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
•Third Quarter Review-highlights from the third 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 nine months ended
•Liquidity and Capital Resources-an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
Third Quarter Results
We recorded consolidated pretax income for the third quarter of 2022 under GAAP
of
In the third quarter non-fuel operating expense, excluding special items,
increased 24% over the prior year period. The increase was driven by incremental
departure related costs on 13% more flown capacity, as well as higher wages and
training costs. Costs were also pressured by the impact of new labor agreements,
elevated staff levels relative to our level of flying, and a one-time charge 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.
Labor Update
During the third quarter, we reached three new labor agreements. In
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new agreement includes increased pay and benefits as well as improvements to job
security and scheduling. Also in
As a result of these new agreements, we recorded
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 Gevo Inc. to purchase 185 million gallons
of SAF to be delivered over the five year term of the agreement beginning in
2026. We also launched a new initiative in partnership with Microsoft, Boeing,
and
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 have incorporated a carbon emissions target into our company-wide Performance Based Pay Plan, which is currently tracking to maximum achievement.
Outlook
We remain committed to our transition to a single fleet for both our mainline and regional operations, which will best position our airlines for long-term sustainable growth. In working toward this goal, our capacity for the fourth quarter is expected to be temporarily constrained as we focus on pilot transition training. As a result, we anticipate capacity for the fourth quarter to be down 7% to 10% 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 fourth quarter CASMex to be up 20% to 23% over 2019. Continued strength in the demand environment is expected to generate revenue 12% to 15% over 2019 levels. For the full year, we continue to anticipate adjusted pretax margins will range between 6% to 9%.
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 in the remainder of 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.
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•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 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 nonrecurring, infrequent, or unusual in nature.
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