Alaska Air Group, Inc. — Q1 2023 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2023, and includes Alaska Airlines, Horizon Air, McGee Air Services and other immaterial units. Results are seasonal and, the company cautions, are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Operating revenue | $2.196 billion | $1.681 billion; up 31% |
| Operating loss | $186 million | $202 million loss |
| Net loss / diluted loss per share | $142 million / $1.11 | $143 million / $1.14 |
| Adjusted pretax loss (non-GAAP) | $115 million | $238 million |
| Adjusted net loss / diluted loss per share (non-GAAP) | $79 million / $0.62 | $167 million / $1.33 |
| Operating cash flow | $222 million | $287 million |
| Cash and marketable securities | $2.429 billion at March 31 | $2.417 billion at December 31, 2022 |
| Total debt, net of issuance costs | $2.063 billion | $2.159 billion at December 31, 2022 |
Passenger revenue rose 31% to $1.984 billion; Mileage Plan other revenue increased 38% to $154 million, while cargo and other revenue was unchanged at $58 million. Passenger traffic rose 19%, yield 11%, and load factor increased 3.1 percentage points to 79.9%. Consolidated revenue per available seat mile (RASM) increased 15% to 13.98 cents. CASMex, the company’s non-GAAP unit-cost measure excluding fuel and special items, declined 1% to 10.53 cents.
Fuel expense increased 92% to $665 million, including a $20 million mark-to-market hedge loss versus a $107 million gain in Q1 2022. Economic fuel cost per gallon rose 30% to $3.41. Non-fuel operating expenses excluding special items increased 13% to $1.653 billion. The company reported a 48% debt-to-capitalization ratio including operating leases and adjusted net debt to trailing-twelve-month EBITDAR of 0.8x.
Material changes and notable items
- Higher passenger demand, traffic, yield and Mileage Plan partner commissions drove revenue growth. The company notes that the comparison also benefited from Q1 2022 travel demand being suppressed by the Omicron variant.
- Wages and benefits increased 19%, primarily reflecting higher wage rates from labor agreements and 6% more full-time-equivalent employees. Elevated fuel prices and higher capacity-related costs also weighed on results.
- The company recorded $51 million of labor-related special expense for a one-time change to accrued pilot sick-leave benefits. Fleet-transition and other special charges were $13 million, compared with $75 million in Q1 2022, which included a $70 million long-lived-asset impairment.
- Alaska retired its remaining A320 and Q400 aircraft in January 2023 and planned to retire its ten A321neo aircraft by September. After quarter-end, it agreed to exit leases on four A321neos and purchase the aircraft for resale; expected 2023 cash outflows are approximately $250 million. These agreements were not reflected in the quarter-end statements.
- The company repurchased 413,554 shares for $18 million during the quarter, restarting its existing repurchase program.
Liquidity, commitments and risks
Operating cash flow was $222 million, down $65 million year over year, partly because cash payments for the 2022 performance-based pay program were approximately $110 million higher than payments for the prior-year program. Investing activities provided $60 million, including net sales of marketable securities; financing activities used $114 million, including $96 million of debt payments and $18 million of share repurchases. Quarter-end cash, cash equivalents and restricted cash totaled $537 million.
The company reported $400 million of unused credit lines in its liquidity discussion and said it had 72 unencumbered aircraft available for potential financing. It stated that available liquidity should be sufficient for foreseeable operating and debt needs. Credit facilities require at least $500 million of unrestricted cash and marketable securities; the company was in compliance at quarter-end. Certain credit-card agreements could require reserves if specified credit-rating or liquidity triggers are met.
- Management estimated another $300 million to $350 million of fleet-transition special charges for the remainder of 2023, primarily related to accelerated A321neo ownership expenses. It also anticipated adjustments to A320 lease-return estimates. Accrued aircraft return costs were $225 million at March 31.
- Aircraft-related contractual commitments totaled $6.197 billion; debt principal payments totaled $2.078 billion. Certain Boeing 737 deliveries expected in 2023 were delayed into 2024.
- The Bernstein flight-attendant case had a $31 million final judgment, with attorneys’ fees still to be determined; the company accrued $37 million. A related Washington lawsuit has no probable, estimable liability determined to date.
- In the Virgin trademark dispute, an English court adopted Virgin Group’s interpretation of the agreement. The company is appealing and disputes the claim; the stated possible contractual liability ranges from $10 million to $160 million. A separate company claim may affect total liability.
- The company identifies fuel-price volatility, labor costs and agreements, operational execution, aircraft delivery timing, and litigation as relevant uncertainties. It reported no material change in market-risk disclosures from its 2022 Form 10-K.
Guidance and management outlook
Management expected Q2 2023 total revenue to increase 2.5%–5.5% year over year on capacity growth of 6%–9%, and CASMex to increase 1%–3%. It forecast Q2 economic fuel cost of $2.95–$3.15 per gallon. For full-year 2023, it maintained prior guidance for an adjusted pretax margin of 9%–12%. Management cited near-term demand strength and progress in productivity, training and aircraft utilization, while noting inflation, labor and maintenance-cost pressures. These are forward-looking estimates and may change.
Important facts for investors to verify
- Whether demand, capacity growth, yield and Mileage Plan revenue support the stated Q2 and full-year outlook.
- Actual fuel costs, hedge settlements and mark-to-market effects, and the impact of labor and maintenance costs on CASMex.
- The amount and timing of A321neo transition charges, the approximately $250 million aircraft transaction cash outflow, and lease-return costs.
- Boeing delivery schedules, capital commitments and the company’s ability to maintain liquidity and credit-facility covenant compliance.
- Developments in the Bernstein, Krueger and Virgin trademark matters, including judgments, fees, appeals and any changes to recorded liabilities.