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 December 31, 2020. This overview summarizes the MD&A, which includes the following sections:

•First Quarter Review-highlights from the first quarter of 2021 outlining some of the major events that happened during the period and how they affected our financial performance.

•Results of Operations-an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three months ended March 31, 2021. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2021.

•Liquidity and Capital Resources-an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

FIRST QUARTER REVIEW

Business Recovery and Financial Outlook

The COVID-19 pandemic continues to have a material impact on our business. However, in the first quarter of 2021 we began to see positive momentum toward recovery. Vaccine availability, coupled with the relaxation of restrictions imposed by state and local governments helped to stimulate demand for air travel to the highest level since the onset of the pandemic. Positive revenue and forward booking trends, combined with the benefits from cost-saving measures enacted in 2020 and the PSP wage offset, drove positive operating cash flow of $167 million for the quarter.

During the first quarter of 2021, we also completed key milestones which will be instrumental to our future success. On March 31, 2021, Alaska formally entered the oneworld® alliance as the 14th member airline. Entry into the alliance will move Alaska forward as a global airline and will provide increased connectivity and benefits for our guests and Mileage Plan members. This alliance, coupled with our West Coast International Alliance with American, uniquely positions us for recovery through increased corporate travel and international connectivity.

Also in the first quarter of 2021, we finalized a previously announced deal with Boeing to restructure Alaska's aircraft purchase agreement and increase the number of firm aircraft deliveries. Under the terms of the agreement, Alaska will take delivery of 55 Boeing 737-9 MAX aircraft with options for an additional 52 planes. The deliveries secured under the Boeing agreement, as well as the 13 additional leased 737-9 MAX aircraft from Air Lease Corporation, provide Alaska with the ability to replace most of the outgoing leased Airbus fleet with more fuel efficient and cost-effective Boeing aircraft. The first four aircraft available under this agreement were delivered in the first quarter, with two entering revenue service in March.



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In 2021, guidance will be compared to 2019 as we believe it provides meaningful indication of the pace and quality of recovery to pre-pandemic levels. For the second quarter, we are planning for capacity to be approximately 20% below the same period in 2019. We expect to see continued increases in passenger counts during the summer travel season and as more destinations relax restrictions and the vaccine rollout continues. As we have been measured in returning capacity and optimizing the aircraft gauge for flown routes, we anticipate second quarter load factors to range between 70% to 75%.

Our outlook, and the guidance provided, is sensitive to health trends, the vaccine rollout, and regulations and restrictions imposed by state, local and federal authorities. Our plans for 2021 will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. Our people are focused on keeping our costs low, running a great operation, and welcoming guests back to travel with Next-Level Care to ensure they are safe and comfortable when they fly. These competitive advantages we have cultivated over many years will continue to serve us well in 2021 and beyond, and we are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.

Sustainability Updates

As we move into a new phase of recovery, we have shifted attention back to our 2025 strategic plan, which was announced in 2019. Recently, we published updates on our 2025 goals, which include increased commitments towards diversity, equity and inclusion, as well as expanded sustainability efforts. We have highlighted our commitment and support for equity in education through a new 737-900ER livery designed in partnership with the United Negro College Fund. Additionally, in April 2021, we announced strengthened commitments to reduce our carbon footprint, including joining the Amazon Climate Pledge, which calls for reducing our carbon emissions to net-zero by 2040. In order to achieve this, we have identified specific areas of focus, and have placed emphasis on goals which are achievable by 2025, including becoming the most fuel-efficient U.S. airline and reducing emissions from ground service equipment by 50%.

As a reflection of the importance of the commitments made, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emission target into our company-wide performance-based pay program.

Financial Overview

Our consolidated pre-tax loss for the first quarter of 2021 was $173 million, compared to a pre-tax loss of $317 million in the first quarter of 2020. The $144 million improvement is primarily driven by the $411 million wage offset from the extension of the Payroll Support Program of the CARES Act, as well as lower wages and benefits and aircraft fuel due to decreased flight activity. These benefits were offset by a decrease of $839 million in operating revenue, primarily a result of reduced demand for business and leisure travel during the COVID-19 pandemic.

See "Results of Operations" below for further discussion of changes in revenues and operating expenses 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.




RESULTS OF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of the Payroll Support Program grant wage offset, special items, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

•By excluding fuel expense and certain special items (including the Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs) 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 labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.



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•Cost per ASM (CASM) excluding fuel and certain special items, such as the Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

•Adjusted income before income tax (and other items as specified in our plan documents) is an important metrics for the employee annual cash incentive plan, which covers the majority of employees within the Air Group organization.

•CASM excluding fuel and certain special 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.

•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 revenues, we do not (nor are we able to) evaluate unit revenues 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 revenues 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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