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, 20222023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
| | | | | | | | |
Delaware | | 91-1292054 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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19300 International Boulevard, | Seattle, | WA | 98188 |
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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.
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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 126,837,831128,053,077 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, 20222023
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
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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)
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(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) | | | | | |
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Stock-based compensation | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
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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 | | | | | |
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| | | | | | | | | | | | | | | | | |
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) | | | | | |
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Stock-based compensation | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
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Stock issued under stock plans | 0.074 | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | | | |
Balances at September 30, 2022 | 126.834 | | $ | 1 | | | $ | 549 | | | $ | (674) | | | $ | (328) | | | $ | 4,278 | | | $ | 3,826 | | | | | |
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(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 | | | | | |
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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 | |
| | | | 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 | |
|
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, 20222023 and the results of operations for the three and nine months ended September 30, 20222023 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 revenuesrevenue 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, 20222023 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, retiringfleet. 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 acceleratingfinalized an agreement to sell the retirement of its Airbus A320ten aircraft withto American Airlines. The remaining seven purchases and all sales to American Airlines are expected to exitoccur in the fleet by January 2023. Alaska also operates Airbus A321neo aircraft, and plans to remove them from its fleet by the endfourth quarter of 2023 subject to agreementand first quarter of 2024. As a result of the new agreements, the operating leases associated with counterparties. The Company operated 23 A320 and ten A321neothe seven aircraft as ofthat were not purchased by September 30, 2022. Horizon plans to retire its Q400 fleet, which includes 19 owned2023 were considered modified, and three leased aircraft in operationupon evaluation were reclassified as of September 30, 2022, in January 2023.finance leases.
Valuation of long-lived assetsLong-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changescircumstances indicate that the total carrying amountvalue of an asset or asset group may not be recoverable. DuringIn the firstsecond 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 recordedcharge is included within the "SpecialSpecial items - fleet transition" linetransition 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 summaryOther 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 belowcosts for the three and nine months ended September 30, 2022. The impairment charges are one-time2023 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 inthree 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 | |
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, 20222023 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, 20222023 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 availableindustry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of September 30, 2022.2023.
Fair values of financial instruments on the condensed consolidated balance sheetsheets (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 sheetsheets 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 discussiondetails regarding impairment charges recorded duringin the three and nine months ended September 30, 2022.2023.
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheetsheets (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 andwhich 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 LIBORSOFR plus a specified margin. A third credit facility for $86$76 million expires in June 20232024 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) | |
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of September 30, 20222023 (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 leasePrimarily 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, 20222023 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 737B737 deliveries contracted in 2022 and 2023 are expected to be delayed to 2023 andinto 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 optionshas contractual agreements as of September 30, 2023 to purchase 52 737seven 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 2024including both the remaining lease payments and 2027. The agreement also secures rights for 105 additional aircraft through 2030. The incremental firmsubsequent purchase, commitments perare reflected within Current portion of long-term debt and finance leases in the agreement are not contractually obligated atcondensed consolidated balance sheets as of September 30, 2022,2023 and are not reflected in the future minimum payments tabletables 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 contractcontracts for maintenance on its Boeing 737-800B737-800 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 Embraercertain 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. TheOn February 16, 2023, the commercial court issued a ruling adopting Virgin Group asserts that payments are required without regard to actual useGroup’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 TreasuryU.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) | |
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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) | |
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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. ForAnti-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, 20222023, and 1.4 million and 1.7 million for the three and nine months ended September 30, 2021, anti-dilutive shares excluded from2022.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS
A roll forward of the calculationamounts 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:
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| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
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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) | |
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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) | |
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| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
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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) | |
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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 revenuesrevenue 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 | |
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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 | |
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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 | % |
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| 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 | |
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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 | % |
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| 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 | |
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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 | % |
| | | 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 | |
| | |
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 20222023 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 20222023 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 consolidated2022. Increased pretax income foris primarily the quarterresult of $441a $183 million compared to consolidated pretax income of $236decrease 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 revenuespecial operating and non-operating charges. These decreases were partially offset by a $134 million increase in the third quarter.
In the third quarter non-fuelother 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
DuringUnder 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 threequarter. 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 employeescontracts with its mainline flight attendants represented by the International Association of MachinistsFlight Attendants, whose contract became amendable in December 2022, and Aerospace Workers ratifiedits 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, Horizonits 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 constraineddown 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 expectedwe 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 continueheadwinds from fuel prices which were not previously contemplated, coupled with decreased revenue expectations, have led us to anticipatereduce our expected full year adjusted pretax margins will range between 6%margin to 9%7% to 8%.
Our plans willWe continue to be responsiveremain focused on setting intentional targets and taking the appropriate steps to emerging informationdeliver on those targets. Changes to the operating environment and industry trends could lead to adjustments to the guidance we have provided above is subjectas management aligns our business to greater uncertainty than we have historically experienced.be appropriately responsive. As we leverage our network Mileage Plan program, and fleetdiversified 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 20222023 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 otherspecial 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)ReflectsExcludes 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, 20222023 TO THREE MONTHS ENDED SEPTEMBER 30, 20212022
Our consolidated net income for the three months ended September 30, 20222023 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 20222023 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%, duringwas approximately flat in the third quarter of 20222023 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% increase2023 was approximately flat compared to the same period in 2022. While passenger traffic androse 11% due to increased departures flown by larger aircraft in our Mainline fleet, softening of the demand environment led to a 21% improvement10% decrease in ticket yields. Increased demandyield following record highs in the prior year. Additionally, cancellations for air travel and constrained capacity industry wide enabled higher load factorsto 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 20222023 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 $501decreased $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 20222023 compared to the third quarter of 2021,2022, due to significantly higherlower per gallon costs, andpartially offset by increased fuel consumption. Raw fuel expense per gallon increaseddecreased by approximately 76%16% due to higher West Coastlower all-in jet fuel prices. West Coast jetJet 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 pricesfuel, both of which have risen 30% while refining margins have more than tripleddecreased in the third quarter of 2023 compared to 2021.the prior year. Fuel gallons consumed increased 11%10%, consistent with risingdriven 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.
GainsLosses 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 20212022 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 AlaskaFTEs. When combined with FTE increases, higher wage rates stemming from market adjustments and Horizon hire to supportannual step increases were the ramp up in operations. The ratification of three new collective bargaining agreements during the third quarter resulted in significant wage increasesprimary driver for the represented groups. As a result of the new agreements, the Company recorded $35 million in incremental wageyear-over-year expense during the quarter, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates.wages.
IncreasedIncremental expense for defined contribution plans and payroll taxes are consistent withwas driven by the change in wages.wages as well as higher matching contributions for several labor groups. Decreased defined benefit expense was driven by changes in actuarial assumptions.
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 payAircraft maintenance expense increased by $6$26 million, or 14%28%, in the third quarter of 2022.2023. The increase is due towas 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 increaseddecreased by $12$28 million, or 19%37%, in the third quarter of 2022. Increased expense is due2023. 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 eightfour leased Boeing 737-9B737-9 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 iswas 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 rentthe 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 byvendors 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 with2023. The increase was driven by a 16% increasecombination of 7% growth in revenue passengers. Additional on-board offerings coupled with increased chargespassengers and higher costs for transportation andfood, 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 $81decreased by $22 million, or 64%11%, in the third quarter of 2022. Increased expense as compared to the prior year period is partially due to2023. The decrease was primarily driven by one-time employee recognition costs of $28 million incurred for employee recognition relatedrecorded 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 travelmiscellaneous variable costs crew hotel stays, and crew per diem. Increases in crew-related costs are2023 consistent with the rise in departures.increased capacity.
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 pretaxa profit of $221$446 million in the third quarter of 2021.same period in 2022. The $225$120 million improvementdecrease 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 comparedexpenses. 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-fuelnon-fuel operating expenses increased driven byprimarily 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, drovedepartures, 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 lossprofit of $1 million in the third quarter of 2021. While operating revenue increased $472023, 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 costsdecreased 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 $8same period in 2022. The $10 million in the third quarter of 2021. The shift to adjusted pretax loss isimprovement was driven by lowerupdates 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, 20222023 TO NINE MONTHS ENDED SEPTEMBER 30, 20212022
Our consolidated net income for the nine months ended September 30, 20222023 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, 20222023 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, infor 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 20222023 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 20222023 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 theWe expect to see fourth quarter we anticipate Passenger revenue will continue to show meaningful improvements overconsistent with the comparable prior year period on increased capacity offered. Strong demand fordue 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 bydue to increased consumer spendingspend 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 quarterremainder of 2022 compared to the prior year, driven2023, 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.
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 20222023 compared to the first nine months of 2021,2022, due to significantly higherlower per gallon costs, andpartially offset by increased fuel consumption. Raw fuel expense per gallon increaseddecreased by approximately 84%17% due to higher West Coastlower all-in jet fuel prices. West Coast jetJet 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 pricesfuel, both of which have risen 49% while refining margins have more than tripleddecreased in the first nine months of 2023 compared to 2021.the prior year. Fuel gallons consumed increased 20%8%, consistent with risingdriven 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 $1672023 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 settledthose 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.
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, primarilyprimary 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 supportadditional 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.
IncreasedIncremental expense for defined contribution plans and payroll taxes are consistent withwas 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%, inWe expect to see higher wages and benefits for the first nine monthsremainder of 2022. The increase is2023 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 is2023. The increase was primarily driven by the resultnew B737-900ER power-by-the-hour contract and increased aircraft utilization, partially offset by $35 million of charges recorded for maintenance work tolease return leased aircraft recordedcosts 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 increasedother 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 coveredcontract, 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 increaseddecreased 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 eightnet 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 flat2023. 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 increasedhigher 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%, inWe expect contracted services to increase for the first nine monthsremainder of 2023 as compared to 2022 primarily driven by an increase in distribution costs and credit card commissions incurred withdue 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. Incremental2023. 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 withservice for the 34% increase in revenue passengers as well as additional offeringsremainder of on-board products2023 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 ourthe 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 withthe annualization of ten additionalE175 aircraft in operating service as comparedunder 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 inbe higher for the fourth quarterremainder of 20222023 as compared to the prior year2022 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 drivers2023. Costs increased as a result of the increased costcrew-related expenses due to contract improvements for Alaska pilots, coupled with additional professional services and software expenses. These increases were training events and related travelpartially 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 includesof $28 million incurred for employee recognition related torecorded 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 bonusand other
We recorded a nonrecurring expense of $90$51 million in the thirdfirst quarter of 2022 representing2023 due to a payment toLetter of Agreement with Alaska pilots, following the ratificationrepresented 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 lossa 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 fuelnon-fuel operating expense and a $871$49 million increase in Mainline non-fuel operatingfuel expense.
As compared to the prior year, higher Mainline revenue areis 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 additionalAdditional 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 pretaxa loss of $207$59 million in the first nine months of 2021. Improved results were attributablesame 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 demandlower 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 profita 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, combinedconsistent with less flying, as well as higher wage and benefit costs on incremental FTEs and increased wage rates resulting from theinterest 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 ninethree months ended September 30, 2022,2023, we took free and clear delivery of 18five owned Boeing 737-9 aircraft. We alsoincurred 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 increasedecrease 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 incremental2022 operating cash as compared to 2021 on improved economics and increased volumes. Additionally, in 2022 we received $260 million inflows included federal income tax refunds and the changeof $260 million. Additionally, growth in our air traffic liability increased by $152decreased $125 million due to strong passenger demand. The prior year also included a nonrecurring voluntary contribution of $100and 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 asan 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 months2022. 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 expendituresfactors. 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 purchasesin 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 inprovided by financing activities was $296$12 million during the first nine months of 2022,2023, compared to $825cash used in financing activities of $296 million during the same period in 2021. During the first nine months of 2022, we had no2022. 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 proceeds2022. These amounts were partially offset by common stock repurchases of $363$70 million in 2023 and paymentsa 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 20242023 and 2026. Subsequent2027 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 secureshas rights for 105 additional 737B737-10 aircraft throughbetween 2026 and 2030. Alaska also has commitments to lease two B737-800 freighters with deliveries in 2023 and 2024.
AlaskaBoeing has received information from Boeing indicatingcommunicated to Alaska that certain 737B737 deliveries contracted in 2022 and 2023 are expected to be delayed to 2023 andinto 2024. The anticipated fleet delivery schedule outlined below reflects the expected impact of these delays. Alaska will continuecontinues to work with Boeing onto structure delivery timelines in a manner that reflectsupports Alaska's plans for growth.capacity growth plans.
As of September 30, 2023, Horizon has commitments to purchase 20 Embraernine E175 aircraft with deliveries between 20222024 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 | | |
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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. Duringincreases 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 |
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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 |
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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 |
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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 reflectsprovides a summary of our contractual obligations as of September 30, 2022,November 2, 2023 and the agreement executedreflects 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)FutureLease 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 billionDebt Obligations and $1.6 billion, which we planInterest 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 byregular 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 activitiesfleet, 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 haveAlaska 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 CostsSustainability Commitments
For manyAs part of our leased aircraft,efforts to reach net-zero carbon emissions by 2040, we are required under the contractual termshave outlined a five-part path that we expect to return theinclude operational efficiency, fleet renewal, sustainable aviation fuel (SAF), enabling new technologies including zero emission aircraft in a specified state. As a resultthe 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 costscommitments is in process. Currently, Alaska has agreements to return these aircraft atpurchase 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 probableCPA 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 assetsproperty 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 basisproperty 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-termshort 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 forliquidity 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, forThere 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 familyA320, and Airbus 321neoA321neo 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
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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.
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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).
PART II
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ITEM 1. LEGAL PROCEEDINGS |
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company 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. TheOn February 16, 2023, the commercial court issued a ruling adopting Virgin Group asserts that payments are required without regard to actual useGroup’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.
See Part I, Item 1A. "Risk Factors," in our 20212022 Form 10-K for a detailed discussion of risk factors affecting Alaska Air Group.
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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 Companythird 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) |
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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”).
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. MINE SAFETY DISCLOSURES |
None.
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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.
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.
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ALASKA AIR GROUP, INC. | |
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/s/ EMILY HALVERSON | |
Emily Halverson | |
Vice President Finance and Controller | |
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November 3, 20222, 2023 | |
EXHIBIT INDEX | | | | | | | | | | | | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
10.1# | | 10-K | February 14, 2013 | 10.8 |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
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† | 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). |
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Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
| | | | |
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3.2 | | 8-K | December 15, 2015 | 3.2 |
10.1#† | | 10-Q | | |
10.2#† | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
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. | | | |
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† | 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). |