990
Travel miles and companion certificate redemption - Passenger revenue		(238)		(208)
Miles redeemed on partner airlines - Other revenue		(17)		(21)
Increase in liability for mileage credits issued		324		313
Total Deferred Revenue balance at June 30		$	2,346	$	2,074

NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of June 30, ~~2020,~~2021, total cost basis for all marketable securities was ~~$1.3~~$2.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the condensed consolidated balance sheet (in millions):

June 30, 2020 December 31, 2019
Level 1 Level 2 Total Level 1 Level 2 Total
Assets
Marketable securities
U.S. government and agency securities $ 281 $ — $ 281 $ 330 $ — $ 330
Equity mutual funds 5 — 5 6 — 6
Foreign government bonds — 22 22 — 31 31
Asset-backed securities — 197 197 — 211 211
Mortgage-backed securities — 214 214 — 176 176
Corporate notes and bonds — 546 546 — 523 523
Municipal securities — 29 29 — 23 23
Total Marketable securities 286 1,008 1,294 336 964 1,300
Derivative instruments
Fuel hedge—call options — 5 5 — 11 11
Interest rate swap agreements — — — — 3 3
Total Assets $ 286 $ 1,013 $ 1,299 $ 336 $ 978 $ 1,314
Liabilities
Derivative instruments
Interest rate swap agreements — (33) (33) — (10) (10)
Total Liabilities $ — $ (33) $ (33) $ — $ (10) $ (10)


	June 30, 2021						December 31, 2020
	Level 1		Level 2		Total		Level 1		Level 2		Total

Assets
Marketable securities
U.S. government and agency securities	$	298	$	0	$	298	$	407	$	0	$	407
Equity mutual funds	5		0		5		7		0		7
Foreign government bonds	0		31		31		0		20		20
Asset-backed securities	0		330		330		0		224		224
Mortgage-backed securities	0		253		253		0		290		290
Corporate notes and bonds	0		1,943		1,943		0		978		978
Municipal securities	0		66		66		0		50		50
Total Marketable securities	303		2,623		2,926		414		1,562		1,976
Derivative instruments
Fuel hedge - call options	0		92		92		0		15		15

Total Assets	$	303	$	2,715	$	3,018	$	414	$	1,577	$	1,991

Liabilities
Derivative instruments

Interest rate swap agreements	0		(16)		(16)		0		(25)		(25)
Total Liabilities	$	0	$	(16)	$	(16)	$	0	$	(25)	$	(25)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in

active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts isare determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available information as of June 30, ~~2020.~~2021.

Maturities for marketable securities (in millions):

June 30, 2020 Cost Basis Fair Value
Due in one year or less $ 133 $ 134
Due after one year through five years 1,063 1,094
Due after five years through 10 years 60 61
Total $ 1,256 $ 1,289


June 30, 2021	Cost Basis		Fair Value
Due in one year or less	$	1,538	$	1,539
Due after one year through five years	1,280		1,294
Due after five years through 10 years	88		88

Total	$	2,906	$	2,921

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents, and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of June 30, ~~2020,~~2021, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $780 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as ~~certain inputs used are unobservable.~~it is not actively traded and is valued using discounted cash flows which is an unobservable input.

Fixed-rate debt on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):

June 30, 2020 December 31, 2019
Fixed-rate debt at cost $ 444 $ 473
Non-recurring purchase price accounting fair value adjustment 2 2
Total fixed-rate debt $ 446 $ 475
Estimated fair value $ 463 $ 483


	June 30, 2021		December 31, 2020


Total fixed-rate debt	$	1,896	$	1,662

Estimated fair value	$	2,019	$	1,778

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. ~~Refer to Note 2 for discussion regarding impairment charges recorded during the three and six months ended June 30, 2020.~~ No material ~~impairment charges~~impairments were recorded during the three and six months ended June 30, ~~2019.~~2021.

NOTE 5. LONG-TERM DEBT

Long-term debt obligations on the condensed consolidated balance sheet (in millions):

June 30, 2020 December 31, 2019
Fixed-rate notes payable due through 2029 $ 446 $ 475
Fixed-rate PSP notes payable due through 2030 276 —
Variable-rate notes payable due through 2029 1,925 1,032
Less debt issuance costs (11) (8)
Total debt 2,636 1,499
Less current portion 1,087 235
Long-term debt, less current portion $ 1,549 $ 1,264
Weighted-average fixed-interest rate 2.4 % 3.3 %
Weighted-average variable-interest rate 2.0 % 2.9 %


	June 30, 2021			December 31, 2020
Fixed-rate notes payable due through 2029	$	180		$	198
Fixed-rate PSP notes payable due through 2031	600			290
Fixed-rate EETC payable due through 2025 & 2027	1,116			1,174
Variable-rate notes payable due through 2029	1,315			1,866
Less debt issuance costs and unamortized debt discount	(23)			(33)
Total debt	3,188			3,495
Less current portion	869			1,138
Long-term debt, less current portion	$	2,319		$	2,357

Weighted-average fixed-interest rate	3.7		%	4.3		%
Weighted-average variable-interest rate	1.6		%	1.9		%

Approximately ~~$666~~$562 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, ~~2020.~~2021, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.1%.

During the six months ended June 30, ~~2020,~~2021, the Company ~~obtained additional secured~~issued $363 million of debt, ~~financing~~comprised of ~~$589~~$311 million of unsecured loans from ~~multiple lenders. The new~~the PSP and $54 million in proceeds from issuance of debt. Debt proceeds were offset by $681 million in debt ~~is secured by a~~

payments. Included within total ~~of 32 aircraft. The Company also made scheduled~~ debt payments is the full repayment of ~~$125~~the $135 million ~~during~~loan from the ~~six months ended June 30, 2020.~~U.S. Treasury made available under the CARES Act and the $363 million outstanding balance on two credit facilities.

The ~~$276~~$600 million PSP ~~note is an~~notes are unsecured senior term ~~loan~~loans with a 10-year term, bearing an interest rate of 1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The ~~loan is~~PSP notes are prepayable at par at any time. Alaska and Horizon PSP proceeds were deposited into an account which will be drawn down over time for payroll expenses. That account and the balance of the proceeds will serve as the only collateral for the loan.without penalty.

CARES Act

In 2020, the Company finalized an agreement with the Treasury to obtain up to $1.9 billion via a secured term loan facility. Obligations under the loan agreement were secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 30 aircraft and 15 spare engines. In 2020, the Company drew $135 million under the agreement, which was used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act. The full balance was repaid in the second quarter of 2021. In accordance with the related agreement, the facility terminated at the time of payment.

Debt Maturity

At June 30, ~~2020~~2021 long-term debt principal payments for the next five years and thereafter are as follows (in millions):

Total
Remainder of 2020 $ 529
2021 742
2022 281
2023 245
2024 153
Thereafter 695
Total $ 2,645

Subsequent to quarter end, the Company obtained $1.2 billion in private funding through the issuance of Enhanced Equipment Trust Certificates (EETC). The EETCs are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft.


	Total
Remainder of 2021	$	227
2022	796
2023	334
2024	240
2025	261
Thereafter	1,353
Total	$	3,211

Bank Lines of Credit

The Company has 3 credit facilities with ~~capacity~~availability totaling ~~$516 million, and availability of $509~~$486 million as of June 30, ~~2020. All 3~~2021, resulting from the second quarter 2021 repayment of $363 million. One of the credit facilities ~~have variable interest rates based on LIBOR plus a specified margin. One credit facility~~ for ~~$250 million expires in June 2021 and is secured by aircraft. A second credit facility with capacity of~~ $150 ~~million and availability of $143~~ million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The second credit facility for $250 million expires in June 2024 and is secured by aircraft. These two facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for ~~$116~~$86 million expires in ~~July 2020, with a mechanism for annual renewal,~~June 2022 and is secured by aircraft.

~~During the six months ended June 30, 2020, the Company drew $400 million on the first 2 existing facilities. In the second quarter, the Company repaid $7 million on the second credit facility.~~ The Company ~~has drawn the full availability of both facilities, and the outstanding balance is classified as short-term on the condensed consolidated balance sheet. The Company also~~ has secured letters of credit against the ~~$116 million facility.~~third facility, but has no plans to borrow using either of the other two facilities. All 3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at June 30, ~~2020.~~2021.

NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Service cost	$	13	$	13	$	26	$	26
Pension expense included in Wages and benefits	13		13		26		26

Interest cost	14		19		28		38
Expected return on assets	(30)		(27)		(61)		(55)

Recognized actuarial loss	9		8		18		17
Pension expense included in Nonoperating Income (Expense)	$	(7)	$	0	$	(15)	$	0

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Service cost $ 13 $ 10 $ 26 $ 21
Pension expense included in Wages and benefits 13 10 26 21
Interest cost 19 22 38 44
Expected return on assets (27) (23) (55) (47)
Recognized actuarial loss 8 9 17 18
Pension expense included in Nonoperating Income (Expense) $ — $ 8 $ — $ 15

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of June 30, ~~2020~~2021 (in millions):

Aircraft Commitments^(a)
Capacity Purchase Agreements ^(b)
Aircraft Maintenance Deposits
Remainder of 2020 $ 335 $ 36 $ 12
2021 554 166 53
2022 337 174 45
2023 186 179 24
2024 18 184 6
Thereafter 25 880 2
Total $ 1,455 $ 1,619 $ 142


	Aircraft Commitments(a)		Capacity Purchase Agreements (b)
Remainder of 2021	$	107	$	82
2022	1,458		173
2023	1,207		178
2024	291		183
2025	76		188
Thereafter	12		877
Total	$	3,151	$	1,681

(a)Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management.

(b)Includes all non-aircraft lease costs associated with capacity purchase agreements. ~~In the second quarter, Alaska entered into an agreement with SkyWest to defer a portion of 2020 payments and eliminate contractual minimums through September 30, 2020.~~

In the second quarter, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations and rates. The impact of those negotiations on our leases was not material to the operating lease liability. The Company has also deferred the payment of remaining 2020 contractual aircraft commitments, including those related to the B737 MAX9, to periods beyond 2020.

Aircraft Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of June 30, ~~2020,~~2021, Alaska had commitments to purchase ~~32 B737 MAX9~~63 B737-9 MAX aircraft, with contracted deliveries between ~~2020~~2021 and ~~2023. As a result of the grounding order mandated by the FAA on March 13, 2019, the delivery schedule for these MAX aircraft is subject to change.~~2024. Future minimum contractual payments for these aircraft ~~have been updated to~~ reflect the ~~possible~~expected delivery timing, but are also subject to change. Horizon also has commitments to purchase 312 E175 aircraft with deliveries ~~in 2023.~~between 2022 and 2025. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through ~~2026.~~2027. In addition, Alaska has options to purchase ~~37 B737~~39 B737-9 MAX aircraft, and Horizon has options to purchase 3021 E175 aircraft. ~~Alaska also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries in 2022.~~

The cancelable purchase commitments and option payments are not reflected in the table above. ~~Given the current COVID-19 pandemic, the Company is in discussion with aircraft manufacturers regarding these purchase commitments and delivery timelines.~~

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. ~~For these reasons, no loss has been accrued.~~

The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of June 30, ~~2020,~~2021, the Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.

CARES Act Warrant ~~Issuance~~Issuances

As additional taxpayer protection required under PSP programs, during the ~~PSP,~~six months ended June 30, 2021 the Company granted the Treasury ~~Department 874,344~~a total of 539,508 warrants to purchase Alaska Air Group (ALK) common ~~stock at a strike price of $31.61, based on the closing price on April 9, 2020.~~stock. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a ~~five year~~five-year term. ~~Additional~~

Additionally, in conjunction with the October 2020 draw on the CARES Act Loan, the Company granted the Treasury 427,080 warrants to purchase ~~14,327 shares of Air Group~~ALK common ~~stock will be issued to Treasury in connection with McGee's receipt~~stock. The value of the ~~remaining second~~warrants was estimated using a Black-Scholes option pricing model, and ~~third installments~~the relative fair value of ~~PSP funds~~the warrants of $6 million was recorded in ~~the third quarter.~~stockholders' equity.

Total warrants outstanding are as follows as of June 30, 2021:


	Number of shares of ALK common stock	Strike Price
PSP 1	928,127	31.61
CARES Act loan warrants	427,080	31.61
PSP 2	305,499	52.25
PSP 3	221,812	66.39
Total	1,882,518

Accumulated ~~Other Comprehensive Loss~~other comprehensive loss

Components of accumulated other comprehensive loss, net of tax (in millions):

June 30, 2020 December 31, 2019
Related to marketable securities $ 25 $ 9
Related to employee benefit plans (458) (469)
Related to interest rate derivatives (25) (5)
Total $ (458) $ (465)


	June 30, 2021		December 31, 2020
Related to marketable securities	$	10	$	23
Related to employee benefit plans	(485)		(498)
Related to interest rate derivatives	(12)		(19)
Total	$	(487)	$	(494)

Earnings (Loss) Per Share (EPS)

~~Diluted~~ EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and six months ended June 30, ~~2020 and 2019,~~2021, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating ~~airlines—~~airlines – Alaska and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with ~~third-party carriers,~~SkyWest, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of 3three reportable operating segments:

•Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.

•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.

•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

Operating segment information is as follows (in millions):

Three Months Ended June 30, 2020
Mainline Regional Horizon
Consolidating & Other^(a)
Air Group Adjusted^(b)
Special Items^(c)
Consolidated
Operating Revenues
Passenger revenues $ 225 $ 84 $ — $ — $ 309 $ — $ 309
CPA revenues — — 81 (81) — — —
Mileage Plan other revenue 56 17 — — 73 — 73
Cargo and other 39 — — — 39 — 39
Total Operating Revenues 320 101 81 (81) 421 — 421
Operating Expenses
Operating expenses, excluding fuel 746 210 68 (82) 942 (292) 650
Economic fuel 45 20 — — 65 (6) 59
Total Operating Expenses 791 230 68 (82) 1,007 (298) 709
Nonoperating Income (Expense)
Interest income 11 — — (4) 7 — 7
Interest expense (18) — (5) 6 (17) — (17)
Interest capitalized 1 — — — 1 — 1
Other - net 6 — — — 6 — 6
Total Nonoperating Income (Expense) — — (5) 2 (3) — (3)
Income (Loss) Before Income Tax $ (471) $ (129) $ 8 $ 3 $ (589) $ 298 $ (291)
Three Months Ended June 30, 2019
Mainline Regional Horizon
Consolidating & Other^(a)
Air Group Adjusted^(b)
Special Items^(c)
Consolidated
Operating Revenues
Passenger revenues $ 1,767 $ 344 $ — $ — $ 2,111 $ — $ 2,111
CPA revenues — — 112 (112) — — —
Mileage Plan other revenue 105 13 — — 118 — 118
Cargo and other 57 — — 2 59 — 59
Total Operating Revenues 1,929 357 112 (110) 2,288 — 2,288
Operating Expenses
Operating expenses, excluding fuel 1,167 268 95 (116) 1,414 8 1,422
Economic fuel 422 77 — — 499 3 502
Total Operating Expenses 1,589 345 95 (116) 1,913 11 1,924
Nonoperating Income (Expense)
Interest income 17 — — (6) 11 — 11
Interest expense (19) — (7) 6 (20) — (20)
Interest capitalized 3 — — — 3 — 3
Other - net (7) — — — (7) — (7)
Total Nonoperating Income (Expense) (6) — (7) — (13) — (13)
Income (Loss) Before Income Tax $ 334 $ 12 $ 10 $ 6 $ 362 $ (11) $ 351


	Three Months Ended June 30, 2021
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	1,072	$	280	$	0	$	0	$	1,352	$	0	$	1,352
CPA revenues	0		0		111		(111)		0		0		0
Mileage Plan other revenue	102		16		0		0		118		0		118
Cargo and other	55		0		0		2		57		0		57
Total Operating Revenues	1,229		296		111		(109)		1,527		0		1,527
Operating Expenses
Operating expenses, excluding fuel	984		286		91		(127)		1,234		(530)		704
Economic fuel	253		66		0		1		320		(46)		274
Total Operating Expenses	1,237		352		91		(126)		1,554		(576)		978
Nonoperating Income (Expense)
Interest income	6		0		0		0		6		0		6
Interest expense	(34)		0		(5)		0		(39)		0		(39)
Interest capitalized	3		0		0		0		3		0		3
Other - net	9		0		0		0		9		0		9
Total Nonoperating Income (Expense)	(16)		0		(5)		0		(21)		0		(21)
Income (Loss) Before Income Tax	$	(24)	$	(56)	$	15	$	17	$	(48)	$	576	$	528

	Three Months Ended June 30, 2020
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	225	$	84	$	0	$	0	$	309	$	0	$	309
CPA revenues	0		0		81		(81)		0		0		0
Mileage Plan other revenue	56		17		0		0		73		0		73
Cargo and other	39		0		0		0		39		0		39
Total Operating Revenues	320		101		81		(81)		421		0		421
Operating Expenses
Operating expenses, excluding fuel	746		210		68		(82)		942		(292)		650
Economic fuel	45		20		0		0		65		(6)		59
Total Operating Expenses	791		230		68		(82)		1,007		(298)		709
Nonoperating Income (Expense)
Interest income	11		0		0		(4)		7		0		7
Interest expense	(18)		0		(5)		6		(17)		0		(17)
Interest capitalized	1		0		0		0		1		0		1
Other - net	6		0		0		0		6		0		6
Total Nonoperating Income (Expense)	0		0		(5)		2		(3)		0		(3)
Income (Loss) Before Income Tax	$	(471)	$	(129)	$	8	$	3	$	(589)	$	298	$	(291)


		Six Months Ended June 30, 2020																				Six Months Ended June 30, 2021
		Mainline	Regional	Horizon	Consolidating & Other^(a)	Air Group Adjusted^(b)	Special Items^(c)	Consolidated		Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues	Operating Revenues								Operating Revenues
Passenger revenues	Passenger revenues	1,459	331	—	—	1,790	—	1,790	Passenger revenues	$	1,578	$	433	$	0	$	0	$	2,011	$	0	$	2,011
CPA revenues	CPA revenues	—	—	186	(186)	—	—	—	CPA revenues	0		0		215		(215)		0		0		0
Mileage Plan other revenue	Mileage Plan other revenue	154	28	—	—	182	—	182	Mileage Plan other revenue	182		30		0		0		212		0		212
Cargo and other	Cargo and other	83	—	—	2	85	—	85	Cargo and other	99		0		0		2		101		0		101
Total Operating Revenues	Total Operating Revenues	1,696	359	186	(184)	2,057	—	2,057	Total Operating Revenues	1,859		463		215		(213)		2,324		0		2,324
Operating Expenses	Operating Expenses								Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,905	479	160	(192)	2,352	(129)	2,223	Operating expenses, excluding fuel	1,877		551		179		(236)		2,371		(912)		1,459
Economic fuel	Economic fuel	358	82	—	—	440	3	443	Economic fuel	427		118		0		0		545		(68)		477
Total Operating Expenses	Total Operating Expenses	2,263	561	160	(192)	2,792	(126)	2,666	Total Operating Expenses	2,304		669		179		(236)		2,916		(980)		1,936
Nonoperating Income (Expense)	Nonoperating Income (Expense)								Nonoperating Income (Expense)
Interest income	Interest income	25	—	—	(9)	16	—	16	Interest income	13		0		0		0		13		0		13
Interest expense	Interest expense	(30)	—	(10)	10	(30)	—	(30)	Interest expense	(61)		0		(10)		0		(71)		0		(71)
Interest capitalized	Interest capitalized	4	—	—	—	4	—	4	Interest capitalized	6		0		0		0		6		0		6
Other - net	Other - net	12	—	—	(1)	11	—	11	Other - net	19		0		0		0		19		0		19
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	11	—	(10)	—	1	—	1	Total Nonoperating Income (Expense)	(23)		0		(10)		0		(33)		0		(33)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	(556)	(202)	16	8	(734)	126	(608)	Income (Loss) Before Income Tax	$	(468)	$	(206)	$	26	$	23	$	(625)	$	980	$	355

		Six Months Ended June 30, 2019																				Six Months Ended June 30, 2020
		Mainline	Regional	Horizon	Consolidating & Other^(a)	Air Group Adjusted^(b)	Special Items^(c)	Consolidated		Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues	Operating Revenues								Operating Revenues
Passenger revenues	Passenger revenues	3,189	638	—	—	3,827	—	3,827	Passenger revenues	$	1,459	$	331	$	0	$	0	$	1,790	$	0	$	1,790
CPA revenues	CPA revenues	—	—	228	(228)	—	—	—	CPA revenues	0		0		186		(186)		0		0		0
Mileage Plan other revenue	Mileage Plan other revenue	205	23	—	—	228	—	228	Mileage Plan other revenue	154		28		0		0		182		0		182
Cargo and other	Cargo and other	105	1	1	2	109	—	109	Cargo and other	83		0		0		2		85		0		85
Total Operating Revenues	Total Operating Revenues	3,499	662	229	(226)	4,164	—	4,164	Total Operating Revenues	1,696		359		186		(184)		2,057		0		2,057
Operating Expenses	Operating Expenses								Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	2,319	542	192	(234)	2,819	34	2,853	Operating expenses, excluding fuel	1,905		479		160		(192)		2,352		(129)		2,223
Economic fuel	Economic fuel	780	143	—	—	923	(1)	922	Economic fuel	358		82		0		0		440		3		443
Total Operating Expenses	Total Operating Expenses	3,099	685	192	(234)	3,742	33	3,775	Total Operating Expenses	2,263		561		160		(192)		2,792		(126)		2,666
Nonoperating Income (Expense)	Nonoperating Income (Expense)								Nonoperating Income (Expense)
Interest income	Interest income	33	—	—	(13)	20	—	20	Interest income	25		0		0		(9)		16		0		16
Interest expense	Interest expense	(40)	—	(15)	13	(42)	—	(42)	Interest expense	(30)		0		(10)		10		(30)		0		(30)
Interest capitalized	Interest capitalized	7	—	—	—	7	—	7	Interest capitalized	4		0		0		0		4		0		4
Other - net	Other - net	(17)	—	—	—	(17)	—	(17)	Other - net	12		0		0		(1)		11		0		11
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(17)	—	(15)	—	(32)	—	(32)	Total Nonoperating Income (Expense)	11		0		(10)		0		1		0		1
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	383	(23)	22	8	390	(33)	357	Income (Loss) Before Income Tax	$	(556)	$	(202)	$	16	$	8	$	(734)	$	126	$	(608)

(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital ~~allocations~~allocation and excludes certain ~~income and~~ charges. See Note A in the accompanying pages for further information.

(c)Includes ~~payroll support program grant~~Payroll Support Program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.

Total assets were as follows (in millions):

June 30, 2020 December 31, 2019
Mainline $ 20,261 $ 19,207
Horizon 1,199 1,266
Consolidating & Other (7,462) (7,480)
Consolidated $ 13,998 $ 12,993


	June 30, 2021		December 31, 2020
Mainline	$	19,920	$	19,754
Horizon	1,251		1,170
Consolidating & Other	(6,515)		(6,878)
Consolidated	$	14,656	$	14,046


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2019, and in Item 1A. "Risk Factors" of Part II of this Form 10-Q.~~2020. This overview summarizes the MD&A, which includes the following sections:

•Second Quarter Review—highlights from the second quarter of ~~2020~~2021 outlining some of the major events that happened during the period and how they affected our financial performance.

•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and six months ended June 30, ~~2020.~~2021. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of ~~2020.~~2021.

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

SECOND QUARTER REVIEW

~~COVID-19 Impacts~~Business Recovery and ~~Response~~Financial Outlook

~~The~~Second quarter 2021 results indicate we have reached a turning point in our recovery from the significant impacts of the COVID-19 on our business have been unprecedented, and have presented us with some of the greatest challenges in our 88-year history. The cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country beginning in March 2020, and continuing through to June 2020, has driven demand for air travel to historic lows.

As we entered the second quarter, passenger counts were approximately 5% of prior year levels. Throughout the quarter, we began to see slight improvements in demand and new bookings, with daily passenger counts peaking around 20% of prior year levels, primarily driven by leisure travelers.

~~Currently, we are planning a capacity reduction of about 50%~~pandemic. Early in the ~~third quarter and about 35% in the fourth quarter, although that is subject~~pandemic we shared plans to ~~change based on demand. Given the significant reduction to~~return capacity it is critical that we take action to address the size of our workforce. In an effort to mitigate the need for involuntary furloughs, we have initiated various early-out and voluntary furlough programs for most frontline workers and provided incentive leave options to our pilots. To date, we have had approximately 4,000 volunteers for these programs. In addition, we made the difficult decision to reduce our non-union management positions by approximately 300 management positions. In total these changes are expected to result in a prudent manner, only when demand supported doing so. We also established structural cost removal targets that have positioned the airline well for returning to profitability in recovery. With the strong return of ~~$250 million to $300 million, which will be recognized~~demand in the third quarter. We sent WARN notices on August 1 to approximately 4,000 employees, who may be potentially impacted if we determine furloughs are needed to adjust the workforce to fit the new size of the business.

~~Changes to our workforce is one of the ways we will reduce costs as we restructure our business. These and other cost reduction measures are critical to reaching our monthly cash burn goals. In~~ the second quarter, we ~~reduced~~reported an adjusted net loss that was significantly better than previous quarterly losses, and we currently expect double-digit adjusted pre-tax profit margins in the third quarter.

In the second half of 2021, we remain committed to returning capacity in a deliberate manner to match the return of leisure and business demand in the markets we serve. We also continue to return to 2019 capacity levels no later than the summer of 2022, though we have increased our ~~cash burn rate from approximately $400 million~~near-term flying expectations as we ~~exited March~~ramp towards that target. To support this plan and prepare for growth beyond 2022, in the second quarter of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and 2024, and nine E175 to ~~$120 million~~be operated by Horizon Air with deliveries in ~~June. We remain focused on~~2022 and 2023. In addition, we expanded our ~~goal~~long-term capacity agreement with SkyWest by eight aircraft beginning in 2022.

Our guidance for 2021 compares against 2019 as we believe it provides a more meaningful indication of the pace and quality of recovery to ~~achieve cash break-even by year end. To reach this goal, our~~pre-pandemic levels. For the third quarter, we are planning ~~assumption is that cash bookings will recover~~for capacity to ~~40%~~be approximately 17% to ~~60% of prior year levels by December. Our~~20% below the same period in 2019, coupled with increased passenger counts as leisure travel continues through the summer months and business travel rebuilds as workplaces reopen. As we continue to be disciplined with returning capacity and ~~cash bookings planning assumptions do not represent guidance,~~optimizing the aircraft gauge for flown routes, we anticipate third quarter load factors to range between 82% and ~~we will adjust our plans if demand trends don't support these assumptions.~~85%.

2322

~~Maintaining~~The guidance we have provided and our outlook more broadly are sensitive to health trends, exposure to variants of the COVID-19 virus, and regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. Our people continue to focus on keeping costs low, running a ~~significant liquidity balance is also paramount~~great operation, and welcoming guests back to ~~preserving~~travel with Next-Level Care to ensure they are safe and comfortable when they fly. These competitive advantages we have cultivated over many years will continue to serve us well in 2021 and beyond, and we are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.

Sustainability Updates

As we move beyond the impacts of the COVID-19 pandemic, we have shifted our ~~financial strength. In addition~~focus back to ~~the $1 billion~~our 2025 strategic plan, which was announced in ~~CARES Act funding obtained in~~2019. During the second quarter, we continued to make strides towards our goals of ~~2020,~~increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. As part of these commitments, we ~~have~~announced a partnership with Boeing on the 737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies to enhance the safety and sustainability of air travel. In the second quarter we also ~~sourced $589 million in secured financing, drawn $400 million from our existing credit facilities,~~announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and ~~issued $1.2 billion in EETCs which were finalized on July 2, 2020. We also have available~~machine learning to ~~us an additional $1.1 billion in CARES Act loans, should we choose to participate. As~~optimize air traffic and enable more fuel-efficient flight paths for aggregate savings of ~~August 4, 2020, our cash~~fuel, carbon emissions and ~~marketable securities balance was approximately $3.8 billion.~~time.

~~Our commitment~~As a reflection of the importance of the commitments made, we continue to ~~the health and safety~~tie a portion of ~~our guests and employees remains our top priority. In response~~long-term executive compensation to ~~the crisis,~~achievement of diversity goals. Additionally, we have ~~partnered with experts~~incorporated a carbon emission target into our company-wide performance-based pay program, for which we currently expect to build our Next-Level Care initiative. In doing so, we have added layers of safety with over 100 safety measures through all stages of travel. Some examples of measures that are helping our guests build confidence include:

•~~Making~~meet the ~~pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;~~

•~~Requiring masks for both guests aged 12 and older and employees, and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so;~~

•~~Using the latest air filtration technology and hospital grade filters to remove particulates and fully recycle air in the cabin every 2 to 3 minutes;~~

•~~Exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmission on board, and;~~

•~~Providing for adequate social distancing in our airports and on-board, including blocking middle seats on mainline aircraft through September 30, 2020.~~

~~oneworld~~ ~~Invitation~~

~~In July 2020, we received our formal invitation to join the~~ ~~one~~world alliance. Upon entrance to the alliance, Alaska guests will be able to access the full range of customer services and benefits, and Mileage Plan members will be able to earn and redeem rewards on all ~~oneworld member airlines. The Company is working to accelerate its timeline for entrance into the alliance, with a focus on completion as early as the end of 2020.~~targeted goal.

Financial Overview

Our consolidated ~~pretax loss was $291 million during~~pre-tax income for the second quarter of ~~2020,~~2021 was $528 million, compared to ~~pretax profit~~a pre-tax loss of ~~$351~~$291 million in the second quarter of ~~2019.~~2020. The ~~shift to pretax loss was~~$819 million improvement is primarily driven ~~primarily~~ by ~~a decrease~~an increase of $1.1 billion in operating ~~revenues~~revenue and $141 million of ~~$1.9 billion stemming from~~increased wage offsets provided by extensions of the ~~sharp decline in demand and $69 million in special charges from asset impairment,~~PSP of the CARES Act. These improvements were offset by a ~~decrease~~$292 million increase in non-fuel operating ~~expenses of $772~~costs, excluding special items, and a $215 million ~~including wage offsets from the payroll support program of the CARES Act of $362 million. Pretax loss was also offset by a decrease~~increase in fuel expense ~~of $443 million.~~as the operation ramps up to meet increased demand.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.

RESULTS OF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of the ~~payroll support program~~Payroll Support Program grant wage offset, ~~impairment and other charges, merger-related costs,~~special items, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

•By excluding fuel expense and certain special items (including the ~~payroll support program~~Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations ~~and our non-fuel cost initiatives.~~as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important

for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as ~~labor rates and~~ productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•Cost per ASM (CASM) excluding fuel and certain special items, such as the ~~payroll support program~~Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

•Adjusted income before income tax ~~and CASM excluding fuel~~ (and other items as specified in our plan documents) ~~are~~is an important ~~metrics~~metric for the employee annual cash incentive plan, which covers the majority of employees within the Air Group organization.

•CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they ~~compare~~have historically compared our ~~airlines~~airline to others in the industry. The measure is also the subject of frequent questions from investors.

•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of ~~certain~~these items ~~such~~ as ~~the payroll support program grant wage offset, impairment charges, merger-related costs, and mark-to-market hedging adjustments,~~noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•Although we disclose our unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.

2524

OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
Consolidated Operating Statistics:^(a)
Revenue passengers (000) 1,485 12,026 (87.7)% 10,417 22,442 (53.6)%
RPMs (000,000) "traffic" 1,654 14,638 (88.7)% 12,310 27,087 (54.6)%
ASMs (000,000) "capacity" 4,307 16,980 (74.6)% 19,612 32,487 (39.6)%
Load factor 38.4% 86.2% (47.8) pts 62.8% 83.4% (20.6) pts
Yield 18.68¢ 14.43¢ 29.5% 14.54¢ 14.13¢ 2.9%
RASM 9.77¢ 13.48¢ (27.5)% 10.49¢ 12.82¢ (18.2)%
CASM excluding fuel and special items^(b)
21.87¢ 8.33¢ 162.5% 12.00¢ 8.68¢ 38.2%
Economic fuel cost per gallon^(b)
$1.20 $2.27 (47.1)% $1.77 $2.20 (19.5)%
Fuel gallons (000,000) 54 220 (75.5)% 248 419 (40.8)%
ASMs per fuel gallon 79.8 77.2 3.4% 79.1 77.5 2.1%
Average full-time equivalent employees (FTEs) 15,836 21,921 (27.8)% 19,155 21,876 (12.4)%
Mainline Operating Statistics:
Revenue passengers (000) 905 9,206 (90.2)% 7,580 17,070 (55.6)%
RPMs (000,000) "traffic" 1,276 13,207 (90.3)% 10,858 24,379 (55.5)%
ASMs (000,000) "capacity" 3,363 15,241 (77.9)% 17,060 29,114 (41.4)%
Load factor 37.9% 86.7% (48.8) pts 63.6% 83.7% (20.1) pts
Yield 17.63¢ 13.38¢ 31.8% 13.44¢ 13.08¢ 2.8%
RASM 9.52¢ 12.66¢ (24.8)% 9.94¢ 12.02¢ (17.3)%
CASM excluding fuel and special items^(b)
22.19¢ 7.65¢ 190.1% 11.17¢ 7.96¢ 40.3%
Economic fuel cost per gallon^(b)
$1.20 $2.26 (46.9)% $1.78 $2.19 (18.7)%
Fuel gallons (000,000) 38 187 (79.7)% 201 356 (43.5)%
ASMs per fuel gallon 88.5 81.5 8.6% 84.9 81.8 3.8%
Average FTEs 12,340 16,551 (25.4)% 14,579 16,504 (11.7)%
Aircraft utilization 5.6 11.1 (49.5)% 8.8 10.7 (17.8)%
Average aircraft stage length 1,144 1,311 (12.7)% 1,270 1,308 (2.9)%
Operating fleet^(d)
225 238 (13) a/c 225 238 (13) a/c
Regional Operating Statistics:^(c)
Revenue passengers (000) 580 2,820 (79.4)% 2,837 5,372 (47.2)%
RPMs (000,000) "traffic" 378 1,431 (73.6)% 1,452 2,708 (46.4)%
ASMs (000,000) "capacity" 945 1,739 (45.7)% 2,552 3,373 (24.3)%
Load factor 40.0% 82.3% (42.3 pts) 56.9% 80.3% (23.4 pts)
Yield 22.12¢ 24.06¢ (8.1)% 22.80¢ 23.57¢ (3.3)%
RASM 10.63¢ 20.51¢ (48.2)% 14.07¢ 19.62¢ (28.3)%
Operating fleet 94 94 — a/c 94 94 — a/c


	Three Months Ended June 30,			Six Months Ended June 30,
	2021	2020	Change	2021	2020	Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)	8,712	1,485	486.7%	13,379	10,417	28.4%
RPMs (000,000) "traffic"	10,334	1,654	524.8%	15,727	12,310	27.8%
ASMs (000,000) "capacity"	13,413	4,307	211.4%	23,810	19,612	21.4%
Load factor	77.0%	38.4%	38.6 pts	66.1%	62.8%	3.3 pts
Yield	13.09¢	18.68¢	(29.9)%	12.79¢	14.54¢	(12.0)%
RASM	11.38¢	9.77¢	16.5%	9.76¢	10.49¢	(7.0)%
CASM excluding fuel and special items(b)	9.20¢	21.87¢	(57.9)%	9.95¢	12.00¢	(17.1)%
Economic fuel cost per gallon(b)	$1.90	$1.20	58.3%	$1.85	$1.77	4.5%
Fuel gallons (000,000)	168	54	211.1%	294	248	18.5%
ASMs per fuel gallon	79.8	79.8	—%	81.0	79.1	2.4%
Average full-time equivalent employees (FTEs)	19,001	15,836	20.0%	18,071	19,115	(5.5)%
Mainline Operating Statistics:
Revenue passengers (000)	6,151	905	579.7%	9,302	7,580	22.7%
RPMs (000,000) "traffic"	8,966	1,276	602.7%	13,555	10,858	24.8%
ASMs (000,000) "capacity"	11,611	3,363	245.3%	20,464	17,060	20.0%
Load factor	77.2%	37.9%	39.3 pts	66.2%	63.6%	2.6 pts
Yield	11.96¢	17.63¢	(32.2)%	11.64¢	13.44¢	(13.4)%
RASM	10.59¢	9.52¢	11.2%	9.09¢	9.94¢	(8.6)%
CASM excluding fuel and special items(b)	8.48¢	22.19¢	(61.8)%	9.17¢	11.17¢	(17.9)%
Economic fuel cost per gallon(b)	$1.88	$1.20	56.7%	$1.84	$1.78	3.4%
Fuel gallons (000,000)	135	38	255.3%	233	201	15.9%
ASMs per fuel gallon	86.0	88.5	(2.8)%	87.8	84.9	3.4%
Average FTEs	14,021	12,340	13.6%	13,247	14,579	(9.1)%
Aircraft utilization	9.9	5.6	76.8%	9.2	8.8	4.5%
Average aircraft stage length	1,320	1,144	15.4%	1,313	1,270	3.4%
Operating fleet(d)	202	225	(23) a/c	202	225	(23) a/c
Regional Operating Statistics:(c)
Revenue passengers (000)	2,562	580	341.7%	4,077	2,837	43.7%
RPMs (000,000) "traffic"	1,367	378	261.6%	2,172	1,452	49.6%
ASMs (000,000) "capacity"	1,802	945	90.7%	3,346	2,552	31.1%
Load factor	75.9%	40.0%	35.9 pts	64.9%	56.9%	8.0 pts
Yield	20.48¢	22.12¢	(7.4)%	19.95¢	22.80¢	(12.5)%
RASM	16.41¢	10.63¢	54.4%	13.84¢	14.07¢	(1.6)%
Operating fleet	94	94	— a/c	94	94	— a/c

(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

(c)Data presented includes information related to flights operated by Horizon and third-party carriers.

(d)Excludes 12all aircraft ~~permanently parked~~removed from operating service.

Given the unusual nature of 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2021 to 2019.


FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited)
Alaska Air Group, Inc.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021		2019		Change		2021		2019		Change
Passenger revenue	$	1,352	$	2,111	(36)	%	$	2,011	$	3,827	(47)	%
Mileage plan other revenue	118		118		—	%	212		228		(7)	%
Cargo and other	57		59		(3)	%	101		109		(7)	%
Total operating revenues	$	1,527	$	2,288	(33)	%	$	2,324	$	4,164	(44)	%

Operating expense, excluding fuel and special items	$	1,234	$	1,414	(13)	%	$	2,371	$	2,819	(16)	%
Economic fuel	274		502		(45)	%	477		922		(48)	%
Special items	(530)		8		NM		(912)		34		NM
Total operating expenses	$	978	$	1,924	(49)	%	$	1,936	$	3,775	(49)	%

Total nonoperating expense	(21)		(13)		62	%	(33)		(32)		3	%
Income (loss) before income tax	$	528	$	351	50	%	$	355	$	357	(1)	%

Consolidated Operating Statistics(a):
Revenue passengers (000)	8,712		12,026		(28)	%	13,379		22,442		(40)	%
RPMs (000,000) "traffic"	10,334		14,638		(29)	%	15,727		27,087		(42)	%
ASMs (000,000) "capacity"	13,413		16,980		(21)	%	23,810		32,487		(27)	%
Load Factor	77.0%		86.2%		(9.2)	pts	66.1%		83.4%		(17.3)	pts
Yield	13.09¢		14.43¢		(9)	%	12.79¢		14.13¢		(9)	%
RASM	11.38¢		13.48¢		(16)	%	9.76¢		12.82¢		(24)	%
CASMex	9.20¢		8.33¢		10	%	9.95¢		8.68¢		15	%
FTEs	19,001		21,921		(13)	%	18,071		21,876		(17)	%

(a)2019 comparative operating statistics have been recalculated using the information presented above, and as filed in ~~March 2020.~~our second quarter 2019 Form 10-Q.

COMPARISON OF THREE MONTHS ENDED JUNE 30, ~~2020~~2021 TO THREE MONTHS ENDED JUNE 30, ~~2019~~2020

Our consolidated net ~~loss~~income for the three months ended June 30, ~~2020~~2021 was $397 million, or $3.13 per share, compared to a net loss of $214 million, or ~~$1.73~~$1.74 per ~~diluted share, compared to net income of $262 million, or $2.11 per diluted~~ share, for the three months ended June 30, ~~2019.~~2020.

Excluding the impact of the ~~payroll support program~~Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the second quarter of ~~2020~~2021 was $38 million, or $0.30 per share, compared to an adjusted net loss of $439 million, or ~~$3.54~~$3.57 per ~~diluted share, compared to adjusted net income of $270 million, or $2.17 per diluted~~ share, in the second quarter of ~~2019.~~2020. The following tables reconcile our adjusted net ~~income and adjusted earnings~~loss per ~~diluted~~ share (EPS) to amounts as reported in accordance with GAAP:


		Three Months Ended June 30,															Three Months Ended June 30,
		2020						2019							2021				2020
(in millions, except per share amounts)	(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS		(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income (loss) and diluted EPS		$	(214)	$	(1.73)	$	262	$	2.11
Payroll support program grant wage offset		(362)		(2.92)		—		—
GAAP net income (loss) per share										GAAP net income (loss) per share	$	397	$	3.13	$	(214)	$	(1.74)
Payroll Support Program grant wage offset										Payroll Support Program grant wage offset	(503)		(3.97)		(362)		(2.94)
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(6)		(0.05)		3		0.02		Mark-to-market fuel hedge adjustments	(46)		(0.36)		(6)		(0.05)
Special items - impairment charges and other	Special items - impairment charges and other	69		0.56		—		—		Special items - impairment charges and other	(4)		(0.03)		69		0.56
Special items - restructuring charges										Special items - restructuring charges	(23)		(0.18)		—		—
Special items - merger-related costs	Special items - merger-related costs	1		0.01		8		0.06		Special items - merger-related costs	—		—		1		0.01

Income tax effect of reconciling items above	Income tax effect of reconciling items above	73		0.59		(3)		(0.02)		Income tax effect of reconciling items above	141		1.11		73		0.59
Non-GAAP adjusted net income (loss) and diluted EPS		$	(439)	$	(3.54)	$	270	$	2.17
Non-GAAP adjusted net loss per share										Non-GAAP adjusted net loss per share	$	(38)	$	(0.30)	$	(439)	$	(3.57)

CASM reconciliation is summarized below:

Three Months Ended June 30,
(in cents) 2020 2019 % Change
Consolidated:
CASM 16.46 ¢ 11.33 ¢ 45 %
Less the following components:
Payroll support program grant wage offset (8.40) — NM
Aircraft fuel, including hedging gains and losses 1.37 2.96 (54) %
Special items - merger-related costs 0.02 0.04 (50) %
Special items - impairment charges and other 1.60 — NM
CASM excluding fuel and special items 21.87 ¢ 8.33 ¢ 163 %
Mainline:
CASM 15.79 ¢ 10.50 ¢ 50 %
Less the following components:
Payroll support program grant wage offset (9.69) — NM
Aircraft fuel, including hedging gains and losses 1.16 2.79 (58) %
Special items - merger-related costs 0.02 0.06 (67) %
Special items - impairment charges and other 2.11 — NM
CASM excluding fuel and special items 22.19 ¢ 7.65 ¢ 190 %


	Three Months Ended June 30,
(in cents)	2021		2020		% Change
Consolidated:
CASM	7.29	¢	16.46	¢	(56)	%
Less the following components:
Payroll Support Program grant wage offset	(3.75)		(8.40)		(55)	%
Aircraft fuel, including hedging gains and losses	2.04		1.37		49	%
Special items - impairment charges and other	(0.03)		1.60		(102)	%
Special items - restructuring charges	(0.17)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	9.20	¢	21.87	¢	(58)	%

Mainline:
CASM	6.24	¢	15.79	¢	(60)	%
Less the following components:
Payroll Support Program grant wage offset	(3.79)		(9.69)		(61)	%
Aircraft fuel, including hedging gains and losses	1.78		1.16		53	%

Special items - impairment charges and other	(0.03)		2.11		(101)	%
Special items - restructuring charges	(0.20)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	8.48	¢	22.19	¢	(62)	%

OPERATING REVENUES

Total operating revenues ~~decreased $1.9~~increased $1.1 billion ~~or 82%,~~ during the second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The changes are summarized in the following table:

Three Months Ended June 30,
(in millions) 2020 2019 % Change
Passenger revenue $ 309 $ 2,111 (85) %
Mileage Plan other revenue 73 118 (38) %
Cargo and other 39 59 (34) %
Total operating revenues $ 421 $ 2,288 (82) %


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Passenger revenue	$	1,352	$	309	338	%
Mileage Plan other revenue	118		73		62	%
Cargo and other	57		39		46	%
Total operating revenues	$	1,527	$	421	263	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the second quarter of 2021 increased by $1.0 billion, primarily driven by a significant increase in passenger traffic. In the second quarter of 2020, ~~decreased by $1.8 billion, or 85%, on an 89% decline in traffic. Decreased revenue year-over-year is primarily due to the~~we experienced a near complete loss of demand driven by the COVID-19 ~~pandemic, which began significantly impacting revenues in March 2020~~pandemic. As recovery has taken hold, including wide availability of the vaccine and ~~continued~~removal of restrictions throughout the ~~second quarter. In response to the decline in~~markets we serve, demand ~~we reduced capacity 75%, and experienced a 48-point decrease in load factor.~~for air travel has increased exponentially driven primarily by leisure travelers.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue ~~decreased~~increased by $45 million, or ~~38%~~62%, as compared to the same prior-year period, ~~primarily on a reduction~~largely due to an increase in ~~miles purchased~~commissions from our bank card partners driven by ~~our affinity~~increased consumer spending and new card ~~partner, consistent with an overall reduction~~acquisitions. Performance of Mileage Plan other revenues outpaced all other revenue sources, and resulted in ~~consumer spending.~~the best performance of the program ever in the second quarter of 2021.

Cargo and ~~Other Revenue~~other

On a consolidated basis, Cargo and other revenue for the second quarter of ~~2020 decreased~~2021 increased by ~~$20~~$18 million, or ~~34%~~46%, as compared to the same prior-year period. The ~~decrease~~increase is primarily due to ~~reduced~~the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity ~~driven by the schedule reductions for passenger aircraft,~~ as ~~well as continued capacity limitations in our freighters.~~we increase scheduled departures.

OPERATING EXPENSES

Total operating expenses ~~decreased $1.2 billion,~~increased $269 million, or ~~63%~~38%, compared to the second quarter of ~~2019.~~2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

Three Months Ended June 30,
(in millions) 2020 2019 % Change
Fuel expense $ 59 $ 502 (88) %
Non-fuel operating expenses, excluding special items 942 1,414 (33) %
Payroll support program grant wage offset (362) — NM
Special items - merger-related costs 1 8 (88) %
Special items - impairment charges and other 69 — NM
Total operating expenses $ 709 $ 1,924 (63) %


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Fuel expense	$	274	$	59	364	%
Non-fuel operating expenses, excluding special items	1,234		942		31	%
Payroll Support Program grant wage offset	(503)		(362)		39	%
Special items - impairment charges and other	(4)		69		(106)	%
Special items - restructuring charges	(23)		—		NM
Special items - merger-related costs	—		1		(100)	%
Total operating expenses	$	978	$	709	38	%

Fuel Expense

Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense ~~decreased $443~~increased $215 million, ~~or 88%,~~ compared to the second quarter of ~~2019.~~2020. The elements of the change are illustrated in the following table:

Three Months Ended June 30,
2020 2019
(in millions, except for per gallon amounts) Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost $ 60 $ 1.11 $ 495 $ 2.25
Losses on settled hedges 5 0.09 4 0.02
Consolidated economic fuel expense 65 1.20 $ 499 $ 2.27
Mark-to-market fuel hedge adjustments (6) (0.11) 3 0.01
GAAP fuel expense $ 59 $ 1.09 $ 502 $ 2.28
Fuel gallons 54 220


	Three Months Ended June 30,
	2021				2020
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	330	$	1.96	$	60	$	1.11
(Gain)/loss on settled hedges	(10)		(0.06)		5		0.09
Consolidated economic fuel expense	320		1.90		$	65	$	1.20
Mark-to-market fuel hedge adjustments	(46)		(0.27)		(6)		(0.11)
GAAP fuel expense	$	274	$	1.63	$	59	$	1.09
Fuel gallons	168				54

Raw fuel expense per gallon for the three months ended June 30, ~~2020 decreased~~2021 increased by approximately ~~51%~~77% due to ~~lower~~higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The ~~decrease~~increase in raw fuel price per gallon during the second quarter of ~~2020~~2021 was primarily driven by a ~~53% decrease~~24% increase in crude oil prices and a 75% decrease in refining margins, when compared to the prior year. Crude oil prices have been dramatically impacted by the COVID-19 pandemic and the related reduction in demand. The decreaseprices. This is ~~also due to a year-over-year decline~~coupled with an increase in consumption of ~~166~~114 million gallons, ~~or 75%, primarily~~ on ~~a significant reduction to flight time and block hours.~~an increase in scheduled departures.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

~~Losses~~Gains recognized for hedges that settled during the second quarter were $5$10 million in ~~2020,~~2021, compared to losses of $4$5 million in the same period in ~~2019.~~2020. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.

Non-fuel Expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel, the ~~payroll support program~~Payroll Support Program grant wage offset and special items. Significant operating expense variances from ~~2019~~2020 are more fully described below.

Three Months Ended June 30,
(in millions) 2020 2019 % Change
Wages and benefits $ 472 $ 567 (17) %
Variable incentive pay 16 44 (64) %
Aircraft maintenance 45 115 (61) %
Aircraft rent 74 82 (10) %
Landing fees and other rentals 83 113 (27) %
Contracted services 30 70 (57) %
Selling expenses 4 87 (95) %
Depreciation and amortization 107 105 2 %
Food and beverage service 7 53 (87) %
Third-party regional carrier expense 26 42 (38) %
Other 78 136 (43) %
Total non-fuel operating expenses, excluding special items $ 942 $ 1,414 (33) %


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Wages and benefits	$	510	$	472	8	%
Variable incentive pay	34		16		113	%
Aircraft maintenance	102		45		127	%
Aircraft rent	62		74		(16)	%
Landing fees and other rentals	144		83		73	%
Contracted services	54		30		80	%
Selling expenses	41		4		925	%
Depreciation and amortization	98		107		(8)	%
Food and beverage service	35		7		400	%
Third-party regional carrier expense	37		26		42	%
Other	117		78		50	%
Total non-fuel operating expenses, excluding special items	$	1,234	$	942	31	%

Wages and Benefits

Wages and benefits ~~decreased~~increased during the second quarter of ~~2020~~2021 by ~~$95~~$38 million, or ~~17%~~8%, compared to ~~2019.~~2020. The primary components of Wages and benefits are shown in the following table:

Three Months Ended June 30,
(in millions) 2020 2019 % Change
Wages $ 350 $ 421 (17) %
Pension - Defined benefit plans service cost 13 11 18 %
Defined contribution plans 30 35 (14) %
Medical and other benefits 54 69 (22) %
Payroll taxes 25 31 (19) %
Total wages and benefits $ 472 $ 567 (17) %


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Wages	$	386	$	350	10	%
Pension - Defined benefit plans service cost	13		13		—	%
Defined contribution plans	26		30		(13)	%
Medical and other benefits	59		54		9	%
Payroll taxes	26		25		4	%
Total wages and benefits	$	510	$	472	8	%

Wages ~~decreased $71~~increased $36 million, or ~~17%~~10%, on a ~~28% reduction~~20% increase in FTEs. ~~The decrease is~~Increased wages as compared to the prior period are primarily ~~due to voluntary~~the result of leaves of absence ~~accepted by more than 6,000 employees, as well as~~taken and reduction in executive pay and hours for management employees ~~and reducing represented employees work hours to minimums.~~in 2020 which were not repeated in 2021.

~~Medical and other benefits~~Defined contribution plan expense decreased ~~$15 million, or 22%, primarily due~~13% as compared to 2020 as a ~~significant reduction~~result of a one-time adjustment recorded in ~~elective procedures and adjustments~~the second quarter of 2021 for employer contributions to ~~reserves for high-dollar value medical claims.~~those participating in incentive leave programs.

Variable Incentive Pay

Variable incentive pay expense ~~decreased $28~~increased $18 million ~~or 64%,~~ during the second quarter of ~~2020~~2021 compared to the same period in ~~2019, due to the~~2020 on increased expectation ~~that~~of achievement of key financial ~~metrics will not be achieved under the performance based pay program.~~and operational metrics.

Aircraft Maintenance

Aircraft maintenance expense increased by $57 million during the second quarter of 2021 compared to the same period in 2020. This is primarily due to a significant increase in utilization of aircraft as we return to capacity, resulting in increased engine events, heavy checks and power-by-the-hour expense.

Aircraft Rent

Aircraft rent expense decreased by ~~$70~~$12 million, or ~~61%~~16%, during the second quarter of ~~2020~~2021 compared to the same period in ~~2019. The decrease is~~2020 primarily ~~due to fewer engine events and heavy checks as compared to~~ the ~~prior year, as well as lower power-by-the-hour expense~~result of the full impairment taken on ~~reduced second quarter utilization of covered aircraft. These decreases were offset by costs incurred~~certain leased Airbus aircraft in ~~the temporary grounding of certain aircraft.~~2020.

Landing fees and other rentals

Landing fees and other rentals ~~decreased~~increased by ~~$30~~$61 million, or ~~27%~~73%, during the second quarter of ~~2020~~2021 compared to the same period in ~~2019 on~~2020 primarily due to a ~~67% decrease~~significant increase in departures. ~~Decreased~~Increased departure-related costs were ~~offset~~coupled by rate increases at many of our ~~airports.~~hub airports, including the renegotiated lease at our largest airport hub Seattle-Tacoma International Airport.

Contracted Services

Contracted services ~~decreased~~increased by ~~$40~~$24 million, or ~~57%~~80%, during the second quarter of ~~2020~~2021 compared to the same period in ~~2019~~2020 driven primarily by ~~decreased~~increased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.

Selling Expense

Selling expense ~~decreased~~increased by ~~$83~~$37 million ~~or 95%,~~ during the second quarter of ~~2020~~2021 compared to the same period in ~~2019,~~2020, primarily driven by a significant ~~reduction~~increase in distribution costs and credit card ~~commissions. Reduced marketing spend and sponsorship costs also contributed to~~commissions incurred with the ~~year-over-year decline given COVID-19 related delays in professional sports seasons.~~increase of overall travel.

Food and Beverage Service

Food and beverage service ~~decreased~~increased by ~~$46~~$28 million ~~or 87%,~~ during the second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. This ~~decrease~~increase is ~~in-line~~consistent with the overall ~~reduction~~increase in revenue passengers as compared to the prior-year period, as well as the ~~temporary closure~~return of ~~the majority~~many of our ~~airport lounges.~~

on-board products in the second quarter of 2021.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, ~~decreased~~increased by ~~$16~~$11 million, or ~~38%~~42%, during the second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The ~~reduction~~increase in expense is primarily due to ~~a 41% reduction~~increases in departures flown by SkyWest as compared to the prior-year period. Increased expense was partially offset by a pass through of CARES Act PSP funding of $5 million received in the second quarter to offset SkyWest pilot and flight attendant wages and benefits.

Other expense

Other expense increased $39 million, or 50%, during the second quarter of 2021 compared to the same period ~~a reduction~~ in ~~departure-related contractual rates,~~2020. Increased expense is primarily driven by incremental crew hotel stays and per diem, consistent with the ~~elimination of PenAir flying.~~overall increase in departures and capacity, as well as additional expense for professional services.

Special Items - Impairment and other charges

We recorded a benefit associated with impairment and other charges of ~~$69~~$4 million in the second quarter of ~~2020,~~2021, consisting of ~~our~~ updated ~~estimate of~~estimates for costs ~~required to return~~associated with leased ~~Airbus~~ aircraft that ~~were permanently parked~~have been retired and removed from the operating fleet but not yet returned to the lessor.

Special Items - Restructuring charges

We recorded a benefit for workforce restructuring of $23 million in the ~~first quarter.~~second quarter of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline recorded an adjusted pretax loss of $24 million in the second quarter of 2021, compared to a pretax loss of $471 million in the second quarter of ~~2020, compared to a pretax profit of $334~~2020. The $447 million ~~in the second quarter of 2019. The $805 million shift to pretax loss~~improvement was primarily driven by ~~a $1.5 billion decrease~~an $847 million increase in Passenger revenues as a result of ~~the COVID-19 pandemic,~~increased demand for air travel, offset by a ~~$421~~$238 million ~~decrease~~increase in non-fuel operating costs and a ~~$377~~$208 million ~~decrease~~increase in economic fuel cost.

The ~~decrease~~increase in Mainline passenger revenue for the second quarter of ~~2020~~2021 was primarily driven by a ~~90% decline~~significant increase in ~~traffic on a 78% decrease in capacity. The overall decrease in both~~ traffic and capacity ~~are driven by the significant reduction in~~due to increased demand ~~as a result of the COVID-19 pandemic.~~for air travel.

Non-fuel operating expenses ~~decreased~~increased significantly, ~~on cost savings~~ driven by ~~reduced~~increased variable costs, ~~on reduced~~largely consistent with the overall increase in capacity ~~as well as decreased wages~~ and ~~benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lower~~departures. Higher raw fuel prices, combined with a ~~80% decrease~~significant increase in gallons consumed, drove the ~~decline~~increase in Mainline fuel expense.

Regional

Regional operations generated an adjusted pretax loss of $56 million in the second quarter of 2021, compared to a pretax loss of $129 million in the second quarter of ~~2020, compared to a pretax profit of $12 million in the second quarter of 2019.~~2020. The ~~increase in the~~improved pretax loss was attributable to a ~~$256~~$195 million ~~decline~~increase in operating revenues, partially offset by a ~~$57~~$76 million ~~decrease in fuel costs and an $58 million decrease~~increase in non-fuel operating ~~expenses.~~expenses and a $46 million increase in fuel costs.

Regional passenger revenue ~~decreased 76%~~increased significantly compared to the second quarter of ~~2019,~~2020, primarily driven by ~~a 74% decline in traffic on a 46% decrease in capacity. The overall decrease in both~~increased traffic and capacity ~~are~~ driven by the ~~significant reduction~~resurgence in demand ~~as a result of the COVID-19 pandemic.~~for air travel.

The ~~decrease~~increase in non-fuel operating expenses is primarily due to ~~the 46% decline~~increased variable costs and higher CPA rates on an increase in capacity, ~~as well as elimination~~offset by the pass through of ~~costs for PenAir flying~~CARES Act PSP funds recorded in the ~~state~~second quarter of ~~Alaska.~~2021.

Horizon

Horizon achieved aan adjusted pretax profit of $15 million in the second quarter of 2021 compared to $8 million in the second quarter of ~~2020, compared to a pretax~~2020. Increased profit ~~of $10 million in the second quarter of 2019. Profit recorded by Horizon in the second quarter~~ is primarily the result of ~~incremental flying as a proportion of overall Air Group~~increased capacity as compared to the prior year. Horizon revenues are recorded based upon purchased capacity, and are not impacted by changes to ticket prices and customer demand. Horizon profit is also the result of significantflown, coupled with substantial progress in cost reduction ~~efforts implemented in response to the COVID-19 pandemic.~~efforts.

COMPARISON OF SIX MONTHS ENDED JUNE 30, ~~2020~~2021 TO SIX MONTHS ENDED JUNE 30, ~~2019~~2020

Our consolidated net ~~loss~~income for the six months ended June 30, ~~2020~~2021 was ~~$446~~$266 million, or ~~$3.60~~$2.10 per diluted share, compared to a net ~~income~~loss of ~~$266~~$446 million, or ~~$2.14~~$3.62 per diluted share, for the six months ended June 30, ~~2019.~~2020.

Our adjusted net loss for the six months ended June 30, ~~2020~~2021 was ~~$541~~$474 million, or ~~$4.37~~$3.75 per diluted share, compared to an adjusted net ~~income~~loss of ~~$291~~$541 million, or ~~$2.34~~$4.40 per diluted share, in the six months ended June 30, ~~2019.~~2020. The following tables reconcile our adjusted net ~~income~~loss and adjusted diluted EPS to amounts as reported in accordance with GAAP:

Six Months Ended June 30,
2020 2019
(in millions, except per share amounts) Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income (loss) and diluted EPS $ (446) $ (3.60) $ 266 $ 2.14
Payroll support program grant wage offset (362) (2.93) — —
Mark-to-market fuel hedge adjustments 3 0.03 (1) (0.01)
Special items - merger-related costs 4 0.03 34 0.27
Special items - impairment charges and other 229 1.85 — —
Income tax effect of reconciling items above 31 0.25 (8) (0.06)
Non-GAAP adjusted net income (loss) and diluted EPS $ (541) $ (4.37) $ 291 $ 2.34

~~Our operating costs per ASM are summarized below:~~

Six Months Ended June 30,
(in cents) 2020 2019 % Change
Consolidated:
CASM 13.59 ¢ 11.62 ¢ 17 %
Less the following components:
Payroll support program grant wage offset (1.85) — NM
Aircraft fuel, including hedging gains and losses 2.26 2.84 (20) %
Special items - merger-related costs 0.01 0.10 (90) %
Special items - impairment charges and other 1.17 — NM
CASM excluding fuel and special items 12.00 ¢ 8.68 ¢ 38 %
Mainline:
CASM 12.39 ¢ 10.76 ¢ 15 %
Less the following components:
Payroll support program grant wage offset (1.91) — NM
Aircraft fuel, including hedging gains and losses 2.12 2.68 (21) %
Special items - merger-related costs 0.02 0.12 (83) %
Special items - impairment charges and other 0.99 — NM
CASM excluding fuel and special items 11.17 ¢ 7.96 ¢ 40 %


	Six Months Ended June 30,
	2021				2020
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
Reported GAAP net income (loss) and diluted EPS	$	266	$	2.10	$	(446)	$	(3.62)
Payroll Support Program grant wage offset	(914)		(7.23)		(362)		(2.94)
Mark-to-market fuel hedge adjustments	(68)		(0.54)		3		0.02
Special items - merger-related costs	—		—		4		0.03
Special items - impairment charges and other	14		0.11		229		1.86
Special items - restructuring charges	(12)		(0.09)		—		—
Income tax effect of reconciling items above	240		1.90		31		0.25
Non-GAAP adjusted net loss per share	$	(474)	$	(3.75)	$	(541)	$	(4.40)

Our operating costs per ASM are summarized below:


	Six Months Ended June 30,
(in cents)	2021		2020		% Change
Consolidated:
CASM	8.13	¢	13.59	¢	(40)	%
Less the following components:
Payroll Support Program grant wage offset	(3.84)		(1.85)		108	%
Aircraft fuel, including hedging gains and losses	2.00		2.26		(12)	%
Special items - impairment charges and other	0.07		1.17		(94)	%
Special items - restructuring charges	(0.05)		—		NM
Special items - merger-related costs	—		0.01		(100)	%
CASM excluding fuel and special items	9.95	¢	12.00	¢	(17)	%

Mainline:
CASM	6.72	¢	12.39	¢	(46)	%
Less the following components:
Payroll Support Program grant wage offset	(4.21)		(1.91)		120	%
Aircraft fuel, including hedging gains and losses	1.75		2.12		(17)	%
Special items - impairment charges and other	0.07		0.99		(93)	%
Special items - restructuring charges and other	(0.06)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	9.17	¢	11.17	¢	(18)	%

OPERATING REVENUES

Total operating revenues ~~decreased $2.1 billion,~~increased $267 million, or ~~51%~~13%, during the first six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The changes are summarized in the following table:

Six Months Ended June 30,
(in millions) 2020 2019 % Change
Passenger revenue $ 1,790 $ 3,827 (53) %
Mileage Plan other revenue 182 228 (20) %
Cargo and other 85 109 (22) %
Total operating revenues $ 2,057 $ 4,164 (51) %


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Passenger revenue	$	2,011	$	1,790	12	%
Mileage Plan other revenue	212		182		16	%
Cargo and other	101		85		19	%
Total operating revenues	$	2,324	$	2,057	13	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the first six months of ~~2020 decreased~~2021 increased by ~~$2 billion,~~$221 million, or ~~53%~~12%, on a ~~40% decrease~~28% increase in ~~capacity, and a 21 point decrease~~passenger traffic, driven primarily by rebounding demand for leisure travel experienced in ~~load factor. Decreased revenue year-over-year is primarily due~~the second quarter of 2021. As travel restrictions were removed, including the full removal of restrictions in the state of California in June of 2021, passenger counts increased dramatically as compared to the ~~near complete loss~~prior year. These improvements were offset by a decrease of 12% in yield, stemming from promotional activities undertaken to stimulate demand ~~due to the COVID-19 pandemic. Load factors~~ and unit revenues in the first two months of 2020 were in-line with our original expectations. In March 2020, demand deteriorated at an unprecedented level, and in response we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Althoughincrease bookings during what is typically a ~~moderate recovery was observed in June 2020, the resurgence of cases throughout the United States is expected to continue to have significant impacts to our revenue throughout 2020.~~low booking period.

We expect to see continued improvement to Passenger revenue as we progress through 2021, driven by continued growth in demand and capacity, as well as improvements to business travel as employees return to work.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue ~~decreased $46~~increased $30 million, or ~~20%~~16%, in the first six months of ~~2020~~2021 compared to the first six months of ~~2019,~~2020, due largely to ~~a reduction~~an increase in ~~purchased miles and decreased commissions~~commission received from our affinity card partner ~~consistent with fewer~~stemming from growing consumer spend and incremental new ~~affinity~~ card ~~holders in 2020 and an overall reduction in consumer spending.~~acquisitions.

Cargo and other

On a consolidated basis, Cargo and other revenue ~~decreased $24~~increased $16 million, or ~~22%~~19%, in the first six months of ~~2020~~2021 compared to the first six months of ~~2019.~~2020. The ~~decrease~~increase is primarily due to ~~reduced~~the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity ~~driven by~~as we increase scheduled departures.

We expect that our cargo and other revenues will be positively impacted as compared to 2020 due to the ~~schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters.~~elimination of freighter limitations.

OPERATING EXPENSES

Total operating expenses decreased ~~$1.1 billion,~~$730 million, or ~~29%~~27%, compared to the first six months of ~~2019.~~2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

Six Months Ended June 30,
(in millions) 2020 2019 % Change
Fuel expense $ 443 $ 922 (52) %
Non-fuel operating expenses, excluding special items 2,352 2,819 (17) %
Payroll support program grant wage offset (362) — NM
Special items - merger-related costs 4 34 (88) %
Special items - impairment charges and other 229 — NM
Total operating expenses $ 2,666 $ 3,775 (29) %


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Fuel expense	$	477	$	443	8	%
Non-fuel operating expenses, excluding special items	2,371		2,352		1	%
Payroll Support Program grant wage offset	(914)		(362)		152	%
Special items - impairment charges and other	14		229		(94)	%
Special items - restructuring charges	(12)		—		NM
Special items - merger-related costs	—		4		(100)	%
Total operating expenses	$	1,936	$	2,666	(27)	%

Fuel Expense

Aircraft fuel expense ~~decreased $479~~increased $34 million, or ~~52%~~8%, compared to the six months ended June 30, ~~2019.~~2020. The elements of the change are illustrated in the ~~following~~ table:

Six Months Ended June 30,
2020 2019
(in millions, except for per gallon amounts) Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost $ 430 $ 1.73 $ 916 $ 2.18
Losses on settled hedges 10 0.04 7 0.02
Consolidated economic fuel expense 440 1.77 $ 923 $ 2.20
Mark-to-market fuel hedge adjustments 3 0.01 (1) —
GAAP fuel expense $ 443 $ 1.78 $ 922 $ 2.20
Fuel gallons 248 419


	Six Months Ended June 30,
	2021				2020
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	552	$	1.87	$	430	$	1.73
(Gain)/loss on settled hedges	(7)		(0.02)		10		0.04
Consolidated economic fuel expense	545		1.85		$	440	$	1.77
Mark-to-market fuel hedge adjustments	(68)		(0.23)		3		0.01
GAAP fuel expense	$	477	$	1.62	$	443	$	1.78
Fuel gallons	294				248

The raw fuel price per gallon ~~decreased 21%~~increased 8% due to ~~lower~~higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The ~~decrease~~increase in raw fuel price per gallon during the first six months of ~~2020~~2021 was driven by a ~~36% decrease~~10% increase in crude oil prices, ~~and~~offset by a ~~56%~~65% decrease in refining margins.

~~Losses~~Gains recognized for hedges that settled in the first six months of ~~2020~~2021 were ~~$10~~$7 million, compared to losses of $7$10 million in the same period in ~~2019.~~2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.

We expect our economic fuel cost per gallon in the third quarter to range between ~~$1.35~~$1.95 and ~~$1.40~~$2.00 per gallon based on ~~a significant decrease in consumption as compared to the prior-year period.~~current market West Coast jet fuel prices.

Non-fuel Expense and Non- special items


		Six Months Ended June 30,											Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		% Change		(in millions)	2021		2020		% Change
Wages and benefits	Wages and benefits	$	1,084	$	1,124	(4)	%	Wages and benefits	$	1,003	$	1,084	(7)	%
Variable incentive pay	Variable incentive pay	23		79		(71)	%	Variable incentive pay	67		23		191	%
Aircraft maintenance	Aircraft maintenance	160		235		(32)	%	Aircraft maintenance	183		160		14	%
Aircraft rent	Aircraft rent	155		165		(6)	%	Aircraft rent	124		155		(20)	%
Landing fees and other rentals	Landing fees and other rentals	214		245		(13)	%	Landing fees and other rentals	273		214		28	%
Contracted services	Contracted services	102		142		(28)	%	Contracted services	105		102		3	%
Selling expenses	Selling expenses	59		159		(63)	%	Selling expenses	74		59		25	%
Depreciation and amortization	Depreciation and amortization	215		211		2	%	Depreciation and amortization	195		215		(9)	%
Food and beverage service	Food and beverage service	56		102		(45)	%	Food and beverage service	58		56		4	%
Third-party regional carrier expense	Third-party regional carrier expense	63		83		(24)	%	Third-party regional carrier expense	67		63		6	%
Other	Other	221		274		(19)	%	Other	222		221		—	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	2,352	$	2,819	(17)	%	Total non-fuel operating expenses, excluding special items	$	2,371	$	2,352	1	%

Wages and Benefits

Wages and benefits decreased during the first six months of ~~2020~~2021 by ~~$40~~$81 million, or 4%7%. The primary components of wages and benefits are shown in the following table:

Six Months Ended June 30,
(in millions) 2020 2019 % Change
Wages $ 803 $ 845 (5) %
Pension—Defined benefit plans service cost 26 21 24 %
Defined contribution plans 68 66 3 %
Medical and other benefits 130 132 (2) %
Payroll taxes 57 60 (5) %
Total wages and benefits $ 1,084 $ 1,124 (4) %


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Wages	$	743	$	803	(7)	%
Pension—Defined benefit plans service cost	26		26		—	%
Defined contribution plans	58		68		(15)	%
Medical and other benefits	124		130		(5)	%
Payroll taxes	52		57		(9)	%
Total wages and benefits	$	1,003	$	1,084	(7)	%

Wages decreased ~~$42~~$60 million, or 5%7%, on a ~~12%~~5% decrease in FTEs. ~~The decrease is~~Decreased wages as compared to the prior period are primarily ~~due to~~the result of voluntary early-outs, as well as leaves of absence and incentive lines accepted ~~by more than 6,000 employees, as well as reduction~~ in ~~executive pay and hours for management employees.~~2020 which carried into 2021. These ~~decreases~~reductions were offset by increased ~~wage rates following~~wages in the ~~mid-2019 ratification~~second quarter as we began to rebuild staffing and provide incentives to employees in response to increasing demand. Reductions to defined-contribution plan expense, medical and other benefits, and payroll taxes are a direct result of ~~new contracts for employees represented by~~ the ~~Aircraft Mechanics Fraternal Association and the International Association of Machinists.~~decline in wages.

For the full year, we expect wages and benefits will ~~decline~~increase compared to ~~the prior year~~2020 as we ~~reduce~~increase scheduled flying and ~~executive salaries, and realize savings generated~~return workers from ~~our reduction in workforce necessary~~incentive leaves or other absences to align with our expectation of increased demand. Additionally, as labor shortages continue to impact many of our markets, we expect to see continued wage pressure as we offer premium and bonus pay to attract and retain employees.

Variable Incentive Pay

Variable incentive pay expense ~~decreased $56~~increased $44 million, or ~~71%~~191%, during the first six months of ~~2020~~2021 as compared to the same period in ~~2019.~~2020. The ~~decrease~~increase is primarily due to the expectation that incremental key ~~financial metrics~~targets will ~~not~~ be achieved under the performance based pay program.

Aircraft Maintenance

Aircraft maintenance expense ~~decreased~~increased by ~~$75~~$23 million, or ~~32%~~14%, during the first six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The ~~decrease~~increase is primarily due to increased component repairs which were delayed from 2020 as a ~~significant reduction in engine events and heavy checks,~~result of increased flight hours, as well as ~~reduced~~increased power-by-the-hour ~~expense on reduced~~combined with increased utilization inof covered aircraft.

We expect full year aircraft maintenance expense to be ~~lower~~higher than ~~2019~~2020 on ~~reduced~~increased aircraft ~~utilization and parking of certain aircraft.~~utilization.

Landing fees and other rentals

Landing fees and other rentals ~~decreased~~increased by ~~$31~~$59 million, or ~~13%~~28%, during the first six months of ~~2020~~2021 compared to the same period in ~~2019,~~2020, primarily due to a ~~35% decrease~~significant increase in departures, ~~offset by~~combined with increased rates at certain of our airports.

For the full year we expect landing fees and other rentals to ~~decrease~~increase as compared to ~~2019, however, not at the same rate~~2020 as ~~decreased departures. We expect~~we continue to ~~see continued rate increases~~increase capacity and departures on increased rates at many of our ~~airports, as well as negative net settlements to cover airport operating costs.~~

~~Contracted Services~~

Contracted services decreased by $40 million, or 28%, during the first six months of 2020 compared to the same period in 2019. This decrease is primarily a result of reduced vendor spend directly correlating to reduced year-over-year departures and passengers as a result of the COVID-19 pandemic.

~~For the full year, we expect contracted services expense to be significantly lower than in 2019, given our ongoing cost reduction efforts and significant reduction in departures.~~

hub airports.

Selling Expense

Selling expense ~~decreased~~increased by ~~$100~~$15 million, or ~~63%~~25%, during the first six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020, primarily driven by a significant ~~reduction~~increase in distribution costs and credit card commissions. ~~Reduced~~Increased marketing spend and sponsorship costs given the ~~continued delay in~~return of professional sports and events also contributed to the year-over-year ~~decline.~~increase.

We expect full year selling expense will ~~decrease~~increase in-line with the ~~reduction~~increase to revenue as a result of ~~reduced~~increased distribution costs on ~~lower~~higher bookings, as well as ~~reduced~~increased sponsorship ~~costs.~~

~~Food~~ and ~~beverage service~~

Food and beverage service decreased by $46 million, or 45%, during the first six months of 2020 compared to the same period in 2019. This decrease is primarily due to the 55% decrease in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges in the second quarter of 2020.

~~We expect food and beverage service to decrease as compared to 2019, consistent with our expectation of reduced passengers throughout 2020.~~marketing costs.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, ~~decreased $20~~increased $4 million, or ~~24%~~6%, during the first six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The ~~decrease~~increase is primarily due to a ~~30% decrease~~26% increase in ~~capacity flown by~~ SkyWest departures as compared to the prior year. Increased SkyWest activity was offset by the receipt and recognition of $14 million in pass-through of CARES Act PSP funding for pilot and flight attendant wages and benefits.

For the full year, we expect third-party regional carrier expense to be ~~lower~~higher than ~~2019 due to decreased flying and reduced contractual rates.~~

~~Special Items—Merger-Related Costs~~

~~We recorded special items of $4 million in the first six months of~~ 2020 for merger-related costs associated with our acquisition of Virgin America, compared to $34 million in the first six months of 2019. Costs incurred in the first six months of 2020 are primarily comprised of certain technology integration costs. We expect 2020 will be the final year in which we incur integration related charges.driven by increased departures.

Special Items - Impairment and other charges

We recorded impairment and other charges of ~~$229~~$14 million in the ~~second quarter~~first six months of ~~2020, driven by our current expectation~~2021, consisting of ~~decreased future cash flows stemming~~costs associated with leased aircraft that have been retired and removed from the ~~COVID-19 pandemic. Impairment and other charges primarily consist of~~operating fleet but not yet returned to the ~~full write-down of the operating lease assets and related spare inventory and parts, as well as~~lessor. We continue to evaluate total estimated ~~lease~~costs to return ~~costs for certain Airbus aircraft which were~~these permanently parked ~~the write-down of our owned Q400 fleet~~aircraft, and make updates to ~~fair value, and the full write-off of gate assets at Dallas Love Field.~~total expense where necessary.

~~Additional impairment~~Special Items - Restructuring charges ~~may be~~

We recorded a restructuring benefit of $12 million in the first six months of 2021 primarily as ~~we execute further capacity reductions beyond those already scheduled and potentially permanently park additional aircraft.~~a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline reported an adjusted pretax loss was ~~$556~~$468 million in the first six months of ~~2020,~~2021, compared to an adjusted pretax ~~profit~~loss of ~~$383~~$556 million in the same period in ~~2019.~~2020. The ~~$939~~$88 million ~~shift~~improvement to pretax loss was driven by a ~~$1.8 billion decrease~~$163 million increase in Mainline operating revenues ~~offset by~~coupled with a ~~$414~~$28 million decrease in Mainline non-fuel operating ~~expense and~~expense. These improvements were offset by a ~~$422~~$69 million ~~decrease~~increase in Mainline fuel expense.

As compared to the prior year, ~~lower~~higher Mainline revenues are primarily attributable to a ~~55% decrease~~25% increase in traffic ~~and~~on a 20 point ~~decrease~~increase in capacity, driven by the significant ~~reduction~~increase in demand ~~as a result of~~recovering from the COVID-19 pandemic. Non-fuel operating expenses ~~decreased significantly on cost savings driven by reduced~~increased from higher variable costs on ~~reduced~~increased capacity, as well as ~~decreased~~rising wages and benefits expense ~~from voluntary leaves of absence~~as we expand our workforce to meet growing demand and ~~a reduction in hours for management employees. Lower~~leisure travel seasonality. Higher raw fuel prices, combined with ~~decreased~~increased consumption ~~from the reduction in flying,~~ drove the ~~decrease~~growth in Mainline fuel expense.

Regional

Regional operations ~~generated a~~incurred an adjusted pretax loss of $206 million in the first six months of 2021, compared to an adjusted pretax loss of $202 million in the first six months of ~~2020, compared to a pretax loss of $23 million in the first six months of 2019.~~2020. The ~~increase in the pretax~~increased loss was attributable to a ~~$303~~$72 million ~~decrease~~increase in non-fuel operating ~~revenues, partially~~expenses and a $36 million increase in fuel costs, offset by a ~~$61~~$104 million ~~decrease~~increase in ~~fuel costs and~~operating revenues.

The increase to regional revenues is driven by a ~~$63 million decrease~~50% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses. ~~The decrease in regional revenues is primarily due to the 24% decrease in capacity, spurred by the COVID-19 pandemic.~~

Horizon

Horizon achieved aan adjusted pretax profit of $26 million in the first six months of 2021, compared to an adjusted pretax profit of $16 million in the ~~first six months of 2020, compared to pretax profit of $22 million in the~~ same period in ~~2019,~~2020, primarily due to ~~significant~~improved operational performance and cost ~~reduction efforts implemented in response to the COVID-19 pandemic.~~management.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, ~~increase~~manage liquidity and ~~help to~~ preserve the relative strength of our balance sheet. ~~From the onset of the pandemic,~~In 2020, we ~~have taken the following key~~took significant actions to enhance and preserve our ~~liquidity:~~liquidity, withstand depressed demand, and prepare for the recovery ahead. In 2021, we have achieved the following, which we believe positions us well for recovery:

•~~Obtained $1~~Generated positive operating cash flow of $1.0 billion, bolstered by improved advance bookings for increased demand for air travel, and the receipt of $1.2 billion in payroll support funding from the U.S. Treasury under extensions of CARES Act ~~funding to offset wage and benefit expense;~~programs, $892 million of which is included in operating cash flow;

•~~Raised $589~~Repaid $681 million in ~~secured financing collateralized by 32 aircraft;~~debt, including the termination of the CARES Act loan, and the full repayment of two outstanding lines of credit;

•~~Drew $400 million~~Decreased debt-to-capitalization ratio to 56% at June 30, 2021 from ~~existing credit facilities;~~61% at December 31, 2020;

•~~Suspended~~Finalized a previously announced amendment to the existing aircraft purchase agreement with Boeing, which significantly reduced our ~~share repurchase program~~2021 capital commitments and ~~quarterly dividend indefinitely,~~provides slide rights to defer commitments from 2022 to later years, and;

•~~Reduced planned~~Maintained low capital expenditures, ~~by nearly $600~~which are expected to be approximately $225 million ~~for 2020,~~in 2021, including ~~suspension~~renegotiated timing of pre-delivery payments and deferral of non-essential capital projects.

~~Subsequent to quarter end, we obtained $1.2 billion in financing through the issuance of EETCs in July 2020. The EETCs are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft.~~

~~We have significant remaining borrowing capacity, supported by our remaining 33 unencumbered aircraft, real estate and slot assets, and our loyalty program.~~ Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors.

InAs the business continues to recover and returns to profitability, reducing outstanding debt and strengthening our balance sheet is a high priority. Based on our expectations about the recovery ahead, we expect to generate cash flow from operations of zero to $100 million in the third quarter. This is lower than in the second quarter ~~we notified~~due to the ~~U.S. Department~~expectation of ~~the Treasury (Treasury) of Alaska~~no further government support and ~~Horizon’s intent to apply~~seasonal booking patterns that result in less cash bookings for loans under the CARES Act, which enables us to access up to $1.1 billion of additional financing. In July 2020, we signed a non-binding letter of intent with the Treasury, anticipating that Mileage Plan assets may be used as loan collateral, and that definitive terms would be negotiated before September 30, 2020. As we continue our negotiations with Treasury, we are also considering other possible sources of liquidityfuture travel.

~~To preserve~~We believe that our current cash and marketable securities balance, combined with available sources of liquidity, ~~we have continued~~will be sufficient to fund our ~~focus on reducing cash burn. We have successfully reduced~~operations and meet our ~~monthly cash burn rate from $400 million as we exited March~~debt payment obligations, and to ~~$120 million~~remain in ~~June. We define cash burn as all cash flows, excluding~~compliance with the ~~impact of any CARES Act funding or proceeds from new borrowings, plus net activities from marketable securities.~~

financial debt covenants in existing financing arrangements for the foreseeable future.

~~Our daily cash burn for the three and six months ended June 30, 2020, is reconciled from our statement of cash flows as follows:~~

(in millions) Six Months Ended June 30, 2020
Three Months Ended March 31, 2020^(a)
Three Months Ended June 30, 2020^(b)
Net cash provided by operating activities $ 321 $ 33 $ 288
Net cash provided by (used in) investing activities (124) (127) 3
Net cash provided by financing activities 1,091 $ 684 407
Net increase in cash, cash equivalents and restricted cash 1,288 590 698
Adjusted to remove:
Payroll support program grant 723 — 723
Payroll support program note and equity 284 — 284
Secured debt issuances 589 425 164
Credit facility draws 400 400 —
Net marketable security activity (5) (24) 19
Total adjustments 1,991 801 1,190
Adjusted cash burn $ (703) $ (211) $ (492)
Days in the period 182 91 91
Average daily cash burn $ (4) $ (2) $ (5)

~~(a) As filed in our first quarter 10-Q, as amended.~~

~~(b)~~ Cash burn for the three months ended June 30, 2020, can be calculated by subtracting cash flows for the three months ended March 31, 2020, as previously filed with the SEC, from the six months ended June 30, 2020.

The table below presents the major indicators of financial condition and liquidity:


(in millions)	June 30, 2021			December 31, 2020			Change
Cash and marketable securities	$	3,951		$	3,346		18 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	103		%	94		%	9 pts
Total debt	3,188			3,495			(9) %
Shareholders’ equity	$	3,324		$	2,988		11%

(in millions) June 30, 2020 December 31, 2019 Change
Cash and marketable securities $ 2,803 $ 1,521 84 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue 42 % 17 % 25 pts
Total debt 2,636 1,499 76 %
Shareholders’ equity $ 3,861 $ 4,331 (11)%


Debt-to-capitalization, adjusted for operating leases	Debt-to-capitalization, adjusted for operating leases								Debt-to-capitalization, adjusted for operating leases
(in millions)	(in millions)	June 30, 2020			December 31, 2019			Change	(in millions)	June 30, 2021			December 31, 2020			Change
Long-term debt, net of current portion	Long-term debt, net of current portion	$	1,549		$	1,264		23%	Long-term debt, net of current portion	$	2,319		$	2,357		(2)%
Capitalized operating leases	Capitalized operating leases	1,649			1,708			(4)%	Capitalized operating leases	1,485			1,558			(5)%
COVID-19 related borrowings^(a)	COVID-19 related borrowings^(a)	818			—			NM	COVID-19 related borrowings(a)	425			734			(42)%
Adjusted debt		$	4,016		$	2,972		35%
Adjusted debt, net of current portion of long-term debt									Adjusted debt, net of current portion of long-term debt	$	4,229		$	4,649		(9)%
Shareholders' equity	Shareholders' equity	3,861			4,331			(11)%	Shareholders' equity	3,324			2,988			11%
Total invested capital	Total invested capital	$	7,877		$	7,303		8%	Total invested capital	$	7,553		$	7,637		(1)%

Debt-to-capitalization, including operating leases	Debt-to-capitalization, including operating leases	51		%	41		%	10 pts	Debt-to-capitalization, including operating leases	56		%	61		%	(5) pts

(a)To best reflect our leverage, ~~at June 30, 2020,~~ we included the remaining short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.


~~Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent~~
~~(in millions)~~	~~June 30, 2020~~
~~Adjusted debt~~	$	~~4,016~~
~~Current portion of long-term debt, net of COVID-19 related borrowings~~	~~269~~
~~Total adjusted debt~~	~~4,285~~
~~Less: Cash and marketable securities~~	~~(2,803)~~
~~Net adjusted debt~~	$	~~1,482~~

~~(in millions)~~	~~Last Twelve Months Ended June 30, 2020~~
~~GAAP Operating Income~~^(a)	$	65
~~Adjusted for:~~
~~Special items~~	~~(119)~~
~~Mark-to-market fuel hedge adjustments~~	~~(2)~~
~~Depreciation and amortization~~	~~427~~
~~Aircraft rent~~	~~321~~
~~EBITDAR~~	$	~~692~~
~~Net adjusted debt to EBITDAR~~	~~2.1x~~


Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)	June 30, 2021		December 31, 2020
Current portion of long-term debt	$	869	$	1,138
Current portion of operating lease liabilities	263		290
Long-term debt, net of current portion	2,319		2,357
Long-term operating lease liabilities, net of current portion	1,222		1,268
Total adjusted debt	4,673		5,053
Less: Cash and marketable securities	(3,951)		(3,346)
Adjusted net debt	$	722	$	1,707

(in millions)	Twelve Months Ended June 30, 2021		Twelve Months Ended December 31, 2020
GAAP Operating Loss(a)	$	(778)	$	(1,775)
Adjusted for:
Payroll Support Program grant wage offset and special items	(712)		71
Mark-to-market fuel hedge adjustments	(79)		(8)
Depreciation and amortization	400		420
Aircraft rent	268		299
EBITDAR	$	(901)	$	(993)
Adjusted net debt to EBITDAR	(0.8x)		(1.7x)

(a)Operating ~~income~~loss can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.

ANALYSIS OF OUR CASH FLOWS

Cash ~~Used in~~Provided by Operating Activities

For the first six months of ~~2020,~~2021, net cash provided by operating activities was ~~$321 million,~~$1.0 billion, compared to ~~$1 billion~~$321 million during the same period in ~~2019.~~2020. The ~~$712~~$686 million ~~decrease~~increase in our operating cash flows is primarily attributable to a $712 million ~~decline in~~improvement to net income, ~~as well as~~aided by the receipt and recognition of $892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is due to continued increases in advanced bookings and a significant ~~cash~~reduction in refund activity ~~and a decline in advance bookings as~~when compared to the ~~same period in the prior year, all as a result~~first six months of ~~the COVID-19 pandemic. The net loss was offset by funds received from the U.S. Treasury as part of the PSP.~~2020.

Cash Used in Investing Activities

Cash used in investing activities was ~~$124 million~~$1.1 billion during the first six months of ~~2020,~~2021, compared to ~~$530~~$124 million during the same period of ~~2019.~~2020. The ~~decrease~~increase to cash used in investing activities is primarily due to ~~a reduction in~~ net purchases of marketable securities, which were ~~$34~~$963 million in the first six months of ~~2020,~~2021, compared to ~~$222~~net sales of $34 million in the six months ended June 30, ~~2019.~~2020. The ~~decrease in~~shift to net purchases is primarily driven by additional cash on hand from increased operating cash flow and the ~~need~~PSP program, which allowed the Company to ~~utilize previously invested cash to fund operations and provide customer refunds. The decrease is also due to the postponement of capital expenditures in 2020 as a result of the COVID-19 pandemic.~~invest additional funds.

Cash ~~Used in~~Provided by (Used in) Financing Activities

Cash ~~from~~used in financing activities was ~~$1.1 billion~~$281 million during the first six months of ~~2020~~2021 compared to cash ~~used for~~provided by financing activities of ~~$363~~$1.1 billion during the same period in 2020. During the first six months of 2021, we utilized cash on hand to repay $681 million of outstanding long-term debt, compared to payments of $125 million during the same period in ~~2019. During the first six months of 2020, we had~~2020. These payments were offset by proceeds from debt issuances of ~~$1.3 billion, including~~$363 million, primarily a result of the loan portion of the proceeds from the ~~PSP. These proceeds were partially offset by debt payments of $125 million, dividend payments totaling $45 million, and $31 million~~CARES Act PSP, compared to $1.3 billion issued in ~~common stock repurchases.~~2020 in response to the COVID-19 pandemic.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Commitments

As of June 30, ~~2020,~~2021, we have firm orders to purchase 3575 aircraft, and firm commitments to lease 13 aircraft. Alaska also has ~~cancelable~~an agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by eight aircraft in 2022. Alaska also has cancellable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through ~~2026. We could incur a loss~~2027. At this time, we do not expect to take delivery of ~~pre-delivery payments and credits as a cancellation fee.~~these 30 Airbus aircraft. Alaska also has options to acquire ~~37 B737~~39 B737-9 MAX aircraft with deliveries from ~~2021~~2024 through ~~2024,~~2026, and Horizon has options to acquire 3021 E175 aircraft with deliveries from ~~2022~~2023 through 2024. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, Alaska has options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

~~Given the drastically reduced demand for air travel as a result of the COVID-19 pandemic, we are currently evaluating~~

The following table summarizes our overall fleet strategy and long-term plan. We are also in the process of negotiating with aircraft manufacturers and lessors to optimize timing of fleet activity. It is probable that the current outlook as stated below will change significantly. This table represents anticipated fleet ~~activity~~count by year, as of June 30, ~~2020:~~

Actual Fleet Anticipated Fleet Activity
Aircraft June 30, 2020 2020 Additions 2020 Removals December 31, 2020 2021 Changes December 31, 2021
B737 Freighters 3 — — 3 — 3
B737-700 11 — — 11 — 11
B737-800 61 — — 61 — 61
B737-900 12 — — 12 — 12
B737-900ER 79 — — 79 — 79
B737 MAX9^(a)
— 3 — 3 15 18
A320^(b)
49 — — 49 (7) 42
A321neo 10 — — 10 — 10
Total Mainline Fleet 225 3 — 228 8 236
Q400 operated by Horizon 32 — — 32 — 32
E175 operated by Horizon 30 — — 30 — 30
E175 operated by third party 32 — — 32 — 32
Total Regional Fleet 94 — — 94 — 94
Total 319 3 — 322 8 330
2021:


	Actual Fleet	Anticipated Fleet Activity(a)
Aircraft	June 30, 2021	2021 Additions	2021 Removals	Dec 31, 2021	2022 Changes	Dec 31, 2022	2023 Changes	Dec 31, 2023
B737 Freighters	3	—	—	3	—	3	—	3
B737-700	11	—	—	11	—	11	—	11
B737-800	61	—	—	61	—	61	—	61
B737-900	12	—	—	12	—	12	—	12
B737-900ER	79	—	—	79	—	79	—	79
B737-9 MAX	5	7	—	12	31	43	22	65
A320(b)	21	7	(1)	27	(3)	24	(24)	—
A321neo	10	—	—	10	—	10	—	10
Total Mainline Fleet	202	14	(1)	215	28	243	(2)	241
Q400 operated by Horizon(c)	32	—	—	32	—	32	—	32
E175 operated by Horizon(c)	30	—	—	30	5	35	4	39
E175 operated by third party(c)	32	—	—	32	8	40	—	40
Total Regional Fleet	94	—	—	94	13	107	4	111
Total	296	14	(1)	309	41	350	2	352

(a)~~The three B737 MAX9 aircraft reflected in 2020 were originally contracted for delivery in 2019~~Anticipated fleet activity reflects intended early retirement and ~~delayed due to the MAX grounding. Seven B737 MAX9 deliveries originally contracted for 2020~~extensions or replacement of certain leases, not all of which have been ~~shifted to 2021 based on our current estimate of expected delivery dates.~~contracted yet.

(b)Actual fleet at June 30, ~~2020, excludes 12~~2021, excluding Airbus aircraft permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12 of these aircraft to operating service, seven of which are planned for 2021 and five for 2022.

(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. Under the terms of our capacity purchase agreement with a third party, in 2023 an additional spare aircraft will be leased to support the operational integrity of the network.

For future firm orders and option exercises, we may finance the aircraft through cash flow from operations or long-term ~~debt, or lease arrangements.~~debt.

Fuel Hedge Positions

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. However, given the sharp decline in demand and our capacity resulting from the COVID-19 pandemic, we are currently overhedged relative to our target of 50% of consumption through the remainder of 2020. Our crude oil positions are as follows:

Approximate Gallons Hedged (in millions) Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
Third Quarter 2020 115 $66 $2
Fourth Quarter 2020 85 $64 $2
Full Year 2020 200 $65 $2
First Quarter 2021 60 $62 $2
Second Quarter 2021 45 $63 $2
Third Quarter 2021 40 $57 $2
Fourth Quarter 2021 20 $49 $4
Total 2021 165 $60 $2


	Approximate Gallons Hedged (in millions)	Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel







Third Quarter 2021	100	$60	$2
Fourth Quarter 2021	90	$61	$3
Remainder of 2021	190	$60	$2
First Quarter 2022	80	$67	$3
Second Quarter 2022	60	$66	$3
Third Quarter 2022	40	$70	$3
Fourth Quarter 2022	20	$71	$3
Full Year 2022	200	$68	$3

Contractual Obligations

The following table provides a summary of our contractual obligations as of June 30, ~~2020.~~2021. For agreements with variable terms, amounts included reflect our minimum obligations.

(in millions) Remainder of 2020 2021 2022 2023 2024 Beyond 2024 Total
Current and long-term debt obligations $ 529 $ 742 $ 281 $ 245 $ 153 $ 695 $ 2,645
Aircraft lease commitments 162 300 274 217 166 677 1,796
Facility lease commitments 5 9 8 7 7 84 120
Aircraft maintenance deposits 12 53 45 24 6 2 142
Aircraft purchase commitments ^(a)
335 554 337 186 18 25 1,455
Interest obligations ^(b)
32 42 30 23 17 61 205
Other obligations ^(c)
41 179 185 190 197 910 1,702
Total $ 1,116 $ 1,879 $ 1,160 $ 892 $ 564 $ 2,454 $ 8,065


(in millions)	Remainder of 2021		2022		2023		2024		2025		Beyond 2025		Total
Current and long-term debt obligations	$	227	$	796	$	334	$	240	$	261	$	1,353	$	3,211
Aircraft lease commitments(a)	162		280		219		167		159		633		1,620
Facility lease commitments	6		10		9		8		6		88		127
Aircraft-related commitments(b)	107		1,458		1,207		291		76		12		3,151


Interest obligations (c)	55		98		72		57		51		175		508
Other obligations (d)	89		184		189		196		197		898		1,753
Total	$	646	$	2,826	$	2,030	$	959	$	750	$	3,159	$	10,370

(a)~~Although the Company has contractual obligations~~Future minimum lease payments for ~~purchase~~aircraft includes commitments ~~in 2020, informal agreements~~for aircraft which have been ~~reached with aircraft manufacturers to defer payments beyond 2020.~~removed from operating service, as we have remaining obligation under existing terms.

(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.

(c)For variable-rate debt, future obligations are shown above using ~~forecasted~~ interest rates forecast as of June 30, ~~2020.~~2021.

~~(c)~~(d)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements. ~~In the second quarter, Alaska entered into an agreement with SkyWest to defer a portion of 2020 payments and eliminate contractual minimums through September 30, 2020.~~

In the second quarter, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations. The Company has also deferred 2020 aircraft payments, including those related to the B737 MAX9, to periods beyond 2020. Discussions remain ongoing with aircraft manufacturers and lessors to optimize the timing of aircraft deliveries and lease returns.

Credit Card Agreements

We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

Deferred Income Taxes

For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. ~~We expect that our 2020 cash tax rate will be close to zero, given our current expectation of operating losses for the remainder of the year.~~

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three months ended June 30, ~~2020.~~2021. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, ~~2019 and Note 2, "COVID-19," for discussion about the estimates used in the Company's impairment analyses.~~2020.

GLOSSARY OF AIRLINE TERMS

Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Adjusted net debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus capitalized operating leases) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period

~~Free Cash Flow -~~ ~~total operating cash flow generated less cash paid for capital expenditures~~

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737, Airbus 320 family and Airbus 321neo jets and all associated revenues and costs

~~Net adjusted debt -~~ ~~long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities~~

~~Net adjusted debt to EBITDAR~~ ~~- represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)~~

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon ~~SkyWest~~ and ~~PenAir.~~SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon ~~SkyWest~~ and ~~PenAir~~SkyWest under the respective capacity purchased arrangement (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

4342


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

4443


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, ~~2020,~~2021, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of June 30, ~~2020.~~2021.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, ~~2020,~~2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).

4544

PART II


ITEM 1. LEGAL PROCEEDINGS

~~We are~~The Company is a party to routine litigation matters incidental to ~~our business. Management believes the ultimate disposition of these matters~~its business and with respect to which no material liability is ~~not likely~~expected. Liabilities for litigation related contingencies are recorded when a loss is determined to ~~materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law~~be probable and ~~facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.~~estimable.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. OnIn February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.


ITEM 1A. RISK FACTORS

~~Except for the additional risk factors below, there~~There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and is expected to continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.

In late 2019, an outbreak of novel coronavirus and its resulting disease (COVID-19) was detected in Wuhan, China. Since that time, COVID-19 has spread rapidly throughout the globe, including within the United States, where over one million cases have been positively diagnosed to date. In March 2020, the President of the United States declared a national emergency in response to the rapid spread, and all markets we serve have implemented some measure of travel restriction or stay-at-home order. These orders, combined with a wariness among the public of travel by aircraft due to perceived risk of infection, have resulted in an unprecedented decline in business and leisure travel. Cancellations of conventions and conferences, sporting events, concerts and other similar events, as well as the closure of popular tourist destinations, have contributed to this decline. This reduction in demand has materially negatively impacted our revenues and results of operations. As there is no indication of when these restrictions may be lifted or when demand may return, we expect to continue to see negative impacts from the COVID-19 pandemic on our business.

In response to the pandemic, we have implemented and continue to implement a comprehensive strategy to mitigate the impacts on our business. This strategy may itself have negative impacts on our business and operations. One such action is the waiver of change fees and the ability to rebook travel for an extended period beyond standard rebooking terms. The loss of change fee revenue, combined with ongoing significant ticket cancellation activity, has adversely impacted our revenues and liquidity, and we expect such impacts to continue if governmental authorities extend existing travel restriction or stay-at-home orders or

impose new orders or other restrictions intended to mitigate the spread of COVID-19, if businesses continue to restrict nonessential travel for their employees, or if the perceived risk of infection persists.

We have also implemented significant cash preservation and cost reduction strategies in response to the impacts of COVID-19. These strategies include, but are not limited to, capital expenditure reductions, hiring freezes, solicitation of voluntary leaves of absence and renegotiation of contractual terms and conditions. These measures, while helpful in slowing the rate at which we utilize our cash, are not expected to fully recover the loss of cash as a result of decreased ticket sales.

The Company may also experience significant supply chain disruptions as the COVID-19 pandemic may also adversely impact our suppliers. See “Item 1A., Risk Factors – We are dependent on a limited number of suppliers for aircraft and parts” of our Annual Report on Form 10-K for further discussion of risks related to the Company’s dependence on a limited number of suppliers. Should COVID-19 cause our limited vendors to have performance problems, reduced or ceased operations, or bankruptcies, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

At this time, we are unable to predict what impact the pandemic will have on future customer behavior. Future business travel may be impacted by widespread use of videoconferencing or the reduction of business travel budgets. Travelers may also become more reluctant in general to travel. In addition, the Company has incurred, and will continue to incur COVID-19 related costs for enhanced aircraft cleaning and additional procedures to limit transmission among employees and guests. Although these procedures are elective, the industry may in the future be subject to further cleaning and safety measures, which may be costly and take a significant amount of time to implement. These contingencies, individually and combined, could have a material adverse impact on our business. See “Item 1A., Risk Factors – Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.” of our Annual Report on Form 10-K for further discussion of the Company’s vulnerability to a general economic downturn or recession.

We have a significant amount of debt and fixed obligations and have incurred substantial incremental debt in response to the COVID-19 pandemic. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments, as well as non-cancelable commitments for airport and facility leases, maintenance and other obligations. In response to the COVID-19 pandemic, we have incurred and continue to seek new financing sources to fund our operations while demand remains at an unprecedented low level and for the unknown duration of any economic recovery period. Further, as we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, the impacts of COVID-19, or from other risks as described in “Item 1A., Risk Factors” of our Annual Report on Form 10-K, may prohibit us from doing so in the future and may adversely affect our overall liquidity.

~~We have accepted certain conditions by accepting funding under the payroll support program of the Coronavirus Aid, Relief and Economic Security (CARES) Act.~~

On March 27, 2020, the CARES Act was signed into law and provides the Company with the ability to access liquidity in the form of grants, loans, loan guarantees and other investments by the U.S. government.

In the second quarter of 2020, the Company and its subsidiaries Alaska Airlines and Horizon Air, as well as McGee, entered agreements with the United States Department of the Treasury (the Treasury) to secure funding under the PSP of the CARES Act. Alaska, Horizon and McGee agreed to use PSP funds exclusively for employee payroll and benefits expenses through at least September 30, 2020. ~~Our aggregate receipts from the PSP total approximately $1 billion, of which, a total of $281 million is in the form of an unsecured senior term loan payable over ten years.~~Additionally, the government received warrants to purchase 874,344 non-voting shares of the Company’s common stock. On April 23, 2020, Alaska and Horizon received full disbursement of the PSP funds. McGee received partial disbursement in June 2020, with the remainder expected in the third quarter of 2020. Additional warrants to purchase 14,327 shares of Air Group common stock will be issued to Treasury in connection with McGee's receipt of the second and third installments of PSP funds.

~~Our PSP funding is subject to the following conditions:~~

•~~Alaska Airlines and Horizon Air must refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits for non-officer employees through September 30, 2020;~~

•~~Executive compensation for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through March 24, 2022;~~

•~~The Company is prohibited from repurchasing its common stock and from paying dividends on its common stock until September 30, 2021;~~

•~~Alaska Airlines and Horizon Air must maintain air service to markets they served as of March 1, 2020, unless exempted by the Department of Transportation, through March 1, 2022; and~~

•~~The Company must maintain certain internal controls and records, and provide any additional reporting required by the U.S. government, relating to PSP funding.~~

~~These conditions may affect the profitability of the Company, including through increased compliance costs, and affect retention of key personnel.~~

~~In April 2020, the Company and its airline subsidiaries applied for loans under a separate provision of the CARES Act.If we accept funds under the loan program, we will be required to provide additional compensation to the U.S. government and may be subject to conditions beyond those stated above.~~


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~This table provides certain information with respect to our purchases of shares of our common stock during the second quarter of 2020.~~

Total Number of
Shares Purchased

Average Price
Paid per Share

Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)

~~April 1, 2020 - April 30, 2020~~

—

~~May 1, 2020 - May 31, 2020~~

—

~~June 1, 2020 - June 30, 2020~~

—

~~Total~~

—

~~456~~

Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.

In the second quarter of 2021, the Company issued 271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 1,455,436 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $52.25 (49,625 shares related to PSP2) and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS

The following documents are filed as part of this report:

1.Exhibits: See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


ALASKA AIR GROUP, INC.

/s/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller

August ~~4, 2020~~3, 2021

4946

EXHIBIT INDEX

Exhibit
Number Exhibit
Description Form Date of First Filing Exhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-Q August 3, 2017 3.1
10.1†
COVID-19 Business Recovery Incentive Pay Plan
10-Q
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
101.INS† XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
101.SCH† XBRL Taxonomy Extension Schema Document
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document
101.LAB† XBRL Taxonomy Extension Label Linkbase Document
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document
† Filed herewith
* Indicates management contract or compensatory plan arrangement

Exhibit
Number

Exhibit
Description

Form

Date of First Filing

Exhibit Number

3.1

Amended and Restated Certificate of Incorporation of Registrant

10-Q

August 3, 2017

3.1

4.1†

Closing Date Warrant to Purchase Common Stock, dated April 8, 2021

4.2†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.3†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.4†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.5†

Closing Date Warrant to Purchase Common Stock, dated June 3, 2021

4.6†

Promissory note, dated April 29, 2021, by Alaska Airlines, Inc., issuer, and each of Alaska Air Group, Inc. and Horizon Air Industries, Inc., as guarantors

10.1†

Payroll Support Program 3 Agreement, dated April 29, 2021, between Alaska Airlines, Inc., and the United States Department of the Treasury

10.2†

Warrant Agreement, dated April 29, 2021, between Alaska Air Group, Inc. and the United States Department of the Treasury

10.3†

Supplemental Agreement No. 16 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.

10.4†

Supplemental Agreement No. 17 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.

10.5†*

Amendment No. 15 to Purchase Agreement dated April 11, 2016, between Embraer S.A. and Horizon Air Industries, Inc.

10.6†

Alaska Air Group Performance Based Pay Plan, Amended and Restated May 6, 2021

10.7†

Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended May 6, 2021

31.1†

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

31.2†

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

32.1†

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

32.2†

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

101.INS†

XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

Filed herewith

Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

5047


PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2322
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4443
ITEM 4.	CONTROLS AND PROCEDURES	4544
PART II.	OTHER INFORMATION	4645
ITEM 1.	LEGAL PROCEEDINGS	4645
ITEM 1A.	RISK FACTORS	4645
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4845
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4845
ITEM 4.	MINE SAFETY DISCLOSURES	4846
ITEM 5.	OTHER INFORMATION	4846
ITEM 6.	EXHIBITS	4946
	SIGNATURES	4946


	Airbus Aircraft		Q400 Aircraft		Total Impairment
Aircraft and other flight equipment, net	$	11	$	58	$	69
Operating lease assets	62		—		62
Inventory and supplies - net	2		—		2
Prepaid expenses and other current assets	—		3		3
Other accrued liabilities	78		—		78
Total impairment charges - Long-lived assets	$	153	$	61	$	214


	June 30, 2020		December 31, 2019
Fixed-rate debt at cost	$	444	$	473
Non-recurring purchase price accounting fair value adjustment	2		2
Total fixed-rate debt	$	446	$	475

Estimated fair value	$	463	$	483


	Total
Remainder of 2020	$	529
2021	742
2022	281
2023	245
2024	153
Thereafter	695
Total	$	2,645


	Aircraft Commitments^(a)		Capacity Purchase Agreements ^(b)		Aircraft Maintenance Deposits
Remainder of 2020	$	335	$	36	$	12
2021	554		166		53
2022	337		174		45
2023	186		179		24
2024	18		184		6
Thereafter	25		880		2
Total	$	1,455	$	1,619	$	142


(in millions)	Six Months Ended June 30, 2020		Three Months Ended March 31, 2020^(a)		Three Months Ended June 30, 2020^(b)
Net cash provided by operating activities	$	321	$	33	$	288
Net cash provided by (used in) investing activities	(124)		(127)		3
Net cash provided by financing activities	1,091		$	684	407
Net increase in cash, cash equivalents and restricted cash	1,288		590		698

Adjusted to remove:
Payroll support program grant	723		—		723
Payroll support program note and equity	284		—		284
Secured debt issuances	589		425		164
Credit facility draws	400		400		—
Net marketable security activity	(5)		(24)		19
Total adjustments	1,991		801		1,190

Adjusted cash burn	$	(703)	$	(211)	$	(492)
Days in the period	182		91		91
Average daily cash burn	$	(4)	$	(2)	$	(5)


	Actual Fleet	Anticipated Fleet Activity
Aircraft	June 30, 2020	2020 Additions	2020 Removals	December 31, 2020	2021 Changes	December 31, 2021
B737 Freighters	3	—	—	3	—	3
B737-700	11	—	—	11	—	11
B737-800	61	—	—	61	—	61
B737-900	12	—	—	12	—	12
B737-900ER	79	—	—	79	—	79
B737 MAX9^(a)	—	3	—	3	15	18
A320^(b)	49	—	—	49	(7)	42
A321neo	10	—	—	10	—	10
Total Mainline Fleet	225	3	—	228	8	236
Q400 operated by Horizon	32	—	—	32	—	32
E175 operated by Horizon	30	—	—	30	—	30
E175 operated by third party	32	—	—	32	—	32
Total Regional Fleet	94	—	—	94	—	94
Total	319	3	—	322	8	330