UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
☐ 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 |
| | | | | | | | |
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 125,310,668126,837,831 common shares, par value $0.01, outstanding at October 29, 2021.31, 2022.
This document is also available on our website at http://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 20212022
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, and Item 1A. "Risk Factors" of Part II of this Form 10-Q.2021. Please consider our forward-looking statements in light of those risks as you read this report.
PART I
| | |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | (in millions) | (in millions) | September 30, 2021 | | December 31, 2020 | (in millions) | September 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 495 | | | $ | 1,370 | | Cash and cash equivalents | $ | 688 | | | $ | 470 | |
Marketable securities | Marketable securities | 2,700 | | | 1,976 | | Marketable securities | 2,462 | | | 2,646 | |
Total cash and marketable securities | Total cash and marketable securities | 3,195 | | | 3,346 | | Total cash and marketable securities | 3,150 | | | 3,116 | |
Receivables - net | Receivables - net | 536 | | | 480 | | Receivables - net | 345 | | | 546 | |
Inventories and supplies - net | Inventories and supplies - net | 62 | | | 57 | | Inventories and supplies - net | 94 | | | 62 | |
Prepaid expenses, assets held-for-sale, and other current assets | 208 | | | 123 | | |
Prepaid expenses and other current assets | | Prepaid expenses and other current assets | 221 | | | 196 | |
Total Current Assets | Total Current Assets | 4,001 | | | 4,006 | | Total Current Assets | 3,810 | | | 3,920 | |
| Property and Equipment | Property and Equipment | | | | Property and Equipment | | | |
Aircraft and other flight equipment | Aircraft and other flight equipment | 8,076 | | | 7,761 | | Aircraft and other flight equipment | 8,811 | | | 8,127 | |
Other property and equipment | Other property and equipment | 1,446 | | | 1,398 | | Other property and equipment | 1,589 | | | 1,489 | |
Deposits for future flight equipment | Deposits for future flight equipment | 378 | | | 583 | | Deposits for future flight equipment | 300 | | | 384 | |
| | 9,900 | | | 9,742 | | | 10,700 | | | 10,000 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | 3,780 | | | 3,531 | | Less accumulated depreciation and amortization | 4,046 | | | 3,862 | |
Total Property and Equipment - Net | Total Property and Equipment - Net | 6,120 | | | 6,211 | | Total Property and Equipment - Net | 6,654 | | | 6,138 | |
| Other Assets | | Other Assets | |
Operating lease assets | Operating lease assets | 1,370 | | | 1,400 | | Operating lease assets | 1,605 | | | 1,453 | |
Goodwill | 1,943 | | | 1,943 | | |
Intangible assets - net | 102 | | | 107 | | |
Goodwill and intangible assets | | Goodwill and intangible assets | 2,040 | | | 2,044 | |
Other noncurrent assets | Other noncurrent assets | 346 | | | 379 | | Other noncurrent assets | 422 | | | 396 | |
Other Assets | 3,761 | | | 3,829 | | |
Total Other Assets | | Total Other Assets | 4,067 | | | 3,893 | |
| Total Assets | Total Assets | $ | 13,882 | | | $ | 14,046 | | Total Assets | $ | 14,531 | | | $ | 13,951 | |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | (in millions, except share amounts) | (in millions, except share amounts) | September 30, 2021 | | December 31, 2020 | (in millions, except share amounts) | September 30, 2022 | | December 31, 2021 |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | Current Liabilities | | | | Current Liabilities | | | |
Accounts payable | Accounts payable | $ | 181 | | | $ | 108 | | Accounts payable | $ | 202 | | | $ | 200 | |
Accrued wages, vacation and payroll taxes | Accrued wages, vacation and payroll taxes | 426 | | | 527 | | Accrued wages, vacation and payroll taxes | 583 | | | 457 | |
Air traffic liability | Air traffic liability | 1,225 | | | 1,073 | | Air traffic liability | 1,467 | | | 1,163 | |
| Other accrued liabilities | Other accrued liabilities | 603 | | | 424 | | Other accrued liabilities | 805 | | | 625 | |
Deferred revenue | Deferred revenue | 904 | | | 733 | | Deferred revenue | 1,068 | | | 912 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 260 | | | 290 | | Current portion of operating lease liabilities | 263 | | | 268 | |
Current portion of long-term debt | Current portion of long-term debt | 425 | | | 1,138 | | Current portion of long-term debt | 321 | | | 366 | |
Total Current Liabilities | Total Current Liabilities | 4,024 | | | 4,293 | | Total Current Liabilities | 4,709 | | | 3,991 | |
| Long-Term Debt, Net of Current Portion | Long-Term Debt, Net of Current Portion | 2,225 | | | 2,357 | | Long-Term Debt, Net of Current Portion | 1,889 | | | 2,173 | |
| Noncurrent Liabilities | Noncurrent Liabilities | | | | Noncurrent Liabilities | | | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,206 | | | 1,268 | | Long-term operating lease liabilities, net of current portion | 1,482 | | | 1,279 | |
Deferred income taxes | Deferred income taxes | 501 | | | 407 | | Deferred income taxes | 571 | | | 578 | |
Deferred revenue | Deferred revenue | 1,446 | | | 1,544 | | Deferred revenue | 1,413 | | | 1,446 | |
Obligation for pension and postretirement medical benefits | 558 | | | 665 | | |
Obligation for pension and post-retirement medical benefits | | Obligation for pension and post-retirement medical benefits | 296 | | | 305 | |
Other liabilities | Other liabilities | 391 | | | 524 | | Other liabilities | 345 | | | 378 | |
Total Noncurrent Liabilities | | Total Noncurrent Liabilities | 4,107 | | | 3,986 | |
| | 4,102 | | | 4,408 | | | | | |
Commitments and Contingencies | 0 | | 0 | |
Commitments and Contingencies (Note 7) | | Commitments and Contingencies (Note 7) | |
| Shareholders' Equity | Shareholders' Equity | | | | Shareholders' Equity | | | |
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 | — | | | — | | 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 | 1 | | | 1 | | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares | | Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares | 1 | | | 1 | |
Capital in excess of par value | Capital in excess of par value | 462 | | | 391 | | Capital in excess of par value | 549 | | | 494 | |
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares | (674) | | | (674) | | |
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares | | Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares | (674) | | | (674) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (482) | | | (494) | | Accumulated other comprehensive loss | (328) | | | (262) | |
Retained earnings | Retained earnings | 4,224 | | | 3,764 | | Retained earnings | 4,278 | | | 4,242 | |
| | 3,531 | | | 2,988 | | | 3,826 | | | 3,801 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 13,882 | | | $ | 14,046 | | Total Liabilities and Shareholders' Equity | $ | 14,531 | | | $ | 13,951 | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) | | | Three Months Ended September 30, | | Nine Months Ended September 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) | 2022 | | 2021 | | 2022 | | 2021 |
Operating Revenues | Operating Revenues | | | | | | | | Operating Revenues | | | | | | | |
Passenger revenue | Passenger revenue | $ | 1,774 | | | $ | 572 | | | $ | 3,785 | | | $ | 2,362 | | Passenger revenue | $ | 2,615 | | | $ | 1,774 | | | $ | 6,544 | | | $ | 3,785 | |
Mileage Plan other revenue | Mileage Plan other revenue | 120 | | | 84 | | | 332 | | | 266 | | Mileage Plan other revenue | 146 | | | 120 | | | 433 | | | 332 | |
Cargo and other | Cargo and other | 59 | | | 45 | | | 160 | | | 130 | | Cargo and other | 67 | | | 59 | | | 190 | | | 160 | |
Total Operating Revenues | Total Operating Revenues | 1,953 | | | 701 | | | 4,277 | | | 2,758 | | Total Operating Revenues | 2,828 | | | 1,953 | | | 7,167 | | | 4,277 | |
Operating Expenses | Operating Expenses | | | | | | | | Operating Expenses | | | | | | | |
Wages and benefits | Wages and benefits | 578 | | | 495 | | | 1,581 | | | 1,579 | | Wages and benefits | 686 | | | 578 | | | 1,931 | | | 1,581 | |
Variable incentive pay | Variable incentive pay | 42 | | | 42 | | | 109 | | | 65 | | Variable incentive pay | 48 | | | 42 | | | 140 | | | 109 | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | — | | | (398) | | | (914) | | | (760) | | Payroll Support Program grant wage offset | — | | | — | | | — | | | (914) | |
Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 376 | | | 125 | | | 853 | | | 568 | | Aircraft fuel, including hedging gains and losses | 877 | | | 376 | | | 2,000 | | | 853 | |
Aircraft maintenance | Aircraft maintenance | 89 | | | 84 | | | 272 | | | 244 | | Aircraft maintenance | 92 | | | 89 | | | 331 | | | 272 | |
Aircraft rent | Aircraft rent | 64 | | | 74 | | | 188 | | | 229 | | Aircraft rent | 76 | | | 64 | | | 222 | | | 188 | |
Landing fees and other rentals | Landing fees and other rentals | 141 | | | 109 | | | 414 | | | 323 | | Landing fees and other rentals | 161 | | | 141 | | | 435 | | | 414 | |
Contracted services | Contracted services | 62 | | | 36 | | | 167 | | | 138 | | Contracted services | 83 | | | 62 | | | 243 | | | 167 | |
Selling expenses | Selling expenses | 49 | | | 24 | | | 123 | | | 83 | | Selling expenses | 82 | | | 49 | | | 218 | | | 123 | |
Depreciation and amortization | Depreciation and amortization | 99 | | | 105 | | | 294 | | | 320 | | Depreciation and amortization | 104 | | | 99 | | | 310 | | | 294 | |
Food and beverage service | Food and beverage service | 39 | | | 14 | | | 97 | | | 70 | | Food and beverage service | 52 | | | 39 | | | 143 | | | 97 | |
Third-party regional carrier expense | Third-party regional carrier expense | 39 | | | 29 | | | 106 | | | 92 | | Third-party regional carrier expense | 53 | | | 39 | | | 145 | | | 106 | |
Other | Other | 126 | | | 89 | | | 348 | | | 310 | | Other | 207 | | | 126 | | | 536 | | | 348 | |
Special items - impairment charges and other | (9) | | | 121 | | | 5 | | | 350 | | |
Special items - restructuring charges | — | | | 322 | | | (12) | | | 322 | | |
Special items - merger-related costs | — | | | 1 | | | — | | | 5 | | |
Special items - fleet transition | | Special items - fleet transition | 155 | | | (9) | | | 376 | | | 5 | |
Special items - labor ratification bonus | | Special items - labor ratification bonus | 90 | | | — | | | 90 | | | — | |
Special items - restructuring | | Special items - restructuring | — | | | — | | | — | | | (12) | |
| Total Operating Expenses | Total Operating Expenses | 1,695 | | | 1,272 | | | 3,631 | | | 3,938 | | Total Operating Expenses | 2,766 | | | 1,695 | | | 7,120 | | | 3,631 | |
Operating Income (Loss) | 258 | | | (571) | | | 646 | | | (1,180) | | |
Nonoperating Income (Expense) | | | | | |
Operating Income | | Operating Income | 62 | | | 258 | | | 47 | | | 646 | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | | | | |
Interest income | Interest income | 6 | | | 7 | | | 19 | | | 23 | | Interest income | 17 | | | 6 | | | 35 | | | 19 | |
Interest expense | Interest expense | (30) | | | (34) | | | (101) | | | (64) | | Interest expense | (31) | | | (30) | | | (84) | | | (101) | |
Interest capitalized | Interest capitalized | 3 | | | 4 | | | 9 | | | 8 | | Interest capitalized | 3 | | | 3 | | | 8 | | | 9 | |
Other - net | Other - net | 8 | | | 5 | | | 27 | | | 16 | | Other - net | 14 | | | 8 | | | 38 | | | 27 | |
Total Nonoperating Income (Expense) | (13) | | | (18) | | | (46) | | | (17) | | |
Income (Loss) Before Income Tax | 245 | | | (589) | | | 600 | | | (1,197) | | |
Income tax expense (benefit) | 51 | | | (158) | | | 140 | | | (320) | | |
Net Income (Loss) | $ | 194 | | | $ | (431) | | | $ | 460 | | | $ | (877) | | |
Total Non-operating Income (Expense) | | Total Non-operating Income (Expense) | 3 | | | (13) | | | (3) | | | (46) | |
Income Before Income Tax | | Income Before Income Tax | 65 | | | 245 | | | 44 | | | 600 | |
Income tax expense | | Income tax expense | 25 | | | 51 | | | 8 | | | 140 | |
Net Income | | Net Income | $ | 40 | | | $ | 194 | | | $ | 36 | | | $ | 460 | |
| Basic Income (Loss) Per Share: | $ | 1.55 | | | $ | (3.49) | | | $ | 3.69 | | | $ | (7.12) | | |
Diluted Income (Loss) Per Share: | $ | 1.53 | | | $ | (3.49) | | | $ | 3.64 | | | $ | (7.12) | | |
Basic Earnings Per Share: | | Basic Earnings Per Share: | $ | 0.32 | | | $ | 1.55 | | | $ | 0.28 | | | $ | 3.69 | |
Diluted Earnings Per Share: | | Diluted Earnings Per Share: | $ | 0.31 | | | $ | 1.53 | | | $ | 0.28 | | | $ | 3.64 | |
Shares used for computation: | Shares used for computation: | | | Shares used for computation: | | |
Basic | Basic | 125.250 | | | 123.647 | | | 124.846 | | | 123.255 | | Basic | 126.783 | | | 125.250 | | | 126.440 | | | 124.846 | |
Diluted | Diluted | 127.188 | | | 123.647 | | | 126.325 | | | 123.255 | | Diluted | 128.370 | | | 127.188 | | | 128.087 | | | 126.325 | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Net Income (Loss) | $ | 194 | | | $ | (431) | | | $ | 460 | | | $ | (877) | |
| | | | | | | |
Other Comprehensive Income (Loss): | | | | | | | |
Related to marketable securities: | | | | | | | |
Unrealized holding gain (loss) arising during the period | (4) | | | 2 | | | (15) | | | 32 | |
Reclassification of gain into Other - net nonoperating income | — | | | (2) | | | (6) | | | (11) | |
Income tax effect | 1 | | | — | | | 5 | | | (5) | |
Total | (3) | | | — | | | (16) | | | 16 | |
| | | | | | | |
Related to employee benefit plans: | | | | | | | |
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income | 8 | | | 7 | | | 25 | | | 22 | |
Income tax effect | (2) | | | (1) | | | (6) | | | (5) | |
Total | 6 | | | 6 | | | 19 | | | 17 | |
| | | | | | | |
Related to interest rate derivative instruments: | | | | | | | |
Unrealized holding gain (loss) arising during the period | 2 | | | 2 | | | 11 | | | (25) | |
Reclassification of loss into Aircraft rent | — | | | 1 | | | — | | | 2 | |
Income tax effect | — | | | (1) | | | (2) | | | 5 | |
Total | 2 | | | 2 | | | 9 | | | (18) | |
| | | | | | | |
Other Comprehensive Income | 5 | | | 8 | | | 12 | | | 15 | |
| | | | | | | |
Comprehensive Income (Loss) | $ | 199 | | | $ | (423) | | | $ | 472 | | | $ | (862) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net Income | $ | 40 | | | $ | 194 | | | $ | 36 | | | $ | 460 | |
Other comprehensive income (loss), net of tax | | | | | | | |
Marketable securities | (26) | | | (3) | | | (86) | | | (16) | |
Employee benefit plans | 1 | | | 6 | | | 2 | | | 19 | |
Interest rate derivative instruments | 5 | | | 2 | | | 18 | | | 9 | |
Total other comprehensive income (loss), net of tax | $ | (20) | | | $ | 5 | | | $ | (66) | | | $ | 12 | |
| | | | | | | |
Total comprehensive income (loss), net | $ | 20 | | | $ | 199 | | | $ | (30) | | | $ | 472 | |
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 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
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 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 194 | | | 194 | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.076 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
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, 2021 | 125.906 | | | $ | 1 | | | $ | 494 | | | $ | (674) | | | $ | (262) | | | $ | 4,242 | | | $ | 3,801 | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (143) | | | (143) | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (30) | | | — | | | (30) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.182 | | | — | | | (4) | | | — | | | — | | | — | | | (4) | | | | | |
Balances at March 31, 2022 | 126.088 | | | $ | 1 | | | $ | 503 | | | $ | (674) | | | $ | (292) | | | $ | 4,099 | | | $ | 3,637 | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 139 | | | 139 | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (16) | | | — | | | (16) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | 0.017 | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued for employee stock purchase plan | 0.643 | | | — | | | 30 | | | — | | | — | | | — | | | 30 | | | | | |
Stock issued under stock plans | 0.012 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
Balances at June 30, 2022 | 126.760 | | | $ | 1 | | | $ | 542 | | | $ | (674) | | | $ | (308) | | | $ | 4,238 | | | $ | 3,799 | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 40 | | | 40 | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (20) | | | — | | | (20) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.074 | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | | | |
Balances at September 30, 2022 | 126.834 | | $ | 1 | | | $ | 549 | | | $ | (674) | | | $ | (328) | | | $ | 4,278 | | | $ | 3,826 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 income (loss) | — | | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | | | |
CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.225 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
Balance at March 31, 2021 | 124.442 | | | $ | 1 | | | $ | 409 | | | $ | (674) | | | $ | (494) | | | $ | 3,633 | | | $ | 2,875 | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 397 | | | 397 | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 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 | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 194 | | | 194 | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | | | | | |
Stock issued under stock plans | 0.076 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
Balances at September 30, 2021 | 125.305 | | $ | 1 | | | $ | 462 | | | $ | (674) | | | $ | (482) | | | $ | 4,224 | | | $ | 3,531 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | (in millions) | | | 2022 | | 2021 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | | | |
Net Income (Loss) | $ | 460 | | | $ | (877) | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net Income | | Net Income | | | $ | 36 | | | $ | 460 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | Depreciation and amortization | 294 | | | 320 | | Depreciation and amortization | | | 310 | | | 294 | |
Stock-based compensation and other | Stock-based compensation and other | 35 | | | 14 | | Stock-based compensation and other | | | 33 | | | 35 | |
Special items - impairment charges and other | 5 | | | 350 | | |
Special items - restructuring charges | (12) | | | 322 | | |
Special items - fleet transition | | Special items - fleet transition | | | 376 | | | 5 | |
Special items - restructuring | | Special items - restructuring | | | — | | | (12) | |
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 | 95 | | | (220) | | Changes in deferred tax provision | | | — | | | 95 | |
Increase in accounts receivable | | Increase in accounts receivable | | | (59) | | | (56) | |
Increase in air traffic liability | Increase in air traffic liability | 152 | | | 171 | | Increase in air traffic liability | | | 304 | | | 152 | |
Increase in deferred revenue | Increase in deferred revenue | 73 | | | 193 | | Increase in deferred revenue | | | 123 | | | 73 | |
Pension contribution | Pension contribution | (100) | | | — | | Pension contribution | | | — | | | (100) | |
Federal income tax refund | | Federal income tax refund | | | 260 | | | — | |
Other - net | Other - net | (101) | | | (157) | | Other - net | | | 26 | | | (45) | |
Net cash provided by operating activities | Net cash provided by operating activities | 901 | | | 116 | | Net cash provided by operating activities | | | 1,409 | | | 901 | |
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 | (52) | | | (61) | | Aircraft and aircraft purchase deposits | | | (688) | | | (52) | |
Other flight equipment | Other flight equipment | (78) | | | (49) | | Other flight equipment | | | (156) | | | (78) | |
Other property and equipment | Other property and equipment | (60) | | | (94) | | Other property and equipment | | | (103) | | | (60) | |
Total property and equipment additions, including capitalized interest | Total property and equipment additions, including capitalized interest | (190) | | | (204) | | Total property and equipment additions, including capitalized interest | | | (947) | | | (190) | |
Purchases of marketable securities | Purchases of marketable securities | (3,413) | | | (2,092) | | Purchases of marketable securities | | | (1,670) | | | (3,413) | |
Sales and maturities of marketable securities | Sales and maturities of marketable securities | 2,669 | | | 1,520 | | Sales and maturities of marketable securities | | | 1,731 | | | 2,669 | |
Other investing activities | Other investing activities | (9) | | | 9 | | Other investing activities | | | (2) | | | (9) | |
Net cash used in investing activities | Net cash used in investing activities | (943) | | | (767) | | Net cash used in investing activities | | | (888) | | | (943) | |
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 | | | 2,581 | | Proceeds from issuance of debt | | | — | | | 363 | |
Common stock repurchases | — | | | (31) | | |
Dividends paid | — | | | (45) | | |
| Long-term debt payments | Long-term debt payments | (1,222) | | | (238) | | Long-term debt payments | | | (333) | | | (1,222) | |
Other financing activities | Other financing activities | 34 | | | 19 | | Other financing activities | | | 37 | | | 34 | |
Net cash provided by (used in) financing activities | (825) | | | 2,286 | | |
Net cash used in financing activities | | Net cash used in financing activities | | | (296) | | | (825) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | Net increase (decrease) in cash, cash equivalents, and restricted cash | (867) | | | 1,635 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | | | 225 | | | (867) | |
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 | | | 494 | | | 1,386 | |
Cash, cash equivalents, and restricted cash at end of the period | Cash, cash equivalents, and restricted cash at end of the period | $ | 519 | | | $ | 1,867 | | Cash, cash equivalents, and restricted cash at end of the period | | | $ | 719 | | | $ | 519 | |
|
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | (in millions) | | | 2022 | | 2021 |
Cash paid during the period for: | Cash paid during the period for: | | | | Cash paid during the period for: | | | | | |
Interest (net of amount capitalized) | Interest (net of amount capitalized) | $ | 100 | | | $ | 38 | | Interest (net of amount capitalized) | | | $ | 72 | | | $ | 100 | |
Income taxes | Income taxes | — | | | — | | Income taxes | | | — | | | — | |
| Non-cash transactions: | Non-cash transactions: | | Non-cash transactions: | | | |
Right-of-use assets acquired through operating leases | Right-of-use assets acquired through operating leases | $ | 126 | | | 54 | | Right-of-use assets acquired through operating leases | | | 419 | | | 126 | |
| Reconciliation of cash, cash equivalents, and restricted cash at end of the period | Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 495 | | | $ | 1,855 | | Cash and cash equivalents | | | 688 | | | 495 | |
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets | 24 | | | 12 | | |
Restricted cash included in Prepaid expenses and other current assets | | Restricted cash included in Prepaid expenses and other current assets | | | 31 | | | 24 | |
Total cash, cash equivalents, and restricted cash at end of the period | Total cash, cash equivalents, and restricted cash at end of the period | $ | 519 | | | $ | 1,867 | | Total cash, cash equivalents, and restricted cash at end of the period | | | $ | 719 | | | $ | 519 | |
|
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, 2020.2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 20212022 and the results of operations for the three and nine months ended September 30, 20212022 and 2020.2021. 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 nine months ended September 30, 20212022 are not necessarily indicative of operating results for the entire year.
NOTE 2. COVID-19 PANDEMICFLEET TRANSITION
In the first quarter of 2022, the Company announced plans to accelerate the transition of its mainline operations to an all-Boeing 737 fleet. It also announced plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska is accelerating the retirement of its Airbus A320 aircraft, with all expected to exit the fleet by January 2023. Alaska also operates Airbus A321neo aircraft, and plans to remove them from its fleet by the end of 2023, subject to agreement with counterparties. The Company operated 23 A320 and ten A321neo aircraft as of September 30, 2022. Horizon plans to retire its Q400 fleet, which includes 19 owned and three leased aircraft in operation as of September 30, 2022, in January 2023.
Valuation of long-lived assets
The public health and economic crisis resulting fromCompany reviews its long-lived assets for impairment whenever events or changes indicate that the outbreaktotal carrying amount of COVID-19 inan asset or asset group may not be recoverable. During the first quarter of 2020 continues2022, the Company recorded an impairment charge of $70 million related to have a significant impactthe Q400 fleet, reflecting the amount by which carrying value exceeded fair value of the owned Q400 aircraft as of March 31, 2022. This amount was recorded within the "Special items - fleet transition" line in the consolidated statement of operations. Refer to Note 2 to our consolidated financial statements in our Quarterly Report on the Company. Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowedForm 10-Q 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.three months ended March 31, 2022 for additional details.
Beginning in 2020,In the second quarter, the Company implemented various cost-saving initiatives, including permanently parkingadjusted useful lives and depreciation schedules for Airbus and Q400 capitalized leasehold improvements, spare engines, inventory, and other fixed assets, as well as the amortization schedules for the right of use assets and aircraft restructuringrent expenses. These accelerated schedules are based on the workforce through early-outdates the aircraft are expected to be removed from operating service. Incremental costs associated with the accelerated schedules are recognized within the "Special items - fleet transition" line item.
The Company has estimated future lease return costs for the leased Airbus aircraft. Costs of returning leased aircraft begin accruing when the costs are probable and incentive leave programs,reasonably estimable, and obtaining funding available under programs offered byare recognized over the U.S. Departmentremaining operating life of the Treasury (the Treasury). As demand has improvedaircraft. These estimates are based on the time remaining on the lease, planned aircraft usage, and lease terms. These estimates may change as actual amounts due to any lessor upon return may not be known with certainty until lease termination. In the business has grown back toward pre-pandemic flying levels, these programs have been adjusted to meetthird quarter, all lease return costs were recorded within the needs"Special items - fleet transition" line in the consolidated statement of the airline. The impactsoperations.
A summary of these programsspecial charges for fleet transition activities is included below for the three and nine months ended September 30, 2021 are described below.
Lease Return Costs
Alaska removed 40 leased aircraft from operating service in 2020, and recorded an estimate of the expected future lease return costs for the aircraft. Lease return costs include the write off of associated maintenance deposits, as Alaska no longer expects to perform maintenance events covered by those deposits.2022. 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 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 andare one-time in nature, while the other on the condensed consolidated statements of operations. The Company continues to evaluate estimated costs to return leased aircraft, resulting in reductions to the related accrual of $4 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, Alaska initiated a plan to reactivate up to 12 previously parked Airbus aircraft to support Alaska's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. Six of these reactivated aircraft returned to the operating fleet in the third quarter of 2021, with all 12 expectedspecial charges continue to be reactivated by the second quarter of 2022. The Company currently anticipates all aircraft that are temporarily being returned to service will be removed from operating service by the end of 2023. At this time, the Company does not anticipate 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.
consistent
Workforce restructuringwith the schedules described above. The majority of remaining charges will be recorded in 2022 with additional charges associated with the Airbus A321neo aircraft to be recorded in 2023. The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.
The Company's subsidiaries reduced 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. All employees on leave returned to work by October 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
(in millions) | | Airbus | | Q400 | | Total | | Airbus | | Q400 | | Total |
Lease return costs and other expenses | | $ | 75 | | | $ | — | | | $ | 75 | | | $ | 183 | | | $ | — | | | $ | 183 | |
Accelerated aircraft ownership expenses | | 62 | | | 18 | | | 80 | | | 102 | | | 21 | | | 123 | |
Impairment of long-lived assets | | — | | | — | | | — | | | — | | | 70 | | | 70 | |
Total special items - fleet transition | | $ | 137 | | | $ | 18 | | | $ | 155 | | | $ | 285 | | | $ | 91 | | | $ | 376 | |
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. Throughout 2021, the Company continued to refine and update capacity expectations and training schedules, which resulted in changes to anticipated leave lengths. As a result, the Company has recorded a net benefit of $12 million during the nine months ended September 30, 2021.
The table below presents a roll forward of the outstanding voluntary leave liability (in millions): | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
Total voluntary leave liability balance at January 1 | | $ | 127 | |
Cash payments | | (99) | |
Charges and adjustments | | (12) | |
Total voluntary leave liability balance at September 30 | | $ | 16 | |
The outstanding accrual is for final payments for participants on 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 McGee received total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska, Horizon and McGee received an additional $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 nine months ended 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 nine months ended September 30, 2021, the Company recognized $914 million of the PSP grant proceeds as a wage offset. Included 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 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. The conditions also included suspension of dividends and share repurchases 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 areis passenger ancillary revenuesrevenue 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 main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from 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.
In the first quarter of 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The amendment extended the term of the agreement into 2030 and resulted in modifications to the separately identifiable performance obligations.
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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
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 ticket revenue, including ticket breakage, net of taxes and fees | $ | 2,252 | | | $ | 1,483 | | | $ | 5,536 | | | $ | 3,122 | |
Passenger ancillary revenue | Passenger ancillary revenue | 101 | | | 49 | | | 235 | | | 196 | | Passenger ancillary revenue | 127 | | | 101 | | | 337 | | | 235 | |
Mileage Plan passenger revenue | Mileage Plan passenger revenue | 190 | | | 64 | | | 428 | | | 272 | | Mileage Plan passenger revenue | 236 | | | 190 | | | 671 | | | 428 | |
Total Passenger revenue | Total Passenger revenue | $ | 1,774 | | | $ | 572 | | | $ | 3,785 | | | $ | 2,362 | | Total Passenger revenue | $ | 2,615 | | | $ | 1,774 | | | $ | 6,544 | | | $ | 3,785 | |
Mileage Plan™Plan Loyalty Program
Mileage Plan™Plan revenue included in the condensed consolidated statements of operations (in millions): | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Passenger revenue | Passenger revenue | $ | 190 | | | $ | 64 | | | $ | 428 | | | $ | 272 | | Passenger revenue | $ | 236 | | | $ | 190 | | | $ | 671 | | | $ | 428 | |
Mileage Plan other revenue | Mileage Plan other revenue | 120 | | | 84 | | | 332 | | | 266 | | Mileage Plan other revenue | 146 | | | 120 | | | 433 | | | 332 | |
Total Mileage Plan revenue | Total Mileage Plan revenue | $ | 310 | | | $ | 148 | | | $ | 760 | | | $ | 538 | | Total Mileage Plan revenue | $ | 382 | | | $ | 310 | | | $ | 1,104 | | | $ | 760 | |
Cargo and Other
Cargo and other revenue included in the condensed consolidated statements of operations (in millions): | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Cargo revenue | Cargo revenue | $ | 34 | | | $ | 31 | | | $ | 95 | | | $ | 83 | | Cargo revenue | $ | 37 | | | $ | 34 | | | $ | 102 | | | $ | 95 | |
Other revenue | Other revenue | 25 | | | 14 | | | 65 | | | 47 | | Other revenue | 30 | | | 25 | | | 88 | | | 65 | |
Total Cargo and other revenue | Total Cargo and other revenue | $ | 59 | | | $ | 45 | | | $ | 160 | | | $ | 130 | | Total Cargo and other revenue | $ | 67 | | | $ | 59 | | | $ | 190 | | | $ | 160 | |
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $65 million and $101 million from the prior year-end air traffic liability balance for the three months ended September 30, 2022 and 2021, ,and $587 million and $276 million and $484 million for the nine months ended September 30, 20212022 and 2020.2021.
Included within the air traffic liability 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 issuance levels in 2021 have normalized, though remain above pre-COVID levels. In April 2021, as part of the Company's COVID-19 relief measures, travel credits 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 bankaffinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $57$80 million of such receivables as of September 30, 20212022 and $48$64 million as of December 31, 2020. As demand for air travel remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.2021.
The table below presents a roll forward of the total frequent flyer liability (in millions): | | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2021 | | 2020 | | 2022 | | 2021 |
Total Deferred revenue balance at January 1 | Total Deferred revenue balance at January 1 | | $ | 2,277 | | | $ | 1,990 | | Total Deferred revenue balance at January 1 | $ | 2,358 | | | $ | 2,277 | |
Travel miles and companion certificate redemption - Passenger revenue | Travel miles and companion certificate redemption - Passenger revenue | | (428) | | | (272) | | Travel miles and companion certificate redemption - Passenger revenue | (632) | | | (428) | |
Miles redeemed on partner airlines - Other revenue | Miles redeemed on partner airlines - Other revenue | | (30) | | | (21) | | Miles redeemed on partner airlines - Other revenue | (45) | | | (30) | |
Increase in liability for mileage credits issued | Increase in liability for mileage credits issued | | 531 | | | 486 | | Increase in liability for mileage credits issued | 800 | | | 531 | |
Total Deferred revenue balance at September 30 | Total Deferred revenue balance at September 30 | | $ | 2,350 | | | $ | 2,183 | | Total Deferred revenue balance at September 30 | $ | 2,481 | | | $ | 2,350 | |
NOTE 4. FAIR VALUE MEASUREMENTS
In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.
Fair Value of Financial Instruments on a Recurring Basis
As of September 30, 2021,2022, total cost basis for all marketable securities was $2.7 billion. There were no significant differences between the cost basis and$2.6 billion, compared to a total fair value of $2.5 billion. The decline in value is primarily due to changes in interest rates. Management does not believe any individual classunrealized losses are the result of marketable securities.expected credit losses based on its evaluation of available information as of September 30, 2022.
Fair values of financial instruments on the condensed consolidated balance sheet (in millions): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | 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 | $ | 278 | | | $ | — | | | $ | 278 | | | $ | 407 | | | $ | — | | | $ | 407 | | U.S. government and agency securities | $ | 532 | | | $ | — | | | $ | 532 | | | $ | 331 | | | $ | — | | | $ | 331 | |
Equity mutual funds | Equity mutual funds | 6 | | | — | | | 6 | | | 7 | | | — | | | 7 | | Equity mutual funds | 5 | | | — | | | 5 | | | 6 | | | — | | | 6 | |
Foreign government bonds | Foreign government bonds | — | | | 38 | | | 38 | | | — | | | 20 | | | 20 | | Foreign government bonds | — | | | 25 | | | 25 | | | — | | | 38 | | | 38 | |
Asset-backed securities | Asset-backed securities | — | | | 337 | | | 337 | | | — | | | 224 | | | 224 | | Asset-backed securities | — | | | 260 | | | 260 | | | — | | | 311 | | | 311 | |
Mortgage-backed securities | Mortgage-backed securities | — | | | 239 | | | 239 | | | — | | | 290 | | | 290 | | Mortgage-backed securities | — | | | 208 | | | 208 | | | — | | | 232 | | | 232 | |
Corporate notes and bonds | Corporate notes and bonds | — | | | 1,736 | | | 1,736 | | | — | | | 978 | | | 978 | | Corporate notes and bonds | — | | | 1,384 | | | 1,384 | | | — | | | 1,663 | | | 1,663 | |
Municipal securities | Municipal securities | — | | | 66 | | | 66 | | | — | | | 50 | | | 50 | | Municipal securities | — | | | 48 | | | 48 | | | — | | | 65 | | | 65 | |
Total Marketable securities | Total Marketable securities | 284 | | | 2,416 | | | 2,700 | | | 414 | | | 1,562 | | | 1,976 | | Total Marketable securities | 537 | | | 1,925 | | | 2,462 | | | 337 | | | 2,309 | | | 2,646 | |
Derivative instruments | Derivative instruments | | Derivative instruments | |
Fuel hedge - call options | Fuel hedge - call options | — | | | 95 | | | 95 | | | — | | | 15 | | | 15 | | Fuel hedge - call options | — | | | 51 | | | 51 | | | — | | | 81 | | | 81 | |
| Interest rate swap agreements | | Interest rate swap agreements | — | | | 15 | | | 15 | | | — | | | — | | | — | |
Total Assets | Total Assets | $ | 284 | | | $ | 2,511 | | | $ | 2,795 | | | $ | 414 | | | $ | 1,577 | | | $ | 1,991 | | Total Assets | $ | 537 | | | $ | 1,991 | | | $ | 2,528 | | | $ | 337 | | | $ | 2,390 | | | $ | 2,727 | |
| Liabilities | Liabilities | | Liabilities | |
Derivative instruments | Derivative instruments | | Derivative instruments | |
| Interest rate swap agreements | Interest rate swap agreements | — | | | (14) | | | (14) | | | — | | | (25) | | | (25) | | Interest rate swap agreements | — | | | — | | | — | | | — | | | (9) | | | (9) | |
Total Liabilities | Total Liabilities | $ | — | | | $ | (14) | | | $ | (14) | | | $ | — | | | $ | (25) | | | $ | (25) | | Total Liabilities | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (9) | | | $ | (9) | |
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 September 30, 2021.
Maturities for marketable securities (in millions): | September 30, 2021 | Cost Basis | | Fair Value | |
September 30, 2022 | | September 30, 2022 | Cost Basis | | Fair Value |
Due in one year or less | Due in one year or less | $ | 1,193 | | | $ | 1,194 | | Due in one year or less | $ | 738 | | | $ | 729 | |
Due after one year through five years | Due after one year through five years | 1,409 | | | 1,418 | | Due after one year through five years | 1,811 | | | 1,704 | |
Due after five years through 10 years | 81 | | | 81 | | |
Due after five years | | Due after five years | 26 | | | 24 | |
| Total | Total | $ | 2,683 | | | $ | 2,693 | | Total | $ | 2,575 | | | $ | 2,457 | |
As of September 30, 2022, $5 million of total marketable securities do not have a maturity date and are therefore excluded from the total fair value of maturities for marketable securities above.
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 September 30, 2021,2022, 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 (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $769$708 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): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| Total fixed-rate debt | Total fixed-rate debt | $ | 1,828 | | | $ | 1,662 | | Total fixed-rate debt | $ | 1,664 | | | $ | 1,821 | |
| Estimated fair value | Estimated fair value | $ | 1,949 | | | $ | 1,778 | | Estimated fair value | $ | 1,610 | | | $ | 1,919 | |
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 wereRefer to Note 2 for discussion regarding impairment charges recorded during the three and nine months ended September 30, 2021.2022.
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheet (in millions): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Fixed-rate notes payable due through 2029 | Fixed-rate notes payable due through 2029 | $ | 169 | | | $ | 198 | | Fixed-rate notes payable due through 2029 | $ | 117 | | | $ | 163 | |
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 | | | 600 | |
Fixed-rate EETC payable due through 2025 & 2027 | Fixed-rate EETC payable due through 2025 & 2027 | 1,058 | | | 1,174 | | Fixed-rate EETC payable due through 2025 & 2027 | 947 | | | 1,058 | |
Variable-rate notes payable due through 2029 | Variable-rate notes payable due through 2029 | 843 | | | 1,866 | | Variable-rate notes payable due through 2029 | 562 | | | 738 | |
Less debt issuance costs and unamortized debt discount | (20) | | | (33) | | |
Less debt issuance costs | | Less debt issuance costs | (16) | | | (20) | |
Total debt | Total debt | 2,650 | | | 3,495 | | Total debt | 2,210 | | | 2,539 | |
Less current portion | Less current portion | 425 | | | 1,138 | | Less current portion | 321 | | | 366 | |
Long-term debt, less current portion | Long-term debt, less current portion | $ | 2,225 | | | $ | 2,357 | | Long-term debt, less current portion | $ | 1,889 | | | $ | 2,173 | |
| Weighted-average fixed-interest rate | Weighted-average fixed-interest rate | 3.6 | % | | 4.3 | % | Weighted-average fixed-interest rate | 3.5 | % | | 3.7 | % |
Weighted-average variable-interest rate | Weighted-average variable-interest rate | 1.2 | % | | 1.9 | % | Weighted-average variable-interest rate | 4.2 | % | | 1.3 | % |
Approximately $539$353 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2021,2022, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.3%3.5%.
During the nine months ended September 30, 2021,2022, 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 $1.2 billion in
debt payments. Included within totalmade scheduled debt payments is the full repayment of the $135$316 million loan from the U.S. Treasury made available under the CARES Act, $363and prepayments of $17 million outstanding balance on two credit facilities, and prepayment of the $425 million 364-day term loan facility.
The $600 million PSP notes are unsecured senior termfor 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 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.Q400 aircraft.
Debt Maturity
At September 30, 20212022, long-term debt principal payments for the next five years and thereafter are as follows (in millions): | | | Total | | Total |
Remainder of 2021 | $ | 112 | | |
2022 | 371 | | |
Remainder of 2022 | | Remainder of 2022 | $ | 52 | |
2023 | 2023 | 334 | | 2023 | 309 | |
2024 | 2024 | 240 | | 2024 | 238 | |
2025 | 2025 | 261 | | 2025 | 273 | |
2026 | | 2026 | 176 | |
Thereafter | Thereafter | 1,352 | | Thereafter | 1,178 | |
Total | Total | $ | 2,670 | | Total | $ | 2,226 | |
Bank Lines of Credit
Alaska has 3three credit facilities totaling $486 million as of September 30, 2021.2022. One of the credit facilities for $150 million expires in March 20222025 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. TheA second credit facility for $250 million expires in June 2024 and is secured by aircraft. These twoBoth facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June 20222023 and is secured by aircraft.
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. Alaska was in compliance with this covenant at September 30, 2021.2022.
NOTE 6. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | Service cost | $ | 13 | | | $ | 11 | | | $ | 39 | | | $ | 37 | | Service cost | $ | 12 | | | $ | 13 | | | $ | 34 | | | $ | 39 | |
Pension expense included in Wages and benefits | Pension expense included in Wages and benefits | 13 | | | 11 | | | 39 | | | 37 | | Pension expense included in Wages and benefits | 12 | | | 13 | | | 34 | | | 39 | |
| Interest cost | Interest cost | 14 | | | 19 | | | 42 | | | 57 | | Interest cost | 17 | | | 14 | | | 49 | | | 42 | |
Expected return on assets | Expected return on assets | (30) | | | (28) | | | (91) | | | (83) | | Expected return on assets | (32) | | | (30) | | | (96) | | | (91) | |
Amortization of prior service cost (credit) | Amortization of prior service cost (credit) | (1) | | | (1) | | | (1) | | | (1) | | Amortization of prior service cost (credit) | (1) | | | (1) | | | (1) | | | (1) | |
Recognized actuarial loss | Recognized actuarial loss | 9 | | | 9 | | | 27 | | | 26 | | Recognized actuarial loss | 2 | | | 9 | | | 6 | | | 27 | |
Pension expense included in Nonoperating Income (Expense) | $ | (8) | | | $ | (1) | | | $ | (23) | | | $ | (1) | | |
Pension expense included in Non-operating Income (Expense) | | Pension expense included in Non-operating Income (Expense) | $ | (14) | | | $ | (8) | | | $ | (42) | | | $ | (23) | |
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 September 30, 20212022 (in millions): | | | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | |
Remainder of 2021 | | | $ | 60 | | | $ | 42 | | | |
2022 | | | 1,476 | | | 173 | | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 529 | | | $ | 41 | | |
2023 | 2023 | | | 1,681 | | | 178 | | | 2023 | | 2,124 | | | 172 | | |
2024 | 2024 | | | 385 | | | 183 | | | 2024 | | 512 | | | 178 | | |
2025 | 2025 | | | 79 | | | 188 | | | 2025 | | 254 | | | 186 | | |
2026 | | 2026 | | 249 | | | 186 | | |
Thereafter | Thereafter | | | 13 | | | 877 | | | Thereafter | | 738 | | | 763 | | |
Total | Total | | | $ | 3,694 | | | $ | 1,641 | | | Total | | $ | 4,406 | | | $ | 1,526 | | |
(a)Includes non-cancelable contractual commitments for aircraft, engines, and engines, aircraft maintenance and parts management.maintenance. Option deliveries are excluded from minimum commitments until exercise.
(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. AsIn the second quarter of September 30, 2021, Alaska had commitments2022, Horizon amended its aircraft purchase agreement with Embraer, adding eight firm E175 deliveries between 2023 and 2026 and 13 options to purchase 74 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 E175additional aircraft with deliveries between 2024 and 2025. The aircraft covered by the amendment may be assigned by Horizon to another entity. Horizon intends to take delivery of and operate all firm E175 aircraft.
Details for contractual aircraft commitments as of September 30, 2022 are outlined in the table below.
| | | | | | | | | | | | | | | | | |
| Firm Orders | | Options | | Total |
Aircraft Type | 2022-2026 | | 2024-2026 | | 2022-2026 |
Boeing 737-8 | 10 | | — | | 10 |
Boeing 737-9 | 40 | | 11 | | 51 |
Boeing 737-10 | 6 | | 41 | | 47 |
Embraer E175 | 20 | | 13 | | 33 |
Total | 76 | | 65 | | 141 |
The fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of September 30, 2022. Alaska has received information from Boeing indicating that certain 737 deliveries in 2022 and 2025. In addition,2023 are expected to be delayed to 2023 and 2024. Alaska haswill continue to work with Boeing on delivery timelines that reflect Alaska's plans for growth.
Subsequent to quarter end, Alaska executed an agreement with Boeing to exercise options to purchase 52 B737-9 MAX737 aircraft for delivery between 2024 and Horizon has options to2027. The agreement also secures rights for 105 additional aircraft through 2030. The incremental firm purchase 21 E175 aircraft. Option paymentscommitments per the agreement are not contractually obligated at September 30, 2022, and are not reflected in the future minimum payments table above.
Aircraft Maintenance
Aircraft maintenance commitments include contractual commitments for engine maintenance agreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft. In turn, these maintenance agreements transfer certain risks to the third-party service provider. Alaska has a contract for maintenance on its Boeing 737-800 aircraft engines through 2033. In the third quarter of 2022, Alaska entered into a contract for maintenance on its Boeing 737-900ER aircraft engines with minimum payments effective 2023 through 2033. Horizon has a contract for maintenance on its Embraer E175 aircraft engines through 2033.
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, aspursued numerous appeal paths following 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 judgmentfederal district court order against Virgin America and Alaska Airlines in the amount ofawarding plaintiffs approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, anmillion, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the judgment, again without awarding injunctive relief against Alaska. The determination ofPAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.
The final total judgment amount has not been completeddetermined by the lower court 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.
Alaska The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as appliedanalyzing a range of potential options to airlines pursuant to the U.S. Constitutionbalance new compliance obligations with operational and provisionslabor considerations. Some or all of federal law 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. If appeal efforts are unsuccessful, compliance with the California lawsthese solutions may have an adverse impact on the Company'sCompany’s operations and financial position.position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. The Virgin Group asserts that payments are required without regard to actual use of the mark. A trial was held in October 2022, and a decision is expected soon. Further legal proceedings are likely to take place before the matter is resolved. The Company is involvedbelieves the claims in other litigation around the application of statecase are without factual and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preemptedlegal merit, a position supported by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.Virgin America’s representations during pre-merger due diligence.
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of September 30, 2021, theThe Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, subject to restrictions under the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Company suspended the share repurchase program indefinitely. These restrictions ended on October 1, 2022.
CARES Act Warrant Issuances
As additional taxpayer protection required under PSP programs, during the nine months ended September 30, 2021Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of 539,5081,455,437 warrants to purchase ALK common stock. Thestock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at 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 relativemodel. The total fair value of theall outstanding warrants of $6was $30 million, was recorded in stockholders' equity.equity at issuance.
Total warrants outstanding are as follows as of September 30, 2021:2022: | | | Number of shares of ALK common stock | | Strike Price | | Number of warrants outstanding | | Strike Price |
PSP 1 | PSP 1 | 928,127 | | | 31.61 | PSP 1 | 928,126 | | | 31.61 |
CARES Act loan warrants | CARES Act loan warrants | 427,080 | | | 31.61 | CARES Act loan warrants | 427,080 | | | 31.61 |
PSP 2 | PSP 2 | 305,499 | | | 52.25 | PSP 2 | 305,499 | | | 52.25 |
PSP 3 | PSP 3 | 221,812 | | | 66.39 | PSP 3 | 221,812 | | | 66.39 |
Total | 1,882,518 | | | |
Outstanding September 30, 2022 | | Outstanding September 30, 2022 | 1,882,517 | | |
Accumulated other comprehensive loss
ComponentsA roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions): | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Related to marketable securities | $ | 7 | | | $ | 23 | |
Related to employee benefit plans | (479) | | | (498) | |
Related to interest rate derivatives | (10) | | | (19) | |
Total | $ | (482) | | | $ | (494) | |
, is shown below for the three and nine months ended September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
Balance at June 30, 2022, net of tax effect of $98 | $ | (64) | | | $ | (251) | | | $ | 7 | | | $ | (308) | |
Reclassifications into earnings, net of tax impact of $0 | 2 | | | 1 | | | — | | | 3 | |
Change in value, net of tax impact of $6 | (28) | | | — | | | 5 | | | (23) | |
Balance at September 30, 2022, net of tax effect of $104 | $ | (90) | | | $ | (250) | | | $ | 12 | | | $ | (328) | |
| | | | | | | |
Balance at December 31, 2021, net of tax effect of $83 | $ | (4) | | | $ | (252) | | | $ | (6) | | | $ | (262) | |
Reclassifications into earnings, net of tax impact of $1 | 6 | | | 2 | | | — | | | 8 | |
Change in value, net of tax impact of $20 | (92) | | | — | | | 18 | | | (74) | |
Balance at September 30, 2022, net of tax effect of $104 | $ | (90) | | | $ | (250) | | | $ | 12 | | | $ | (328) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings (Loss) Per Share (EPS)
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, 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 nine months ended September 30, 2022 and 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 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, Costa Rica, and Costa Rica.Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Operating segment information is as follows (in millions): | | | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2022 |
| | 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 | $ | 1,425 | | | $ | 349 | | | $ | — | | | $ | — | | | $ | 1,774 | | | $ | — | | | $ | 1,774 | | Passenger revenues | $ | 2,217 | | | $ | 398 | | | $ | — | | | $ | — | | | $ | 2,615 | | | $ | — | | | $ | 2,615 | |
CPA revenues | CPA revenues | — | | | — | | | 107 | | | (107) | | | — | | | — | | | — | | CPA revenues | — | | | — | | | 93 | | | (93) | | | — | | | — | | | — | |
Mileage Plan other revenue | Mileage Plan other revenue | 105 | | | 15 | | | — | | | — | | | 120 | | | — | | | 120 | | Mileage Plan other revenue | 133 | | | 13 | | | — | | | — | | | 146 | | | — | | | 146 | |
Cargo and other | Cargo and other | 58 | | | — | | | — | | | 1 | | | 59 | | | — | | | 59 | | Cargo and other | 65 | | | — | | | — | | | 2 | | | 67 | | | — | | | 67 | |
Total Operating Revenues | Total Operating Revenues | 1,588 | | | 364 | | | 107 | | | (106) | | | 1,953 | | | — | | | 1,953 | | Total Operating Revenues | 2,415 | | | 411 | | | 93 | | | (91) | | | 2,828 | | | — | | | 2,828 | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | Operating expenses, excluding fuel | 1,060 | | | 288 | | | 93 | | | (113) | | | 1,328 | | | (9) | | | 1,319 | | Operating expenses, excluding fuel | 1,352 | | | 292 | | | 94 | | | (94) | | | 1,644 | | | 245 | | | 1,889 | |
Economic fuel | 299 | | | 77 | | | — | | | — | | | 376 | | | — | | | 376 | | |
Fuel expense | | Fuel expense | 625 | | | 121 | | | — | | | — | | | 746 | | | 131 | | | 877 | |
Total Operating Expenses | Total Operating Expenses | 1,359 | | | 365 | | | 93 | | | (113) | | | 1,704 | | | (9) | | | 1,695 | | Total Operating Expenses | 1,977 | | | 413 | | | 94 | | | (94) | | | 2,390 | | | 376 | | | 2,766 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | | |
Interest income | 7 | | | — | | | — | | | (1) | | | 6 | | | — | | | 6 | | |
Interest expense | (25) | | | — | | | (6) | | | 1 | | | (30) | | | — | | | (30) | | |
Interest capitalized | 2 | | | — | | | — | | | 1 | | | 3 | | | — | | | 3 | | |
Other - net | 8 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | | |
Total Nonoperating Income (Expense) | (8) | | | — | | | (6) | | | 1 | | | (13) | | | — | | | (13) | | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | 8 | | | — | | | (5) | | | — | | | 3 | | | — | | | 3 | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | 221 | | | $ | (1) | | | $ | 8 | | | $ | 8 | | | $ | 236 | | | $ | 9 | | | $ | 245 | | Income (Loss) Before Income Tax | $ | 446 | | | $ | (2) | | | $ | (6) | | | $ | 3 | | | $ | 441 | | | $ | (376) | | | $ | 65 | |
Pretax Margin | | Pretax Margin | | | | | | | | | 15.6 | % | | | | 2.3 | % |
| | | Three Months Ended September 30, 2020 | | 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 | $ | 401 | | | $ | 171 | | | $ | — | | | $ | — | | | $ | 572 | | | $ | — | | | $ | 572 | | Passenger revenues | $ | 1,425 | | | $ | 349 | | | $ | — | | | $ | — | | | $ | 1,774 | | | $ | — | | | $ | 1,774 | |
CPA revenues | CPA revenues | — | | | — | | | 95 | | | (95) | | | — | | | — | | | — | | CPA revenues | — | | | — | | | 107 | | | (107) | | | — | | | — | | | — | |
Mileage Plan other revenue | Mileage Plan other revenue | 65 | | | 19 | | | — | | | — | | | 84 | | | — | | | 84 | | Mileage Plan other revenue | 105 | | | 15 | | | — | | | — | | | 120 | | | — | | | 120 | |
Cargo and other | Cargo and other | 45 | | | — | | | — | | | — | | | 45 | | | — | | | 45 | | Cargo and other | 58 | | | — | | | — | | | 1 | | | 59 | | | — | | | 59 | |
Total Operating Revenues | Total Operating Revenues | 511 | | | 190 | | | 95 | | | (95) | | | 701 | | | — | | | 701 | | 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 | 872 | | | 248 | | | 78 | | | (97) | | | 1,101 | | | 46 | | | 1,147 | | Operating expenses, excluding fuel | 1,060 | | | 288 | | | 93 | | | (113) | | | 1,328 | | | (9) | | | 1,319 | |
Economic fuel | 90 | | | 38 | | | — | | | — | | | 128 | | | (3) | | | 125 | | |
Fuel expense | | Fuel expense | 299 | | | 77 | | | — | | | — | | | 376 | | | — | | | 376 | |
Total Operating Expenses | Total Operating Expenses | 962 | | | 286 | | | 78 | | | (97) | | | 1,229 | | | 43 | | | 1,272 | | Total Operating Expenses | 1,359 | | | 365 | | | 93 | | | (113) | | | 1,704 | | | (9) | | | 1,695 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | | |
Interest income | 8 | | | — | | | — | | | (1) | | | 7 | | | — | | | 7 | | |
Interest expense | (28) | | | — | | | (6) | | | — | | | (34) | | | — | | | (34) | | |
Interest capitalized | 4 | | | — | | | — | | | — | | | 4 | | | — | | | 4 | | |
Other - net | 4 | | | — | | | — | | | 1 | | | 5 | | | — | | | 5 | | |
Total Nonoperating Income (Expense) | (12) | | | — | | | (6) | | | — | | | (18) | | | — | | | (18) | | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | (8) | | | — | | | (6) | | | 1 | | | (13) | | | — | | | (13) | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | (463) | | | $ | (96) | | | $ | 11 | | | $ | 2 | | | $ | (546) | | | $ | (43) | | | $ | (589) | | Income (Loss) Before Income Tax | $ | 221 | | | $ | (1) | | | $ | 8 | | | $ | 8 | | | $ | 236 | | | $ | 9 | | | $ | 245 | |
Pretax Margin | | Pretax Margin | | | | | | | | | 12.1 | % | | | | 12.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 3,003 | | | $ | 782 | | | $ | — | | | $ | — | | | $ | 3,785 | | | $ | — | | | $ | 3,785 | |
CPA revenues | — | | | — | | | 322 | | | (322) | | | — | | | — | | | — | |
Mileage Plan other revenue | 287 | | | 45 | | | — | | | — | | | 332 | | | — | | | 332 | |
Cargo and other | 157 | | | — | | | — | | | 3 | | | 160 | | | — | | | 160 | |
Total Operating Revenues | 3,447 | | | 827 | | | 322 | | | (319) | | | 4,277 | | | — | | | 4,277 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 2,937 | | | 839 | | | 272 | | | (349) | | | 3,699 | | | (921) | | | 2,778 | |
Economic fuel | 726 | | | 195 | | | — | | | — | | | 921 | | | (68) | | | 853 | |
Total Operating Expenses | 3,663 | | | 1,034 | | | 272 | | | (349) | | | 4,620 | | | (989) | | | 3,631 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 20 | | | — | | | — | | | (1) | | | 19 | | | — | | | 19 | |
Interest expense | (86) | | | — | | | (16) | | | 1 | | | (101) | | | — | | | (101) | |
Interest capitalized | 8 | | | — | | | — | | | 1 | | | 9 | | | — | | | 9 | |
Other - net | 27 | | | — | | | — | | | — | | | 27 | | | — | | | 27 | |
Total Nonoperating Income (Expense) | (31) | | | — | | | (16) | | | 1 | | | (46) | | | — | | | (46) | |
Income (Loss) Before Income Tax | $ | (247) | | | $ | (207) | | | $ | 34 | | | $ | 31 | | | $ | (389) | | | $ | 989 | | | $ | 600 | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 1,860 | | | $ | 502 | | | $ | — | | | $ | — | | | $ | 2,362 | | | $ | — | | | $ | 2,362 | |
CPA revenues | — | | | — | | | 281 | | | (281) | | | — | | | — | | | — | |
Mileage Plan other revenue | 219 | | | 47 | | | — | | | — | | | 266 | | | — | | | 266 | |
Cargo and other | 128 | | | — | | | — | | | 2 | | | 130 | | | — | | | 130 | |
Total Operating Revenues | 2,207 | | | 549 | | | 281 | | | (279) | | | 2,758 | | | — | | | 2,758 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 2,777 | | | 727 | | | 238 | | | (289) | | | 3,453 | | | (83) | | | 3,370 | |
Economic fuel | 448 | | | 120 | | | — | | | — | | | 568 | | | — | | | 568 | |
Total Operating Expenses | 3,225 | | | 847 | | | 238 | | | (289) | | | 4,021 | | | (83) | | | 3,938 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 33 | | | — | | | — | | | (10) | | | 23 | | | — | | | 23 | |
Interest expense | (58) | | | — | | | (16) | | | 10 | | | (64) | | | — | | | (64) | |
Interest capitalized | 8 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Other - net | 16 | | | — | | | — | | | — | | | 16 | | | — | | | 16 | |
Total Nonoperating Income (Expense) | (1) | | | — | | | (16) | | | — | | | (17) | | | — | | | (17) | |
Income (Loss) Before Income Tax | $ | (1,019) | | | $ | (298) | | | $ | 27 | | | $ | 10 | | | $ | (1,280) | | | $ | 83 | | | $ | (1,197) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 5,488 | | | $ | 1,056 | | | $ | — | | | $ | — | | | $ | 6,544 | | | $ | — | | | $ | 6,544 | |
CPA revenues | — | | | — | | | 288 | | | (288) | | | — | | | — | | | — | |
Mileage Plan other revenue | 392 | | | 41 | | | — | | | — | | | 433 | | | — | | | 433 | |
Cargo and other | 186 | | | — | | | — | | | 4 | | | 190 | | | — | | | 190 | |
Total Operating Revenues | 6,066 | | | 1,097 | | | 288 | | | (284) | | | 7,167 | | | — | | | 7,167 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 3,808 | | | 843 | | | 291 | | | (288) | | | 4,654 | | | 466 | | | 5,120 | |
Fuel expense | 1,623 | | | 313 | | | — | | | — | | | 1,936 | | | 64 | | | 2,000 | |
Total Operating Expenses | 5,431 | | | 1,156 | | | 291 | | | (288) | | | 6,590 | | | 530 | | | 7,120 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | 12 | | | — | | | (15) | | | — | | | (3) | | | — | | | (3) | |
Income (Loss) Before Income Tax | $ | 647 | | | $ | (59) | | | $ | (18) | | | $ | 4 | | | $ | 574 | | | $ | (530) | | | $ | 44 | |
Pretax Margin | | | | | | | | | 8.0 | % | | | | 0.6 | % |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 3,003 | | | $ | 782 | | | $ | — | | | $ | — | | | $ | 3,785 | | | $ | — | | | $ | 3,785 | |
CPA revenues | — | | | — | | | 322 | | | (322) | | | — | | | — | | | — | |
Mileage Plan other revenue | 287 | | | 45 | | | — | | | — | | | 332 | | | — | | | 332 | |
Cargo and other | 157 | | | — | | | — | | | 3 | | | 160 | | | — | | | 160 | |
Total Operating Revenues | 3,447 | | | 827 | | | 322 | | | (319) | | | 4,277 | | | — | | | 4,277 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 2,937 | | | 839 | | | 272 | | | (349) | | | 3,699 | | | (921) | | | 2,778 | |
Fuel expense | 726 | | | 195 | | | — | | | — | | | 921 | | | (68) | | | 853 | |
Total Operating Expenses | 3,663 | | | 1,034 | | | 272 | | | (349) | | | 4,620 | | | (989) | | | 3,631 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | (31) | | | — | | | (16) | | | 1 | | | (46) | | | — | | | (46) | |
Income (Loss) Before Income Tax | $ | (247) | | | $ | (207) | | | $ | 34 | | | $ | 31 | | | $ | (389) | | | $ | 989 | | | $ | 600 | |
Pretax Margin | | | | | | | | | (9.1) | % | | | | 14.0 | % |
(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 grant wage offsets, special items, and mark-to-market fuel hedge accounting adjustments.
Total assets were as follows (in millions): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Mainline | Mainline | $ | 19,161 | | | $ | 19,754 | | Mainline | $ | 20,065 | | | $ | 19,258 | |
Horizon | Horizon | 1,251 | | | 1,170 | | Horizon | 1,115 | | | 1,212 | |
Consolidating & Other | Consolidating & Other | (6,530) | | | (6,878) | | Consolidating & Other | (6,649) | | | (6,519) | |
Consolidated | Consolidated | $ | 13,882 | | | $ | 14,046 | | Consolidated | $ | 14,531 | | | $ | 13,951 | |
| | |
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, and in "Item 1A. Risk Factors" of Part II of this Form 10-Q.2021. This overview summarizes the MD&A, which includes the following sections:
•Third Quarter Review—highlights from the third quarter of 20212022 outlining some of the major events that happenedoccurred during the period and how they affected our financial performance.
•Results of Operations—an in-depth analysis of our revenuesrevenue by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2021.2022. 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 2021.2022.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
Business Recovery and Financial Outlook
In the third quarter of 2021, we reported our first adjusted net income since the onset of the pandemic. The 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 delta variant. In conjunction with these positive results, we took further steps in the third 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.Third Quarter Results
We remain committed to returning capacity in a prudent manner to match demand as we also work toward our goal of returning flying to 2019 levels by no later than the summer of 2022. However, we 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 in the fourth quarter to be 13% to 16% below the same period in 2019. Although we continue to be disciplined in matching the return of capacity with 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 fourth quarter load factors to range between 77% and 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. 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.
Environmental, Social and Governance Updates
As we move beyond the impacts of the COVID-19 pandemic, we are returning our focus back to our 2025 strategic plan, which was announced in 2019. During the third quarter, we continued to make strides toward our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. In the third quarter we formed Alaska Star Ventures, a wholly-owned entity with the purpose of 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 new internal maintenance technician program, which will provide eligible employees with financial assistance to enhance and develop skills with the goal of becoming a certified maintenance technician.
As a reflection of the importance of the commitments made, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emissions target into our company-wide Performance-Based Pay Plan, which we currently expect to meet.
Labor Update
In July 2021, we ratified an amended wage agreement with the 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
Ourrecorded consolidated pretax income for the third quarter of 2021 was $2452022 under GAAP of $65 million, compared to aconsolidated pretax lossincome of $589$245 million in the third quarter of 2020. The $8342021. On an adjusted basis, we reported consolidated pretax income for the quarter of $441 million, improvement is driven by an increasecompared to consolidated pretax income of $1.3 billion$236 million in operating revenue from an exponential increase inthe same period of 2021. Strong demand for passenger air travel coupledcombined with a decrease of $453 million in special charges recorded for impairment and workforce restructuring. These improvements were offset by $398 million in wage offsets provided by the Payroll Support Program of the CARES Act recordedexcellent operational performance enabled Air Group to deliver record breaking quarterly revenue in the third quarter.
In the third quarter of 2020 which were not repeated in 2021, a $227 million increase in non-fuel operating costs,expense, excluding special items, increased 24% over the prior year period. The increase was driven by incremental departure related costs on 13% more flown capacity, as well as higher wages and training costs. Costs were also pressured by the impact of new labor agreements, elevated staff levels relative to our level of flying, and a $251one-time charge of $28 million associated with gifting each of our employees 90,000 Mileage Plan miles. Fuel costs remain elevated, resulting in a 133% increase over the prior year period. Although our hedging program provided a benefit of $29 million for the quarter, total fuel cost exceeded 2021 levels due primarily to a 79% increase in fuel expense driven by increased consumptioneconomic price per gallon. We also incurred special charges of $245 million, including $155 million related to our Airbus and rising fuel costs.Q400 fleet transitions and $90 million in ratification bonuses from the new collective bargaining agreement with Alaska pilots.
See “Results of Operations” below for further discussion of changes in revenuesrevenue and operating expenses as compared to 2021, 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.
Labor Update
During the third quarter, we reached three new labor agreements. In August 2022, Alaska's employees represented by the International Association of Machinists and Aerospace Workers ratified a two-year contract extension that includes increased pay with added steps to ensure wage rates remain competitive. In September 2022, Horizon pilots represented by the International Brotherhood of Teamsters ratified an agreement that includes increased pay and improved benefits designed to improve pilot retention. In September 2022, Alaska pilots represented by the Air Line Pilots Association reached a tentative agreement for a new contract with management. The agreement was ratified subsequent to quarter end in October 2022. The
new agreement includes increased pay and benefits as well as improvements to job security and scheduling. Also in October 2022, the Company opened negotiations with Alaska's flight attendants, whose contract becomes amendable in December 2022.
As a result of these new agreements, we recorded $35 million in additional costs in the third quarter due to increased wage rates and improvements to a slate of benefits. For the fourth quarter, we expect to record additional costs between $55 million and $60 million.
Environmental, Social and Governance Updates
In order to achieve our long-term target of zero carbon emissions by 2040, the use of sustainable aviation fuel (SAF) will play a crucial role. During the quarter, we signed an agreement with Gevo Inc. to purchase 185 million gallons of SAF to be delivered over the five year term of the agreement beginning in 2026. We also launched a new initiative in partnership with Microsoft, Boeing, and Washington State University to expand the use of SAF in business travel and increase education on sustainable travel topics.
Delivering on our diversity, equity, and inclusion goals is critical to our long-term success. As a reflection of our commitment to these goals, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emissions target into our company-wide Performance Based Pay Plan, which is currently tracking to maximum achievement.
Outlook
We remain committed to our transition to a single fleet for both our mainline and regional operations, which will best position our airlines for long-term sustainable growth. In working toward this goal, our capacity for the fourth quarter is expected to be temporarily constrained as we focus on pilot transition training. As a result, we anticipate capacity for the fourth quarter to be down 7% to 10% versus 2019, with full year capacity down 8% to 9%. Lower capacity, coupled with pressures from wages and training costs, has shifted our expectation for fourth quarter CASMex to be up 20% to 23% over 2019. Continued strength in the demand environment is expected to generate revenue 12% to 15% over 2019 levels. For the full year, we continue to anticipate adjusted pretax margins will range between 6% to 9%.
Our plans will continue to be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. As we leverage our network, Mileage Plan program, and fleet for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years that will continue to serve us in the remainder of 2022 and beyond.
RESULTS OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of aircraft fuel, the Payroll Support Program grant wage offset and other 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 specialother items, (includingsuch as the Payroll Support Program grant wage offset impairment and restructuring charges and merger-related costs)other special items, 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 specialother items, such as the Payroll Support Program grant wage offset impairment and restructuring charges and merger-related costs,other special items, is one of the most important measures used by management and by 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 specialother 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.
•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual incentive plan, which covers the majority of employees within the Alaska Air Group organization.
•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,revenue, we do not, (nornor are we able to)to, evaluate unit revenuesrevenue 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 revenuesrevenue 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,nonrecurring, infrequent, or unusual in nature.
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenuesrevenue and adjusted unit costs, which are non-GAAP measures. | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Consolidated Operating Statistics:(a) | Consolidated Operating Statistics:(a) | | | | | | | | | | | | Consolidated Operating Statistics:(a) | | | | | | | | | | | |
Revenue passengers (000) | Revenue passengers (000) | 9,832 | | 3,595 | | 173.5% | | 23,211 | | 14,012 | | 65.7% | Revenue passengers (000) | 11,437 | | 9,832 | | 16.3% | | 31,137 | | 23,211 | | 34.1% |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 11,592 | | 3,817 | | 203.7% | | 27,319 | | 16,127 | | 69.4% | RPMs (000,000) "traffic" | 14,143 | | 11,592 | | 22.0% | | 38,475 | | 27,319 | | 40.8% |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 14,429 | | 7,871 | | 83.3% | | 38,238 | | 27,483 | | 39.1% | ASMs (000,000) "capacity" | 16,349 | | 14,429 | | 13.3% | | 45,743 | | 38,238 | | 19.6% |
Load factor | Load factor | 80.3% | | 48.5% | | 31.8 pts | | 71.4% | | 58.7% | | 12.7 pts | Load factor | 86.5% | | 80.3% | | 6.2 pts | | 84.1% | | 71.4% | | 12.7 pts |
Yield | Yield | 15.30¢ | | 14.99¢ | | 2.1% | | 13.85¢ | | 14.65¢ | | (5.5)% | Yield | 18.48¢ | | 15.30¢ | | 20.8% | | 17.01¢ | | 13.85¢ | | 22.8% |
RASM | RASM | 13.54¢ | | 8.90¢ | | 52.1% | | 11.19¢ | | 10.04¢ | | 11.5% | RASM | 17.30¢ | | 13.54¢ | | 27.8% | | 15.67¢ | | 11.19¢ | | 40.0% |
CASM excluding fuel and special items(b) | CASM excluding fuel and special items(b) | 9.21¢ | | 14.00¢ | | (34.2)% | | 9.67¢ | | 12.57¢ | | (23.1)% | CASM excluding fuel and special items(b) | 10.05¢ | | 9.21¢ | | 9.1% | | 10.17¢ | | 9.67¢ | | 5.2% |
Economic fuel cost per gallon(b) | Economic fuel cost per gallon(b) | $2.05 | | $1.32 | | 55.3% | | $1.93 | | $1.65 | | 17.0% | Economic fuel cost per gallon(b) | $3.66 | | $2.05 | | 78.5% | | $3.38 | | $1.93 | | 75.1% |
Fuel gallons (000,000) | Fuel gallons (000,000) | 183 | | 97 | | 88.7% | | 477 | | 344 | | 38.7% | Fuel gallons (000,000) | 204 | | 183 | | 11.5% | | 573 | | 477 | | 20.1% |
ASMs per fuel gallon | ASMs per fuel gallon | 78.8 | | 81.3 | | (3.1)% | | 80.2 | | 79.9 | | 0.4% | ASMs per fuel gallon | 80.1 | | 78.8 | | 1.6% | | 79.8 | | 80.2 | | (0.5)% |
Average full-time equivalent employees (FTEs) | Average full-time equivalent employees (FTEs) | 20,315 | | 16,027 | | 26.8% | | 18,819 | | 18,112 | | 3.9% | Average full-time equivalent employees (FTEs) | 22,878 | | 20,315 | | 12.6% | | 22,354 | | 18,819 | | 18.8% |
Mainline Operating Statistics: | Mainline Operating Statistics: | | Mainline Operating Statistics: | |
Revenue passengers (000) | Revenue passengers (000) | 7,065 | | 2,156 | | 227.7% | | 16,367 | | 9,736 | | 68.1% | Revenue passengers (000) | 8,671 | | 7,065 | | 22.7% | | 23,557 | | 16,367 | | 43.9% |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 10,122 | | 2,958 | | 242.2% | | 23,677 | | 13,816 | | 71.4% | RPMs (000,000) "traffic" | 12,846 | | 10,122 | | 26.9% | | 34,818 | | 23,677 | | 47.1% |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 12,540 | | 6,280 | | 99.7% | | 33,004 | | 23,339 | | 41.4% | ASMs (000,000) "capacity" | 14,782 | | 12,540 | | 17.9% | | 41,221 | | 33,004 | | 24.9% |
Load factor | Load factor | 80.7% | | 47.1% | | 33.6 pts | | 71.7% | | 59.2% | | 12.5 pts | Load factor | 86.9% | | 80.7% | | 6.2 pts | | 84.5% | | 71.7% | | 12.8 pts |
Yield | Yield | 14.08¢ | | 13.56¢ | | 3.8% | | 12.68¢ | | 13.46¢ | | (5.8)% | Yield | 17.26¢ | | 14.08¢ | | 22.6% | | 15.76¢ | | 12.68¢ | | 24.3% |
RASM | RASM | 12.66¢ | | 8.14¢ | | 55.5% | | 10.44¢ | | 9.46¢ | | 10.4% | RASM | 16.34¢ | | 12.66¢ | | 29.1% | | 14.72¢ | | 10.44¢ | | 41.0% |
CASM excluding fuel and special items(b) | CASM excluding fuel and special items(b) | 8.45¢ | | 13.88¢ | | (39.1)% | | 8.90¢ | | 11.90¢ | | (25.2)% | CASM excluding fuel and special items(b) | 9.15¢ | | 8.45¢ | | 8.3% | | 9.24¢ | | 8.90¢ | | 3.8% |
Economic fuel cost per gallon(b) | Economic fuel cost per gallon(b) | $2.03 | | $1.31 | | 55.0% | | $1.91 | | $1.66 | | 15.1% | Economic fuel cost per gallon(b) | $3.61 | | $2.03 | | 77.8% | | $3.35 | | $1.91 | | 75.4% |
Fuel gallons (000,000) | Fuel gallons (000,000) | 147 | | 69 | | 113.0% | | 380 | | 270 | | 40.7% | Fuel gallons (000,000) | 173 | | 147 | | 17.7% | | 484 | | 380 | | 27.4% |
ASMs per fuel gallon | ASMs per fuel gallon | 85.3 | | 91.0 | | (6.3)% | | 86.9 | | 86.4 | | 0.6% | ASMs per fuel gallon | 85.4 | | 85.3 | | 0.1% | | 85.2 | | 86.9 | | (2.0)% |
Average FTEs | Average FTEs | 15,116 | | 12,032 | | 25.6% | | 13,870 | | 13,730 | | 1.0% | Average FTEs | 17,453 | | 15,116 | | 15.5% | | 17,035 | | 13,870 | | 22.8% |
Aircraft utilization | Aircraft utilization | 10.2 | | 7.3 | | 39.7% | | 9.6 | | 8.3 | | 15.7% | Aircraft utilization | 10.5 | | 10.2 | | 2.9% | | 10.4 | | 9.6 | | 8.3% |
Average aircraft stage length | Average aircraft stage length | 1,313 | | 1,244 | | 5.5% | | 1,313 | | 1,263 | | 4.0% | Average aircraft stage length | 1,347 | | 1,313 | | 2.6% | | 1,348 | | 1,313 | | 2.7% |
Operating fleet(d) | Operating fleet(d) | 210 | | 217 | | (7) a/c | | 210 | | 217 | | (7) a/c | Operating fleet(d) | 232 | | 210 | | 22 a/c | | 232 | | 210 | | 22 a/c |
Regional Operating Statistics:(c) | Regional Operating Statistics:(c) | | Regional Operating Statistics:(c) | |
Revenue passengers (000) | Revenue passengers (000) | 2,767 | | 1,439 | | 92.3% | | 6,843 | | 4,276 | | 60.0% | Revenue passengers (000) | 2,767 | | 2,767 | | —% | | 7,579 | | 6,843 | | 10.8% |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 1,470 | | 859 | | 71.1% | | 3,642 | | 2,311 | | 57.6% | RPMs (000,000) "traffic" | 1,297 | | 1,470 | | (11.8)% | | 3,657 | | 3,642 | | 0.4% |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 1,889 | | 1,592 | | 18.7% | | 5,235 | | 4,143 | | 26.4% | ASMs (000,000) "capacity" | 1,567 | | 1,889 | | (17.0)% | | 4,522 | | 5,235 | | (13.6)% |
Load factor | Load factor | 77.8% | | 54.0% | | 23.8 pts | | 69.6% | | 55.8% | | 13.8 pts | Load factor | 82.8% | | 77.8% | | 5.0 pts | | 80.9% | | 69.6% | | 11.3 pts |
Yield | Yield | 23.72¢ | | 19.89¢ | | 19.3% | | 21.47¢ | | 21.72¢ | | (1.2)% | Yield | 30.69¢ | | 23.72¢ | | 29.4% | | 28.88¢ | | 21.47¢ | | 34.5% |
RASM | RASM | 19.26¢ | | 11.91¢ | | 61.7% | | 15.80¢ | | 13.24¢ | | 19.3% | RASM | 26.23¢ | | 19.26¢ | | 36.2% | | 24.26¢ | | 15.80¢ | | 53.5% |
Operating fleet | 94 | | 94 | | — a/c | | 94 | | 94 | | — a/c | |
Operating fleet(d) | | Operating fleet(d) | 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)ExcludesReflects all aircraft removed fromin operating service. In 2021, six aircraft previously removed reentered the operating fleet, and are reflected above.service at September 30, 2022.
Given the unusual nature of 2021 and 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 20212022 to 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited) |
Alaska Air Group, Inc. | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2019 | | Change | | 2021 | | 2019 | | Change |
Passenger revenue | $ | 1,774 | | | $ | 2,211 | | | (20) | % | | $ | 3,785 | | | $ | 6,038 | | | (37) | % |
Mileage plan other revenue | 120 | | | 118 | | | 2 | % | | 332 | | | 346 | | | (4) | % |
Cargo and other | 59 | | | 60 | | | (2) | % | | 160 | | | 169 | | | (5) | % |
Total operating revenues | $ | 1,953 | | | $ | 2,389 | | | (18) | % | | $ | 4,277 | | | $ | 6,553 | | | (35) | % |
| | | | | | | | | | | |
Operating expense, excluding fuel and special items | $ | 1,328 | | | $ | 1,476 | | | (10) | % | | 3,699 | | | $ | 4,295 | | | (14) | % |
Economic fuel | 376 | | | 486 | | | (23) | % | | 853 | | | 1,408 | | | (39) | % |
Special items | (9) | | | 5 | | (280) | % | | (921) | | | 39 | | NM |
Total operating expenses | $ | 1,695 | | | $ | 1,967 | | | (14) | % | | $ | 3,631 | | | $ | 5,742 | | | (37) | % |
| | | | | | | | | | | |
Total nonoperating expense | (13) | | | (6) | | | 117 | % | | (46) | | | (38) | | | 21 | % |
Income (loss) before income tax | $ | 245 | | | $ | 416 | | | (41) | % | | $ | 600 | | | $ | 773 | | | (22) | % |
| | | | | | | | | | | |
Consolidated Operating Statistics(a): | | | | | | | | | | | |
Revenue passengers (000) | 9,832 | | 12,574 | | (22) | % | | 23,211 | | 35,018 | | (34) | % |
RPMs (000,000) "traffic" | 11,592 | | 15,026 | | (23) | % | | 27,319 | | 42,113 | | (35) | % |
ASMs (000,000) "capacity" | 14,429 | | 17,519 | | (18) | % | | 38,238 | | 50,006 | | (24) | % |
Load Factor | 80.3% | | 85.8% | | (5.5) | pts | | 71.4% | | 84.2% | | (12.8) | pts |
Yield | 15.30¢ | | 14.71¢ | | 4 | % | | 13.85¢ | | 14.34¢ | | (3) | % |
RASM | 13.54¢ | | 13.64¢ | | (1) | % | | 11.19¢ | | 13.10¢ | | (15) | % |
CASMex | 9.21¢ | | 8.43¢ | | 9 | % | | 9.67¢ | | 8.59¢ | | 13 | % |
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 third quarter 2019 Form 10-Q. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited) |
Alaska Air Group, Inc. | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2019 | | Change | | 2022 | | 2019 | | Change |
Passenger revenue | $ | 2,615 | | | $ | 2,211 | | | 18% | | $ | 6,544 | | | $ | 6,038 | | | 8% |
Mileage plan other revenue | 146 | | | 118 | | | 24% | | 433 | | | 346 | | | 25% |
Cargo and other | 67 | | | 60 | | | 12% | | 190 | | | 169 | | | 12% |
Total operating revenue | $ | 2,828 | | | $ | 2,389 | | | 18% | | $ | 7,167 | | | $ | 6,553 | | | 9% |
| | | | | | | | | | | |
Operating expense, excluding fuel and special items | $ | 1,644 | | | $ | 1,476 | | | 11% | | $ | 4,654 | | | $ | 4,295 | | | 8% |
Aircraft fuel, including hedging gains and losses | 877 | | | 486 | | | 80% | | 2,000 | | | 1,408 | | | 42% |
Special items | 245 | | | 5 | | NM | | 466 | | | 39 | | NM |
Total operating expenses | $ | 2,766 | | | $ | 1,967 | | | 41% | | $ | 7,120 | | | $ | 5,742 | | | 24% |
| | | | | | | | | | | |
Total non-operating income (expense) | 3 | | | (6) | | | (150)% | | (3) | | | (38) | | | (92)% |
Income before income tax | $ | 65 | | | $ | 416 | | | (84)% | | $ | 44 | | | $ | 773 | | | (94)% |
| | | | | | | | | | | |
Consolidated Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 11,437 | | 12,574 | | (9)% | | 31,137 | | 35,018 | | (11)% |
RPMs (000,000) "traffic" | 14,143 | | 15,026 | | (6)% | | 38,475 | | 42,113 | | (9)% |
ASMs (000,000) "capacity" | 16,349 | | 17,519 | | (7)% | | 45,743 | | 50,006 | | (9)% |
Load Factor | 86.5% | | 85.8% | | 0.7 pts | | 84.1% | | 84.2% | | (0.1) pts |
Yield | 18.48¢ | | 14.71¢ | | 26% | | 17.01¢ | | 14.34¢ | | 19% |
RASM | 17.30¢ | | 13.64¢ | | 27% | | 15.67¢ | | 13.10¢ | | 20% |
CASMex | 10.05¢ | | 8.43¢ | | 19% | | 10.17¢ | | 8.59¢ | | 18% |
FTEs | 22,878 | | 22,247 | | 3% | | 22,354 | | 22,000 | | 2% |
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 20212022 TO THREE MONTHS ENDED SEPTEMBER 30, 20202021
Our consolidated net income for the three months ended September 30, 20212022 was $40 million, or $0.31 per share, compared to a consolidated net income of $194 million, or $1.53 per diluted share, compared to a net loss of $431 million, or $3.49 per share, for the three months ended September 30, 2020.2021.
Excluding the impact of the Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of 20212022 was $187$325 million, or $1.47$2.53 per share, compared to an adjusted net lossincome of $399$187 million, or $3.23$1.47 per share, in the third quarter of 2020.2021. The following table reconciles our adjusted net income (loss) per diluted share (EPS) to amounts as reported in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2021 | | 2020 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income (loss) per share | $ | 194 | | | $ | 1.53 | | | $ | (431) | | | $ | (3.49) | |
Payroll Support Program grant wage offset | — | | | — | | | (398) | | | (3.22) | |
Mark-to-market fuel hedge adjustments | — | | | — | | | (3) | | | (0.02) | |
Special items - impairment charges and other | (9) | | | (0.07) | | | 121 | | | 0.98 | |
Special items - restructuring charges | — | | | — | | | 322 | | | 2.60 | |
Special items - merger-related costs | — | | | — | | | 1 | | | 0.01 | |
Income tax effect of reconciling items above | 2 | | | 0.01 | | | (11) | | | (0.09) | |
Non-GAAP adjusted net income (loss) per share | $ | 187 | | | $ | 1.47 | | | $ | (399) | | | $ | (3.23) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income per share | $ | 40 | | | $ | 0.31 | | | $ | 194 | | | $ | 1.53 | |
| | | | | | | |
Mark-to-market fuel hedge adjustments | 131 | | | 1.02 | | | — | | | — | |
Special items - fleet transition | 155 | | | 1.21 | | | (9) | | | (0.07) | |
| | | | | | | |
| | | | | | | |
Special items - labor ratification bonus | 90 | | | 0.70 | | | — | | | — | |
Income tax effect of reconciling items above | (91) | | | (0.71) | | | 2 | | | 0.01 | |
Non-GAAP adjusted net income per share | $ | 325 | | | $ | 2.53 | | | $ | 187 | | | $ | 1.47 | |
CASM excluding fuel and special items reconciliation is summarized below: | | | Three Months Ended September 30, | | Three Months Ended September 30, |
(in cents) | (in cents) | 2021 | | 2020 | | % Change | (in cents) | 2022 | | 2021 | | % Change |
Consolidated: | Consolidated: | | | | | | Consolidated: | | | | | |
CASM | CASM | 11.75 | ¢ | | 16.16 | ¢ | | (27) | % | CASM | 16.91 | ¢ | | 11.75 | ¢ | | 44 | % |
Less the following components: | Less the following components: | | Less the following components: | |
Payroll Support Program grant wage offset | — | | | (5.06) | | | (100) | % | |
| Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 2.60 | | | 1.59 | | | 64 | % | Aircraft fuel, including hedging gains and losses | 5.36 | | | 2.60 | | | 106 | % |
Special items - impairment charges and other | (0.06) | | | 1.53 | | | (104) | % | |
Special items - restructuring charges | — | | | 4.09 | | | (100) | % | |
Special items - merger-related costs | — | | | 0.01 | | | (100) | % | |
Special items - fleet transition | | Special items - fleet transition | 0.95 | | | (0.06) | | | NM |
Special items - labor ratification bonus | | Special items - labor ratification bonus | 0.55 | | | — | | | NM |
| CASM excluding fuel and special items | CASM excluding fuel and special items | 9.21 | ¢ | | 14.00 | ¢ | | (34) | % | CASM excluding fuel and special items | 10.05 | ¢ | | 9.21 | ¢ | | 9 | % |
| Mainline: | Mainline: | | Mainline: | |
CASM | CASM | 10.77 | ¢ | | 16.80 | ¢ | | (36) | % | CASM | 16.20 | ¢ | | 10.77 | ¢ | | 50 | % |
Less the following components: | Less the following components: | | Less the following components: | |
Payroll Support Program grant wage offset | — | | | (5.56) | | | (100) | % | |
| Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 2.39 | | | 1.43 | | | 67 | % | Aircraft fuel, including hedging gains and losses | 5.52 | | | 2.39 | | | 131 | % |
| Special items - impairment charges and other | (0.07) | | | 1.93 | | | (104) | % | |
Special items - restructuring charges | — | | | 5.10 | | | (100) | % | |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % | |
Special items - fleet transition | | Special items - fleet transition | 0.92 | | | (0.07) | | | NM |
Special items - labor ratification bonus | | Special items - labor ratification bonus | 0.61 | | | — | | | NM |
| CASM excluding fuel and special items | CASM excluding fuel and special items | 8.45 | ¢ | | 13.88 | ¢ | | (39) | % | CASM excluding fuel and special items | 9.15 | ¢ | | 8.45 | ¢ | | 8 | % |
OPERATING REVENUESREVENUE
Total operating revenuesrevenue increased $1.3 billion$875 million, or 45%, during the third quarter of 20212022 compared to the same period in 2020.2021. The changes are summarized in the following table: | | | Three Months Ended September 30, | | Three Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Passenger revenue | Passenger revenue | $ | 1,774 | | | $ | 572 | | | 210 | % | Passenger revenue | $ | 2,615 | | | $ | 1,774 | | | 47 | % |
Mileage Plan other revenue | Mileage Plan other revenue | 120 | | | 84 | | | 43 | % | Mileage Plan other revenue | 146 | | | 120 | | | 22 | % |
Cargo and other | Cargo and other | 59 | | | 45 | | | 31 | % | Cargo and other | 67 | | | 59 | | | 14 | % |
Total operating revenues | $ | 1,953 | | | $ | 701 | | | 179 | % | |
Total operating revenue | | Total operating revenue | $ | 2,828 | | | $ | 1,953 | | | 45 | % |
Passenger Revenuerevenue
On a consolidated basis, Passenger revenue for the third quarter of 20212022 increased by $1.2 billion, primarily$841 million, or 47%, driven by a significant22% increase in passenger traffic. Intraffic and a 21% improvement in ticket yields. Increased demand for air travel and constrained capacity industry wide enabled higher load factors in the third quarter of 2020, although we began to see rebounding demand during2022. Higher revenue on improved Mileage Plan award redemptions and from our alliance partners following the summer months, traffic remained well below historical levels. This compares to the third quarterrelaxing of 2021, where pent up demand for leisureinternational travel spurred a significant increase in traffic, particularly in July and August. As we entered September, results were impacted by the rise of the delta variant, slowing demand and increasing refund activity. Despite these headwinds, quarterly load factor increased 32 points over the prior year on an 83% increase in capacity, providing meaningful increasesrestrictions also contributed meaningfully to revenue asgrowth compared to the prior year.2021.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue for the third quarter of 2022 increased by $36$26 million, or 43%, as compared to the same prior-year period,22%. The change is largely due to an increase in commissions from our bank card partners driven by increased consumer spending and improved economics from our new co-branded credit 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 third quarter of 2021.agreement.
Cargo and other
On a consolidated basis, Cargo and other revenue for the third quarter of 20212022 increased by $14$8 million, or 31%, as compared to14%. Other ancillary revenue was the same prior-year period. Theprimary driver of the year-over-year increase, is primarilyconsistent with the return in demand for travel. Incremental freight revenue also contributed due to the returngreater use of all three freighters back to fullbelly capacity, which grew on an increase in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.
OPERATING EXPENSES
Total operating expenses increased $423 million,$1.1 billion, or 33%63%, compared to the third quarter of 2020.2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management: | | | Three Months Ended September 30, | | Three Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Fuel expense | Fuel expense | $ | 376 | | | $ | 125 | | | 201 | % | Fuel expense | $ | 877 | | | $ | 376 | | | 133 | % |
Non-fuel operating expenses, excluding special items | Non-fuel operating expenses, excluding special items | 1,328 | | | 1,101 | | | 21 | % | Non-fuel operating expenses, excluding special items | 1,644 | | | 1,328 | | | 24 | % |
Payroll Support Program grant wage offset | — | | | (398) | | | (100) | % | |
Special items - impairment charges and other | (9) | | | 121 | | | (107) | % | |
Special items - restructuring charges | — | | | 322 | | | (100) | % | |
Special items - merger-related costs | — | | | 1 | | | (100) | % | |
| Special items - fleet transition | | Special items - fleet transition | 155 | | | (9) | | | NM |
Special items - labor ratification bonus | | Special items - labor ratification bonus | 90 | | | — | | | NM |
| Total operating expenses | Total operating expenses | $ | 1,695 | | | $ | 1,272 | | | 33 | % | Total operating expenses | $ | 2,766 | | | $ | 1,695 | | | 63 | % |
Fuel Expenseexpense
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 $251$501 million, or 133%, compared to the third quarter of 2020.2021. The elements of the change are illustrated in the following table: | | | Three Months Ended September 30, | | Three Months Ended September 30, | |
| | 2021 | | 2020 | | 2022 | | 2021 | |
(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 | $ | 397 | | | $ | 2.16 | | | $ | 123 | | | $ | 1.27 | | Raw or "into-plane" fuel cost | $ | 775 | | | $ | 3.80 | | | $ | 397 | | | $ | 2.16 | | |
(Gain)/loss on settled hedges | (Gain)/loss on settled hedges | (21) | | | (0.11) | | | 5 | | | 0.05 | | (Gain)/loss on settled hedges | (29) | | | (0.14) | | | (21) | | | (0.11) | | |
Consolidated economic fuel expense | Consolidated economic fuel expense | 376 | | | 2.05 | | | $ | 128 | | | $ | 1.32 | | Consolidated economic fuel expense | $ | 746 | | | $ | 3.66 | | | $ | 376 | | | $ | 2.05 | | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | — | | | — | | | (3) | | | (0.03) | | Mark-to-market fuel hedge adjustments | 131 | | | 0.64 | | | — | | | — | | |
GAAP fuel expense | GAAP fuel expense | $ | 376 | | | $ | 2.05 | | | $ | 125 | | | $ | 1.29 | | GAAP fuel expense | $ | 877 | | | $ | 4.30 | | | $ | 376 | | | $ | 2.05 | | |
Fuel gallons | Fuel gallons | 183 | | | | | 97 | | | | Fuel gallons | | | 204 | | | | | 183 | | |
Raw fuel expense increased 95% in the third quarter of 2022 compared to the third quarter of 2021, due to significantly higher per gallon for the three months ended September 30, 2021costs and increased fuel consumption. Raw fuel expense per gallon increased by approximately 70%76% 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 third quarter of 2021 was primarily driven by a 70% increase in crudeCrude oil prices and a 170% increase inhave risen 30% while refining margins whenhave more than tripled compared to the prior year. This is coupled2021. Fuel gallons consumed increased 11%, consistent with an increase in consumption of 86 million gallons on an increase in scheduled departures.rising capacity.
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 economicEconomic fuel expense, we include includes 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 third quarter were $21$29 million in 2021,2022, compared to lossesgains of $5$21 million in the same period in 2020.2021. These amounts represent cash received from hedges at settlement, offset by cash paid in prior periods for premium expense.
Non-fuel Expensesexpenses
The table below provides the reconciliation of the operating expense line items, excluding fuel, the Payroll Support Program grant wage offset, and other special items. Significant operating expense variances from 20202021 are more fully described below. | | | Three Months Ended September 30, | | Three Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Wages and benefits | Wages and benefits | $ | 578 | | | $ | 495 | | | 17 | % | Wages and benefits | $ | 686 | | | $ | 578 | | | 19 | % |
Variable incentive pay | Variable incentive pay | 42 | | | 42 | | | — | % | Variable incentive pay | 48 | | | 42 | | | 14 | % |
Aircraft maintenance | Aircraft maintenance | 89 | | | 84 | | | 6 | % | Aircraft maintenance | 92 | | | 89 | | | 3 | % |
Aircraft rent | Aircraft rent | 64 | | | 74 | | | (14) | % | Aircraft rent | 76 | | | 64 | | | 19 | % |
Landing fees and other rentals | Landing fees and other rentals | 141 | | | 109 | | | 29 | % | Landing fees and other rentals | 161 | | | 141 | | | 14 | % |
Contracted services | Contracted services | 62 | | | 36 | | | 72 | % | Contracted services | 83 | | | 62 | | | 34 | % |
Selling expenses | Selling expenses | 49 | | | 24 | | | 104 | % | Selling expenses | 82 | | | 49 | | | 67 | % |
Depreciation and amortization | Depreciation and amortization | 99 | | | 105 | | | (6) | % | Depreciation and amortization | 104 | | | 99 | | | 5 | % |
Food and beverage service | Food and beverage service | 39 | | | 14 | | | 179 | % | Food and beverage service | 52 | | | 39 | | | 33 | % |
Third-party regional carrier expense | Third-party regional carrier expense | 39 | | | 29 | | | 34 | % | Third-party regional carrier expense | 53 | | | 39 | | | 36 | % |
Other | Other | 126 | | | 89 | | | 42 | % | Other | 207 | | | 126 | | | 64 | % |
Total non-fuel operating expenses, excluding special items | Total non-fuel operating expenses, excluding special items | $ | 1,328 | | | $ | 1,101 | | | 21 | % | Total non-fuel operating expenses, excluding special items | $ | 1,644 | | | $ | 1,328 | | | 24 | % |
Wages and Benefitsbenefits
Wages and benefits increased duringby $108 million, or 19%, in the third quarter of 2021 by $83 million, or 17%, compared to 2020.2022. The primary components of Wages and benefits are shown in the following table: | | | Three Months Ended September 30, | | Three Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Wages | Wages | $ | 433 | | | $ | 356 | | | 22 | % | Wages | $ | 514 | | | $ | 433 | | | 19 | % |
Pension - Defined benefit plans service cost | Pension - Defined benefit plans service cost | 13 | | | 11 | | | 18 | % | Pension - Defined benefit plans service cost | 11 | | | 13 | | | (15) | % |
Defined contribution plans | Defined contribution plans | 33 | | | 28 | | | 18 | % | Defined contribution plans | 39 | | | 33 | | | 18 | % |
Medical and other benefits | Medical and other benefits | 68 | | | 75 | | | (9) | % | Medical and other benefits | 85 | | | 68 | | | 25 | % |
Payroll taxes | Payroll taxes | 31 | | | 25 | | | 24 | % | Payroll taxes | 37 | | | 31 | | | 19 | % |
Total wages and benefits | Total wages and benefits | $ | 578 | | | $ | 495 | | | 17 | % | Total wages and benefits | $ | 686 | | | $ | 578 | | | 19 | % |
Wages increased $77$81 million, or 22%19%, onprimarily driven by 13% growth in FTEs as Alaska and Horizon hire to support the ramp up in operations. The ratification of three new collective bargaining agreements during the third quarter resulted in significant wage increases for the represented groups. As a 27% increase in FTEs. Increased wages as compared to the prior period are primarily the result of leavesthe new agreements, the Company recorded $35 million in incremental wage expense during the quarter, $16 million of absence taken and reduction in executive pay and hourswhich relates to a one-time adjustment of accrued benefits for management employees in 2020 which were not repeated in 2021. new wage rates.
Increased expense for defined contribution plans and payroll taxes are in lineconsistent with the related increase tochange in wages.
Medical and other benefits increased $17 million, or 25%, driven by growth in FTEs and premium costs, coupled with an increase in the obligation for our pilots long-term disability plan.
Variable incentive pay
Variable incentive pay expense increased by $6 million, or 14%, in the third quarter of 2022. The increase is due to the expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.
Aircraft Rentrent
Aircraft rent expense decreasedincreased by $10$12 million, or 14%19%, duringin the third quarter of 2021 compared2022. Increased expense is due to the same period in 2020 primarily the resultdelivery of the full impairment taken on certaineight leased AirbusBoeing 737-9 aircraft in 2020.and ten leased Embraer E175 aircraft operated by SkyWest since September 30, 2021.
Landing fees and other rentals
Landing fees and other rentals increased by $32$20 million, or 29%14%, duringin the third quarter of 20212022. The increase compared to the same period in 20202021 is driven primarily due to a significant increaseby increases in departures. Increased departure-related costs were coupled bydepartures as well as rate increases for terminal rents. Rates for both fixed airport rent and landing fees rose significantly at manySeattle-Tacoma International Airport, the Company's largest hub, which accounted for 75% of our hub airports.the increase compared to prior year.
Contracted Servicesservices
Contracted services increased by $26$21 million, or 72%34%, duringin the third quarter of 2021 compared to the same period in 20202022, driven primarily by increased departures and passengers, as compared to the prior-year period as a result of the COVID-19 pandemic.coupled with higher rates charged by vendor partners.
Selling Expenseexpenses
Selling expenseexpenses increased by $25$33 million, duringor 67%, in the third quarter of 2021 compared to the same period in 2020,2022, driven primarily driven by a significantan increase in distribution costs and credit card commissions incurred with the overall increase in travel.revenue recovery.
Food and Beverage Servicebeverage service
Food and beverage service increased by $25$13 million, during the 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 productsor 33%, in the third quarter of 2021.2022, consistent with a 16% increase in revenue passengers. Additional on-board offerings coupled with increased charges for transportation and food service supplies also contributed to the overall increase.
Third-party Regional Carrier Expenseregional carrier expense
Third-party regional carrier expense, which represents payments made toexpenses associated with SkyWest under our CPA, increased by $10$14 million, or 34%36%, duringin the third quarter of 2021 compared to the same period in 2020.2022. The increase in expense is primarily due to increases inincremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period, offset by the final pass through of CARES Act PSP funding for SkyWest pilot and flight attendant wages.period.
Other expense
Other expense increased $37$81 million, or 42%64%, duringin the third quarter of 20212022. Increased expense as compared to the sameprior year period in 2020. Increasedis partially due to $28 million incurred for employee recognition related to the 90,000 mile gift granted to all employees. Other items that increased within Other expense is primarily driven by incrementalinclude training events and related travel costs, crew hotel stays, and crew per diem,diem. Increases in crew-related costs are consistent with the overall increaserise in departuresdepartures.
Special items - fleet transition
We recorded expenses associated with fleet transition and capacity, as well asrelated charges of $155 million in the third quarter of 2022. Refer to Note 2 to the consolidated financial statements for additional expense for professional services.details.
Special Itemsitems - Impairment and other chargeslabor ratification bonus
We recorded a benefit associated with impairment and other chargesnonrecurring expense of $9$90 million in the third quarter of 2021, consisting2022 representing a payment to Alaska pilots following the ratification 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.a new collective bargaining agreement.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 ofto the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline recordedoperations reported an adjusted pretax profit of $446 million in the third quarter of 2022, compared to an adjusted pretax profit of $221 million in the third quarter of 2021, compared to a pretax loss of $463 million in the third quarter of 2020.2021. The $684$225 million improvement was primarily driven by a $1 billion$792 million increase in Passenger revenues as a result of increased demand for air travel,revenue, offset by a $188$326 million increase in economic fuel cost and a $292 million increase in non-fuel operating costs and a $209 million increase in economic fuel cost.costs.
As compared to the prior year, higher Mainline revenue is primarily attributable to a 27% increase in traffic and a 23% increase in yield, driven by a historically strong demand environment. Non-fuel operating expenses increased, significantly, driven by increasedhigher variable costs, largely consistent with the overall increasegrowth in capacity and departures. Higher economic fuel prices, combined with a significant increase inmore gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations generatedreported an adjusted pretax loss of $2 million in the third quarter of 2022, compared to an adjusted pretax loss of $1 million in the third quarter of 2021, compared to an adjusted pretax loss of $962021. While operating revenue increased $47 million, in the third quarter of 2020. The improved pretax lossimprovement was attributable tooffset by a $174$44 million increase in operating revenues, partially offset byfuel costs and a $40$4 million increase in non-fuel operating expenses and a $39 million increase in fuel costs.expenses.
Regional passenger revenue increased significantly compared to the third quarter of 2020,2021, primarily driven by increased traffican improved load factor and capacity driven bya 29% improvement in yield. Higher fuel prices contributed to 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.Regional fuel expense.
Horizon
Horizon achievedreported an adjusted pretax loss of $6 million in the third quarter of 2022, compared to an adjusted pretax profit of $8 million in the third quarter of 2021 compared2021. The shift to $11 million in the third quarter of 2020. Decreased profitadjusted pretax loss is driven by increased operating expenses, primarily driven by increased maintenance expenselower CPA revenue on the Q400 fleet as compared to the prior year.decreased departures.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 20212022 TO NINE MONTHS ENDED SEPTEMBER 30, 20202021
Our consolidated net income for the nine months ended September 30, 20212022 was $36 million, or $0.28 per share, compared to consolidated net income of $460 million, or $3.64 per diluted share, compared to a net loss of $877 million, or $7.12 per share, for the nine months ended September 30, 2020.2021.
Our adjusted net lossincome for the nine months ended September 30, 20212022 was $287$438 million, or $2.27$3.42 per diluted share, compared to an adjusted net loss of $940$287 million, or $7.63$2.27 per diluted share, in the nine months ended September 30, 2020.2021. The following table reconciles our adjusted net lossincome and adjusted diluted EPS to amounts as reported in accordance with GAAP: | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Reported GAAP net income (loss) and diluted EPS | $ | 460 | | | $ | 3.64 | | | $ | (877) | | | $ | (7.12) | |
Payroll Support Program grant wage offset | (914) | | | (7.24) | | | (760) | | | (6.16) | |
Mark-to-market fuel hedge adjustments | (68) | | | (0.54) | | | — | | | — | |
Special items - merger-related costs | — | | | — | | | 5 | | | 0.04 | |
Special items - impairment charges and other | 5 | | | 0.04 | | | 350 | | | 2.84 | |
Special items - restructuring charges | (12) | | | (0.09) | | | 322 | | | 2.61 | |
Income tax effect of reconciling items above | 242 | | | 1.92 | | | 20 | | | 0.16 | |
Non-GAAP adjusted net loss per share | $ | (287) | | | $ | (2.27) | | | $ | (940) | | | $ | (7.63) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income per share | $ | 36 | | | $ | 0.28 | | | $ | 460 | | | $ | 3.64 | |
Payroll Support Program grant wage offset | — | | | — | | | (914) | | | (7.24) | |
Mark-to-market fuel hedge adjustments | 64 | | | 0.50 | | | (68) | | | (0.54) | |
| | | | | | | |
Special items - fleet transition | 376 | | | 2.94 | | | 5 | | | 0.04 | |
Special items - labor ratification bonus | 90 | | | 0.70 | | | — | | | — | |
Special items - restructuring | — | | | — | | | (12) | | | (0.09) | |
Income tax effect of reconciling items above | (128) | | | (1.00) | | | 242 | | | 1.92 | |
Non-GAAP adjusted net income (loss) per share | $ | 438 | | | $ | 3.42 | | | $ | (287) | | | $ | (2.27) | |
CASM excluding fuel and special items reconciliation is summarized below: | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in cents) | 2022 | | 2021 | | % Change |
Consolidated: | | | | | |
CASM | 15.56 | ¢ | | 9.50 | ¢ | | 64 | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | — | | | (2.39) | | | NM |
Aircraft fuel, including hedging gains and losses | 4.37 | | | 2.24 | | | 95 | % |
Special items - fleet transition | 0.82 | | | 0.01 | | | NM |
Special items - labor ratification bonus | 0.20 | | | — | | | NM |
Special items - restructuring | — | | | (0.03) | | | NM |
| | | | | |
CASM excluding fuel and special items | 10.17 | ¢ | | 9.67 | ¢ | | 5 | % |
| | | | | |
Mainline: | | | | | |
CASM | 14.59 | ¢ | | 8.26 | ¢ | | 77 | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | — | | | (2.61) | | | NM |
Aircraft fuel, including hedging gains and losses | 4.44 | | | 1.99 | | | 123 | % |
Special items - fleet transition | 0.69 | | | 0.02 | | | NM |
Special items - labor ratification bonus | 0.22 | | | — | | | NM |
Special items - restructuring | — | | | (0.04) | | | NM |
| | | | | |
CASM excluding fuel and special items | 9.24 | ¢ | | 8.90 | ¢ | | 4 | % |
Our operating costs per ASM are summarized below: | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in cents) | 2021 | | 2020 | | % Change |
Consolidated: | | | | | |
CASM | 9.50 | ¢ | | 14.33 | ¢ | | (34) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (2.39) | | | (2.77) | | | (14) | % |
Aircraft fuel, including hedging gains and losses | 2.24 | | | 2.07 | | | 8 | % |
Special items - impairment charges and other | 0.01 | | | 1.27 | | | (98) | % |
Special items - restructuring charges | (0.03) | | | 1.17 | | | (103) | % |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 9.67 | ¢ | | 12.57 | ¢ | | (23) | % |
| | | | | |
Mainline: | | | | | |
CASM | 8.26 | ¢ | | 13.56 | ¢ | | (39) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (2.61) | | | (2.89) | | | (10) | % |
Aircraft fuel, including hedging gains and losses | 1.99 | | | 1.92 | | | 4 | % |
Special items - impairment charges and other | 0.02 | | | 1.24 | | | (99) | % |
Special items - restructuring charges and other | (0.04) | | | 1.37 | | | (103) | % |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 8.90 | ¢ | | 11.90 | ¢ | | (25) | % |
OPERATING REVENUESREVENUE
Total operating revenuesrevenue increased $1.5$2.9 billion, or 55%68%, during the first nine months of 20212022 compared to the same period in 2020.2021. The changes are summarized in the following table: | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Passenger revenue | Passenger revenue | $ | 3,785 | | | $ | 2,362 | | | 60 | % | Passenger revenue | $ | 6,544 | | | $ | 3,785 | | | 73 | % |
Mileage Plan other revenue | Mileage Plan other revenue | 332 | | | 266 | | | 25 | % | Mileage Plan other revenue | 433 | | | 332 | | | 30 | % |
Cargo and other | Cargo and other | 160 | | | 130 | | | 23 | % | Cargo and other | 190 | | | 160 | | | 19 | % |
Total operating revenues | $ | 4,277 | | | $ | 2,758 | | | 55 | % | |
Total operating revenue | | Total operating revenue | $ | 7,167 | | | $ | 4,277 | | | 68 | % |
Passenger Revenuerevenue
On a consolidated basis, Passenger revenue for the first nine months of 20212022 increased by $1.4$2.8 billion, or 60%73%, on a 69%41% increase in passenger traffic driven primarily by reboundingand a 23% improvement in ticket yields. Although our airlines experienced operational disruptions in the first half of 2022 that have since been resolved, demand for both leisure and business travel experienced in the second and third quarters of 2021. As travel restrictions were largely removed in the second quarter of 2021, passenger counts increased dramatically as comparedcontinued to the prior year, with summer holiday travel approaching pre-COVIDdrive revenue results to historic levels. These improvements were offset by the impacts of the delta variant, which slowed the return of demand primarily in September 2021.
AlthoughFor the delta variant is likely to have an acute impact on October results,fourth quarter, we expect that overall fourth quarteranticipate Passenger revenue will continue to show improvementmeaningful improvements over 2020 driven by leisure passengers travelingthe comparable prior year period on increased capacity offered. Strong demand for passenger air travel has persisted through summer and into the holiday season,fall, with yields and the gradual return of business travel.load factors expected to exceed prior year results.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased $66$101 million, or 25%30%, in the first nine months of 2021 compared to the first nine months of 2020,2022. The change is largely due largely to an increase in commission receivedcommissions from our affinitybank card partner stemmingpartners driven by increased consumer spending and improved economics from growing consumer spendour new co-branded credit card agreement.
We expect continued strength in Mileage Plan other revenue for the fourth quarter of 2022 compared to the prior year, driven by higher commissions resulting from the improved economics of our new co-branded credit card agreement and an increase in cardholders.increased card spend.
Cargo and other
On a consolidated basis, Cargo and other revenue increased $30 million, or 23%19%, in the first nine months of 2021 compared to2022. Other ancillary revenue was the first nine monthsprimary driver of 2020. Thethe year-over-year increase, is primarilyconsistent with the return in demand for travel. Incremental freight revenue also contributed due to the returngreater use of all three freighters back to fullbelly capacity, which grew on an increase in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.
We expect thatCargo and other revenue to increase in the fourth quarter of 2022 compared to the prior year, driven by greater ancillary revenue and growth in our cargo and other revenues will be positively impacted as compared to 2020 due to similar reasons as discussed above.business.
OPERATING EXPENSES
Total operating expenses decreased $307 million,increased $3.5 billion, or 8%96%, compared to the first nine months of 2020.2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management: | | | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change | |
Fuel expense | Fuel expense | $ | 853 | | | $ | 568 | | | 50 | % | Fuel expense | $ | 2,000 | | | $ | 853 | | | 134 | % | |
Non-fuel operating expenses, excluding special items | Non-fuel operating expenses, excluding special items | 3,699 | | | 3,453 | | | 7 | % | Non-fuel operating expenses, excluding special items | 4,654 | | | 3,699 | | | 26 | % | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (914) | | | (760) | | | 20 | % | Payroll Support Program grant wage offset | — | | | (914) | | | NM | |
Special items - impairment charges and other | 5 | | | 350 | | | (99) | % | |
Special items - restructuring charges | (12) | | | 322 | | | (104) | % | |
Special items - merger-related costs | — | | | 5 | | | (100) | % | |
Special items - fleet transition | | Special items - fleet transition | 376 | | | 5 | | | NM | |
Special items - labor ratification bonus | | Special items - labor ratification bonus | 90 | | | — | | | NM | |
Special items - restructuring | | Special items - restructuring | — | | | (12) | | | NM | |
| Total operating expenses | Total operating expenses | $ | 3,631 | | | $ | 3,938 | | | (8) | % | Total operating expenses | $ | 7,120 | | | $ | 3,631 | | | 96 | % | |
Fuel Expenseexpense
Aircraft fuel expense increased $285 million,$1.1 billion, or 50%134%, compared to the nine months ended September 30, 2020.2021. The elements of the change are illustrated in the table:
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
(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 | $ | 949 | | | $ | 1.99 | | | $ | 553 | | | $ | 1.61 | | Raw or "into-plane" fuel cost | $ | 2,103 | | | $ | 3.67 | | | $ | 949 | | | $ | 1.99 | |
(Gain)/loss on settled hedges | (Gain)/loss on settled hedges | (28) | | | (0.06) | | | 15 | | | 0.04 | | (Gain)/loss on settled hedges | (167) | | | (0.29) | | | (28) | | | (0.06) | |
Consolidated economic fuel expense | Consolidated economic fuel expense | 921 | | | 1.93 | | | $ | 568 | | | $ | 1.65 | | Consolidated economic fuel expense | $ | 1,936 | | | $ | 3.38 | | | $ | 921 | | | $ | 1.93 | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (68) | | | (0.14) | | | — | | | — | | Mark-to-market fuel hedge adjustments | 64 | | | 0.11 | | | (68) | | | (0.14) | |
GAAP fuel expense | GAAP fuel expense | $ | 853 | | | $ | 1.79 | | | $ | 568 | | | $ | 1.65 | | GAAP fuel expense | $ | 2,000 | | | $ | 3.49 | | | $ | 853 | | | $ | 1.79 | |
Fuel gallons | Fuel gallons | 477 | | | | | 344 | | | | Fuel gallons | | | 573 | | | | | 477 | |
The rawRaw fuel priceexpense increased 122% in the first nine months of 2022 compared to the first nine months of 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel expense per gallon increased 24%by approximately 84% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil as well asand refining margins associated with the conversion of crude oil to jet fuel. The increase in Crude oil prices have risen 49% while refining margins have more than tripled compared to 2021. Fuel gallons consumed increased 20%, consistent with rising capacity.
We also evaluate economic fuel expense, which we define as raw fuel price per gallonexpense adjusted for the cash we receive from hedge counterparties for hedges that settle during the first nine monthsperiod 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 2021 was driven by a 55% increase in crude oilgain or loss recognition on our hedge portfolio. Economic fuel expense includes 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 offset by a slight decrease in refining margins.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 in the first nine months of 20212022 were $28$167 million, compared to lossesgains of $15$28 million in the same period in 2020.2021. These amounts represent cash received from settled hedges, offset by cash paid in prior periods for premium expense.
We expect continued pressure in aircraft fuel expense in the fourth quarter of 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the fourth quarter to range between $2.25 and $2.30$3.50 to $3.70 per gallon basedgallon. Based on currentexpected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio in the fourth quarter. We expect the magnitude of the hedge benefit to be smaller compared to prior quarters in 2022 as the strike price of the portfolio approaches projected market West Coast jet fuel prices.cost per barrel.
Non-fuel Expenseexpenses
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | % Change |
Wages and benefits | $ | 1,931 | | | $ | 1,581 | | | 22 | % |
Variable incentive pay | 140 | | | 109 | | | 27 | % |
Aircraft maintenance | 331 | | | 272 | | | 22 | % |
Aircraft rent | 222 | | | 188 | | | 18 | % |
Landing fees and other rentals | 435 | | | 414 | | | 5 | % |
Contracted services | 243 | | | 167 | | | 45 | % |
Selling expenses | 218 | | | 123 | | | 76 | % |
Depreciation and amortization | 310 | | | 294 | | | 5 | % |
Food and beverage service | 143 | | | 97 | | | 46 | % |
Third-party regional carrier expense | 145 | | | 106 | | | 37 | % |
Other | 536 | | | 348 | | | 54 | % |
Total non-fuel operating expenses, excluding special items | $ | 4,654 | | | $ | 3,699 | | | 26 | % |
For the fourth quarter of 2022, we generally anticipate recognizing higher non-fuel operating costs compared to the prior year as we continue to increase our capacity and Non- special items
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages and benefits | $ | 1,581 | | | $ | 1,579 | | | — | % |
Variable incentive pay | 109 | | | 65 | | | 68 | % |
Aircraft maintenance | 272 | | | 244 | | | 11 | % |
Aircraft rent | 188 | | | 229 | | | (18) | % |
Landing fees and other rentals | 414 | | | 323 | | | 28 | % |
Contracted services | 167 | | | 138 | | | 21 | % |
Selling expenses | 123 | | | 83 | | | 48 | % |
Depreciation and amortization | 294 | | | 320 | | | (8) | % |
Food and beverage service | 97 | | | 70 | | | 39 | % |
Third-party regional carrier expense | 106 | | | 92 | | | 15 | % |
Other | 348 | | | 310 | | | 12 | % |
Total non-fuel operating expenses, excluding special items | $ | 3,699 | | | $ | 3,453 | | | 7 | % |
scheduled departures, and pay a larger employee base higher wage rates following the ratification of new labor agreements.
Wages and Benefitsbenefits
Wages and benefits increased duringby $350 million, or 22%, in the first nine months of 2021 by $2 million.2022. The primary components of wages and benefits are shown in the following table: | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Wages | Wages | $ | 1,176 | | | $ | 1,159 | | | 1 | % | Wages | $ | 1,467 | | | $ | 1,176 | | | 25 | % |
Pension—Defined benefit plans service cost | 39 | | | 37 | | | 5 | % | |
Pension - Defined benefit plans service cost | | Pension - Defined benefit plans service cost | 34 | | | 39 | | | (13) | % |
Defined contribution plans | Defined contribution plans | 91 | | | 96 | | | (5) | % | Defined contribution plans | 116 | | | 91 | | | 27 | % |
Medical and other benefits | Medical and other benefits | 192 | | | 205 | | | (6) | % | Medical and other benefits | 207 | | | 192 | | | 8 | % |
Payroll taxes | Payroll taxes | 83 | | | 82 | | | 1 | % | Payroll taxes | 107 | | | 83 | | | 29 | % |
Total wages and benefits | Total wages and benefits | $ | 1,581 | | | $ | 1,579 | | | — | % | Total wages and benefits | $ | 1,931 | | | $ | 1,581 | | | 22 | % |
Wages increased $17$291 million, or 1%25%, on a 4% increase in FTEs. Increased wagesthe first nine months of 2022, primarily driven by 19% growth in FTEs as comparedAlaska and Horizon hire to support the prior period are primarily the resultramp up in operations. The ratification of pilots and employees returning from leaves of absence and incentive lines accepted in 2020. These increases were coupled with increased wages inthree new collective bargaining agreements during the third quarter as we beganresulted in significant wage increases for the represented groups. As a result of the new agreements, the Company recorded $35 million in incremental wage expense during the quarter, $16 million of which relates to rebuild staffing and provide incentives to employees in response to increasing demand.a one-time adjustment of accrued benefits for new wage rates.
ForIncreased expense for defined contribution plans and payroll taxes are consistent with 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 wage pressure as we offer premium and bonus pay to attract and retain employees.change in wages.
Variable Incentive Payincentive pay
Variable incentive pay expense increased $44$31 million, or 68%27%, duringin the first nine months of 2021 as compared to the same period in 2020.2022. The increase is primarily due to the expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.
In the fourth quarter we anticipate variable incentive pay will increase as compared to the prior-year period on an expectation of improved payout under the plan.
Aircraft Maintenancemaintenance
Aircraft maintenance expense increased by $28$59 million, or 11%22%, duringin the first nine months of 2021 compared2022. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft recorded in the same period in 2020. The increase is primarily due to increased component repairs which were deferred in 2020, as well asfirst quarter of 2022 and increased power-by-the-hour expense driven by increased utilization ofcharges on covered aircraft.
aircraft, including a new contract for our regional fleet.
We expect full yearAircraft rent
Aircraft rent expense increased by $34 million, or 18%, in the first nine months of 2022. Increased expense is due to the delivery of eight leased Boeing 737-9 aircraft maintenance expense to be higher than 2020 on increasedand ten leased Embraer E175 aircraft utilization.operated by SkyWest since September 30, 2021.
Landing fees and other rentals
Landing fees and other rentals increased by $91 million, or 28%, duringin the first nine months of 20212022 were generally flat as compared to the same period in 2020, primarily due to a significant increase2021. Increases in departures combined with increased rates atacross the system were offset by favorable resolution for certain of our hub airports.pandemic period airport accruals.
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.Contracted services
Selling Expense
Selling expenseContracted services increased by $40$76 million, or 48%46%, duringin the first nine months of 2021 compared to2022, driven primarily by increased departures and passengers in line with increased demand, coupled with increased rates charged by vendor partners.
Selling expenses
Selling expenses increased by $95 million, or 77%, in the same period in 2020,first nine months of 2022, primarily driven by a significantan increase in distribution costs and credit card commissions. Increased marketing spend and sponsorship costs givencommissions incurred with the return of professional sports and events also contributed to the year-over-year increase.overall revenue recovery.
We expect full year selling expense will increase in-lineFood and beverage service
Food and beverage service increased by $46 million, or 46%, in the first nine months of 2022. Incremental food and beverage charges are in line with the 34% increase toin revenue as a result of increased distribution costs on higher bookings,passengers as well as increased sponsorship and marketing costs.additional offerings of on-board products as compared to the prior-year period.
Third-party Regional Carrier Expenseregional carrier expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $14$39 million, or 15%37%, duringin the first nine months of 2021 compared to the same period in 2020.2022. The increase in expense is primarily due to a 25% increaseincremental departures flown by SkyWest with ten additional aircraft in SkyWest departuresoperating service as compared to the prior year.prior-year period.
For the full year, weWe expect third-party regional carrier expense to be higher than 2020 driven bygrow in the fourth quarter of 2022 compared to the prior year as we continue operating the ten additional Embraer E175 aircraft under the CPA with SkyWest.
Other expense
Other expense increased $188 million, or 54%, in the first nine months of 2022. The most significant drivers of the increased cost were training events and related travel costs, crew hotel stays, and crew per diem. Increases in crew-related costs are consistent with the rise in departures. The increase within Other expense also includes $28 million incurred for employee recognition related to the 90,000 mile gift granted to all employees.
Special Itemsitems - Impairment and other chargesfleet transition
We recorded impairmentexpenses associated with fleet transition and otherrelated charges of $5$376 million in the first nine months of 2021, consisting of costs2022. We expect to record additional special charges associated with the fleet transition during 2022, primarily related to accelerated aircraft ownership and lease return expenses. At this time, these costs are estimated to be between $100 million and $125 million for the fourth quarter of 2022, and are subject to change as management continues to negotiate leased aircraft that have been retired and removed from the operating fleet but not yet returnedreturns. Refer to Note 2 to the lessor. We continue to evaluate total estimated costs to return these permanently parked aircraft, and make updates to total expense where necessary.consolidated financial statements for additional details.
Special Itemsitems - Restructuring chargeslabor ratification bonus
We recorded a restructuring benefitnonrecurring expense of $12$90 million in the first nine monthsthird quarter of 2021 primarily as2022 representing a resultpayment to Alaska pilots following the ratification of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.a new collective bargaining agreement.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 ofto the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline operations reported an adjusted pretax profit of $647 million in the first nine months of 2022, compared to an adjusted pretax loss of $247 million in the first nine months of 2021, compared to an adjusted pretax loss of $1 billion in the same period in 2020.2021. The $772$894 million improvement to pretax loss was driven by a $1.2$2.6 billion increase in Mainline operating revenuesrevenue partially offset by a $278$897 million increase in Mainline fuel expense and a $160$871 million increase in Mainline non-fuel operating expense.
As compared to the prior year, higher Mainline revenuesrevenue are primarily attributable to a 71%47% increase in traffic onand a 41-point24% increase in capacity,yield, driven by the significant increase in demand recovering from the COVID-19 pandemic.demand. Non-fuel operating expenses increased, fromdriven by higher variable costs, on increasedlargely consistent with the overall growth in capacity as well as rising wages and benefits expense as we expand our workforce to meet growing demand.departures. Higher raw fuel prices, combined with increased consumptionadditional gallons consumed, drove the growthincrease in Mainline fuel expense.
Regional
Regional operations incurredreported an adjusted pretax loss of $59 million in the first nine months of 2022, compared to an adjusted pretax loss of $207 million in the first nine months of 2021, compared to an adjusted pretax loss of $298 million in the first nine months of 2020. The decreased loss was2021. Improved results were attributable to a $278$270 million increase in operating revenues,revenue which was the result of higher demand and yields, partially offset by a $112 million increase in non-fuel operating expenses and a $75$118 million increase in fuel costs.
The increase to regional revenues is driven by a 58% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses.costs on higher fuel prices.
Horizon
Horizon achievedreported an adjusted pretax loss of $18 million in the first nine months of 2022, compared to an adjusted pretax profit of $34 million in the first nine months of 2021, compared to an adjusted pretax profit of $27 million in the same period in 2020, primarily due2021. The shift to improved operational performanceadjusted pretax loss is driven by lower CPA revenue on decreased departures, combined with higher wage and cost management.benefit costs on incremental FTEs and increased wage rates resulting from the new collective bargaining agreement with Horizon pilots.
LIQUIDITY AND CAPITAL RESOURCES
As a resultOur primary sources 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:are:
•Generated positive operatingExisting cash flowand marketable securities balance of $901 million, bolstered by improved advance bookings for increased demand for air travel,$3.2 billion, and the receipt of $1.2 billion in payroll support fundingcash flows from the U.S. Treasury under extensions of CARES Act programs, $892 million of which is included in operating cash flow;operations;
•Repaid $1.2 billion in debt, including the termination of the CARES Act loan, full repayment of two outstanding lines of credit, and prepayment of the $425 million 364-day term loan facility;67 unencumbered aircraft that could be financed, if necessary;
•Decreased debt-to-capitalization ratio to 51% at September 30, 2021 from 61% at December 31, 2020;Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.
•MadeDuring the nine months ended September 30, 2022, we took free and clear delivery of 18 owned Boeing 737-9 aircraft. We also made debt payments totaling $333 million, ending the quarter with a $100 million voluntary contributiondebt-to-capitalization ratio of 49%, within our target range of 40% 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 flexibility for timing of future deliveries and capital expenditures, and;
•Maintained low capital expenditures, which are expected to be approximately $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.50%.
As theour business continuesreturns to recover and maintainsustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and strengthening ourmaintaining a strong balance sheet is aremain high priority. Based on our fourth quarter expectations including reduced bookings driven by the delta variant and rising fuel prices, we expect to use cash flow from operations of $100 million to zero, excluding any federal income tax refunds or payments.priorities.
We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.
The table below presents the major indicators of financial condition and liquidity: | (in millions) | (in millions) | September 30, 2021 | | December 31, 2020 | | Change | (in millions) | September 30, 2022 | | December 31, 2021 | | Change |
Cash and marketable securities | Cash and marketable securities | $ | 3,195 | | | $ | 3,346 | | | (5) % | Cash and marketable securities | $ | 3,150 | | | $ | 3,116 | | | 1 % |
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 | 71 | % | | 94 | % | | (23) pts | Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 39 | % | | 57 | % | | (18) pts |
Total debt | 2,650 | | | 3,495 | | | (24) % | |
Long-term debt, net of current portion | | Long-term debt, net of current portion | 1,889 | | | 2,173 | | | (13)% |
Shareholders’ equity | Shareholders’ equity | $ | 3,531 | | | $ | 2,988 | | | 18% | Shareholders’ equity | $ | 3,826 | | | $ | 3,801 | | | 1% |
| Debt-to-capitalization, adjusted for operating leases | Debt-to-capitalization, adjusted for operating leases | | Debt-to-capitalization, adjusted for operating leases | |
(in millions) | (in millions) | September 30, 2021 | | December 31, 2020 | | Change | (in millions) | September 30, 2022 | | December 31, 2021 | | Change |
Long-term debt, net of current portion | Long-term debt, net of current portion | $ | 2,225 | | | $ | 2,357 | | | (6)% | Long-term debt, net of current portion | $ | 1,889 | | | $ | 2,173 | | | (13)% |
Capitalized operating leases | Capitalized operating leases | 1,466 | | | 1,558 | | | (6)% | Capitalized operating leases | 1,745 | | | 1,547 | | | 13% |
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 | $ | 3,691 | | | $ | 4,649 | | | (21)% | Adjusted debt, net of current portion of long-term debt | $ | 3,634 | | | $ | 3,720 | | | (2)% |
Shareholders' equity | Shareholders' equity | 3,531 | | | 2,988 | | | 18% | Shareholders' equity | 3,826 | | | 3,801 | | | 1% |
Total invested capital | Total invested capital | $ | 7,222 | | | $ | 7,637 | | | (5)% | Total invested capital | $ | 7,460 | | | $ | 7,521 | | | (1)% |
| Debt-to-capitalization, including operating leases | Debt-to-capitalization, including operating leases | 51 | % | | 61 | % | | (10) pts | Debt-to-capitalization, including operating leases | 49 | % | | 49 | % | | — pt |
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | |
(in millions) | (in millions) | September 30, 2021 | | December 31, 2020 | (in millions) | September 30, 2022 | | December 31, 2021 |
Current portion of long-term debt | Current portion of long-term debt | $ | 425 | | | $ | 1,138 | | Current portion of long-term debt | $ | 321 | | | $ | 366 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 260 | | | 290 | | Current portion of operating lease liabilities | 263 | | | 268 | |
Long-term debt, net of current portion | 2,225 | | | 2,357 | | |
Long-term debt | | Long-term debt | 1,889 | | | 2,173 | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,206 | | | 1,268 | | Long-term operating lease liabilities, net of current portion | 1,482 | | | 1,279 | |
Total adjusted debt | Total adjusted debt | 4,116 | | | 5,053 | | Total adjusted debt | 3,955 | | | 4,086 | |
Less: Cash and marketable securities | Less: Cash and marketable securities | (3,195) | | | (3,346) | | Less: Cash and marketable securities | (3,150) | | | (3,116) | |
Adjusted net debt | Adjusted net debt | $ | 921 | | | $ | 1,707 | | Adjusted net debt | $ | 805 | | | $ | 970 | |
| (in millions) | (in millions) | Twelve Months Ended September 30, 2021 | | Twelve Months Ended December 31, 2020 | (in millions) | Twelve Months Ended September 30, 2022 | | Twelve Months Ended December 31, 2021 |
GAAP Operating Income (loss)(a) | $ | 51 | | | $ | (1,775) | | |
GAAP Operating Income(a) | | GAAP Operating Income(a) | $ | 86 | | | $ | 685 | |
Adjusted for: | Adjusted for: | | Adjusted for: | |
Payroll Support Program grant wage offset and special items | Payroll Support Program grant wage offset and special items | (767) | | | 71 | | Payroll Support Program grant wage offset and special items | 462 | | | (925) | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (76) | | | (8) | | Mark-to-market fuel hedge adjustments | 85 | | | (47) | |
Depreciation and amortization | Depreciation and amortization | 394 | | | 420 | | Depreciation and amortization | 410 | | | 394 | |
Aircraft rent | Aircraft rent | 258 | | | 299 | | Aircraft rent | 288 | | | 254 | |
EBITDAR | EBITDAR | $ | (140) | | | $ | (993) | | EBITDAR | $ | 1,331 | | | $ | 361 | |
Adjusted net debt to EBITDAR | Adjusted net debt to EBITDAR | (6.6x) | | (1.7x) | Adjusted net debt to EBITDAR | 0.6x | | 2.7x |
(a)Operating Income (loss) can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.
ANALYSIS OF OUR CASH FLOWS
Cash Provided by Operating Activities
For the first nine months of 2021,2022, net cash provided by operating activities was $901 million,$1.4 billion, compared to $116$901 million during the same period in 2020.2021. The $785$508 million increase in our operating cash flows is primarily attributable to a $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, improvementincrease in our operating cash flows is due to continued increasesa combination of factors. Increased remuneration from our co-brand credit card provided nearly $300 million in advanced bookings and a significant reduction in refund activity whenincremental cash as compared to 2021 on improved economics and increased volumes. Additionally, in 2022 we received $260 million in federal income tax refunds and the first nine monthschange in air traffic liability increased by $152 million due to strong passenger demand. The prior year also included a nonrecurring voluntary contribution of 2020.$100 million to Alaska pilots' defined benefit plan. These improvementsamounts were partially offset by a $100 million voluntary contribution touses of cash on increasing operating expenses as the defined benefit plan for Alaska pilots.business returned flying capacity.
Cash Used in Investing Activities
Cash used in investing activities was $943$888 million during the first nine months of 2021,2022, compared to $767$943 million during the same period of 2020. The increase to cash2021. Cash used in investing activities is primarily due to net purchases of marketable securities, which were $744capital expenditures for aircraft purchase deposits and other property and equipment was $947 million in the first nine months of 2021,2022, compared to $572$190 million in the first nine months ended September 30, 2020. Increasedof 2021. This increase in cash used in capital expenditures was offset by purchases and sales of marketable securities, which were $61 million of net sales during the first nine months of 2022, compared to $744 million of net purchases is primarily driven by additional cash on hand fromduring the PSP program and improved operational results, allowing the Company to invest additional funds.first nine months of 2021.
Cash Provided by (Used in)Used in Financing Activities
Cash used in financing activities was $825$296 million during the first nine months of 20212022, compared to $825 million during the same period in 2021. During the first nine months of 2022, we had no new proceeds from issuance of debt and utilized cash provided by financing activitieson hand to repay $333 million of $2.3outstanding long-term debt, compared to debt proceeds of $363 million and payments of $1.2 billion during the same period in 2020. During the first nine months of 2021, we utilized cash on hand to repay $1.2 billion of outstanding long-term debt, compared to payments of $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 $2.6 billion issued in 2020 in response to the COVID-19 pandemic.2021.
CONTRACTUAL OBLIGATIONS ANDMATERIAL CASH COMMITMENTS
Aircraft Commitments
As of September 30, 2021, our airlines have2022, Alaska has firm orders to purchase 8656 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease 12 aircraft.five Boeing 737-9 aircraft with deliveries in 2022 and 2023. Alaska also has an agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by eight aircraft in 2022. Alaska also has options to acquire 52 B737-9 MAXup to 11 additional Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries between 2024 and 2026. Subsequent to quarter end, Alaska executed an agreement with Boeing to exercise options to purchase 52 737 aircraft for delivery between 2024 and 2027. The agreement also secures rights for 105 additional 737 aircraft through 2030.
Alaska has received information from 2024 through 2026,Boeing indicating that certain 737 deliveries in 2022 and 2023 are expected to be delayed to 2023 and 2024. Alaska will continue to work with Boeing on delivery timelines that reflect Alaska's plans for growth.
Horizon has commitments to purchase 20 Embraer E175 aircraft with deliveries between 2022 and 2026. Horizon has options to acquire 2113 Embraer E175 aircraft with deliveries from 2023 throughbetween 2024 and 2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
TheTo best reflect our expectations of future fleet activity, we have incorporated anticipated delivery delays related to 2022 and the October 2022 Boeing agreement described above into the following table, which summarizes our anticipatedexpected fleet count by year, as of September 30, 2021:November 3, 2022: | | | Actual Fleet | | Anticipated Fleet Activity(a) | | Actual Fleet | | Anticipated Fleet Activity(a) | |
Aircraft | Aircraft | Sept 30, 2021 | | 2021 Additions | | 2021 Removals | | Dec 31, 2021 | | 2022 Changes | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 | Aircraft | September 30, 2022 | | 2022 Additions | | 2022 Removals | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 | | 2024 Changes | | Dec 31, 2024 | |
B737 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | | |
B737-700 Freighters | | B737-700 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | | |
B737-800 Freighters | | B737-800 Freighters | — | | | — | | | — | | | — | | | 2 | | | 2 | | | — | | | 2 | | |
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 | | | (2) | | | 59 | | | — | | | 59 | | |
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 | 7 | | | 5 | | | — | | | 12 | | | 31 | | | 43 | | | 32 | | | 75 | | |
A320(b) | 27 | | | 4 | | | 31 | | | (7) | | | 24 | | | (24) | | | — | | |
B737-8 | | B737-8 | — | | | — | | | — | | | — | | | 5 | | | 5 | | | 5 | | | 10 | | |
B737-9 | | B737-9 | 33 | | | 5 | | | — | | | 38 | | | 35 | | | 73 | | | 10 | | | 83 | | |
B737-10 | | B737-10 | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | | |
A320 | | A320 | 23 | | | — | | | (10) | | | 13 | | | (13) | | | — | | | — | | | — | | |
A321neo | A321neo | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | | — | | | 10 | | A321neo | 10 | | | — | | | — | | | 10 | | | (10) | | | — | | | — | | | — | | |
Total Mainline Fleet | Total Mainline Fleet | 210 | | | 9 | | | — | | | 219 | | | 24 | | | 243 | | | 8 | | | 251 | | Total Mainline Fleet | 232 | | | 5 | | | (10) | | | 227 | | | 17 | | | 244 | | | 21 | | | 265 | | |
Q400 operated by Horizon(c) | 32 | | | — | | | — | | | 32 | | | — | | | 32 | | | — | | | 32 | | |
E175 operated by Horizon(c) | 30 | | | — | | | — | | | 30 | | | 5 | | | 35 | | | 4 | | | 39 | | |
E175 operated by third party(c) | 32 | | | — | | | — | | | 32 | | | 8 | | | 40 | | | — | | | 40 | | |
Total Regional Fleet | 94 | | | — | | | — | | | 94 | | | 13 | | | 107 | | | 4 | | | 111 | | |
Q400 operated by Horizon | | Q400 operated by Horizon | 22 | | | — | | | (11) | | | 11 | | | (11) | | | — | | | — | | | — | | |
E175 operated by Horizon | | E175 operated by Horizon | 30 | | | 3 | | | — | | | 33 | | | 8 | | | 41 | | | 3 | | | 44 | | |
E175 operated by third party | | E175 operated by third party | 42 | | | — | | | — | | | 42 | | | — | | | 42 | | | — | | | 42 | | |
Total Regional Fleet(b) | | Total Regional Fleet(b) | 94 | | | 3 | | | (11) | | | 86 | | | (3) | | | 83 | | | 3 | | | 86 | | |
Total | Total | 304 | | | 9 | | | — | | | 313 | | | 37 | | | 350 | | | 12 | | | 362 | | Total | 326 | | | 8 | | | (21) | | | 313 | | | 14 | | | 327 | | | 24 | | | 351 | | |
(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted or agreed to by counterparties yet.
(b)Actual fleet at 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. Of these aircraft, six were returned in Q3 2021, four are planned for Q4 2021 and 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.
ForWe intend to finance future firm ordersaircraft deliveries and option exercises we may finance the aircraft throughusing 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 % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Fourth Quarter 2021 | 50 | % | | $61 | | $3 |
Remainder of 2021 | 50 | % | | $61 | | $3 |
First Quarter 2022 | 50 | % | | $69 | | $3 |
Second Quarter 2022 | 40 | % | | $69 | | $3 |
Third Quarter 2022 | 30 | % | | $73 | | $3 |
Fourth Quarter 2022 | 20 | % | | $70 | | $4 |
Full Year 2022 | 34 | % | | $70 | | $3 |
First Quarter of 2023 | 10 | % | | $69 | | $4 |
Full Year 2023 | 2 | % | | $69 | | $4 |
| | | | | | | | | | | | | | | | | |
| Approximate % of Expected Fuel Requirements(a) | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Fourth Quarter 2022 | 60 | % | | $88 | | $5 |
Remainder of 2022 | 60 | % | | $88 | | $5 |
First Quarter of 2023 | 50 | % | | $93 | | $6 |
Second Quarter of 2023 | 40 | % | | $98 | | $7 |
Third Quarter of 2023 | 30 | % | | $103 | | $8 |
Fourth Quarter of 2023 | 20 | % | | $102 | | $8 |
Full Year 2023 | 35 | % | | $98 | | $7 |
First Quarter of 2024 | 10 | % | | $88 | | $8 |
| | | | | |
| | | | | |
| | | | | |
Full Year 2024 | 2 | % | | $88 | | $8 |
(a)We are hedged at approximately 60% of expected fuel consumption for the remainder of 2022 due to schedule reductions that occurred subsequent to the Company entering these positions.
Contractual Obligations
The following table provides a summary ofreflects our contractual obligations as of September 30, 2021.2022, and the agreement executed with Boeing in October 2022. 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 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Beyond 2026 | | Total |
Current and long-term debt obligations | $ | 112 | | | $ | 371 | | | $ | 334 | | | $ | 240 | | | $ | 261 | | | $ | 1,352 | | | $ | 2,670 | | |
Debt obligations | | Debt obligations | $ | 52 | | | $ | 309 | | | $ | 238 | | | $ | 273 | | | $ | 176 | | | $ | 1,178 | | | $ | 2,226 | |
Aircraft lease commitments(a) | Aircraft lease commitments(a) | 81 | | | 292 | | | 229 | | | 172 | | | 165 | | | 656 | | | 1,595 | | Aircraft lease commitments(a) | 84 | | | 282 | | | 227 | | | 221 | | | 219 | | | 929 | | | 1,962 | |
Facility lease commitments | Facility lease commitments | 3 | | | 9 | | | 9 | | | 9 | | | 6 | | | 88 | | | 124 | | Facility lease commitments | 5 | | | 17 | | | 9 | | | 8 | | | 8 | | | 86 | | | 133 | |
Aircraft-related commitments(b) | Aircraft-related commitments(b) | 60 | | | 1,476 | | | 1,681 | | | 385 | | | 79 | | | 13 | | | 3,694 | | Aircraft-related commitments(b) | 629 | | | 2,024 | | | 1,394 | | | 1,262 | | | 689 | | | 941 | | | 6,939 | |
| Interest obligations (c) | Interest obligations (c) | 7 | | | 85 | | | 91 | | | 68 | | | 51 | | | 176 | | | 478 | | Interest obligations(c) | 9 | | | 102 | | | 70 | | | 55 | | | 60 | | | 164 | | | 460 | |
Other obligations (d) | Other obligations (d) | 47 | | | 184 | | | 189 | | | 195 | | | 197 | | | 898 | | | 1,710 | | Other obligations(d) | 43 | | | 183 | | | 190 | | | 195 | | | 190 | | | 780 | | | 1,581 | |
Total | Total | $ | 310 | | | $ | 2,417 | | | $ | 2,533 | | | $ | 1,069 | | | $ | 759 | | | $ | 3,183 | | | $ | 10,271 | | Total | $ | 822 | | | $ | 2,917 | | | $ | 2,128 | | | $ | 2,014 | | | $ | 1,342 | | | $ | 4,078 | | | $ | 13,301 | |
(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, engines, and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.maintenance. Option deliveries are excluded from minimum commitments until exercise.
(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of September 30, 2021.2022.
(d)Primarily comprisedComprised of non-aircraft lease costs associated with capacity purchase agreements.agreements and other miscellaneous obligations.
Following the October 2022 agreement with Boeing, we now anticipate capital expenditures for 2022 to range between $1.5 billion and $1.6 billion, which we plan to fund with cash generated by operating activities and cash on hand.
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 allin conjunction with expected lease terminations and the accelerated exit of Airbus A320 aircraft are expected to exit our fleet by 2023.from Alaska's fleet.
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.
43In August 2022, the Inflation Reduction Act ("IRA") bill was signed into law, effective for tax years beginning after December 31, 2022. The IRA includes a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted income during the most recently-completed three-year period exceeds $1 billion. We will continue to evaluate the provisions within the IRA, but at this time we do not believe it will have a material impact on our financial statements.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three months ended September 30, 2021. ForExcept as described below, for information onregarding 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, 2020.2021.
FREQUENT FLYER PROGRAMS
The rate at which we defer sales proceeds related to services sold:
Following the amendment of our agreement with our co-brand bank card partner in the first quarter, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.
The number of miles that will not be redeemed for travel (breakage):
Following its review of significant Mileage Plan assumptions, the Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. At September 30, 2022, the deferred revenue balance associated with the Mileage Plan program was $2.5 billion. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $7 million impact on annual revenue recognized.
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 revenuesrevenue 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™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
| | |
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, 2020.2021.
| | |
ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021,2022, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, 2021.2022.
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 September 30, 2021,2022, 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).
PART II
| | |
ITEM 1. LEGAL PROCEEDINGS |
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, aspursued numerous appeal paths following 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 judgmentfederal district court order against Virgin America and Alaska Airlines in the amount ofawarding plaintiffs approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, anmillion, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the judgment.PAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The determination ofdecision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.
The final total judgment amount has not been completeddetermined by the lower court 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.
Alaska The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as appliedanalyzing a range of potential options to airlines pursuant to the U.S. Constitutionbalance new compliance obligations with operational and provisionslabor considerations. Some or all of federal law 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. If appeal efforts are unsuccessful, compliance with the California lawsthese solutions may have an adverse impact on the Company'sCompany’s operations and financial position.position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. The Virgin Group asserts that payments are required without regard to actual use of the mark. A trial was held in October 2022, and a decision is expected soon. Further legal proceedings are likely to take place before the matter is resolved. The Company is involvedbelieves the claims in other litigation around the application of statecase are without factual and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preemptedlegal merit, a position supported by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.Virgin America’s representations during pre-merger due diligence.
Except
See Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for the additional risk factor below, there have been no material changes to thea detailed discussion of 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.Group.
| | |
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, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely.indefinitely; these restrictions ended on October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.
As of September 30, 2021,2022, a total of 1,455,4361,882,517 shares of the Company’s common stock have been issued to Treasury in connection with the payroll support program.Payroll Support Program. Each warrant is exercisable at a strike price of $52.25 (49,625$31.61 (928,126 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) per share of common stock and will expirestock. An additional 427,080 warrants were issued in conjunction with a draw on the fifth anniversaryCARES Act Loan in 2020 at a strike price of $31.61. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the issue date of the warrant.Company's option, and have a five-year term. 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 |
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.None.
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. BERRYEMILY HALVERSON | |
Christopher M. BerryEmily Halverson | |
Vice President Finance and Controller | |
| |
November 4, 20213, 2022 | |
EXHIBIT INDEX | | | | | | | | | | | | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
10.1† | | 10-Q | | |
10.2†* | | 10-Q | | |
10.3†* | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 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 | | 10-Q | August 3, 2017 | 3.1 |
10.1# | | 10-K | February 14, 2013 | 10.8 |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| |
† | Filed herewith |
* | Indicates management contract or compensatory plan or arrangement. |
# | Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10). |