Alaska Air Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 second quarter earnings call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speaker's remarks, we will conduct a question and answer session for analysts. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Emily Halverson.

Thank you, Operator, and good morning. Thank you for joining us for our second quarter 2022 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 second quarter gap net income of $139 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $280 million. 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 have 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. Our performance this quarter continues to demonstrate the underlying strength of our business model and ability to adapt to a rapidly evolving external environment. We are in a period of record-breaking demand, which is reflected in the solid Q2 results we reported this morning. Our 14% second quarter pre-tax margin lands us near the top of the industry. A remarkable achievement given the fact that fuel expense is up 65% versus the same period in 2019. June especially was a phenomenal month as revenue surpassed $1 billion, the highest monthly revenue recorded in our history. And we achieved this on capacities still below 2019 levels. Bank cash remuneration increased 40% in June, demonstrating the power of our renewed credit card deal and the strength of our terrific partnership with Bank of America. And lastly, we generated record revenue from our airline partnerships during the month, representing over 8% of coupon revenue, an exciting result given that international and business travel haven't fully unlocked yet. Meeting these historic levels of demand is both exciting and challenging, and we are rising to the occasion. June is proof of this, marking an important turnaround in our operation as we were at or near the top of the industry in both on-time performance and completion rate for the month, with this trend continuing into July. Our fundamental commitment to our guests and our people is to run a safe, Reliable, on-time airline. It's that simple, and we will continue to prioritize those requirements as we move forward. I'm very proud of the turnaround our team of 23,000 has delivered over the past two months, and I want to extend my thanks to all of them. This is a complex industry that has become more challenging lately. Our team has persevered. met new challenges with professionalism and care, and continues to put their best into the company and operation each day. This year, we are celebrating our 90th year as an airline, which is a remarkable accomplishment for any business, but especially in this industry. To celebrate our remarkable people, we issued 90,000 miles to Air Group employees that they can use to fly with us or anywhere our One World and other partners fly. Now, let me briefly outline some areas that are going well for us, along with the challenges we continue to manage through. Of course, demand is a bright spot, as guests take summer vacations and get out to visit friends and family, and business travel continues to return. Andrew will talk more about demand, including what we're seeing into Q3, and growing revenue contribution from our credit card, as well as our domestic and international partners, which is great to see. We continue hiring at a rapid pace and are consistently meeting our hiring goals. We are currently at our target staffing levels across most work groups and locations. Our transition towards a single fleet remains on track. Our max fleet continues to grow while the A320s and Q400s will be fully retired by early 2023, followed by the A321s at the end of 2023. This quarter, we also reached a tentative agreement with the International Association of Machinists, who represent 5,000 customer service, stores, reservations, ramp, and clerical agents. The TA is undergoing ratification voting and provides raises for our people and an extension of the current contract by two years to 2026. We look forward to reaching new contracts with both our Alaska and Horizon pilots as well. Finally, our relative financial performance is strong, which is our commitment to owners. Year-to-date, we've generated $1.2 billion in cash flow from operations, with $600 million in free cash flow. On the challenge front, fuel costs remain an issue for the industry. Our hedges continue to dampen the impact for us, and we expect our full-year hedge benefit to be approximately $200 million based on the forward curve as of July 18. Pilot attrition is another challenge we are attentive to across Alaska, Horizon, and SkyWest. Attrition is most acute at our regional carriers and is a constraint across the industry. This is evidenced by industry regional capacity that is down 20 to 30 percent versus 2019 as mainline carriers hire pilots at unprecedented levels. And lastly, as is the case for the entire economy, supply chains remain disrupted by the pandemic. We are working with key partners closer than ever before and will be more conservative in planning our operation and capacity until we see higher levels of stability and predictability. Our aircraft, engine, and component partners are working extraordinarily hard and will continue to support them in their efforts. As we look forward, we are committed to producing strong financial results this year while also priming our company for success in 2023 and beyond. I am excited about what we can deliver on this front over the next few years. We are growing our fleet with new, efficient aircraft within an improved competitive network, and we're expanding global connections through our partnerships. Our relative cost advantage remains intact despite industry headwinds overall, and our focus on enabling structural cost improvements in our move to single fleet will be a powerful enabler for us going forward. And finally, we've unlocked commercial levers that are already materializing and are set to drive incremental benefit for us over the next few years. We have all the elements in place to continue to drive sustainable and profitable growth here at Air Group, and we are setting ourselves up to continue to deliver industry-leading financial results, as we have done so for so many years. To wrap up, demand in the short term remains robust, despite real headwinds that exist in the economy and our industry today. Headwinds like the war in Ukraine, stubbornly high fuel prices, high inflation, and a potential recession. And even with these negative factors, we still expect to deliver strong financial performance this year with double-digit pre-tax margins in the third quarter, as well as our 6% to 9% full-year pre-tax margin. As anyone who has been in the airline industry for a period of time learns, long-term success only comes from taking one step at a time. The strategic steps we've taken, streamlining our business, moving to a single fleet, and capitalizing on commercial opportunities are set to make Air Group a stronger company, positioning us well in any environment. And with that, I'll turn it over to Andrew.