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, ~~2021~~2022

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

For the transition period from to

Commission File Number 1-8957

ALASKA AIR GROUP, INC.


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


19300 International Boulevard,			Seattle,			WA			98188

Telephone:

(206)

392-5040


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	ALK	New York Stock Exchange

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

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

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

Act.

Large accelerated filer

☒

Accelerated filer

☐

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

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The registrant has ~~125,310,668~~126,837,831 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, ~~2021~~2022

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

109


		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

1110

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, ~~2021~~2022 and the results of operations for the three and nine months ended September 30, ~~2021~~2022 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, ~~2021~~2022 are not necessarily indicative of operating results for the entire year.

NOTE 2. ~~COVID-19 PANDEMIC~~FLEET 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 from~~Company reviews its long-lived assets for impairment whenever events or changes indicate that the ~~outbreak~~total carrying amount of ~~COVID-19 in~~an asset or asset group may not be recoverable. During the first quarter of ~~2020 continues~~2022, the Company recorded an impairment charge of $70 million related to ~~have a significant impact~~the 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 allowed~~Form 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 parking~~adjusted 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 ~~restructuring~~rent expenses. These accelerated schedules are based on the ~~workforce through early-out~~dates 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 by~~are recognized over the ~~U.S. Department~~remaining operating life of the ~~Treasury (the Treasury). As demand has improved~~aircraft. 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 meet~~third quarter, all lease return costs were recorded within the ~~needs~~"Special items - fleet transition" line in the consolidated statement of ~~the airline. The impacts~~operations.

A summary of ~~these programs~~special 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 ~~and~~are 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

1211

~~Workforce restructuring~~with 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 ~~are~~is passenger ancillary ~~revenues~~revenue 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, ~~2021~~2022 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 ~~bank~~affinity 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, ~~2021~~2022 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 class~~unrealized losses are the result of ~~marketable securities.~~expected credit losses based on its evaluation of available information as of September 30, 2022.

1513

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.

1614

Fair Value of Other Financial Instruments

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

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

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

Debt: 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 were~~Refer 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 total~~made scheduled debt payments ~~is the full repayment~~ of ~~the $135~~$316 million ~~loan from the U.S. Treasury made available under the CARES Act, $363~~and 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 term~~for 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 Plan~~TM 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, ~~2021~~2022, 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 ~~2022~~2025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. ~~In October 2021, the expiry of this facility was extended to March 2025. The~~A second credit facility for $250 million expires in June 2024 and is secured by aircraft. ~~These two~~Both facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June ~~2022~~2023 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, ~~2021~~2022 (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 commitments~~2022, 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 ~~has~~will 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 MAX~~737 aircraft for delivery between 2024 and ~~Horizon has options to~~2027. The agreement also secures rights for 105 additional aircraft through 2030. The incremental firm purchase ~~21 E175 aircraft. Option payments~~commitments 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, as~~pursued 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 judgment~~federal district court order against Virgin America and Alaska Airlines ~~in the amount of~~awarding plaintiffs approximately $78 ~~million. It did not award injunctive relief against Alaska Airlines. In February 2021, an~~million, 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 of~~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 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 ~~completed~~determined 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 applied~~analyzing a range of potential options to ~~airlines pursuant to the U.S. Constitution~~balance new compliance obligations with operational and ~~provisions~~labor 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's~~Company’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 involved~~believes the claims in ~~other litigation around~~ the ~~application of state~~case 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 preempted~~legal 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, the~~The 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, 2021~~Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of ~~539,508~~1,455,437 warrants to purchase ALK common ~~stock. The~~stock 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 relative~~model. The total fair value of ~~the~~all outstanding warrants ~~of $6~~was $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

~~Components~~A 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		%

2220

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 ~~2021~~2022 outlining some of the major events that ~~happened~~occurred during the period and how they affected our financial performance.

•Results of Operations—an in-depth analysis of our ~~revenues~~revenue 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~~

~~Our~~recorded consolidated pretax income for the third quarter of ~~2021 was $245~~2022 under GAAP of $65 million, compared to aconsolidated pretax ~~loss~~income of ~~$589~~$245 million in the third quarter of ~~2020. The $834~~2021. On an adjusted basis, we reported consolidated pretax income for the quarter of $441 million, ~~improvement is driven by an increase~~compared to consolidated pretax income of ~~$1.3 billion~~$236 million in ~~operating revenue from an exponential increase in~~the same period of 2021. Strong demand for passenger air travel ~~coupled~~combined 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 ~~$251~~one-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 consumption~~economic 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 ~~revenues~~revenue 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 ~~special~~other items, ~~(including~~such 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 ~~special~~other 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 ~~special~~other 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, ~~(nor~~nor are we able ~~to)~~to, evaluate unit ~~revenues~~revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit ~~revenues~~revenue 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.

2624

OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit ~~revenues~~revenue 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)~~Excludes~~Reflects all aircraft ~~removed from~~in 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 ~~2021~~2022 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%

2826

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 TO THREE MONTHS ENDED SEPTEMBER 30, ~~2020~~2021

Our consolidated net income for the three months ended September 30, ~~2021~~2022 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 ~~2021~~2022 was ~~$187~~$325 million, or ~~$1.47~~$2.53 per share, compared to an adjusted net ~~loss~~income 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 ~~REVENUES~~REVENUE

Total operating ~~revenues~~revenue increased ~~$1.3 billion~~$875 million, or 45%, during the third quarter of ~~2021~~2022 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 ~~Revenue~~revenue

On a consolidated basis, Passenger revenue for the third quarter of ~~2021~~2022 increased by ~~$1.2 billion, primarily~~$841 million, or 47%, driven by a ~~significant~~22% increase in passenger ~~traffic. In~~traffic 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 during~~2022. 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 quarter~~relaxing of ~~2021, where pent up demand for leisure~~international 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 ~~2021~~2022 increased by ~~$14~~$8 million, or ~~31%, as compared to~~14%. Other ancillary revenue was the ~~same prior-year period. The~~primary driver of the year-over-year increase, ~~is primarily~~consistent with the return in demand for travel. Incremental freight revenue also contributed due to ~~the return~~greater use of ~~all three freighters back to full~~belly 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 ~~Expense~~expense

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

Aircraft fuel expense increased ~~$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, 2021~~costs 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 crude~~Crude oil prices ~~and a 170% increase in~~have risen 30% while refining margins ~~when~~have more than tripled compared to ~~the prior year. This is coupled~~2021. 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~~ ~~economic~~Economic 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 ~~losses~~gains 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 ~~Expenses~~expenses

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 ~~2020~~2021 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 ~~Benefits~~benefits

Wages and benefits increased ~~during~~by $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 ~~leaves~~the 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 hours~~which 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 line~~consistent with the ~~related increase to~~change 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 ~~Rent~~rent

Aircraft rent expense ~~decreased~~increased by ~~$10~~$12 million, or ~~14%~~19%, ~~during~~in the third quarter of ~~2021 compared~~2022. Increased expense is due to the ~~same period in 2020 primarily the result~~delivery of ~~the full impairment taken on certain~~eight leased ~~Airbus~~Boeing 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%, ~~during~~in the third quarter of ~~2021~~2022. The increase compared to the same period in ~~2020~~2021 is driven primarily ~~due to a significant increase~~by increases in ~~departures. Increased departure-related costs were coupled by~~departures as well as rate increases for terminal rents. Rates for both fixed airport rent and landing fees rose significantly at ~~many~~Seattle-Tacoma International Airport, the Company's largest hub, which accounted for 75% of ~~our hub airports.~~the increase compared to prior year.

Contracted ~~Services~~services

Contracted services increased by ~~$26~~$21 million, or ~~72%~~34%, ~~during~~in the third quarter of ~~2021 compared to the same period in 2020~~2022, 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 ~~Expense~~expenses

Selling ~~expense~~expenses increased by ~~$25~~$33 million, ~~during~~or 67%, in the third quarter of ~~2021 compared to the same period in 2020,~~2022, driven primarily ~~driven~~ by ~~a significant~~an increase in distribution costs and credit card commissions incurred with the overall ~~increase in travel.~~revenue recovery.

Food and ~~Beverage Service~~beverage 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 Expense~~regional carrier expense

Third-party regional carrier expense, which represents ~~payments made to~~expenses associated with SkyWest under our CPA, increased by ~~$10~~$14 million, or ~~34%~~36%, ~~during~~in the third quarter of ~~2021 compared to the same period in 2020.~~2022. The increase in expense is ~~primarily~~ due to ~~increases in~~incremental 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%, ~~during~~in the third quarter of ~~2021~~2022. Increased expense as compared to the ~~same~~prior year period ~~in 2020. Increased~~is 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 incremental~~include training events and related travel costs, crew hotel stays, and crew per ~~diem,~~diem. Increases in crew-related costs are consistent with the ~~overall increase~~rise in ~~departures~~departures.

Special items - fleet transition

We recorded expenses associated with fleet transition and ~~capacity, as well as~~related 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 ~~Items~~items - ~~Impairment and other charges~~labor ratification bonus

We recorded a ~~benefit associated with impairment and other charges~~nonrecurring expense of $9$90 million in the third quarter of ~~2021, consisting~~2022 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 ~~recorded~~operations 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 ~~increased~~higher variable costs, largely consistent with the overall ~~increase~~growth in capacity and departures. Higher ~~economic~~ fuel prices, combined with ~~a significant increase in~~more gallons consumed, drove the increase in Mainline fuel expense.

Regional

Regional operations ~~generated~~reported 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 $96~~2021. While operating revenue increased $47 million, in the ~~third quarter of 2020. The improved pretax loss~~improvement was ~~attributable to~~offset by a ~~$174~~$44 million increase in ~~operating revenues, partially offset by~~fuel 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 traffic~~an improved load factor and ~~capacity driven by~~a 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 ~~achieved~~reported 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 compared~~2021. The shift to ~~$11 million in the third quarter of 2020. Decreased profit~~adjusted pretax loss is driven by ~~increased operating expenses, primarily driven by increased maintenance expense~~lower CPA revenue on ~~the Q400 fleet as compared to the prior year.~~decreased departures.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022 TO NINE MONTHS ENDED SEPTEMBER 30, ~~2020~~2021

Our consolidated net income for the nine months ended September 30, ~~2021~~2022 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 ~~loss~~income for the nine months ended September 30, ~~2021~~2022 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 ~~loss~~income 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	%

3432

~~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 ~~REVENUES~~REVENUE

Total operating ~~revenues~~revenue increased ~~$1.5~~$2.9 billion, or ~~55%~~68%, during the first nine months of ~~2021~~2022 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 ~~Revenue~~revenue

On a consolidated basis, Passenger revenue for the first nine months of ~~2021~~2022 increased by ~~$1.4~~$2.8 billion, or ~~60%~~73%, on a ~~69%~~41% increase in passenger traffic ~~driven primarily by rebounding~~and 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 compared~~continued to ~~the prior year, with summer holiday travel approaching pre-COVID~~drive 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.~~

~~Although~~For the ~~delta variant is likely to have an acute impact on October results,~~fourth quarter, we ~~expect that overall fourth quarter~~anticipate Passenger revenue will continue to show ~~improvement~~meaningful improvements over ~~2020 driven by leisure passengers traveling~~the 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 received~~commissions from our ~~affinity~~bank card ~~partner stemming~~partners driven by increased consumer spending and improved economics from ~~growing consumer spend~~our 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 to~~2022. Other ancillary revenue was the ~~first nine months~~primary driver of ~~2020. The~~the year-over-year increase, ~~is primarily~~consistent with the return in demand for travel. Incremental freight revenue also contributed due to ~~the return~~greater use of ~~all three freighters back to full~~belly 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 ~~that~~Cargo 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 ~~Expense~~expense

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 raw~~Raw fuel ~~price~~expense 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 as~~and 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 gallon~~expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the ~~first nine months~~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 ~~2021 was driven by a 55% increase in crude oil~~gain 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 ~~2021~~2022 were ~~$28~~$167 million, compared to ~~losses~~gains 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 based~~gallon. Based on ~~current~~expected 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 ~~Expense~~expenses


	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 ~~Benefits~~benefits

Wages and benefits increased ~~during~~by $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 wages~~the first nine months of 2022, primarily driven by 19% growth in FTEs as ~~compared~~Alaska and Horizon hire to support the ~~prior period are primarily the result~~ramp 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 in~~three new collective bargaining agreements during the third quarter ~~as we began~~resulted 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.

~~For~~Increased 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 Pay~~incentive pay

Variable incentive pay expense increased ~~$44~~$31 million, or ~~68%~~27%, ~~during~~in 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 ~~Maintenance~~maintenance

Aircraft maintenance expense increased by ~~$28~~$59 million, or ~~11%~~22%, ~~during~~in the first nine months of ~~2021 compared~~2022. 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 as~~first quarter of 2022 and increased power-by-the-hour ~~expense driven by increased utilization of~~charges on covered ~~aircraft.~~

aircraft, including a new contract for our regional fleet.

~~We expect full year~~Aircraft 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 increased~~and 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%, during~~in the first nine months of ~~2021~~2022 were generally flat as compared to the same period in ~~2020, primarily due to a significant increase~~2021. Increases in departures ~~combined with increased rates at~~across 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 expense~~Contracted services increased by ~~$40~~$76 million, or ~~48%~~46%, ~~during~~in the first nine months of ~~2021 compared to~~2022, 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 significant~~an increase in distribution costs and credit card ~~commissions. Increased marketing spend and sponsorship costs given~~commissions 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-line~~Food 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 Expense~~regional carrier expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased ~~$14~~$39 million, or ~~15%~~37%, ~~during~~in the first nine months of ~~2021 compared to the same period in 2020.~~2022. The increase in expense is ~~primarily~~ due to ~~a 25% increase~~incremental departures flown by SkyWest with ten additional aircraft in ~~SkyWest departures~~operating service as compared to the ~~prior year.~~prior-year period.

~~For the full year, we~~We expect third-party regional carrier expense to ~~be higher than 2020 driven by~~grow 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 ~~Items~~items - ~~Impairment and other charges~~fleet transition

We recorded ~~impairment~~expenses associated with fleet transition and ~~other~~related charges of $5$376 million in the first nine months of ~~2021, consisting of costs~~2022. 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 returned~~returns. 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 ~~Items~~items - ~~Restructuring charges~~labor ratification bonus

We recorded a ~~restructuring benefit~~nonrecurring expense of ~~$12~~$90 million in the ~~first nine months~~third quarter of ~~2021 primarily as~~2022 representing a ~~result~~payment 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 ~~revenues~~revenue 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 ~~revenues~~revenue are primarily attributable to a ~~71%~~47% increase in traffic onand a ~~41-point~~24% increase in ~~capacity,~~yield, driven by the significant increase in ~~demand recovering from the COVID-19 pandemic.~~demand. Non-fuel operating expenses increased, ~~from~~driven by higher variable costs, ~~on increased~~largely 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 consumption~~additional gallons consumed, drove the ~~growth~~increase in Mainline fuel expense.

Regional

Regional operations ~~incurred~~reported 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 was~~2021. 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 ~~achieved~~reported 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 due~~2021. The shift to ~~improved operational performance~~adjusted 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 result~~Our 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 operating~~Existing cash ~~flow~~and 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 funding~~cash 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.

•~~Made~~During 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 contribution~~debt-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 ~~the~~our business ~~continues~~returns to ~~recover and maintain~~sustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and ~~strengthening our~~maintaining a strong balance sheet ~~is a~~remain 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.

4038

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, improvement~~increase in our operating cash flows is due to ~~continued increases~~a 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 when~~incremental 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 months~~change 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 ~~improvements~~amounts were partially offset by ~~a $100 million voluntary contribution to~~uses 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 cash~~2021. Cash used in ~~investing activities is primarily due to net purchases of marketable securities, which were $744~~capital 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. Increased~~of 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 from~~during 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 ~~2021~~2022, 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 activities~~on hand to repay $333 million of ~~$2.3~~outstanding 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 AND~~MATERIAL CASH COMMITMENTS

Aircraft Commitments

As of September 30, ~~2021, our airlines have~~2022, 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 MAX~~up 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 through~~between 2024 and 2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

4139

~~The~~To 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 ~~anticipated~~expected 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.~~

~~For~~We intend to finance future ~~firm orders~~aircraft deliveries and option exercises ~~we may finance the aircraft through~~using 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.

4240

Contractual Obligations

The following table ~~provides a summary of~~reflects 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 comprised~~Comprised 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 all~~in 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. For~~Except 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 ~~revenues~~revenue 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

4443


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.

4544


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).

4645

PART II


ITEM 1. LEGAL PROCEEDINGS

~~In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as~~pursued 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 judgment~~federal district court order against Virgin America and Alaska Airlines ~~in the amount of~~awarding plaintiffs approximately $78 ~~million. It did not award injunctive relief against Alaska Airlines. In February 2021, an~~million, 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 of~~decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.


ITEM 1A. RISK FACTORS

~~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 the~~a 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 ~~1,455,436~~1,882,517 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 expire~~stock. An additional 427,080 warrants were issued in conjunction with a draw on the ~~fifth anniversary~~CARES 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.


ITEM 6. EXHIBITS

The following documents are filed as part of this report:

1.Exhibits: See Exhibit Index.

SIGNATURES

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


ALASKA AIR GROUP, INC.

/s/ ~~CHRISTOPHER M. BERRY~~EMILY HALVERSON
~~Christopher M. Berry~~Emily Halverson
Vice President Finance and Controller

November ~~4, 2021~~3, 2022

4947

EXHIBIT INDEX
Exhibit
Number Exhibit
Description Form Date of First Filing Exhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-Q August 3, 2017 3.1
10.1†
Form of Alaska Air Group, Inc. Change of Control Agreement for named executive officers, as amended August 3, 2021
10-Q
10.2†*
Amendment No. 16 to Purchase Agreement dated April 11, 2016, between Embraer S.A. and Horizon Air Industries, Inc.
10-Q
10.3†*
Supplemental Agreement No. 18 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.
10-Q
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
101.INS† XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
101.SCH† XBRL Taxonomy Extension Schema Document
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document
101.LAB† XBRL Taxonomy Extension Label Linkbase Document
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document
† Filed herewith
* Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

Exhibit
Number

Exhibit
Description

Form

Date of First Filing

Exhibit Number

3.1

Amended and Restated Certificate of Incorporation of Registrant

10-Q

August 3, 2017

3.1

10.1#

Purchase Agreement No. 3866 between T he Boeing Company and Alaska Airlines, Inc.

10-K

February 14, 2013

10.8

31.1†

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

10-Q

31.2†

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

10-Q

32.1†

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

10-Q

32.2†

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

10-Q

101.INS†

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

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

Filed herewith

Indicates management contract or compensatory plan or arrangement.

Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10).

5048


PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2422
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4544
ITEM 4.	CONTROLS AND PROCEDURES	4645
PART II.	OTHER INFORMATION	4746
ITEM 1.	LEGAL PROCEEDINGS	4746
ITEM 1A.	RISK FACTORS	4746
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4746
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4846
ITEM 4.	MINE SAFETY DISCLOSURES	4847
ITEM 5.	OTHER INFORMATION	4847
ITEM 6.	EXHIBITS	4947
	SIGNATURES	4947


	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


	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)