UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 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 ~~125,232,721~~125,310,668 common shares, par value $0.01, outstanding at ~~July 31,~~October 29, 2021.

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

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~JUNE~~SEPTEMBER 30, 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, ~~2020.~~2020, and Item 1A. "Risk Factors" of Part II of this Form 10-Q. Please consider our forward-looking statements in light of those risks as you read this report.

PART I


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	September 30, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	1,025	$	1,370	Cash and cash equivalents	$	495	$	1,370
Marketable securities	Marketable securities	2,926		1,976		Marketable securities	2,700		1,976
Total cash and marketable securities	Total cash and marketable securities	3,951		3,346		Total cash and marketable securities	3,195		3,346
Receivables - net	Receivables - net	567		480		Receivables - net	536		480
Inventories and supplies - net	Inventories and supplies - net	52		57		Inventories and supplies - net	62		57
Prepaid expenses, assets held-for-sale, and other current assets	Prepaid expenses, assets held-for-sale, and other current assets	201		123		Prepaid expenses, assets held-for-sale, and other current assets	208		123
Total Current Assets	Total Current Assets	4,771		4,006		Total Current Assets	4,001		4,006

Property and Equipment	Property and Equipment					Property and Equipment
Aircraft and other flight equipment	Aircraft and other flight equipment	7,996		7,761		Aircraft and other flight equipment	8,076		7,761
Other property and equipment	Other property and equipment	1,433		1,398		Other property and equipment	1,446		1,398
Deposits for future flight equipment	Deposits for future flight equipment	402		583		Deposits for future flight equipment	378		583
		9,831		9,742			9,900		9,742
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	3,703		3,531		Less accumulated depreciation and amortization	3,780		3,531
Total Property and Equipment - Net	Total Property and Equipment - Net	6,128		6,211		Total Property and Equipment - Net	6,120		6,211

Operating lease assets	Operating lease assets	1,375		1,400		Operating lease assets	1,370		1,400
Goodwill	Goodwill	1,943		1,943		Goodwill	1,943		1,943
Intangible assets - net	Intangible assets - net	103		107		Intangible assets - net	102		107
Other noncurrent assets	Other noncurrent assets	336		379		Other noncurrent assets	346		379
Other Assets	Other Assets	3,757		3,829		Other Assets	3,761		3,829

Total Assets	Total Assets	$	14,656	$	14,046	Total Assets	$	13,882	$	14,046

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	June 30, 2021		December 31, 2020		(in millions, except share amounts)	September 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	$	159	$	108	Accounts payable	$	181	$	108
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	439		527		Accrued wages, vacation and payroll taxes	426		527
Air traffic liability	Air traffic liability	1,533		1,073		Air traffic liability	1,225		1,073

Other accrued liabilities	Other accrued liabilities	661		424		Other accrued liabilities	603		424
Deferred revenue	Deferred revenue	922		733		Deferred revenue	904		733
Current portion of operating lease liabilities	Current portion of operating lease liabilities	263		290		Current portion of operating lease liabilities	260		290
Current portion of long-term debt	Current portion of long-term debt	869		1,138		Current portion of long-term debt	425		1,138
Total Current Liabilities	Total Current Liabilities	4,846		4,293		Total Current Liabilities	4,024		4,293

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	2,319		2,357		Long-Term Debt, Net of Current Portion	2,225		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	1,222		1,268		Long-term operating lease liabilities, net of current portion	1,206		1,268
Deferred income taxes	Deferred income taxes	439		407		Deferred income taxes	501		407
Deferred revenue	Deferred revenue	1,424		1,544		Deferred revenue	1,446		1,544
Obligation for pension and postretirement medical benefits	Obligation for pension and postretirement medical benefits	660		665		Obligation for pension and postretirement medical benefits	558		665
Other liabilities	Other liabilities	422		524		Other liabilities	391		524
		4,167		4,408			4,102		4,408
Commitments and Contingencies	Commitments and Contingencies	0		0		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		0		0
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
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding						Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—		—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,655,235 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,305,291 shares; 2020 - 124,217,590 shares						Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,655,235 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,305,291 shares; 2020 - 124,217,590 shares	1		1
Capital in excess of par value	Capital in excess of par value	454		391		Capital in excess of par value	462		391
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)		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	(487)		(494)		Accumulated other comprehensive loss	(482)		(494)
Retained earnings	Retained earnings	4,030		3,764		Retained earnings	4,224		3,764
		3,324		2,988			3,531		2,988
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	14,656	$	14,046	Total Liabilities and Shareholders' Equity	$	13,882	$	14,046

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	(in millions, except per share amounts)	2021		2020		2021		2020		(in millions, except per share amounts)	2021		2020		2021		2020
Operating Revenues	Operating Revenues									Operating Revenues
Passenger revenue	Passenger revenue	$	1,352	$	309	$	2,011	$	1,790	Passenger revenue	$	1,774	$	572	$	3,785	$	2,362
Mileage Plan other revenue	Mileage Plan other revenue	118		73		212		182		Mileage Plan other revenue	120		84		332		266
Cargo and other	Cargo and other	57		39		101		85		Cargo and other	59		45		160		130
Total Operating Revenues	Total Operating Revenues	1,527		421		2,324		2,057		Total Operating Revenues	1,953		701		4,277		2,758
Operating Expenses	Operating Expenses									Operating Expenses
Wages and benefits	Wages and benefits	510		472		1,003		1,084		Wages and benefits	578		495		1,581		1,579
Variable incentive pay	Variable incentive pay	34		16		67		23		Variable incentive pay	42		42		109		65
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(503)		(362)		(914)		(362)		Payroll Support Program grant wage offset	—		(398)		(914)		(760)
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	274		59		477		443		Aircraft fuel, including hedging gains and losses	376		125		853		568
Aircraft maintenance	Aircraft maintenance	102		45		183		160		Aircraft maintenance	89		84		272		244
Aircraft rent	Aircraft rent	62		74		124		155		Aircraft rent	64		74		188		229
Landing fees and other rentals	Landing fees and other rentals	144		83		273		214		Landing fees and other rentals	141		109		414		323
Contracted services	Contracted services	54		30		105		102		Contracted services	62		36		167		138
Selling expenses	Selling expenses	41		4		74		59		Selling expenses	49		24		123		83
Depreciation and amortization	Depreciation and amortization	98		107		195		215		Depreciation and amortization	99		105		294		320
Food and beverage service	Food and beverage service	35		7		58		56		Food and beverage service	39		14		97		70
Third-party regional carrier expense	Third-party regional carrier expense	37		26		67		63		Third-party regional carrier expense	39		29		106		92
Other	Other	117		78		222		221		Other	126		89		348		310
Special items - impairment charges and other	Special items - impairment charges and other	(4)		69		14		229		Special items - impairment charges and other	(9)		121		5		350
Special items - restructuring charges	Special items - restructuring charges	(23)		0		(12)		0		Special items - restructuring charges	—		322		(12)		322
Special items - merger-related costs	Special items - merger-related costs	0		1		0		4		Special items - merger-related costs	—		1		—		5
Total Operating Expenses	Total Operating Expenses	978		709		1,936		2,666		Total Operating Expenses	1,695		1,272		3,631		3,938
Operating Income (Loss)	Operating Income (Loss)	549		(288)		388		(609)		Operating Income (Loss)	258		(571)		646		(1,180)
Nonoperating Income (Expense)	Nonoperating Income (Expense)									Nonoperating Income (Expense)
Interest income	Interest income	6		7		13		16		Interest income	6		7		19		23
Interest expense	Interest expense	(39)		(17)		(71)		(30)		Interest expense	(30)		(34)		(101)		(64)
Interest capitalized	Interest capitalized	3		1		6		4		Interest capitalized	3		4		9		8
Other - net	Other - net	9		6		19		11		Other - net	8		5		27		16
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(21)		(3)		(33)		1		Total Nonoperating Income (Expense)	(13)		(18)		(46)		(17)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	528		(291)		355		(608)		Income (Loss) Before Income Tax	245		(589)		600		(1,197)
Income tax expense (benefit)	Income tax expense (benefit)	131		(77)		89		(162)		Income tax expense (benefit)	51		(158)		140		(320)
Net Income (Loss)	Net Income (Loss)	$	397	$	(214)	$	266	$	(446)	Net Income (Loss)	$	194	$	(431)	$	460	$	(877)

Basic Income (Loss) Per Share:	Basic Income (Loss) Per Share:	$	3.18	$	(1.74)	$	2.13	$	(3.62)	Basic Income (Loss) Per Share:	$	1.55	$	(3.49)	$	3.69	$	(7.12)
Diluted Income (Loss) Per Share:	Diluted Income (Loss) Per Share:	$	3.13	$	(1.74)	$	2.10	$	(3.62)	Diluted Income (Loss) Per Share:	$	1.53	$	(3.49)	$	3.64	$	(7.12)
Shares used for computation:	Shares used for computation:									Shares used for computation:
Basic	Basic	124.977		123.296		124.640		123.058		Basic	125.250		123.647		124.846		123.255
Diluted	Diluted	126.825		123.296		126.388		123.058		Diluted	127.188		123.647		126.325		123.255

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Net Income (Loss)	Net Income (Loss)	$	397	$	(214)	$	266	$	(446)	Net Income (Loss)	$	194	$	(431)	$	460	$	(877)

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	0		31		(11)		30		Unrealized holding gain (loss) arising during the period	(4)		2		(15)		32
Reclassification of gain into Other - net nonoperating income	Reclassification of gain into Other - net nonoperating income	(2)		(6)		(6)		(9)		Reclassification of gain into Other - net nonoperating income	—		(2)		(6)		(11)
Income tax effect	Income tax effect	1		(6)		4		(5)		Income tax effect	1		—		5		(5)
Total	Total	(1)		19		(13)		16		Total	(3)		—		(16)		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	Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income	9		8		17		15		Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income	8		7		25		22
Income tax effect	Income tax effect	(2)		(2)		(4)		(4)		Income tax effect	(2)		(1)		(6)		(5)
Total	Total	7		6		13		11		Total	6		6		19		17

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	1		(2)		9		(27)		Unrealized holding gain (loss) arising during the period	2		2		11		(25)
Reclassification of loss into Aircraft rent	Reclassification of loss into Aircraft rent	0		0		0		1		Reclassification of loss into Aircraft rent	—		1		—		2
Income tax effect	Income tax effect	0		1		(2)		6		Income tax effect	—		(1)		(2)		5
Total	Total	1		(1)		7		(20)		Total	2		2		9		(18)

Other Comprehensive Income	Other Comprehensive Income	7		24		7		7		Other Comprehensive Income	5		8		12		15

Comprehensive Income (Loss)	Comprehensive Income (Loss)	$	404	$	(190)	$	273	$	(439)	Comprehensive Income (Loss)	$	199	$	(423)	$	472	$	(862)

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		123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331
Balances at December 31, 2020															Balances at December 31, 2020	124.217	$	1	$	391	$	(674)	$	(494)	$	3,764	$	2,988
Net loss															Net loss	—	—		—		—		—		(131)		(131)
Other comprehensive income															Other comprehensive income	—	—		—		—		—		—		—

Net loss		—	—		—		—		—		(232)		(232)
Other comprehensive loss		—	—		—		—		(17)		—		(17)
Common stock repurchase		(0.538)	—		—		(31)		—		—		(31)
Stock-based compensation	Stock-based compensation	—	—		9		—		—		—		9		Stock-based compensation	—	—		12		—		—		—		12
CARES Act warrant issuance															CARES Act warrant issuance	—	—		8		—		—		—		8

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

Stock issued under stock plans	Stock issued under stock plans	0.123	—		—		—		—		—		0		Stock issued under stock plans	0.225	—		(2)		—		—		—		(2)
Balance at March 31, 2020		122.585	$	1	$	314	$	(674)	$	(482)	$	4,856	$	4,015
Net loss		—	—		—		—		—		(214)		(214)
Balances at March 31, 2021															Balances at March 31, 2021	124.442	$	1	$	409	$	(674)	$	(494)	$	3,633	$	2,875
Net income															Net income	—	—		—		—		—		397		397
Other comprehensive income	Other comprehensive income	—	—		—		—		24		—		24		Other comprehensive income	—	—		—		—		7		—		7

Stock-based compensation	Stock-based compensation	—	—		2		—		—		—		2		Stock-based compensation	0.009	—		13		—		—		—		13
CARES Act warrant issuance	CARES Act warrant issuance	—	—		7		—		—		—		7		CARES Act warrant issuance	—	—		8		—		—		—		8

Stock issued for employee stock purchase plan	Stock issued for employee stock purchase plan	1.000	—		27		—		—		—		27		Stock issued for employee stock purchase plan	0.716	—		23		—		—		—		23
Stock issued under stock plans	Stock issued under stock plans	0.054	—		0		—		—		—		0		Stock issued under stock plans	0.062	—		1		—		—		—		1
Balances at June 30, 2020		123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861
Balances at June 30, 2021															Balances at June 30, 2021	125.229	$	1	$	454	$	(674)	$	(487)	$	4,030	$	3,324
Net income															Net income	—	—		—		—		—		194		194
Other comprehensive income															Other comprehensive income	—	—		—		—		5		—		5

Stock-based compensation															Stock-based compensation	—	—		10		—		—		—		10

Stock issued under stock plans															Stock issued under stock plans	0.076	—		(2)		—		—		—		(2)
Balances at September 30, 2021															Balances at September 30, 2021	125.305	$	1	$	462	$	(674)	$	(482)	$	4,224	$	3,531


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

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

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

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


		Six Months Ended June 30,					Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		(in millions)	2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net Income (Loss)	Net Income (Loss)	$	266	$	(446)	Net Income (Loss)	$	460	$	(877)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	Adjustments to reconcile net income (loss) to net cash provided by operating activities:					Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	195		215		Depreciation and amortization	294		320
Stock-based compensation and other	Stock-based compensation and other	24		7		Stock-based compensation and other	35		14
Special items - impairment charges and other	Special items - impairment charges and other	14		229		Special items - impairment charges and other	5		350
Special items - restructuring charges	Special items - restructuring charges	(12)		0		Special items - restructuring charges	(12)		322
Changes in certain assets and liabilities:	Changes in certain assets and liabilities:					Changes in certain assets and liabilities:
Changes in deferred tax provision	Changes in deferred tax provision	33		(98)		Changes in deferred tax provision	95		(220)
Increase in air traffic liability	Increase in air traffic liability	460		231		Increase in air traffic liability	152		171
Increase in deferred revenue	Increase in deferred revenue	69		84		Increase in deferred revenue	73		193
Pension contribution						Pension contribution	(100)		—
Other - net	Other - net	(42)		99		Other - net	(101)		(157)
Net cash provided by operating activities	Net cash provided by operating activities	1,007		321		Net cash provided by operating activities	901		116
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Property and equipment additions:	Property and equipment additions:					Property and equipment additions:
Aircraft and aircraft purchase deposits	Aircraft and aircraft purchase deposits	(30)		(58)		Aircraft and aircraft purchase deposits	(52)		(61)
Other flight equipment	Other flight equipment	(38)		(43)		Other flight equipment	(78)		(49)
Other property and equipment	Other property and equipment	(34)		(67)		Other property and equipment	(60)		(94)
Total property and equipment additions, including capitalized interest	Total property and equipment additions, including capitalized interest	(102)		(168)		Total property and equipment additions, including capitalized interest	(190)		(204)
Purchases of marketable securities	Purchases of marketable securities	(2,524)		(1,004)		Purchases of marketable securities	(3,413)		(2,092)
Sales and maturities of marketable securities	Sales and maturities of marketable securities	1,561		1,038		Sales and maturities of marketable securities	2,669		1,520
Other investing activities	Other investing activities	(5)		10		Other investing activities	(9)		9
Net cash used in investing activities	Net cash used in investing activities	(1,070)		(124)		Net cash used in investing activities	(943)		(767)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from issuance of debt	Proceeds from issuance of debt	363		1,265		Proceeds from issuance of debt	363		2,581
Common stock repurchases	Common stock repurchases	0		(31)		Common stock repurchases	—		(31)
Dividends paid	Dividends paid	0		(45)		Dividends paid	—		(45)
Long-term debt payments	Long-term debt payments	(681)		(125)		Long-term debt payments	(1,222)		(238)
Other financing activities	Other financing activities	37		27		Other financing activities	34		19
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(281)		1,091		Net cash provided by (used in) financing activities	(825)		2,286
Net increase (decrease) in cash, cash equivalents, and restricted cash	Net increase (decrease) in cash, cash equivalents, and restricted cash	(344)		1,288		Net increase (decrease) in cash, cash equivalents, and restricted cash	(867)		1,635
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period	1,386		232		Cash, cash equivalents, and restricted cash at beginning of period	1,386		232
Cash, cash equivalents, and restricted cash at end of the period	Cash, cash equivalents, and restricted cash at end of the period	$	1,042	$	1,520	Cash, cash equivalents, and restricted cash at end of the period	$	519	$	1,867

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

910


	Nine Months Ended September 30,
(in millions)	2021		2020
Cash paid during the period for:
Interest (net of amount capitalized)	$	100	$	38
Income taxes	—		—

Non-cash transactions:
Right-of-use assets acquired through operating leases	$	126	54

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	$	495	$	1,855
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets	24		12
Total cash, cash equivalents, and restricted cash at end of the period	$	519	$	1,867

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, 2020. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of ~~June~~September 30, 2021 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 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 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 ~~six~~nine months ended ~~June~~September 30, 2021 are not necessarily indicative of operating results for the entire year.

NOTE 2. COVID-19 PANDEMIC

The public health and economic crisis resulting from the outbreak of COVID-19 in the first quarter of 2020 continues to have a significant impact on the Company. 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 continues to fly less capacity than it had pre-pandemic.

Beginning in 2020, the Company implemented 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~~toward pre-pandemic flying levels, these programs have been adjusted to meet the needs of the airline. The impacts of these programs for the three and ~~six~~nine months ended ~~June~~September 30, 2021 are described below.

Lease Return Costs

~~The Company~~Alaska removed 40 leased ~~Aircraft~~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~~Alaska no longer expects to 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 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~~The Company continues to evaluate estimated costs to return leased aircraft, ~~was reduced by~~resulting in reductions to the related accrual of $4 ~~million.~~million in the second quarter and $9 million in the third quarter. The lease return cost estimates are based on the Company's best estimate of costs to return aircraft as of the date of this filing.

In the second quarter of 2021, ~~the Company~~Alaska initiated a plan to reactivate up to ~~twelve~~12 previously parked Airbus aircraft to support ~~the Company's~~Alaska'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 been accelerated into the second half of 2021 in response to the strong demand recovery that took place in the second quarter.The firstSix of these reactivated aircraft ~~are expected~~returned to ~~reenter revenue service beginning~~the operating fleet in the third quarter of 2021, with all 12 expected to be reactivated by the second quarter of 2022. The Company currently anticipates ~~these~~all aircraft that are temporarily being returned to service will be removed from operating service ~~beginning in late 2022 through~~by the end

of 2023. At this time, the Company does not anticipate ~~material changes~~that the return to service of these aircraft will materially change estimated lease return costs previously recorded, as leases for aircraft returning to service generally expire within a near term window.

Workforce restructuring

The ~~Company continues to expect that demand will be below pre-pandemic levels through the end of 2021, but management will continue rebuilding capacity to 2019 levels. The Company~~Company's subsidiaries reduced ~~its~~their operating workforce in 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 voluntary leave program. The Company expects all~~All employees on leave ~~to return~~returned to work by October 2021.

In 2020, as a result of these programs, the Company recorded $220 million in wage expense for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. ~~In the first quarter of~~Throughout 2021, the Company ~~refined~~continued to refine and update capacity expectations and training schedules, ~~and delayed certain recalls~~which resulted in changes 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.~~lengths. 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~~nine months ended ~~June~~September 30, 2021.

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


	~~Six~~Nine Months Ended ~~June~~September 30, 2021
Total voluntary leave liability balance at January 1	$	127
Cash payments	~~(79)~~(99)
Charges and adjustments	(12)
Total voluntary leave liability balance at ~~June~~September 30	$	3616

The outstanding accrual is ~~based~~for final payments for participants on ~~the Company's best estimate of capacity expectations and training schedules for 2021, as of the date of this filing.~~an incentive leave who will not return to active employment. The Company will make the majority of the remaining cash payments associated with this liability in 2021. The balance is reflected in accrued wages, benefits and payroll taxes on the condensed consolidated balance sheet.

CARES Act Funding

During the first quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the Treasury through an extension of the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the supporting agreements, Alaska, Horizon and ~~Horizon~~McGee received total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska, Horizon and ~~Horizon~~McGee received an additional ~~$80~~$87 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 of 2021.

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

Total funds contracted from the Treasury under the three Payroll Support Programs are 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~~were exclusively used for payment of employee salaries, wages and benefits. Upon receipt of the funds issued under PSP 3, certain conditions and restrictions were extended. These conditions include, but are not limited to, 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~~The conditions also ~~agreed to continue the~~included suspension of dividends and share repurchases ~~until~~through 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 2020, the Company eliminated ticket change fees indefinitely from ~~its~~ main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from ~~our~~the 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 level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Passenger ticket revenue, including ticket breakage and net of taxes and fees		$	1,114	$	222	$	1,639	$	1,435
Passenger ticket revenue, including ticket breakage, net of taxes and fees										Passenger ticket revenue, including ticket breakage, net of taxes and fees	$	1,483	$	459	$	3,122	$	1,894
Passenger ancillary revenue	Passenger ancillary revenue	84		31		134		147		Passenger ancillary revenue	101		49		235		196
Mileage Plan passenger revenue	Mileage Plan passenger revenue	154		56		238		208		Mileage Plan passenger revenue	190		64		428		272
Total Passenger revenue	Total Passenger revenue	$	1,352	$	309	$	2,011	$	1,790	Total Passenger revenue	$	1,774	$	572	$	3,785	$	2,362

Mileage Plan™ Loyalty Program

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Passenger revenue	Passenger revenue	$	154	$	56	$	238	$	208	Passenger revenue	$	190	$	64	$	428	$	272
Mileage Plan other revenue	Mileage Plan other revenue	118		73		212		182		Mileage Plan other revenue	120		84		332		266
Total Mileage Plan revenue	Total Mileage Plan revenue	$	272	$	129	$	450	$	390	Total Mileage Plan revenue	$	310	$	148	$	760	$	538

Cargo and Other

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Cargo revenue	Cargo revenue	$	34	$	28	$	61	$	52	Cargo revenue	$	34	$	31	$	95	$	83
Other revenue	Other revenue	23		11		40		33		Other revenue	25		14		65		47
Total Cargo and other revenue	Total Cargo and other revenue	$	57	$	39	$	101	$	85	Total Cargo and other revenue	$	59	$	45	$	160	$	130

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of ~~$36~~$101 million ~~and net refunds~~ from the prior year-end air traffic liability balance for the three months ended ~~June~~September 30, 2021 , and ~~2020, and $175~~$276 million and $484 million for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.

Given the increase in demand for air travel from the recovery from the COVID-19 pandemic, advance bookings and associated cash receipts have significantly increased in relation to prior year. The Company also experienced increased revenue recognition from credits redeemed for travel, for which the remaining balance is included inIncluded within the air traffic liability ~~balance,~~is an outstanding liability for travel credits that guests may utilize for future travel. A high volume of credits were issued in 2020 as a result of the COVID-19 pandemic, and ~~total $387 million, net of breakage.~~issuance levels in 2021 have normalized, though remain above pre-COVID levels. In April 2021, as part of the ~~Company announced updated expiration terms for these~~Company's COVID-19 relief measures, travel credits ~~extending~~that were set to expire at any point in 2021 were extended through December 31, 2021 for possible travel through November 30, 2022. As a result of improving demand, the Company has experienced increased credit redemptions in 2021. Total credits, net of breakage, included in the air traffic liability balance as of September 30, 2021 were $324 million, compared to $569 million at December 31, 2020.

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 ~~$61~~$57 million of such receivables as of ~~June~~September 30, 2021 and $48 million as of December 31, 2020. As demand for air travel ~~continues to increase unpredictably,~~remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.

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


		Six Months Ended June 30,						Nine Months Ended September 30,
			2021		2020				2021		2020
Total Deferred Revenue balance at January 1			$	2,277	$	1,990
Total Deferred revenue balance at January 1							Total Deferred revenue balance at January 1		$	2,277	$	1,990
Travel miles and companion certificate redemption - Passenger revenue	Travel miles and companion certificate redemption - Passenger revenue		(238)		(208)		Travel miles and companion certificate redemption - Passenger revenue		(428)		(272)
Miles redeemed on partner airlines - Other revenue	Miles redeemed on partner airlines - Other revenue		(17)		(21)		Miles redeemed on partner airlines - Other revenue		(30)		(21)
Increase in liability for mileage credits issued	Increase in liability for mileage credits issued		324		313		Increase in liability for mileage credits issued		531		486
Total Deferred Revenue balance at June 30			$	2,346	$	2,074
Total Deferred revenue balance at September 30							Total Deferred revenue balance at September 30		$	2,350	$	2,183

NOTE 4. FAIR VALUE MEASUREMENTS

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

Fair Value of Financial Instruments on a Recurring Basis

As of ~~June~~September 30, 2021, total cost basis for all marketable securities was ~~$2.9~~$2.7 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

1315

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


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

Assets	Assets													Assets
Marketable securities	Marketable securities													Marketable securities
U.S. government and agency securities	U.S. government and agency securities	$	298	$	0	$	298	$	407	$	0	$	407	U.S. government and agency securities	$	278	$	—	$	278	$	407	$	—	$	407
Equity mutual funds	Equity mutual funds	5		0		5		7		0		7		Equity mutual funds	6		—		6		7		—		7
Foreign government bonds	Foreign government bonds	0		31		31		0		20		20		Foreign government bonds	—		38		38		—		20		20
Asset-backed securities	Asset-backed securities	0		330		330		0		224		224		Asset-backed securities	—		337		337		—		224		224
Mortgage-backed securities	Mortgage-backed securities	0		253		253		0		290		290		Mortgage-backed securities	—		239		239		—		290		290
Corporate notes and bonds	Corporate notes and bonds	0		1,943		1,943		0		978		978		Corporate notes and bonds	—		1,736		1,736		—		978		978
Municipal securities	Municipal securities	0		66		66		0		50		50		Municipal securities	—		66		66		—		50		50
Total Marketable securities	Total Marketable securities	303		2,623		2,926		414		1,562		1,976		Total Marketable securities	284		2,416		2,700		414		1,562		1,976
Derivative instruments	Derivative instruments													Derivative instruments
Fuel hedge - call options	Fuel hedge - call options	0		92		92		0		15		15		Fuel hedge - call options	—		95		95		—		15		15

Total Assets	Total Assets	$	303	$	2,715	$	3,018	$	414	$	1,577	$	1,991	Total Assets	$	284	$	2,511	$	2,795	$	414	$	1,577	$	1,991

Liabilities	Liabilities													Liabilities
Derivative instruments	Derivative instruments													Derivative instruments

Interest rate swap agreements	Interest rate swap agreements	0		(16)		(16)		0		(25)		(25)		Interest rate swap agreements	—		(14)		(14)		—		(25)		(25)
Total Liabilities	Total Liabilities	$	0	$	(16)	$	(16)	$	0	$	(25)	$	(25)	Total Liabilities	$	—	$	(14)	$	(14)	$	—	$	(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 are determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

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

Maturities for marketable securities (in millions):


June 30, 2021		Cost Basis		Fair Value
September 30, 2021						September 30, 2021	Cost Basis		Fair Value
Due in one year or less	Due in one year or less	$	1,538	$	1,539	Due in one year or less	$	1,193	$	1,194
Due after one year through five years	Due after one year through five years	1,280		1,294		Due after one year through five years	1,409		1,418
Due after five years through 10 years	Due after five years through 10 years	88		88		Due after five years through 10 years	81		81

Total	Total	$	2,906	$	2,921	Total	$	2,683	$	2,693

1416

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: To estimate the fair value of all fixed-rate debt as of ~~June~~September 30, 2021, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of ~~$780~~$769 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.

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


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020

Total fixed-rate debt	Total fixed-rate debt	$	1,896	$	1,662	Total fixed-rate debt	$	1,828	$	1,662

Estimated fair value	Estimated fair value	$	2,019	$	1,778	Estimated fair value	$	1,949	$	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. No material impairments were recorded during the three and ~~six~~nine months ended ~~June~~September 30, 2021.

NOTE 5. LONG-TERM DEBT

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


		June 30, 2021			December 31, 2020				September 30, 2021			December 31, 2020
Fixed-rate notes payable due through 2029	Fixed-rate notes payable due through 2029	$	180		$	198		Fixed-rate notes payable due through 2029	$	169		$	198
Fixed-rate PSP notes payable due through 2031	Fixed-rate PSP notes payable due through 2031	600			290			Fixed-rate PSP notes payable due through 2031	600			290
Fixed-rate EETC payable due through 2025 & 2027	Fixed-rate EETC payable due through 2025 & 2027	1,116			1,174			Fixed-rate EETC payable due through 2025 & 2027	1,058			1,174
Variable-rate notes payable due through 2029	Variable-rate notes payable due through 2029	1,315			1,866			Variable-rate notes payable due through 2029	843			1,866
Less debt issuance costs and unamortized debt discount	Less debt issuance costs and unamortized debt discount	(23)			(33)			Less debt issuance costs and unamortized debt discount	(20)			(33)
Total debt	Total debt	3,188			3,495			Total debt	2,650			3,495
Less current portion	Less current portion	869			1,138			Less current portion	425			1,138
Long-term debt, less current portion	Long-term debt, less current portion	$	2,319		$	2,357		Long-term debt, less current portion	$	2,225		$	2,357

Weighted-average fixed-interest rate	Weighted-average fixed-interest rate	3.7		%	4.3		%	Weighted-average fixed-interest rate	3.6		%	4.3		%
Weighted-average variable-interest rate	Weighted-average variable-interest rate	1.6		%	1.9		%	Weighted-average variable-interest rate	1.2		%	1.9		%

Approximately ~~$562~~$539 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at ~~June~~September 30, 2021, resulting in an effective weighted-average interest rate for the full debt portfolio of ~~3.1%~~3.3%.

During the ~~six~~nine months ended ~~June~~September 30, 2021, the Company issued $363 million of debt, comprised of $311 million of unsecured loans from the PSP and $54 million in proceeds from issuance of debt. Debt proceeds were offset by ~~$681 million~~$1.2 billion in ~~debt~~

1517

debt payments. Included within total debt payments is the full repayment of the $135 million loan from the U.S. Treasury made available under the CARES Act, ~~and the~~ $363 million outstanding balance on two credit ~~facilities.~~facilities, and prepayment of the $425 million 364-day term loan facility.

The $600 million PSP notes are unsecured senior term 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 PSP notes are prepayable at par without penalty.

CARES Act

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

Debt Maturity

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


		Total			Total
Remainder of 2021	Remainder of 2021	$	227	Remainder of 2021	$	112
2022	2022	796		2022	371
2023	2023	334		2023	334
2024	2024	240		2024	240
2025	2025	261		2025	261
Thereafter	Thereafter	1,353		Thereafter	1,352
Total	Total	$	3,211	Total	$	2,670

Bank Lines of Credit

~~The Company~~Alaska has 3 credit facilities ~~with availability~~ totaling $486 million as of ~~June~~September 30, ~~2021, resulting from the second quarter 2021 repayment of $363 million.~~2021. One of the credit facilities for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. In October 2021, the expiry of this facility was extended to March 2025. 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 $86 million expires in June 2022 and is secured by aircraft.

~~The Company~~Alaska has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. ~~The Company~~Alaska was in compliance with this covenant at ~~June~~September 30, 2021.

NOTE 6. EMPLOYEE BENEFIT PLANS

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Service cost	Service cost	$	13	$	13	$	26	$	26	Service cost	$	13	$	11	$	39	$	37
Pension expense included in Wages and benefits	Pension expense included in Wages and benefits	13		13		26		26		Pension expense included in Wages and benefits	13		11		39		37

Interest cost	Interest cost	14		19		28		38		Interest cost	14		19		42		57
Expected return on assets	Expected return on assets	(30)		(27)		(61)		(55)		Expected return on assets	(30)		(28)		(91)		(83)

Amortization of prior service cost (credit)										Amortization of prior service cost (credit)	(1)		(1)		(1)		(1)
Recognized actuarial loss	Recognized actuarial loss	9		8		18		17		Recognized actuarial loss	9		9		27		26
Pension expense included in Nonoperating Income (Expense)	Pension expense included in Nonoperating Income (Expense)	$	(7)	$	0	$	(15)	$	0	Pension expense included in Nonoperating Income (Expense)	$	(8)	$	(1)	$	(23)	$	(1)

Alaska made a $100 million voluntary contribution to the defined benefit plan for its pilots during the three months ended September 30, 2021.

NOTE 7. COMMITMENTS AND CONTINGENCIES

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


		Aircraft Commitments(a)		Capacity Purchase Agreements (b)			Aircraft Commitments(a)		Capacity Purchase Agreements (b)
Remainder of 2021	Remainder of 2021	$	107	$	82	Remainder of 2021	$	60	$	42
2022	2022	1,458		173		2022	1,476		173
2023	2023	1,207		178		2023	1,681		178
2024	2024	291		183		2024	385		183
2025	2025	76		188		2025	79		188
Thereafter	Thereafter	12		877		Thereafter	13		877
Total	Total	$	3,151	$	1,681	Total	$	3,694	$	1,641

(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.

Aircraft Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of ~~June~~September 30, 2021, Alaska had commitments to purchase 6374 B737-9 MAX aircraft, with contracted deliveries between 2021 and 2024. Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change. Horizon also has commitments to purchase 12 E175 aircraft with deliveries between 2022 and 2025. ~~Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2027.~~ In addition, Alaska has options to purchase 3952 B737-9 MAX aircraft, and Horizon has options to purchase 21 E175 aircraft. ~~The cancelable purchase commitments and option~~Option payments are not reflected in the table above.

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.~~judgment, again without awarding injunctive relief against Alaska. 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~~Alaska 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 provisions of 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~~case. If appeal efforts are unsuccessful, compliance with the California laws may have an adverse impact on the Company's ~~other bases for appeal.~~operations and financial position.

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.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of ~~June~~September 30, 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 Issuances

As additional taxpayer protection required under PSP programs, during the ~~six~~nine months ended ~~June~~September 30, 2021 the Company granted the Treasury a total of 539,508 warrants to purchase ~~Alaska Air Group (ALK)~~ common stock. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at ~~Alaska's~~the Company's option, and have a five-year term.

Additionally, in conjunction with the October 2020 draw on the CARES Act Loan, the Company granted the Treasury 427,080 warrants to purchase ALK common stock. 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.

Total warrants outstanding are as follows as of ~~June~~September 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):


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020
Related to marketable securities	Related to marketable securities	$	10	$	23	Related to marketable securities	$	7	$	23
Related to employee benefit plans	Related to employee benefit plans	(485)		(498)		Related to employee benefit plans	(479)		(498)
Related to interest rate derivatives	Related to interest rate derivatives	(12)		(19)		Related to interest rate derivatives	(10)		(19)
Total	Total	$	(487)	$	(494)	Total	$	(482)	$	(494)

Earnings (Loss) Per Share (EPS)

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, and warrants, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and ~~six~~nine months ended ~~June~~September 30, 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 – 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~~and 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 three 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.

1921

Operating segment information is as follows (in millions):


		Three Months Ended June 30, 2021															Three Months Ended September 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	$	1,072	$	280	$	0	$	0	$	1,352	$	0	$	1,352	Passenger revenues	$	1,425	$	349	$	—	$	—	$	1,774	$	—	$	1,774
CPA revenues	CPA revenues	0		0		111		(111)		0		0		0		CPA revenues	—		—		107		(107)		—		—		—
Mileage Plan other revenue	Mileage Plan other revenue	102		16		0		0		118		0		118		Mileage Plan other revenue	105		15		—		—		120		—		120
Cargo and other	Cargo and other	55		0		0		2		57		0		57		Cargo and other	58		—		—		1		59		—		59
Total Operating Revenues	Total Operating Revenues	1,229		296		111		(109)		1,527		0		1,527		Total Operating Revenues	1,588		364		107		(106)		1,953		—		1,953
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	984		286		91		(127)		1,234		(530)		704		Operating expenses, excluding fuel	1,060		288		93		(113)		1,328		(9)		1,319
Economic fuel	Economic fuel	253		66		0		1		320		(46)		274		Economic fuel	299		77		—		—		376		—		376
Total Operating Expenses	Total Operating Expenses	1,237		352		91		(126)		1,554		(576)		978		Total Operating Expenses	1,359		365		93		(113)		1,704		(9)		1,695
Nonoperating Income (Expense)	Nonoperating Income (Expense)															Nonoperating Income (Expense)
Interest income	Interest income	6		0		0		0		6		0		6		Interest income	7		—		—		(1)		6		—		6
Interest expense	Interest expense	(34)		0		(5)		0		(39)		0		(39)		Interest expense	(25)		—		(6)		1		(30)		—		(30)
Interest capitalized	Interest capitalized	3		0		0		0		3		0		3		Interest capitalized	2		—		—		1		3		—		3
Other - net	Other - net	9		0		0		0		9		0		9		Other - net	8		—		—		—		8		—		8
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(16)		0		(5)		0		(21)		0		(21)		Total Nonoperating Income (Expense)	(8)		—		(6)		1		(13)		—		(13)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(24)	$	(56)	$	15	$	17	$	(48)	$	576	$	528	Income (Loss) Before Income Tax	$	221	$	(1)	$	8	$	8	$	236	$	9	$	245

		Three Months Ended June 30, 2020															Three Months Ended September 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	$	225	$	84	$	0	$	0	$	309	$	0	$	309	Passenger revenues	$	401	$	171	$	—	$	—	$	572	$	—	$	572
CPA revenues	CPA revenues	0		0		81		(81)		0		0		0		CPA revenues	—		—		95		(95)		—		—		—
Mileage Plan other revenue	Mileage Plan other revenue	56		17		0		0		73		0		73		Mileage Plan other revenue	65		19		—		—		84		—		84
Cargo and other	Cargo and other	39		0		0		0		39		0		39		Cargo and other	45		—		—		—		45		—		45
Total Operating Revenues	Total Operating Revenues	320		101		81		(81)		421		0		421		Total Operating Revenues	511		190		95		(95)		701		—		701
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	746		210		68		(82)		942		(292)		650		Operating expenses, excluding fuel	872		248		78		(97)		1,101		46		1,147
Economic fuel	Economic fuel	45		20		0		0		65		(6)		59		Economic fuel	90		38		—		—		128		(3)		125
Total Operating Expenses	Total Operating Expenses	791		230		68		(82)		1,007		(298)		709		Total Operating Expenses	962		286		78		(97)		1,229		43		1,272
Nonoperating Income (Expense)	Nonoperating Income (Expense)															Nonoperating Income (Expense)
Interest income	Interest income	11		0		0		(4)		7		0		7		Interest income	8		—		—		(1)		7		—		7
Interest expense	Interest expense	(18)		0		(5)		6		(17)		0		(17)		Interest expense	(28)		—		(6)		—		(34)		—		(34)
Interest capitalized	Interest capitalized	1		0		0		0		1		0		1		Interest capitalized	4		—		—		—		4		—		4
Other - net	Other - net	6		0		0		0		6		0		6		Other - net	4		—		—		1		5		—		5
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	0		0		(5)		2		(3)		0		(3)		Total Nonoperating Income (Expense)	(12)		—		(6)		—		(18)		—		(18)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(471)	$	(129)	$	8	$	3	$	(589)	$	298	$	(291)	Income (Loss) Before Income Tax	$	(463)	$	(96)	$	11	$	2	$	(546)	$	(43)	$	(589)

2022


		Six Months Ended June 30, 2021															Nine Months Ended September 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	$	1,578	$	433	$	0	$	0	$	2,011	$	0	$	2,011	Passenger revenues	$	3,003	$	782	$	—	$	—	$	3,785	$	—	$	3,785
CPA revenues	CPA revenues	0		0		215		(215)		0		0		0		CPA revenues	—		—		322		(322)		—		—		—
Mileage Plan other revenue	Mileage Plan other revenue	182		30		0		0		212		0		212		Mileage Plan other revenue	287		45		—		—		332		—		332
Cargo and other	Cargo and other	99		0		0		2		101		0		101		Cargo and other	157		—		—		3		160		—		160
Total Operating Revenues	Total Operating Revenues	1,859		463		215		(213)		2,324		0		2,324		Total Operating Revenues	3,447		827		322		(319)		4,277		—		4,277
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,877		551		179		(236)		2,371		(912)		1,459		Operating expenses, excluding fuel	2,937		839		272		(349)		3,699		(921)		2,778
Economic fuel	Economic fuel	427		118		0		0		545		(68)		477		Economic fuel	726		195		—		—		921		(68)		853
Total Operating Expenses	Total Operating Expenses	2,304		669		179		(236)		2,916		(980)		1,936		Total Operating Expenses	3,663		1,034		272		(349)		4,620		(989)		3,631
Nonoperating Income (Expense)	Nonoperating Income (Expense)															Nonoperating Income (Expense)
Interest income	Interest income	13		0		0		0		13		0		13		Interest income	20		—		—		(1)		19		—		19
Interest expense	Interest expense	(61)		0		(10)		0		(71)		0		(71)		Interest expense	(86)		—		(16)		1		(101)		—		(101)
Interest capitalized	Interest capitalized	6		0		0		0		6		0		6		Interest capitalized	8		—		—		1		9		—		9
Other - net	Other - net	19		0		0		0		19		0		19		Other - net	27		—		—		—		27		—		27
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	(23)		0		(10)		0		(33)		0		(33)		Total Nonoperating Income (Expense)	(31)		—		(16)		1		(46)		—		(46)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(468)	$	(206)	$	26	$	23	$	(625)	$	980	$	355	Income (Loss) Before Income Tax	$	(247)	$	(207)	$	34	$	31	$	(389)	$	989	$	600

		Six Months Ended June 30, 2020															Nine Months Ended September 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	$	1,459	$	331	$	0	$	0	$	1,790	$	0	$	1,790	Passenger revenues	$	1,860	$	502	$	—	$	—	$	2,362	$	—	$	2,362
CPA revenues	CPA revenues	0		0		186		(186)		0		0		0		CPA revenues	—		—		281		(281)		—		—		—
Mileage Plan other revenue	Mileage Plan other revenue	154		28		0		0		182		0		182		Mileage Plan other revenue	219		47		—		—		266		—		266
Cargo and other	Cargo and other	83		0		0		2		85		0		85		Cargo and other	128		—		—		2		130		—		130
Total Operating Revenues	Total Operating Revenues	1,696		359		186		(184)		2,057		0		2,057		Total Operating Revenues	2,207		549		281		(279)		2,758		—		2,758
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,905		479		160		(192)		2,352		(129)		2,223		Operating expenses, excluding fuel	2,777		727		238		(289)		3,453		(83)		3,370
Economic fuel	Economic fuel	358		82		0		0		440		3		443		Economic fuel	448		120		—		—		568		—		568
Total Operating Expenses	Total Operating Expenses	2,263		561		160		(192)		2,792		(126)		2,666		Total Operating Expenses	3,225		847		238		(289)		4,021		(83)		3,938
Nonoperating Income (Expense)	Nonoperating Income (Expense)															Nonoperating Income (Expense)
Interest income	Interest income	25		0		0		(9)		16		0		16		Interest income	33		—		—		(10)		23		—		23
Interest expense	Interest expense	(30)		0		(10)		10		(30)		0		(30)		Interest expense	(58)		—		(16)		10		(64)		—		(64)
Interest capitalized	Interest capitalized	4		0		0		0		4		0		4		Interest capitalized	8		—		—		—		8		—		8
Other - net	Other - net	12		0		0		(1)		11		0		11		Other - net	16		—		—		—		16		—		16
Total Nonoperating Income (Expense)	Total Nonoperating Income (Expense)	11		0		(10)		0		1		0		1		Total Nonoperating Income (Expense)	(1)		—		(16)		—		(17)		—		(17)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(556)	$	(202)	$	16	$	8	$	(734)	$	126	$	(608)	Income (Loss) Before Income Tax	$	(1,019)	$	(298)	$	27	$	10	$	(1,280)	$	83	$	(1,197)

(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 allocation and excludes certain charges. See Note A in the accompanying pages for further information.

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

2123

Total assets were as follows (in millions):


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020
Mainline	Mainline	$	19,920	$	19,754	Mainline	$	19,161	$	19,754
Horizon	Horizon	1,251		1,170		Horizon	1,251		1,170
Consolidating & Other	Consolidating & Other	(6,515)		(6,878)		Consolidating & Other	(6,530)		(6,878)
Consolidated	Consolidated	$	14,656	$	14,046	Consolidated	$	13,882	$	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, ~~2020.~~2020, and in "Item 1A. Risk Factors" of Part II of this Form 10-Q. This overview summarizes the MD&A, which includes the following sections:

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

•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and ~~six~~nine months ended ~~June~~September 30, 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 2021.

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

~~SECOND~~THIRD QUARTER REVIEW

Business Recovery and Financial Outlook

~~Second~~In the third quarter of 2021, ~~results indicate~~ we ~~have reached a turning point in~~reported our ~~recovery from~~first adjusted net income since the ~~significant impacts~~onset of the ~~COVID-19~~ 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 positioned the airline well for returning to profitability in recovery. With theThe strong return of demand during the summer season, coupled with solid cost control and operational performance at the top of the industry resulted in 12% adjusted pretax margin despite headwinds from the ~~second quarter,~~delta variant. In conjunction with these positive results, we ~~reported an adjusted net loss that was significantly better than previous quarterly losses, and we currently expect double-digit adjusted pre-tax profit margins~~took further steps in the third ~~quarter.~~quarter to repair our balance sheet, with $541 million in debt repaid during the quarter, including the prepayment of the $425 million 364-day term loan facility. Efforts taken throughout 2021 have resulted in lowering our debt-to-capitalization ratio to 51%, a 10-point improvement from December 31, 2020.

~~In the second half of 2021, we~~We remain committed to returning capacity in a ~~deliberate~~prudent manner to match ~~the return~~demand as we also work toward our goal of ~~leisure and business demand in the markets we serve. We also continue to return~~returning flying to 2019 ~~capacity~~ levels by no later than the summer of ~~2022, though~~2022. However, we ~~have increased our near-term~~anticipate fourth quarter regional capacity will be negatively impacted due to anticipated pilot attrition at Horizon, as industry mainline carriers ramp to 2019 capacity levels and look to hire regional pilots. As a result of these factors, we anticipate flying ~~expectations as we ramp towards that target. To support this plan and prepare for growth beyond 2022,~~ in the ~~second~~fourth quarter ~~of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and 2024, and nine E175~~ to be ~~operated by Horizon Air with deliveries in 2022 and 2023. In addition, we expanded our long-term capacity agreement with SkyWest by eight aircraft beginning in 2022.~~

~~Our guidance for 2021 compares against 2019 as we believe it provides a more meaningful indication of the pace and quality of recovery~~13% to ~~pre-pandemic levels. For the third quarter, we are planning for capacity to be approximately 17% to 20%~~16% below the same period in ~~2019, coupled with increased passenger counts as leisure travel continues through the summer months and business travel rebuilds as workplaces reopen. As~~2019. Although we continue to be disciplined in matching the return of capacity with ~~returning capacity~~demand, and optimizing the aircraft gauge for flown routes, the delta variant has had a significant negative impact on our fourth quarter expectations and advance bookings. Given this, we anticipate ~~third~~fourth quarter load factors to range between ~~82%~~77% and ~~85%~~80%.

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 are competitive advantages we have

cultivated over many years that will continue to serve us well in 2021 and ~~beyond, and we~~beyond. We are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.

~~Sustainability~~Environmental, Social and Governance Updates

As we move beyond the impacts of the COVID-19 pandemic, we ~~have shifted~~are returning our focus back to our 2025 strategic plan, which was announced in 2019. During the ~~second~~third quarter, we continued to make strides ~~towards~~toward our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. ~~As part~~In the third quarter we formed Alaska Star Ventures, a wholly-owned entity with the purpose of ~~these commitments, we~~identifying and investing in technologies that may accelerate Alaska's path to net zero carbon emissions. During the quarter, Alaska Airlines Foundation also awarded $260,000 in LIFT Grants to 25 nonprofits who are dedicated to providing educational and career-development programs to young people throughout their respective communities. Alaska and Horizon also announced expanded measures to invest in people, including a ~~partnership~~new internal maintenance technician program, which will provide eligible employees with ~~Boeing on the 737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies~~financial assistance to enhance and develop skills with the ~~safety and sustainability~~goal of air travel. In the second quarter we also announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and machine learning to optimize air traffic and enable more fuel-efficient flight paths for aggregate savings of fuel, carbon emissions and time.becoming a certified maintenance technician.

As a reflection of the importance of the commitments made, we ~~continue to tie~~have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon ~~emission~~emissions target into our company-wide ~~performance-based pay program, for~~Performance-Based Pay Plan, which we currently expect to ~~meet~~meet.

Labor Update

In July 2021, we ratified an amended wage agreement with the ~~targeted goal.~~International Brotherhood of Teamsters, representing Horizon Air pilots. The amended agreement contains competitive wage increases aimed at attracting and retaining pilots. Additionally, in September 2021, Alaska Airlines engaged the National Mediation Board to assist in negotiations with Alaska's pilots, represented by the Air Line Pilots Association.

Financial Overview

Our consolidated ~~pre-tax~~pretax income for the ~~second~~third quarter of 2021 was ~~$528~~$245 million, compared to a ~~pre-tax~~pretax loss of ~~$291~~$589 million in the ~~second~~third quarter of 2020. The ~~$819~~$834 million improvement is ~~primarily~~ driven by an increase of ~~$1.1~~$1.3 billion in operating revenue from an exponential increase in demand for air travel, coupled with a decrease of $453 million in special charges recorded for impairment and ~~$141 million of increased wage offsets provided by extensions of the PSP of the CARES Act.~~workforce restructuring. These improvements were offset by $398 million in wage offsets provided by the Payroll Support Program of the CARES Act recorded in the third quarter of 2020 which were not repeated in 2021, a ~~$292~~$227 million increase in non-fuel operating costs, excluding special items, and a ~~$215~~$251 million increase in fuel expense ~~as the operation ramps up to meet~~driven by increased ~~demand.~~consumption and rising fuel costs.

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 grant wage offset, 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 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 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 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~~our Board of Directors in assessing quarterly and annual cost performance.

•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual cash incentive plan, which covers the majority of employees within the Alaska 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.

2426

OPERATING STATISTICS SUMMARY (unaudited)

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


		Three Months Ended June 30,			Six Months Ended June 30,				Three Months Ended September 30,			Nine Months Ended September 30,
		2021	2020	Change	2021	2020	Change		2021	2020	Change	2021	2020	Change
Consolidated Operating Statistics:(a)	Consolidated Operating Statistics:(a)							Consolidated Operating Statistics:(a)
Revenue passengers (000)	Revenue passengers (000)	8,712	1,485	486.7%	13,379	10,417	28.4%	Revenue passengers (000)	9,832	3,595	173.5%	23,211	14,012	65.7%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	10,334	1,654	524.8%	15,727	12,310	27.8%	RPMs (000,000) "traffic"	11,592	3,817	203.7%	27,319	16,127	69.4%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	13,413	4,307	211.4%	23,810	19,612	21.4%	ASMs (000,000) "capacity"	14,429	7,871	83.3%	38,238	27,483	39.1%
Load factor	Load factor	77.0%	38.4%	38.6 pts	66.1%	62.8%	3.3 pts	Load factor	80.3%	48.5%	31.8 pts	71.4%	58.7%	12.7 pts
Yield	Yield	13.09¢	18.68¢	(29.9)%	12.79¢	14.54¢	(12.0)%	Yield	15.30¢	14.99¢	2.1%	13.85¢	14.65¢	(5.5)%
RASM	RASM	11.38¢	9.77¢	16.5%	9.76¢	10.49¢	(7.0)%	RASM	13.54¢	8.90¢	52.1%	11.19¢	10.04¢	11.5%
CASM excluding fuel and special items(b)	CASM excluding fuel and special items(b)	9.20¢	21.87¢	(57.9)%	9.95¢	12.00¢	(17.1)%	CASM excluding fuel and special items(b)	9.21¢	14.00¢	(34.2)%	9.67¢	12.57¢	(23.1)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$1.90	$1.20	58.3%	$1.85	$1.77	4.5%	Economic fuel cost per gallon(b)	$2.05	$1.32	55.3%	$1.93	$1.65	17.0%
Fuel gallons (000,000)	Fuel gallons (000,000)	168	54	211.1%	294	248	18.5%	Fuel gallons (000,000)	183	97	88.7%	477	344	38.7%
ASMs per fuel gallon	ASMs per fuel gallon	79.8	79.8	—%	81.0	79.1	2.4%	ASMs per fuel gallon	78.8	81.3	(3.1)%	80.2	79.9	0.4%
Average full-time equivalent employees (FTEs)	Average full-time equivalent employees (FTEs)	19,001	15,836	20.0%	18,071	19,115	(5.5)%	Average full-time equivalent employees (FTEs)	20,315	16,027	26.8%	18,819	18,112	3.9%
Mainline Operating Statistics:	Mainline Operating Statistics:							Mainline Operating Statistics:
Revenue passengers (000)	Revenue passengers (000)	6,151	905	579.7%	9,302	7,580	22.7%	Revenue passengers (000)	7,065	2,156	227.7%	16,367	9,736	68.1%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	8,966	1,276	602.7%	13,555	10,858	24.8%	RPMs (000,000) "traffic"	10,122	2,958	242.2%	23,677	13,816	71.4%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	11,611	3,363	245.3%	20,464	17,060	20.0%	ASMs (000,000) "capacity"	12,540	6,280	99.7%	33,004	23,339	41.4%
Load factor	Load factor	77.2%	37.9%	39.3 pts	66.2%	63.6%	2.6 pts	Load factor	80.7%	47.1%	33.6 pts	71.7%	59.2%	12.5 pts
Yield	Yield	11.96¢	17.63¢	(32.2)%	11.64¢	13.44¢	(13.4)%	Yield	14.08¢	13.56¢	3.8%	12.68¢	13.46¢	(5.8)%
RASM	RASM	10.59¢	9.52¢	11.2%	9.09¢	9.94¢	(8.6)%	RASM	12.66¢	8.14¢	55.5%	10.44¢	9.46¢	10.4%
CASM excluding fuel and special items(b)	CASM excluding fuel and special items(b)	8.48¢	22.19¢	(61.8)%	9.17¢	11.17¢	(17.9)%	CASM excluding fuel and special items(b)	8.45¢	13.88¢	(39.1)%	8.90¢	11.90¢	(25.2)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$1.88	$1.20	56.7%	$1.84	$1.78	3.4%	Economic fuel cost per gallon(b)	$2.03	$1.31	55.0%	$1.91	$1.66	15.1%
Fuel gallons (000,000)	Fuel gallons (000,000)	135	38	255.3%	233	201	15.9%	Fuel gallons (000,000)	147	69	113.0%	380	270	40.7%
ASMs per fuel gallon	ASMs per fuel gallon	86.0	88.5	(2.8)%	87.8	84.9	3.4%	ASMs per fuel gallon	85.3	91.0	(6.3)%	86.9	86.4	0.6%
Average FTEs	Average FTEs	14,021	12,340	13.6%	13,247	14,579	(9.1)%	Average FTEs	15,116	12,032	25.6%	13,870	13,730	1.0%
Aircraft utilization	Aircraft utilization	9.9	5.6	76.8%	9.2	8.8	4.5%	Aircraft utilization	10.2	7.3	39.7%	9.6	8.3	15.7%
Average aircraft stage length	Average aircraft stage length	1,320	1,144	15.4%	1,313	1,270	3.4%	Average aircraft stage length	1,313	1,244	5.5%	1,313	1,263	4.0%
Operating fleet(d)	Operating fleet(d)	202	225	(23) a/c	202	225	(23) a/c	Operating fleet(d)	210	217	(7) a/c	210	217	(7) a/c
Regional Operating Statistics:(c)	Regional Operating Statistics:(c)							Regional Operating Statistics:(c)
Revenue passengers (000)	Revenue passengers (000)	2,562	580	341.7%	4,077	2,837	43.7%	Revenue passengers (000)	2,767	1,439	92.3%	6,843	4,276	60.0%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	1,367	378	261.6%	2,172	1,452	49.6%	RPMs (000,000) "traffic"	1,470	859	71.1%	3,642	2,311	57.6%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	1,802	945	90.7%	3,346	2,552	31.1%	ASMs (000,000) "capacity"	1,889	1,592	18.7%	5,235	4,143	26.4%
Load factor	Load factor	75.9%	40.0%	35.9 pts	64.9%	56.9%	8.0 pts	Load factor	77.8%	54.0%	23.8 pts	69.6%	55.8%	13.8 pts
Yield	Yield	20.48¢	22.12¢	(7.4)%	19.95¢	22.80¢	(12.5)%	Yield	23.72¢	19.89¢	19.3%	21.47¢	21.72¢	(1.2)%
RASM	RASM	16.41¢	10.63¢	54.4%	13.84¢	14.07¢	(1.6)%	RASM	19.26¢	11.91¢	61.7%	15.80¢	13.24¢	19.3%
Operating fleet	Operating fleet	94	94	— a/c	94	94	— a/c	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 all aircraft removed from operating service. In 2021, six aircraft previously removed reentered the operating fleet, and are reflected above.

2527

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

		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2021		2019		Change		2021		2019		Change			2021		2019		Change		2021		2019		Change
Passenger revenue	Passenger revenue	$	1,352	$	2,111	(36)	%	$	2,011	$	3,827	(47)	%	Passenger revenue	$	1,774	$	2,211	(20)	%	$	3,785	$	6,038	(37)	%
Mileage plan other revenue	Mileage plan other revenue	118		118		—	%	212		228		(7)	%	Mileage plan other revenue	120		118		2	%	332		346		(4)	%
Cargo and other	Cargo and other	57		59		(3)	%	101		109		(7)	%	Cargo and other	59		60		(2)	%	160		169		(5)	%
Total operating revenues	Total operating revenues	$	1,527	$	2,288	(33)	%	$	2,324	$	4,164	(44)	%	Total operating revenues	$	1,953	$	2,389	(18)	%	$	4,277	$	6,553	(35)	%

Operating expense, excluding fuel and special items	Operating expense, excluding fuel and special items	$	1,234	$	1,414	(13)	%	$	2,371	$	2,819	(16)	%	Operating expense, excluding fuel and special items	$	1,328	$	1,476	(10)	%	3,699		$	4,295	(14)	%
Economic fuel	Economic fuel	274		502		(45)	%	477		922		(48)	%	Economic fuel	376		486		(23)	%	853		1,408		(39)	%
Special items	Special items	(530)		8		NM		(912)		34		NM		Special items	(9)		5		(280)	%	(921)		39		NM
Total operating expenses	Total operating expenses	$	978	$	1,924	(49)	%	$	1,936	$	3,775	(49)	%	Total operating expenses	$	1,695	$	1,967	(14)	%	$	3,631	$	5,742	(37)	%

Total nonoperating expense	Total nonoperating expense	(21)		(13)		62	%	(33)		(32)		3	%	Total nonoperating expense	(13)		(6)		117	%	(46)		(38)		21	%
Income (loss) before income tax	Income (loss) before income tax	$	528	$	351	50	%	$	355	$	357	(1)	%	Income (loss) before income tax	$	245	$	416	(41)	%	$	600	$	773	(22)	%

Consolidated Operating Statistics(a):	Consolidated Operating Statistics(a):													Consolidated Operating Statistics(a):
Revenue passengers (000)	Revenue passengers (000)	8,712		12,026		(28)	%	13,379		22,442		(40)	%	Revenue passengers (000)	9,832		12,574		(22)	%	23,211		35,018		(34)	%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	10,334		14,638		(29)	%	15,727		27,087		(42)	%	RPMs (000,000) "traffic"	11,592		15,026		(23)	%	27,319		42,113		(35)	%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	13,413		16,980		(21)	%	23,810		32,487		(27)	%	ASMs (000,000) "capacity"	14,429		17,519		(18)	%	38,238		50,006		(24)	%
Load Factor	Load Factor	77.0%		86.2%		(9.2)	pts	66.1%		83.4%		(17.3)	pts	Load Factor	80.3%		85.8%		(5.5)	pts	71.4%		84.2%		(12.8)	pts
Yield	Yield	13.09¢		14.43¢		(9)	%	12.79¢		14.13¢		(9)	%	Yield	15.30¢		14.71¢		4	%	13.85¢		14.34¢		(3)	%
RASM	RASM	11.38¢		13.48¢		(16)	%	9.76¢		12.82¢		(24)	%	RASM	13.54¢		13.64¢		(1)	%	11.19¢		13.10¢		(15)	%
CASMex	CASMex	9.20¢		8.33¢		10	%	9.95¢		8.68¢		15	%	CASMex	9.21¢		8.43¢		9	%	9.67¢		8.59¢		13	%
FTEs	FTEs	19,001		21,921		(13)	%	18,071		21,876		(17)	%	FTEs	20,315		22,247		(9)	%	18,819		22,000		(14)	%

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

2628

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

Our consolidated net income for the three months ended ~~June~~September 30, 2021 was ~~$397~~$194 million, or ~~$3.13~~$1.53 per diluted share, compared to a net loss of ~~$214~~$431 million, or ~~$1.74~~$3.49 per share, for the three months ended ~~June~~September 30, 2020.

Excluding the impact of the Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net ~~loss~~income for the ~~second~~third quarter of 2021 was ~~$38~~$187 million, or ~~$0.30~~$1.47 per share, compared to an adjusted net loss of ~~$439~~$399 million, or ~~$3.57~~$3.23 per share, in the ~~second~~third quarter of 2020. The following ~~tables reconcile~~table reconciles our adjusted net ~~loss~~income (loss) per diluted share (EPS) to amounts as reported in accordance with GAAP:


		Three Months Ended June 30,									Three Months Ended September 30,
		2021				2020					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) per share	GAAP net income (loss) per share	$	397	$	3.13	$	(214)	$	(1.74)	GAAP net income (loss) per share	$	194	$	1.53	$	(431)	$	(3.49)
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(503)		(3.97)		(362)		(2.94)		Payroll Support Program grant wage offset	—		—		(398)		(3.22)
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(46)		(0.36)		(6)		(0.05)		Mark-to-market fuel hedge adjustments	—		—		(3)		(0.02)
Special items - impairment charges and other	Special items - impairment charges and other	(4)		(0.03)		69		0.56		Special items - impairment charges and other	(9)		(0.07)		121		0.98
Special items - restructuring charges	Special items - restructuring charges	(23)		(0.18)		—		—		Special items - restructuring charges	—		—		322		2.60
Special items - merger-related costs	Special items - merger-related costs	—		—		1		0.01		Special items - merger-related costs	—		—		1		0.01
Income tax effect of reconciling items above	Income tax effect of reconciling items above	141		1.11		73		0.59		Income tax effect of reconciling items above	2		0.01		(11)		(0.09)
Non-GAAP adjusted net loss per share		$	(38)	$	(0.30)	$	(439)	$	(3.57)
Non-GAAP adjusted net income (loss) per share										Non-GAAP adjusted net income (loss) per share	$	187	$	1.47	$	(399)	$	(3.23)

CASM reconciliation is summarized below:


		Three Months Ended June 30,							Three Months Ended September 30,
(in cents)	(in cents)	2021		2020		% Change		(in cents)	2021		2020		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	7.29	¢	16.46	¢	(56)	%	CASM	11.75	¢	16.16	¢	(27)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(3.75)		(8.40)		(55)	%	Payroll Support Program grant wage offset	—		(5.06)		(100)	%
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	2.04		1.37		49	%	Aircraft fuel, including hedging gains and losses	2.60		1.59		64	%
Special items - impairment charges and other	Special items - impairment charges and other	(0.03)		1.60		(102)	%	Special items - impairment charges and other	(0.06)		1.53		(104)	%
Special items - restructuring charges	Special items - restructuring charges	(0.17)		—		NM		Special items - restructuring charges	—		4.09		(100)	%
Special items - merger-related costs	Special items - merger-related costs	—		0.02		(100)	%	Special items - merger-related costs	—		0.01		(100)	%
CASM excluding fuel and special items	CASM excluding fuel and special items	9.20	¢	21.87	¢	(58)	%	CASM excluding fuel and special items	9.21	¢	14.00	¢	(34)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	6.24	¢	15.79	¢	(60)	%	CASM	10.77	¢	16.80	¢	(36)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(3.79)		(9.69)		(61)	%	Payroll Support Program grant wage offset	—		(5.56)		(100)	%
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	1.78		1.16		53	%	Aircraft fuel, including hedging gains and losses	2.39		1.43		67	%

Special items - impairment charges and other	Special items - impairment charges and other	(0.03)		2.11		(101)	%	Special items - impairment charges and other	(0.07)		1.93		(104)	%
Special items - restructuring charges	Special items - restructuring charges	(0.20)		—		NM		Special items - restructuring charges	—		5.10		(100)	%
Special items - merger-related costs	Special items - merger-related costs	—		0.02		(100)	%	Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	CASM excluding fuel and special items	8.48	¢	22.19	¢	(62)	%	CASM excluding fuel and special items	8.45	¢	13.88	¢	(39)	%

2729

OPERATING REVENUES

Total operating revenues increased ~~$1.1~~$1.3 billion during the ~~second~~third quarter of 2021 compared to the same period in 2020. The changes are summarized in the following table:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Passenger revenue	Passenger revenue	$	1,352	$	309	338	%	Passenger revenue	$	1,774	$	572	210	%
Mileage Plan other revenue	Mileage Plan other revenue	118		73		62	%	Mileage Plan other revenue	120		84		43	%
Cargo and other	Cargo and other	57		39		46	%	Cargo and other	59		45		31	%
Total operating revenues	Total operating revenues	$	1,527	$	421	263	%	Total operating revenues	$	1,953	$	701	179	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the ~~second~~third quarter of 2021 increased by ~~$1.0~~$1.2 billion, primarily driven by a significant increase in passenger traffic. In the ~~second~~third quarter of 2020, although we ~~experienced~~began to see rebounding demand during the summer months, traffic remained well below historical levels. This compares to the third quarter of 2021, where pent up demand for leisure travel spurred a ~~near complete loss of demand driven~~significant increase in traffic, particularly in July and August. As we entered September, results were impacted by the ~~COVID-19 pandemic. As recovery has taken hold, including wide availability~~rise of the ~~vaccine~~delta variant, slowing demand and ~~removal of restrictions throughout~~increasing refund activity. Despite these headwinds, quarterly load factor increased 32 points over the ~~markets we serve, demand for air travel has increased exponentially driven primarily by leisure travelers.~~prior year on an 83% increase in capacity, providing meaningful increases to revenue as compared to the prior year.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased by ~~$45~~$36 million, or ~~62%~~43%, as compared to the same prior-year period, largely due to an increase in commissions from our bank card partners driven by increased consumer spending and new card acquisitions. Performance of Mileage Plan other revenues outpaced all other revenue sources, and resulted in the best performance of the program ever in the ~~second~~third quarter of 2021.

Cargo and other

On a consolidated basis, Cargo and other revenue for the ~~second~~third quarter of 2021 increased by ~~$18~~$14 million, or ~~46%~~31%, as compared to the same prior-year period. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.

OPERATING EXPENSES

Total operating expenses increased ~~$269~~$423 million, or ~~38%~~33%, compared to the ~~second~~third quarter of 2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Fuel expense	Fuel expense	$	274	$	59	364	%	Fuel expense	$	376	$	125	201	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	1,234		942		31	%	Non-fuel operating expenses, excluding special items	1,328		1,101		21	%
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(503)		(362)		39	%	Payroll Support Program grant wage offset	—		(398)		(100)	%
Special items - impairment charges and other	Special items - impairment charges and other	(4)		69		(106)	%	Special items - impairment charges and other	(9)		121		(107)	%
Special items - restructuring charges	Special items - restructuring charges	(23)		—		NM		Special items - restructuring charges	—		322		(100)	%
Special items - merger-related costs	Special items - merger-related costs	—		1		(100)	%	Special items - merger-related costs	—		1		(100)	%
Total operating expenses	Total operating expenses	$	978	$	709	38	%	Total operating expenses	$	1,695	$	1,272	33	%

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 increased ~~$215~~$251 million, compared to the ~~second~~third quarter of 2020. The elements of the change are illustrated in the following table:


		Three Months Ended June 30,									Three Months Ended September 30,
		2021				2020					2021				2020
(in millions, except for per gallon amounts)	(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal		(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	Raw or "into-plane" fuel cost	$	330	$	1.96	$	60	$	1.11	Raw or "into-plane" fuel cost	$	397	$	2.16	$	123	$	1.27
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	(10)		(0.06)		5		0.09		(Gain)/loss on settled hedges	(21)		(0.11)		5		0.05
Consolidated economic fuel expense	Consolidated economic fuel expense	320		1.90		$	65	$	1.20	Consolidated economic fuel expense	376		2.05		$	128	$	1.32
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(46)		(0.27)		(6)		(0.11)		Mark-to-market fuel hedge adjustments	—		—		(3)		(0.03)
GAAP fuel expense	GAAP fuel expense	$	274	$	1.63	$	59	$	1.09	GAAP fuel expense	$	376	$	2.05	$	125	$	1.29
Fuel gallons	Fuel gallons	168				54				Fuel gallons	183				97

Raw fuel expense per gallon for the three months ended ~~June~~September 30, 2021 increased by approximately ~~77%~~70% due to 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 increase in raw fuel price per gallon during the ~~second~~third quarter of 2021 was primarily driven by a ~~24%~~70% increase in crude oil ~~prices.~~prices and a 170% increase in refining margins, when compared to the prior year. This is coupled with an increase in consumption of ~~114~~86 million gallons on 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.

Gains recognized for hedges that settled during the ~~second~~third quarter were ~~$10~~$21 million in 2021, compared to losses of $5 million in the same period in 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 grant wage offset and special items. Significant operating expense variances from 2020 are more fully described below.


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Wages and benefits	Wages and benefits	$	510	$	472	8	%	Wages and benefits	$	578	$	495	17	%
Variable incentive pay	Variable incentive pay	34		16		113	%	Variable incentive pay	42		42		—	%
Aircraft maintenance	Aircraft maintenance	102		45		127	%	Aircraft maintenance	89		84		6	%
Aircraft rent	Aircraft rent	62		74		(16)	%	Aircraft rent	64		74		(14)	%
Landing fees and other rentals	Landing fees and other rentals	144		83		73	%	Landing fees and other rentals	141		109		29	%
Contracted services	Contracted services	54		30		80	%	Contracted services	62		36		72	%
Selling expenses	Selling expenses	41		4		925	%	Selling expenses	49		24		104	%
Depreciation and amortization	Depreciation and amortization	98		107		(8)	%	Depreciation and amortization	99		105		(6)	%
Food and beverage service	Food and beverage service	35		7		400	%	Food and beverage service	39		14		179	%
Third-party regional carrier expense	Third-party regional carrier expense	37		26		42	%	Third-party regional carrier expense	39		29		34	%
Other	Other	117		78		50	%	Other	126		89		42	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	1,234	$	942	31	%	Total non-fuel operating expenses, excluding special items	$	1,328	$	1,101	21	%

Wages and Benefits

Wages and benefits increased during the ~~second~~third quarter of 2021 by ~~$38~~$83 million, or 8%17%, compared to 2020. The primary components of Wages and benefits are shown in the following table:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Wages	Wages	$	386	$	350	10	%	Wages	$	433	$	356	22	%
Pension - Defined benefit plans service cost	Pension - Defined benefit plans service cost	13		13		—	%	Pension - Defined benefit plans service cost	13		11		18	%
Defined contribution plans	Defined contribution plans	26		30		(13)	%	Defined contribution plans	33		28		18	%
Medical and other benefits	Medical and other benefits	59		54		9	%	Medical and other benefits	68		75		(9)	%
Payroll taxes	Payroll taxes	26		25		4	%	Payroll taxes	31		25		24	%
Total wages and benefits	Total wages and benefits	$	510	$	472	8	%	Total wages and benefits	$	578	$	495	17	%

Wages increased ~~$36~~$77 million, or ~~10%~~22%, on a ~~20%~~27% increase in FTEs. Increased wages as compared to the prior period are primarily the result of leaves of absence taken and reduction in executive pay and hours for management employees in 2020 which were not repeated in 2021.

~~Defined~~ Increased expense for defined contribution ~~plan expense decreased 13% as compared~~plans and payroll taxes are in line with the related increase to ~~2020 as a result of a one-time adjustment recorded in the second quarter of 2021 for employer contributions to those participating in incentive leave programs.~~

~~Variable Incentive Pay~~

Variable incentive pay expense increased $18 million during the second quarter of 2021 compared to the same period in 2020 on increased expectation of achievement of key financial and operational metrics.

~~Aircraft Maintenance~~

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

Aircraft Rent

Aircraft rent expense decreased by ~~$12~~$10 million, or ~~16%~~14%, during the ~~second~~third quarter of 2021 compared to the same period in 2020 primarily the result of the full impairment taken on certain leased Airbus aircraft in 2020.

Landing fees and other rentals

Landing fees and other rentals increased by ~~$61~~$32 million, or ~~73%~~29%, during the ~~second~~third quarter of 2021 compared to the same period in 2020 primarily due to a significant increase in departures. Increased departure-related costs were coupled by rate increases at many of our hub ~~airports, including the renegotiated lease at our largest airport hub Seattle-Tacoma International Airport.~~airports.

Contracted Services

Contracted services increased by ~~$24~~$26 million, or ~~80%~~72%, during the ~~second~~third quarter of 2021 compared to the same period in 2020 driven primarily by increased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.

Selling Expense

Selling expense increased by ~~$37~~$25 million during the ~~second~~third quarter of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions incurred with the overall increase ~~of overall~~in travel.

Food and Beverage Service

Food and beverage service increased by ~~$28~~$25 million during the ~~second~~third quarter of 2021 compared to the same period in 2020. This increase is consistent with the overall increase in revenue passengers as compared to the prior-year period, as well as the return and expansion of many of our on-board products in the ~~second~~third quarter of 2021.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased by ~~$11~~$10 million, or ~~42%~~34%, during the ~~second~~third quarter of 2021 compared to the same period in 2020. The increase in expense is primarily due to increases in departures flown by SkyWest as compared to the prior-year ~~period. Increased expense was partially~~period, offset by athe final pass through of CARES Act PSP funding ~~of $5 million received in the second quarter to offset~~for SkyWest pilot and flight attendant ~~wages and benefits.~~wages.

Other expense

Other expense increased ~~$39~~$37 million, or ~~50%~~42%, during the ~~second~~third quarter of 2021 compared to the same period in 2020. Increased expense is primarily driven by incremental crew hotel stays and per diem, consistent with the 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 $4$9 million in the ~~second~~third quarter of 2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor.

~~Special Items - Restructuring charges~~

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

ADDITIONAL SEGMENT INFORMATION

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

Mainline

Mainline recorded an adjusted pretax ~~loss~~profit of ~~$24~~$221 million in the ~~second~~third quarter of 2021, compared to a pretax loss of ~~$471~~$463 million in the ~~second~~third quarter of 2020. The ~~$447~~$684 million improvement was primarily driven by ~~an $847 million~~a $1 billion increase in Passenger revenues as a result of increased demand for air travel, offset by a ~~$238~~$188 million increase in non-fuel operating costs and a ~~$208~~$209 million increase in economic fuel cost.

~~The increase in Mainline passenger revenue for the second quarter of 2021 was primarily driven by a significant increase in traffic and capacity due to increased demand for air travel.~~

Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher ~~raw~~economic fuel prices, combined with a significant increase in gallons consumed, drove the increase in Mainline fuel expense.

Regional

Regional operations generated an adjusted pretax loss of ~~$56~~$1 million in the ~~second~~third quarter of 2021, compared to aan adjusted pretax loss of ~~$129~~$96 million in the ~~second~~third quarter of 2020. The improved pretax loss was attributable to a ~~$195~~$174 million increase in operating revenues, partially offset by a ~~$76~~$40 million increase in non-fuel operating expenses and a ~~$46~~$39 million increase in fuel costs.

3133

Regional passenger revenue increased significantly compared to the ~~second~~third quarter of 2020, primarily driven by increased traffic and capacity driven by the resurgence in demand for air travel.

The increase in non-fuel operating expenses is primarily due to increased variable costs and higher CPA rates on an increase in ~~capacity, offset by the pass through of CARES Act PSP funds recorded in the second quarter of 2021.~~capacity.

Horizon

Horizon achieved an adjusted pretax profit of ~~$15~~$8 million in the ~~second~~third quarter of 2021 compared to $8$11 million in the ~~second~~third quarter of 2020. ~~Increased~~Decreased profit is driven by increased operating expenses, primarily driven by increased maintenance expense on the ~~result of increased capacity flown, coupled with substantial progress in cost reduction efforts.~~Q400 fleet as compared to the prior year.

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

Our consolidated net income for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$266~~$460 million, or ~~$2.10~~$3.64 per diluted share, compared to a net loss of ~~$446~~$877 million, or ~~$3.62~~$7.12 per ~~diluted~~ share, for the ~~six~~nine months ended ~~June~~September 30, 2020.

Our adjusted net loss for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$474~~$287 million, or ~~$3.75~~$2.27 per diluted share, compared to an adjusted net loss of ~~$541~~$940 million, or ~~$4.40~~$7.63 per diluted share, in the ~~six~~nine months ended ~~June~~September 30, 2020. The following ~~tables reconcile~~table reconciles our adjusted net loss and adjusted diluted EPS to amounts as reported in accordance with GAAP:


		Six Months Ended June 30,									Nine Months Ended September 30,
		2021				2020					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
Reported GAAP net income (loss) and diluted EPS	Reported GAAP net income (loss) and diluted EPS	$	266	$	2.10	$	(446)	$	(3.62)	Reported GAAP net income (loss) and diluted EPS	$	460	$	3.64	$	(877)	$	(7.12)
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(914)		(7.23)		(362)		(2.94)		Payroll Support Program grant wage offset	(914)		(7.24)		(760)		(6.16)
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(68)		(0.54)		3		0.02		Mark-to-market fuel hedge adjustments	(68)		(0.54)		—		—
Special items - merger-related costs	Special items - merger-related costs	—		—		4		0.03		Special items - merger-related costs	—		—		5		0.04
Special items - impairment charges and other	Special items - impairment charges and other	14		0.11		229		1.86		Special items - impairment charges and other	5		0.04		350		2.84
Special items - restructuring charges	Special items - restructuring charges	(12)		(0.09)		—		—		Special items - restructuring charges	(12)		(0.09)		322		2.61
Income tax effect of reconciling items above	Income tax effect of reconciling items above	240		1.90		31		0.25		Income tax effect of reconciling items above	242		1.92		20		0.16
Non-GAAP adjusted net loss per share	Non-GAAP adjusted net loss per share	$	(474)	$	(3.75)	$	(541)	$	(4.40)	Non-GAAP adjusted net loss per share	$	(287)	$	(2.27)	$	(940)	$	(7.63)

3234

Our operating costs per ASM are summarized below:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in cents)	(in cents)	2021		2020		% Change		(in cents)	2021		2020		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	8.13	¢	13.59	¢	(40)	%	CASM	9.50	¢	14.33	¢	(34)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(3.84)		(1.85)		108	%	Payroll Support Program grant wage offset	(2.39)		(2.77)		(14)	%
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	2.00		2.26		(12)	%	Aircraft fuel, including hedging gains and losses	2.24		2.07		8	%
Special items - impairment charges and other	Special items - impairment charges and other	0.07		1.17		(94)	%	Special items - impairment charges and other	0.01		1.27		(98)	%
Special items - restructuring charges	Special items - restructuring charges	(0.05)		—		NM		Special items - restructuring charges	(0.03)		1.17		(103)	%
Special items - merger-related costs	Special items - merger-related costs	—		0.01		(100)	%	Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	CASM excluding fuel and special items	9.95	¢	12.00	¢	(17)	%	CASM excluding fuel and special items	9.67	¢	12.57	¢	(23)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	6.72	¢	12.39	¢	(46)	%	CASM	8.26	¢	13.56	¢	(39)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(4.21)		(1.91)		120	%	Payroll Support Program grant wage offset	(2.61)		(2.89)		(10)	%
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	1.75		2.12		(17)	%	Aircraft fuel, including hedging gains and losses	1.99		1.92		4	%
Special items - impairment charges and other	Special items - impairment charges and other	0.07		0.99		(93)	%	Special items - impairment charges and other	0.02		1.24		(99)	%
Special items - restructuring charges and other	Special items - restructuring charges and other	(0.06)		—		NM		Special items - restructuring charges and other	(0.04)		1.37		(103)	%
Special items - merger-related costs	Special items - merger-related costs	—		0.02		(100)	%	Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	CASM excluding fuel and special items	9.17	¢	11.17	¢	(18)	%	CASM excluding fuel and special items	8.90	¢	11.90	¢	(25)	%

OPERATING REVENUES

Total operating revenues increased ~~$267 million,~~$1.5 billion, or ~~13%~~55%, during the first ~~six~~nine months of 2021 compared to the same period in 2020. The changes are summarized in the following table:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Passenger revenue	Passenger revenue	$	2,011	$	1,790	12	%	Passenger revenue	$	3,785	$	2,362	60	%
Mileage Plan other revenue	Mileage Plan other revenue	212		182		16	%	Mileage Plan other revenue	332		266		25	%
Cargo and other	Cargo and other	101		85		19	%	Cargo and other	160		130		23	%
Total operating revenues	Total operating revenues	$	2,324	$	2,057	13	%	Total operating revenues	$	4,277	$	2,758	55	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the first ~~six~~nine months of 2021 increased by ~~$221 million,~~$1.4 billion, or ~~12%~~60%, on a ~~28%~~69% increase in passenger traffic, driven primarily by rebounding demand for leisure travel experienced in the second ~~quarter~~and third quarters of 2021. As travel restrictions were largely removed ~~including the full removal of restrictions~~ in the ~~state of California in June~~second quarter of 2021, passenger counts increased dramatically as compared to the prior ~~year.~~year, with summer holiday travel approaching pre-COVID levels. These improvements were offset by ~~a decrease~~the impacts of ~~12%~~the delta variant, which slowed the return of demand primarily in ~~yield, stemming from promotional activities undertaken to stimulate demand and increase bookings during what is typically a low booking period.~~September 2021.

WeAlthough the delta variant is likely to have an acute impact on October results, we expect that overall fourth quarter revenue will continue to ~~see continued~~show improvement ~~to Passenger revenue as we progress through 2021,~~over 2020 driven by ~~continued growth in demand~~leisure passengers traveling for the holiday season, and ~~capacity, as well as improvements to~~the gradual return of business ~~travel as employees return to work.~~

travel.

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Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased ~~$30~~$66 million, or ~~16%~~25%, in the first ~~six~~nine months of 2021 compared to the first ~~six~~nine months of 2020, due largely to an increase in commission received from our affinity card partner stemming from growing consumer spend and ~~incremental new card acquisitions.~~an increase in cardholders.

Cargo and other

On a consolidated basis, Cargo and other revenue increased ~~$16~~$30 million, or ~~19%~~23%, in the first ~~six~~nine months of 2021 compared to the first ~~six~~nine months of 2020. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.

We expect that our cargo and other revenues will be positively impacted as compared to 2020 due to ~~the elimination of freighter limitations.~~similar reasons as discussed above.

OPERATING EXPENSES

Total operating expenses decreased ~~$730~~$307 million, or ~~27%~~8%, compared to the first ~~six~~nine months of 2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Fuel expense	Fuel expense	$	477	$	443	8	%	Fuel expense	$	853	$	568	50	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	2,371		2,352		1	%	Non-fuel operating expenses, excluding special items	3,699		3,453		7	%
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	(914)		(362)		152	%	Payroll Support Program grant wage offset	(914)		(760)		20	%
Special items - impairment charges and other	Special items - impairment charges and other	14		229		(94)	%	Special items - impairment charges and other	5		350		(99)	%
Special items - restructuring charges	Special items - restructuring charges	(12)		—		NM		Special items - restructuring charges	(12)		322		(104)	%
Special items - merger-related costs	Special items - merger-related costs	—		4		(100)	%	Special items - merger-related costs	—		5		(100)	%
Total operating expenses	Total operating expenses	$	1,936	$	2,666	(27)	%	Total operating expenses	$	3,631	$	3,938	(8)	%

Fuel Expense

Aircraft fuel expense increased ~~$34~~$285 million, or 8%50%, compared to the ~~six~~nine months ended ~~June~~September 30, 2020. The elements of the change are illustrated in the table:


		Six Months Ended June 30,									Nine Months Ended September 30,
		2021				2020					2021				2020
(in millions, except for per gallon amounts)	(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal		(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	Raw or "into-plane" fuel cost	$	552	$	1.87	$	430	$	1.73	Raw or "into-plane" fuel cost	$	949	$	1.99	$	553	$	1.61
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	(7)		(0.02)		10		0.04		(Gain)/loss on settled hedges	(28)		(0.06)		15		0.04
Consolidated economic fuel expense	Consolidated economic fuel expense	545		1.85		$	440	$	1.77	Consolidated economic fuel expense	921		1.93		$	568	$	1.65
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(68)		(0.23)		3		0.01		Mark-to-market fuel hedge adjustments	(68)		(0.14)		—		—
GAAP fuel expense	GAAP fuel expense	$	477	$	1.62	$	443	$	1.78	GAAP fuel expense	$	853	$	1.79	$	568	$	1.65
Fuel gallons	Fuel gallons	294				248				Fuel gallons	477				344

The raw fuel price per gallon increased 8%24% due to 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 increase in raw fuel price per gallon during the first ~~six~~nine months of 2021 was driven by a ~~10%~~55% increase in crude oil prices, offset by a ~~65%~~slight decrease in refining margins.

Gains recognized for hedges that settled in the first ~~six~~nine months of 2021 were $7$28 million, compared to losses of ~~$10~~$15 million in the same period in 2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.

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We expect our economic fuel cost per gallon in the ~~third~~fourth quarter to range between ~~$1.95~~$2.25 and ~~$2.00~~$2.30 per gallon based on current market West Coast jet fuel prices.

Non-fuel Expense and Non- special items


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Wages and benefits	Wages and benefits	$	1,003	$	1,084	(7)	%	Wages and benefits	$	1,581	$	1,579	—	%
Variable incentive pay	Variable incentive pay	67		23		191	%	Variable incentive pay	109		65		68	%
Aircraft maintenance	Aircraft maintenance	183		160		14	%	Aircraft maintenance	272		244		11	%
Aircraft rent	Aircraft rent	124		155		(20)	%	Aircraft rent	188		229		(18)	%
Landing fees and other rentals	Landing fees and other rentals	273		214		28	%	Landing fees and other rentals	414		323		28	%
Contracted services	Contracted services	105		102		3	%	Contracted services	167		138		21	%
Selling expenses	Selling expenses	74		59		25	%	Selling expenses	123		83		48	%
Depreciation and amortization	Depreciation and amortization	195		215		(9)	%	Depreciation and amortization	294		320		(8)	%
Food and beverage service	Food and beverage service	58		56		4	%	Food and beverage service	97		70		39	%
Third-party regional carrier expense	Third-party regional carrier expense	67		63		6	%	Third-party regional carrier expense	106		92		15	%
Other	Other	222		221		—	%	Other	348		310		12	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	2,371	$	2,352	1	%	Total non-fuel operating expenses, excluding special items	$	3,699	$	3,453	7	%

Wages and Benefits

Wages and benefits ~~decreased~~increased during the first ~~six~~nine months of 2021 by ~~$81 million, or 7%.~~$2 million. The primary components of wages and benefits are shown in the following table:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2021		2020		% Change		(in millions)	2021		2020		% Change
Wages	Wages	$	743	$	803	(7)	%	Wages	$	1,176	$	1,159	1	%
Pension—Defined benefit plans service cost	Pension—Defined benefit plans service cost	26		26		—	%	Pension—Defined benefit plans service cost	39		37		5	%
Defined contribution plans	Defined contribution plans	58		68		(15)	%	Defined contribution plans	91		96		(5)	%
Medical and other benefits	Medical and other benefits	124		130		(5)	%	Medical and other benefits	192		205		(6)	%
Payroll taxes	Payroll taxes	52		57		(9)	%	Payroll taxes	83		82		1	%
Total wages and benefits	Total wages and benefits	$	1,003	$	1,084	(7)	%	Total wages and benefits	$	1,581	$	1,579	—	%

Wages ~~decreased $60~~increased $17 million, or 7%1%, on a ~~5% decrease~~4% increase in FTEs. ~~Decreased~~Increased wages as compared to the prior period are primarily the result of ~~voluntary early-outs, as well as~~pilots and employees returning from leaves of absence and incentive lines accepted in ~~2020 which carried into 2021.~~2020. These ~~reductions~~increases were ~~offset by~~coupled with increased wages in the ~~second~~third 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 the decline in wages.~~

For the full year, we expect wages and benefits will increase compared to 2020 as we increase scheduled flying and return workers from 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 increased $44 million, or ~~191%~~68%, during the first ~~six~~nine months of 2021 as compared to the same period in 2020. The increase is primarily due to the expectation that ~~incremental key targets~~higher payouts will be achieved under the ~~performance based pay program.~~Performance Based Pay Plan.

Aircraft Maintenance

Aircraft maintenance expense increased by ~~$23~~$28 million, or ~~14%~~11%, during the first ~~six~~nine months of 2021 compared to the same period in 2020. The increase is primarily due to increased component repairs which were ~~delayed from~~deferred in 2020, ~~as a result of increased flight hours,~~ as well as increased power-by-the-hour ~~combined with~~expense driven by increased utilization of covered aircraft.

We expect full year aircraft maintenance expense to be higher than 2020 on increased aircraft utilization.

Landing fees and other rentals

Landing fees and other rentals increased by ~~$59~~$91 million, or 28%, during the first ~~six~~nine months of 2021 compared to the same period in 2020, primarily due to a significant increase in departures, combined with increased rates at certain of our hub airports.

For the full year, we expect landing fees and other rentals to increase as compared to 2020 as we continue to increase capacity and departures on increased rates at many of our hub airports.

Selling Expense

Selling expense increased by ~~$15~~$40 million, or ~~25%~~48%, during the first ~~six~~nine months of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions. Increased marketing spend and sponsorship costs given the return of professional sports and events also contributed to the year-over-year increase.

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

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $4$14 million, or 6%15%, during the first ~~six~~nine months of 2021 compared to the same period in 2020. The increase is primarily due to a ~~26%~~25% 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 higher than 2020 driven by increased departures.

Special Items - Impairment and other charges

We recorded impairment and other charges of ~~$14~~$5 million in the first ~~six~~nine months of 2021, consisting of costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor. We continue to evaluate total estimated costs to return these permanently parked aircraft, and make updates to total expense where necessary.

Special Items - Restructuring charges

We recorded a restructuring benefit of $12 million in the first ~~six~~nine months of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.

ADDITIONAL SEGMENT INFORMATION

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

Mainline

Mainline reported an adjusted pretax loss ~~was $468~~of $247 million in the first ~~six~~nine months of 2021, compared to an adjusted pretax loss of ~~$556 million~~$1 billion in the same period in 2020. The ~~$88~~$772 million improvement to pretax loss was driven by a ~~$163 million~~$1.2 billion increase in Mainline operating revenues ~~coupled with~~offset by a ~~$28~~$278 million ~~decrease~~increase in Mainline fuel expense and a $160 million increase in Mainline non-fuel operating expense. ~~These improvements were offset by a $69 million increase in Mainline fuel expense.~~

As compared to the prior year, higher Mainline revenues are primarily attributable to a ~~25%~~71% increase in traffic on a ~~20 point~~41-point increase in capacity, driven by the significant increase in demand recovering from the COVID-19 pandemic. Non-fuel operating expenses increased from higher variable costs on increased capacity, as well as rising wages and benefits expense as we expand our workforce to meet growing ~~demand and leisure travel seasonality.~~demand. Higher raw fuel prices, combined with increased consumption drove the growth in Mainline fuel expense.

Regional

Regional operations incurred an adjusted pretax loss of ~~$206~~$207 million in the first ~~six~~nine months of 2021, compared to an adjusted pretax loss of ~~$202~~$298 million in the first ~~six~~nine months of 2020. The ~~increased~~decreased loss was attributable to a ~~$72~~$278 million increase in operating revenues, offset by a $112 million increase in non-fuel operating expenses and a ~~$36~~$75 million increase in fuel ~~costs, offset by a $104 million increase in operating revenues.~~costs.

The increase to regional revenues is driven by a ~~50%~~58% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses.

Horizon

Horizon achieved an adjusted pretax profit of ~~$26~~$34 million in the first ~~six~~nine months of 2021, compared to an adjusted pretax profit of ~~$16~~$27 million in the same period in 2020, primarily due to improved operational performance and cost 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, manage liquidity and preserve the relative strength of our balance sheet. In 2020, we took significant actions to enhance and preserve our 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:

•Generated positive operating cash flow of ~~$1.0 billion,~~$901 million, 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 programs, $892 million of which is included in operating cash flow;

•Repaid ~~$681 million~~$1.2 billion in debt, including the termination of the CARES Act loan, ~~and the~~ full repayment of two outstanding lines of ~~credit;~~credit, and prepayment of the $425 million 364-day term loan facility;

•Decreased debt-to-capitalization ratio to ~~56%~~51% at ~~June~~September 30, 2021 from 61% at December 31, 2020;

•Made a $100 million voluntary contribution to the defined benefit plan for Alaska's pilots in the third quarter, boosting estimated combined funded status of all defined benefit plans to 94%;

•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 2022 to later years,~~flexibility for timing of future deliveries and capital expenditures, and;

•Maintained low capital expenditures, which are expected to be approximately ~~$225~~$250 million in 2021, including 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.

As the business continues to recover and ~~returns to~~maintain profitability, reducing outstanding debt, normalizing our on-hand liquidity, and strengthening our balance sheet is a high priority. Based on our fourth quarter expectations ~~about~~including reduced bookings driven by the ~~recovery ahead,~~delta variant and rising fuel prices, we expect to ~~generate~~use 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.~~zero, excluding any federal income tax refunds or payments.

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.

3739

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


(in millions)	(in millions)	June 30, 2021			December 31, 2020			Change	(in millions)	September 30, 2021			December 31, 2020			Change
Cash and marketable securities	Cash and marketable securities	$	3,951		$	3,346		18 %	Cash and marketable securities	$	3,195		$	3,346		(5) %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	103		%	94		%	9 pts	Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	71		%	94		%	(23) pts
Total debt	Total debt	3,188			3,495			(9) %	Total debt	2,650			3,495			(24) %
Shareholders’ equity	Shareholders’ equity	$	3,324		$	2,988		11%	Shareholders’ equity	$	3,531		$	2,988		18%


Debt-to-capitalization, adjusted for operating leases	Debt-to-capitalization, adjusted for operating leases								Debt-to-capitalization, adjusted for operating leases
(in millions)	(in millions)	June 30, 2021			December 31, 2020			Change	(in millions)	September 30, 2021			December 31, 2020			Change
Long-term debt, net of current portion	Long-term debt, net of current portion	$	2,319		$	2,357		(2)%	Long-term debt, net of current portion	$	2,225		$	2,357		(6)%
Capitalized operating leases	Capitalized operating leases	1,485			1,558			(5)%	Capitalized operating leases	1,466			1,558			(6)%
COVID-19 related borrowings(a)	COVID-19 related borrowings(a)	425			734			(42)%	COVID-19 related borrowings(a)	—			734			(100)%
Adjusted debt, net of current portion of long-term debt	Adjusted debt, net of current portion of long-term debt	$	4,229		$	4,649		(9)%	Adjusted debt, net of current portion of long-term debt	$	3,691		$	4,649		(21)%
Shareholders' equity	Shareholders' equity	3,324			2,988			11%	Shareholders' equity	3,531			2,988			18%
Total invested capital	Total invested capital	$	7,553		$	7,637		(1)%	Total invested capital	$	7,222		$	7,637		(5)%

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

~~(a)~~To best reflect our leverage, 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)	June 30, 2021		December 31, 2020		(in millions)	September 30, 2021		December 31, 2020
Current portion of long-term debt	Current portion of long-term debt	$	869	$	1,138	Current portion of long-term debt	$	425	$	1,138
Current portion of operating lease liabilities	Current portion of operating lease liabilities	263		290		Current portion of operating lease liabilities	260		290
Long-term debt, net of current portion	Long-term debt, net of current portion	2,319		2,357		Long-term debt, net of current portion	2,225		2,357
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,222		1,268		Long-term operating lease liabilities, net of current portion	1,206		1,268
Total adjusted debt	Total adjusted debt	4,673		5,053		Total adjusted debt	4,116		5,053
Less: Cash and marketable securities	Less: Cash and marketable securities	(3,951)		(3,346)		Less: Cash and marketable securities	(3,195)		(3,346)
Adjusted net debt	Adjusted net debt	$	722	$	1,707	Adjusted net debt	$	921	$	1,707

(in millions)	(in millions)	Twelve Months Ended June 30, 2021		Twelve Months Ended December 31, 2020		(in millions)	Twelve Months Ended September 30, 2021		Twelve Months Ended December 31, 2020
GAAP Operating Loss(a)		$	(778)	$	(1,775)
GAAP Operating Income (loss)(a)						GAAP Operating Income (loss)(a)	$	51	$	(1,775)
Adjusted for:	Adjusted for:					Adjusted for:
Payroll Support Program grant wage offset and special items	Payroll Support Program grant wage offset and special items	(712)		71		Payroll Support Program grant wage offset and special items	(767)		71
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(79)		(8)		Mark-to-market fuel hedge adjustments	(76)		(8)
Depreciation and amortization	Depreciation and amortization	400		420		Depreciation and amortization	394		420
Aircraft rent	Aircraft rent	268		299		Aircraft rent	258		299
EBITDAR	EBITDAR	$	(901)	$	(993)	EBITDAR	$	(140)	$	(993)
Adjusted net debt to EBITDAR	Adjusted net debt to EBITDAR	(0.8x)		(1.7x)		Adjusted net debt to EBITDAR	(6.6x)		(1.7x)

(a)Operating ~~loss~~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.

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ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first ~~six~~nine months of 2021, net cash provided by operating activities was ~~$1.0 billion,~~$901 million, compared to ~~$321~~$116 million during the same period in 2020. The ~~$686~~$785 million increase in our operating cash flows is primarily attributable to a ~~$712 million~~$1.3 billion improvement to net income, aided by the receipt and recognition of $892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is due to continued increases in advanced bookings and a significant reduction in refund activity when compared to the first ~~six~~nine months of 2020. These improvements were partially offset by a $100 million voluntary contribution to the defined benefit plan for Alaska pilots.

Cash Used in Investing Activities

Cash used in investing activities was ~~$1.1 billion~~$943 million during the first ~~six~~nine months of 2021, compared to ~~$124~~$767 million during the same period of 2020. The increase to cash used in investing activities is primarily due to net purchases of marketable securities, which were ~~$963~~$744 million in the first ~~six~~nine months of 2021, compared to ~~net sales of $34~~$572 million in the ~~six~~nine months ended ~~June~~September 30, 2020. ~~The shift to~~Increased net purchases is primarily driven by additional cash on hand from ~~increased operating cash flow and~~ the PSP program ~~which allowed~~and improved operational results, allowing the Company to invest additional funds.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities was ~~$281~~$825 million during the first ~~six~~nine months of 2021 compared to cash provided by financing activities of ~~$1.1~~$2.3 billion during the same period in 2020. During the first ~~six~~nine months of 2021, we utilized cash on hand to repay ~~$681 million~~$1.2 billion of outstanding long-term debt, compared to payments of ~~$125~~$238 million during the same period in 2020. These payments were offset by proceeds from debt issuances of $363 million, primarily a result of the loan portion of the proceeds from the CARES Act PSP, compared to ~~$1.3~~$2.6 billion issued in 2020 in response to the COVID-19 pandemic.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Commitments

As of ~~June~~September 30, 2021, weour airlines have firm orders to purchase 7586 aircraft, and firm commitments to lease 1312 aircraft. Alaska also has 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 2027. At this time, we do not expect to take delivery of these 30 Airbus aircraft. Alaska also has~~ options to acquire 3952 B737-9 MAX aircraft with deliveries from 2024 through 2026, and Horizon has options to acquire 21 E175 aircraft with deliveries from 2023 through ~~2024.~~2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

3941

The following table summarizes our anticipated fleet count by year, as of ~~June~~September 30, 2021:


		Actual Fleet	Anticipated Fleet Activity(a)								Actual Fleet	Anticipated Fleet Activity(a)
Aircraft	Aircraft	June 30, 2021	2021 Additions	2021 Removals	Dec 31, 2021	2022 Changes	Dec 31, 2022	2023 Changes	Dec 31, 2023	Aircraft	Sept 30, 2021	2021 Additions	2021 Removals	Dec 31, 2021	2022 Changes	Dec 31, 2022	2023 Changes	Dec 31, 2023
B737 Freighters	B737 Freighters	3	—	—	3	—	3	—	3	B737 Freighters	3	—	—	3	—	3	—	3
B737-700	B737-700	11	—	—	11	—	11	—	11	B737-700	11	—	—	11	—	11	—	11
B737-800	B737-800	61	—	—	61	—	61	—	61	B737-800	61	—	—	61	—	61	—	61
B737-900	B737-900	12	—	—	12	—	12	—	12	B737-900	12	—	—	12	—	12	—	12
B737-900ER	B737-900ER	79	—	—	79	—	79	—	79	B737-900ER	79	—	—	79	—	79	—	79
B737-9 MAX	B737-9 MAX	5	7	—	12	31	43	22	65	B737-9 MAX	7	5	—	12	31	43	32	75
A320(b)	A320(b)	21	7	(1)	27	(3)	24	(24)	—	A320(b)	27	4		31	(7)	24	(24)	—
A321neo	A321neo	10	—	—	10	—	10	—	10	A321neo	10	—	—	10	—	10	—	10
Total Mainline Fleet	Total Mainline Fleet	202	14	(1)	215	28	243	(2)	241	Total Mainline Fleet	210	9	—	219	24	243	8	251
Q400 operated by Horizon(c)	Q400 operated by Horizon(c)	32	—	—	32	—	32	—	32	Q400 operated by Horizon(c)	32	—	—	32	—	32	—	32
E175 operated by Horizon(c)	E175 operated by Horizon(c)	30	—	—	30	5	35	4	39	E175 operated by Horizon(c)	30	—	—	30	5	35	4	39
E175 operated by third party(c)	E175 operated by third party(c)	32	—	—	32	8	40	—	40	E175 operated by third party(c)	32	—	—	32	8	40	—	40
Total Regional Fleet	Total Regional Fleet	94	—	—	94	13	107	4	111	Total Regional Fleet	94	—	—	94	13	107	4	111
Total	Total	296	14	(1)	309	41	350	2	352	Total	304	9	—	313	37	350	12	362

(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted yet.

(b)Actual fleet at ~~June~~September 30, 2021, excluding Airbus aircraft permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12 of these aircraft to operating ~~service, seven of which~~service. Of these aircraft, six were returned in Q3 2021, four are planned for Q4 2021 and ~~five~~two 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.

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. Our crude oil positions are as follows:


		Approximate Gallons Hedged (in millions)	Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel		Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel

Third Quarter 2021		100	$60	$2

Fourth Quarter 2021	Fourth Quarter 2021	90	$61	$3	Fourth Quarter 2021	50	%	$61	$3
Remainder of 2021	Remainder of 2021	190	$60	$2	Remainder of 2021	50	%	$61	$3
First Quarter 2022	First Quarter 2022	80	$67	$3	First Quarter 2022	50	%	$69	$3
Second Quarter 2022	Second Quarter 2022	60	$66	$3	Second Quarter 2022	40	%	$69	$3
Third Quarter 2022	Third Quarter 2022	40	$70	$3	Third Quarter 2022	30	%	$73	$3
Fourth Quarter 2022	Fourth Quarter 2022	20	$71	$3	Fourth Quarter 2022	20	%	$70	$4
Full Year 2022	Full Year 2022	200	$68	$3	Full Year 2022	34	%	$70	$3
First Quarter of 2023					First Quarter of 2023	10	%	$69	$4
Full Year 2023					Full Year 2023	2	%	$69	$4

4042

Contractual Obligations

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


(in millions)	(in millions)	Remainder of 2021		2022		2023		2024		2025		Beyond 2025		Total		(in millions)	Remainder of 2021		2022		2023		2024		2025		Beyond 2025		Total
Current and long-term debt obligations	Current and long-term debt obligations	$	227	$	796	$	334	$	240	$	261	$	1,353	$	3,211	Current and long-term debt obligations	$	112	$	371	$	334	$	240	$	261	$	1,352	$	2,670
Aircraft lease commitments(a)	Aircraft lease commitments(a)	162		280		219		167		159		633		1,620		Aircraft lease commitments(a)	81		292		229		172		165		656		1,595
Facility lease commitments	Facility lease commitments	6		10		9		8		6		88		127		Facility lease commitments	3		9		9		9		6		88		124
Aircraft-related commitments(b)	Aircraft-related commitments(b)	107		1,458		1,207		291		76		12		3,151		Aircraft-related commitments(b)	60		1,476		1,681		385		79		13		3,694

Interest obligations (c)	Interest obligations (c)	55		98		72		57		51		175		508		Interest obligations (c)	7		85		91		68		51		176		478
Other obligations (d)	Other obligations (d)	89		184		189		196		197		898		1,753		Other obligations (d)	47		184		189		195		197		898		1,710
Total	Total	$	646	$	2,826	$	2,030	$	959	$	750	$	3,159	$	10,370	Total	$	310	$	2,417	$	2,533	$	1,069	$	759	$	3,183	$	10,271

(a)Future minimum lease payments for aircraft includes commitments for aircraft which have been 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 interest rates forecast as of ~~June~~September 30, 2021.

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

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.

Leased Aircraft Return Costs

For many of our leased aircraft, we are required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. We anticipate recording material expenses and cash outflows to return aircraft beginning in 2022, as all Airbus A320 aircraft are expected to exit our fleet by 2023.

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.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three months ended ~~June~~September 30, 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, 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 and SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and 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

4244


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, 2020.

4345


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended ~~June~~September 30, 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).

4446

PART II


ITEM 1. LEGAL PROCEEDINGS

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. In February 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

~~There~~Except for the additional risk factor below, 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, 2020.

Mandatory vaccination programs could have a material adverse impact on the Company's operations and financial results.

The President's executive order of September 9, 2021 requires employees of government contractors to be fully vaccinated against COVID-19 as soon as December 8, 2021, though final timelines are pending. Alaska Airlines and Horizon Air are government contractors by virtue of their agreements with the U.S. government for the carriage of passengers and mail, among other activities. McGee Air Services is subject to the executive order as a subcontractor of Alaska Airlines. Our operating subsidiaries are working to achieve compliance with the mandate. The executive order allows employers to excuse employees from the vaccination requirement only with a valid medical or religious exemption. Alaska, Horizon and McGee operate in highly competitive job markets in which the pool of available employees is limited. Our companies, contractors and vendor partners whose services we rely on to run our operation, may lose current or prospective employees because individuals decline to be vaccinated. If our companies, contractors and vendor partners cannot fill job vacancies with other qualified workers, operational disruption and associated negative impact to guests and our financial results could result. If we cannot comply with the scope and/or timing of the executive order or similar state mandates, we could lose business and revenues associated with our government contracts.


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.

~~In the second quarter~~As of September 30, 2021, the Company issued 271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 1,455,436 shares of the Company’s common stock ~~that~~ have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $52.25 (49,625 shares related to PSP2) and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

~~None.~~On November 2, 2021, the Company entered into new Change of Control Agreements with Messrs. Minicucci, Tackett and Harrison, as well as other officers of the Company and its subsidiaries. The new Change of Control Agreements replace and supersede the change-in-control agreements that were previously in place for these officers. The new agreements with Messrs. Minicucci, Tackett and Harrison have a term of three years, with automatic one-year extensions on each anniversary of the effective date, unless the Company notifies an executive before the next occurring anniversary that the agreement will not be extended beyond the term then in effect.

Under the new agreements, if a change of control occurs, an “employment period” of three years would go into effect. During the employment period, Messrs. Minicucci, Tackett and Harrison would be entitled to the following benefits, provided that they comply with any restrictive covenants under any agreements to which they remain subject:

•The highest monthly salary the executive received at any time during the 12-month period preceding the change in control;

•An annual incentive payment equal to the higher of the executive’s target Performance-Based Pay Plan incentive or the average of the executive’s annual incentive payments for the three years preceding the year in which the change in control occurs;

•Continued employer contributions under the Company’s DC Supplementary Retirement Plan;

•Continued participation in fringe benefit programs that are at least as favorable as those in which the executive was participating prior to the change of control;

•Travel benefits for the executive and his spouse or domestic partner and eligible family members and dependents under the most favorable plans, policies, programs and practices of the Company as in effect for the executive at any time during the 90‑day period immediately preceding the change of control or, if more favorable to the executive, as in effect generally at any time thereafter with respect to other peer executives of the Company; and

•Within 60 days after the later of the change of control or the date on which any restrictions on the executive’s compensation pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act Restrictions”) end, (i) a lump-sum cash payment equal to any cash-based obligations recouped by the Company pursuant to the CARES Act Restrictions, and (ii) with respect to any equity awards forfeited pursuant to the CARES Act Restrictions, a combination of shares of common stock of the Company or its successor, equity awards of the same type and subject to the same vesting schedule as the forfeited awards, and/or a cash payment equal to the fair market value of all or a portion of the shares of common stock covered by the forfeited awards (the amounts described in clauses (i) and (ii) collectively referred to as “CARES Act Restoration Payments”).

If the executive’s employment is terminated by the Company without cause or by the executive for “good reason” during the employment period (or, in certain circumstances, if such a termination occurs prior to and in connection with a change of control), the executive would be entitled to receive:

•A lump sum payment equal to the value of the payments and benefits identified above that the executive would have received had he continued to be employed for the entire employment period (other than travel benefits and equity awards forfeited pursuant to the Cares Act Restrictions);

•Lifetime unlimited, fee-waived, positive-space travel in any class of service for the executive and his spouse or domestic partner and eligible family members and dependents or, if more favorable to the executive, as in effect generally at any time thereafter with respect to other peer executives of the Company; and

•In the event that the CARES Act Restrictions end and, as of the executive’s termination date, CARES Act Restoration Payments have not been paid in full, then any remaining CARES Act Restoration Payments that would otherwise be payable had the executive remained employed.

The amount an executive would be entitled to receive would be reduced on a pro-rata basis for any time the executive worked during the employment period. (The terms “cause,” “good reason” and “change in control” are each defined in the new agreements.) In the event that change of control benefits under the new agreements exceed the threshold amount that would trigger an excise tax under Section 280G of the Internal Revenue Code, the executive would receive the larger of the following amounts:

•The “safe harbor amount,” which is equal to the level at which excise taxes are triggered; or

•The full change in control benefits if, after receipt of the full change in control benefits and payment of the excise tax, the after-tax amount is greater than the safe harbor amount referenced above.


ITEM 6. EXHIBITS

The following documents are filed as part of this report:

1.Exhibits: See Exhibit Index.

SIGNATURES

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


ALASKA AIR GROUP, INC.

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

~~August 3,~~November 4, 2021

4649

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†
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.

Exhibit
Number

Exhibit
Description

Form

Date of First Filing

Exhibit Number

3.1

Amended and Restated Certificate of Incorporation of Registrant

10-Q

August 3, 2017

3.1

10.1†

Form of Alaska Air Group, Inc. Change of Control Agreement for named executive officers, as amended August 3, 2021

10-Q

10.2†*

Amendment No. 16 to Purchase Agreement dated April 11, 2016, between Embraer S.A. and Horizon Air Industries, Inc.

10-Q

10.3†*

Supplemental Agreement No. 18 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.

10-Q

31.1†

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

10-Q

31.2†

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

10-Q

32.1†

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

10-Q

32.2†

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

10-Q

101.INS†

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

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

Filed herewith

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.

4750


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	2224
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4345
ITEM 4.	CONTROLS AND PROCEDURES	4446
PART II.	OTHER INFORMATION	4547
ITEM 1.	LEGAL PROCEEDINGS	4547
ITEM 1A.	RISK FACTORS	4547
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4547
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4548
ITEM 4.	MINE SAFETY DISCLOSURES	4648
ITEM 5.	OTHER INFORMATION	4648
ITEM 6.	EXHIBITS	4649
	SIGNATURES	4649