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, ~~2022~~2023

☐ 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 ~~126,837,831~~128,053,077 common shares, par value $0.01, outstanding at October 31, ~~2022.~~2023.

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, ~~2022~~2023

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, ~~2021.~~2022. Some of these risks include competition, labor costs, relations and availability, general economic conditions including those associated with pandemic recovery, increases in operating costs including fuel, inability to meet cost reduction, ESG and other strategic goals, seasonal fluctuations in demand and financial results, supply chain risks, events that negatively impact aviation safety and security, and changes in laws and regulations that impact our business. 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, 2022		December 31, 2021		(in millions)	September 30, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	688	$	470	Cash and cash equivalents	$	647	$	338
Marketable securities	Marketable securities	2,462		2,646		Marketable securities	1,804		2,079
Total cash and marketable securities	Total cash and marketable securities	3,150		3,116		Total cash and marketable securities	2,451		2,417
Receivables - net	Receivables - net	345		546		Receivables - net	341		296
Inventories and supplies - net	Inventories and supplies - net	94		62		Inventories and supplies - net	122		104
Prepaid expenses and other current assets		221		196
Prepaid expenses						Prepaid expenses	187		163
Assets held for sale						Assets held for sale	385		3
Other current assets						Other current assets	158		57
Total Current Assets	Total Current Assets	3,810		3,920		Total Current Assets	3,644		3,040

Property and Equipment	Property and Equipment					Property and Equipment
Aircraft and other flight equipment	Aircraft and other flight equipment	8,811		8,127		Aircraft and other flight equipment	10,015		9,053
Other property and equipment	Other property and equipment	1,589		1,489		Other property and equipment	1,756		1,661
Deposits for future flight equipment	Deposits for future flight equipment	300		384		Deposits for future flight equipment	538		670
		10,700		10,000			12,309		11,384
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	4,046		3,862		Less accumulated depreciation and amortization	4,283		4,127
Total Property and Equipment - Net	Total Property and Equipment - Net	6,654		6,138		Total Property and Equipment - Net	8,026		7,257

Other Assets	Other Assets					Other Assets
Operating lease assets	Operating lease assets	1,605		1,453		Operating lease assets	1,171		1,471
Goodwill and intangible assets	Goodwill and intangible assets	2,040		2,044		Goodwill and intangible assets	2,034		2,038
Other noncurrent assets	Other noncurrent assets	422		396		Other noncurrent assets	290		380
Total Other Assets	Total Other Assets	4,067		3,893		Total Other Assets	3,495		3,889

Total Assets	Total Assets	$	14,531	$	13,951	Total Assets	$	15,165	$	14,186

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	September 30, 2022		December 31, 2021		(in millions, except share amounts)	September 30, 2023		December 31, 2022
LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY					LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	202	$	200	Accounts payable	$	229	$	221
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	583		457		Accrued wages, vacation and payroll taxes	561		619
Air traffic liability	Air traffic liability	1,467		1,163		Air traffic liability	1,359		1,180
Other accrued liabilities	Other accrued liabilities	805		625		Other accrued liabilities	806		846
Deferred revenue	Deferred revenue	1,068		912		Deferred revenue	1,233		1,123
Current portion of operating lease liabilities	Current portion of operating lease liabilities	263		268		Current portion of operating lease liabilities	150		228
Current portion of long-term debt		321		366
Current portion of long-term debt and finance leases						Current portion of long-term debt and finance leases	736		276
Total Current Liabilities	Total Current Liabilities	4,709		3,991		Total Current Liabilities	5,074		4,493

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	1,889		2,173		Long-Term Debt, Net of Current Portion	2,128		1,883

Noncurrent Liabilities	Noncurrent Liabilities					Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,482		1,279		Long-term operating lease liabilities, net of current portion	1,113		1,393
Deferred income taxes	Deferred income taxes	571		578		Deferred income taxes	662		574
Deferred revenue	Deferred revenue	1,413		1,446		Deferred revenue	1,366		1,374
Obligation for pension and post-retirement medical benefits	Obligation for pension and post-retirement medical benefits	296		305		Obligation for pension and post-retirement medical benefits	368		348
Other liabilities	Other liabilities	345		378		Other liabilities	361		305
Total Noncurrent Liabilities	Total Noncurrent Liabilities	4,107		3,986		Total Noncurrent Liabilities	3,870		3,994

Commitments and Contingencies (Note 7)	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: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares		1		1
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares						Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares	1		1
Capital in excess of par value	Capital in excess of par value	549		494		Capital in excess of par value	659		577
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares		(674)		(674)
Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares						Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares	(744)		(674)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(328)		(262)		Accumulated other comprehensive loss	(360)		(388)
Retained earnings	Retained earnings	4,278		4,242		Retained earnings	4,537		4,300
		3,826		3,801			4,093		3,816
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	14,531	$	13,951	Total Liabilities and Shareholders' Equity	$	15,165	$	14,186

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)	2022		2021		2022		2021		(in millions, except per share amounts)	2023		2022		2023		2022
Operating Revenues
Operating Revenue										Operating Revenue
Passenger revenue	Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785	Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544
Mileage Plan other revenue	Mileage Plan other revenue	146		120		433		332		Mileage Plan other revenue	159		146		483		433
Cargo and other		67		59		190		160
Total Operating Revenues		2,828		1,953		7,167		4,277
Cargo and other revenue										Cargo and other revenue	62		67		190		190
Total Operating Revenue										Total Operating Revenue	2,839		2,828		7,873		7,167

Operating Expenses	Operating Expenses									Operating Expenses
Wages and benefits	Wages and benefits	686		578		1,931		1,581		Wages and benefits	782		686		2,259		1,931
Variable incentive pay	Variable incentive pay	48		42		140		109		Variable incentive pay	45		48		149		140
Payroll Support Program grant wage offset		—		—		—		(914)
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	877		376		2,000		853		Aircraft fuel, including hedging gains and losses	694		877		1,932		2,000
Aircraft maintenance	Aircraft maintenance	92		89		331		272		Aircraft maintenance	118		92		367		331
Aircraft rent	Aircraft rent	76		64		222		188		Aircraft rent	48		76		161		222
Landing fees and other rentals	Landing fees and other rentals	161		141		435		414		Landing fees and other rentals	183		161		502		435
Contracted services	Contracted services	83		62		243		167		Contracted services	100		83		290		243
Selling expenses	Selling expenses	82		49		218		123		Selling expenses	84		82		231		218
Depreciation and amortization	Depreciation and amortization	104		99		310		294		Depreciation and amortization	113		104		330		310
Food and beverage service	Food and beverage service	52		39		143		97		Food and beverage service	62		52		176		143
Third-party regional carrier expense	Third-party regional carrier expense	53		39		145		106		Third-party regional carrier expense	58		53		164		145
Other	Other	207		126		536		348		Other	185		207		544		536
Special items - fleet transition		155		(9)		376		5
Special items - labor ratification bonus		90		—		90		—
Special items - restructuring		—		—		—		(12)

Special items - fleet transition and other										Special items - fleet transition and other	156		155		355		376
Special items - labor and related										Special items - labor and related	—		90		51		90
Total Operating Expenses	Total Operating Expenses	2,766		1,695		7,120		3,631		Total Operating Expenses	2,628		2,766		7,511		7,120
Operating Income	Operating Income	62		258		47		646		Operating Income	211		62		362		47

Non-operating Income (Expense)	Non-operating Income (Expense)									Non-operating Income (Expense)
Interest income	Interest income	17		6		35		19		Interest income	23		17		62		35
Interest expense	Interest expense	(31)		(30)		(84)		(101)		Interest expense	(34)		(31)		(90)		(84)
Interest capitalized	Interest capitalized	3		3		8		9		Interest capitalized	7		3		21		8
Special items - net non-operating										Special items - net non-operating	(8)		—		(14)		—
Other - net	Other - net	14		8		38		27		Other - net	(6)		14		(22)		38
Total Non-operating Income (Expense)	Total Non-operating Income (Expense)	3		(13)		(3)		(46)		Total Non-operating Income (Expense)	(18)		3		(43)		(3)
Income Before Income Tax	Income Before Income Tax	65		245		44		600		Income Before Income Tax	193		65		319		44
Income tax expense	Income tax expense	25		51		8		140		Income tax expense	54		25		82		8
Net Income	Net Income	$	40	$	194	$	36	$	460	Net Income	$	139	$	40	$	237	$	36

Basic Earnings Per Share:	Basic Earnings Per Share:	$	0.32	$	1.55	$	0.28	$	3.69	Basic Earnings Per Share:	$	1.09	$	0.32	$	1.86	$	0.28
Diluted Earnings Per Share:	Diluted Earnings Per Share:	$	0.31	$	1.53	$	0.28	$	3.64	Diluted Earnings Per Share:	$	1.08	$	0.31	$	1.84	$	0.28
Shares used for computation:	Shares used for computation:									Shares used for computation:
Basic	Basic	126.783		125.250		126.440		124.846		Basic	127.187		126.783		127.375		126.440
Diluted	Diluted	128.370		127.188		128.087		126.325		Diluted	129.188		128.370		129.085		128.087

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022		2023		2022
Net Income	Net Income	$	40	$	194	$	36	$	460	Net Income	$	139	$	40	$	237	$	36
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax									Other comprehensive income (loss), net of tax
Marketable securities	Marketable securities	(26)		(3)		(86)		(16)		Marketable securities	2		(26)		18		(86)
Employee benefit plans	Employee benefit plans	1		6		2		19		Employee benefit plans	3		1		11		2
Interest rate derivative instruments	Interest rate derivative instruments	5		2		18		9		Interest rate derivative instruments	—		5		(1)		18
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	$	(20)	$	5	$	(66)	$	12	Total other comprehensive income (loss), net of tax	$	5	$	(20)	$	28	$	(66)

Total comprehensive income (loss), net		$	20	$	199	$	(30)	$	472
Total Comprehensive Income (Loss), Net of Tax										Total Comprehensive Income (Loss), Net of Tax	$	144	$	20	$	265	$	(30)

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, 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 Loss		Retained Earnings		Total
Balance at December 31, 2022	127.534	$	1	$	577	$	(674)	$	(388)	$	4,300	$	3,816
Net loss	—	—		—		—		—		(142)		(142)
Other comprehensive income	—	—		—		—		23		—		23
Common stock repurchase	(0.414)	—		—		(18)		—		—		(18)
Stock-based compensation	—	—		12		—		—		—		12



Stock issued under stock plans	0.123	—		(2)		—		—		—		(2)
Balance at March 31, 2023	127.243	$	1	$	587	$	(692)	$	(365)	$	4,158	$	3,689
Net income	—	—		—		—		—		240		240
Other comprehensive income	—	—		—		—		—		—		—
Common stock repurchase	(0.872)	—		—		(39)		—		—		(39)
Stock-based compensation	0.017	—		26		—		—		—		26


Stock issued for employee stock purchase plan	0.924	—		34		—		—		—		34
Stock issued under stock plans	0.036	—		1		—		—		—		1
Balance at June 30, 2023	127.348	$	1	$	648	$	(731)	$	(365)	$	4,398	$	3,951
Net income	—	—		—		—		—		139		139
Other comprehensive income	—	—		—		—		5		—		5
Common stock repurchase	(0.249)	—		—		(13)		—		—		(13)
Stock-based compensation	—	—		11		—		—		—		11


Stock issued under stock plans	0.021	—		—		—		—		—		—
Balance at September 30, 2023	127.120	$	1	$	659	$	(744)	$	(360)	$	4,537	$	4,093

(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


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801

Net loss	—	—		—		—		—		(143)		(143)
Other comprehensive loss	—	—		—		—		(30)		—		(30)

Stock-based compensation	—	—		13		—		—		—		13



Stock issued under stock plans	0.182	—		(4)		—		—		—		(4)
Balance at March 31, 2022	126.088	$	1	$	503	$	(674)	$	(292)	$	4,099	$	3,637
Net income	—	—		—		—		—		139		139
Other comprehensive 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	—		—		—		—		—		—
Balance at June 30, 2022	126.760	$	1	$	542	$	(674)	$	(308)	$	4,238	$	3,799
Net income	—	—		—		—		—		40		40
Other comprehensive loss	—	—		—		—		(20)		—		(20)

Stock-based compensation	—	—		8		—		—		—		8
Stock issued under stock plans	0.074	—		(1)		—		—		—		(1)
Balance at September 30, 2022	126.834	$	1	$	549	$	(674)	$	(328)	$	4,278	$	3,826

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


		Nine Months Ended September 30,						Nine Months Ended September 30,
(in millions)	(in millions)		2022		2021		(in millions)		2023		2022
Cash flows from operating activities:
Cash Flows from Operating Activities:							Cash Flows from Operating Activities:
Net Income	Net Income		$	36	$	460	Net Income		$	237	$	36
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:							Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization		310		294		Depreciation and amortization		330		310
Stock-based compensation and other	Stock-based compensation and other		33		35		Stock-based compensation and other		73		33
Special items - fleet transition			376		5
Special items - restructuring			—		(12)
Special items - fleet transition and other							Special items - fleet transition and other		344		376
Special items - labor and related							Special items - labor and related		51		—

Changes in certain assets and liabilities:	Changes in certain assets and liabilities:						Changes in certain assets and liabilities:
Changes in deferred tax provision			—		95
Changes in deferred income taxes							Changes in deferred income taxes		90		—
Increase in accounts receivable	Increase in accounts receivable		(59)		(56)		Increase in accounts receivable		(45)		(59)
Increase in air traffic liability	Increase in air traffic liability		304		152		Increase in air traffic liability		179		304
Increase in deferred revenue	Increase in deferred revenue		123		73		Increase in deferred revenue		102		123
Pension contribution			—		(100)

Federal income tax refund	Federal income tax refund		260		—		Federal income tax refund		—		260
Other - net	Other - net		26		(45)		Other - net		(258)		26
Net cash provided by operating activities	Net cash provided by operating activities		1,409		901		Net cash provided by operating activities		1,103		1,409
Cash flows from investing activities:
Property and equipment additions:
Cash Flows from Investing Activities:							Cash Flows from Investing Activities:
Property and equipment additions							Property and equipment additions
Aircraft and aircraft purchase deposits	Aircraft and aircraft purchase deposits		(688)		(52)		Aircraft and aircraft purchase deposits		(669)		(688)
Other flight equipment	Other flight equipment		(156)		(78)		Other flight equipment		(153)		(156)
Other property and equipment	Other property and equipment		(103)		(60)		Other property and equipment		(169)		(103)
Total property and equipment additions, including capitalized interest			(947)		(190)
Total property and equipment additions							Total property and equipment additions		(991)		(947)
Purchases of marketable securities	Purchases of marketable securities		(1,670)		(3,413)		Purchases of marketable securities		(519)		(1,670)
Sales and maturities of marketable securities	Sales and maturities of marketable securities		1,731		2,669		Sales and maturities of marketable securities		806		1,731

Other investing activities	Other investing activities		(2)		(9)		Other investing activities		(106)		(2)
Net cash used in investing activities	Net cash used in investing activities		(888)		(943)		Net cash used in investing activities		(810)		(888)
Cash flows from financing activities:
Proceeds from issuance of debt			—		363
Cash Flows from Financing Activities:							Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt, net of issuance costs							Proceeds from issuance of long-term debt, net of issuance costs		313		—
Long-term debt payments							Long-term debt payments		(242)		(333)
Common stock repurchases							Common stock repurchases		(70)		—

Long-term debt payments			(333)		(1,222)
Other financing activities	Other financing activities		37		34		Other financing activities		11		37
Net cash used in financing activities			(296)		(825)
Net increase (decrease) in cash, cash equivalents, and restricted cash			225		(867)
Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities		12		(296)
Net increase in cash and cash equivalents							Net increase in cash and cash equivalents		305		225
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period		494		1,386		Cash, cash equivalents, and restricted cash at beginning of period		369		494
Cash, cash equivalents, and restricted cash at end of the period	Cash, cash equivalents, and restricted cash at end of the period		$	719	$	519	Cash, cash equivalents, and restricted cash at end of the period		$	674	$	719

910


		Nine Months Ended September 30,						Nine Months Ended September 30,
(in millions)	(in millions)		2022		2021		(in millions)		2023		2022
Supplemental disclosure:							Supplemental disclosure:
Cash paid during the period for:	Cash paid during the period for:						Cash paid during the period for:
Interest (net of amount capitalized)			$	72	$	100
Income taxes			—		—
Interest, net of amount capitalized							Interest, net of amount capitalized		$	85	$	72

Income taxes, net of refunds received							Income taxes, net of refunds received		14		—

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		419		126		Right-of-use assets acquired through operating leases		120		419
Operating leases converted to finance leases							Operating leases converted to finance leases		505		—
Property and equipment acquired through the issuance of debt							Property and equipment acquired through the issuance of debt		179		—

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Reconciliation of cash, cash equivalents, and restricted cash:							Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	Cash and cash equivalents		688		495		Cash and cash equivalents		647		688
Restricted cash included in Prepaid expenses and other current assets			31		24
Restricted cash included in Other noncurrent assets							Restricted cash included in Other noncurrent assets		27		31
Total cash, cash equivalents, and restricted cash at end of the period	Total cash, cash equivalents, and restricted cash at end of the period		$	719	$	519	Total cash, cash equivalents, and restricted cash at end of the period		$	674	$	719

1011

NOTES TO 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.~~Alaska, and other immaterial business units. 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, ~~2021.~~2022. 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, ~~2022~~2023 and the results of operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022. Such adjustments were of a normal recurring nature. Certain rows, columns, figures, or percentages may not recalculate due to rounding.

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~~revenue 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, ~~2022~~2023 are not necessarily indicative of operating results for the entire year.

NOTE 2. 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~~fleet. The removal of all A320 and Q400 aircraft from operating service was completed in January 2023. The removal of all A321neo aircraft from operating service was completed in September 2023. At September 30, 2023, Alaska had reached agreements with multiple lessors to exit its ten A321neo operating leases and purchase the ~~Q400 fleet. Under these plans,~~aircraft. Three aircraft purchases closed by September 30, 2023. Subsequent to quarter end, Alaska ~~is accelerating~~finalized an agreement to sell the ~~retirement of its Airbus A320~~ten aircraft ~~with~~to American Airlines. The remaining seven purchases and all sales to American Airlines are expected to ~~exit~~occur in the ~~fleet by January 2023. Alaska also operates Airbus A321neo aircraft, and plans to remove them from its fleet by the end~~fourth quarter of 2023 ~~subject to agreement~~and first quarter of 2024. As a result of the new agreements, the operating leases associated with ~~counterparties. The Company operated 23 A320 and ten A321neo~~the seven aircraft ~~as of~~that were not purchased by September 30, ~~2022. Horizon plans to retire its Q400 fleet, which includes 19 owned~~2023 were considered modified, and ~~three leased aircraft in operation~~upon evaluation were reclassified as ~~of September 30, 2022, in January 2023.~~finance leases.

Valuation of ~~long-lived assets~~Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or ~~changes~~circumstances indicate that the total carrying ~~amount~~value of an asset or asset group may not be recoverable. ~~During~~In the ~~first~~second quarter, the Company performed an impairment analysis for the A321neo fleet and recorded an impairment charge of ~~2022,~~$156 million.

In the third quarter, the Company determined there was additional impairment related to the A321neo fleet due to new purchase activity in the period. The Company estimated the fair market value for the A321neo aircraft using available market price information with adjustments based on quantitative and qualitative considerations. Based on this fair market value, the Company recorded an impairment charge of ~~$70~~$123 million, ~~related to the Q400 fleet,~~ reflecting the amount by which carrying value exceeded fair value of the ~~owned Q400 aircraft as of March 31, 2022.~~aircraft. This ~~amount was recorded~~charge is included within ~~the "Special~~Special items - fleet ~~transition" line~~transition and other in the condensed consolidated ~~statement of operations. Refer to Note 2 to our consolidated financial~~ statements ~~in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 for additional details.~~

In the second quarter, the Company 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 rent expenses. These accelerated schedules are based on the 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 reasonably estimable, and are recognized over the remaining operating life of the 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 third quarter, all lease return costs were recorded within the "Special items - fleet transition" line in the consolidated statement of operations.

~~A summary~~Other Fleet Related Disclosure

The ten A321neo aircraft that have been removed from operating service are classified as Assets held for sale in the condensed consolidated balance sheets as of September 30, 2023. Seven of these aircraft are classified as finance leases, whose lease liabilities are reflected within Current portion of long-term debt and finance leases and total $452 million as of September 30, 2023. Interest expense associated with the finance leases of $8 million for the third quarter of 2023 was recognized within Special items - net non-operating in the condensed consolidated statements of operations.

Special charges were also recognized during the three and nine months ended September 30, 2023 for other fleet transition costs, including accelerated aircraft ownership expenses, certain aircraft maintenance work performed as a result of the fleet retirements, adjustments to estimated costs to return the A320 fleet, and penalty rent for Airbus aircraft which have not yet been returned to the lessor as of the lease expiration date.

The following table summarizes our special charges for fleet transition ~~activities is included below~~costs for the three and nine months ended September 30, ~~2022. The impairment charges are one-time~~2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2023		2022		2023		2022
Impairment of long-lived assets(a)	$	120	$	—	$	271	$	70

Other fleet transition costs	36		155		84		306
Special items - fleet transition and other	$	156	$	155	$	355	$	376

(a) Net of other immaterial activity recognized in ~~nature, while~~ the ~~other special charges continue to be recorded consistent~~

~~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~~three and nine months ended September 30, 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.~~

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

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 is passenger ancillary revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. 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 9.10. 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,
		2022		2021		2022		2021			2023		2022		2023		2022
Passenger ticket revenue, including ticket breakage, net of taxes and fees		$	2,252	$	1,483	$	5,536	$	3,122
Passenger ticket revenue, net of taxes and fees										Passenger ticket revenue, net of taxes and fees	$	2,226	$	2,252	$	6,081	$	5,536
Passenger ancillary revenue	Passenger ancillary revenue	127		101		337		235		Passenger ancillary revenue	135		127		362		337
Mileage Plan passenger revenue	Mileage Plan passenger revenue	236		190		671		428		Mileage Plan passenger revenue	257		236		757		671
Total Passenger revenue	Total Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785	Total Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544

Mileage Plan Loyalty Program

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Passenger revenue	Passenger revenue	$	236	$	190	$	671	$	428	Passenger revenue	$	257	$	236	$	757	$	671
Mileage Plan other revenue	Mileage Plan other revenue	146		120		433		332		Mileage Plan other revenue	159		146		483		433
Total Mileage Plan revenue	Total Mileage Plan revenue	$	382	$	310	$	1,104	$	760	Total Mileage Plan revenue	$	416	$	382	$	1,240	$	1,104

1213

Cargo and Other Revenue

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,
		2022		2021		2022		2021			2023		2022		2023		2022
Cargo revenue	Cargo revenue	$	37	$	34	$	102	$	95	Cargo revenue	$	29	$	37	$	97	$	102
Other revenue	Other revenue	30		25		88		65		Other revenue	33		30		93		88
Total Cargo and other revenue	Total Cargo and other revenue	$	67	$	59	$	190	$	160	Total Cargo and other revenue	$	62	$	67	$	190	$	190

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of ~~$65~~$33 million and ~~$101~~$65 million from the prior year-end air traffic liability balance for the three months ended September 30, 2023 and 2022, and ~~2021,~~$621 million and ~~$587~~$587 million ~~and $276 million~~ from the prior year-end air traffic liability balance for the nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022.

Mileage Plan assets and liabilities

The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had ~~$80~~$91 million of such receivables as of September 30, ~~2022~~2023 and ~~$64~~$83 million as of December 31, ~~2021.~~2022.

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,
		2022		2021			2023		2022
Total Deferred revenue balance at January 1		$	2,358	$	2,277
Total Deferred Revenue balance at January 1						Total Deferred Revenue balance at January 1	$	2,497	$	2,358
Travel miles and companion certificate redemption - Passenger revenue	Travel miles and companion certificate redemption - Passenger revenue	(632)		(428)		Travel miles and companion certificate redemption - Passenger revenue	(712)		(632)
Miles redeemed on partner airlines - Other revenue	Miles redeemed on partner airlines - Other revenue	(45)		(30)		Miles redeemed on partner airlines - Other revenue	(86)		(45)
Increase in liability for mileage credits issued	Increase in liability for mileage credits issued	800		531		Increase in liability for mileage credits issued	900		800
Total Deferred revenue balance at September 30		$	2,481	$	2,350
Total Deferred Revenue balance at September 30						Total Deferred Revenue balance at September 30	$	2,599	$	2,481

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, ~~2022,~~2023, total cost basis for all marketable securities was ~~$2.6~~$1.9 billion, compared to a total fair value of ~~$2.5~~$1.8 billion. The decline in value is primarily due 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~~industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of September 30, ~~2022.~~2023.

1314

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


		September 30, 2022						December 31, 2021							September 30, 2023						December 31, 2022
		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	$	532	$	—	$	532	$	331	$	—	$	331	U.S. government and agency securities	$	508	$	—	$	508	$	505	$	—	$	505
Equity mutual funds	Equity mutual funds	5		—		5		6		—		6		Equity mutual funds	5		—		5		5		—		5
Foreign government bonds	Foreign government bonds	—		25		25		—		38		38		Foreign government bonds	—		10		10		—		25		25
Asset-backed securities	Asset-backed securities	—		260		260		—		311		311		Asset-backed securities	—		216		216		—		261		261
Mortgage-backed securities	Mortgage-backed securities	—		208		208		—		232		232		Mortgage-backed securities	—		123		123		—		196		196
Corporate notes and bonds	Corporate notes and bonds	—		1,384		1,384		—		1,663		1,663		Corporate notes and bonds	—		889		889		—		1,025		1,025
Municipal securities	Municipal securities	—		48		48		—		65		65		Municipal securities	—		53		53		—		62		62
Total Marketable securities	Total Marketable securities	537		1,925		2,462		337		2,309		2,646		Total Marketable securities	513		1,291		1,804		510		1,569		2,079
Derivative instruments	Derivative instruments													Derivative instruments
Fuel hedge - call options		—		51		51		—		81		81
Fuel hedge contracts - call options														Fuel hedge contracts - call options	—		40		40		—		44		44
Interest rate swap agreements	Interest rate swap agreements	—		15		15		—		—		—		Interest rate swap agreements	—		13		13		—		15		15
Total Assets	Total Assets	$	537	$	1,991	$	2,528	$	337	$	2,390	$	2,727	Total Assets	$	513	$	1,344	$	1,857	$	510	$	1,628	$	2,138

Liabilities
Derivative instruments

Interest rate swap agreements		—		—		—		—		(9)		(9)
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 SOFR-based forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Maturities for marketable securities (in millions):


September 30, 2022		Cost Basis		Fair Value
September 30, 2023						September 30, 2023	Cost Basis		Fair Value
Due in one year or less	Due in one year or less	$	738	$	729	Due in one year or less	$	403	$	395
Due after one year through five years	Due after one year through five years	1,811		1,704		Due after one year through five years	1,386		1,320
Due after five years	Due after five years	26		24		Due after five years	73		68

Due after 10 years						Due after 10 years	18		16
No maturity date						No maturity date	4		5
Total	Total	$	2,575	$	2,457	Total	$	1,884	$	1,804

~~As of September 30, 2022, $5 million of total marketable securities do not have a maturity date and are therefore excluded from the total fair value of maturities for marketable securities above.~~

Fair Value of Other Financial Instruments

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

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

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

Debt: To estimate the fair value of all fixed-rate debt as of September 30, ~~2022,~~2023, 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 ~~$708~~$566 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~~sheets and the estimated fair value of long-term fixed-rate debt ~~is as follows~~ (in millions):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022

Total fixed-rate debt		$	1,664	$	1,821
Fixed-rate debt						Fixed-rate debt	$	1,520	$	1,660

Estimated fair value	Estimated fair value	$	1,610	$	1,919	Estimated fair value	$	1,372	$	1,473

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 and finance lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for ~~discussion~~details regarding impairment charges recorded ~~during~~in the three and nine months ended September 30, ~~2022.~~2023.

NOTE 5. LONG-TERM DEBT

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


		September 30, 2022			December 31, 2021				September 30, 2023			December 31, 2022
Fixed-rate notes payable due through 2029	Fixed-rate notes payable due through 2029	$	117		$	163		Fixed-rate notes payable due through 2029	$	85		$	113
Fixed-rate PSP notes payable due through 2031	Fixed-rate PSP notes payable due through 2031	600			600			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	947			1,058			Fixed-rate EETC payable due through 2025 & 2027	835			947
Variable-rate notes payable due through 2029		562			738
Variable-rate notes payable due through 2035								Variable-rate notes payable due through 2035	907			514
Less debt issuance costs	Less debt issuance costs	(16)			(20)			Less debt issuance costs	(15)			(15)
Total debt	Total debt	2,210			2,539			Total debt	2,412			2,159
Less current portion(a)	Less current portion(a)	321			366			Less current portion(a)	284			276
Long-term debt, less current portion	Long-term debt, less current portion	$	1,889		$	2,173		Long-term debt, less current portion	$	2,128		$	1,883

Weighted-average fixed-interest rate	Weighted-average fixed-interest rate	3.5		%	3.7		%	Weighted-average fixed-interest rate	3.4		%	3.5		%
Weighted-average variable-interest rate	Weighted-average variable-interest rate	4.2		%	1.3		%	Weighted-average variable-interest rate	6.8		%	5.8		%

(a) Excludes finance lease liabilities recognized within Current portion of long-term debt and finance leases in the condensed consolidated balance sheets as of September 30, 2023.

Approximately ~~$353~~$216 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, ~~2022,~~2023, resulting in an effective weighted-average interest rate for the full debt portfolio of ~~3.5%~~4.3%.

During the nine months ended September 30, ~~2022,~~2023, the Company incurred debt of $495 million from multiple lenders and sources. New debt includes proceeds of $316 million which is secured by aircraft. Additionally, $179 million was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement is reflected as a non-cash transaction within the supplemental disclosures in the condensed consolidated statements of cash flows. Also during the nine months ended September 30, 2023, the Company made scheduled debt payments of ~~$316~~$240 million and prepayments of ~~$17 million for loans related to Q400 aircraft.~~$2 million.

Debt Maturity

At September 30, ~~2022,~~2023, long-term debt principal payments for the next five years and thereafter are as follows (in millions):


		Total			Total
Remainder of 2022		$	52
2023		309
Remainder of 2023				Remainder of 2023	$	45
2024	2024	238		2024	286
2025	2025	273		2025	343
2026	2026	176		2026	292
2027				2027	597
Thereafter	Thereafter	1,178		Thereafter	864
Total		$	2,226
Total Principal Payments				Total Principal Payments	$	2,427

Bank Lines of Credit

Alaska has three credit facilities totaling ~~$486~~$626 million as of September 30, ~~2022.~~2023. One of the credit facilities for $150 million expires in March 2025 and is secured by certain accounts receivable, spare engines, spare parts, and ground service equipment. A second credit facility, ~~for $250 million expires in June 2024 and~~which is secured by ~~aircraft.~~aircraft, was amended by the Company in the third quarter to increase its size to $400 million and extend its term to June 2026. Both facilities have variable interest rates based on ~~LIBOR~~SOFR plus a specified margin. A third credit facility for ~~$86~~$76 million expires in June ~~2023~~2024 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, ~~2022.~~2023.

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,
		2022		2021		2022		2021			2023		2022		2023		2022
Service cost	Service cost	$	12	$	13	$	34	$	39	Service cost	$	8	$	12	$	22	$	34
Pension expense included in Wages and benefits	Pension expense included in Wages and benefits	12		13		34		39		Pension expense included in Wages and benefits	8		12		22		34

Interest cost	Interest cost	17		14		49		42		Interest cost	27		17		81		49
Expected return on assets	Expected return on assets	(32)		(30)		(96)		(91)		Expected return on assets	(28)		(32)		(85)		(96)
Amortization of prior service cost (credit)	Amortization of prior service cost (credit)	(1)		(1)		(1)		(1)		Amortization of prior service cost (credit)	—		(1)		—		(1)
Recognized actuarial loss	Recognized actuarial loss	2		9		6		27		Recognized actuarial loss	5		2		17		6
Pension expense included in Non-operating Income (Expense)	Pension expense included in Non-operating Income (Expense)	$	(14)	$	(8)	$	(42)	$	(23)	Pension expense included in Non-operating Income (Expense)	$	4	$	(14)	$	13	$	(42)

1617

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of September 30, ~~2022~~2023 (in millions):


		Aircraft Commitments(a)		Capacity Purchase Agreements (b)			Aircraft-Related Commitments(a)		Capacity Purchase Agreements and Other Obligations (b)
Remainder of 2022		$	529	$	41
2023		2,124		172
Remainder of 2023						Remainder of 2023	$	460	$	56
2024	2024	512		178		2024	1,754		224
2025	2025	254		186		2025	1,438		227
2026	2026	249		186		2026	688		219
2027						2027	334		220
Thereafter	Thereafter	738		763		Thereafter	591		739
Total	Total	$	4,406	$	1,526	Total	$	5,265	$	1,685

(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.

(b)~~Includes all non-aircraft lease~~Primarily comprised of non-lease costs associated with capacity purchase ~~agreements.~~agreements, as well as other various sponsorship agreements and investment commitments.

Aircraft Commitments

Aircraft purchase commitments include contractual commitments for aircraft and engines. In the second quarter of 2022, Horizon amended its aircraft purchase agreement with Embraer, adding eight firm E175 deliveries between 2023 and 2026 and 13 options to purchase additional 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~~2023 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


	Firm Orders	Options and Other Rights	Total
Aircraft Type	2023-2027	2025-2030	2023-2030
B737	89	105	194
E175	9	13	22
Total	98	118	216

The B737 fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of September 30, ~~2022.~~2023. Boeing has communicated to Alaska ~~has received information from Boeing indicating~~ that certain ~~737~~B737 deliveries contracted in ~~2022 and~~ 2023 are expected to be delayed ~~to 2023 and~~into 2024. ~~Alaska 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~~has contractual agreements as of September 30, 2023 to purchase ~~52 737~~seven of its leased A321neo aircraft. These transactions are expected to occur in the fourth quarter of 2023 and first quarter of 2024. The obligations for these aircraft, ~~for delivery between 2024~~including both the remaining lease payments and ~~2027. The agreement also secures rights for 105 additional aircraft through 2030. The incremental firm~~subsequent purchase, ~~commitments per~~are reflected within Current portion of long-term debt and finance leases in the ~~agreement are not contractually obligated at~~condensed consolidated balance sheets as of September 30, ~~2022,~~2023 and are not reflected in the ~~future minimum payments table~~tables above.

Refer to Note 2 to the condensed consolidated financial statements for additional details.

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~~contracts for maintenance on its ~~Boeing 737-800~~B737-800 and B737-900ER 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.~~2026 and 2032, respectively. Horizon has a contract for maintenance on ~~its Embraer~~certain 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 pursued numerous appeal paths following a February 2019 federal district court order against Virgin America and Alaska Airlines awarding plaintiffs approximately $78 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 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 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. The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of these solutions may have an adverse impact on the Company’s operations and financial 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, pursuant to that agreement's venue provision, 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.~~inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. ~~The~~On February 16, 2023, the commercial court issued a ruling adopting Virgin ~~Group asserts that payments are required without regard to actual use~~Group’s interpretation 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.~~license agreement. The Company has appealed the decision and believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. ~~The Company 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.~~as required by the CARES Act. These restrictions ended on October 1, 2022. The Company restarted the share repurchase program in February 2023 pursuant to the existing repurchase program. As of September 30, 2023, the Company has repurchased 9.1 million shares for $613 million under this program. No shares were repurchased in 2022.

Share purchase activity (in millions, except share amounts):


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	248,988	$	13	1,534,529	$	70

CARES Act Warrant Issuances

As ~~additional~~ taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the ~~Treasury~~U.S. government a total of 1,455,437 warrants to purchase ALK common 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.

As of September 30, 2023, there are 1,882,517 total warrants outstanding, with a weighted average strike price of $39.06. The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, recorded in stockholders' equity at issuance.

~~Total warrants outstanding are as follows as of September 30, 2022:~~
Number of warrants outstanding Strike Price
PSP 1 928,126 31.61
CARES Act loan warrants 427,080 31.61
PSP 2 305,499 52.25
PSP 3 221,812 66.39
Outstanding September 30, 2022 1,882,517

~~Accumulated other comprehensive loss~~

~~A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), 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 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. ~~For~~Anti-dilutive common stock equivalents excluded from the calculation of diluted earnings per share were 1.2 million and 1.9 million for the three and nine months ended September 30, ~~2022~~2023, and 1.4 million and 1.7 million for the three and nine months ended September 30, ~~2021, anti-dilutive shares excluded from~~2022.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

A roll forward of the ~~calculation~~amounts included in accumulated other comprehensive loss, net of ~~EPS were not material.~~tax (in millions), is shown below for the three and nine months ended September 30, 2023 and 2022:


	Marketable Securities		Employee Benefit Plan		Interest Rate Derivatives		Total






Balance at June 30, 2023, net of tax effect of $116	$	(64)	$	(311)	$	10	$	(365)
Reclassifications into earnings, net of tax impact of $(1)	2		3		—		5
Change in value, net of tax impact of $0	—		—		—		—
Balance at September 30, 2023, net of tax effect of $115	$	(62)	$	(308)	$	10	$	(360)

Balance at December 31, 2022, net of tax effect of $122	$	(80)	$	(319)	$	11	$	(388)
Reclassifications into earnings, net of tax effect of $(5)	9		11		—		20
Change in value, net of tax effect of $(2)	9		—		(1)		8
Balance at September 30, 2023, net of tax effect of $115	$	(62)	$	(308)	$	10	$	(360)


	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 effect of $1	6		2		—		8
Change in value, net of tax effect of $20	(92)		—		18		(74)
Balance at September 30, 2022, net of tax effect of $104	$	(90)	$	(250)	$	12	$	(328)

NOTE 9.10. 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.~~revenue.

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 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~~revenue 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, 2022
Mainline Regional Horizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues $ 2,217 $ 398 $ — $ — $ 2,615 $ — $ 2,615
CPA revenues — — 93 (93) — — —
Mileage Plan other revenue 133 13 — — 146 — 146
Cargo and other 65 — — 2 67 — 67
Total Operating Revenues 2,415 411 93 (91) 2,828 — 2,828
Operating Expenses
Operating expenses, excluding fuel 1,352 292 94 (94) 1,644 245 1,889
Fuel expense 625 121 — — 746 131 877
Total Operating Expenses 1,977 413 94 (94) 2,390 376 2,766
Non-operating Income (Expense) 8 — (5) — 3 — 3
Income (Loss) Before Income Tax $ 446 $ (2) $ (6) $ 3 $ 441 $ (376) $ 65
Pretax Margin 15.6 % 2.3 %
Three Months Ended September 30, 2021
Mainline Regional Horizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues $ 1,425 $ 349 $ — $ — $ 1,774 $ — $ 1,774
CPA revenues — — 107 (107) — — —
Mileage Plan other revenue 105 15 — — 120 — 120
Cargo and other 58 — — 1 59 — 59
Total Operating Revenues 1,588 364 107 (106) 1,953 — 1,953
Operating Expenses
Operating expenses, excluding fuel 1,060 288 93 (113) 1,328 (9) 1,319
Fuel expense 299 77 — — 376 — 376
Total Operating Expenses 1,359 365 93 (113) 1,704 (9) 1,695
Non-operating Income (Expense) (8) — (6) 1 (13) — (13)
Income (Loss) Before Income Tax $ 221 $ (1) $ 8 $ 8 $ 236 $ 9 $ 245
Pretax Margin 12.1 % 12.5 %


	Three Months Ended September 30, 2023
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)			Special Items(c)		Consolidated
Operating Revenue
Passenger revenue	$	2,225	$	393	$	—	$	—	$	2,618		$	—	$	2,618
CPA revenue	—		—		104		(104)		—			—		—
Mileage Plan other revenue	146		13		—		—		159			—		159
Cargo and other revenue	60		—		—		2		62			—		62
Total Operating Revenue	2,431		406		104		(102)		2,839			—		2,839
Operating Expenses
Operating expenses, excluding fuel	1,484		297		89		(92)		1,778			156		1,934
Fuel expense	621		108		—		—		729			(35)		694
Total Operating Expenses	2,105		405		89		(92)		2,507			121		2,628






Non-operating Income (Expense)	—		—		(11)		1		(10)			(8)		(18)
Income (Loss) Before Income Tax	$	326	$	1	$	4	$	(9)	$	322		$	(129)	$	193
Pretax Margin									11.4		%			6.8		%

	Three Months Ended September 30, 2022
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)			Special Items(c)		Consolidated
Operating Revenue
Passenger revenue	$	2,217	$	398	$	—	$	—	$	2,615		$	—	$	2,615
CPA revenue	—		—		93		(93)		—			—		—
Mileage Plan other revenue	133		13		—		—		146			—		146
Cargo and other revenue	65		—		—		2		67			—		67
Total Operating Revenue	2,415		411		93		(91)		2,828			—		2,828
Operating Expenses
Operating expenses, excluding fuel	1,352		292		94		(94)		1,644			245		1,889
Fuel expense	625		121		—		—		746			131		877
Total Operating Expenses	1,977		413		94		(94)		2,390			376		2,766





Non-operating Income (Expense)	8		—		(5)		—		3			—		3
Income (Loss) Before Income Tax	$	446	$	(2)	$	(6)	$	3	$	441		$	(376)	$	65
Pretax Margin									15.6		%			2.3		%

2021


		Nine Months Ended September 30, 2022																	Nine Months Ended September 30, 2023
		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
Passenger revenues		$	5,488	$	1,056	$	—	$	—	$	6,544		$	—	$	6,544
CPA revenues		—		—		288		(288)		—			—		—
Operating Revenue																		Operating Revenue
Passenger revenue																		Passenger revenue	$	6,143	$	1,057	$	—	$	—	$	7,200		$	—	$	7,200
CPA revenue																		CPA revenue	—		—		274		(274)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	392		41		—		—		433			—		433			Mileage Plan other revenue	447		36		—		—		483			—		483
Cargo and other		186		—		—		4		190			—		190
Total Operating Revenues		6,066		1,097		288		(284)		7,167			—		7,167
Cargo and other revenue																		Cargo and other revenue	184		—		—		6		190			—		190
Total Operating Revenue																		Total Operating Revenue	6,774		1,093		274		(268)		7,873			—		7,873
Operating Expenses																		Operating Expenses
Operating expenses, excluding fuel																		Operating expenses, excluding fuel	4,342		832		260		(261)		5,173			406		5,579
Fuel expense																		Fuel expense	1,672		274		—		—		1,946			(14)		1,932
Total Operating Expenses																		Total Operating Expenses	6,014		1,106		260		(261)		7,119			392		7,511

Non-operating Income (Expense)																		Non-operating Income (Expense)	(3)		—		(29)		3		(29)			(14)		(43)
Income (Loss) Before Income Tax																		Income (Loss) Before Income Tax	$	757	$	(13)	$	(15)	$	(4)	$	725		$	(406)	$	319
Pretax Margin																		Pretax Margin									9.2		%			4.1		%

																			Nine Months Ended September 30, 2022
																			Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)			Special Items(c)		Consolidated
Operating Revenue																		Operating Revenue
Passenger revenue																		Passenger revenue	$	5,488	$	1,056	$	—	$	—	$	6,544		$	—	$	6,544
CPA revenue																		CPA revenue	—		—		288		(288)		—			—		—
Mileage Plan other revenue																		Mileage Plan other revenue	392		41		—		—		433			—		433
Cargo and other revenue																		Cargo and other revenue	186		—		—		4		190			—		190
Total Operating Revenue																		Total Operating Revenue	6,066		1,097		288		(284)		7,167			—		7,167
Operating Expenses	Operating Expenses																	Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	3,808		843		291		(288)		4,654			466		5,120			Operating expenses, excluding fuel	3,808		843		291		(288)		4,654			466		5,120
Fuel expense	Fuel expense	1,623		313		—		—		1,936			64		2,000			Fuel expense	1,623		313		—		—		1,936			64		2,000
Total Operating Expenses	Total Operating Expenses	5,431		1,156		291		(288)		6,590			530		7,120			Total Operating Expenses	5,431		1,156		291		(288)		6,590			530		7,120

Non-operating Income (Expense)	Non-operating Income (Expense)	12		—		(15)		—		(3)			—		(3)			Non-operating Income (Expense)	12		—		(15)		—		(3)			—		(3)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	647	$	(59)	$	(18)	$	4	$	574		$	(530)	$	44		Income (Loss) Before Income Tax	$	647	$	(59)	$	(18)	$	4	$	574		$	(530)	$	44
Pretax Margin	Pretax Margin									8.0		%			0.6		%	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.

(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, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Mainline	Mainline	$	20,065	$	19,258	Mainline	$	20,468	$	19,733
Horizon	Horizon	1,115		1,212		Horizon	1,320		1,157
Consolidating & Other	Consolidating & Other	(6,649)		(6,519)		Consolidating & Other	(6,623)		(6,704)
Consolidated	Consolidated	$	14,531	$	13,951	Consolidated	$	15,165	$	14,186

2122


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, ~~2021.~~2022. This overview summarizes the MD&A, which includes the following sections:

•Third Quarter Review—highlights from the third quarter of ~~2022~~2023 outlining some of the major events that occurred during the ~~period and how they affected our financial performance.~~period.

•Results of Operations—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, ~~2022.~~2023. 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 ~~2022.~~2023.

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

THIRD QUARTER REVIEW

Third Quarter Results

We recorded consolidated pretax income for the third quarter of ~~2022~~2023 under GAAP of ~~$65~~$193 million, compared to consolidated pretax income of ~~$245~~$65 million in the third quarter of ~~2021. On an adjusted basis, we reported consolidated~~2022. Increased pretax income ~~for~~is primarily the ~~quarter~~result of ~~$441~~a $183 million ~~compared to consolidated pretax income of $236~~decrease in aircraft fuel costs, and an $81 million decrease in ~~the same period of 2021. Strong demand for passenger air travel combined with excellent operational performance enabled Air Group to deliver record breaking quarterly revenue~~special operating and non-operating charges. These decreases were partially offset by a $134 million increase in ~~the third quarter.~~

~~In the third quarter non-fuel~~other operating 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 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 economic price per gallon. We also incurred special charges of $245 million, including $155 million related to our Airbus and Q400 fleet transitions and $90 million in ratification bonuses from the new collective bargaining agreement with Alaska pilots.categories.

See “Results of Operations” below for further discussion of changes in revenue and operating expenses as compared to ~~2021,~~2022, 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.

Operational Milestones

In the third quarter, our airlines leveraged our foundational strength of operational excellence, leading the industry in completion rate and finishing with an on-time performance higher than 80%. Additionally, Alaska completed its transition back to a single-fleet operator following the retirement of its A321neo aircraft in September. Subsequent to quarter end, Alaska reached an agreement with American Airlines to sell all ten A321neos, with sales expected to be completed by the first quarter of 2024.

Labor Update

~~During~~Under the terms of the existing collective bargaining agreement with the Air Line Pilots Association (ALPA), Alaska's pilots' wages underwent a market review in the third ~~quarter, we reached three~~quarter. Following this review, Alaska executed a Letter of Agreement with ALPA for a one-time market rate adjustment to increase pay rates effective September 1, 2023.

Alaska is actively negotiating for new ~~labor agreements. In August 2022, Alaska's employees~~contracts with its mainline flight attendants represented by the ~~International~~ Association of ~~Machinists~~Flight Attendants, whose contract became amendable in December 2022, and ~~Aerospace Workers ratified~~its mainline mechanics represented by the Aircraft Mechanics Fraternal Association, whose contract became amendable in October 2023. Horizon is actively negotiating for a ~~two-year~~ new

contract ~~extension that includes increased pay~~ with ~~added steps to ensure wage rates remain competitive. In September 2022, Horizon~~its 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.2024.

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 forFor the fourth quarter isof 2023, we anticipate our cost discipline and operational excellence will continue to benefit unit costs, with CASMex expected to be ~~temporarily constrained~~down 3% to 5% on capacity up 11% to 14% as compared to the prior year. Although 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 strengthhave seen some slowing in the demand environment, ~~is expected~~we expect our diversified product offerings and Mileage Plan revenue streams will lift total revenue up 1% to ~~generate revenue 12% to 15%~~4% over ~~2019 levels.~~2022. For the full year, ~~we continue~~headwinds from fuel prices which were not previously contemplated, coupled with decreased revenue expectations, have led us to ~~anticipate~~reduce our expected full year adjusted pretax ~~margins will range between 6%~~margin to 9%7% to 8%.

~~Our plans will~~We continue to ~~be responsive~~remain focused on setting intentional targets and taking the appropriate steps to ~~emerging information~~deliver on those targets. Changes to the operating environment and industry trends could lead to adjustments to the guidance ~~we have~~ provided ~~above is subject~~as management aligns our business to ~~greater uncertainty than we have historically experienced.~~be appropriately responsive. As we leverage our network ~~Mileage Plan program,~~ and ~~fleet~~diversified revenue offerings 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~~2023 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 is useful information to investors because:

•By excluding fuel expense and ~~certain other items, such as the Payroll Support Program grant wage offset and 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.~~and productivity initiatives. 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 expense and ~~certain other items, such as the Payroll Support Program grant wage offset and 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.

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

•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 revenue, we do not, nor are we able to, evaluate unit 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 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 nonrecurring, infrequent, or unusual in nature.

OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit 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,
		2022	2021	Change	2022	2021	Change		2023	2022	Change	2023	2022	Change
Consolidated Operating Statistics:(a)	Consolidated Operating Statistics:(a)							Consolidated Operating Statistics:(a)
Revenue passengers (000)	Revenue passengers (000)	11,437	9,832	16.3%	31,137	23,211	34.1%	Revenue passengers (000)	12,210	11,437	7%	33,654	31,137	8%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	14,143	11,592	22.0%	38,475	27,319	40.8%	RPMs (000,000) "traffic"	15,718	14,143	11%	43,208	38,475	12%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	16,349	14,429	13.3%	45,743	38,238	19.6%	ASMs (000,000) "capacity"	18,582	16,349	14%	51,447	45,743	12%
Load factor	Load factor	86.5%	80.3%	6.2 pts	84.1%	71.4%	12.7 pts	Load factor	84.6%	86.5%	(1.9) pts	84.0%	84.1%	(0.1) pts
Yield	Yield	18.48¢	15.30¢	20.8%	17.01¢	13.85¢	22.8%	Yield	16.66¢	18.48¢	(10)%	16.66¢	17.01¢	(2)%
RASM	RASM	17.30¢	13.54¢	27.8%	15.67¢	11.19¢	40.0%	RASM	15.28¢	17.30¢	(12)%	15.30¢	15.67¢	(2)%
CASM excluding fuel and special items(b)		10.05¢	9.21¢	9.1%	10.17¢	9.67¢	5.2%
CASMex(b)								CASMex(b)	9.57¢	10.05¢	(5)%	10.05¢	10.17¢	(1)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$3.66	$2.05	78.5%	$3.38	$1.93	75.1%	Economic fuel cost per gallon(b)	$3.26	$3.66	(11)%	$3.14	$3.38	(7)%
Fuel gallons (000,000)	Fuel gallons (000,000)	204	183	11.5%	573	477	20.1%	Fuel gallons (000,000)	224	204	10%	620	573	8%
ASMs per fuel gallon	ASMs per fuel gallon	80.1	78.8	1.6%	79.8	80.2	(0.5)%	ASMs per fuel gallon	83.0	80.1	4%	83.0	79.8	4%
Departures (000)								Departures (000)	111.8	110.4	1%	311.6	309.3	1%
Average full-time equivalent employees (FTEs)	Average full-time equivalent employees (FTEs)	22,878	20,315	12.6%	22,354	18,819	18.8%	Average full-time equivalent employees (FTEs)	23,879	22,878	4%	23,386	22,354	5%
Mainline Operating Statistics:	Mainline Operating Statistics:							Mainline Operating Statistics:
Revenue passengers (000)	Revenue passengers (000)	8,671	7,065	22.7%	23,557	16,367	43.9%	Revenue passengers (000)	9,681	8,671	12%	26,735	23,557	13%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	12,846	10,122	26.9%	34,818	23,677	47.1%	RPMs (000,000) "traffic"	14,471	12,846	13%	39,967	34,818	15%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	14,782	12,540	17.9%	41,221	33,004	24.9%	ASMs (000,000) "capacity"	17,123	14,782	16%	47,584	41,221	15%
Load factor	Load factor	86.9%	80.7%	6.2 pts	84.5%	71.7%	12.8 pts	Load factor	84.5%	86.9%	(2.4) pts	84.0%	84.5%	(0.5) pts
Yield	Yield	17.26¢	14.08¢	22.6%	15.76¢	12.68¢	24.3%	Yield	15.37¢	17.26¢	(11)%	15.37¢	15.76¢	(2)%
RASM	RASM	16.34¢	12.66¢	29.1%	14.72¢	10.44¢	41.0%	RASM	14.20¢	16.34¢	(13)%	14.24¢	14.72¢	(3)%
CASM excluding fuel and special items(b)		9.15¢	8.45¢	8.3%	9.24¢	8.90¢	3.8%
CASMex(b)								CASMex(b)	8.67¢	9.15¢	(5)%	9.12¢	9.24¢	(1)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$3.61	$2.03	77.8%	$3.35	$1.91	75.4%	Economic fuel cost per gallon(b)	$3.22	$3.61	(11)%	$3.11	$3.35	(7)%
Fuel gallons (000,000)	Fuel gallons (000,000)	173	147	17.7%	484	380	27.4%	Fuel gallons (000,000)	193	173	12%	538	484	11%
ASMs per fuel gallon	ASMs per fuel gallon	85.4	85.3	0.1%	85.2	86.9	(2.0)%	ASMs per fuel gallon	88.7	85.4	4%	88.4	85.2	4%
Average FTEs		17,453	15,116	15.5%	17,035	13,870	22.8%
Departures (000)								Departures (000)	72.3	65.3	11%	202.1	182.7	11%
Average full-time equivalent employees (FTEs)								Average full-time equivalent employees (FTEs)	18,619	17,453	7%	18,184	17,035	7%
Aircraft utilization	Aircraft utilization	10.5	10.2	2.9%	10.4	9.6	8.3%	Aircraft utilization	11.9	10.5	13%	11.5	10.4	11%
Average aircraft stage length	Average aircraft stage length	1,347	1,313	2.6%	1,348	1,313	2.7%	Average aircraft stage length	1,386	1,347	3%	1,379	1,348	2%
Operating fleet(d)	Operating fleet(d)	232	210	22 a/c	232	210	22 a/c	Operating fleet(d)	220	232	(12) a/c	220	232	(12) a/c
Regional Operating Statistics:(c)	Regional Operating Statistics:(c)							Regional Operating Statistics:(c)
Revenue passengers (000)	Revenue passengers (000)	2,767	2,767	—%	7,579	6,843	10.8%	Revenue passengers (000)	2,529	2,767	(9)%	6,919	7,579	(9)%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	1,297	1,470	(11.8)%	3,657	3,642	0.4%	RPMs (000,000) "traffic"	1,247	1,297	(4)%	3,241	3,657	(11)%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	1,567	1,889	(17.0)%	4,522	5,235	(13.6)%	ASMs (000,000) "capacity"	1,459	1,567	(7)%	3,862	4,522	(15)%
Load factor	Load factor	82.8%	77.8%	5.0 pts	80.9%	69.6%	11.3 pts	Load factor	85.5%	82.8%	2.7 pts	83.9%	80.9%	3.0 pts
Yield	Yield	30.69¢	23.72¢	29.4%	28.88¢	21.47¢	34.5%	Yield	31.57¢	30.69¢	3%	32.61¢	28.88¢	13%
RASM	RASM	26.23¢	19.26¢	36.2%	24.26¢	15.80¢	53.5%	RASM	27.85¢	26.23¢	6%	28.30¢	24.26¢	17%
Departures (000)								Departures (000)	39.5	45.2	(13)%	109.5	126.6	(14)%
Operating fleet(d)	Operating fleet(d)	94	94	— a/c	94	94	— a/c	Operating fleet(d)	83	94	(11) a/c	83	94	(11) 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)~~Reflects~~Excludes all aircraft inremoved from operating ~~service at September 30, 2022.~~

service.

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 2022 to 2019.

FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited)
Alaska Air Group, Inc.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2019 Change 2022 2019 Change
Passenger revenue $ 2,615 $ 2,211 18% $ 6,544 $ 6,038 8%
Mileage plan other revenue 146 118 24% 433 346 25%
Cargo and other 67 60 12% 190 169 12%
Total operating revenue $ 2,828 $ 2,389 18% $ 7,167 $ 6,553 9%
Operating expense, excluding fuel and special items $ 1,644 $ 1,476 11% $ 4,654 $ 4,295 8%
Aircraft fuel, including hedging gains and losses 877 486 80% 2,000 1,408 42%
Special items 245 5 NM 466 39 NM
Total operating expenses $ 2,766 $ 1,967 41% $ 7,120 $ 5,742 24%
Total non-operating income (expense) 3 (6) (150)% (3) (38) (92)%
Income before income tax $ 65 $ 416 (84)% $ 44 $ 773 (94)%
Consolidated Operating Statistics:
Revenue passengers (000) 11,437 12,574 (9)% 31,137 35,018 (11)%
RPMs (000,000) "traffic" 14,143 15,026 (6)% 38,475 42,113 (9)%
ASMs (000,000) "capacity" 16,349 17,519 (7)% 45,743 50,006 (9)%
Load Factor 86.5% 85.8% 0.7 pts 84.1% 84.2% (0.1) pts
Yield 18.48¢ 14.71¢ 26% 17.01¢ 14.34¢ 19%
RASM 17.30¢ 13.64¢ 27% 15.67¢ 13.10¢ 20%
CASMex 10.05¢ 8.43¢ 19% 10.17¢ 8.59¢ 18%
FTEs 22,878 22,247 3% 22,354 22,000 2%

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 TO THREE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022

Our consolidated net income for the three months ended September 30, ~~2022~~2023 was ~~$40~~$139 million, or ~~$0.31~~$1.08 per share, compared to a consolidated net income of ~~$194~~$40 million, or ~~$1.53~~$0.31 per share, for the three months ended September 30, ~~2021.~~2022.

Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of ~~2022~~2023 was ~~$325~~$237 million, or ~~$2.53~~$1.83 per share, compared to an adjusted net income of ~~$187~~$325 million, or ~~$1.47~~$2.53 per share, infor the third quarter of ~~2021.~~2022. The following table reconciles our adjusted net income per share (EPS) to amounts as reported in accordance with GAAP:


		Three Months Ended September 30,									Three Months Ended September 30,
		2022				2021					2023				2022
(in millions, except per share amounts)	(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS		(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income per share	GAAP net income per share	$	40	$	0.31	$	194	$	1.53	GAAP net income per share	$	139	$	1.08	$	40	$	0.31

Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	131		1.02		—		—		Mark-to-market fuel hedge adjustments	(35)		(0.27)		131		1.02
Special items - fleet transition		155		1.21		(9)		(0.07)

Special items - labor ratification bonus		90		0.70		—		—
Special items - fleet transition and other										Special items - fleet transition and other	156		1.20		155		1.21
Special items - labor and related										Special items - labor and related	—		—		90		0.70
Special items - net non-operating										Special items - net non-operating	8		0.06		—		—
Income tax effect of reconciling items above	Income tax effect of reconciling items above	(91)		(0.71)		2		0.01		Income tax effect of reconciling items above	(31)		(0.24)		(91)		(0.71)
Non-GAAP adjusted net income per share	Non-GAAP adjusted net income per share	$	325	$	2.53	$	187	$	1.47	Non-GAAP adjusted net income per share	$	237	$	1.83	$	325	$	2.53

CASM excluding fuel and special items reconciliation is summarized below:


		Three Months Ended September 30,							Three Months Ended September 30,
(in cents)	(in cents)	2022		2021		% Change		(in cents)	2023		2022		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	16.91	¢	11.75	¢	44	%	CASM	14.14	¢	16.91	¢	(16)	%
Less the following components:	Less the following components:							Less the following components:

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	5.36		2.60		106	%	Aircraft fuel, including hedging gains and losses	3.73		5.36		(30)	%
Special items - fleet transition		0.95		(0.06)		NM
Special items - labor ratification bonus		0.55		—		NM
Special items - fleet transition and other								Special items - fleet transition and other	0.84		0.95		(12)	%
Special items - labor and related								Special items - labor and related	—		0.55		(100)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	10.05	¢	9.21	¢	9	%	CASM excluding fuel and special items	9.57	¢	10.05	¢	(5)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	16.20	¢	10.77	¢	50	%	CASM	13.01	¢	16.20	¢	(20)	%
Less the following components:	Less the following components:							Less the following components:

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	5.52		2.39		131	%	Aircraft fuel, including hedging gains and losses	3.42		5.52		(38)	%

Special items - fleet transition		0.92		(0.07)		NM
Special items - labor ratification bonus		0.61		—		NM
Special items - fleet transition and other								Special items - fleet transition and other	0.92		0.92		—	%
Special items - labor and related								Special items - labor and related	—		0.61		(100)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	9.15	¢	8.45	¢	8	%	CASM excluding fuel and special items	8.67	¢	9.15	¢	(5)	%

OPERATING REVENUE

Total operating revenue ~~increased $875 million, or 45%, during~~was approximately flat in the third quarter of ~~2022~~2023 compared to the same period in ~~2021.~~2022. The changes are summarized in the following table:


		Three Months Ended September 30,							Three Months Ended September 30,
(in millions)	(in millions)	2022		2021		% Change		(in millions)	2023		2022		% Change
Passenger revenue	Passenger revenue	$	2,615	$	1,774	47	%	Passenger revenue	$	2,618	$	2,615	—	%
Mileage Plan other revenue	Mileage Plan other revenue	146		120		22	%	Mileage Plan other revenue	159		146		9	%
Cargo and other		67		59		14	%
Total operating revenue		$	2,828	$	1,953	45	%
Cargo and other revenue								Cargo and other revenue	62		67		(7)	%
Total Operating Revenue								Total Operating Revenue	$	2,839	$	2,828	—	%

Passenger revenue

On a consolidated basis, Passenger revenue for the third quarter of ~~2022 increased by $841 million, or 47%, driven by a 22% increase~~2023 was approximately flat compared to the same period in 2022. While passenger traffic ~~and~~rose 11% due to increased departures flown by larger aircraft in our Mainline fleet, softening of the demand environment led to a ~~21% improvement~~10% decrease in ~~ticket yields. Increased demand~~yield following record highs in the prior year. Additionally, cancellations for ~~air~~ travel ~~and constrained capacity industry wide enabled higher load factors~~to Maui following wildfires in August resulted in approximately $20 million in decreased passenger revenue for the third quarter of 2022. Higher revenue on improved Mileage Plan award redemptions and from our alliance partners following the relaxing of international travel restrictions also contributed meaningfully to revenue growth compared to ~~2021.~~the prior year.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue for the third quarter of ~~2022~~2023 increased by ~~$26~~$13 million, or ~~22%~~9%. The ~~change is largely due to an~~ increase inwas driven by higher commissions from our bank card partners ~~driven by increased consumer spending and improved economics from our new co-branded credit card agreement.~~

~~Cargo and other~~

On a consolidated basis, Cargo and other revenue for the third quarter of 2022 increased by $8 million, or 14%. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed due to ~~greater use of belly capacity, which grew on an increase in scheduled departures.~~increased spend levels and annual membership fees.

OPERATING EXPENSES

Total operating expenses ~~increased $1.1 billion,~~decreased $138 million, or ~~63%~~5%, compared to the third quarter of ~~2021.~~2022. 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)	2022		2021		% Change		(in millions)	2023		2022		% Change
Fuel expense	Fuel expense	$	877	$	376	133	%	Fuel expense	$	694	$	877	(21)	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	1,644		1,328		24	%	Non-fuel operating expenses, excluding special items	1,778		1,644		8	%

Special items - fleet transition		155		(9)		NM
Special items - labor ratification bonus		90		—		NM
Special items - fleet transition and other								Special items - fleet transition and other	156		155		1	%
Special items - labor and related								Special items - labor and related	—		90		(100)	%

Total operating expenses		$	2,766	$	1,695	63	%
Total Operating Expenses								Total Operating Expenses	$	2,628	$	2,766	(5)	%

Fuel expense

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

Aircraft fuel expense ~~increased $501~~decreased $183 million, or ~~133%~~21%, compared to the third quarter of ~~2021.~~2022. The elements of the change are illustrated in the following table:


		Three Months Ended September 30,									Three Months Ended September 30,
		2022				2021					2023				2022
(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	$	775	$	3.80	$	397	$	2.16	Raw or "into-plane" fuel cost	$	711	$	3.18	$	775	$	3.80
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	(29)		(0.14)		(21)		(0.11)		(Gain)/loss on settled hedges	18		0.08		(29)		(0.14)
Consolidated economic fuel expense	Consolidated economic fuel expense	$	746	$	3.66	$	376	$	2.05	Consolidated economic fuel expense	$	729	$	3.26	$	746	$	3.66
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	131		0.64		—		—		Mark-to-market fuel hedge adjustments	(35)		(0.16)		131		0.64
GAAP fuel expense	GAAP fuel expense	$	877	$	4.30	$	376	$	2.05	GAAP fuel expense	$	694	$	3.10	$	877	$	4.30
Fuel gallons	Fuel gallons			204				183		Fuel gallons			224				204

Raw fuel expense ~~increased 95%~~ decreased 8% in the third quarter of ~~2022~~2023 compared to the third quarter of ~~2021,~~2022, due to ~~significantly higher~~lower per gallon costs, ~~and~~partially offset by increased fuel consumption. Raw fuel expense per gallon ~~increased~~decreased by ~~approximately 76%~~16% due to ~~higher West Coast~~lower all-in jet fuel prices. ~~West Coast jet~~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. Crude oil prices~~fuel, both of which have ~~risen 30% while refining margins have more than tripled~~decreased in the third quarter of 2023 compared to ~~2021.~~the prior year. Fuel gallons consumed increased ~~11%~~10%, ~~consistent with rising~~driven by increased capacity.

We also evaluate economic fuel expense,, which we define as raw fuel expense adjusted for the cash we receive from 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. 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 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~~Losses recognized for hedges that settled during the third quarter were ~~$29~~$18 million in ~~2022,~~2023, compared to gains of ~~$21~~$29 million in the same period in ~~2021.~~2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at ~~settlement, offset by cash paid in prior periods for premium expense.~~settlement.

Non-fuel expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel ~~the Payroll Support Program grant wage offset,~~ and other special items. Significant operating expense variances from ~~2021~~2022 are more fully described below.


		Three Months Ended September 30,							Three Months Ended September 30,
(in millions)	(in millions)	2022		2021		% Change		(in millions)	2023		2022		% Change
Wages and benefits	Wages and benefits	$	686	$	578	19	%	Wages and benefits	$	782	$	686	14	%
Variable incentive pay	Variable incentive pay	48		42		14	%	Variable incentive pay	45		48		(6)	%
Aircraft maintenance	Aircraft maintenance	92		89		3	%	Aircraft maintenance	118		92		28	%
Aircraft rent	Aircraft rent	76		64		19	%	Aircraft rent	48		76		(37)	%
Landing fees and other rentals	Landing fees and other rentals	161		141		14	%	Landing fees and other rentals	183		161		14	%
Contracted services	Contracted services	83		62		34	%	Contracted services	100		83		20	%
Selling expenses	Selling expenses	82		49		67	%	Selling expenses	84		82		2	%
Depreciation and amortization	Depreciation and amortization	104		99		5	%	Depreciation and amortization	113		104		9	%
Food and beverage service	Food and beverage service	52		39		33	%	Food and beverage service	62		52		19	%
Third-party regional carrier expense	Third-party regional carrier expense	53		39		36	%	Third-party regional carrier expense	58		53		9	%
Other	Other	207		126		64	%	Other	185		207		(11)	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	1,644	$	1,328	24	%	Total non-fuel operating expenses, excluding special items	$	1,778	$	1,644	8	%

Wages and benefits

Wages and benefits increased by ~~$108~~$96 million, or ~~19%~~14%, in the third quarter of ~~2022.~~2023. 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)	2022		2021		% Change		(in millions)	2023		2022		% Change
Wages	Wages	$	514	$	433	19	%	Wages	$	602	$	514	17	%
Pension - Defined benefit plans service cost		11		13		(15)	%
Pension - Defined benefit plans								Pension - Defined benefit plans	7		11		(36)	%
Defined contribution plans	Defined contribution plans	39		33		18	%	Defined contribution plans	51		39		31	%
Medical and other benefits	Medical and other benefits	85		68		25	%	Medical and other benefits	85		85		—	%
Payroll taxes	Payroll taxes	37		31		19	%	Payroll taxes	37		37		—	%
Total wages and benefits		$	686	$	578	19	%
Total Wages and benefits								Total Wages and benefits	$	782	$	686	14	%

Wages increased ~~$81~~$88 million, or ~~19%~~17%, ~~primarily driven by 13%~~on 4% growth in ~~FTEs as Alaska~~FTEs. When combined with FTE increases, higher wage rates stemming from market adjustments and ~~Horizon hire to support~~annual step increases were the ~~ramp up in operations. The ratification of three new collective bargaining agreements during the third quarter resulted in significant wage increases~~primary driver for ~~the represented groups. As a result of the new agreements, the Company recorded $35 million in~~ incremental ~~wage~~year-over-year expense ~~during the quarter, $16 million of which relates to a one-time adjustment of accrued benefits~~ for ~~new wage rates.~~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.~~Aircraft maintenance

~~Variable incentive pay~~

~~Variable incentive pay~~Aircraft maintenance expense increased by $6$26 million, or ~~14%~~28%, in the third quarter of ~~2022.~~2023. The increase ~~is due to~~was primarily driven by the ~~expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.~~new B737-900ER power-by-the-hour contract in 2023, as well as increased aircraft utilization.

Aircraft rent

Aircraft rent expense ~~increased~~decreased by ~~$12~~$28 million, or ~~19%~~37%, in the third quarter of ~~2022. Increased expense is due~~2023. The decrease was primarily driven by the retirement of 23 leased A320 aircraft. The A321neo fleet retirement also contributed to the decrease, as seven aircraft were reclassified from operating leases to finance leases and three aircraft were purchased during 2023. These decreases were partially offset by delivery of ~~eight~~four leased ~~Boeing 737-9~~B737-9 aircraft ~~and ten leased Embraer E175 aircraft operated by SkyWest~~ since ~~September 30, 2021.~~the third quarter of 2022.

Landing fees and other rentals

Landing fees and other rentals increased by ~~$20~~$22 million, or 14%, in the third quarter of ~~2022.~~2023. The increase ~~compared to the same period in 2021 is~~was driven primarily by higher terminal rent costs resulting from both rate and volume increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due to a shift in ~~departures as well as rate increases for terminal rents. Rates for both fixed airport rent~~the mix of flying from Regional to Mainline and ~~landing fees rose significantly at Seattle-Tacoma International Airport, the Company's largest hub, which accounted for 75% of the increase compared to prior year.~~upgauging our fleet.

Contracted services

Contracted services increased by ~~$21~~$17 million, or ~~34%~~20%, in the third quarter of ~~2022,~~2023. The increase was driven primarily by ~~increased departures and passengers, coupled with~~ higher rates charged by ~~vendor partners.~~

~~Selling expenses~~

~~Selling expenses increased by $33 million, or 67%, in the third quarter of 2022, driven primarily by~~vendors for services as well as an increase in ~~distribution costs and credit card commissions incurred with the overall revenue recovery.~~passengers.

Food and beverage service

Food and beverage service increased by ~~$13~~$10 million, or ~~33%~~19%, in the third quarter of ~~2022, consistent with~~2023. The increase was driven by a ~~16% increase~~combination of 7% growth in revenue ~~passengers. Additional on-board offerings coupled with increased charges~~passengers and higher costs for ~~transportation and~~food, food service supplies, ~~also contributed to the overall increase.~~

~~Third-party regional carrier expense~~

Third-party regional carrier expense, which represents expenses associated with SkyWest under our CPA, increased by $14 million, or 36%, in the third quarter of 2022. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period.and transportation.

Other expense

Other expense ~~increased $81~~decreased by $22 million, or ~~64%~~11%, in the third quarter of ~~2022. Increased expense as compared to the prior year period is partially due to~~2023. The decrease was primarily driven by one-time employee recognition costs of $28 million ~~incurred for employee recognition related~~recorded in the third quarter of 2022, partially offset by increases to ~~the 90,000 mile gift granted to all employees. Other items that increased within Other expense include training events and related travel~~miscellaneous variable costs ~~crew hotel stays, and crew per diem. Increases~~ in ~~crew-related costs are~~2023 consistent with ~~the rise in departures.~~increased capacity.

3029

Special items - fleet transition and other

We recorded expenses associated with the Company's fleet transition ~~and related charges~~ of ~~$155~~$156 million in the third quarter of ~~2022.~~2023. Refer to Note 2 to the consolidated financial statements for additional details.

~~Special items - labor ratification bonus~~

~~We recorded a nonrecurring expense of $90 million in the third quarter of 2022 representing a payment to Alaska pilots following the ratification of a new collective bargaining agreement.~~

ADDITIONAL SEGMENT INFORMATION

Refer to Note 910 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's ~~profitability.~~results.

Mainline

Mainline operations reported an adjusted pretax profit of ~~$446~~$326 million in the third quarter of ~~2022,~~2023, compared to ~~an adjusted pretax~~a profit of ~~$221~~$446 million in the ~~third quarter of 2021.~~same period in 2022. The ~~$225~~$120 million ~~improvement~~decrease was driven primarily ~~driven~~ by a ~~$792 million increase in Passenger revenue, offset by a $326 million increase in economic fuel cost and a $292~~$132 million increase in non-fuel operating ~~costs.~~

~~As compared~~expenses. 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~~non-fuel operating expenses increased ~~driven by~~primarily due to higher wage rates across various labor groups. Higher variable costs, largely consistent with the overall growth in capacity and ~~departures. Higher fuel prices, combined with more gallons consumed, drove~~departures, also contributed to the ~~increase in Mainline fuel expense.~~increase.

Regional

Regional operations reported an adjusted pretax ~~loss of $2 million in the third quarter of 2022, compared to an adjusted pretax loss~~profit of $1 million in the third quarter of ~~2021. While operating revenue increased $47~~2023, compared to a loss of $2 million in the same period in 2022. The $3 million improvement was driven by decreased fuel expense on less capacity and a lower price per gallon, partially offset by ~~a $44 million increase in fuel costs~~decreased revenue on less capacity and ~~a $4 million increase in non-fuel operating expenses.~~

Regional passenger revenue increased significantly compared to the third quarter of 2021, primarily driven by an improved load factor and a 29% improvement in yield. Higher fuel prices contributed to the increase in Regional fuel expense.higher wage rates.

Horizon

Horizon reported an adjusted pretax profit of $4 million in the third quarter of 2023, compared to a loss of $6 million in the ~~third quarter of 2022, compared to an adjusted pretax profit of $8~~same period in 2022. The $10 million ~~in the third quarter of 2021. The shift to adjusted pretax loss is~~improvement was driven by ~~lower~~updates to internal rates under Horizon's CPA ~~revenue on decreased departures.~~with Alaska and cost savings following Horizon’s transition to a single fleet. These improvements were partially offset by higher interest expense associated with debt financing of new E175 deliveries in 2023.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, ~~2022~~2023 TO NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022

Our consolidated net income for the nine months ended September 30, ~~2022~~2023 was ~~$36~~$237 million, or ~~$0.28~~$1.84 per share, compared to consolidated net income of ~~$460~~$36 million, or ~~$3.64~~$0.28 per share, for the nine months ended September 30, ~~2021.~~2022.

Our adjusted net income for the nine months ended September 30, ~~2022~~2023 was $545 million, or $4.22 per share, compared to adjusted net income of $438 million, or $3.42 per share, ~~compared to an adjusted net loss of $287 million, or $2.27 per share, in~~for the nine months ended September 30, ~~2021.~~2022. The following table reconciles our adjusted net income and adjusted EPS to amounts as reported in accordance with GAAP:
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)


	Nine Months Ended September 30,
	2023				2022
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income per share	$	237	$	1.84	$	36	$	0.28
Mark-to-market fuel hedge adjustments	(14)		(0.11)		64		0.50
Special items - fleet transition and other	355		2.75		376		2.94
Special items - labor and related	51		0.39		90		0.70
Special items - net non-operating	14		0.11		—		—
Income tax effect of reconciling items above	(98)		(0.76)		(128)		(1.00)
Non-GAAP adjusted net income per share	$	545	$	4.22	$	438	$	3.42

CASM excluding fuel and special items reconciliation is summarized below:


		Nine Months Ended September 30,							Nine Months Ended September 30,
(in cents)	(in cents)	2022		2021		% Change		(in cents)	2023		2022		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	15.56	¢	9.50	¢	64	%	CASM	14.60	¢	15.56	¢	(6)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset		—		(2.39)		NM

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	4.37		2.24		95	%	Aircraft fuel, including hedging gains and losses	3.76		4.37		(14)	%
Special items - fleet transition		0.82		0.01		NM
Special items - labor ratification bonus		0.20		—		NM
Special items - restructuring		—		(0.03)		NM
Special items - fleet transition and other								Special items - fleet transition and other	0.69		0.82		(16)	%
Special items - labor and related								Special items - labor and related	0.10		0.20		(50)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	10.17	¢	9.67	¢	5	%	CASM excluding fuel and special items	10.05	¢	10.17	¢	(1)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	14.59	¢	8.26	¢	77	%	CASM	13.47	¢	14.59	¢	(8)	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset		—		(2.61)		NM

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	4.44		1.99		123	%	Aircraft fuel, including hedging gains and losses	3.49		4.44		(21)	%
Special items - fleet transition		0.69		0.02		NM
Special items - labor ratification bonus		0.22		—		NM
Special items - restructuring		—		(0.04)		NM
Special items - fleet transition and other								Special items - fleet transition and other	0.75		0.69		9	%
Special items - labor and related								Special items - labor and related	0.11		0.22		(50)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	9.24	¢	8.90	¢	4	%	CASM excluding fuel and special items	9.12	¢	9.24	¢	(1)	%

OPERATING REVENUE

Total operating revenue increased ~~$2.9 billion,~~$706 million, or ~~68%~~10%, during the first nine months of ~~2022~~2023 compared to the same period in ~~2021.~~2022. The changes are summarized in the following table:


		Nine Months Ended September 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2022		2021		% Change		(in millions)	2023		2022		% Change
Passenger revenue	Passenger revenue	$	6,544	$	3,785	73	%	Passenger revenue	$	7,200	$	6,544	10	%
Mileage Plan other revenue	Mileage Plan other revenue	433		332		30	%	Mileage Plan other revenue	483		433		12	%
Cargo and other		190		160		19	%
Total operating revenue		$	7,167	$	4,277	68	%
Cargo and other revenue								Cargo and other revenue	190		190		—	%
Total Operating Revenue								Total Operating Revenue	$	7,873	$	7,167	10	%

Passenger revenue

On a consolidated basis, Passenger revenue for the first nine months of ~~2022~~2023 increased by ~~$2.8 billion,~~$656 million, or ~~73%~~10%, on a ~~41%~~12% increase in passenger traffic, partially offset by a 2% decrease in yield. The increase was primarily driven by increased departures flown by larger aircraft in our Mainline fleet. Redemptions by Mileage Plan members also provided a benefit over the prior year, with greater redemption on both Alaska 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 continued to drive revenue results to historic levels.partner airlines.

~~For the~~We expect to see fourth quarter ~~we anticipate~~ Passenger revenue ~~will continue to show meaningful improvements over~~consistent with the ~~comparable~~ prior year ~~period on increased capacity offered. Strong demand for~~due to increases in passenger ~~air travel has persisted through summer and into the fall, with yields and load factors expected to exceed prior year results.~~traffic being offset by decreased yields.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased ~~$101~~$50 million, or ~~30%~~12%, in the first nine months of ~~2022.~~2023. The ~~change is largely due to an~~ increase inwas driven by higher commissions from our bank card partners ~~driven by~~due to increased ~~consumer spending~~spend levels, annual membership fees, and ~~improved economics from our new co-branded~~ credit card ~~agreement.~~acquisitions.

We expect to see continued strength in Mileage Plan other revenue for the ~~fourth quarter~~remainder of ~~2022 compared to the prior year, driven~~2023, enabled by higher commissions ~~resulting~~ from ~~the improved economics of our new co-branded credit card agreement and~~ increased card spend.

~~Cargo and other~~

On a consolidated basis, Cargo and other revenue increased $30 million, or 19%, in the first nine months of 2022. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed due to greater use of belly capacity, which grew on an increase in scheduled departures.

~~We expect 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 business.~~

3331

OPERATING EXPENSES

Total operating expenses increased ~~$3.5 billion,~~$391 million, or ~~96%~~5%, compared to the first nine months of ~~2021.~~2022. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
Nine Months Ended September 30,
(in millions) 2022 2021 % Change
Fuel expense $ 2,000 $ 853 134 %
Non-fuel operating expenses, excluding special items 4,654 3,699 26 %
Payroll Support Program grant wage offset — (914) NM
Special items - fleet transition 376 5 NM
Special items - labor ratification bonus 90 — NM
Special items - restructuring — (12) NM
Total operating expenses $ 7,120 $ 3,631 96 %


	Nine Months Ended September 30,
(in millions)	2023		2022		% Change
Fuel expense	$	1,932	$	2,000	(3)	%
Non-fuel operating expenses, excluding special items	5,173		4,654		11	%

Special items - fleet transition and other	355		376		(6)	%
Special items - labor and related	51		90		(43)	%


Total Operating Expenses	$	7,511	$	7,120	5	%

Fuel expense

Aircraft fuel expense ~~increased $1.1 billion,~~decreased $68 million, or ~~134%~~3%, compared to the nine months ended September 30, ~~2021.~~2022. The elements of the change are illustrated in the table:


		Nine Months Ended September 30,									Nine Months Ended September 30,
		2022				2021					2023				2022
(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	$	2,103	$	3.67	$	949	$	1.99	Raw or "into-plane" fuel cost	$	1,899	$	3.06	$	2,103	$	3.67
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	(167)		(0.29)		(28)		(0.06)		(Gain)/loss on settled hedges	47		0.08		(167)		(0.29)
Consolidated economic fuel expense	Consolidated economic fuel expense	$	1,936	$	3.38	$	921	$	1.93	Consolidated economic fuel expense	$	1,946	$	3.14	$	1,936	$	3.38
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	64		0.11		(68)		(0.14)		Mark-to-market fuel hedge adjustments	(14)		(0.02)		64		0.11
GAAP fuel expense	GAAP fuel expense	$	2,000	$	3.49	$	853	$	1.79	GAAP fuel expense	$	1,932	$	3.12	$	2,000	$	3.49
Fuel gallons	Fuel gallons			573				477		Fuel gallons			620				573

Raw fuel expense ~~increased 122%~~ decreased 10% in the first nine months of ~~2022~~2023 compared to the first nine months of ~~2021,~~2022, due to ~~significantly higher~~lower per gallon costs, ~~and~~partially offset by increased fuel consumption. Raw fuel expense per gallon ~~increased~~decreased by approximately ~~84%~~17% due to ~~higher West Coast~~lower all-in jet fuel prices. ~~West Coast jet~~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. Crude oil prices~~fuel, both of which have ~~risen~~ ~~49%~~ ~~while refining margins have more than tripled~~decreased in the first nine months of 2023 compared to ~~2021.~~the prior year. Fuel gallons consumed increased ~~20%~~8%, ~~consistent with rising~~driven by increased capacity.

~~We also evaluate~~ ~~economic fuel expense, which we define as~~ ~~raw fuel expense~~ adjusted for the cash we receive from 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.~~ 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 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 ~~2022 were $167~~2023 of $47 million, compared to gains of ~~$28~~$167 million in the same period in ~~2021.~~2022. These amounts represent cash paid for premium expense, offset by any cash received from ~~settled~~those hedges ~~offset by cash paid in prior periods for premium expense.~~at settlement.

~~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 ~~$3.50~~$3.30 to ~~$3.70~~$3.40 per gallon. Based on 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 cost per barrel.

3432

Non-fuel 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 scheduled departures, and pay a larger employee base higher wage rates following the ratification of new labor agreements.


	Nine Months Ended September 30,
(in millions)	2023		2022		% Change
Wages and benefits	$	2,259	$	1,931	17	%
Variable incentive pay	149		140		6	%
Aircraft maintenance	367		331		11	%
Aircraft rent	161		222		(27)	%
Landing fees and other rentals	502		435		15	%
Contracted services	290		243		19	%
Selling expenses	231		218		6	%
Depreciation and amortization	330		310		6	%
Food and beverage service	176		143		23	%
Third-party regional carrier expense	164		145		13	%
Other	544		536		1	%
Total non-fuel operating expenses, excluding special items	$	5,173	$	4,654	11	%

Wages and benefits

Wages and benefits increased by ~~$350~~$328 million, or ~~22%~~17%, in the first nine months of ~~2022.~~2023. 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)	2022		2021		% Change		(in millions)	2023		2022		% Change
Wages	Wages	$	1,467	$	1,176	25	%	Wages	$	1,736	$	1,467	18	%
Pension - Defined benefit plans service cost		34		39		(13)	%
Pension - Defined benefit plans								Pension - Defined benefit plans	22		34		(35)	%
Defined contribution plans	Defined contribution plans	116		91		27	%	Defined contribution plans	151		116		30	%
Medical and other benefits	Medical and other benefits	207		192		8	%	Medical and other benefits	228		207		10	%
Payroll taxes	Payroll taxes	107		83		29	%	Payroll taxes	122		107		14	%
Total wages and benefits		$	1,931	$	1,581	22	%
Total Wages and benefits								Total Wages and benefits	$	2,259	$	1,931	17	%

Wages increased ~~$291~~$269 million, or ~~25%~~18%, on 5% growth in FTEs. When combined with FTE increases, higher wage rates stemming from market adjustments and annual step increases were the ~~first nine months of 2022, primarily~~primary driver for incremental year-over-year expense for wages and related taxes. Higher stock-based compensation also contributed to the increase in wages, driven by ~~19% growth in FTEs as Alaska and Horizon hire to support~~additional stock award grants within 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 result of the new agreements, the Company recorded $35 million in incremental wage expense during the quarter, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates.period.

~~Increased~~Incremental expense for defined contribution plans ~~and payroll taxes are consistent with~~was driven by the change in ~~wages.~~wages as well as higher matching contributions for several labor groups. Increased expense for medical and other benefits was primarily driven by an increase in claims compared to the prior year and incremental FTEs. Decreased defined benefit expense was driven by changes in actuarial assumptions.

~~Variable incentive pay~~

~~Variable incentive pay expense increased $31 million, or 27%, in~~We expect to see higher wages and benefits for the ~~first nine months~~remainder of ~~2022. The increase is~~2023 due to the ~~expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.~~

Inincrease in wage rates. Wages and benefits could also increase further in 2023 due to agreements we may reach 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.~~with represented labor groups.

Aircraft maintenance

Aircraft maintenance expense increased by ~~$59~~$36 million, or ~~22%~~11%, in the first nine months of ~~2022. Higher maintenance expense is~~2023. The increase was primarily driven by the ~~result~~new B737-900ER power-by-the-hour contract and increased aircraft utilization, partially offset by $35 million of ~~charges recorded for maintenance work to~~lease return ~~leased aircraft recorded~~costs in the first quarter of 2022 that did not recur in 2023 as all lease return costs associated with the Company's fleet transition have been recorded to Special items - fleet transition and ~~increased~~other since the announcement of our fleet transition plan in the second quarter of 2022.

We expect aircraft maintenance to increase for the remainder of 2023 as compared to 2022 due primarily to the B737-900ER power-by-the-hour ~~charges on covered~~contract, which will total approximately $100 million for the year. Higher aircraft ~~including a new contract for our regional fleet.~~utilization will also contribute to an increase in aircraft maintenance.

Aircraft rent

Aircraft rent expense ~~increased~~decreased by ~~$34~~$61 million, or ~~18%~~27%, in the first nine months of 2023. The decrease was driven by the retirement of 23 leased A320 aircraft. The A321neo fleet retirement also contributed to the decrease, as seven aircraft were reclassified from operating leases to finance leases and three aircraft were purchased during 2023. These decreases were partially offset by delivery of four leased B737-9 aircraft since the third quarter of 2022. ~~Increased expense is~~

We expect aircraft rent will remain below 2022 levels for the remainder of 2023, due to the ~~delivery of eight~~net reduction in overall leased ~~Boeing 737-9~~ aircraft ~~and ten leased Embraer E175 aircraft operated by SkyWest since September 30, 2021.~~described above.

Landing fees and other rentals

Landing fees and other rentals increased by $67 million, or 15%, in the first nine months of ~~2022 were generally flat~~2023. The increase was driven primarily by higher terminal rent costs resulting from both rate and volume increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due a shift in the mix of flying from Regional to Mainline and upgauging our fleet.

We expect landing fees and other rentals to increase for the remainder of 2023 as compared to ~~the same period in 2021. Increases in departures across the system were offset by favorable resolution for certain pandemic period airport accruals.~~2022 due to increased capacity and higher rates at airports.

Contracted services

Contracted services increased by ~~$76~~$47 million, or ~~46%~~19%, in the first nine months of ~~2022,~~2023. The increase was primarily driven ~~primarily~~ by ~~increased departures and passengers in line with increased demand, coupled with increased~~higher rates charged by ~~vendor partners.~~vendors for services as well as an increase in passengers.

~~Selling expenses~~

~~Selling expenses increased by $95 million, or 77%, in~~We expect contracted services to increase for the ~~first nine months~~remainder of 2023 as compared to 2022 ~~primarily driven by an increase in distribution costs and credit card commissions incurred with~~due to the ~~overall revenue recovery.~~reasons described above.

Food and beverage service

Food and beverage service increased by ~~$46~~$33 million, or ~~46%~~23%, in the first nine months of ~~2022. Incremental~~2023. The increase was driven by a combination of 8% growth in revenue passengers and higher costs for food, food service supplies, and transportation.

We expect the factors described above will continue to have a similar impact on food and beverage ~~charges are in line with~~service for the ~~34% increase in revenue passengers as well as additional offerings~~remainder of ~~on-board products~~2023 as compared to ~~the prior-year period.~~2022.

Third-party regional carrier expense

Third-party regional carrier expense, which represents payments made to SkyWest under ~~our~~the CPA with Alaska, increased ~~$39~~$19 million, or ~~37%~~13%, in the first nine months of ~~2022.~~2023. The increase in third-party regional carrier expense is driven by incremental SkyWest-operated departures. SkyWest departures have risen due to ~~incremental departures flown by SkyWest with~~the annualization of ten ~~additional~~E175 aircraft in operating ~~service as compared~~under the CPA which were delivered during the first half of 2022. Higher wage rates for flight crews have also contributed to the ~~prior-year period.~~increase.

We expect third-party regional carrier expense will continue to ~~grow in~~be higher for the ~~fourth quarter~~remainder of ~~2022~~2023 as compared to ~~the prior year~~2022 due to incremental departures and block hours, as ~~we continue operating the ten additional Embraer E175 aircraft under the CPA with SkyWest.~~well as higher wage rates for flight crews.

Other expense

Other expense increased ~~$188~~$8 million, or ~~54%~~1%, in the first nine months of ~~2022. The most significant drivers~~2023. Costs increased as a result of ~~the increased cost~~crew-related expenses due to contract improvements for Alaska pilots, coupled with additional professional services and software expenses. These increases were ~~training events and related travel~~partially offset by one-time employee recognition 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~~of $28 million ~~incurred for employee recognition related to~~recorded in the ~~90,000 mile gift granted to all employees.~~third quarter of 2022.

We expect other expense will continue to be higher for the remainder of 2023 as compared to 2022 due to overall growth throughout our network.

Special items - fleet transition

We recorded expenses associated with the Company's fleet transition ~~and related charges~~ of ~~$376~~$355 million in the first nine months of 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 returns.2023. Refer to Note 2 to the consolidated financial statements for additional details.

Special items - labor ~~ratification bonus~~and other

We recorded a nonrecurring expense of ~~$90~~$51 million in the ~~third~~first quarter of ~~2022 representing~~2023 due to a ~~payment to~~Letter of Agreement with Alaska pilots, ~~following the ratification~~represented by ALPA. The charge is a one-time adjustment of ~~a new collective bargaining agreement.~~accrued benefits related to expected future cash payments of pilots' unused sick leave upon retirement.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 910 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's ~~profitability.~~results.

Mainline

Mainline operations reported an adjusted pretax profit of ~~$647~~$757 million in the first nine months of ~~2022,~~2023, compared to ~~an adjusted pretax loss~~a profit of ~~$247~~$647 million in the same period in ~~2021.~~2022. The ~~$894~~$110 million improvement was driven by a ~~$2.6 billion~~$708 million increase in ~~Mainline~~ operating revenue, partially offset by a ~~$897~~$534 million increase in ~~Mainline fuel~~non-fuel operating expense and a ~~$871~~$49 million increase in ~~Mainline non-fuel operating~~fuel expense.

As compared to the prior year, higher ~~Mainline~~ revenue ~~are~~is primarily attributable to a ~~47%~~15% increase in traffic ~~and a 24% increase in yield,~~ driven by the ~~significant~~ increase in ~~demand.~~capacity. Non-fuel operating expenses increased, driven by higher wage rates and higher variable costs, largely consistent with the overall growth in capacity and departures. ~~Higher fuel prices, combined with additional~~Additional gallons consumed and prior year gains from settled hedges drove the increase in ~~Mainline~~ fuel expense.

Regional

Regional operations reported an adjusted pretax loss of ~~$59~~$13 million in the first nine months of ~~2022,~~2023, compared to ~~an adjusted pretax~~a loss of ~~$207~~$59 million in the ~~first nine months of 2021. Improved results were attributable~~same period in 2022. The $46 million improvement was primarily driven by decreased fuel expense due to a ~~$270 million increase in operating revenue which was the result of higher demand~~lower price per gallon and ~~yields, partially offset by a $118 million increase in fuel costs on higher fuel prices.~~fewer gallons consumed.

Horizon

Horizon reported an adjusted pretax loss of ~~$18~~$15 million in the first nine months of ~~2022,~~2023, compared to ~~an adjusted pretax profit~~a loss of ~~$34~~$18 million in the same period in ~~2021.~~2022. The ~~shift to adjusted pretax loss is~~$3 million improvement was driven by decreased operating expenses consistent with less flying and other cost savings following Horizon’s transition to a single fleet, as well as updates to internal rates under Horizon’s CPA with Alaska. These improvements were partially offset by lower overall CPA revenue ~~on decreased departures, combined~~consistent with less flying, as well as higher ~~wage and benefit costs on incremental FTEs and increased wage rates resulting from the~~interest expense associated with debt financing of new ~~collective bargaining agreement with Horizon pilots.~~E175 deliveries in 2023.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

•Existing cash and marketable securities ~~balance~~ of ~~$3.2 billion, and cash flows from operations;~~$2.5 billion;

•67Cash flows from operations of $1.1 billion;

•62 unencumbered aircraft that could be financed, if necessary;

•Combined bank line-of-credit facilities, with no outstanding borrowings, of ~~$400~~$550 million.

During the ~~nine~~three months ended September 30, ~~2022,~~2023, we took free and clear delivery of 18five owned Boeing 737-9 aircraft. We ~~also~~incurred new of debt of $361 million and made debt payments totaling ~~$333 million, ending~~$93 million. We ended the quarter with a debt-to-capitalization ratio of ~~49%~~48%, within our target range of 40% to 50%. We continued share repurchases, spending $13 million in the third quarter, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.

~~As our business returns to sustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and maintaining a strong balance sheet remain high 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, 2022			December 31, 2021			Change	(in millions)	September 30, 2023			December 31, 2022			Change
Cash and marketable securities	Cash and marketable securities	$	3,150		$	3,116		1 %	Cash and marketable securities	$	2,451		$	2,417		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	39		%	57		%	(18) pts	Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	29		%	29		%	—
Long-term debt, net of current portion	Long-term debt, net of current portion	1,889			2,173			(13)%	Long-term debt, net of current portion	2,128			1,883			13%
Shareholders’ equity	Shareholders’ equity	$	3,826		$	3,801		1%	Shareholders’ equity	$	4,093		$	3,816		7%


Debt-to-capitalization, adjusted for operating leases
Debt-to-capitalization, including operating and finance leases									Debt-to-capitalization, including operating and finance leases
(in millions)	(in millions)	September 30, 2022			December 31, 2021			Change	(in millions)	September 30, 2023			December 31, 2022			Change
Long-term debt, net of current portion	Long-term debt, net of current portion	$	1,889		$	2,173		(13)%	Long-term debt, net of current portion	$	2,128		$	1,883		13%
Capitalized operating leases	Capitalized operating leases	1,745			1,547			13%	Capitalized operating leases	1,263			1,621			(22)%

Capitalized finance leases(a)									Capitalized finance leases(a)	452			—			NM
Adjusted debt, net of current portion of long-term debt	Adjusted debt, net of current portion of long-term debt	$	3,634		$	3,720		(2)%	Adjusted debt, net of current portion of long-term debt	$	3,843		$	3,504		10%
Shareholders' equity	Shareholders' equity	3,826			3,801			1%	Shareholders' equity	4,093			3,816			7%
Total invested capital	Total invested capital	$	7,460		$	7,521		(1)%	Total invested capital	$	7,936		$	7,320		8%

Debt-to-capitalization, including operating leases		49		%	49		%	— pt
Debt-to-capitalization, including operating and finance leases									Debt-to-capitalization, including operating and finance leases	48		%	48		%	—

Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions) September 30, 2022 December 31, 2021
Current portion of long-term debt $ 321 $ 366
Current portion of operating lease liabilities 263 268
Long-term debt 1,889 2,173
Long-term operating lease liabilities, net of current portion 1,482 1,279
Total adjusted debt 3,955 4,086
Less: Cash and marketable securities (3,150) (3,116)
Adjusted net debt $ 805 $ 970
(in millions) Twelve Months Ended September 30, 2022 Twelve Months Ended December 31, 2021
GAAP Operating Income(a)
$ 86 $ 685
Adjusted for:
Payroll Support Program grant wage offset and special items 462 (925)
Mark-to-market fuel hedge adjustments 85 (47)
Depreciation and amortization 410 394
Aircraft rent 288 254
EBITDAR $ 1,331 $ 361
Adjusted net debt to EBITDAR 0.6x 2.7x
(a)To best reflect our leverage at September 30, 2023, we included our capitalized finance lease balances, which are recognized within the Current portion of long-term debt and finance leases line in the condensed consolidated balance sheets.


Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items, and rent
(in millions)	September 30, 2023		December 31, 2022
Current portion of long-term debt and finance leases	$	736	$	276
Current portion of operating lease liabilities	150		228
Long-term debt	2,128		1,883
Long-term operating lease liabilities, net of current portion	1,113		1,393
Total adjusted debt	4,127		3,780
Less: Cash and marketable securities	2,451		2,417
Adjusted net debt	$	1,676	$	1,363

(in millions)	Twelve Months Ended September 30, 2023		Twelve Months Ended December 31, 2022
GAAP Operating Income(a)	$	385	$	70
Adjusted for:
Special items	520		580
Mark-to-market fuel hedge adjustments	(2)		76
Depreciation and amortization	435		415
Aircraft rent	230		291
EBITDAR	$	1,568	$	1,432
Adjusted net debt to EBITDAR	1.1x		1.0x

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

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

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first nine months of ~~2022,~~2023, net cash provided by operating activities was ~~$1.4~~$1.1 billion, compared to ~~$901 million during~~$1.4 billion in 2022. Cash provided by ticket sales and from our co-branded credit card agreement are the ~~same period in 2021.~~ primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.

The ~~$508~~$306 million net ~~increase~~decrease in our operating cash flows iswas due to a combination of factors. ~~Increased remuneration from our co-brand credit card provided nearly $300 million in incremental~~2022 operating cash ~~as compared to 2021 on improved economics and increased volumes. Additionally, in 2022 we received $260 million in~~flows included federal income tax refunds ~~and the change~~of $260 million. Additionally, growth in our air traffic liability ~~increased by $152~~decreased $125 million ~~due to strong passenger demand. The prior year also included a nonrecurring voluntary contribution of $100~~and payments made in 2023 for our 2022 performance-based pay program were approximately $110 million ~~to Alaska pilots' defined benefit plan.~~higher than payments in 2022 for our 2021 program. These amounts were partially offset by ~~uses of cash on increasing operating expenses as~~an improved net income compared to the ~~business returned flying capacity.~~prior year.

Cash Used in Investing Activities

Cash used in investing activities was ~~$888~~$810 million during the first nine months of ~~2022,~~2023, compared to ~~$943 million during the same period of 2021. Cash used in capital expenditures for aircraft purchase deposits and other property and equipment was $947~~$888 million in ~~the first nine months~~2022. The change was due to a combination of ~~2022, compared to $190 million in the first nine months of 2021. This increase in cash used in capital expenditures~~factors. Marketable securities activity was ~~offset by purchases and sales of marketable securities, which were $61~~$287 million of net sales during the first nine months of ~~2022,~~2023, compared to ~~$744~~$61 million ~~of net purchases~~in 2022. This amount was partially offset by an increase in capital expenditures, which were $44 million higher compared to 2022. Cash used in investing during the first nine months of ~~2021.~~2023 was also impacted by the purchase of three previously leased A321neo aircraft, included in Other investing activities, which are expected to be sold to American Airlines in the fourth quarter of 2023 and first quarter of 2024.

Cash Provided by (Used in) Financing Activities

Cash ~~Used in Financing Activities~~

~~Cash used in~~provided by financing activities was ~~$296~~$12 million during the first nine months of ~~2022,~~2023, compared to ~~$825~~cash used in financing activities of $296 million ~~during the same period~~ in ~~2021. During the first nine months of 2022, we had no~~2022. The change was largely driven by $313 million in new debt proceeds ~~from issuance of debt~~ and ~~utilized cash on hand to repay $333~~$91 million ofless in payments for outstanding long-term debt compared to ~~debt proceeds~~2022. These amounts were partially offset by common stock repurchases of ~~$363~~$70 million in 2023 and ~~payments~~a decrease of ~~$1.2 billion during the same period in 2021.~~

cash flows from other financing activities of $26 million.

MATERIAL CASH COMMITMENTS

Material cash requirements include the following contractual and other obligations:

Aircraft Commitments

As of September 30, ~~2022,~~2023, Alaska has firm orders to purchase 56 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease five Boeing 737-9 aircraft with deliveries in 2022 and 2023. Alaska has options to acquire up to 11 additional Boeing 737-9 aircraft and 41 additional Boeing 737-1089 B737 aircraft with deliveries between ~~2024~~2023 and ~~2026. Subsequent~~2027 and a firm commitment to ~~quarter end,~~lease one B737-9 aircraft with delivery in 2023. Alaska ~~executed an agreement with Boeing to exercise options to purchase 52 737 aircraft for delivery between 2024 and 2027. The agreement also secures~~has rights for 105 additional ~~737~~B737-10 aircraft ~~through~~between 2026 and 2030. Alaska also has commitments to lease two B737-800 freighters with deliveries in 2023 and 2024.

~~Alaska~~Boeing has ~~received information from Boeing indicating~~communicated to Alaska that certain ~~737~~B737 deliveries contracted in ~~2022 and~~ 2023 are expected to be delayed ~~to 2023 and~~into 2024. The anticipated fleet delivery schedule outlined below reflects the expected impact of these delays. Alaska ~~will continue~~continues to work with Boeing onto structure delivery timelines in a manner that ~~reflect~~supports Alaska's ~~plans for growth.~~capacity growth plans.

As of September 30, 2023, Horizon has commitments to purchase ~~20 Embraer~~nine E175 aircraft with deliveries between ~~2022~~2024 and 2026. Horizon has options to acquire 13 ~~Embraer~~ E175 aircraft between 2025 and 2026. The E175 deliveries expected through the end of 2024 ~~and 2025.~~ are covered under a financing agreement executed in the second quarter of 2023. Capital expenditures for these deliveries, which are included within aircraft-related commitments in the contractual obligations table below, will be reflected as a non-cash transaction in the condensed consolidated statements of cash flows. Subsequent to quarter end, two of Horizon's 13 E175 options expired.

Options will be exercised only if we believe return on invested capital targets can be met over the long term.

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 expected fleet count by year, as of November 3, 2022:
Actual Fleet
Anticipated Fleet Activity(a)
Aircraft September 30, 2022 2022 Additions 2022 Removals Dec 31, 2022 2023 Changes Dec 31, 2023 2024 Changes Dec 31, 2024
B737-700 Freighters 3 — — 3 — 3 — 3
B737-800 Freighters — — — — 2 2 — 2
B737-700 11 — — 11 — 11 — 11
B737-800 61 — — 61 (2) 59 — 59
B737-900 12 — — 12 — 12 — 12
B737-900ER 79 — — 79 — 79 — 79
B737-8 — — — — 5 5 5 10
B737-9 33 5 — 38 35 73 10 83
B737-10 — — — — — — 6 6
A320 23 — (10) 13 (13) — — —
A321neo 10 — — 10 (10) — — —
Total Mainline Fleet 232 5 (10) 227 17 244 21 265
Q400 operated by Horizon 22 — (11) 11 (11) — — —
E175 operated by Horizon 30 3 — 33 8 41 3 44
E175 operated by third party 42 — — 42 — 42 — 42
Total Regional Fleet(b)
94 3 (11) 86 (3) 83 3 86
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)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party.~~

We intend to finance future aircraft deliveries and option exercises using cash flow from operations or long-term debt.

To best reflect our expectations of future fleet activity, we have incorporated anticipated delivery delays and other modifications of our order book as agreed to in principle with Boeing into the following table, which summarizes our expected fleet count by year, as of November 2, 2023:


	Actual Fleet	Anticipated Fleet Activity
Aircraft	September 30, 2023	2023 Changes	Dec 31, 2023	2024 Changes	Dec 31, 2024	2025 Changes	Dec 31, 2025
B737-700 Freighters	3	—	3	—	3	—	3
B737-800 Freighters	—	1	1	1	2	—	2
B737-700	11	—	11	—	11	—	11
B737-800	59	—	59	—	59	—	59
B737-900	12	—	12	—	12	—	12
B737-900ER	79	—	79	—	79	—	79
B737-8	—	1	1	7	8	12	20
B737-9	56	8	64	17	81	—	81
B737-10	—	—	—	—	—	11	11


Total Mainline Fleet	220	10	230	25	255	23	278

E175 operated by Horizon	41	—	41	3	44	3	47
E175 operated by third party	42	—	42	—	42	1	43
Total Regional Fleet	83	—	83	3	86	4	90
Total	303	10	313	28	341	27	368

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~~increases and, 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(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.~~


	Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel


















Fourth Quarter of 2023	50	%	$96	$7
Full Year 2023	50	%	$96	$7
First Quarter of 2024	50	%	$90	$5
Second Quarter of 2024	40	%	$90	$5
Third Quarter of 2024	30	%	$88	$5
Fourth Quarter of 2024	20	%	$87	$5
Full Year 2024	35	%	$89	$5
First Quarter of 2025	10	%	$92	$5
Full Year 2025	2	%	$92	$5

Contractual Obligations

The following table ~~reflects~~provides a summary of our ~~contractual~~ obligations as of ~~September 30, 2022,~~November 2, 2023 and ~~the agreement executed~~reflects anticipated delivery delays and other modifications of our order book as agreed to in principle with ~~Boeing in October 2022.~~Boeing. For agreements with variable terms, amounts included reflect our minimum obligations.


(in millions)	(in millions)	Remainder of 2022		2023		2024		2025		2026		Beyond 2026		Total		(in millions)	Remainder of 2023		2024		2025		2026		2027		Beyond 2027		Total
Debt obligations	Debt obligations	$	52	$	309	$	238	$	273	$	176	$	1,178	$	2,226	Debt obligations	$	45	$	286	$	343	$	292	$	597	$	864	$	2,427
Aircraft lease commitments(a)		84		282		227		221		219		929		1,962
Facility lease commitments		5		17		9		8		8		86		133
Lease commitments(a)																Lease commitments(a)	454		265		195		194		188		841		2,137

Aircraft-related commitments(b)	Aircraft-related commitments(b)	629		2,024		1,394		1,262		689		941		6,939		Aircraft-related commitments(b)	460		1,211		1,337		1,093		587		591		5,279

Interest obligations(c)	Interest obligations(c)	9		102		70		55		60		164		460		Interest obligations(c)	23		120		104		102		92		150		591
Other obligations(d)		43		183		190		195		190		780		1,581
CPA and other obligations																CPA and other obligations	56		224		227		219		220		739		1,685
Total	Total	$	822	$	2,917	$	2,128	$	2,014	$	1,342	$	4,078	$	13,301	Total	$	1,038	$	2,106	$	2,206	$	1,900	$	1,684	$	3,185	$	12,119

(a)~~Future~~Lease commitments include minimum payments for aircraft operated under operating leases and aircraft removed from operating service which remain under operating and finance leases, as we have remaining cash obligations under existing terms. It also includes minimum lease payments for ~~aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.~~facilities.

(b)Includes contractual commitments for aircraft, engines, and aircraft 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, ~~2022.~~

~~(d)Comprised of non-aircraft lease costs associated with capacity purchase agreements and other miscellaneous obligations.~~2023.

~~Following the October 2022 agreement with Boeing, we now anticipate capital expenditures for 2022 to range between $1.5 billion~~Debt Obligations and ~~$1.6 billion, which we plan~~Interest Obligations

The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. During the nine months ended September 30, 2023, the Company incurred new debt of $495 million and repaid $242 million in existing debt. At September 30, 2023, our debt portfolio carries a weighted average interest rate of 4.3%. Interest is paid with ~~cash generated by~~regular debt service. Refer to Note 5 to the consolidated financial statements for further discussion of our debt and interest balances.

CPA and Other Obligations

We have obligations primarily associated with the non-lease components of our capacity purchase agreement between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.

Leased Aircraft Return Costs

For many of our leased aircraft, contractual terms require us 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 to return 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 to remove the leased asset from operation. If the leased aircraft is removed from the operating ~~activities~~fleet, the estimated cost to return is accrued at the time of removal. If a leased aircraft has a known early retirement date in the future, the estimated cost to return is accrued through the retirement date. Any accrual is based on the time remaining on the lease, planned aircraft usage, and ~~cash on hand.~~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. A total of $165 million is accrued for upcoming lease returns at September 30, 2023, including costs recorded in prior year periods.

Credit Card Agreements

~~We have~~Alaska has 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~~Sustainability Commitments

~~For many~~As part of our ~~leased aircraft,~~efforts to reach net-zero carbon emissions by 2040, we ~~are required under the contractual terms~~have outlined a five-part path that we expect to ~~return the~~include operational efficiency, fleet renewal, sustainable aviation fuel (SAF), enabling new technologies including zero emission aircraft in ~~a specified state. As a result~~the future, and using credible offsetting and removal technologies to close the gaps to our emissions target in future years. We anticipate these efforts will require cash outlays, not all of which are reflected in our contractual commitments. Finding and establishing relationships with suppliers to meet these ~~contractual terms, we will incur significant costs~~commitments is in process. Currently, Alaska has agreements to ~~return these aircraft at~~purchase approximately 200 million gallons of neat SAF to be delivered through 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within the ~~termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable~~CPA 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 includedother obligations row 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 in 2022 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.above table.

Income Taxes

For federal income tax purposes, the majority of our ~~assets~~property and equipment 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~~property and equipment difference will reverse ~~including via asset impairment,~~into taxable income, potentially resulting in an increase in income taxes ~~paid.~~payable.

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~~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)~~prices, among other factors out of our control), ~~usage of net operating losses,~~ whether ~~"bonus~~

~~depreciation"~~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.

~~In August 2022,~~ We believe we have the ~~Inflation Reduction Act ("IRA") bill was signed into law, effective for~~liquidity to make our future 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.payments.

CRITICAL ACCOUNTING ESTIMATES

~~Except as described below, for~~There have been no material changes to our critical accounting estimates during the three and nine months ended September 30, 2023. For information regarding 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, ~~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 and finance 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";~~ASM; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ~~ASM;~~ASM, or "unit cost"; 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 and finance 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~~A320, and Airbus ~~321neo~~A321neo jets and all associated 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 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

4341


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, ~~2021.~~2022.

4442


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2022,~~2023, 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, ~~2022.~~2023.

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, ~~2022,~~2023, 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).

4543

PART II


ITEM 1. LEGAL PROCEEDINGS


ITEM 1A. RISK FACTORS

See Part I, Item 1A. "Risk Factors," in our ~~2021~~2022 Form 10-K for a detailed discussion of risk factors affecting Alaska Air Group.


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

~~Historically,~~This table provides certain information with respect to our purchases of shares of our common stock during the ~~Company~~third quarter of 2023.


	Total Number of Shares Purchased	Average Price Paid per Share		Maximum remaining dollar value of shares that can be purchased under the plan (in millions)






July 1, 2023 - July 31, 2023	141,538	$	51.08
August 1, 2023 - August 31, 2023	107,450	$	46.99
September 1, 2023 - September 30, 2023	—	$	—
Total	248,988	$	49.32	$	387

The shares were 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; 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, ~~2022,~~2023, a total of 1,882,517 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $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. An additional 427,080 warrants were issued in conjunction with a draw on the 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 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

~~None.~~During the three months ended September 30, 2023, no director or officer of Alaska Air Group adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K promulgated under the Securities Exchange Act of 1934.


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/ EMILY HALVERSON
Emily Halverson
Vice President Finance and Controller

November ~~3, 2022~~2, 2023

4745

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#
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).

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

3.2

Amended and Restated Bylaws of Registrant

8-K

December 15, 2015

3.2

10.1#†

Amendment No. 22 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, Inc.

10-Q

10.2#†

Amendment No. 23 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, 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

104†

Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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).

4846


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	2223
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4442
ITEM 4.	CONTROLS AND PROCEDURES	4543
PART II.	OTHER INFORMATION	4644
ITEM 1.	LEGAL PROCEEDINGS	4644
ITEM 1A.	RISK FACTORS	4644
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4644
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4644
ITEM 4.	MINE SAFETY DISCLOSURES	4744
ITEM 5.	OTHER INFORMATION	4745
ITEM 6.	EXHIBITS	4745
	SIGNATURES	4745


	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


	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


	Number of warrants outstanding	Strike Price
PSP 1	928,126	31.61
CARES Act loan warrants	427,080	31.61
PSP 2	305,499	52.25
PSP 3	221,812	66.39
Outstanding September 30, 2022	1,882,517


	Actual Fleet	Anticipated Fleet Activity(a)
Aircraft	September 30, 2022	2022 Additions	2022 Removals	Dec 31, 2022	2023 Changes	Dec 31, 2023	2024 Changes	Dec 31, 2024
B737-700 Freighters	3	—	—	3	—	3	—	3
B737-800 Freighters	—	—	—	—	2	2	—	2
B737-700	11	—	—	11	—	11	—	11
B737-800	61	—	—	61	(2)	59	—	59
B737-900	12	—	—	12	—	12	—	12
B737-900ER	79	—	—	79	—	79	—	79
B737-8	—	—	—	—	5	5	5	10
B737-9	33	5	—	38	35	73	10	83
B737-10	—	—	—	—	—	—	6	6
A320	23	—	(10)	13	(13)	—	—	—
A321neo	10	—	—	10	(10)	—	—	—
Total Mainline Fleet	232	5	(10)	227	17	244	21	265
Q400 operated by Horizon	22	—	(11)	11	(11)	—	—	—
E175 operated by Horizon	30	3	—	33	8	41	3	44
E175 operated by third party	42	—	—	42	—	42	—	42
Total Regional Fleet(b)	94	3	(11)	86	(3)	83	3	86
Total	326	8	(21)	313	14	327	24	351