ALASKA AIR GROUP, INC. OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand our
company, segment operations and the present business environment. MD&A is
provided as a supplement to - and should be read in conjunction with - our
consolidated financial statements and the accompanying notes. All statements in
the following discussion that are not statements of historical information or
descriptions of current accounting policy are forward-looking statements. Please
consider our forward-looking statements in light of the risks referred to in
this report's introductory cautionary note and the risks mentioned in "Item 1A.
Risk Factors" of our Annual Report on Form 10-K for the year ended
•Second Quarter Review-highlights from the second quarter of 2022 outlining some of the major events that occurred during the period and how they affected our financial performance.
•Results of Operations-an in-depth analysis of our revenue by segment and our
expenses from a consolidated perspective for the three and six months ended
•Liquidity and Capital Resources-an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
SECOND QUARTER REVIEW
Business Recovery and Second Quarter Results
We recorded consolidated pretax income for the second quarter of 2022 under GAAP
of
As we ramp capacity back to 2019 levels, we have experienced increases to
non-fuel operating expenses. Costs have also been impacted by inflationary
pressures and supply chain constraints. Non-fuel operating expense, excluding
special items, rose 26% over the prior year period, driven by a combination of
increased departure-related costs on 16% more capacity flown and higher wages
and training costs as we hire new employees. Second quarter fuel prices were at
historically high levels. Although our hedging program provided a benefit of
See "Results of Operations" below for further discussion of changes in revenue and operating expenses as compared to 2021, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
Environmental, Social and Governance Updates
In order to achieve our long-term target of zero carbon emissions by 2040, the use of sustainable aviation fuel (SAF) will play a crucial role. During the quarter, we signed an agreement with Aemetis to purchase 13 million gallons of SAF to be delivered over the seven year term of the agreement. Subsequent to quarter end, we announced a partnership with Microsoft and Twelve, a carbon transformation company, to advance the use of SAF within the commercial airline industry.
Delivering on our diversity, equity and inclusion goals is critical to our long-term success. As a reflection of our commitment to these goals, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we
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have incorporated a carbon emissions target into our company-wide Performance Based Pay Plan, which is currently tracking to target achievement.
Labor Update
In
Outlook
For the third quarter and remainder of the year, we remain committed to best positioning our airlines for long-term sustainable growth. We have moderated our capacity plans for the remainder of the year to stabilize our operation, improve our training throughput and execute on our fleet transition plans. As a result, we now anticipate our capacity for the third quarter to be down 5% to 8% versus 2019, with full year capacity down 8% to 9%. Lower capacity, coupled with pressures from wages and training costs, has shifted our expectation for third quarter CASMex to be up 16% to 19% over 2019. Continued strength in the demand environment is expected to generate revenue 16% to 19% over 2019 levels. For the full year, we continue to anticipate adjusted pretax margins will range between 6% and 9%.
Although our operations have stabilized, ongoing industry-wide labor shortages and supply chain delays could have a material impact on our results moving forward. Our plans will continue to be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. As we leverage our network, Mileage Plan program, and fleet for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years that will continue to serve us well in 2022 and beyond.
RESULTS OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of aircraft fuel, the Payroll Support Program grant wage offset and other special items is useful information to investors because:
•By excluding fuel expense and certain other items, such as the Payroll Support Program grant wage offset and other special items, from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as productivity, airport costs, maintenance costs, etc., which are more controllable by management.
•Cost per ASM (CASM) excluding fuel and certain other items, such as the Payroll Support Program grant wage offset and other special items, is one of the most important measures used by management and by our Board of Directors in assessing quarterly and annual cost performance.
•CASM excluding fuel and certain other items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.
•Adjusted income before income tax (and other items as specified in our plan
documents) is an important metric for the employee annual incentive plan, which
covers the majority of employees within the
•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above
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is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
•Although we disclose our unit revenue, we do not, nor are we able to, evaluate unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
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