Alaska Air Group, Inc.

Good morning. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group 2021 Third Quarter Earnings Release Conference Call. Today's call is being recorded and will be accessible for future playback at alaskaair.com. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session for analysts. If you would wish to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw the question, press the pound key. Thank you. I will now turn the call over to Alaska Air Group's Managing Director of Investor Relations, Emily Halverson. Please go ahead.

Thank you, Thea, and good morning. Thanks for joining us for our third quarter 2021 earnings call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of our call. This morning, Air Group reported third quarter gap net income of $194 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $187 million. Pre-tax margins were 12%, a 15-point improvement from the prior quarter. This marks our first profitable quarter on an adjusted basis since the pandemic began. 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 in our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs excluding fuel. And as usual, we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Ben, over to you.

Thanks, Emily, and good morning, everyone. Air Group's $187 million adjusted net income marks an inflection point on our path to recovery. During our last earnings call, we forecasted a double-digit third-quarter pre-tax margin, and despite the impact of the Delta COVID variant, we delivered. Our 12% pre-tax margin solidly led the industry and was just six points shy of our Q3 2019 margin. I'm proud of how our company is emerging strong from the pandemic, and I'm looking forward to when the recovery is stable and less likely to undergo the man shocks due to variance. Our approach from the beginning has been deliberate, scaling our business back in a measured way, leveraging our strong balance sheet, and running our operation to produce consistent industry-leading financial performance, no matter what the external circumstances. Our third quarter results reflect the strength of the summer season. with pent-up leisure demand bringing passengers back to the skies. Both 4th of July and Labor Day passenger employments approached 2019 levels. Even with the dampening impact that the Delta variant had on demand in August and beyond, our third quarter load factor came in at 80%, and total revenue was down just 18% on a year-over-two basis, a 15-point improvement sequentially from the second quarter. Our unit costs were up 9% in the third quarter, beating the better end of our guidance range. This solid cost execution reflects incremental progress towards our productivity goals as passengers per FTE increased 6% sequentially, falling just 12 points below 2019 levels for the quarter. Shane will provide more detail about our cost performance and pressures we are seeing in a few cost categories. Looking forward, Our longer-term thinking about our approach to recovery remains intact. Despite the transient choppiness we're experiencing from the Delta variant, our plan is still to return to our pre-COVID size no later than next summer and then to grow from there. We anticipate recovery will continue to be volatile at times as we learn to live with COVID and until demand ultimately normalizes. Our job is to deliver consistently strong financial and operational performance no matter what course the recovery takes. And Q3 has shown us that when demand does come back, our business model is tuned for success. Looking ahead to the fourth quarter, we plan to increase our capacity to 13% to 16% below Q4 of 2019. And given the dampening effect of the Delta variant, we expect to deliver break-even to slightly positive pre-tax margins. If the pace of the recovery accelerates from here, there will be upside to our expectations. This quarter's results were only possible because of the hard work of our frontline employees and crews. Their dedication to delivering an efficient operation with our culture of kindness and caring is at the heart of our success. I want to thank them for their efforts and for putting Air Group amongst the top performers in the industry in on-time arrivals and completion rates once again this quarter. Our guests have shown their appreciation for that great service too. guest satisfaction scores have exceeded internal targets every month so far in 2021. Sustaining operational performance with high guest satisfaction is a remarkable achievement given how complex re-ramping our operations has proven to be. Several quarters of improving demand and financial performance have provided the stability necessary to invest in repairing our balance sheet. Year-to-date, we have made gross debt repayments of $1.2 billion, driving our debt to capitalization ratio down 10 points from year end 2020 to 51%, and moving within reach of our sweet spot for leverage between 40 to 50%. Having the leverage so quickly from our pandemic borings makes clear to me that we made the right decision in not diluting shareholders during the depths of the crisis, even though that is not yet something the market is rewarding us for. We are making progress each quarter on our path to single fleet. This quarter, we took delivery of two more 737-9 aircraft and also exercised options for 12 incremental firm airplanes to be delivered in 2023 and 2024. All told, we will have 93 737-9 aircraft in our fleet by 2024 with options for 52 additional airplanes. This fleet order not only replaces our departing Airbus 319 and 320 fleet, but positions us for significant growth when demand comes back, which we expect will be in the back half of 2022. Importantly, we are in a financial position to take these deliveries while also maintaining our strong balance sheet. To close, I'm optimistic about the foundation we have laid to prepare for Air Group's return to growth and profitability. We have a fantastic Boeing order book creating flexibility for significant growth through 2025, a low-cost structure that allows us to compete with low fares supported by a strong balance sheet, a great onboard product matched with industry-leading customer service and operational performance, a powerful domestic West Coast network supported with the One World Alliance, a brand with a fierce customer loyalty behind it, and most importantly, a culture rooted in kindness and caring. I'd like to thank our people one more time