Alaska Air Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. The filing is unaudited.
Business context and results
Air Group operates Alaska Airlines and Horizon Air, with mainline, regional and Horizon reporting segments. In Q3, passenger traffic grew, but softer demand reduced yields. Alaska completed the retirement of its A321neo aircraft from service and reported industry-leading completion rates and on-time performance above 80%.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $2,839 | $2,828 | $7,873 | $7,167 |
| Operating income | $211 | $62 | $362 | $47 |
| Net income | $139 | $40 | $237 | $36 |
| Diluted EPS | $1.08 | $0.31 | $1.84 | $0.28 |
| Adjusted net income (non-GAAP) | $237 | $325 | $545 | $438 |
| Adjusted diluted EPS (non-GAAP) | $1.83 | $2.53 | $4.22 | $3.42 |
Q3 GAAP operating margin was approximately 7.4% (2.2% in Q3 2022); net margin was approximately 4.9% (1.4% in Q3 2022). These are calculated from reported revenue and income. Consolidated Q3 revenue was nearly flat: passenger revenue was $2,618, Mileage Plan other revenue $159, and cargo and other revenue $62.
- Q3 cost and operations: Operating expenses fell 5% to $2,628, chiefly because GAAP fuel expense declined $183 to $694 and prior-year labor-related special charges did not recur. Non-fuel expenses excluding special items rose 8%, including wages and benefits up 14%. CASMex, a non-GAAP unit-cost measure, declined 5% to 9.57 cents.
- Nine-month trends: Revenue increased 10%; operating expenses increased 5%. CASMex declined 1% to 10.05 cents. Passenger traffic rose 12%, while yield fell 2%.
- Cash flow: Operating cash flow was $1,103 for the first nine months, versus $1,409 in 2022. Investing cash outflow was $810 and financing cash inflow was $12. Cash, cash equivalents and restricted cash ended at $674; cash and marketable securities were $2,451.
- Debt and liquidity: Total debt was $2,412, including $284 current debt; long-term debt was $2,128. Debt-to-capitalization including operating and finance leases was 48%, within management’s 40%–50% target range. Adjusted net debt was $1,676 and adjusted net debt to trailing-twelve-month EBITDAR was 1.1x. The company reported compliance with its $500 minimum unrestricted cash and marketable securities covenant.
Material changes and unusual items
- Q3 GAAP pretax income rose to $193 from $65, primarily due to lower fuel expense and fewer special operating and non-operating charges. However, adjusted net income fell to $237 from $325, reflecting the impact of fuel-hedge mark-to-market adjustments and other reconciling items. Non-GAAP measures are defined and reconciled in the filing.
- Fleet transition charges were $156 in Q3 and $355 for the first nine months. These include impairment and other costs. The company recorded a $123 million Q3 impairment charge related to the A321neo fleet; the note’s summary table reports $120 million of net impairment for the quarter.
- Following agreements to exit and purchase its ten A321neo leases, seven aircraft were reclassified as finance leases; related liabilities were $452. Three aircraft purchases had closed by quarter-end. The company subsequently agreed to sell all ten aircraft to American Airlines, with purchases and sales expected to complete in Q4 2023 and Q1 2024.
- Q3 passenger revenue was affected by approximately $20 million of reduced revenue associated with Maui travel cancellations after the August wildfires.
- At September 30, marketable securities had a fair value of $1,804 versus a $1,884 cost basis; management attributed the unrealized decline primarily to interest rates and did not consider it credit-loss driven.
Outlook, risks and commitments
- Q4 2023 outlook: Management expected CASMex to decline 3%–5% year over year with capacity up 11%–14%; total revenue was forecast to rise 1%–4%. Expected economic fuel cost was $3.30–$3.40 per gallon.
- Full-year outlook: Management reduced its expected adjusted pretax margin to 7%–8%, citing higher-than-anticipated fuel headwinds and lower revenue expectations. It also noted some slowing in demand.
- Cost pressures include wage increases, ongoing labor negotiations, maintenance, airport fees and vendor costs. Alaska’s pilots received a market-rate pay adjustment effective September 1; negotiations continued with mainline flight attendants and mechanics.
- Boeing advised that some contracted 2023 aircraft deliveries were expected to shift into 2024. The company had $5,265 of aircraft-related commitments and $1,685 of capacity-purchase and other obligations in the commitments table; later MD&A tables reflected updated delivery assumptions.
- The Virgin trademark dispute remains unresolved. A court ruling adopted Virgin Group’s interpretation of the license; Alaska appealed. The filing states a possible contractual liability range of $10–$160 million and notes Alaska’s separate claim against Virgin Group.
- Other stated risks include fuel-price volatility, demand and seasonal fluctuations, competition, labor costs and availability, supply-chain constraints, aviation safety and security, and regulatory changes. The company also disclosed $165 of accrued upcoming leased-aircraft return costs.
Important facts for investors to verify
- Whether Q4 revenue, capacity, CASMex and fuel-cost guidance was achieved, and whether the 7%–8% full-year adjusted pretax margin outlook changed.
- Completion timing, proceeds and financial effects of the A321neo purchases and planned sales to American Airlines.
- Actual labor-contract outcomes and their effect on wage expense and unit costs.
- Debt, lease obligations, aircraft commitments and liquidity headroom, including the distinction between the filing’s $626 of total credit facilities and its MD&A reference to $550 of unused lines.
- Developments in the Virgin trademark litigation and any change to the stated potential exposure.