Alaska Air Group, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing reports annual results; standalone fourth-quarter figures are not clearly provided in the filing text. Comparisons below are primarily with FY2021, with selected FY2019 comparisons.
Business context
Air Group operates Alaska Airlines, Horizon Air and McGee Air Services. Its reportable segments are Mainline, Regional and Horizon. The company described strong travel demand and a substantial recovery in flying, while prioritizing operational reliability, labor agreements and a transition to single-type fleets.
Financial and operating performance
| Metric | FY2022 | Comparable period / change |
|---|---|---|
| Operating revenue | $9.646 billion | Up 56% from FY2021; up 10% from FY2019 |
| Operating income | $70 million | $685 million in FY2021 |
| Net income and diluted EPS, GAAP | $58 million; $0.45 | $478 million; $3.77 in FY2021 |
| Adjusted net income and EPS, non-GAAP | $556 million; $4.35 | Adjusted net loss of $256 million; loss per share of $2.03 in FY2021 |
| Pretax income / adjusted pretax income | $79 million / $736 million | Adjusted pretax margin was 7.6% |
| Operating cash flow | $1.418 billion | $1.030 billion in FY2021 |
| Capital expenditures | $1.671 billion | $292 million in FY2021 |
| Cash and marketable securities | $2.417 billion | Down from $3.116 billion at FY2021 year-end |
| Long-term debt, including current portion | $2.159 billion | $2.539 billion at FY2021 year-end |
| Adjusted debt-to-capitalization, including operating leases | 48% | 49% at FY2021 year-end |
| Adjusted net debt to EBITDAR | 1.0x | 2.7x at FY2021 year-end |
Revenue growth reflected passenger traffic up 33% and yield up 20% year over year. Load factor increased to 84.5% from 73.6%; capacity rose 15.9%, but remained 9% below FY2019. The company generated a 0.7% GAAP operating margin and reported 7.6% adjusted pretax margin.
Fuel was a major cost pressure: GAAP aircraft fuel expense rose 109% to $2.668 billion. Economic fuel cost was $3.42 per gallon, up 69% from FY2021. Non-fuel operating expense excluding special items rose 23%; CASMex increased 6.3%.
Material changes versus FY2021
- Revenue recovered sharply, but GAAP net income declined to $58 million from $478 million. FY2021 included a $914 million Payroll Support Program grant wage offset; adjusted comparisons remove that offset, special items and mark-to-market fuel hedge adjustments.
- FY2022 included $580 million of special charges, principally fleet-transition costs and labor-related costs. Fleet charges included estimated Airbus lease-return costs, accelerated aircraft ownership expense and a Q400 impairment.
- Cash from operations improved, supported in part by $295 million of federal tax refunds and increased receipts under the co-branded credit-card agreement. The company repaid $385 million of debt and invested $1.671 billion in property and equipment.
- Five labor agreements were reached during the year. The agreements increased compensation and benefits; management recorded $97 million of incremental wage expense associated with them.
- The company accelerated its transition to an all-Boeing 737 Mainline fleet and an all-Embraer regional fleet. Airbus A320 and Q400 aircraft left operating service in January 2023; A321neo aircraft were expected to exit by year-end 2023.
Outlook, risks and contingencies
Management outlook as of the filing: For FY2023, management expected capacity growth of 8%–10%, revenue growth of 8%–10%, unit costs down 1%–3%, adjusted pretax margin of 9%–12%, and diluted EPS of $5.50–$7.50. First-quarter capacity was expected to grow 11%–14% year over year, with unit costs flat to down 2%. Management cautioned that forecasts remained more uncertain than before the pandemic. It expected 2023 economic fuel cost of $3.15–$3.35 per gallon for the first quarter.
Management cited strong demand, network initiatives, the Mileage Plan program, and larger, more fuel-efficient aircraft as growth supports. It also noted that certain 2023 Boeing aircraft deliveries were expected to be delayed into 2024. Planned FY2023 capital expenditures were $1.8–$2.0 billion.
- Key operating and financial risks: volatile fuel prices, inflation, rising labor costs, staffing and pilot availability, supply-chain constraints and aircraft delivery delays, weather and air-traffic disruption, intense fare competition, and the concentration of 82% of passengers in Seattle, Portland and the Bay Area.
- Fleet transition and commitments: Aircraft-related commitments were $6.320 billion, with total disclosed contractual obligations of $12.879 billion. Management anticipated material 2023 cash outflows to return leased aircraft. The company had firm orders for 105 Boeing 737 aircraft and rights for 105 more, as well as Horizon commitments for 17 E175 aircraft.
- Legal matters: A California flight-attendant class action had a final judgment of $31 million, with attorneys’ fees still to be determined; the company accrued $37 million. A similar Washington case had no probable, estimable liability determined as of year-end. The company also disputed Virgin Group claims for annual royalties under a trademark agreement; a ruling was expected after the October 2022 trial.
- Other exposures: A decline in cash and marketable securities below $500 million, or specified credit-rating triggers, could require reserves under credit-card processing agreements. The company reported it was not required to maintain such reserves at year-end. It identified cyber, regulatory and climate-related risks, and noted that SAF availability and emerging decarbonization technologies remain uncertain.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The Mileage Plan accounting model was identified as a critical audit matter; related deferred revenue was $2.5 billion at year-end.
Important facts for investors to verify
- How much of FY2022 adjusted earnings reflects sustainable operations versus exclusions, including the $580 million of special charges and FY2021’s government grant wage offset.
- Whether 2023 revenue, capacity, cost, margin and EPS guidance was achieved, particularly given fuel, labor and aircraft-delivery risks.
- The ultimate cash costs and timing of Airbus aircraft returns, including the A321neo exit and amounts still subject to negotiation.
- Progress on Boeing and Embraer deliveries, fleet growth, and the planned $1.8–$2.0 billion of FY2023 capital spending.
- Developments in the California and Washington flight-attendant cases and the Virgin trademark royalty dispute.
- Liquidity and leverage relative to substantial aircraft, lease and other contractual commitments; also verify the planned resumption of share repurchases and the absence of dividends, which remained suspended.
- Assumptions behind Mileage Plan deferred revenue and breakage estimates, a material judgment area highlighted by the auditor.