Alaska Air Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 Fourth 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 speakers' 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 fourth 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 fourth quarter gap net income of $22 million. Excluding special items in mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $118 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 within 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. Despite another volatile year, we closed out 2022 with solid results. With our continued focus and the incredible dedication of our employees, we are well positioned to build on this success as we move into 2023 and beyond. This year, we generated full year revenue 10% above 2019 levels, doing so on 9% less capacity. Our 7.6% full year adjusted pre-tax margin led the industry, proving that our business model is resilient. Air Group's pre-tax margins have now ranked number one in the industry for 11 of the last 13 years. Additionally, our employees earned the largest performance bonus payout in our company's history, on average adding 10.5% on top of our employees' salaries or nearly six weeks' worth of pay. Our people did a fantastic job delivering care and want to thank all of them for the work they do to ensure Air Group outperforms even during turbulent times. Earlier this year, we identified three key priorities to strengthen our competitive advantage and prepare for future growth. Our teams delivered on each of these priorities, including one, completing our labor deals. We signed five labor contracts in 2022, all of which includes significant improvements for our people and create stability and clarity for our company and employees. With these in place, we are well positioned to fully focus on our future. Two, fortifying our operational reliability. Despite challenges throughout the year, we finished 2022 with one of the industry's best completion and on-time performance rates. Operational integrity is the foundation of a healthy airline, and we remain focused on balancing our growth aspirations with consistent delivery of the operational excellence Alaska is known for. And three, executing our single fleet transitions at both Alaska and Horizon. On January 8th, we flew our last A320 revenue service flight and today marks the final Q400 flight, leaving only 10 A321s in the fleet through year end. We have retired over 60 aircraft the last few months, paving the way to more cost efficient and productive operations in both our regional and mainline business. As we take off 2023, we're taking with us many lessons learned. We closed out a solid year, and we are committed to make 2023 even better. Our leadership team has a clear set of strategic initiatives that will support our growth aspirations, expand margins, and improve operational excellence. For the full year, we expect to achieve adjusted pre-tax margins of between 9 and 12%. This morning, we introduced an earnings guide of $5.50 to $7.50 per share, which implies restoration to 2019 EPS levels at the midpoint. Delivering on these targets will be challenging and will require us to leverage our competitive strengths. Undoubtedly, there have been structural shifts within the industry. but history has proven time and again that cost discipline and a strong balance sheet are required to win in the airline business. This is the heart of Air Group's DNA, and we continue to believe low costs and high productivity matter, and that pursuing both benefits all stakeholders. Productivity is not where it used to be in this post-pandemic era, and it can be debated what is structural and what is temporary. but our leadership team is dedicated to driving down unit costs in 2023 as we restore flying and begin to close the productivity gap. This strategy is largely enabled by our single fleet transition and the upgauge benefits that come with our new MAX fleet. Two critical factors to successful capacity growth in 2023 will continue to be staffing and aircraft availability. We had success in hiring nearly 8,000 people in 2022 and are confident in our plans to hire 3,500 more in 2023. And as it relates to aircraft, we remain in close communication with Boeing and have a high degree of confidence in our fleet planning assumptions as well. Having factored in the appropriate buffer in both these areas, we are confident in our 2023 plans to grow 8% to 10% versus prior year, so long as demand and the economic environment continue to support it. Lastly, the revenue roadmap we outlined at our March Investor Day will provide valuable contributions in 2023 and continue to build to our $400 million target. Through focus on cost discipline and growing revenue opportunities, we have a tangible path to expand margins and our team is excited to deliver on these in 2023. To wrap up, our goal throughout the pandemic has been to emerge a stronger, more competitive airline, and the steps we've taken to date ensure we're on that path. We have the people, the resources, the knowledge, and the discipline to drive performance. I am proud of the results we achieved in 2022, but even more so, I'm looking forward to the opportunities ahead of us as we deliver on our financial and strategic initiatives in 2023 and beyond. And with that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. My comments today will focus on our fourth quarter and full year results, along with first quarter guidance. Fourth quarter revenues totaled $2.5 billion, That's up 11.3% versus the fourth quarter of 2019, notwithstanding our capacity was down nearly 10%. These strong results included the impact of severe winter conditions that we experienced over the peak holiday travel period in December. The storm reduced revenue by approximately $45 million. Notwithstanding this, we achieved unit revenue increases of 23% for the quarter with robust loads which exceeded 2019 levels and came in at 85.5%. More impressively, as Ben mentioned, our full year revenues came in at $9.6 billion and that's up 10% versus 2019 on 9% less capacity. This resulted in industry leading full year unit revenues, which were up 21% versus 2019, capping off a strong year of outperformance and demonstrating the leverage of our commercial initiatives, power of our network and a constructive pricing environment. Turning to product and loyalty, as has been the case all year, we continue to benefit from strong demand in our premium products. The first class was up 19% and premium class up 14% versus the fourth quarter of 2019 with paid load factors up six points and two points respectively. As we reflect on the full year of 2022, we were able to drive an increase in premium revenues of nearly half a billion dollars or 20% above 2019. Our loyalty program has also been a significant revenue driver given our renewed credit card deal with Bank of America. Cash remuneration from the bank was up 42% versus the fourth quarter of 2019 and 39% for the full year. As a reminder, product and loyalty represented roughly half of our 400 million commercial initiatives and we expect to achieve product and loyalty's full run rate in 2023. Regarding network and alliances, we are encouraged by the results we've seen through our partnerships and One World. Through increased opportunities that we simply did not have before the pandemic, including joint contracting with American and working with MXGBT, we have meaningfully improved our corporate share gap and continue to experience higher traffic volumes facilitated by our alliance partnerships. And we are stepping up our airline partner selling capability in 2023. which will have us offering full partner inventory for 10 global carriers on alaskaair.com by year end. These partners include American Airlines, IAG, Japan Airlines, Qatar, and Qantas. An expanded global network that we can sell and market as our own is compelling for our guests, and we expect our airline partner revenue to reach 8% to 10% of total air group revenues by 2025. Turning to corporate travel, we experienced a softening in bookings during the fourth quarter from those in the late summer peaks, exiting 2022 at approximately 75% recovered on a volume basis and 85% recovered on a revenue basis. West Coast business remains less recovered, which is not surprising given the significant workforce reductions happening across large technology companies located up and down the coast, where we primarily operate. Despite the choppiness we've seen in this segment, business travel has trended in a positive direction the last few weeks. While we don't expect continued recovery to be linear, over time we do still expect to fully restore our business revenue based on our improved opportunity set. Looking ahead to guidance for the first quarter, we expect total revenue to be up 29% to 32% year over year on capacity that is up 11% to 14% as we lap weak comps when Omicron reached its peak in the first quarter of 22. Q1 is always our weakest quarter of the year, but leisure travel remains healthy and yields are holding steady. For the full year, we expect revenue to be up 8% to 10% on flat unit revenue. Our 8% to 10% growth in 2023 will continue to focus on deepening the connections of our network while growing the Pacific Northwest and restoring California. Approximately two-thirds of our growth will be focused in the Pacific Northwest and one-third in California and will not be overly dilutive to our yields as much of it will be added to our strongest markets where demand exceeded supply in 2022. Importantly, 85% of growth comes from increased gauge and stage. This is the most efficient capacity growth of any year that I can recall at Alaska Airlines. In closing, my team and I are squarely focused on 2022 as our baseline year, which represented industry-leading unit revenue and profitability. And from that base, we look forward to building an even stronger result for 2023. The economics of our renewed credit card will continue to build this year. Our alliances and partnerships are set to gain further momentum as we improve our corporate share and international travel continues to unlock. Our premium seat mix and upgaging opportunities will also grow as we take 37 max deliveries where 22% of seats are premium. This combination drives further unit revenue momentum that we believe will be a differentiator for us going forward. I'm excited for what our commercial team is set to deliver in 2023. And with that, I'll pass it over to Shane.

Thanks Andrew and good morning everyone. As you heard from Ben, our full year 7.6% adjusted pre-tax margin led the industry and is a great result for us given how the year started and the challenges we experienced rescaling our company in the face of incredible demand for travel. We are especially proud that all of our people will receive significant performance-based bonuses in February given their achievements this year. We are looking forward to further building towards our long-term financial goals in 2023 by remaining focused on running a reliable operation, driving unit cost and productivity improvements, and delivering on our commercial roadmap. Turning to Q4 results and an update on our balance sheet, we ended the year with debt to cap of 49%, within our target range of 40% to 50%, and still among the strongest in the industry. Debt payments during the fourth quarter were approximately $50 million, For full year 2023, debt repayments are modest, totaling approximately $280 million with $100 million in the first quarter. Cash flow from operations totaled $1.4 billion for full year 2022, and total liquidity inclusive of on-hand cash and undrawn lines of credit ended the year at $2.8 billion, a great result given that we continued to pay cash for our CapEx in 2022, which was one of the highest CapEx years in our history. In addition to top of industry margins and our balance sheet strength, our trailing 12-month return on invested capital reached 9% in 2022, above our cost of capital and approaching our long-term target range. Our balance sheet strength, our cash position, and our margin and return on capital results allowed us to take two other important steps towards the end of 2022. First, we announced in December our plan to restart share repurchases in the first quarter of 2023, initially focused on offsetting dilution. And second, we secured an expanded order book with Boeing, now having firm and option aircraft positions through the rest of this decade. Given overall aircraft and engine demand and ongoing supply chain challenges, having access to positions for the next seven plus years will, we believe, prove to be beneficial strategically as it provides us maximum fleet flexibility on great terms. Turning to costs, in Q4, CASMX increased 24% versus 2019, approximately one point above our guide, driven entirely by lost capacity and incremental costs as a result of the severe winter weather in November and December. Absent this impact, our Q4 CASMX would have slightly beat our guide. Our full year CASMX and capacity ended the year within our guided ranges at up 20% and down 9% respectively versus 2019. And as a reminder, we do continue to include the cost of our performance based bonus and incentive pay programs in our unit costs. For the full year, this represented approximately two points of unit cost pressure versus 2019 and was materially more impactful on our unit costs than at other airlines. Our beliefs about what will drive long-term success and value in the airline industry remain largely intact and consistent with what we believed pre-pandemic. We firmly believe a strong balance sheet and low relative costs will be the ultimate drivers of business stability and success. We remain focused on and confident in both of these areas. Our balance sheet is strong, and based on 2023 guides, Alaska is positioned to achieve the best unit cost result within the industry this year, helping us maintain or improve our pre-pandemic relative cost position. Looking ahead to 2023, our current schedule has us returning to pre-pandemic levels of capacity during the first half of the year. Maintaining operational safety and reliability remains our top priority, and we will have continued modest cost headwinds as we complete the transition training related to our fleet transitions. However, we are planning for solid improvements to our overall fleet utilization and levels of productivity during 2023, and are focused on reducing unit costs on a year-over-year basis. For the first quarter, we expect capacity to be up 11% to 14%, with CASMX down 0% to 2% year-over-year. And for the full year, we continue to expect capacity to be up 8% to 10%, with CASMX down 1% to 3% on a year-over-year basis. Touching on fuel, oil prices have moderated from 2022 levels but remain elevated. Refining spreads also remain volatile. We currently expect fuel price per gallon to be $3.15 to $3.35 for the first quarter and $3.10 to $3.30 for the full year. Our significant 2022 benefit from hedging, which was approximately $170 million, will likely turn to a net cost in 2023. As a reminder, our hedging program uses 20% out-of-the-money call options only, and our strike prices are above what we anticipate oil prices will be during the year. Taken all together, as Ben mentioned, we expect margins to improve this year with our full-year adjusted pre-tax margin guide of 9% to 12%. This incorporates the full structural impact of our ratified labor contracts, contributing approximately three points to our full-year CASA max. And while we are optimistic about demand for travel this year, we are also cognizant of the uncertain economic backdrop we are operating in, and we'll adjust capacity accordingly this year if we need to. One of our primary strengths over the years has been to execute our plans. In 2022, we certainly experienced volatility and some setback. But overall, we executed on the major components of our recovery plan and have a strong foundation to work from in 2023. We have most of our labor deals completed. We are through the majority of our fleet transition. We were one of the most reliable airlines in the industry. We've got a solid balance sheet and a great aircraft order book. And we are now focused on improving utilization, productivity, and delivering on more of our commercial roadmap as we attempt to lead the industry again in financial performance in 2023. And with that, let's go to your questions.

At this time, I would like to invite analysts who would like to ask a question to please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And our first question today will come from Andrew Dodora with Bank of America Global Research.

Hi. Good morning, everyone. Andrew, just a quick question. You got the RASM premium last year, even with kind of the West Coast corporate tech travel not showing as much growth as other areas. Based on guides out of other airlines and your guide this morning, it doesn't seem like you're assuming much of a further RASM growth premium here. Just curious, what are you baking into your guide in terms of corporate travel recovery here in 2023? And do you think there's the opportunity for that RASM premium to kind of maintain throughout this year?

Yeah, good morning. Thanks, Andrew. So a couple of things. I think firstly, and to your point, we did have the higher benchmark last year. If you look at the industry's guide for this year, I think we're all saying unit revenue is about flat. So we're in line with that. I do think, as I shared in my prepared remarks, that we may have more upside in the corporate side than perhaps others on a relative basis. So I do see that there is opportunity there. And of course, as you're well aware, we really peak in the second and certainly the third quarter. And again, industry capacity is not back to where it was in 19. So again, there could be upside here, but right now we're in a pretty good place.

Got in the question for Shane, just in regards to that kind of peaking in 2Q and 3Q. When we think about capacity and chasm for the rest of the year, do you expect each to be fairly consistent across the quarters going forward here? Or is there like any lumpiness that we should build into our models? Thanks.

Yeah. Hey, good morning, Andrew. Thanks. You know, from a capacity perspective, it's pretty sequentially modest. Q4 to Q1, Q1 to Q2 to Q3. There is a step up in the second half of the year. But it's very reasonable, I think. In terms of unit costs, I think flattish for the first half of the year, consistent with our Q1 guide, obviously. And then a little bit of momentum in the back half of the year. It's not exaggerated. It's sort of flattish first half of the year and then, you know, single digits-ish in the second half of the year. So I don't think there's a big swing quarter to quarter that you guys need to expect from us this year.

That's helpful. Thank you. Thanks, Andrew.

And our next question will come from Jamie Baker with JP Morgan.

Hey, good morning, everybody. I know your pilot contract has a snap up or a, you know, a me too clause. But as I recall, it's a little complex. Can you remind us of the mechanics of that mechanism? When do look backs occur? What's the group of airlines that you comp against? And You know, I can obviously do my own analysis, but if you have an Alaska estimate, you know, based on Delta becoming the market, you know, I'm all ears, but, you know, we can do that work on our end.

Yeah, Jamie, I'll give you the very – I'll give you the complicated formula, and then you guys can do the math. It's the simple average of the – four larger airlines than us and JetBlue. And we look at it on September 1st. So you can make sort of estimates about what you think the industry would have ratified by that point in time and pretty easily back into, you know, what you think the impact might be relative to the scheduled 4% downline raise. So we're happy that we have this, by the way, in the contract. We don't want our pilots to fall behind. And we knew going first that we had to have some mechanism to make sure that we kept up with the market if it went to a different place than we were expecting.

Okay, perfect. I appreciate the color. And then on One World, you said reaching 10% of group revenue by 2025, that's the goal you gave, right?

Eight to 10%. Eight to 10%. Okay.

So I've always assumed that connecting revenue or alliance revenue is less profitable than local revenue. Obviously, if the connecting revenue is entirely incremental, it's highly accretive. I know, and maybe my assumption is flawed, I know you've been really bulled up on your One World membership, but on a margin basis, how does that 8% to 10% compare to your core flying?

Well, I think, so a couple of things, and again, just what we've seen this year, especially with American Airlines and not just international but domestically connecting over their hubs and even some local market code share we have. We've participated in Americans strong revenue environment as well where their corporate travelers or leisure travelers or connecting beyond need to utilize our network to help make for a better shorter trip. So overall I've been very happy with the yields that have been produced. And, again, as we go into this year with international travel and the proration of these strong international fares, again, from what we had last year, I think these are all positive momentum for us.

Okay.

That's helpful. I appreciate it. Take care, everyone. Thanks, Jamie.

And our next question will come from Catherine O'Brien with Goldman Sachs. Hey, good morning, everyone.

Hope you're doing well. So, you know, in December, you got hit with some really unusual weather that drove the operational issues you saw. You know, not saying that preparing for an ice storm on Christmas should be the operational base case, but, you know, some of your peers are talking about the need to have permanently higher buffers to protect the operation. You know, do you believe that you already had the appropriate buffers in place for 8% to 10% capacity guy over 2023? And, you know, so December didn't really need to change anything? Some color there would be great. Thanks.

Maybe I'll just speak to 23 and you can speak to the December event. By the way, welcome back, Katie. It's good to hear from you. I think we do have sufficient buffers in our capacity plan and our staffing plan to ensure that we're not overstressing the network. You know, if you look at the second half of the year, once we sorted out our April issues with pilot training, we were amongst the best in the industry in both on time and completion rate. Yeah, this was a, although it's becoming the norm because it happened last year as well, this was a pretty unique event that lasted multiple days and did ice over our aircraft here in Seattle and in Portland and actually in other parts of the Pacific Northwest. So it was a pretty unique event. events. And I think it's probably not, we're not going to assume that it happens to us every single year, but we do have to build some more resiliency and irregular ops for sure.

Yeah, Katie, it's been, you know, having done operations, you know, my whole career, I mean, you can look at it a couple of ways. You can create a massive amount of buffer for an event that might not happen, or you can go in with, you know, the appropriate level of staffing with some with some additional cushion to deal with winter events. But things like ice storms are massive events that, you know, cripple a city. And there's not a lot you can do, no matter how much buffer you put in. There's nothing you can do to operate in an ice storm. So, you know, our mindset is create a robust schedule that we can operate in the peak periods or peak periods where there's, you know, where we're susceptible to weather, create additional buffers. But it's got to be, you know, managed appropriately. So we were good. This was just, you know, a big event. And I'm pretty proud of the team and how we dug out of it and got back on track.

Totally understandable. I mean, just seeing some of the scenes in Seattle, it definitely seems like a unique event. So maybe just one then, you know, great to have most of the fleet transition behind you. Can you just help us think about some of the moving pieces on the P&L for this year underlying your full year of CASMX guidance? You know, I know you mentioned some elevated training, your prepared remarks, Shane, but anything else we should be thinking about that, you know, as we go forward might roll off that's unique to this fleet transition Alaska? Thanks.

Yeah, I don't think there's anything sort of major. A lot of the expenses related to returning the leased aircraft we took through special last year. So we don't expect a lot of noise this year in the P&L related to the fleet transition. The biggest cost piece is that we're completing the transition training of pilots by and large, in the first quarter, slipping a tiny bit into the second quarter. But that's really it in terms of fleet transition-related specific costs in the P&L. I don't think anything else is, you know, different than what you've seen across most of the industry. We have airport costs that remain, you know, an area of growth in terms of the P&L. I think that's consistent with the entire industry. And then certainly labor costs. you know, have gone up structurally. And as we grow, they're going to, you know, they're going to continue to go up as we hire more people to fund that growth. But everything else looks pretty normal, I would say, in terms of trend.

Nothing to really point out.

Great. Thank you.

Thanks, Katie. Thanks, Katie.

And we'll go next to Helene Becker with Cowan & Company.

Thanks very much, Operator. Hi, everybody, and thank you very much for the time. Just one quick clarification on that last point, Jane. The $120 million in the fourth quarter, then is that the end of the transition cost? Is that the way we think about that?

Helene, this is Emily. So the $120 million that you saw in special charges in Q4 should be most of the remainder because we've put all of our estimates in for returning all the A320s. We've done all the accelerated depreciation and other charges that we're going to take on both the Q4s and the A320s. Those aircraft actually leave our property over the next 12 to 18 months, so there could be some minor true-ups that come through there. The last remaining thing that you're going to see coming through special charges in 2023 is going to be whatever we end up doing with the A321s, which are still on our books. So there will be some dollars there, but there should not be much more for A320s.

Okay, that's very helpful. Thanks for clarifying that. And then just on the mileage plan, I think... there was an announcement that there are new benefits that are accruing to your members beginning, like, I want to say around now. Yeah. Maybe, Andrew, can you talk about that and how that should benefit your revenue line?

Yeah, thanks, Elaine. So two things. Certainly for our loyalty guest members, there's some really, you know, cool incremental benefits. As it relates to bonus miles for subscriptions, boarding priorities, and even if you hold Bank of America accounts, you'll get bonuses there. So there's a lot of good things there. I think specifically for Air Group, a couple of things. For new cardholders, there's going to be some minimum spend thresholds, which we've never had before. So I think that will add to some of the quality. And then the other thing, we did have a fee increase this year, which we haven't done forever, and we're still one of, if not the lowest card membership fee. But, again, that went from $75 to $95. So we will participate in that goodness.

Okay. That's very helpful. Just on that minimum spend, just to clarify, that – so you're talking about it – I understand what you're saying about it being – a better quality customer but do you think that you get fewer applications because you're putting that in? Do people get turned off by that?

No, I think, again, this is just on the forward book, Helene, not the back book. But again, obviously, this is something that we'll watch. But at the end of the day, knowing what our average card spend is and all the rest of it, our guests get a lot of value from our card. And the spend on the card is very, very healthy. So we think this is... well within industry. In fact, it's probably low versus the industry, but we don't have any concerns about it.

And, Andrew, since we've launched it, you've seen a lot of credit card signups, right?

Yes, exactly, and a lot of positive comments.

Okay, that's helpful. Thanks, team.

Thanks, Elaine. Thanks, Elaine.

And our next question will come from Duane Fenigworth with Evercore ISI.

In terms of the pacing benefits, the pacing of benefits of moving to a single fleet. What are we seeing in the first quarter here, if any? And can you just remind us what are the hurdles you need to clear to realize further benefits?

Yeah. Hey, good morning, Dwayne. Really, it's just getting through the pilot training and getting the dash nines that replace the A320s here on property. We are at low 40s of dash nines relative to the 60-ish A319s and A320s we had. So the planes are coming. We've got a bunch more coming this year. We'll have, you know, full restoration of the fleet size as we get through the year. We'll be through all of the transition training on horizon here in the first half of the year, mostly in the first quarter. Similar on mainline, although we'll have these 10 A321s, I think we can pretty quickly pretty easily get those, uh, into one, one hub, one base and, and manage that. So I think Dwayne, the unlock is basically going to start, um, in the second quarter and ramp, uh, to the rest of the year. Uh, and we should be at close to full run rate as we get through the fourth quarter, dependent upon what we do with the A321 transition. Cause we still have 150 pilots. We've got to transition off of that, um, equipment ultimately.

Great answer. Thank you. And then, um, You know, Ben, you were a, or at least our recollection, you were a process guy historically. Historically, Alaska was very good at, you know, identifying variability, measuring variability, and driving it out of your processes. Certainly, this is a different and more difficult operating environment. But do you think you still have those opportunities to drive out variability? You know, what are the one, two, three kind of productivity initiatives you can go attack this year? Or is that just outdated thinking from a bygone era? Thanks for taking the questions.

Hey, Dwayne, thanks for the question. It's a great question. And, you know, we talk about that a lot. Like what I'm going to tell you is that type of thinking is in our DNA. It's been in our DNA for, I've been here for 20 years. I mean, that's how we think and that's how we wired. In terms of, you know, has it structurally changed? And it could be debated, but my view is that The airline industry isn't even back to 2019 levels of capacity. So if you talk about airspace itself, now, of course, you've got to have ATC staffing in place. We're not flying the same amount we're flying in 2019. So if you look at block times, if you look at, you know, departures, we're still less than we were in 2019. So the airspace is essentially the same. It's got to work from an FAA perspective. And how we look at it internally is we can still have improvements in asset utilization and people productivity, and we have already the processes and the mechanism in place to get to a better place. So has it changed a little bit? Yes. Are we going to bring it back to the left? Absolutely.

Thank you very much. Thanks, Dwayne.

And we will move next to Michael Lindenberg with Deutsche Bank.

Oh, hey, good morning, everyone. Shane, congrats on getting, you know, the ROIC. I guess congrats to you and the whole team on getting your return on invested capital, you know, trailing 12 months better than your cost. You're one of the few out there who can actually, you know, have achieved that objective. You did highlight, you know, the return of a share repurchase program. Again, this is to offset just the dilution and then the, you know, amping up the part of the deliveries of some maxes. Where is your thinking on, you know, bringing back the dividend? Is that something that we see in 2023? Is that later this year? Is that a next-year phenomenon? Thanks.

Mike, thanks. Thanks for picking up the Roik comment in the script. That's nice that you did. We are – that question on dividend is a 2023 conversation item with the board. We decided last year to prioritize – you know, offsetting dilution first. As you know, I mean, I think a dividend is something that you do when you have a lot of confidence in the outlook, you know, for a multi-year period. We're really optimistic, but we want to see how this year shapes up, especially with the economic backdrop. So we're actively discussing it with the board still in our long-term sort of thought process in terms of, you know, capital allocation and shareholder returns, but nothing to say right now on it.

Okay, great. Fair enough. And then just second, my question on loyalty to Andrew. You know, to see the, you know, $1.5 billion of remuneration, and I think, you know, just a few years back it was $1.1 billion. I think you had mentioned something like 39% going back to 2019. And, you know, maybe we're looking at, you know, a 10% or 12% type kegger here. Is that the right rate going forward? I mean, or, you know, or do we see, you know, maybe you talked about a step-up in fee, but do we see a step-up in maybe rate? Are there any, you know, sort of, you know, milestones that we hit over the next year or two where that one five could say jump to two? How should we think about the growth of that program?

Yeah, I think, well, it's a couple of things. And again, you've seen a significant step change from the new contract and that, as you heard this morning, there'll be more goodness there. And, you know, there is also, you know, changes over time. But I think what we're really excited about now is we've got this behind us is, you know, growing the program, growing the portfolio, growing the spend, top of wallet. And that's what my team is squarely focused on now. And so I do personally see continued momentum, and it's going to be a very big focus for us as we continue to move forward.

Okay. Very good. Thanks, everyone.

Thanks, Mike. I did want to mention as well, that was a great answer, Andrew, because it is Andrew's birthday today, which I forgot to mention at the start. And I just want to ask the analysts not to be too hard on Andrew. I'm kidding. You can be as hard on him as you like. Happy birthday, Andrew. Thank you, Ben.

And our next question today will come from Savi Seiss with Raymond James Financial.

Hey. Good morning. And I guess as a follow-up on Andrew Jara's question, and it's probably a question to Andrew, so I apologize if this is mean, but I was kind of curious if you could give a little bit more color on the kind of the business recovery in terms of, you mentioned maybe getting, eventually kind of getting back to 2019 levels, but because you have, you know, some of these other initiatives that should help you get there. Do you get there this year And particularly, I guess, what I'm focused on is you have a lot of headlines about kind of job cuts in kind of the West Coast-based tech companies. And is that having any incremental impact on the tech business demand? Or is it just more you're not seeing the recovery yet?

Yeah. Hi, Savi. Thanks for that. And I think it's a great question because the first thing I will say is that even though the headlines are recent on these job cuts, We've been experiencing, and especially some really large tech companies experiencing their corporate travel has already been severely depressed for some time now. So the corporate numbers that you see from us already include a lot of high-tech companies that already, in some cases, nearly turned off their travel but have severely depressed. So as we move forward, I don't think these cuts personally impact the technology side because I think we've already seen them. And the question is, will they come back? I'm more bullish and confident certainly on the non-tech side side of corporate travel and continued to share there. I will say the jury's a little bit out on where tech does go. But I think overall, portfolio-wise, business is somewhat stable at the, you know, 85, 75, 85% range. But again, I hope with our share movement and continued strength over time that we do get back there.

Savvy, I might just add that the one thing not to lose sight of is these tech companies, while they haven't been traveling for quite a while, these are like the most valuable companies on earth. And at some point they are going to expand again. They're going to get traveling again. So it's probably future goodness for us. We just don't know when it's going to really come back. It could be, it could be a year away or more.

Makes sense. And there's just a lot of the getting back to the, on the utilization and productivity, trying to understand again, you know, then you've talked about the aerospace is, is what it is and we're still below and yet you're seeing everybody struggling with and then questioning if we get back to the previous productivity. What's controllable on Alaska's side and the timing around that versus what's out of your control?

No, Savi, just let me start with a couple of things. I think for us, well, coming back from a pandemic and getting the inertia up for the operation, I think that's where not just Alaska, but the entire industry struggled getting back up to a certain level of capacity. So there was some, you know, there was a lot of issues there. Like, as I look forward now into 2023, when I look at the benefits of single fleet and having the majority of your fleet Boeing and the majority of your fleet Embraer 175, That just drives massive efficiency in terms of crews, in terms of swapping airplanes and getting reserve crews. So just there alone for us is a major, major improvement. Secondly, again, getting through a little bit of the volatility with staffing and training, that goes away. So that volatility goes out. So our focus is purely on every part of the operation where we see volatility in staffing, where we see volatility in performance is to go and zero in on those issues and snuff them out. And that's what good airlines do, and operation reliability is just critical in doing that right. Now, there will be things that will never go back to the way they were in 2019, but I think a lot of this is in our control, and we just don't give up on those type of things. It's savings that you can go after, and we're going to go after them.

Just to clarify, but just on the staffing side, staffing and training, the training is related to the fleet transition, right? Are you fairly caught up in just being able to source the pilots for the capacity?

Right, yeah. We're going through a lot of the A320 Airbus pilot transition right now, so we'll be through it by the end of the first quarter. And so that's going through all our schoolhouse right now. Same thing with the Q400s on the Airborne 175. So we'll be largely done that big bow wave.

Thank you.

Thanks, Debbie.

And we'll go next to Scott Group with Wolf Research.

Hey, thanks. I just want to go back to the revenue guide. So it looks like RASM decelerating from, when I look versus 19, decelerating from fourth quarter to first quarter and then re-accelerating the rest of the year. Just Help us understand that. Is that a market view? Is that something specific to you guys, just any color there?

Yeah, good morning, Scott. So a couple of things, and we've talked about this before, obviously, but our first quarter is You know, always the weakest. And, you know, a little bit business travel certainly in January has been highly choppy and did not return as much as we had hoped. But I think if you take a step back and look at our revenue in general and you even go back to 2019, our unit revenue guides for the first quarter are right in line with the industry's unit guides. And they also have very big international revenues. Travel coming back, which I think will be a big tailwind for them. And again, for the year, we're about right where industry is. But again, for us, we've got work to do again on January and February on the network side. We do need to make sure that we construct our network to handle these lulls in our demand. But again, March and forward is very solid.

Okay. And then Shane, I think you said that there's a fuel hedging loss embedded in the guide for this year. Just how much is that? And then maybe just bigger picture, like the issue has been crack spread, not so much crude. Like any thoughts on revisiting how you guys hedge? I know it's more complicated, but it seems like it would be a much more effective way to hedge it if you want to hedge at all.

Hey, Scott, it's Nat Pieper. Thanks for the question on fuel. I think first on just our hedging program. We started this 20 percent out of the money calls very straightforward formulaic back in 2015. Broke even basically 2015 to 2021. And then as you cited and as we said in the script 2022 it turned out to be a profitable thing. But as you know we're not hedging to make money. We're hedging just as to eliminate volatility. We think it's a good way to use our strong balance sheet and it just gives us some better insights in our planning as we move forward. We have spent a considerable amount of time with investment banking friends back on the East Coast about ways to potentially to hedge the crack spread. You're right in that that's been the main source of frustration, volatility, et cetera. And something we're looking at, but I'd underscore We're only going to do it if, again, it's consistent with our core values as a company, use our strong financial foundation, and just keep it on autopilot.

And what is the hedge loss, though, you've got factored in?

We're looking at about $10 million in the first quarter. And then, as you can imagine, it snaps to something different every day the forward curve moves. Okay.

All right. Thank you, guys. Thanks, Scott.

And our next question will come from Dan McKenzie with Seaport Global.

Oh, hey, good morning, guys. Thanks. Andrew, of course, we want to help you celebrate your birthday with a couple questions here. Happy birthday. Thank you. So, you know, I guess the question is the state of California was pretty slow to come out of the pandemic. And, you know, I guess my question is, is what percent of the revenue growth this year is just simply getting markets back to 2019 levels of revenue? And then related to this, what percent of Alaska's revenue touches the state of California?

Yeah.

So just on the big picture, yeah. then our growth, two-thirds of it is going to be Pacific Northwest and a third of it is going to be California. Just as it relates to recovery, if you look at our growth in 2023, the Pacific Northwest is now in the double-digit territory higher than 2019. But California was still down 23% last year, and it'll be 10 points better than that. So our California network will still be down about 10 to 12 points. this year versus 19, but recovering. And I would say, again, very high level, you know, a third of our revenues is somewhat tied to California.

Wow. That's big. On the prior comment that Alaska has more upside on corporate revenue versus peers, I So I guess on premium revenue, I believe the stat was to have 62% more premium seats this year versus 2019. And I guess I'm wondering if that stat is still correct or if that's right. And I'm not sure if you can share what the mix is today, but what it is today versus where you might expect to exit the year. But if you can, that's helpful. And then related to this, you know, just the corporate travel budgets, are they coming in a little higher than last year, a lot higher or lower just given the tech exposure?

Yeah, so I think a couple of things, and you maybe saw in my prepared remarks that, you know, we were able to increase our premium revenues by nearly half a billion dollars. And as Shane has shared, we're sort of trading out you know, 12 first-class seat, you know, 320s for 16 first-class seat, you know, maxes. So there's real upside there. I think overall, I think first-class revenues are up about 21%. So there is a significant opportunity there. The other opportunity we're working on, Dan, is our regional fleet. And we're actually... We're all 175 now, which have first and premium, and we're really happy with the progress we've made on filling those seats at good fares, and we continue to work that. And then on the last question you had was on corporate. Could you repeat that one again? Sorry.

Yeah, the corporate travel budget, a little higher, a little lower, or given the tech exposure.

Yeah, I think some of the budgets when I last spoke to my team were still being finalized for this year. I think Budgets or no budgets, I think what we're really seeing a little bit here, Dan, in some cases is the on-off switch. You've got to go to your vice president to ask for travel. And so people are not going. So we either see very deep cuts in travel or more to the average mean. So I think the real question is, is will high tech start to give permission for their people to start traveling again? And as you know, it's not just it's hotels, it's cars, it's airfares. So anyway. That's where we're at. Thanks for the time, you guys.

Thanks, Dan.

And our next question will come from Connor Cunningham with Mellius Research.

Hey, everyone. Thank you for the time. Happy birthday, Andrew. Just on the capacity outlook, this would be an easy one. Just can you provide some context on what's new versus core? you know, utilization stage gauge. It just feels like a lot of the growth is going to be utilization gauge based this year within your core markets. But if you could just clarify that, that would be great.

Yeah, I mean, you're exactly right. At the end of the day, very, very few new cities. This is essentially all core restoration and 85% of all of our growth is stage and gauge. So it's very efficient growth.

Is that mostly around the Pacific Northwest and California. I mean, I feel like you mentioned that prior. Yes. Yes, that's correct. All right. And then I hate to ask a cost question because I know you've got a bunch, but it seems like there's some confusion. Just prior to the 1Q CASMX guide, I would have thought first half or second half would just look a lot, lot different than it kind of seems like it's shaping up to be. And when I think about it, high-level second half benefiting from just easier comps, fleet transition, improved productivity, all that stuff. Maybe the offset is more on like profit share accruals and then another increase in the pilot. I'm just struggling with the idea. Are you being ultra conservative or is it just, there's just a lot of uncertainty right now on the second half cost side?

Thanks, Connor. I think if you're implying that you might've thought it would be down more in the second half cost, I'm not sure if that's what your sort of question was, but there's not a lot of noise, as I think, you know, Kitty had asked earlier, sequentially throughout the quarters. I will say, like, with respect to our profit sharing accruals, we had a very significant result in Q4 of 2022 because of our first place performance on the margin side. And, you know, while we are still anticipating to lead the industry next year, I think, you know, you'll see those accruals come in differently this year. And it's significant enough to create a little bit of noise. But, no, I think, look, we need to get through the first quarter, all the transition training, make sure the planes come, and we've got to make some decisions about the A321 and everything. I think what we've shared is something we're highly confident we can get to. We tend to target internally to do a little bit better, and that's what we're going to drive towards. But there's a lot of year ahead of us, a lot of execution to do. And I think the last couple of years, we've been ambitious in our plans and had a lot of setbacks. We don't anticipate those this year, but I think some of that's informing some conservatism in our capacity and other guides.

Sorry, just one clarification. I mean, you did have, like, the least return expense in the first quarter of last year. Is it maybe that? Sorry, I'll take it offline. I'll ask.

Yeah, yeah. We're happy to. I mean, we're not going to obviously get into, like, a lot of the, you know, specific details, but we're happy to give you more color for sure on the progression.

All right. Thank you. Thanks.

And our next question will come from Ravi Shankar with Morgan Stanley.

So another follow-up on corporate, I'm afraid. I think you said that the tech customers of yours are giant corporations and they're eventually going to come back, which I guess it's true, but then we can't be 100% sure of that given the way they do business. So are you happy to wait for them to kind of come back on the corporate side or – Are you looking to maybe expand your corporate customer footprint, maybe chase some more SMB customers? And is there anything you need to do from either a marketing or a network standpoint differently if your corporate customer base is likely to change going forward?

Andrew can speak quickly to the sort of composition. Ravi, one thing I'd say – Tech tends to have, you know, some of the best discounts. It's sort of lower yielding business traffic. And I think the point we were trying to make is they haven't been traveling much all of last year. So there's not, even though you have these headlines of layoffs, it doesn't really mean that there's like another downward step in terms of their travel. And I do think they're at historically low travel volumes. They may never go back to where they were pre-pandemic. I think they're going to be above where they are today.

I'm very confident about that. Just don't know when. Maybe Andrew on sort of pursuing S&P?

Yeah, I think, you know, we'll obviously adjust. You know, we obviously would love high tech to get back to where they were. But at the end of the day, this is about using your channels and the timing and when we sell and when we don't sell. And I think there's just a lot of opportunity to relook about who we're selling our seats to and when and where. And we will manage through this.

Maybe as a quick follow-up, obviously you guys have come a long way in the last couple of years with where your balance sheet is right now and with the biggest boxes checked on the cost side and the fee transition side and everything else. How are you thinking of the pace of shareholder returns or cash returns through the year, maybe as your confidence in your own numbers and the cycle maybe builds through the year?

Yeah. Hey, Ravi. I think, so we announced the sort of dilution offset program. I think we ranged it from 75 to 100 million. We'll put a grid in place, assuming the stock sort of price is somewhat you know consistent throughout the year it should be rateable uh throughout the year but what we'll buy more if the stock goes down and obviously a little bit less if the stock goes up but we'll get through the entire 100 million by the end of the year my my guess is it's it's fairly rateable across the quarters um and that's sort of our plan at this point all right great thank you thanks everybody uh

Thank you, Ravi. Thanks, everyone. Thanks for joining us for our first quarter call. Look forward to following up with anybody out there, and we'll talk to you on the second quarter. Everyone have a nice day. Thanks.

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