Exhibit 99.2
Investor Update - July 26, 2017
References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.
This update includes forecasted operational and financial information for our mainline and consolidated operations. Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items. The most directly comparable GAAP measure is total operating expenses per available seat mile. However, due to the fluctuations in fuel prices, we are unable to predict total operating expenses for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under “Forward-Looking Information.”
We are providing information about estimated fuel prices and our hedging program. Management believes it is useful to compare results between periods on an “economic basis.” Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.
Forward-Looking Information
This update contains forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations, and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.
| AIR GROUP - CONSOLIDATED |
Forecast Information
For the purposes of comparison, the consolidated operating and financial statistics in the historical periods of the table below are on a "Combined Comparative" basis, and include operations for Alaska Air Group and Virgin America Inc. (Virgin America) for the periods prior to the acquisition date of December 14, 2016. Virgin America's historical operating statistics included in the Combined Comparative presentation below have been conformed to Alaska Air Group's presentation where appropriate.
| Forecast Q3 2017 | Q3 2016 Combined Comparative(d) | % Change | Q3 2016 As Reported (c) | Prior Guidance June 15, 2017 | |||
| Capacity (ASMs in millions) | 16,310 - 16,360 | 15,079 | ~ 8% | 11,212 | n/a | ||
Cost per ASM excluding fuel and special items (cents) | 8.00¢ - 8.05¢ | 7.90¢ | ~ 1.5% | 8.20¢ | n/a | ||
| Fuel gallons (millions) | 208 | 192 | ~ 8% | 140 | n/a | ||
Economic fuel cost per gallon(a) | $1.76 | $1.57 | ~ 12% | $1.58 | n/a | ||
| Forecast Full Year 2017 | 2016 Combined Comparative(d) | % Change | 2016 As Reported (c) | Prior Guidance June 15, 2017 | |||
| Capacity (ASMs in millions) | 62,455 - 62,610 | 57,953 | ~ 8% | 44,135 | 62,800 - 63,000 | ||
Cost per ASM excluding fuel and special items (cents) (e) | 8.07¢ - 8.11¢ | 8.04¢ | ~0.5% | 8.23¢ | 8.02¢ - 8.07¢ | ||
| Fuel gallons (millions) | 805 | 739 | ~ 9% | 554 | 800 | ||
Economic fuel cost per gallon(b) | (b) | $1.54 | (b) | $1.52 | (b) | ||
(a) | Our economic fuel cost per gallon estimate for the third quarter includes the following per-gallon assumptions: crude oil cost—$1.10 (approximately $46 per barrel), refining margin—45 cents, cost of settled hedges—2 cents, with the remaining difference due to taxes and other into-plane costs. |
(b) | Because of the volatility of fuel prices, we do not provide full-year economic fuel estimates. |
(c) | Actual financial and operational data reported in prior year - excludes Virgin America information prior to December 14, 2016 acquisition. |
(d) | Refer to our Investor Update issued on April 12, 2017 on Form 8-K for further details of the calculation of the three and six months ended June 30, 2016 combined data. |
(e) | CASM guidance does not include potential cost increases related to a new pilot contract as we do not yet know the timing or amount. However, our position for arbitration will result in an estimated annual increase for the Company of approximately $140 million. |
2016 Combined Comparative Operating Results and Statistics—Other Quarters
Refer to our Investor Update issued on April 12, 2017 on Form 8-K for combined comparative operating results and statistics for each of the quarters and full year 2016.
2017 Forecasted Capacity by Quarter
The following table shows 2017 quarterly forecasted capacity by segment with percent change from the same period in the prior year. Combined Comparative results from 2016 were used in calculating the percentage changes below.
| Actual | Forecast | ||||||||
| (in millions, except % change) | Q1 | Q2 | Q3 | Q4 | Full Year | ||||
| Mainline | 13,260 | 14,341 | 14,870 - 14,910 | 14,615 - 14,710 | 57,085 - 57,220 | ||||
| % Change | ~ 5% | ~ 6% | ~ 7.5% | ~ 10.5% | ~ 7% | ||||
| Regional | 1,134 | 1,270 | 1,440 - 1,450 | 1,525 - 1,535 | 5,370 - 5,390 | ||||
| % Change | ~ 3% | ~ 7% | ~ 18% | ~ 33% | ~ 15% | ||||
| Total Air Group | 14,394 | 15,612 | 16,310 - 16,360 | 16,140 - 16,245 | 62,455 - 62,610 | ||||
| % Change | ~ 5% | ~ 6% | ~ 8% | ~ 12% | ~ 8% | ||||
AIR GROUP - CONSOLIDATED (continued) |
Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $13 million in the third quarter of 2017.
Capital Expenditures(b)
The table below reflects the full-year expectation for total capital expenditures and additional expenditures if options were exercised. These options will be exercised only if we believe return on invested capital targets can be met.
| (in millions) | 2017 | 2018 | 2019 | ||||||||
| Aircraft and aircraft purchase deposits—firm | $ | 805 | $ | 685 | $ | 595 | |||||
| Other property & flight equipment | 310 | 385 | 380 | ||||||||
| Total property and equipment additions | $ | 1,115 | $ | 1,070 | $ | 975 | |||||
Option aircraft and aircraft deposits, if exercised(a) | $ | 55 | $ | 230 | $ | 710 | |||||
(a) | We have options to acquire 41 B737 aircraft with deliveries from 2019 through 2024, options to acquire 30 A320neo aircraft with deliveries from 2020 through 2022, and options to acquire 30 E175 aircraft with deliveries in 2019 to 2021. |
(b) | Preliminary estimate, subject to change. Excludes capitalized interest. |
Projected Fleet Count(a)
| Actual Fleet | Expected Fleet Activity | ||||||||||||||||
| Aircraft | June 30, 2017 | 2017 Additions | 2017 Removals | December 31, 2017 | 2018-2019 Changes | December 31, 2019 | |||||||||||
B737 Freighters & Combis (b) | 5 | 3 | (5 | ) | 3 | — | 3 | ||||||||||
B737 Passenger Aircraft (b) | 151 | 8 | (8 | ) | 151 | 15 | 166 | ||||||||||
| A319/A320/A321 Passenger Aircraft | 65 | 3 | — | 68 | 4 | 72 | |||||||||||
| Total Mainline Fleet | 221 | 14 | (13 | ) | 222 | 19 | 241 | ||||||||||
| Q400 operated by Horizon | 52 | — | — | 52 | (15 | ) | 37 | ||||||||||
| E-175 operated by Horizon | 6 | 7 | — | 13 | 20 | 33 | |||||||||||
E-175 operated by third party (c) | 20 | — | — | 20 | 5 | 25 | |||||||||||
| Total Regional Fleet | 78 | 7 | — | 85 | 10 | 95 | |||||||||||
| Total | 299 | 21 | (13 | ) | 307 | 29 | 336 | ||||||||||
(a) | The expected fleet counts at December 31, 2017 and beyond are subject to change. |
(b) | 2017 changes in passenger aircraft reflect delivery of eight Boeing 737-900ER aircraft, retirement of seven B737-400 aircraft and the conversion of one B737-700 aircraft into freighter. The freighter and combi changes reflect the retirement of four combis and one freighter and the reintroduction of three B737-700 aircraft as freighters. |
(c) | 2018-2019 changes reflects the addition of five E175 aircraft to be flown by Skywest under a capacity purchase agreement. |
Future 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; and, during a period of decline in crude oil prices, we only forfeit cash previously paid for the hedge premiums. Our crude oil positions are as follows:
| Approximate % of Expected Fuel Requirements | Weighted-Average Crude Oil Price per Barrel | Average Premium Cost per Barrel | ||||||||
| Third Quarter 2017 | 50 | % | $ | 62 | $ | 2 | ||||
| Fourth Quarter 2017 | 50 | % | 61 | 2 | ||||||
| Remainder 2017 | 50 | % | 62 | 2 | ||||||
| First Quarter 2018 | 40 | % | 61 | 2 | ||||||
| Second Quarter 2018 | 30 | % | 61 | 2 | ||||||
| Third Quarter 2018 | 20 | % | 58 | 2 | ||||||
| Fourth Quarter 2018 | 10 | % | 57 | 3 | ||||||
| Full Year 2018 | 24 | % | 60 | 2 | ||||||