Blackboxstocks Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 18 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 First Quarter Earnings Call. At this time, all participants have been placed on mute to prevent Today's call is being recorded and will be accessible for future playback at alaskaair.com. Back and forth. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, the Planning and Investor Relations, Ryan St. John.

Speaker 1

Thank you, operator, and good morning. Thank you for joining us for our Q1 2023 earnings the call. This morning, we issued our earnings release, which is available at investor. Alaskaair.com. On today's the call, you'll hear updates from Ben, Andrew and Shane.

Speaker 1

Several others of our management team are also on the line to answer your questions during the Q and A portion of the call. This morning, Air Group reported a 1st quarter GAAP net loss of $142,000,000 Excluding special items and mark to market fuel hedge adjustments, Air Group reported an adjusted net loss of $79,000,000 As a reminder, our comments today will include forward looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non GAAP financial measures, such as adjusted earnings and unit cost, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non GAAP measures in today's earnings release.

Speaker 1

Over to you, Ben. Hello, and good morning, everyone. Before I begin, I want to welcome Ryan St. John as our new Head of Investor Relations. Ryan is a 15 year veteran of Alaska and also leads our financial and resource planning groups.

Speaker 1

I'm excited to see Ryan step into this role and know he will do a great job in it. I also must acknowledge Emily Halverson, who Ryan is replacing. Emily stepped into the IR role at the onset of the pandemic, Not the easiest time to learn how to do this important and challenging work. Emily has been fantastic as our Head of IR, but this change will allow her to fully focus on leading our accounting and financial reporting functions as our controller. So now turning to our results.

Speaker 1

Despite our Q1 loss, I am pleased to report that our operational and financial performance trended positively as we progress throughout the quarter. We are actively driving improvements in our business, and I believe we are well positioned to capitalize in the second and third quarters. It's important to note that Alaska, along with the entire industry, historically experiences weaker results in the Q1 and our loss is the impact of the current network seasonality. In the past, Alaska has found ways to breakeven or earn a small profit in the Q1. Therefore, we are setting a target to reduce our Q1 profit seasonality over the next few years.

Speaker 1

That's the right goal for us to have in the future and it will have a meaningful impact on our full year results. The start of this year has presented more challenging weather conditions than we've seen historically. Persistent storms, regular snow and elevated icing conditions throughout January February across all our geographies, including California, the higher cancellation rates than normal. Additionally, volcanic ash in Alaska and the Pacific Northwest the recently disrupted our operations for several days. Despite these challenges, we still operated with one of the best on time rates and we are second in completion rate year to date.

Speaker 1

We will continue to prioritize operational performance and we remain committed to delivering a reliable experience for our people and our guests, especially as we move into peak demand periods. Although we can't control what mother nature throws at us, I have set a goal for our teams to significantly harden our operational resiliency before next winter and to reduce cancels and customer impacts from weather to the greatest extent possible. The total impact of storms in Q1 We're in the order of $13,000,000 But most importantly, this quarter, we delivered on metrics that were squarely within our control. 1st quarter capacity, revenue and unit cost excluding fuel all landed within our originally guided ranges. I am particularly encouraged to see less close in variability and greater stability when forecasting company performance better than we've seen in the past 3 years.

Speaker 1

As stability returns, our ability to execute on our cost and commercial initiatives improves. Looking ahead, our outlook and priorities remain unchanged as we continue to execute on our strategic initiatives. Our teams remain focused on returning us to the foundational strengths that have served Air Group well for decades. These strengths, including operational excellence, discipline cost management, high productivity and low overhead will continue to be the primary drivers of consistent profitable growth and we are making good progress on several fronts. Our productivity trends are improving.

Speaker 1

Total passengers per FTE is up 6% compared to last year, and we have increased total aircraft utilization by 14%. In fact, our mainline utilization has exceeded 2019 levels. F and T and attrition rates have declined across all work groups, including pilot attrition rates after the ratification of our new contract back in October. With several labor contracts signed last year, We are looking forward to reaching a deal with our flight attendants and aircraft technicians soon to complete the cycle. Our move to a single mainline fleet is driving better economics.

Speaker 1

We have improved fuel efficiency by 4% year over year this quarter or the equivalent of $25,000,000 the 7,000,000 fuel gallons saved as a direct result of the superior MAX aircraft in our fleet. This is equivalent of taking 15,000 cars off the road each year. Additionally, our up gauging strategy, which adds 28 more seats per aircraft than the A320s we replaced allows us to unlock growth efficiencies without adding departures within an the already constrained operating environment. As a result, we are now producing 20% more ASMs per aircraft better than we did at this time last year. Finally, our balance sheet continues to be a pillar of strength.

Speaker 1

Our trailing 12 month return on invested capital Has continued to improve reaching double digits for the first time since the pandemic began. Our financial strength has also allowed us to support a long history back the call. And during the Q1, we officially restarted our share repurchase program to offset dilution and remain on target to spend at least $100,000,000 this year. As we approach our busy Q2 and Q3, We are well prepared for peak summer flying. We have taken proactive steps to prepare our airline, including doubling our pilot training throughput Compared to the same period last year and providing a one day immersive care retreat to 14,000 guest facing employees.

Speaker 1

This retreat emphasized our core values of being kindhearted and doing the right thing, as well as focused on self care, team care and guest care, which are essential to our culture. This has become even more important and necessary in leadership's view post pandemic. Our people are integral to our success and I am proud of the work they do preparing our airline to meet demand while performing at a high level of operational excellence. We have taken deliberate steps to build momentum coming out of this recovery and to fortify our ability to deliver on our targets. As we look forward, we have line of sight to returning to strong double digit adjusted pretax margins this quarter.

Speaker 1

And assuming a stable economy, we remain confident that we will deliver our full year adjusted pretax margin of 9% to 12% better and earnings per share of $5.50 to $7.50 which we believe will be at or near the top of the industry. Despite the potential for a recession and softening in some sectors of the economy, travel demand remains strong. And while our industry and business may face continued economic volatility in 2023, it remains to be seen if there will be any negative impact on revenue. At Alaska, we have a proven track record of adapting and navigating challenging environments. As we progress on our roadmap to profitable growth, We are already seeing the benefits of restoring our historical strengths as a single fleet operator and unlocking new commercial initiatives.

Speaker 1

This positions us well in any environment to continue to deliver on our financial commitments and drive our long term success. That. And with that, I'll turn it over to Andrew.

Speaker 2

Thanks, Ben, and good morning, everyone. My comments today will focus on our Q1 results And in particular, on March, which I believe is more indicative of what we see going forward. I'll also share our thoughts on better results from the Q1 trends and guidance. 1st quarter revenues totaled $2,200,000,000 and that's up 31% versus the Q1 of 2022 with capacity up 14% over the same period. This marked a significant milestone for us as we finally restored capacity to pre pandemic levels, a 3 year journey.

Speaker 2

The load factor came in at 80%, exceeding last year's load by 3 points as we lap the effects of Omicron in early 2022. Even when comparing our results to 2019, we delivered strong revenue progression throughout the quarter with January unit revenues up 13%, February up 15% March up 19%. The strong results in March are a good indication of where we're headed as we look to the 2nd quarter. Total March revenue came in above our record breaking March last year on both higher capacity better and higher yields, while our pretax margin was nearly 2 points better despite higher fuel prices. Throughout my tenure at Air Group, this airline has been solidly profitable 10 months of the year, with January February always being the most difficult due to our network configuration and predominantly leisure consumer base.

Speaker 2

Layer in business travel that hasn't fully recovered the impact of the impact of the impact of the impact of the impact of the impact of the impact of the impact of the impact of the

Speaker 1

impact of the impact of the impact of the impact of the impact of the impact

Speaker 3

of the impact of the impact of the

Speaker 2

impact of the impact of the impact of the impact of the impact of the the seasonally low demand with an aim to return to breakeven or better in the Q1 in future years. Moving to business travel. Nearly all of our core hubs are in geographies where business has not returned as quickly as in other major economic centers throughout the country. The corporate layoffs and a heavy concentration in the tech sector being major contributors. Yet despite the lagging tech sector, which is roughly 50% to 60% further declines.

Speaker 2

Overall business travel remains around 75% recovered by volume the Travel is upside for us, which we have not factored into our revenue forecasts. There may be opportunity ahead as corporate travel budgets increase given some companies begin returning to the office and move into new fiscal periods later this year. We see continuing strength this year in premium and loyalty performance. 1st and premium class revenues were up 35% 33% the year over year, respectively, on higher payload factors and fares. This front cabin preference has persisted, and I expect this trend to continue.

Speaker 2

Bank cash remuneration also remains strong as we lap the anniversary of our renewed credit card deal with Bank of America. That. For the quarter, it was up 17% year over year. And with the launch of our new card benefits, acquisitions have exceeded our expectations, the highest quarterly sign ups in our history, surpassing 100,000 new cards during the quarter. Regarding network and alliances, we are progressing nicely on our plan to unlock selling capabilities for 10 airline partners on our website this year, with the goal of making alaskaair.com a gateway to the world for our guests.

Speaker 2

Since our last call, We've turned on selling capabilities for Iberia as partner number 5, and work is currently underway to launch 3 more airlines by summer. While we know partner enabled selling drives positive yield contributions to our network, direct sales also offer a low cost distribution channel that not only the efforts of our partners, but reinforces to our guests that Alaska Airlines can deliver on their global travel needs, which in turn keeps our guests within our network and loyalty program. I'm excited to see this area of our commercial initiatives continue to grow and drive incremental benefit in line with our goals to enable 8% to 10% of our total revenues through Alliance Partners. Turning to 2nd quarter guidance. We have line of sight to delivering strong results above and beyond the record quarter we produced last year during the demand surge our industry experienced.

Speaker 2

For Q2, we expect total revenue to be up 2.5% to 5.5% year over year on capacity that is up the 6% to 9%. While we experienced softness in close in bookings in January February, Which is understandable given the lack of business travel that usually materializes during this period. We exited March seeing improved performance across the booking curve. Near term, we continue to see strength in demand with held yields sitting above both 2019 2022 levels that as we move into the Q2. My team is doing a great job optimizing the load and yield equation as the impact of the company's revenue.

Speaker 2

I'm very excited to have Kirsten Amrein step into her new VP role, the disconnection of the company's business. Kirsten has spent her 16 years at Air Group in various roles in revenue management. Your deep knowledge and expertise have been an asset as we constantly learn how to manage our inventory to account for new shifts in booking patterns and make network adjustments going forward. Brett Catlin has done a fantastic job at managing our network for the last 4 years, And he will be taking on direct responsibility for our loyalty and credit card programs, corporate sales and continuing his alliance responsibilities. These leadership changes will ensure that the commercial organization stays laser focused and coordinated on these critical revenue generating levers.

Speaker 2

As Ben mentioned, our growth this year is primarily being driven by Gauge and Stage, a highly efficient form of expansion. Having returned to pre pandemic levels of capacity at a system level, we are focused on building network depth in Portland and working to fully restore our network in many California markets. Looking to the remainder of the year, we are poised to produce strong results as the we rebuild our network, up gauge efficiently and refine our revenue capabilities within this evolving demand environment. Importantly, we are performing in line with our internal targets and remain confident in delivering on our full year goals. We have proven product initiatives in place, and they will continue to drive value for our business as we move forward.

Speaker 2

And with that, I'll pass it over to Shane.

Speaker 3

Thanks, Andrew, and good morning, everyone. As Ben mentioned, we experienced improved stability to the business this quarter, Which was good to see. In my experience, the biggest challenge to operational and cost management historically has been volatility. And as that volatility subsides, our ability to drive consistent operational and cost improvements is enhanced. I'm encouraged that we were able to start the year with financial performance, absent fuel price impacts within our original guidance ranges.

Speaker 3

Alaska has a long history of delivering on our commitments and guidance, and we are focused on doing so again in the Q2 and for the full year. Turning to our balance sheet and liquidity, we remain well positioned with both. Our debt to cap finished the quarter at 48% And our net debt to EBITDAR stood below one turn at 0.8 times. Both of these metrics are within our long term target ranges. Debt payments were approximately $100,000,000 for the quarter and are expected to be $50,000,000 $100,000,000 in the second and third quarters respectively.

Speaker 3

We We generated $222,000,000 in cash flow from operations during the quarter, while total liquidity inclusive of on hand cash and undrawn lines of credit that was a healthy $2,800,000,000 at quarter end. As our business normalizes and we continue to pay for aircraft deliveries, We will anchor toward the higher end of our target liquidity range of 15% to 25% of revenue or around $2,000,000,000 to $2,400,000,000 back pain, inclusive of lines of credit. Our trailing 12 month return on invested capital surpassed double digits and closed the quarter at 10.6%. The last time we achieved double digit trailing 12 month ROIC was, not surprisingly, February of 2020. It's nice for this metric to once again be well above our cost of capital and our goal is to now remain above 10% and grow from there.

Speaker 3

We also restarted our share repurchase program this quarter and have spent approximately $23,000,000 year to date, a marker on our way to returning to our long term capital allocation goals. Turning to the performance of the business. We executed to our plan in the quarter, again, absent fuel price. 1st quarter CASM ex was down 1% year over year on capacity up 14%, both within our guided ranges. Our teams did an excellent job delivering on their internal targets, With the only source of significant variance being the cost of challenging winter weather that Ben mentioned, which was approximately $8,000,000 of cost the impact of the $13,000,000 total impact.

Speaker 3

Our completion rate exceeded our goal, while daily aircraft utilization increased 14% year over year, that, helping us return to pre pandemic capacity. With the retirement of our A320s and Q400s in January, Our total aircraft count was down 29 aircraft, yet ASMs were up 14% versus Q1 2022, backtracking the impact of both utilization and the benefits of our upgauging strategy. It's worth acknowledging that our capacity was at the high end of our guide back and our CASM ex fuel was just below our midpoint. I would like to see us return to our historical pattern of matching capacity outperformance with commensurate cost outperformance and I'm confident we will ultimately see this.

Speaker 1

We are

Speaker 3

wholly focused on continuing to rebuild this muscle over the next several quarters. Fuel was a clear headwind in the Q1. While crude prices were between $70 $80 per barrel during the quarter, Refining margins continued to be particularly volatile, although they have been more stable in the past few weeks at what I would view as reasonable levels. Our first quarter fuel price was $3.41 per gallon versus our original guidance midpoint of $3.25 versus $2.62 last year. This added more than $30,000,000 of costs versus our guide, which equated to approximately 150 basis points in margin impact.

Speaker 3

For the Q2, we estimate our price per gallon will be between $2.95 $3.15 We hope this is a conservative guide as month to date, our all in per gallon price is close to the $2.95 low end of our guide. At any fuel price within our range, we have line of sight to solid double digit pre tax margins for the quarter, with any additional price favorability contributing direct the upside opportunity to our results. Turning to capacity and cost guidance, we expect capacity to be backlogs up 6% to 9% versus Q2 2022 and CASM ex to be up 1% to 3%. While lower than the 14% year over year capacity increase in the Q1, when comparing to 2019, our Q2 and first half capacity From a cost standpoint, the Q1 year over year comparison benefited from $35,000,000 of lease return costs rolling off, while this is not the case for the 2nd quarter. Along with lower sequential year over year growth, we have a slightly tougher cost comparison set up this quarter.

Speaker 3

For the full year, we still expect to reduce unit cost the 1% to 3% as we drive productivity improvements, leverage the restoration of our full network and lap labor deals in the back half of the year. Regarding our fleet transition, September 2023 will be the final month we operate the Airbus fleet, at which point we will retire the last back to the U. S. And A321s from what was at one point a 72 aircraft fleet. This cements our future as a single fleet operator by 2024.

Speaker 3

And as a result of this acceleration, we expect to incur approximately $300,000,000 to $350,000,000 in special fleet transition charges through the end of the year. By fully retiring the Airbus fleet at the end of the Q3, we expect all of our pilot training and associated transition costs that should now be completed by year end with very little spillover into 2024. We will plan to transition the remaining Airbus pilots in the Q4 of this year, future. As we've mentioned before, following the setbacks we experienced last year, we de risked our 2023 capacity plan considerably And we'll remain conservative in our capacity commitments as we protect stability and prioritize reliability in our operation, which essentially means that we may continue to perform at the higher end of our guided capacity range if our completion rate continues to be strong. In closing, our management team has been very intentional in setting targets and ensuring we execute the steps necessary to deliver on them.

Speaker 3

We know we still have work to do, but we are encouraged by our recent results and are optimistic about the second and third quarters, which are our peak performance periods. We remain of the belief that we have core competitive advantages, the right business model and the right strategic initiatives to continue to drive outperformance versus our peers in whatever economic backdrop we encounter. And with that, let's go to your questions.

Operator

Thank you. And our first question today will come from Savi Syth with Raymond James.

Speaker 4

Hey, good morning, everyone. I wonder if you could talk about a little bit about what you're seeing in terms of Kind of passenger travel changes versus pre pandemic be in terms of booking curve, seasonality, day of week or destination. Just curious on how that's progressing and how that's impacting how you're forecasting things?

Speaker 2

Hey Savi, good morning. We're still working and observing that we build back, but a couple of things I will share is that number 1, I think the booking curve is back sort of to 2019 levels. So we're sort of seeing leisure booked further the out again. So that's the first thing. I think second thing on the big day a week changes Friday Sunday are still Krasim Kings.

Speaker 2

They generate the highest unit revenues of the week, but we've seen Saturday take a step change up and that's been one of the strongest increase in unit revenue days a week. And so Flying a bit more on Saturdays. I think Wednesday, Tuesday are the weakest and then sort of Thursdays and Mondays. Another big change that's occurred is sort of the advance booking window. I think in my career, I've never seen 30 day advance purchase barriers that have gone up and we're seeing that across our network, Which sort of leads me to believe that essentially business travelers are actually booking further out than they have historically.

Speaker 2

And then the last thing I would mention is Ben is Well articulated is, we need to do a much better job at matching supply and demand in what seems to be a weaker January February with business traffic essentially down 25% at this time.

Speaker 4

That's helpful color. Thanks. And then if I might, on the fleet transition, the special charge that you talked about, is any of that cash this year? And just If you could talk a little bit more about how that transition went in the kind of the first part with the A320s and How that's informing how you do the A321 transition?

Speaker 5

Hey Savi, this is Emily. I will start on the cash and then I'll hand it over to Nat the fleet transition itself. Some of the cash will hit this year. I expect most of it most of what Shane mentioned, the $300,000,000 to $350,000,000 to hit over the next 12 months. We also have some cash that will be incurred this year related to the accruals that were taken last year.

Speaker 5

So as we work through the remainder of the A320 transition, it's all through the P and L already, but the cash is still going to be incurred in 2023.

Speaker 6

And Savi, on the A321s, it's Nat. We're really excited as You gather from Shane, from Ben, from Andrew, really everybody at Air Group to get this fleet transition done and get the single fleet as fast as we can. The op plan is in motion and now the last hurdle we've got to get over is to come up with an A321 exit plan and We're getting close. Late stage discussions with a bunch of parties, lessors, financial firms, other airlines, And our objective is to paper the transaction for the 10 aircraft by the end of the second quarter. And we're confident the way we've structured it that will come out on an NPV and cash flow positive basis versus parking the aircraft to maturity and just making lease payments until then.

Speaker 4

That's helpful. All right. Thank you.

Speaker 1

Thanks, Avi. Thanks, Avi.

Operator

And our next question comes from Connor Cunningham with Melius Research.

Speaker 7

Hi, everyone. Thank you. So the implied exit rate on cost is obviously awesome. But can you just speak to how you get to the high and low end of the full year guide? The reason why I ask is that the ARK seems the ARK and improvement seems pretty steep from up to the I think you're implying basically like down 6% in the 4th quarter.

Speaker 7

So I just want to understand, the puts and takes and how you get there. Thank you.

Speaker 3

Hey, Connor, thanks. It's Shane. Yes, I think the biggest driver of the second half performance trend is going to be the lapping of labor deals. I think we talked about this in the last couple of quarters. We've got about $75,000,000 $80,000,000 structural cost increase the Due to the 6 labor deals we signed last year, they start to lap in August, but the biggest one of course is our pilot deal that really starts to lap in Q4.

Speaker 3

So we'll be fully through the comp headwinds by the Q4. That's the biggest one. I think the other thing just to realize is as We grew the Q1 of this year in an absolute basis over the Q4 of last year. We held extra resources to do that. We typically go down in capacity Q4 to Q1.

Speaker 3

We stress the operation a bit and we made sure we had ample additional sort of resource the impact of the company's earnings release. We're pleased to ensure that we didn't take a hit on completion rate or operational performance, which we didn't. We did a really good job on the operation. So I I think as we go forward, we'll get a little more productive with our resources and then we'll start to lap these large labor deals.

Speaker 7

Okay, helpful. And then on the I think last quarter, there was like endless discussion between the link of fuel and revenue. Today, obviously, fuel is that. A lot lower than where it was in January. So you're reiterating your unit revenue assumptions, I think, for the full year.

Speaker 7

So I'm just trying to understand, Why wouldn't we be at the lower end of the range

Speaker 3

if jet fuel is here? I know

Speaker 7

that you have a lot going on. So maybe you could just talk a little bit about the revenue drivers that you have that could offset some of that.

Speaker 1

Thank you.

Speaker 3

Yes. Hey, Conor, I'll start on the fuel. I think what I mean, I think we've always sort of felt like unit revenue is going to be more a function of capacity. Capacity may be more a function of economic sort of backdrop that the economic backdrop probably is what drives fuel. But I think our sort of full year expectation for fuel was in the 3.15 range or 3.20 range.

Speaker 3

We haven't decided that it's going to be materially below that yet. You can see our Q2 guide is a little bit below that, but certainly above what we're paying today. If we sort of felt like there was a lot of confidence that fuel was trending below 290 or something, yes, I think then we might Have a slightly different perspective on unit revenues. But right now, we think it's too early to tell. Fuel has been super volatile.

Speaker 3

Refining margins have moved around a lot in the Q1. So we just our sort of baseline expectation is what we originally guided to in the 1st part of the year, which is fueling the

Speaker 8

Thank you.

Speaker 3

Thanks, Tommy.

Operator

And our next question will come from Brandon Oglenski with Barclays.

Speaker 9

Hey, good afternoon or good morning, everyone. Thanks for taking the question. Andrew, I was wondering if you could come back to your comments about sequential RASM here and looking at it year over year as well. Looks like you're going to be up sequentially, but maybe down from where you were in 2Q 'twenty Can you talk to that dynamic?

Speaker 2

Yes. I mean, I think, sequentially from Q1 to Q2, you see an absolute unit revenue increase of about 14.5% sort of giving our seasonality. And as we've sort of shared, I think where we're at Right now is our growth is obviously 9 plus percent as we move forward. And so essentially our goal is to bring in traffic Unit revenues that were essentially at the same level we achieved last year. So you're going to see them start to come down a little bit.

Speaker 2

We have obviously very tough comps. But I think big picture for us, the volumes are coming in as we sit here on Q2 and we're maintaining, give or take a few points, our unit revenue increases that we achieved last So that's what goes into the guide and that's how we feel pretty good about the Q2.

Speaker 9

Okay. I Appreciate that. And then can you give us any detail on business travel trends in your network, especially given Silicon Valley Bank in March?

Speaker 2

Yes, I think on a macro level, and again, I just went back and look at the ARC data as well as our own data around the the next few weeks of all of that and essentially the booking levels there's blips here and there, but they've sort of really been stuck at this back in our network at least 75% With revenues closer to 85% 90%. I think as we look forward, we're not Forecasting it, but we're hoping to see, as we move past some of these little shocks to the system that business travel comes back A little bit better than the 75% it's been at, but we're not expecting it.

Speaker 8

All right. Thank you.

Operator

And we'll hear next from Ravi Shanker with Morgan Stanley.

Speaker 10

In the last response, you said in your prepared remarks that West Coast corporate travel is an opportunity for you and I completely agree. But at what point do you kind of say that, hey, that's taking too long or maybe that's just structurally not coming back as much as you think kind of given the job cuts there. I I was wondering, do you envision a point where you're structurally thinking of moving away from West Coast corporate as much exposure as you had And moving more towards a beer traveler.

Speaker 2

That's actually a really good question, Robbie. I think where we are For now, is that the close in volumes aren't there. And so we're going to be biasing towards building the volumes outside of the typical business window. Actually right now leisure revenues are up about 130% versus 2019, very, very strong. And so we're going to continue to capitalize on that and watch that.

Speaker 2

And I think on the network side, some of the hub to hub heavy traditional business traffic markets, we're going to sort of trim back and maybe put that capacity elsewhere. So again, we're watching it, but I think that's going to be a big question as we move forward through this year.

Speaker 10

Got it. That's helpful. And maybe as a follow-up, kind of given your West Coast alliance and kind of part of One World, how do we think about China reopening as a potential tailwind for you guys over the next 12 months. Kind of how do you size the multiplier effect of domestic travel once you have people coming in

Speaker 6

Robbie, it's Nat Pieper. Great question on China and can't speak specifically that. We're kind of watching that with all of our alliance partners. What I can say is that we're really optimistic and bullish with the One World feed and linking our West Coast network to our partners, whether it's nonstop flights into Seattle, Japan Airlines to Tokyo, Fin Air to Helsinki and then Los Angeles with Iberia. We're really seeing a lot of pickup and a lot of incremental revenue that's getting there.

Speaker 6

So as China opens over time. We'd expect to participate in that through our partners.

Speaker 11

Thanks, Ed. Much appreciated.

Speaker 8

Thanks, Rob.

Operator

We'll move next to Andrew Didora with Bank of America.

Speaker 11

Hey, good morning, everyone. Andrew, just can you talk to how recovered your the California market is right now. How do you think about the buildup here? And we've actually heard anecdotally over the last a few days from several folks just and seeing TransCon Fairs pretty weak. What kind of dynamic do you think is going What kind of dynamic is going on there that from your seat?

Speaker 2

Yes, I think we talk in macro levels about our growth and getting back Flat with 2019, the reality is Seattle is actually healthily above 2019 and the rest of the network in Specifically California is still below 2019. And so in some respects, I think that's the right place to be. I think on a year over year basis, we've actually in our network at least been very happy with our unit revenue better performance in the California market because we are building ourselves back to a stronger place. And so at the highest level, your comments are actually Absolutely true. I think for us internally, we feel good that our California network is actually improving.

Speaker 11

Got it. And then thoughts on TransCon?

Speaker 2

California TransCon?

Speaker 3

Yes.

Speaker 2

Yes. Again, I think, especially with our partnership with American and part of One World, we've got code on these flights, especially out of the Bay Area, that's really helping. And I think We'll see what happens this summer, although it's not specifically West Coast, but I think that general New York areas, some of the slots are being pulled down a little bit. But again, I think we're in a better position than we were certainly last year as it relates to the TransCon markets.

Speaker 11

Got it. Understood. And then Shane, what would have to happen for you to consider buying back more stock than just for dilution purposes? Thanks.

Speaker 3

Hey, thanks, Andrew. I might just add one thing. I think your sort of implication of the question is California is somewhat weaker in terms of recovery than a lot of the rest of the country. And I think that's generally true. We've done a good job putting the right supply in there, but it's all upside for us.

Speaker 3

And I think We're feeling good because we've got a chance to still be the industry's top margin producer And further upside when California does recover. It's the 6th largest economy in the world. It's going to come back.

Speaker 11

Yes. No, I wasn't saying I wasn't saying that it was unexpectedly weak. I was just curious where it was in the recovery.

Speaker 3

Got you. No, I appreciate that. Yes. I think we're I think if we continue to trade at prices that we believe are a really good value, which What we believe about our stock price today will have a bias to do more than just dilution throughout the year. So We'll continue to talk about that internally and with our Board.

Speaker 3

But I think if prices are where they are today, we'll probably be more aggressive in the second quarter.

Speaker 11

Thank you.

Speaker 1

Thanks, Andrew.

Operator

And your next question will come from Catherine O'Brien with Goldman Sachs.

Speaker 12

Hey, everyone. Thanks so much for the time. So maybe just one more on the revenue. Your guidance is implying a reacceleration in RASM in 2Q from the Q on a versus 2019 basis to help us adjust for seasonality there. Can you just walk us through what drove the deceleration from year end into 1Q and what you're today that gives you confidence in a better 2Q.

Speaker 12

Is that just higher leisure mix or is there anything else driving that improvement? Thanks.

Speaker 2

Hey, Katie. Just to touch on Q2 first. We're actually we have 63% of the second quarter's revenues In the books right now. And I think as I look forward looking at what we've been booking in the last few weeks both on the yield side and the traffic side, It's sitting very nicely in our guide. I think from Q4 to Q1, obviously, growth in the Q1 was very significant at 14%.

Speaker 2

Also, obviously in what is our weakest quarter being January February. I think as it relates to January February, I do think that and this is on me that we had we known differently, we probably would have structured and shaped the network a little differently in January February and of course we had some very difficult weather and issues there as well that didn't help. But that's really a big part of the deceleration. But again, as you can see in the graphs, we're back on up. We're accelerating back into March, April, May June and I think we're on a good trajectory.

Speaker 12

Great. Thanks so much. And then maybe one for Shane. So based on your commentary around 2 half the capacity growth and then your comments on being considered on completion. It sounds like there is a decent chance you're going to come in at the higher end of capacity guide.

Speaker 12

Should that inform our view on how CASM ultimately comes in or are there offsets to that higher capacity where we shouldn't assume coming into higher end of capacity moves us towards the better end of the down 1 to 3, similar to what we just saw in the Q1? Thanks so much.

Speaker 3

Yes. Thanks, Katie. And I tried to address this a bit in my script. We were at the high end in Q1 of capacity. We have built conservatism into the capacity guide.

Speaker 3

We certainly have more planes and more resources That we could fly harder if we wanted to put more capacity into the system. We're going to continue to prioritize operational reliability and stability and we're going to watch the economy closely. I think I said in the script that if we continue to complete flights at a high level, we could easily be at the high end of that range. And I think that's an absolute that. That's kind of where we would expect to be at this point.

Speaker 3

I don't think we should infer too much in terms of a change in our posture on unit costs. Our goal long term would be to be on the high end of the capacity range and the low end of the CASM ex range. That's where we want to get back to. We didn't do that in Q1. I think we'll get there.

Speaker 3

It's just a matter of rebuilding this muscle. We need stability in the operation, which we now have. We need to lap some of the headwinds that we've got, which We're going to do and I don't think we've forgotten how to work the cost muscle. We just need some time to go do it. And that's what we're going to focus on this year and by the end of the year, I think we'll be in a position to, outperform capacity and be on the better end of our CASM guides as well.

Speaker 12

That's great. Thanks so much.

Speaker 1

Thanks, Katie. Thanks, Katie.

Operator

Your next question comes from Duane Pfennigwerth with Evercore ISI.

Speaker 13

Hey, thank you. Good morning. Just on the technology corporate recovery status, one we've been looking the I think you said 50% to 60%. Is that a revenue or a volume comment? And maybe you could just put it in context, Was it at a higher level than that at any point last year?

Speaker 13

In other words, are you seeing any incremental weakness In tech business travel or is it kind of bouncing along the bottom where it has been for some time?

Speaker 2

Yes, Diane, it's Andrew. That's a volume metric that I just gave you and there are some technology companies that are way worse than that and some that are actually way better than that. I think just going off memory, I think back in the Q3 of 2022, I think we saw a resurgence a little bit of tech. And then we started to see a collapse by the back end of the year again. And just it just really has not changed.

Speaker 2

And my personal view is that Literally, this is driven by the CFOs and a constraint on travel and budgets. And until that gets released, I don't think we're going to see an improvement.

Speaker 1

Duane, it's Ben. Just on that, just being here on the West Coast and watching some of these big tech companies mandate return to office, new fiscal budgets coming. It's not in our forecast, but I think we just see a lot of upside going forward in the future. I think we're out of the trough, To answer your question and we're hopeful that it gets better as these tech companies recover and get stable and then move forward with their business.

Speaker 13

Great. And then, appreciate that. And then just on Revenue management generally and the trade off between loads and yields, any different approach going forward than Maybe the one that you entered the March quarter with. And could you just contrast that approach right here and now versus how you thought about the world in 2019. Thank you.

Speaker 2

Yes. That's you know what, for Kirsten and I, the load and yields the trade off is what keeps us up at night. It is a critical question. And I think really what we wrestle with on a daily basis is how much do we rely on the close in both yields and volume and to date we've seen them be a little weaker versus 2019 well certainly versus 2019. So I think as we continue to watch this, but I think when you go back to 2019, Unit revenues were up a couple of points, capacity was up a couple of points.

Speaker 2

It was a pretty stable non exciting year per se, but I think the volatility that we've got going on and looking at how we manage these ebbs and flows is key. So I think as we go closer into summer and we are a high leisure carrier and that's where we Q2 and especially 3 is where we really do well. We're going to have to really wrestle with that question.

Speaker 13

Okay. Thank you.

Speaker 1

Thanks, Duane. Thanks,

Operator

Duane. And Your next question will come from Jamie Baker with JPMorgan.

Speaker 14

Well, speaking of return to office mandates, here I am. So it's typically better to take local yields over connecting yields, just Sort of a broader industry comment. But in light of this surging international demand dynamic right now year on year, Is Alaska at a point where prioritizing fee to long haul One World Flights might make More economic sense or would that be sort of overstating The portion of the international journey that you take, I mean, are you still better off chasing local yields in other words?

Speaker 2

Jamie, it's a question that we're actually focused on right now. I will and I think we shared this on previous calls, but the traffic and the pro rates and the connecting and even the local from American is actually better than our system average. And so this is highly valuable traffic, especially with the surge in international. We have hired some international pricing Folks as well, so as an RM team, we're getting more and more focused on this. As we shared at the highest level, 8 the 10% of all revenue coming from partners.

Speaker 2

International is obviously a subset of that, but domestic is obviously a much higher portion. But I do think that there is opportunity on certain markets and connecting markets to focus more on this area.

Speaker 14

Okay, interesting. And then second, When I think back to the start of COVID, one of the things that I wasn't initially thinking about or The debate was the industry brain drain that has taken place. And maybe brain drain isn't the best term. I don't mean that in a derogatory sense. But gyrations in the C suite, whatever you want to call it.

Speaker 14

As we think about Your Bench, but also the broader the question and I apologize, I'm just kind of thinking out loud here. But is this a topic that your team gives much consideration to internally. And if it's a stupid question, just say so. I'm sure my competitors will be thrilled.

Speaker 1

No, Jamie, I would never say that's a dumb question. No, actually, it's a topic we talk about at the Board. As I look around the table here at My executives and my officers, we've had very we were fortunate. We've had very little turnover at the executive level at Alaska. But I think what you're talking about is an important topic is, how do you create a bench?

Speaker 1

How do you create succession? And it's something we're focused on and working on as we speak. So your question is valid. Again, short term, we're fortunate here. We haven't had that brain drain, but It's something to be aware of in the next 3 to 5 years.

Speaker 14

Okay. Thank you very much everybody.

Speaker 1

Thanks, Jamie.

Operator

Our next question will come from Stephen Trent with Citigroup.

Speaker 3

Yes. Good morning, everybody, and thanks for taking my question. I was just curious what your thoughts are on U. The infrastructure. So I know you guys and your competitors have done a lot of good work to make ensure, for example, a the control infrastructure investments.

Speaker 3

It looks like the House of Rep and the White House can't seem to agree on budget. So I'm wondering How you're seeing all that on a high level? Thank you.

Speaker 1

Stephen, thanks for your question. So maybe the best way I can contrast it is back to 2019. So when I look at the capacity of the airline industry vis a vis today, it's roughly the same. So we have roughly the same I think the pinch point is air traffic controllers. As you see some of the actions that need to be taken in New York, I think in Florida, I think we've seen some in California and our LA market.

Speaker 1

So I think staffing on the federal side is the key pinch point. And again, we're talking with our government counterparties and making sure that the hiring and train appropriately. Infrastructure is another one I think that airlines and government have to work on together To make sure the airspace is efficient, there's a lot of things that we can do in terms of technology to facilitate that. And I think that Going forward, like I said, we're back to 2019 levels where we were already constrained. But going forward, I think we really need a solid plan to really the next generation of aerospace management.

Speaker 3

Okay, that's super. I really appreciate that. Let me leave it there. Thank you.

Speaker 1

Thank you. Thanks, Steven.

Operator

And we'll move next to Mike Linenberg with Deutsche Bank.

Speaker 15

Yes. Hey, good morning, everyone. Andrew, your this objective about sort of reducing the seasonality of the company in the March quarter or at least finding a way to get to profitability. It seems like no management team at Alaska has really ever been able to crack the code in that regard. I think there's been like maybe a year here or there where we've seen profitability, but it was usually sort of peak.

Speaker 15

I guess, Absent, I don't know, building a hub in Cabo, is it network? Is it just scaling back frequency in some of these corporate markets and maybe running airplanes, more airplanes through maintenance, maybe your utilization goes down, but that's better. Or is it more on the cost side just moving to a single fleet type and you get a tailwind there. I mean, I'm just trying to figure out what you're thinking about. It's interesting.

Speaker 1

Mike, it's Ben. It's a great question. Yes. So if you look at for us, March was very profitable. We almost hit a double digit pre tax margin.

Speaker 1

It was January February that were the issues. So for us, like I got to be honest, I just set the mandate for my team and say, look, leaders change outcomes. We don't like the outcome in January, And we don't know the exact answer, Mike, to be honest. But the mandates been given to the commercial team to say, look, there are things that we know if we dissect the data, Airplanes can be moved. We can do things with our network, manage capacity, but you have to do that not only the right before the quarter, you got to start thinking about it 9 months before, which is why we're setting the goal now.

Speaker 1

So Andrew needs to think about what he does in the 2nd and third quarter as he builds capacity, so he can manage the Q1 of next year. And so a lot of work to do, Mike, and Hopefully, we can show that at least we've closed the gap to next year as we work on this thing. And to your point, it's not been consistently done, but at Alaska, we just like taking big audacious challenges. It says let's change the narrative.

Speaker 15

No, very good. Now just one more. On just watching American back some sort of shift in on their distribution. And I'm sure you've been following the reports closely where it does look like that they're now focusing other larger corporate accounts. And given that you guys have gotten closer and as part of the partnership, you obviously want to grow and build on that and obviously bring in more corporate travel.

Speaker 15

Does that have an impact on you? And I guess specifically, I'm saying where American has said that they're going to sort of back away at some of the smaller accounts, corporate accounts that maybe do less than $1,500,000 or $2,000,000 of sales. And I know that may be an area that you play in. I mean, obviously, you have big corporates that you do business with. But When I think about Alaska historically, given your network and size prior to OneWorld, prior to the American partnership, you probably had a disproportionate amount of Your corporates were probably maybe small, medium enterprises.

Speaker 15

So I'm just curious if there's any sort of impact there. You're probably watching that closely. Any comments that you can make about that shift on American on the distribution and sales side. Thanks.

Speaker 2

Yes. I think obviously it's well documented some of the significant changes that American are doing specifically around NDC and the impact, with GDS And all the rest of it. I think for us, we obviously have good and a lot of joint contracting with American and our larger corporates and they've been working extremely well. And they've been working extremely well. One of Brett Catlin's priority one objectives is I think we under index where we should that in the small and medium enterprise.

Speaker 2

So I think it's not something we've focused on as much as we should. So again, if anything, given our West Coast the footprint. We're going to be focusing a lot more on that. As it relates to NDC, we are well into our journey as well and more to come on that. We'll be sort the full year of 2019.

Speaker 2

Fully up and running next year with OTAs and all that connected. And I think there's a good cost story there and there's a good product story there and more to come.

Speaker 15

Very good. Thanks, Andrew. Thanks, Ben.

Speaker 2

Thanks.

Operator

And we'll hear next from Scott Group with Wolfe Research.

Speaker 8

Hey, thanks. Afternoon. I want to just go back to the chart on the monthly RASM. So I think you said 63% of revenue is booked for the quarter. How much of June is booked at this point because there's obviously a big further step up assumed in June.

Speaker 8

And how do I think about that further acceleration in June relative to some of your comments about the RASM following fuel prices.

Speaker 2

Yes. So I think June, I'm going to just even on our load factor, I think we still got the 45 plus points to go. So to your point, Scott, it is the lowest book of the summer, but I'll also Site is one of the strongest and highest demand as we go into some of this. So, I think that's what the team is fairly squarely focused on right now and to my earlier comments, we need to get right the mix between bookings further out and what we're going to allow to come closer in. Okay.

Speaker 8

And then, Shane, just want to clarify, is you still assuming 8% to 10% revenue growth for the year. And then the fuel hedges, I know I've asked this before, but I'll ask it, it doesn't feel like they're helping. Any thoughts about either Changing how we hedge or just getting rid of hedges?

Speaker 6

Scott, it's Nat. Consistent with the Alaska, you know, we are we play it for the long run. And The hedging costs in the quarter was about $12,000,000 Long term, it was $170,000,000 did a good last the next question. So we didn't get a lot of questions last year about changing the hedge program as you might expect. Since we've had this program Specifically in place since 2015, buying calls 20% out of the money, 18 months in advance.

Speaker 6

The The program has been positive for us. It's all about limiting volatility and really trying to just put a box around it. Discussion about it and look at it over the long run. And if there's smart changes to be made, we'll make them.

Speaker 8

Okay. And then the 8% to 10% revenue, is that still the right number?

Speaker 3

Yes. Sorry, Scott. I didn't mean to not answer that question. Yes, that is still the right number for us for sure.

Speaker 8

Okay. Perfect. Thank you, guys. Appreciate the time. Yes.

Speaker 1

Thanks, Scott.

Operator

And our next question comes from Helane Becker with TD Cowen.

Speaker 16

Thanks very much, operator. Hi, everybody, and thanks for squeezing me in. So I have two questions. My first question is in February This year, I think you lost a lawsuit. And, in the Virgin America case, number 1, or A, have you Taken accruals for that and B, will you appeal that decision or is it non appealable?

Speaker 6

Hi, Helane, it's Kyle. Thanks for the question. This litigation is a long road. We've been fighting this for about 7 years. It's the Virgin Group royalty license matter pending in London.

Speaker 6

And the very first stage of that was a ruling by the judge in London adopting Virgin Group's interpretation of our contract. There are additional proceedings coming, so continue to watch and we'll keep you posted. On the accrual side, we have accrued $10,000,000 at this point and you'll see additional disclosures in our 10 Q in a couple of weeks.

Speaker 16

Okay. That's very helpful. Thanks, Kyle. And then my follow-up question or another question. You guys announced recently, I think within the last week or so that you're eliminating kiosks the accident at the airport.

Speaker 16

And I'm just wondering, how you're thinking about that? I know most people come to the airport with their boarding pass in hand. But how are you thinking about the acceptance rate of that among your clients? Thanks.

Speaker 2

Thanks for bringing that up, Helane. Actually, this is very exciting and the reality is our lobbies are hugely congested And we've actually started rolling these out. We've had about 7 or 8 stations done including Portland. And what we're finding is at least a 10 point increase in people coming prepared to the lobby, checked in already even paid for their bag. And so what it's going to do is there's a little bit of the change management of course, but we've seen hugely positive results both from our guests and our agents and I think what you're going to see in the future People only needing to check bags that are going to be milling around in the lobby.

Speaker 2

Only half of all passengers check bags, the rest need to go straight to security. We've had about a quarter of those be in the lobby using kiosks to do all sorts of things and now we're fully mobile and we can do that outside. So I think you're going to see good productivity, efficiency and a much more pleasant lobby experience as we roll this out over 2023 and 2024.

Speaker 1

And Alan, it's Ben. Our long term vision is to have people come in, just get their bag tag Or have an electronic bag tag, which we've already introduced. Go to a self bag drop, drop your bag and get to security within under 5 minutes is the goal. So really make it a wonderful, easy customer experience. So these are the things that we're rolling out in the next 12 to 18 months.

Speaker 1

It's really exciting for us

Speaker 16

That's really helpful, Ben. Are you able to lower facility costs then?

Speaker 1

Well, I think what we would do as we're growing as my CFO here is on my right side, he would say, Keep the same footprint, but process more people. And I think that's the goal, right, is to increase the productivity of the real estate footprint we have, which Is what we're all about.

Speaker 16

Thank you.

Speaker 3

Thanks, Holly.

Operator

And our next question will come from Chris with Susquehanna International.

Speaker 17

Good morning. Thanks for taking my questions. Ben, could you comment On the procedures in place to navigate, let's say, less than ideal operating conditions versus periods of strong demand. Meaning, North of let's say 95% when conditions are tough.

Speaker 1

Hey, Chris, great question. I would say right now as We had to the summer, I'm extremely confident. I think, 2 things that have to be in place. 1, you have to be staffed properly And our staffing numbers are quite strong across every labor group. The second thing is, as we're getting our We go back and you know our history.

Speaker 1

We've always had great performances. We have an operational playbook that we execute and this is something that We focused on is, we have a timeline. We know exactly what to do and when, and that is starting to click in from what I see across all areas and all of our hubs. So I'm quite confident in our operations team, and I think we're going to have a great summer.

Speaker 17

Okay. Thank you. And then my follow-up on the Stage Engage focus this year, as we think about the cadence of the second half CASM ex. Should we expect this benefit to flow through evenly through the second half? Or is this something that the more fully realized as we exit 4Q.

Speaker 17

And I realize there's also implicitly some type of macro assumption around that from the stage and certainly as it relates to gauge and any order book risk that you've contemplated there. Thank you.

Speaker 3

Yes. Hey, Chris. Yes, the CASM ex cadence, I think we tried to we issued some slides that may help if you take a look at them. Certainly, the Q4 exit rate is the best rate of the year, but it's actually pretty ratable as you get through Q222Q3, then Q4. It's not like all of the benefit comes in Q4.

Speaker 3

So we'll have a chance to see how we're doing against that in the next quarter and a half or so. But yes, I think given that we're lapping the labor deals primarily in the Q4, that's where you get the biggest sort of CASM ex tailwind benefit.

Speaker 8

Okay. Thank you.

Speaker 1

Thanks, Chris, and thank you everyone for joining us. We'll talk to you next quarter.

Operator

And this concludes today's conference call. Thank you for attending.

Speaker 16

The host has ended this call. Goodbye.

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