ALASKA AIR GROUP, INC. quarterly report, Q3 FY2022

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Alaska Air Group, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.

Business context and operating performance

Alaska Air Group operates Alaska Airlines, Horizon Air and related businesses. Management cited strong travel demand and record quarterly revenue, alongside higher fuel, labor and fleet-transition costs. Q3 capacity (ASMs) rose 13.3% year over year; passenger traffic rose 22.0%, load factor increased to 86.5% from 80.3%, and yield rose 20.8%.

Financial results and liquidity

  • Q3 revenue: $2.828 billion, up 45% from $1.953 billion. Passenger revenue was $2.615 billion, up 47%.
  • Q3 earnings: GAAP operating income was $62 million, pretax income $65 million and net income $40 million ($0.31 diluted EPS), versus $258 million, $245 million and $194 million ($1.53), respectively, in Q3 2021. GAAP pretax margin was approximately 2.3%.
  • Adjusted Q3 results: Adjusted pretax income was $441 million versus $236 million; adjusted net income was $325 million ($2.53 diluted EPS) versus $187 million ($1.47). These are non-GAAP measures and exclude specified items, including mark-to-market fuel hedge adjustments.
  • Nine-month results: Revenue was $7.167 billion, up 68%. GAAP net income was $36 million ($0.28 diluted EPS), compared with $460 million ($3.64) in 2021; adjusted net income was $438 million ($3.42 per diluted share), compared with an adjusted net loss of $287 million.
  • Costs and margins: Q3 fuel expense rose 133% to $877 million; economic fuel cost was $3.66 per gallon, up 78.5%. Non-fuel expense excluding special items increased 24%. CASM excluding fuel and special items increased 9.1% to 10.05 cents. Nine-month adjusted pretax margin was 8.0% (versus 0.6% in 2021).
  • Cash flow: Nine-month operating cash flow was $1.409 billion, compared with $901 million. Investing cash outflow was $888 million, including $947 million of property and equipment additions; financing cash outflow was $296 million. Cash, cash equivalents and restricted cash ended at $719 million.
  • Liquidity and debt: Cash and marketable securities totaled $3.150 billion at September 30, 2022, versus $3.116 billion at year-end 2021. Total debt was $2.210 billion, including $321 million current; long-term debt excluding current maturities was $1.889 billion. The company repaid $333 million of debt during the first nine months. Debt-to-capitalization including operating leases was 49%; adjusted net debt to trailing-twelve-month EBITDAR was 0.6x. The company reported compliance with credit-facility covenants.

Material changes and unusual items

  • Higher passenger demand and yields drove revenue growth, but fuel, wages and operating costs rose materially. Against Q3 2019, revenue was up 18%, while pretax income was down 84%; capacity was 7% lower.
  • Q3 special charges included $155 million for Airbus and Q400 fleet transitions and a $90 million Alaska pilots’ ratification bonus. Fleet-transition charges totaled $376 million for the first nine months; the company expected most remaining charges in 2022, with further A321neo-related charges in 2023.
  • The company recorded a $131 million Q3 mark-to-market fuel-hedge loss in GAAP fuel expense; settled hedges provided a $29 million benefit. The timing of mark-to-market recognition can make GAAP results differ from the cash-oriented economic fuel measure.
  • Q3 included $28 million of employee recognition expense related to a 90,000-mile Mileage Plan gift for each employee. New labor agreements added $35 million of Q3 costs; the company estimated another $55–$60 million of related costs in Q4.
  • Marketable securities had a $2.6 billion cost basis and approximately $2.5 billion fair value; management attributed the decline primarily to interest-rate changes and did not consider unrealized losses to reflect expected credit losses.

Outlook, commitments and risks

  • For Q4 2022, management expected capacity down 7%–10% versus 2019, CASMex up 20%–23% versus 2019, and revenue 12%–15% above 2019. Full-year capacity was expected down 8%–9% versus 2019, with adjusted pretax margin guidance maintained at 6%–9%.
  • Management forecast Q4 economic fuel cost of $3.50–$3.70 per gallon and expected a smaller hedge benefit than in earlier 2022 quarters. Q4 fleet-transition charges were estimated at $100–$125 million. 2022 capital expenditures were expected to be $1.5–$1.6 billion.
  • The company is accelerating its transition to an all-Boeing 737 mainline fleet and all-Embraer regional fleet, including planned retirements of Airbus A320s and Horizon Q400s. Boeing had indicated certain deliveries would be delayed. After quarter-end, Alaska agreed to exercise options for 52 Boeing 737s for 2024–2027 deliveries and secured rights to 105 more through 2030; these incremental firm commitments were not contractually obligated at quarter-end.
  • Aircraft and related contractual commitments are substantial: the filing’s contractual-obligations table totaled $13.301 billion, including aircraft-related commitments of $6.939 billion. The company said it expected to fund aircraft deliveries through operating cash flow or long-term debt.
  • Key contingencies include a Virgin America flight-attendant wage-and-hour class action, with a stated potential loss range of $0–$22 million and a $22 million accrual, and a Virgin trademark royalty dispute. The latter concerns a claim for $8 million annually, adjusted for inflation, through 2039; a trial occurred in October 2022 and further proceedings were possible.
  • Management noted uncertainties from fuel prices, travel demand, labor costs and training, fleet transition and aircraft delivery timing, as well as broader economic and competitive conditions. Credit-card agreements could require reserves under specified credit-rating or liquidity triggers; no reserve was required at quarter-end.

Important facts for investors to verify

  • Whether strong demand and yield levels persist while capacity is constrained and operating costs rise.
  • Actual Q4 and full-year performance against the stated capacity, CASMex, revenue, fuel-cost and adjusted-margin outlook; note that guidance is non-GAAP where specified.
  • The amount and timing of remaining fleet-transition costs, aircraft deliveries, capital spending and related financing needs.
  • Developments and potential financial or operational effects of the flight-attendant class action and Virgin trademark litigation.
  • Liquidity and covenant headroom, including the potential effect of any credit-card reserve triggers and changes in the value of marketable securities.