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 ~~September~~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 ~~123,663,778~~125,232,721 common shares, par value $0.01, outstanding at ~~October 30, 2020.~~July 31, 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 ~~SEPTEMBER~~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)	September 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	$	1,855	$	221	Cash and cash equivalents	$	1,025	$	1,370
Marketable securities	Marketable securities	1,904		1,300		Marketable securities	2,926		1,976
Total cash and marketable securities	Total cash and marketable securities	3,759		1,521		Total cash and marketable securities	3,951		3,346
Receivables - net	Receivables - net	321		323		Receivables - net	567		480
Inventories and supplies - net	Inventories and supplies - net	57		72		Inventories and supplies - net	52		57
Prepaid expenses, assets held-for-sale, and other current assets	Prepaid expenses, assets held-for-sale, and other current assets	328		121		Prepaid expenses, assets held-for-sale, and other current assets	201		123
Total Current Assets	Total Current Assets	4,465		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	7,851		8,549		Aircraft and other flight equipment	7,996		7,761
Other property and equipment	Other property and equipment	1,395		1,306		Other property and equipment	1,433		1,398
Deposits for future flight equipment	Deposits for future flight equipment	595		533		Deposits for future flight equipment	402		583
		9,841		10,388			9,831		9,742
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	3,460		3,486		Less accumulated depreciation and amortization	3,703		3,531
Total Property and Equipment - Net	Total Property and Equipment - Net	6,381		6,902		Total Property and Equipment - Net	6,128		6,211

Operating lease assets	Operating lease assets	1,516		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	107		122		Intangible assets - net	103		107
Other noncurrent assets	Other noncurrent assets	337		278		Other noncurrent assets	336		379
Other Assets	Other Assets	3,903		4,054		Other Assets	3,757		3,829

Total Assets	Total Assets	$	14,749	$	12,993	Total Assets	$	14,656	$	14,046

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	September 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	$	93	$	146	Accounts payable	$	159	$	108
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	541		470		Accrued wages, vacation and payroll taxes	439		527
Air traffic liability	Air traffic liability	1,071		900		Air traffic liability	1,533		1,073

Other accrued liabilities	Other accrued liabilities	406		431		Other accrued liabilities	661		424
Deferred revenue	Deferred revenue	663		750		Deferred revenue	922		733
Current portion of operating lease liabilities	Current portion of operating lease liabilities	283		269		Current portion of operating lease liabilities	263		290
Current portion of long-term debt	Current portion of long-term debt	1,150		235		Current portion of long-term debt	869		1,138
Total Current Liabilities	Total Current Liabilities	4,207		3,201		Total Current Liabilities	4,846		4,293

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	2,672		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	1,320		1,439		Long-term operating lease liabilities, net of current portion	1,222		1,268
Deferred income taxes	Deferred income taxes	499		715		Deferred income taxes	439		407
Deferred revenue	Deferred revenue	1,520		1,240		Deferred revenue	1,424		1,544
Obligation for pension and postretirement medical benefits	Obligation for pension and postretirement medical benefits	601		571		Obligation for pension and postretirement medical benefits	660		665
Other liabilities	Other liabilities	476		232		Other liabilities	422		524
		4,416		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	0		0		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 - 133,011,377 shares; 2019 - 131,812,173 shares, Outstanding: 2020 - 123,661,433 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	366		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	(450)		(465)		Accumulated other comprehensive loss	(487)		(494)
Retained earnings	Retained earnings	4,211		5,133		Retained earnings	4,030		3,764
		3,454		4,331			3,324		2,988
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	14,749	$	12,993	Total Liabilities and Shareholders' Equity	$	14,656	$	14,046

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


		Three Months Ended September 30,				Nine Months Ended September 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	$	572	$	2,211	2,362		6,038		Passenger revenue	$	1,352	$	309	$	2,011	$	1,790
Mileage Plan other revenue	Mileage Plan other revenue	84		118		266		346		Mileage Plan other revenue	118		73		212		182
Cargo and other	Cargo and other	45		60		130		169		Cargo and other	57		39		101		85
Total Operating Revenues	Total Operating Revenues	701		2,389		2,758		6,553		Total Operating Revenues	1,527		421		2,324		2,057
Operating Expenses	Operating Expenses									Operating Expenses
Wages and benefits	Wages and benefits	495		608		1,579		1,732		Wages and benefits	510		472		1,003		1,084
Variable incentive pay	Variable incentive pay	42		46		65		125		Variable incentive pay	34		16		67		23
Payroll support program grant wage offset		(398)		0		(760)		0
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	125		486		568		1,408		Aircraft fuel, including hedging gains and losses	274		59		477		443
Aircraft maintenance	Aircraft maintenance	84		106		244		341		Aircraft maintenance	102		45		183		160
Aircraft rent	Aircraft rent	74		82		229		247		Aircraft rent	62		74		124		155
Landing fees and other rentals	Landing fees and other rentals	109		143		323		388		Landing fees and other rentals	144		83		273		214
Contracted services	Contracted services	36		72		138		214		Contracted services	54		30		105		102
Selling expenses	Selling expenses	24		77		83		236		Selling expenses	41		4		74		59
Depreciation and amortization	Depreciation and amortization	105		106		320		317		Depreciation and amortization	98		107		195		215
Food and beverage service	Food and beverage service	14		57		70		159		Food and beverage service	35		7		58		56
Third-party regional carrier expense	Third-party regional carrier expense	29		42		92		125		Third-party regional carrier expense	37		26		67		63
Other	Other	89		137		310		411		Other	117		78		222		221
Special items - merger-related costs		1		5		5		39
Special items - impairment charges and other	Special items - impairment charges and other	121		0		350		0		Special items - impairment charges and other	(4)		69		14		229
Special items - restructuring charges	Special items - restructuring charges	322		0		322		0		Special items - restructuring charges	(23)		0		(12)		0
Special items - merger-related costs										Special items - merger-related costs	0		1		0		4
Total Operating Expenses	Total Operating Expenses	1,272		1,967		3,938		5,742		Total Operating Expenses	978		709		1,936		2,666
Operating Income (Loss)	Operating Income (Loss)	(571)		422		(1,180)		811		Operating Income (Loss)	549		(288)		388		(609)
Nonoperating Income (Expense)	Nonoperating Income (Expense)									Nonoperating Income (Expense)
Interest income	Interest income	7		11		23		31		Interest income	6		7		13		16
Interest expense	Interest expense	(34)		(18)		(64)		(60)		Interest expense	(39)		(17)		(71)		(30)
Interest capitalized	Interest capitalized	4		4		8		11		Interest capitalized	3		1		6		4
Other—net		5		(3)		16		(20)
Other - net										Other - net	9		6		19		11
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(18)		(6)		(17)		(38)		Total Nonoperating Income (Expense)	(21)		(3)		(33)		1
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	(589)		416		(1,197)		773		Income (Loss) Before Income Tax	528		(291)		355		(608)
Income tax (benefit) expense		(158)		94		(320)		185
Income tax expense (benefit)										Income tax expense (benefit)	131		(77)		89		(162)
Net Income (Loss)	Net Income (Loss)	$	(431)	$	322	$	(877)	$	588	Net Income (Loss)	$	397	$	(214)	$	266	$	(446)

Basic Earnings (Loss) Per Share:		$	(3.49)	$	2.61	$	(7.12)	$	4.76
Diluted Earnings (Loss) Per Share:		$	(3.49)	$	2.60	$	(7.12)	$	4.74
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	123.647		123.280		123.255		123.330		Basic	124.977		123.296		124.640		123.058
Diluted	Diluted	123.647		124.067		123.255		124.051		Diluted	126.825		123.296		126.388		123.058

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended September 30,				Nine Months Ended September 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)	$	(431)	$	322	$	(877)	$	588	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	2		4		32		31		Unrealized holding gain (loss) arising during the period	0		31		(11)		30
Reclassification of (gain) loss into Other - net nonoperating income (expense)		(2)		(5)		(11)		(3)
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	0		0		(5)		(7)		Income tax effect	1		(6)		4		(5)
Total	Total	0		(1)		16		21		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)		7		8		22		24
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	(1)		(2)		(5)		(6)		Income tax effect	(2)		(2)		(4)		(4)
Total	Total	6		6		17		18		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		(5)		(25)		(17)		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		2		2		Reclassification of loss into Aircraft rent	0		0		0		1
Income tax effect	Income tax effect	(1)		0		5		3		Income tax effect	0		1		(2)		6
Total	Total	2		(4)		(18)		(12)		Total	1		(1)		7		(20)

Other Comprehensive Income (Loss)		8		1		15		27
Other Comprehensive Income										Other Comprehensive Income	7		24		7		7

Comprehensive Income (Loss)	Comprehensive Income (Loss)	$	(423)	$	323	$	(862)	$	615	Comprehensive Income (Loss)	$	404	$	(190)	$	273	$	(439)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(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, 2020	124.217	$	1	$	391	$	(674)	$	(494)	$	3,764	$	2,988
Net loss	—	—		—		—		—		(131)		(131)
Other comprehensive income	—	—		—		—		0		—		0

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


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

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

Stock issued for employee stock purchase plan	0.716	—		23		—		—		—		23
Stock issued under stock plans	0.062	—		1		—		—		—		1
Balances at June 30, 2021	125.229	1		454		(674)		(487)		4,030		3,324


(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	Balances at December 31, 2019	123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331	Balances at December 31, 2019	123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331

Net loss	Net loss	—	—		—		—		—		(232)		(232)		Net loss	—	—		—		—		—		(232)		(232)
Other comprehensive income (loss)		—	—		—		—		(17)		—		(17)
Other comprehensive loss															Other comprehensive loss	—	—		—		—		(17)		—		(17)
Common stock repurchase	Common stock repurchase	(0.538)	—		0		(31)		—		—		(31)		Common stock repurchase	(0.538)	—		—		(31)		—		—		(31)
Stock-based compensation	Stock-based compensation	—	—		9		—		—		—		9		Stock-based compensation	—	—		9		—		—		—		9

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

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

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

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	1.000	—		27		—		—		—		27
Stock issued under stock plans	Stock issued under stock plans	0.054	—		—		—		—		—		0		Stock issued under stock plans	0.054	—		0		—		—		—		0
Balances at June 30, 2020	Balances at June 30, 2020	123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861	Balances at June 30, 2020	123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861
Net loss		—	—		—		—		—		(431)		(431)
Other comprehensive income (loss)		—	—		—		—		8		—		8
Stock-based compensation		—	—		7		—						7
CARES Act warrant issuance		—	—		9		—		—		—		9
Stock issued under stock plans		0.022	—		—		—		—		—		0
Balances at September 30, 2020		123.661	$	1	$	366	$	(674)	$	(450)	$	4,211	$	3,454

(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)
— — — — 0 3 3
Net income — — — — — 4 4
Other comprehensive income (loss) — — — — 15 — 15
Common stock repurchase (0.215) — 0 (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 — 0 — — — 0
Balances at June 30, 2019 123.338 $ 1 $ 270 $ (593) $ (422) $ 4,717 $ 3,973
Net income — — — — — 322 322
Other comprehensive income (loss) — — — — 1 — 1
Common stock repurchase (0.465) — 0 (28) — — (28)
Stock-based compensation — — 7 — — — 7
Cash dividend declared
($0.35 per share) — — — — — (43) (43)
Stock issued for employee stock purchase plan 0.394 — 20 — — — 20
Stock issued under stock plans 0.011 — 0 — — — 0
Balances at September 30, 2019 123.278 $ 1 $ 297 $ (621) $ (421) $ 4,996 $ 4,252

~~(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)

Nine Months Ended September 30,
(in millions) 2020 2019
Cash flows from operating activities:
Net income (Loss) $ (877) $ 588
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 320 317
Stock-based compensation and other 14 20
Special items - impairment charges and other 350 0
Special items - restructuring charges 322 0
Payroll support program grant wage offset (760) 0
Changes in certain assets and liabilities:
Payroll support program grant funding 753 0
Changes in deferred tax provision (220) 187
Increase in air traffic liability 171 244
Increase in deferred revenue 193 97
Pension contribution 0 (65)
Other - net (150) (7)
Net cash provided by operating activities 116 1,381
Cash flows used in investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits (61) (286)
Other flight equipment (49) (125)
Other property and equipment (94) (116)
Total property and equipment additions, including capitalized interest (204) (527)
Purchases of marketable securities (2,092) (1,446)
Sales and maturities of marketable securities 1,520 1,228
Other investing activities 9 37
Net cash used in investing activities (767) (708)
Cash flows from financing activities:
Proceeds from issuance of debt 2,581 356
Common stock repurchases (31) (752)
Dividends paid (45) (53)
Long-term debt payments (238) (129)
Other financing activities 19 40
Net cash provided by (used in) financing activities 2,286 (538)
Net increase in cash, cash equivalents, and restricted cash 1,635 135
Cash, cash equivalents, and restricted cash at beginning of year 232 114
Cash, cash equivalents, and restricted cash at end of the period $ 1,867 $ 249
Cash paid during the period for:
Interest (net of amount capitalized) $ 38 $ 48
Income taxes 0 2
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents $ 1,855 $ 237
Restricted cash included in Prepaid expenses, assets held-for-sale and other current assets 12 12
Total cash, cash equivalents, and restricted cash at end of the period $ 1,867 $ 249


	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

109

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 ~~September~~June 30, ~~2020~~2021 and the results of operations for the three and ~~nine~~six months ended ~~September~~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 ~~novel~~ coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would 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 ~~nine~~six months ended ~~September~~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 COVID-19 ~~beginning~~ in the first quarter of 2020 ~~has had an unprecedented~~continues to have a significant impact on the Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result, the Company ~~has experienced several months of modest improvement in demand, traffic remains well below 2019 levels. It is uncertain when the impacts of the crisis may resolve and when demand may return~~continues to ~~normal levels.~~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 ~~third quarter, the waiver was extended to cover all ticketed travel purchased through December 31, 2020,~~three and ~~beginning in~~six months ended June 30, 2021 all change fees will be eliminated for first class and main cabin fares. Cancellations and postponement of travel exceeded new bookings in March and April, and had a material impact on second and third quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.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.~~ the date of this filing.

In ~~addition to these payroll saving measures,~~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 ~~actively negotiated with vendor partners~~been accelerated into the second half of 2021 in response to ~~reduce contractual minimums and spending~~the strong demand recovery that took place in ~~line with~~ the ~~reduction~~second quarter.The first of these reactivated aircraft are expected to reenter revenue service beginning in ~~demand. In~~ the third quarter ~~management made~~of 2021, with all reactivated by the ~~difficult decision to reduce~~second quarter of 2022. The Company currently anticipates these aircraft will be removed from operating service beginning in late 2022 through the ~~Company's workforce through voluntary and involuntary leaves.~~

end

1110

~~With demand dramatically depressed,~~of 2023. At this time, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from service. As of September 30, 2020, 64 mainline aircraft were temporarily grounded. The Company made the decision in the first quarter of 2020does not anticipate material changes to permanently remove 12 Airbus aircraft from the operating fleet. In the third quarter of 2020, an additional 8 Airbus aircraft were permanently removed from the operating fleet. As of September 30, 2020, all operating regional aircraft were in service.

~~Valuation of long-lived assets~~

~~The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable.~~

~~To determine if impairment exists, a recoverability test is performed comparing the sum 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, the Company performed impairment tests on certain long-lived assets in each of the quarters of 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in the first and third quarters of 2020.

~~In the first quarter, the Company recorded an impairment charge 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. In the second quarter, the Company identified additional estimable return costs relating to those permanently parked aircraft, and~~previously 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 impairment charges relating to 2 non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.

~~In the third quarter, the Company determined that ten owned Airbus A320 aircraft were impaired,~~ as those aircraft have been specifically identified for retirement prior to the end of their expected useful lives. The Company decided to permanently park eight of these aircraft as of September 30, 2020. As such, the Company recorded an impairment charge of $121 million, representing the amount by which carrying value exceeded fair value for the aircraft and related capital improvements and spare parts inventory. The adjusted net book value of $219 million for the 8 aircraft that have been permanently parked and the 2 Q400 aircraft mentioned above has been transferred to held-for-sale assets in Other current assets on the condensed consolidated balance sheet.

~~A summary of the impairment charges recorded~~leases for aircraft ~~and other flight equipment for the nine months ended September 30, 2020 is as follows (in millions):~~

Airbus Aircraft Q400 Aircraft Total Impairment
Aircraft and other flight equipment, net $ 132 $ 58 $ 190
Operating lease assets 62 0 62
Inventory and supplies - net 2 0 2
Prepaid expenses and other current assets 0 3 3
Other accrued liabilities 78 0 78
Total impairment charges - Long-lived assets $ 274 $ 61 $ 335

~~The Company will continue~~returning to ~~evaluate 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 the strain in the general economic environment and~~service generally expire within a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types at the end of each quarter in 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 result of the second and third quarter impairment tests.near term window.

Workforce restructuring

The Company ~~expects~~continues to expect that demand will ~~remain depressed into~~be below pre-pandemic levels through the end of 2021, ~~and expects~~but management will continue rebuilding capacity to ~~rebuild capacity levels to approximately 80% by summer 2021. Accordingly, the~~2019 levels. The Company reduced its workforce in ~~the third quarter of~~ 2020 to better align with the expected size of the business. To mitigate the need for 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 incentive leaves. As of June 30, 2021, approximately 1,800 employees remain on a ~~result of the participation in these mitigation programs, the involuntary furloughs that became effective October 1, 2020 were limited to approximately 400 employees.~~voluntary leave program. The Company ~~recalled approximately 220 flight attendants~~expects all employees on ~~November 1, 2020. In addition~~leave to ~~these furloughs, the Company permanently eliminated approximately 300 non-union management positions.~~return to work by October 2021.

AsIn 2020, as a result of these programs, the Company recorded ~~expense of $322~~$220 million ~~to Special items - restructuring charges~~ in ~~the condensed consolidated statement of operations in the third quarter of 2020. The charge is primarily comprised of wages~~wage expense for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. In the first quarter of 2021, the Company 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 $11 million. In the second quarter, demand improved at an accelerated pace, and the Company issued recall notices to all pilots on incentive leave for return-to-work by October 2021. As a result, $23 million of incentive leave accrual was reversed and recognized as a benefit within Special items - restructuring charges in the condensed consolidated statements of operations 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, 2021.

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


	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 ~~Company evaluated~~ outstanding ~~receivable balances~~accrual is based on the Company's best estimate of capacity expectations and training schedules for ~~risk~~2021, as of ~~non-payment.~~the date of this filing. The Company ~~identified a $5 million receivable from a vendor that filed for bankruptcy during~~will make the ~~first quarter.~~majority of the remaining cash payments associated with this liability in 2021. The ~~Company expects to file a bankruptcy claim but, as the note~~balance 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 items - impairment charges and other in~~payroll taxes on the condensed consolidated ~~statement of operations in the first quarter.~~

For the three and nine months ended September 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 tax loss are 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 September 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 (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. In the third~~ quarter of 2020, Alaska and Horizon were informed by the Treasury of $29 million in additional funds available under the PSP. Similarly, McGee entered into an agreement to receive a total of $30 million, which was received in three installments in the second and third quarters.2021.

~~Total funds of approximately $1.1 billion are to be used exclusively toward continuing to pay employee salaries, wages and benefits. Upon receipt of~~Of the ~~funds,~~amounts received during the Company is subject to various conditions, including, but not limited to, refraining from conducting involuntary furloughs or reducing employee rates of pay through September 30, 2020 and placing limits on executive compensation. Other conditions also prohibit the Company from repurchasing common stock and from paying dividends until Septembersix months ended June 30, 2021, ~~and required the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation through September 30, 2020.~~

~~The funds received took the form of debt, warrants and a grant. The~~$311 million represented unsecured debt ~~portion of $290 million~~and was recorded at par, and $16 million represented warrants ~~of $8 million~~recorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance ~~sheet at fair value determined using the Black-Scholes model.~~sheet. The ~~residual amount of $753~~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 ~~will be recognized into earnings~~is recorded as ~~eligible~~an offset to wages, salaries and benefits as eligible expenses are incurred. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company recognized ~~$398 million and $760~~$914 million of the PSP grant proceeds as a wage offset. Included within ~~the third quarter total offset~~this $914 million is approximately ~~$17~~$21 million infor employee retention credits ~~for employer taxes,~~ as ~~stipulated~~provided for in the CARES Act. The Company ~~expects~~does not expect to record anany additional ~~$10 million in~~ wage offset in ~~the fourth quarter.~~2021.

~~In the third quarter of 2020, the Company reached an agreement with~~

Total funds contracted from the Treasury ~~to participate in~~under the ~~CARES Act loan program. The loan agreement provides~~three Payroll Support Programs are 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 for ~~a secured term loan facility, which allows Alaska to borrow up to $1.3 billion. In October 2020, the amount~~payment of employee salaries, wages and benefits. Upon receipt of the ~~loan available was increased~~funds issued under PSP 3, certain conditions and restrictions were extended. These conditions include, but are not limited to, ~~$1.9 billion. In~~refraining from conducting involuntary furloughs or reducing employee pay rates through September 30, 2021 and placing limits on executive compensation and severance through April 1, 2023. Alaska Air Group also agreed to continue the ~~Company borrowed $135 million under the loan facility. Refer to Note 5. Long-Term Debt~~suspension of dividends and ~~Note 8. Shareholders' Equity for further details regarding terms of the CARES loan agreement.~~share repurchases until September 30, 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 ~~the third quarter of~~ 2020, the Company ~~announced beginning on January 1, 2021 it would no longer collect~~eliminated ticket change fees indefinitely from ~~those guests traveling on~~its main cabin orand 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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Passenger ticket revenue, including ticket breakage and net of taxes and fees $ 459 $ 1,868 $ 1,894 $ 5,099
Passenger ancillary revenue 49 157 196 428
Mileage Plan passenger revenue 64 186 272 511
Total Passenger revenue $ 572 $ 2,211 $ 2,362 $ 6,038


	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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Passenger revenue $ 64 $ 186 $ 272 $ 511
Mileage Plan other revenue 84 118 266 346
Total Mileage Plan revenue $ 148 $ 304 $ 538 $ 857


	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

1412

Cargo and Other

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

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Cargo revenue $ 31 $ 36 $ 83 $ 104
Other revenue 14 24 47 65
Total Cargo and other revenue $ 45 $ 60 $ 130 $ 169


	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 ~~$582 million~~net refunds from the prior year-end air traffic liability balance for the ~~nine~~three months ended ~~September~~June 30, 2021 and 2020, and ~~2019.~~$175 million and $484 million for the six months ended June 30, 2021 and 2020.

Given the ~~reduction~~increase in demand for air travel ~~stemming~~from the recovery from the COVID-19 pandemic, advance bookings and associated cash receipts have ~~been~~ significantly ~~depressed.~~increased in relation to prior year. The Company also experienced ~~elevated cancellations beginning in March 2020,~~increased revenue recognition from credits redeemed for travel, for which ~~led to cash refunds or~~ the issuance of credits for future travel. Since March, the Company has issued cash refunds of approximately $475 million and credits for future travel of $850 million. At September 30, 2020, such credits, which areremaining balance is included in the air traffic liability balance, ~~totaled $617~~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 PlanTM 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 ~~$45~~$61 million of such receivables as of ~~September~~June 30, ~~2020~~2021 and ~~$105~~$48 million as of December 31, ~~2019. Consistent with the significant cancellation activity outlined above, the Company experienced incremental redeposits in the third 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):

Nine Months Ended September 30,
2020 2019
Total Deferred Revenue balance at January 1 $ 1,990 $ 1,874
Travel miles and companion certificate redemption - Passenger revenue (272) (511)
Miles redeemed on partner airlines - Other revenue (21) (84)
Increase in liability for mileage credits issued 486 692
Total Deferred Revenue balance at Sept 30 $ 2,183 $ 1,971


	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 ~~September~~June 30, ~~2020,~~2021, total cost basis for all marketable securities was ~~$1.9~~$2.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

1513

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

September 30, 2020 December 31, 2019
Level 1 Level 2 Total Level 1 Level 2 Total
Assets
Marketable securities
U.S. government and agency securities $ 479 $ 0 $ 479 $ 330 $ 0 $ 330
Equity mutual funds 6 0 6 6 0 6
Foreign government bonds 0 20 20 0 31 31
Asset-backed securities 0 232 232 0 211 211
Mortgage-backed securities 0 262 262 0 176 176
Corporate notes and bonds 0 859 859 0 523 523
Municipal securities 0 46 46 0 23 23
Total Marketable securities 485 1,419 1,904 336 964 1,300
Derivative instruments
Fuel hedge—call options 0 7 7 0 11 11
Interest rate swap agreements 0 0 0 0 3 3
Total Assets $ 485 $ 1,426 $ 1,911 $ 336 $ 978 $ 1,314
Liabilities
Derivative instruments
Interest rate swap agreements 0 (29) (29) 0 (10) (10)
Total Liabilities $ 0 $ (29) $ (29) $ 0 $ (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 ~~September~~June 30, ~~2020.~~2021.

Maturities for marketable securities (in millions):

September 30, 2020 Cost Basis Fair Value
Due in one year or less $ 702 $ 704
Due after one year through five years 1,108 1,139
Due after five years through 10 years 54 55
Total $ 1,864 $ 1,898


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

1614

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 ~~September~~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, ~~except for $732~~as it is estimated using observable inputs, while the estimated fair value of $780 million ~~which~~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):

September 30, 2020 December 31, 2019
Fixed-rate debt at cost $ 1,889 $ 473
Non-recurring purchase price accounting fair value adjustment 2 2
Total fixed-rate debt $ 1,891 $ 475
Estimated fair value $ 1,960 $ 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 nine months ended September 30, 2020.~~ No material ~~impairment charges~~impairments were recorded during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2021.

NOTE 5. LONG-TERM DEBT

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

September 30, 2020 December 31, 2019
Fixed-rate notes payable due through 2029 $ 427 $ 475
Fixed-rate PSP notes payable due through 2030 290 0
Fixed-rate EETC payable due through 2025 & 2027 1,174 0
Variable-rate notes payable due through 2029 1,966 1,032
Less debt issuance costs and unamortized debt discount (35) (8)
Total debt 3,822 1,499
Less current portion 1,150 235
Long-term debt, less current portion $ 2,672 $ 1,264
Weighted-average fixed-interest rate 4.3 % 3.3 %
Weighted-average variable-interest rate 1.9 % 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 ~~$642~~$562 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at ~~September~~June 30, ~~2020.~~2021, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.1%.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company ~~obtained proceeds from issuance~~issued $363 million of debt, ~~of $2.6 billion from multiple lenders and sources. New proceeds are~~ comprised of ~~$1.2 billion in Enhanced Equipment Trust Certificates (EETC), $589~~$311 million ~~from secured debt financing backed by a total~~ of ~~32 aircraft, $290 million in an~~ unsecured ~~loan~~loans from the PSP and ~~$135~~$54 million ~~from the CARES Act loan program. Also included~~ in proceeds from issuance of ~~debt is $400 million drawn on existing lines of credit. Details around these issuances are more fully described below. Issuances of debt are~~debt. Debt proceeds were offset by ~~$238~~$681 million in debt ~~payments.~~

Inpayments. Included within total debt payments is the ~~third quarter~~full repayment of ~~2020,~~ the ~~Company obtained $1.2 billion in private funding through~~$135 million loan from the ~~issuance of Enhanced Equipment Trust Certificates (EETC). The EETC are collateralized by 42 Boeing 737 aircraft~~U.S. Treasury made available under the CARES Act and ~~19 Embraer E175 aircraft. Principal and interest payments are due semiannually, beginning~~the $363 million outstanding balance on ~~February 15, 2021.~~two credit facilities.

The ~~$290~~$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 ~~Loan Program~~

In ~~the third quarter of~~ 2020, the Company finalized an agreement with the Treasury to obtain up to ~~$1.3~~$1.9 billion via a secured term loan facility. ~~In October 2020, the Company was informed by the Treasury that the total loan available would increase to $1.9 billion. Following the October upsize, obligations of the Company~~Obligations under the loan agreement ~~are~~were secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 3430 aircraft and 15 spare engines.

~~As of September 30,~~ In 2020, the Company ~~has drawn~~drew $135 million ~~available~~ under the agreement, ~~and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021, after a required initial draw of 10%. All proceeds drawn must be~~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 ~~conjunction~~accordance with the ~~initial draw,~~related agreement, the ~~Company granted~~facility terminated at the ~~Treasury 427,080 warrants to purchase ALK common stock at a strike price~~time of $31.61. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in stockholders' equity, with an offsetting debt discount to the CARES Loan issuance.payment.

Debt Maturity

At ~~September~~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 $ 73
2021 1,201
2022 393
2023 357
2024 265
Thereafter 1,568
Total $ 3,857


	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 availability totaling ~~$461~~$486 million as of ~~September~~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, which was renegotiated in September 2020, resulting in decreased capacity from~~ $150 ~~million to $120~~ 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 ~~$91~~$86 million expires in June ~~2021, with a mechanism for annual renewal,~~2022 and is secured by aircraft.

~~During the nine months ended September 30, 2020, the Company drew $400 million on the first 2 existing facilities, of which a total of $37 million has since been repaid.~~ The Company ~~has an outstanding balance of $363 million from the first two 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 ~~$91 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 ~~September~~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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Service cost $ 11 $ 11 $ 37 $ 32
Pension expense included in Wages and benefits 11 11 37 32
Interest cost 19 23 57 67
Expected return on assets (28) (24) (83) (71)
Amortization of prior service cost (credit) (1) (1) (1) (1)
Recognized actuarial loss 9 9 26 27
Pension expense included in Nonoperating Income (Expense) $ (1) $ 7 $ (1) $ 22


	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

In the third quarter of 2020, the Company also recorded $16 million of pension expense within Special items - restructuring charges for those pilots accepting certain furlough mitigation programs, which is not reflected in the table above.

1916

NOTE 7. COMMITMENTS AND CONTINGENCIES

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

Aircraft Commitments(a)
Capacity Purchase Agreements (b)
Aircraft Maintenance Deposits
Remainder of 2020 $ 343 $ 36 $ 7
2021 549 166 35
2022 333 174 45
2023 192 179 24
2024 21 184 6
Thereafter 25 880 2
Total $ 1,463 $ 1,619 $ 119


	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.

During the nine months ended September 30, 2020 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 ~~September~~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 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.~~

In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.

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 laws 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 ~~September~~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 ~~the~~ PSP programs, during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 the Company granted the Treasury a total of ~~915,930~~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.

Additionally, in ~~connection~~conjunction with the ~~execution of~~October 2020 draw on the CARES Act ~~loan agreement,~~Loan, the Company agreed to issue warrants to the Treasury to purchase up to an aggregate of 4,115,786 shares of ALK common stock (the Warrant Agreement). Under the Warrant Agreement, warrants will be granted to the Treasury in conjunction with each new borrowing under the Agreement. Warrants to purchase shares shall be equal to 10% of each borrowing, divided by $31.61, the closing price of Air Group common stock on April 9, 2020. Pursuant to the Warrant Agreement, on the closing date, Air Group granted the Treasury 427,080 warrants to purchase ALK common ~~stock at a strike price of $31.61. Upon upsize~~stock. The value of the ~~loan agreement~~warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in ~~October 2020, an additional 1,983,550~~stockholders' equity.

Total warrants ~~were added to the aggregate.~~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

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

September 30, 2020 December 31, 2019
Related to marketable securities $ 25 $ 9
Related to employee benefit plans (453) (469)
Related to interest rate derivatives (22) (5)
Total $ (450) $ (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 ~~nine~~six months ended ~~September~~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 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.

2219

Operating segment information is as follows (in millions):

Three Months Ended September 30, 2020
Mainline Regional Horizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues $ 401 $ 171 $ 0 $ 0 $ 572 $ 0 $ 572
CPA revenues 0 0 95 (95) 0 0 0
Mileage Plan other revenue 65 19 0 0 84 0 84
Cargo and other 45 0 0 0 45 0 45
Total Operating Revenues 511 190 95 (95) 701 0 701
Operating Expenses
Operating expenses, excluding fuel 872 248 78 (97) 1,101 46 1,147
Economic fuel 90 38 0 0 128 (3) 125
Total Operating Expenses 962 286 78 (97) 1,229 43 1,272
Nonoperating Income (Expense)
Interest income 8 0 0 (1) 7 0 7
Interest expense (28) 0 (6) 0 (34) 0 (34)
Interest capitalized 4 0 0 0 4 0 4
Other - net 4 0 0 1 5 0 5
Total Nonoperating Income (Expense) (12) 0 (6) 0 (18) 0 (18)
Income (Loss) Before Income Tax $ (463) $ (96) $ 11 $ 2 $ (546) $ (43) $ (589)
Three Months Ended September 30, 2019
Mainline Regional Horizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues $ 1,850 $ 361 $ 0 $ 0 $ 2,211 $ 0 $ 2,211
CPA revenues 0 0 112 (112) 0 0 0
Mileage Plan other revenue 107 11 0 0 118 0 118
Cargo and other 58 1 0 1 60 — 60
Total Operating Revenues 2,015 373 112 (111) 2,389 0 2,389
Operating Expenses
Operating expenses, excluding fuel 1,226 275 94 (119) 1,476 5 1,481
Economic fuel 411 75 0 0 486 0 486
Total Operating Expenses 1,637 350 94 (119) 1,962 5 1,967
Nonoperating Income (Expense)
Interest income 17 0 0 (6) 11 0 11
Interest expense (18) 0 (7) 7 (18) 0 (18)
Interest capitalized 4 0 0 0 4 0 4
Other - net (3) 0 0 0 (3) 0 (3)
Total Nonoperating Income (Expense) 0 0 (7) 1 (6) 0 (6)
Income (Loss) Before Income Tax $ 378 $ 23 $ 11 $ 9 $ 421 $ (5) $ 416


	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)

2320


		Nine Months Ended September 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	$	1,860	$	502	$	0	$	0	$	2,362	$	0	$	2,362	Passenger revenues	$	1,578	$	433	$	0	$	0	$	2,011	$	0	$	2,011
CPA revenues	CPA revenues	0		0		281		(281)		0		0		0		CPA revenues	0		0		215		(215)		0		0		0
Mileage Plan other revenue	Mileage Plan other revenue	219		47		0		0		266		0		266		Mileage Plan other revenue	182		30		0		0		212		0		212
Cargo and other	Cargo and other	128		0		0		2		130		0		130		Cargo and other	99		0		0		2		101		0		101
Total Operating Revenues	Total Operating Revenues	2,207		549		281		(279)		2,758		0		2,758		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	2,777		727		238		(289)		3,453		(83)		3,370		Operating expenses, excluding fuel	1,877		551		179		(236)		2,371		(912)		1,459
Economic fuel	Economic fuel	448		120		0		0		568		0		568		Economic fuel	427		118		0		0		545		(68)		477
Total Operating Expenses	Total Operating Expenses	3,225		847		238		(289)		4,021		(83)		3,938		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	33		0		0		(10)		23		0		23		Interest income	13		0		0		0		13		0		13
Interest expense	Interest expense	(58)		0		(16)		10		(64)		0		(64)		Interest expense	(61)		0		(10)		0		(71)		0		(71)
Interest capitalized	Interest capitalized	8		0		0		0		8		0		8		Interest capitalized	6		0		0		0		6		0		6
Other - net	Other - net	16		0		0		0		16		0		16		Other - net	19		0		0		0		19		0		19
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(1)		0		(16)		0		(17)		0		(17)		Total Nonoperating Income (Expense)	(23)		0		(10)		0		(33)		0		(33)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(1,019)	$	(298)	$	27	$	10	$	(1,280)	$	83	$	(1,197)	Income (Loss) Before Income Tax	$	(468)	$	(206)	$	26	$	23	$	(625)	$	980	$	355

		Nine Months Ended September 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	$	5,039	$	999	$	0	$	0	$	6,038	$	0	$	6,038	Passenger revenues	$	1,459	$	331	$	0	$	0	$	1,790	$	0	$	1,790
CPA revenues	CPA revenues	0		0		340		(340)		0		0		0		CPA revenues	0		0		186		(186)		0		0		0
Mileage Plan other revenue	Mileage Plan other revenue	312		34		0		0		346		0		346		Mileage Plan other revenue	154		28		0		0		182		0		182
Cargo and other	Cargo and other	163		2		1		3		169		0		169		Cargo and other	83		0		0		2		85		0		85
Total Operating Revenues	Total Operating Revenues	5,514		1035		341		(337)		6,553		0		6,553		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	3,545		817		286		(353)		4,295		39		4,334		Operating expenses, excluding fuel	1,905		479		160		(192)		2,352		(129)		2,223
Economic fuel	Economic fuel	1,191		218		0		0		1,409		(1)		1,408		Economic fuel	358		82		0		0		440		3		443
Total Operating Expenses	Total Operating Expenses	4,736		1,035		286		(353)		5,704		38		5,742		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	50		0		0		(19)		31		0		31		Interest income	25		0		0		(9)		16		0		16
Interest expense	Interest expense	(58)		0		(22)		20		(60)		0		(60)		Interest expense	(30)		0		(10)		10		(30)		0		(30)
Interest capitalized	Interest capitalized	11		0		0		0		11		0		11		Interest capitalized	4		0		0		0		4		0		4
Other - net	Other - net	(20)		0		0		0		(20)		0		(20)		Other - net	12		0		0		(1)		11		0		11
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(17)		0		(22)		1		(38)		0		(38)		Total Nonoperating Income (Expense)	11		0		(10)		0		1		0		1
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	761	$	0	$	33	$	17	$	811	$	(38)	$	773	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.

2421

Total assets were as follows (in millions):

September 30, 2020 December 31, 2019
Mainline $ 20,586 $ 19,207
Horizon 1,231 1,266
Consolidating & Other (7,068) (7,480)
Consolidated $ 14,749 $ 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:

•~~Third~~Second Quarter Review—highlights from the ~~third~~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 ~~nine~~six months ended ~~September~~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.

~~THIRD~~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~~pandemic. Early in the pandemic we shared plans to return capacity in a prudent manner, only when demand supported doing so. We also established structural cost removal targets that have ~~been unprecedented,~~positioned the airline well for returning to profitability in recovery. With the strong return of demand in the second quarter, we reported an adjusted net loss that was significantly better than previous quarterly losses, and ~~have presented us with some of~~we currently expect double-digit adjusted pre-tax profit margins in 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 has driven demand for air travel to historic lows.third quarter.

~~Although~~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 ~~seen slow improvements~~increased our near-term flying expectations as we ramp towards that target. To support this plan and prepare for growth beyond 2022, in ~~demand through~~ the second quarter of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and ~~third quarters of 2020 as daily passenger counts have grown from a low of 5,000 per day~~2024, and nine E175 to ~~approximately 40,000~~be operated by Horizon Air with deliveries in ~~September,~~2022 and 2023. In addition, we remain well below prior-year traffic levels. Some targeted promotions, including a "Buy the Row" sale, have provided meaningful cash bookings and positive reactions from guests, indicating that there is underlying demand for air travel when the time is right. Based on several recent studies performed on the safety of air travel during the pandemic, we strongly believe air travel is, and has been, safe and we stand ready asexpanded our ~~guests return to travel over the coming months.~~long-term capacity agreement with SkyWest by eight aircraft beginning in 2022.

~~However,~~Our guidance for 2021 compares against 2019 as we ~~expect~~believe it provides a more meaningful indication of the pace and quality of recovery to ~~be slow and we face the reality that our airlines are, and will be, significantly smaller than we were a year ago, we had to make the difficult decision to reduce our workforce at the end of~~pre-pandemic levels. For the third ~~quarter. We initiated various early-out~~quarter, we are planning for capacity to be approximately 17% to 20% below the same period in 2019, coupled with increased passenger counts as leisure travel continues through the summer months and ~~furlough mitigation programs for frontline work groups,~~business travel rebuilds as well as incentive leaves for Alaska pilots and aircraft mechanics. These leaves were accepted by approximately 4,000 employees, including over 600 employees volunteering for early-out separation from the Company. In addition,workplaces reopen. As we ~~reduced our non-union management positions by approximately 300 positions. As a result of these actions, we were able~~continue to ~~reduce the number of involuntary furloughs to approximately 400. Costs of $322 million associated~~be disciplined with ~~these programs were recorded in the third quarter. We expect these workforce reductions will result in permanent annual savings of approximately $130 million.~~

These and other structural cost reduction measures are critical to reaching our monthly cash preservation goals. We believe getting to a zero cash burn position will be a leading indicator of industry health and recovery, and we believe we will be the first airline to reach this goal. Ourreturning 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 do not support these assumptions.~~85%.

2622

~~Looking forward,~~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 great operation, and welcoming guests back to 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 ~~planning for capacity in~~confident that we are prepared to meet the ~~fourth quarter to be approximately 40% below the same period in 2019. We expect to see continued increases in passenger counts~~challenges ahead and that we will emerge from the ~~holiday travel season~~pandemic a stronger and as Hawai'i reopens to tourism travel. However, we do expect load factors to be in the range of 45% to 55% given our decision to block middle seats on the majority of our mainline flights through January 6, 2021.more resilient airline.

~~Currently, by~~Sustainability Updates

As we move beyond the ~~summer of 2021, our planning assumption is that capacity will be approximately 80% of the summer of 2019. Although, that is subject to change given the ever-changing dynamic~~impacts of the COVID-19 pandemic, we have shifted our focus back to our 2025 strategic plan, which was announced in 2019. During the second quarter, we continued to make strides towards our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. As part of these commitments, we announced a partnership with Boeing on the ~~demand for~~737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies to enhance the safety and sustainability of air travel. ~~We will remain flexible as~~In the ~~situation changes~~second quarter we also announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and ~~are committed~~machine learning to ~~take advantage~~optimize air traffic and enable more fuel-efficient flight paths for aggregate savings of ~~opportunities that may arise as the industry begins to recover.~~fuel, carbon emissions and time.

~~Maintaining~~As a ~~significant liquidity balance is also paramount~~reflection of the importance of the commitments made, we continue to ~~preserving our financial strength. In addition~~tie a portion of long-term executive compensation to ~~the $1 billion in CARES Act funding obtained in the second quarter~~achievement of ~~2020,~~diversity goals. Additionally, we have ~~also sourced $589 million in secured financing, drawn $400 million from~~incorporated a carbon emission target into our ~~existing credit facilities, and issued $1.2 billion in EETCs. We also have available to us $1.9 billion in CARES Act loans, from~~company-wide performance-based pay program, for which we ~~have drawn $135 million~~currently expect to ~~support general business operations. As of November 3, 2020, our cash and marketable securities balance was approximately $3.5 billion.~~

~~Guest and employee safety~~

~~Our commitment to~~meet the health and safety of our guests and employees remains our top priority. In response to the crisis, we have partnered with experts 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 the pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;~~

•~~Requiring masks for both guests aged 2 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 January 6, 2021.~~

~~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 by the end of the first quarter of 2021.~~targeted goal.

Financial Overview

Our consolidated ~~pretax loss was $589 million during~~pre-tax income for the ~~third~~second quarter of ~~2020,~~2021 was $528 million, compared to ~~pretax profit~~a pre-tax loss of ~~$416~~$291 million in the ~~third~~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 ~~$1.7 billion stemming from~~increased wage offsets provided by extensions of the ~~sharp decline in demand, $322 million in restructuring costs, and $121 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 $334~~costs, excluding special items, and a $215 million ~~including wage offsets from the payroll support program of the CARES Act of $398 million. Pretax loss was also offset by a decrease~~increase in fuel expense ~~of $361 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 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 have historically compared our 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 these items as 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.

2824

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 September 30, Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
Consolidated Operating Statistics:(a)
Revenue passengers (000) 3,595 12,574 (71.4)% 14,012 35,018 (60.0)%
RPMs (000,000) "traffic" 3,817 15,026 (74.6)% 16,127 42,113 (61.7)%
ASMs (000,000) "capacity" 7,871 17,519 (55.1)% 27,483 50,006 (45.0)%
Load factor 48.5% 85.8% (37.3) pts 58.7% 84.2% (25.5) pts
Yield 14.99¢ 14.71¢ 1.9% 14.65¢ 14.34¢ 2.1%
RASM 8.90¢ 13.64¢ (34.8)% 10.04¢ 13.10¢ (23.4)%
CASM excluding fuel and special items(b)
14.00¢ 8.43¢ 66.1% 12.57¢ 8.59¢ 46.3%
Economic fuel cost per gallon(b)
$1.32 $2.13 (38.0)% $1.65 $2.18 (24.3)%
Fuel gallons (000,000) 97 227 (57.4)% 344 646 (46.7)%
ASMs per fuel gallon 81.3 77.2 5.3% 79.9 77.4 3.2%
Average full-time equivalent employees (FTEs) 16,027 22,247 (28.0)% 18,112 22,000 (17.7)%
Mainline Operating Statistics:
Revenue passengers (000) 2,156 9,655 (77.7)% 9,736 26,725 (63.6)%
RPMs (000,000) "traffic" 2,958 13,538 (78.2)% 13,816 37,917 (63.6)%
ASMs (000,000) "capacity" 6,280 15,702 (60.0)% 23,339 44,816 (47.9)%
Load factor 47.1% 86.2% (39.1) pts 59.2% 84.6% (25.4) pts
Yield 13.56¢ 13.66¢ (0.7)% 13.46¢ 13.29¢ 1.3%
RASM 8.14¢ 12.83¢ (36.6)% 9.46¢ 12.30¢ (23.1)%
CASM excluding fuel and special items(b)
13.88¢ 7.81¢ 77.7% 11.90¢ 7.91¢ 50.4%
Economic fuel cost per gallon(b)
$1.31 $2.13 (38.5)% $1.66 $2.17 (23.5)%
Fuel gallons (000,000) 69 193 (64.2)% 270 549 (50.8)%
ASMs per fuel gallon 91.0 81.4 11.8% 86.4 81.6 5.9%
Average FTEs 12,032 16,789 (28.3)% 13,730 16,599 (17.3)%
Aircraft utilization 7.3 11.3 (35.4)% 8.3 10.9 (23.9)%
Average aircraft stage length 1,244 1,281 (2.9)% 1,263 1,298 (2.7)%
Operating fleet(d)
217 238 (21) a/c 217 238 (21) a/c
Regional Operating Statistics:(c)
Revenue passengers (000) 1,439 2,919 (50.7)% 4,276 8,293 (48.4)%
RPMs (000,000) "traffic" 859 1,488 (42.3)% 2,311 4,196 (44.9)%
ASMs (000,000) "capacity" 1,592 1,817 (12.4)% 4,143 5,190 (20.2)%
Load factor 54.0% 81.9% (27.9 pts) 55.8% 80.8% (25.0 pts)
Yield 19.89¢ 24.23¢ (17.9)% 21.72¢ 23.81¢ (8.8)%
RASM 11.91¢ 20.51¢ (41.9)% 13.24¢ 19.93¢ (33.6)%
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 ~~20 Airbus~~all aircraft ~~permanently parked in the first nine months of 2020.~~removed from operating service.

2925

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 our second quarter 2019 Form 10-Q.

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

Our consolidated net ~~loss~~income for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~$431~~$397 million, or ~~$3.49~~$3.13 per ~~diluted~~ share, compared to a net ~~income~~loss of ~~$322~~$214 million, or ~~$2.60~~$1.74 per ~~diluted~~ share, for the three months ended ~~September~~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 ~~third~~second quarter of ~~2020~~2021 was ~~$399~~$38 million, or ~~$3.23~~$0.30 per ~~diluted~~ share, compared to an adjusted net ~~income~~loss of ~~$326~~$439 million, or ~~$2.63~~$3.57 per ~~diluted~~ share, in the ~~third~~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 September 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		$	(431)	$	(3.49)	$	322	$	2.60
Payroll support program grant wage offset		(398)		(3.22)		—		—
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	(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	121		0.98		—		—		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		5		0.04		Special items - merger-related costs	—		—		1		0.01
Special items - restructuring charges		322		2.60		—		—
Income tax effect of reconciling items above	Income tax effect of reconciling items above	(11)		(0.09)		(1)		(0.01)		Income tax effect of reconciling items above	141		1.11		73		0.59
Non-GAAP adjusted net income (loss) and diluted EPS		$	(399)	$	(3.23)	$	326	$	2.63
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 September 30,
(in cents) 2020 2019 % Change
Consolidated:
CASM 16.16 ¢ 11.23 ¢ 44 %
Less the following components:
Payroll support program grant wage offset (5.06) — NM
Aircraft fuel, including hedging gains and losses 1.59 2.77 (43) %
Special items - merger-related costs 0.01 0.03 (67) %
Special items - impairment charges and other 1.53 — NM
Special items - restructuring charges 4.09 — NM
CASM excluding fuel and special items 14.00 ¢ 8.43 ¢ 66 %
Mainline:
CASM 16.80 ¢ 10.46 ¢ 61 %
Less the following components:
Payroll support program grant wage offset (5.56) — NM
Aircraft fuel, including hedging gains and losses 1.43 2.62 (45) %
Special items - merger-related costs 0.02 0.03 (33) %
Special items - impairment charges and other 1.93 — NM
Special items - restructuring charges 5.10 — NM
CASM excluding fuel and special items 13.88 ¢ 7.81 ¢ 78 %


	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)	%

3027

OPERATING REVENUES

Total operating revenues ~~decreased $1.7~~increased $1.1 billion ~~or 71%,~~ during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The changes are summarized in the following table:

Three Months Ended September 30,
(in millions) 2020 2019 % Change
Passenger revenue $ 572 $ 2,211 (74) %
Mileage Plan other revenue 84 118 (29) %
Cargo and other 45 60 (25) %
Total operating revenues $ 701 $ 2,389 (71) %


	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 ~~third~~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 $1.6 billion, or 74%, on~~we experienced a ~~75% decline in traffic. Decreased revenue year-over-year is~~near complete loss of demand driven ~~by the significant ongoing reductions in demand caused~~ by the COVID-19 pandemic. ~~Impacts to~~As recovery has taken hold, including wide availability of the vaccine and removal of restrictions throughout the markets we serve, demand began in March 2020, and continued through the third quarter. Although third quarter results show sequential improvement from the prior quarter as more guests return to flying, capacity was reduced 55% of that flown in the third quarter of 2019, with a 37 point reduction in system-wide load factors.for air travel has increased exponentially driven primarily by leisure travelers.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue ~~decreased $34~~increased by $45 million, or ~~29%~~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 ~~third~~second quarter of ~~2020 decreased~~2021 increased by ~~$15~~$18 million, or ~~25%~~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 due to design issues that~~ we ~~are working to address with our third-party vendor.~~increase scheduled departures.

OPERATING EXPENSES

Total operating expenses ~~decreased $695~~increased $269 million, or ~~35%~~38%, compared to the ~~third~~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 September 30,
(in millions) 2020 2019 % Change
Fuel expense $ 125 $ 486 (74) %
Non-fuel operating expenses, excluding special items 1,101 1,476 (25) %
Payroll support program grant wage offset (398) — NM
Special items - merger-related costs 1 5 (80) %
Special items - impairment charges and other 121 — NM
Special items - restructuring charges 322 — NM
Total operating expenses $ 1,272 $ 1,967 (35) %


	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 $361~~increased $215 million, ~~or 74%,~~ compared to the ~~third~~second quarter of ~~2019.~~2020. The elements of the change are illustrated in the following table:

Three Months Ended September 30,
2020 2019
(in millions, except for per gallon amounts) Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost $ 123 $ 1.27 $ 481 $ 2.11
Losses on settled hedges 5 0.05 5 0.02
Consolidated economic fuel expense 128 1.32 $ 486 $ 2.13
Mark-to-market fuel hedge adjustments (3) (0.03) — —
GAAP fuel expense $ 125 $ 1.29 $ 486 $ 2.13
Fuel gallons 97 227


	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 ~~September~~June 30, ~~2020 decreased~~2021 increased by approximately ~~40%~~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 ~~third~~second quarter of ~~2020~~2021 was primarily driven by a ~~27% decrease~~24% increase in crude oil prices and a 79% 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 ~~130~~114 million gallons, ~~or 57%, primarily~~ on ~~a significant reduction~~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 ~~third~~second quarter were $5$10 million in ~~2020,~~2021, compared to losses of $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)	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	%

3229

Three Months Ended September 30,
(in millions) 2020 2019 % Change
Wages and benefits $ 495 $ 608 (19) %
Variable incentive pay 42 46 (9) %
Aircraft maintenance 84 106 (21) %
Aircraft rent 74 82 (10) %
Landing fees and other rentals 109 143 (24) %
Contracted services 36 72 (50) %
Selling expenses 24 77 (69) %
Depreciation and amortization 105 106 (1) %
Food and beverage service 14 57 (75) %
Third-party regional carrier expense 29 42 (31) %
Other 89 137 (35) %
Total non-fuel operating expenses, excluding special items $ 1,101 $ 1,476 (25) %

Wages and Benefits

Wages and benefits ~~decreased~~increased during the ~~third~~second quarter of ~~2020~~2021 by ~~$113~~$38 million, or ~~19%~~8%, compared to ~~2019.~~2020. The primary components of Wages and benefits are shown in the following table:

Three Months Ended September 30,
(in millions) 2020 2019 % Change
Wages $ 356 $ 460 (23) %
Pension - Defined benefit plans service cost 11 10 10 %
Defined contribution plans 28 34 (18) %
Medical and other benefits 75 71 6 %
Payroll taxes 25 33 (24) %
Total wages and benefits $ 495 $ 608 (19) %


	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 $104~~increased $36 million, or ~~23%~~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 ~~with an average of 4,600 employees on leave throughout the quarter, as well as reductions~~taken and reduction in executive pay and hours for management employees ~~and reducing represented employees work hours~~in 2020 which were not repeated in 2021.

Defined contribution plan expense decreased 13% as compared to ~~minimums. Reduced employee wages directly correlate with~~2020 as a result of a one-time adjustment recorded in the ~~reduction~~second quarter of 2021 for employer contributions to those participating in ~~retirement contributions and payroll taxes.~~incentive leave programs.

Variable Incentive Pay

Variable incentive pay expense ~~decreased $4~~increased $18 million ~~or 9%,~~ during the ~~third~~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. The decrease was offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July 2020, and ~~increased~~ operational ~~bonuses as compared to the prior year.~~metrics.

Aircraft Maintenance

Aircraft maintenance expense ~~decreased~~increased by ~~$22~~$57 million ~~or 21%,~~ during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019. The decrease~~2020. This is primarily due to ~~fewer~~a significant increase in utilization of aircraft as we return to capacity, resulting in increased engine events, ~~and~~ heavy checks asand power-by-the-hour expense.

Aircraft Rent

Aircraft rent expense decreased by $12 million, or 16%, during the second quarter of 2021 compared to the ~~prior year, as well as lower power-by-the-hour expense~~same period in 2020 primarily the result of the full impairment taken on ~~reduced third quarter utilization of covered aircraft. These decreases were offset by penalties accrued for failure to meet minimum obligations under~~ certain ~~contracts and costs incurred~~leased Airbus aircraft in ~~the temporary grounding of certain aircraft, although we are currently in negotiations with these service providers with respect to these penalties.~~2020.

Landing fees and other rentals

Landing fees and other rentals ~~decreased~~increased by ~~$34~~$61 million, or ~~24%~~73%, during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019 on~~2020 primarily due to a ~~45% 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 ~~$36~~$24 million, or ~~50%~~80%, during the ~~third~~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 ~~$53~~$37 million ~~or 69%,~~ during the ~~third~~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 the renegotiation~~increase of ~~certain contracts.~~overall travel.

Food and Beverage Service

Food and beverage service ~~decreased~~increased by ~~$43~~$28 million ~~or 75%,~~ during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. This ~~decrease~~increase is 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 and temporary elimination~~on-board products in the second quarter of ~~buy-on-board service.~~2021.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, ~~decreased~~increased by ~~$13~~$11 million, or ~~31%~~42%, during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The ~~reduction~~increase in expense is primarily due to ~~a 11% 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 ~~$121~~$4 million in the ~~third~~second quarter of ~~2020,~~2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the ~~impairment for ten owned Airbus aircraft which are expected to be retired prior~~operating fleet but not yet returned to the ~~end of their originally anticipated useful life, eight of which have been permanently parked.~~lessor.

Special Items - Restructuring charges

We recorded a benefit for workforce restructuring ~~charges~~ of ~~$322~~$23 million in the ~~third~~second quarter of ~~2020 relating to the right-sizing of our workforce~~2021 primarily as a result of ~~decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for those~~issuing recall notices to pilots ~~and mechanics~~ on incentive ~~leaves, ongoing medical benefit coverage, and lump-sum termination payouts.~~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 ~~$463~~$471 million in the ~~third~~second quarter of ~~2020, compared to a pretax profit of $378~~2020. The $447 million ~~in the third quarter of 2019. The $841 million shift to pretax loss~~improvement was primarily driven by ~~a $1.4 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 ~~$354~~$238 million ~~decrease~~increase in non-fuel operating costs and a ~~$321~~$208 million ~~decrease~~increase in economic fuel cost.

The ~~decrease~~increase in Mainline passenger revenue for the ~~third~~second quarter of ~~2020~~2021 was primarily driven by a ~~78% decline~~significant increase in ~~traffic on a 60% decrease in capacity. The overall decreases in both~~ traffic and capacity ~~were 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 ~~64% 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 ~~$96~~$129 million in the ~~third~~second quarter of ~~2020, compared to a pretax profit of $23 million in the third quarter of 2019.~~2020. The ~~increase in the~~improved pretax loss was attributable to a ~~$183~~$195 million ~~decline~~increase in operating revenues, partially offset by a ~~$37~~$76 million ~~decrease in fuel costs and an $27 million decrease~~increase in non-fuel operating ~~expenses.~~expenses and a $46 million increase in fuel costs.

Regional passenger revenue ~~decreased 53%~~increased significantly compared to the ~~third~~second quarter of ~~2019,~~2020, primarily driven by ~~a 42% decline in traffic on a 12% 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 12% decline~~increased variable costs and higher CPA rates on an increase in capacity, ~~as well as a discontinuation~~offset by the pass through of ~~our partnership with PenAir for contract flying~~CARES Act PSP funds recorded in the ~~state~~second quarter of ~~Alaska.~~2021.

Horizon

Horizon achieved aan adjusted pretax profit of ~~$11~~$15 million in ~~both~~ the ~~third~~second quarter of ~~2020 and~~2021 compared to $8 million in the ~~third~~second quarter of ~~2019. Profit recorded by Horizon in the third quarter~~2020. Increased profit 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 ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 TO ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

Our consolidated net ~~loss~~income for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$877~~$266 million, or ~~$7.12~~$2.10 per diluted share, compared to a net ~~income~~loss of ~~$588~~$446 million, or ~~$4.74~~$3.62 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

Our adjusted net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$940~~$474 million, or ~~$7.63~~$3.75 per diluted share, compared to an adjusted net ~~income~~loss of ~~$617~~$541 million, or ~~$4.97~~$4.40 per diluted share, in the ~~nine~~six months ended ~~September~~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:

Nine Months Ended September 30,
2020 2019
(in millions, except per share amounts) Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income (loss) and diluted EPS $ (877) $ (7.12) $ 588 $ 4.74
Payroll support program grant wage offset (760) (6.16) — —
Mark-to-market fuel hedge adjustments — — (1) (0.01)
Special items - merger-related costs 5 0.04 39 0.31
Special items - impairment charges and other 350 2.84 — —
Special items - restructuring charges 322 2.61 — —
Income tax effect of reconciling items above 20 0.16 (9) (0.07)
Non-GAAP adjusted net income (loss) and diluted EPS $ (940) $ (7.63) $ 617 $ 4.97


	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)

3532

Our operating costs per ASM are summarized below:

Nine Months Ended September 30,
(in cents) 2020 2019 % Change
Consolidated:
CASM 14.33 ¢ 11.48 ¢ 25 %
Less the following components:
Payroll support program grant wage offset (2.77) — NM
Aircraft fuel, including hedging gains and losses 2.07 2.82 (27) %
Special items - merger-related costs 0.02 0.08 (75) %
Special items - impairment charges and other 1.27 — NM
Special items - restructuring charges 1.17 — NM
CASM excluding fuel and special items 12.57 ¢ 8.59 ¢ 46 %
Mainline:
CASM 13.56 ¢ 10.65 ¢ 27 %
Less the following components:
Payroll support program grant wage offset (2.89) — NM
Aircraft fuel, including hedging gains and losses 1.92 2.65 (28) %
Special items - merger-related costs 0.02 0.09 (78) %
Special items - impairment charges and other 1.24 — NM
Special items - restructuring charges 1.37 — NM
CASM excluding fuel and special items 11.90 ¢ 7.91 ¢ 50 %


	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 $3.8 billion,~~increased $267 million, or ~~58%~~13%, during the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The changes are summarized in the following table:

Nine Months Ended September 30,
(in millions) 2020 2019 % Change
Passenger revenue $ 2,362 $ 6,038 (61) %
Mileage Plan other revenue 266 346 (23) %
Cargo and other 130 169 (23) %
Total operating revenues $ 2,758 $ 6,553 (58) %


	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 ~~nine~~six months of ~~2020 decreased~~2021 increased by ~~$3.7 billion,~~$221 million, or ~~61%~~12%, on a ~~45% decrease~~28% increase in ~~capacity, and a 26 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~~and increase bookings during what is typically a low booking period.

We expect 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 responsesee continued improvement to Passenger revenue as we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Moderate recovery began in June 2020, however, resurgence of cases throughout the United States slowed that recovery in July 2020. Targeted promotions, coupled withprogress through 2021, driven by continued growth ~~of guest confidence~~ in ~~air~~demand and capacity, as well as improvements to business travel ~~led~~as employees return to sequential revenue improvement in the third quarter. We expect that fourth quarter revenue will continue to show improvement, given the holiday travel season and reopening of Hawaii, however, revenues will remain well below 2019 levels.work.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue ~~decreased $80~~increased $30 million, or ~~23%~~16%, in the first ~~nine~~six months of ~~2020~~2021 compared to the first ~~nine~~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 $39~~increased $16 million, or ~~23%~~19%, in the first ~~nine~~six months of ~~2020~~2021 compared to the first ~~nine~~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 the schedule reductions for passenger aircraft,~~ as ~~well as continued capacity limitations in our freighters.~~ we increase scheduled departures.

We expect that our cargo and other revenues will ~~continue~~be positively impacted as compared to ~~be negatively impacted in the fourth quarter~~2020 due to ~~ongoing capacity reductions.~~the elimination of freighter limitations.

OPERATING EXPENSES

Total operating expenses decreased ~~$1.8 billion,~~$730 million, or ~~31%~~27%, compared to the first ~~nine~~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:

Nine Months Ended September 30,
(in millions) 2020 2019 % Change
Fuel expense $ 568 $ 1,408 (60) %
Non-fuel operating expenses, excluding special items 3,453 4,295 (20) %
Payroll support program grant wage offset (760) — NM
Special items - merger-related costs 5 39 (87) %
Special items - impairment charges and other 350 — NM
Special items - restructuring charges 322 — NM
Total operating expenses $ 3,938 $ 5,742 (31) %


	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 $840~~increased $34 million, or ~~60%~~8%, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The elements of the change are illustrated in the ~~following~~ table:

Nine Months Ended September 30,
2020 2019
(in millions, except for per gallon amounts) Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost $ 553 $ 1.61 $ 1,397 $ 2.16
Losses on settled hedges 15 0.04 12 0.02
Consolidated economic fuel expense 568 1.65 $ 1,409 $ 2.18
Mark-to-market fuel hedge adjustments — — (1) —
GAAP fuel expense $ 568 $ 1.65 $ 1,408 $ 2.18
Fuel gallons 344 646


	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 25%~~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 ~~nine~~six months of ~~2020~~2021 was driven by a ~~26% 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 ~~nine~~six months of ~~2020~~2021 were ~~$15~~$7 million, compared to losses of ~~$12~~$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 ~~fourth~~third quarter to range between ~~$1.20~~$1.95 and ~~$1.25~~$2.00 per gallon based on current market West Coast jet fuel ~~prices and trends.~~prices.

Non-fuel Expense and Non- special items


		Nine Months Ended September 30,							Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		% Change		(in millions)	2021		2020		% Change
Wages and benefits	Wages and benefits	$	1,579	$	1,732	(9)	%	Wages and benefits	$	1,003	$	1,084	(7)	%
Variable incentive pay	Variable incentive pay	65		125		(48)	%	Variable incentive pay	67		23		191	%
Aircraft maintenance	Aircraft maintenance	244		341		(28)	%	Aircraft maintenance	183		160		14	%
Aircraft rent	Aircraft rent	229		247		(7)	%	Aircraft rent	124		155		(20)	%
Landing fees and other rentals	Landing fees and other rentals	323		388		(17)	%	Landing fees and other rentals	273		214		28	%
Contracted services	Contracted services	138		214		(36)	%	Contracted services	105		102		3	%
Selling expenses	Selling expenses	83		236		(65)	%	Selling expenses	74		59		25	%
Depreciation and amortization	Depreciation and amortization	320		317		1	%	Depreciation and amortization	195		215		(9)	%
Food and beverage service	Food and beverage service	70		159		(56)	%	Food and beverage service	58		56		4	%
Third-party regional carrier expense	Third-party regional carrier expense	92		125		(26)	%	Third-party regional carrier expense	67		63		6	%
Other	Other	310		411		(25)	%	Other	222		221		—	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	3,453	$	4,295	(20)	%	Total non-fuel operating expenses, excluding special items	$	2,371	$	2,352	1	%

Wages and Benefits

Wages and benefits decreased during the first ~~nine~~six months of ~~2020~~2021 by ~~$153~~$81 million, or 9%7%. The primary components of wages and benefits are shown in the following table:

Nine Months Ended September 30,
(in millions) 2020 2019 % Change
Wages $ 1,159 $ 1,305 (11) %
Pension—Defined benefit plans service cost 37 31 19 %
Defined contribution plans 96 100 (4) %
Medical and other benefits 205 203 1 %
Payroll taxes 82 93 (12) %
Total wages and benefits $ 1,579 $ 1,732 (9) %


	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 ~~$146~~$60 million, or ~~11%~~7%, on ~~an 18%~~a 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 nearly 7,000 employees~~ in ~~the second and third quarters, 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 $60~~increased $44 million, or ~~48%~~191%, during the first ~~nine~~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, offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July 2020, and increased operational bonuses as compared to the prior year.~~program.

Aircraft Maintenance

Aircraft maintenance expense ~~decreased~~increased by ~~$97~~$23 million, or ~~28%~~14%, during the first ~~nine~~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, offset by penalties recorded for failure to meet contractual minimum obligations.~~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 ~~$65~~$59 million, or ~~17%~~28%, during the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019,~~2020, primarily due to a ~~39% 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 $76 million, or 36%, during the first nine 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 ~~$153~~$15 million, or ~~65%~~25%, during the first ~~nine~~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 and marketing costs.

~~Food and beverage service~~

Food and beverage service decreased by $89 million, or 56%, during the first nine months of 2020 compared to the same period in 2019. This decrease is primarily due to the 62% 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 and the temporary elimination of buy-on-board service.

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

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, ~~decreased $33~~increased $4 million, or ~~26%~~6%, during the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The ~~decrease~~increase is primarily due to a ~~14% decrease~~26% increase in 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.~~2020 driven by increased departures.

~~Special Items—Merger-Related Costs~~

We recorded special items of $5 million in the first nine months of 2020 for merger-related costs associated with our acquisition of Virgin America, compared to $39 million in the first nine months of 2019. Costs incurred in the first nine 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.

Special Items - Impairment and other charges

We recorded impairment and other charges of ~~$350~~$14 million in the first ~~nine~~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 ~~write down~~lessor. We continue to ~~fair value for ten owned Airbus A320 aircraft identified for sale, the full write-down of the operating lease assets and related spare inventory and parts, as well as~~evaluate total estimated ~~lease~~costs to return ~~costs for certain leased 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.~~

~~Additional impairment charges may be recorded as we finalize our long-term fleet strategy.~~total expense where necessary.

Special Items - Restructuring charges

We recorded a restructuring ~~charges~~benefit of ~~$322~~$12 million in the first ~~nine~~six months of ~~2020 relating to the right-sizing of our workforce~~2021 primarily as a result of ~~decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for those~~issuing recall notices to pilots ~~and mechanics~~ on incentive ~~leaves, ongoing medical benefit coverage, and lump-sum termination payouts.~~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 ~~$1 billion~~$468 million in the first ~~nine~~six months of ~~2020,~~2021, compared to an adjusted pretax ~~profit~~loss of ~~$761~~$556 million in the same period in ~~2019.~~2020. The ~~$1.8 billion shift~~$88 million improvement to pretax loss was driven by a ~~$3.3 billion decrease~~$163 million increase in Mainline operating revenues ~~offset by~~coupled with a ~~$768~~$28 million decrease in Mainline non-fuel operating ~~expense and~~expense. These improvements were offset by a ~~$743~~$69 million ~~decrease~~increase in Mainline fuel expense.

As compared to the prior year, ~~lower~~higher Mainline revenues are primarily attributable to a ~~64% decrease~~25% increase in traffic ~~and~~on a 4820 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 ~~$298~~$206 million in the first ~~nine~~six months of ~~2020,~~2021, compared to ~~break-even~~an adjusted pretax loss of $202 million in the first ~~nine~~six months of ~~2019.~~2020. The ~~shift to a pretax~~increased loss was attributable to a ~~$486~~$72 million ~~decrease~~increase in non-fuel operating ~~revenues, partially~~expenses and a $36 million increase in fuel costs, offset by a ~~$98~~$104 million ~~decrease~~increase in ~~fuel costs and~~operating revenues.

The increase to regional revenues is driven by a ~~$90 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 20% decrease in capacity, spurred by the COVID-19 pandemic.~~

Horizon

Horizon achieved aan adjusted pretax profit of ~~$27~~$26 million in the first ~~nine~~six months of ~~2020,~~2021, compared to an adjusted pretax profit of ~~$33~~$16 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 approximately $1.1~~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 use towards payment~~programs, $892 million of ~~wages and benefits;~~which is included in operating cash flow;

•~~Executed an agreement with~~Repaid $681 million in debt, including the ~~U.S. Department~~termination of ~~the Treasury to obtain up to $1.9 billion through~~ the CARES Act ~~Loan program, secured by certain Mileage Plan assets~~loan, and ~~cash flow streams, 34 aircraft and 15 spare engines;~~the full repayment of two outstanding lines of credit;

•~~Obtained $1.2 billion in financing through the issuance of EETC, collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft;~~Decreased debt-to-capitalization ratio to 56% at June 30, 2021 from 61% at December 31, 2020;

•~~Raised $589 million in secured financing collateralized by 32 aircraft;~~

•~~Drew $400 million~~Finalized a previously announced amendment to the existing aircraft purchase agreement with Boeing, which significantly reduced our 2021 capital commitments and provides slide rights to defer commitments from ~~existing credit facilities;~~

•~~Suspended our share repurchase program and quarterly dividend indefinitely,~~2022 to later years, and;

•~~Reduced planned~~Maintained low capital expenditures, ~~by nearly $550~~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.

Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors. ~~The liquidity raised from these financings, coupled with~~

As the ~~availability of additional liquidity~~business continues to recover and ~~our meaningful cost reductions have provided the Company with confidence in our ability~~returns to withstand the depressed demand and prepare for the recovery ahead. Despite the significant amount of debt raised, our adjusted net debt is flat as compared to the end of 2019. We will also continue to execute additional cost restructuring initiatives in an effort to transition from a cash-burn focus towardsprofitability, reducing outstanding debt and ~~repairing~~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 due to the expectation of no further government support and seasonal booking patterns that result in less cash bookings for future travel.

We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations and meet our debt payment obligations, and to remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.

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) September 30, 2020 December 31, 2019 Change
Cash and marketable securities $ 3,759 $ 1,521 147 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue 75 % 22 % 53 pts
Total debt 3,822 1,499 155 %
Shareholders’ equity $ 3,454 $ 4,331 (20)%


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)	September 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	$	2,672		$	1,264		111%	Long-term debt, net of current portion	$	2,319		$	2,357		(2)%
Capitalized operating leases	Capitalized operating leases	1,603			1,708			(6)%	Capitalized operating leases	1,485			1,558			(5)%
COVID-19 related borrowings(a)	COVID-19 related borrowings(a)	769			—			NM	COVID-19 related borrowings(a)	425			734			(42)%
Adjusted debt, net of current portion of long-term debt	Adjusted debt, net of current portion of long-term debt	$	5,044		$	2,972		70%	Adjusted debt, net of current portion of long-term debt	$	4,229		$	4,649		(9)%
Shareholders' equity	Shareholders' equity	3,454			4,331			(20)%	Shareholders' equity	3,324			2,988			11%
Total invested capital	Total invested capital	$	8,498		$	7,303		16%	Total invested capital	$	7,553		$	7,637		(1)%

Debt-to-capitalization, including operating leases	Debt-to-capitalization, including operating leases	59		%	41		%	18 pts	Debt-to-capitalization, including operating leases	56		%	61		%	(5) pts

(a)To best reflect our leverage, ~~at September 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.


Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent	Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent					Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)	(in millions)	September 30, 2020		December 31, 2019		(in millions)	June 30, 2021		December 31, 2020
Current portion of long-term debt	Current portion of long-term debt	$	1,150	$	235	Current portion of long-term debt	$	869	$	1,138
Current portion of operating lease liabilities	Current portion of operating lease liabilities	283		269		Current portion of operating lease liabilities	263		290
Long-term debt, net of current portion	Long-term debt, net of current portion	2,672		1,264		Long-term debt, net of current portion	2,319		2,357
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,320		1,439		Long-term operating lease liabilities, net of current portion	1,222		1,268
Total adjusted debt	Total adjusted debt	5,425		3,207		Total adjusted debt	4,673		5,053
Less: Cash and marketable securities	Less: Cash and marketable securities	(3,759)		(1,521)		Less: Cash and marketable securities	(3,951)		(3,346)
Adjusted net debt	Adjusted net debt	$	1,666	$	1,686	Adjusted net debt	$	722	$	1,707

(in millions)	(in millions)	Last Twelve Months Ended September 30, 2020		Last Twelve Months Ended December 31, 2019		(in millions)	Twelve Months Ended June 30, 2021		Twelve Months Ended December 31, 2020
GAAP Operating Income(a)		$	(928)	$	1,063
GAAP Operating Loss(a)						GAAP Operating Loss(a)	$	(778)	$	(1,775)
Adjusted for:	Adjusted for:					Adjusted for:
Special items		(78)		44
Payroll Support Program grant wage offset and special items						Payroll Support Program grant wage offset and special items	(712)		71
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(5)		(6)		Mark-to-market fuel hedge adjustments	(79)		(8)
Depreciation and amortization	Depreciation and amortization	426		423		Depreciation and amortization	400		420
Aircraft rent	Aircraft rent	313		331		Aircraft rent	268		299
EBITDAR	EBITDAR	$	(272)	$	1,855	EBITDAR	$	(901)	$	(993)
Adjusted net debt to EBITDAR	Adjusted net debt to EBITDAR	(6.1x)		0.9x		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 ~~nine~~six months of ~~2020,~~2021, net cash provided by operating activities was ~~$116 million,~~$1.0 billion, compared to ~~$1.4 billion~~$321 million during the same period in ~~2019.~~2020. The ~~$1.3 billion decrease~~$686 million increase in our operating cash flows is primarily attributable to a ~~$793~~$712 million ~~decline in~~improvement to net income, ~~net~~aided by the receipt and recognition of ~~non-cash special items for impairment and workforce reduction. The decrease~~$892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is ~~also~~ 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.~~2020.

Cash Used in Investing Activities

Cash used in investing activities was ~~$767 million~~$1.1 billion during the first ~~nine~~six months of ~~2020,~~2021, compared to ~~$708~~$124 million during the same period of ~~2019.~~2020. The increase to cash used in investing activities is primarily due to ~~an increase in~~ net purchases of marketable securities, which were ~~$572~~$963 million in the first ~~nine~~six months of ~~2020,~~2021, compared to ~~$218~~net sales of $34 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019. Increased~~2020. The shift to net purchases is primarily driven by additional cash on hand from ~~borrowings~~increased operating cash flow and the PSP program, which allowed the Company to invest additional funds. ~~These increases were offset by the postponement of capital expenditures in 2020 as a result of the COVID-19 pandemic.~~

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

Cash ~~from~~used in financing activities was ~~$2.3~~$281 million during the first six months of 2021 compared to cash provided by financing activities of $1.1 billion during the same period in 2020. During the first ~~nine~~six months of ~~2020~~2021, we utilized cash on hand to repay $681 million of outstanding long-term debt, compared to ~~cash used for financing activities~~payments of ~~$538~~$125 million during the same period in ~~2019. During the first nine months of 2020, we had~~2020. These payments were offset by proceeds from debt issuances of ~~$2.6 billion, including funding from the EETC,~~$363 million, primarily a result of the loan portion of the proceeds from the ~~PSP and $135 million drawn on the~~ CARES Act ~~secured term loan. These proceeds were partially offset by debt payments of $238 million, dividend payments totaling $45 million, and $31 million~~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 ~~September~~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 ~~September~~June 30, ~~2020:~~

Actual Fleet Anticipated Fleet Activity
Aircraft September 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)
41 — — 41 (7) 34
A321neo 10 — — 10 — 10
Total Mainline Fleet 217 3 — 220 8 228
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 311 3 — 314 8 322
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 previously reflected in 2020 were originally contracted for delivery in 2019~~Anticipated fleet activity reflects intended early retirement and ~~delayed due to the MAX grounding, and~~extensions or replacement of certain leases, not all of which have been ~~shifted to 2020, but are not expected to enter revenue service until 2021. Seven B737 MAX9 deliveries originally~~ contracted ~~for 2020 have been shifted to 2021 based on our current estimate of expected delivery dates. The Company continues to discuss delivery timelines with Boeing.~~yet.

(b)Actual fleet at ~~September~~June 30, ~~2020,~~2021, excluding 20 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
Fourth Quarter 2020 90 $64 $2
Full Year 2020 90 $64 $2
First Quarter 2021 60 $62 $2
Second Quarter 2021 65 $60 $2
Third Quarter 2021 55 $56 $2
Fourth Quarter 2021 35 $50 $3
Full Year 2021 215 $58 $2
First Quarter 2022 15 $51 $3
Full Year 2022 15 $51 $3


	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 ~~September~~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 $ 73 $ 1,201 $ 393 $ 357 $ 265 $ 1,568 $ 3,857
Aircraft lease commitments 88 310 276 219 166 679 1,738
Facility lease commitments 3 9 8 7 7 84 118
Aircraft maintenance deposits 7 35 45 24 6 2 119
Aircraft purchase commitments (a)
343 549 333 192 21 25 1,463
Interest obligations (b)
16 118 88 75 63 153 513
Other obligations (c)
39 181 185 190 197 910 1,702
Total $ 569 $ 2,403 $ 1,328 $ 1,064 $ 725 $ 3,421 $ 9,510


(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 ~~September~~June 30, ~~2020.~~2021.

~~(c)~~(d)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.

During the nine months ended September 30, 2020, 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. ~~Given our current expectation of operating losses for the remainder of the year, we expect to file for a cash refund for the 2020 tax year.~~

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three months ended ~~September~~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

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

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

4642


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.

4743


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of ~~September~~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 ~~September~~June 30, ~~2020.~~2021.

Changes in Internal Control over Financial Reporting

~~In the quarter ended September 30, 2020, the Company implemented a new revenue accounting system, and updated the relevant control structure. Other than this implementation, there~~There have been no changes in the Company’s internal controls over financial reporting during the quarter ended ~~September~~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).

4844

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. Our operations could be negatively affected further if our employees are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to additional governmental COVID-19 curfews or “shelter

in place” health orders or similar restrictions. Measures restricting the ability of our airport or inflight employees to come to work may cause a further deterioration in our service or operations, all of which could negatively affect 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.~~

The CARES Act was signed into law on March 27, 2020, providing U.S. airlines and related businesses 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, Alaska Airlines, Horizon Air, and McGee entered agreements with the United States Department of the Treasury (Treasury) to secure approximately $1 billion of funding under the CARES Act payroll support program (PSP), of which $290 million is in the form of an unsecured senior term loan payable over ten years. PSP proceeds must be used exclusively for employee payroll and benefits expenses in accordance with the terms and conditions of the PSP agreements and the applicable provisions of the CARES Act.

In the third quarter of 2020, the Company and its airline subsidiaries entered agreements with the Treasury to obtain access to term loans of approximately $1.3 billion under the CARES Act loan program. Funds drawn under the loan program must be secured with assets owned by Alaska Airlines or Horizon Air. In October of 2020, Treasury informed the Company it would amend these agreements to increase the total amount of available secured loan funds to $1.9 billion.

To date, the Company has drawn $135 million from the loan facility, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021. All proceeds must be used for general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreements and the applicable provisions of the CARES Act. All borrowings are pre-payable in whole or in part and are ultimately due and payable on September 26, 2025 (or March 28, 2025 with respect to the portion of the loan, if any, secured with certain loyalty program assets).

~~In addition to repayment commitments, we are subject to the following conditions under our CARES Act PSP and loan agreements:~~

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

•Alaska Airlines and Horizon Air had to maintain DOT-prescribed levels of air service to markets they served as of March 1, 2020, through September 30, 2020 (subject to extension through March 1, 2022);

•~~The Company may not repurchase its common stock or pay dividends on its common stock until the later of September 30, 2021, or one year after secured loan funds are repaid;~~

•~~The Company must meet minimum liquidity and collateral coverage ratio requirements until the secured loan funds are repaid;~~

•Compensation and severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through the later of March 24, 2022, or one year after secured loan funds are repaid; and

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

These conditions may adversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate at market-competitive levels and retain key personnel.2020.


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

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.

~~On September 30, 2020,~~In the second quarter of 2021, the Company issued ~~the New PSP Warrant (as defined in Item 5. “Other Information” below)~~271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the ~~payroll support program~~Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of ~~915,929~~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 ~~$31.61~~$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”).

In addition, in connection with increases on September 28, 2020 and October 30, 2020 in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, the Company may issue the Additional Loan Program Warrants (as defined in Item 5. “Other Information” below) to Treasury pursuant to the loan program, resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program. A warrant to purchase 427,080 shares of the Company’s common stock was issued on September 28, 2020. Additional warrants will be issued to Treasury in conjunction with each new borrowing under the A&R Loan Agreement (as defined in Item 5. “Other Information” below). Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were or, when issued will be, issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

On September 30, 2020, the Company and Treasury agreed to an increase of $28.7 million in the payroll support available to Alaska Airlines and Horizon under the payroll support program (PSP) under the CARES Act, which resulted in an increase in the unsecured term loan borrowed from Treasury by approximately $8.6 million, bringing the total amount in unsecured funds borrowed from Treasury under the payroll support program for Alaska Airlines and Horizon to approximately $280.8 million (the “New Maximum Alaska Airlines Loan Amount”). As a result of this increase, on September 30, 2020, the Company issued additional warrants to Treasury to purchase 27,258 shares of the Company’s common stock (the “New PSP Warrant”).None.

In addition, on September 28, 2020, the Company, Alaska Airlines and Treasury agreed to an increase of $173 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in an initial aggregate lender commitment of $1,301 million. On October 30, 2020, the Company, Alaska Airlines and Treasury agreed to a further increase of $627 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in a new aggregate initial lender commitment of $1,928 million under such program. In connection with the new aggregate initial lender commitment, Alaska Airlines, as Borrower, the Company, as Parent, the guarantors party thereto from time to time, the Treasury, as the initial lender, and Bank of New York Mellon, as administrative agent and collateral agent, entered into a Restatement Agreement (the “Restatement Agreement”) to amend and restate the Loan and Guarantee Agreement (the “A&R Loan Agreement”), and Alaska Airlines, Horizon and, in each case, the guarantors party thereto each entered into an amended and restated Pledge and Security Agreement (together, the “A&R Pledge and Security Agreements”) relating to the collateral that secure the new aggregate initial lender commitment pursuant to the A&R Loan Agreement. As a result of the increases in the aggregate initial lender commitment, additional warrants to purchase 2,530,845 shares of the Common Stock are issuable by the Company to Treasury from time to time in connection with borrowings made pursuant to the A&R Loan Agreement (the “Additional Loan Program Warrants”), resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program.

On November 4, 2020, the Board of Directors (the “Board”) adopted resolutions (the “Resolutions”) pursuant to Section 204 of the General Corporation Law of the State of Delaware, which Resolutions ratify, confirm and approve the additional corporate actions taken on September 28, 2020, September 30, 2020 and October 30, 2020 as described above. Specifically, the Resolutions ratify, confirm and approve: (i) the New Maximum Alaska Airlines Loan Amount, the issuance to Treasury of the New PSP Warrant and the issuance of shares of the Company’s common stock upon exercise of the New PSP Warrant; and (ii) the New Initial Lender Commitment, including the execution, delivery and performance of the Restatement Agreement, the A&R Loan Agreement, the A&R Pledge and Security Agreements and all additional loan documents required to be executed or otherwise related to such agreements, as well as the transactions contemplated by such loan documents, the issuance to Treasury of the Additional Loan Program Warrants and the issuance of shares of the Company’s common stock upon exercise of the Additional Loan Program Warrants. Pursuant to the Resolutions, the Board ratified the foregoing corporate actions because it determined that such actions may not have been approved by the Board. Any claim that the defective corporate acts or putative stock ratified by the Board are void or voidable due to the failure of authorization specified in the Resolutions, or that the Delaware Court of Chancery should declare in its discretion that the ratification thereof not be effective or be effective only on certain conditions, must be brought within 120 days from the later of the validation effective time (which is November 4, 2020), and the giving of this notice (which is deemed given on the date that this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission).


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

~~November 5, 2020~~August 3, 2021

5346

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
4.1
Pass Through Trust Agreement, dated as of July 2, 2020, between Alaska Airlines, Horizon and U.S. Bank Trust National Association. *
8-K July 6, 2020 4.1
4.2
Trust Supplement No. 2020-1A, dated as of July 2, 2020, between Alaska Airlines, Horizon and U.S. Bank Trust National Association, as Class A Trustee, to the Pass Through Trust Agreement dated as of July 2, 2020.
8-K July 6, 2020 4.2
4.3
Trust Supplement No. 2020-1B, dated as of July 2, 2020, between Alaska Airlines, Horizon and U.S. Bank Trust National Association, as Class B Trustee, to the Pass Through Trust Agreement dated as of July 2, 2020.
8-K July 6, 2020 4.3
4.4
Guarantee from Alaska Air Group, Inc., as Guarantor, to U.S. Bank Trust National Association, as Pass Through Trustee under the Class A Pass Through Trust Agreement, Pass Through Trustee under the Class B Pass Through Trust Agreement, Subordination Agent and Loan Trustee, dated as of July 2, 2020. *
8-K July 6, 2020 4.4
4.5
Guarantee from Alaska Airlines Inc., as Guarantor, to U.S. Bank Trust National Association, as Pass Through Trustee under the Class A Pass Through Trust Agreement, Pass Through Trustee under the Class B Pass Through Trust Agreement, Subordination Agent and Loan Trustee, dated as of July 2, 2020. *
8-K July 6, 2020 4.5
4.6
Guarantee from Horizon Air Industries, Inc., as Guarantor, to U.S. Bank Trust National Association, as Pass Through Trustee under the Class A Pass Through Trust Agreement, Pass Through Trustee under the Class B Pass Through Trust Agreement, Subordination Agent and Loan Trustee, dated as of July 2, 2020. *
8-K July 6, 2020 4.6
4.7
Form of Pass Through Trust Certificate, Series 2020-1A (included in Exhibit A to Exhibit 4.2)
8-K July 6, 2020 4.7
4.8
Form of Pass Through Trust Certificate, Series 2020-1B (included in Exhibit A to Exhibit 4.3)
8-K July 6, 2020 4.8
4.9
Intercreditor Agreement (2020-1), dated as of July 2, 2020, among U.S. Bank Trust National Association, as Trustee of the Alaska Air Pass Through Trust 2020-1A and the Alaska Air Pass Through Trust 2020-1B, Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider and Class B Liquidity Provider, and U.S. Bank Trust National Association, as Subordination Agent. *
8-K July 6, 2020 4.9
4.10
Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider. *
8-K July 6, 2020 4.10
4.11
Revolving Credit Agreement (2020-1B), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1B and as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class B Liquidity Provider. *
8-K July 6, 2020 4.11
4.12
Participation Agreement (N568AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, **
8-K July 6, 2020 4.12
4.13
Indenture and Security Agreement (N568AS), dated as of July 2, 2020, between Alaska Airlines and U.S. Bank Trust National Association, as Loan Trustee. *, **
8-K July 6, 2020 4.13
4.14
Participation Agreement (N494AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, ***
8-K July 6, 2020 4.14
4.15
Indenture and Security Agreement (N494AS), dated as of July 2, 2020, between Alaska Airlines and U.S. Bank Trust National Association, as Loan Trustee. *, ***
8-K July 6, 2020 4.15
4.16
Participation Agreement (N626QX), dated as of July 2, 2020, among Horizon U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, ****
8-K July 6, 2020 4.16
4.17
Indenture and Security Agreement (N626QX), dated as of July 2, 2020, between Horizon and U.S. Bank Trust National Association, as Loan Trustee. *, ****
8-K July 6, 2020 4.17

4.18
Form of Series 2020-1 Equipment Notes issued by Alaska Airlines (included in Exhibits 4.13 and 4.15).
8-K July 6, 2020 4.18
4.19
Form of Series 2020-1 Equipment Notes issued by Horizon (included in Exhibit 4.17).
8-K July 6, 2020 4.19
4.20†
Closing Date Warrant to Purchase Common Stock, dated September 28, 2020.
10-Q
4.21†
Warrant Agreement, dated September 28, 2020, between Alaska Air Group, Inc. and the United States Department of the Treasury
10-Q
4.22†
Alaska Airlines Loyalty Program Pledge and Security Agreement, dated as of September 28, 2020.*
10-Q
4.23†
Alaska Airlines Aircraft and Engine Pledge and Security Agreement dated as of September 28, 2020 .
10-Q
4.24†
Amended and Restated Horizon Aircraft, Engine, and Propeller Pledge and Security Agreement dated as of October 30, 2020 .
10-Q
10.1†
Loan and Guarantee Agreement, dated as of September 28, 2020, among Alaska Airlines, Inc., as Borrower, the Guarantors party hereto from time to time, the United States Department of the Treasury, and The Bank of New York Mellon, as Administrative Agent and Collateral Agent
10-Q
10.2†
Loan and Guarantee Agreement, dated as of September 28, 2020, and amended and restated as of October 30, 2020 among Alaska Airlines, Inc., as Borrower, the Guarantors party hereto from time to time, the United States Department of the Treasury, and The Bank of New York Mellon, as Administrative Agent and Collateral Agent
10-Q
10.3†
Restatement Agreement, dated as of October 30, 2020, to that certain Loan and Guarantee Agreement, dated as of September 28, 2020.
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
99.1
Schedule I**.
8-K July 6, 2020 99.1
99.2
Schedule II***.
8-K July 6, 2020 99.2
99.3
Schedule III****.
8-K July 6, 2020 99.3
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 information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and it (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.
** Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.1 filed herewith contains a list of documents applicable to the Boeing 737-890 Aircraft (other than the Aircraft bearing U.S. Registration No. N568AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.12 and 4.13, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-890 Aircraft. Exhibit 99.1 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.12 and 4.13 with respect to the Aircraft bearing U.S. Registration No. N568AS.
*** Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.2 filed herewith contains a list of documents applicable to the Boeing 737-990ER Aircraft (other than the Aircraft bearing U.S. Registration No. N494AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.14 and 4.15, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-990ER Aircraft. Exhibit 99.2 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.14 and 4.15 with respect to the Aircraft bearing U.S. Registration No. N494AS.

~~****~~

Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.3 filed herewith contains a list of documents applicable to the Embraer E175 LR Aircraft (other than the Aircraft bearing U.S. Registration No. N626QX) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.16 and 4.17, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Embraer E175 LR Aircraft. Exhibit 99.3 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.16 and 4.17 with respect to the Aircraft bearing U.S. Registration No. N626QX.

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.

5647


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	2622
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4743
ITEM 4.	CONTROLS AND PROCEDURES	4844
PART II.	OTHER INFORMATION	4945
ITEM 1.	LEGAL PROCEEDINGS	4945
ITEM 1A.	RISK FACTORS	4945
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5145
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5145
ITEM 4.	MINE SAFETY DISCLOSURES	5246
ITEM 5.	OTHER INFORMATION	5246
ITEM 6.	EXHIBITS	5346
	SIGNATURES	5346


	Airbus Aircraft		Q400 Aircraft		Total Impairment
Aircraft and other flight equipment, net	$	132	$	58	$	190
Operating lease assets	62		0		62
Inventory and supplies - net	2		0		2
Prepaid expenses and other current assets	0		3		3
Other accrued liabilities	78		0		78
Total impairment charges - Long-lived assets	$	274	$	61	$	335


	September 30, 2020		December 31, 2019
Fixed-rate debt at cost	$	1,889	$	473
Non-recurring purchase price accounting fair value adjustment	2		2
Total fixed-rate debt	$	1,891	$	475

Estimated fair value	$	1,960	$	483


	Total
Remainder of 2020	$	73
2021	1,201
2022	393
2023	357
2024	265
Thereafter	1,568
Total	$	3,857


	Aircraft Commitments(a)		Capacity Purchase Agreements (b)		Aircraft Maintenance Deposits
Remainder of 2020	$	343	$	36	$	7
2021	549		166		35
2022	333		174		45
2023	192		179		24
2024	21		184		6
Thereafter	25		880		2
Total	$	1,463	$	1,619	$	119


	Three Months Ended September 30, 2020
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	401	$	171	$	0	$	0	$	572	$	0	$	572
CPA revenues	0		0		95		(95)		0		0		0
Mileage Plan other revenue	65		19		0		0		84		0		84
Cargo and other	45		0		0		0		45		0		45
Total Operating Revenues	511		190		95		(95)		701		0		701
Operating Expenses
Operating expenses, excluding fuel	872		248		78		(97)		1,101		46		1,147
Economic fuel	90		38		0		0		128		(3)		125
Total Operating Expenses	962		286		78		(97)		1,229		43		1,272
Nonoperating Income (Expense)
Interest income	8		0		0		(1)		7		0		7
Interest expense	(28)		0		(6)		0		(34)		0		(34)
Interest capitalized	4		0		0		0		4		0		4
Other - net	4		0		0		1		5		0		5
Total Nonoperating Income (Expense)	(12)		0		(6)		0		(18)		0		(18)
Income (Loss) Before Income Tax	$	(463)	$	(96)	$	11	$	2	$	(546)	$	(43)	$	(589)

	Three Months Ended September 30, 2019
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	1,850	$	361	$	0	$	0	$	2,211	$	0	$	2,211
CPA revenues	0		0		112		(112)		0		0		0
Mileage Plan other revenue	107		11		0		0		118		0		118
Cargo and other	58		1		0		1		60		—		60
Total Operating Revenues	2,015		373		112		(111)		2,389		0		2,389
Operating Expenses
Operating expenses, excluding fuel	1,226		275		94		(119)		1,476		5		1,481
Economic fuel	411		75		0		0		486		0		486
Total Operating Expenses	1,637		350		94		(119)		1,962		5		1,967
Nonoperating Income (Expense)
Interest income	17		0		0		(6)		11		0		11
Interest expense	(18)		0		(7)		7		(18)		0		(18)
Interest capitalized	4		0		0		0		4		0		4
Other - net	(3)		0		0		0		(3)		0		(3)
Total Nonoperating Income (Expense)	0		0		(7)		1		(6)		0		(6)
Income (Loss) Before Income Tax	$	378	$	23	$	11	$	9	$	421	$	(5)	$	416


	Actual Fleet	Anticipated Fleet Activity
Aircraft	September 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)	41	—	—	41	(7)	34
A321neo	10	—	—	10	—	10
Total Mainline Fleet	217	3	—	220	8	228
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	311	3	—	314	8	322