Alaska Air Group, Inc.

Good morning. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group 2021 Fourth 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 wish to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Alaska Air Group's Managing Director of Investor Relations, Emily Halverson.

Thank you, Operator, and good morning. Thank you for joining us for our fourth 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 the call. This morning, Air Group reported fourth quarter GAAP net income of $18 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $31 million. Pre-tax margins were 2.4% for the quarter. 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. Over to you, Ben.

Thanks, Emily, and good morning, everyone. In 2021, Alaska established a track record of leading the industry in the recovery from the pandemic. This has been enabled by the strength of our business model, our measured approach to capacity, and our financial discipline. Our 2.4% pre-tax margin in the fourth quarter continues that trend, especially considering the disproportionate impact that severe weather had on our hubs and the Omicron-related impacts we began to face at the end of the year. While I'll discuss the impact of weather on our fourth quarter and the impact of Omicron on our first quarter, let me start by saying both of these are temporary challenges that do not deter my confidence in our underlying business model and its ability to outperform the industry. Starting with recent events, the combination of severe snow, multiple consecutive days of sub-freezing temperatures in our Pacific Northwest hubs, and staffing disruptions caused by the Omicron variant resulted in one of the most challenging holiday travel periods we have ever experienced. Our completion factor was extremely challenged at the end of the year, which resulted in flying approximately one point less than our expected capacity in the quarter and two and a half points less than we planned to operate in December alone. I want to apologize for letting our guests down during one of the most important travel periods of the year, and I also want to acknowledge the strain our teams were under as everyone worked to stabilize the operation. In terms of the financial impact of these events, they were material. Our fourth quarter result was worse by approximately $70 million, and our pre-tax margin was reduced by 3.5 points. Even with this outsized impact, Alaska was profitable in Q4 and strongly led the industry in pre-tax performance over the second half of 2021. In response to the ongoing impacts of Omicron in early January, we proactively reduced our remaining Q1 scheduled flying by about 10%. I am pleased to report that Omicron absences are down significantly and our operation is once again stable. Omicron has not only impacted our ability to operate fully, it has dampened close-in demand substantially as well. Andrew will provide more detail on the demand environment, but the silver lining is that demand for travel from present state and beyond remains strong and booking trends have rebounded week over week since their low point in early January. We expect the bulk of the Omicron impact to be felt in the first quarter, specifically in January and February, as revenue is reduced and as unit costs are pressured, given lower ASM production and higher staffing-related costs. However, as I opened with, this will be short-term in nature and has not changed our expectations about the overall recovery. Clearly, this was a tough way to end a year that otherwise had progress worth celebrating. And in that vein, I want to acknowledge that 2021 was a year of significant recovery and highlight some of the important successes from the full year we've just closed out. First, our revenues recovered to $6.2 billion, or 70% of 2019 levels, and we achieved this while flying less capacity than many of our peers who had similar revenue recovery results. Second, while the full-year adjusted pre-tax loss was $342 million, we recorded $282 million of adjusted pre-tax profit during the second half of the year. Our second half adjusted pre-tax margin was over 7%, clearly outperforming the industry even though West Coast travel has recovered slower than much of the country. Third, with decent demand recovery and disciplined cost management, we returned to positive operating cash flows. Excluding any CARES funding, we generated more than $100 million in operating cash flow for the year, which reflects a $100 million pension contribution we funded in the third quarter. Fourth, as profits and cash flow returned to positive territory, we have essentially repaired our balance sheet. We closed the year with a 49% debt-to-cap ratio, 12 points lower than prior year and within our target range. And lastly, given we were able to meet or exceed several of our recovery goals, our employees earned the industry's highest bonus pay through our incentive-based pay program. For the average employee, this payout amounts to about 6.2% on top of their annual pay. All told, I'm really pleased to report that our bonus programs will pay out $151 million to our employees for the year. In addition to these financial milestones, we also cemented several critical strategic decisions during 2021 that will help drive our success well into the future. We made the decision to return to a single fleet of Boeing aircraft, which will drive revenue and cost benefits. The remaining 27 Airbus A320s that are flying today will be retired by the end of 2023. enabled by our Boeing MAX order of 93 firm and 52 options. We joined One World and launched our West Coast International Alliance with American Airlines, which will unlock additional revenues and loyalty across our West Coast hubs, especially in Seattle. We announced sustainability goals, committed to net zero carbon emissions by 2040 and further embracing a sustainability mindset by linking a portion of our annual performance-based pay plan for all employees to the carbon intensity of our operation. And we renewed our commitment to diversity, equity, and inclusion by establishing a five-year goal to increase leadership representation to match that of our frontline. We also integrated this goal into our executive compensation target. Let me close with a brief look ahead at 2022. Like our industry peers, Q1 will clearly be impacted by Omicron, both for revenues and unit costs. We do believe the virus will move to endemic status and that demand will ultimately stabilize. And when it does, our business model is set to outperform. Notwithstanding a challenging first quarter, we expect to be profitable for the month of March and for the remainder of the year. We remain committed to returning to pre-COVID capacity by the summer and plan to grow from there. I expect full year capacity to be up versus 2019 between 2% and 6%, dependent on demand. This guidance reflects first half capacity that is flat to slightly up, and second half capacity that could be up as much as 10% versus 2019. As we did throughout 2021, we will continue scaling our business back in a measured way, leveraging our strong balance sheet, and running your operation to produce consistent, industry-leading financial performance in 2022. I hope you'll join us at our upcoming Investor Day, where we plan to share our long-term expectations, including comprehensive 2022 guidance. This event is set for March 24th in New York. Before I hand it off to Andrew, I want to thank the people of Alaskan Horizon for all that they do. It is no secret that this is a tough business. but the pandemic has surprised and challenged even the most seasoned in our industry. The strength of our company comes from our people and culture of care, our focus on safety and operational excellence, our reputation for customer service, and our financial discipline. I am confident these strengths will serve us well again in 2022. And with that, I'll turn it over to Andy.