Alaska Air Group, Inc.

Good 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 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, Planning, and Investor Relations, Ryan St. John.

Thank you, operator, and good morning. Thank you for joining us for our first quarter 2023 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 a first quarter gap net loss of $142 million. Excluding special items in mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $79 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 gap and non-gap measures in today's earnings release. 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. 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. Despite our first quarter loss, I am pleased to report that our operational and financial performance trended positively as we progressed 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 first quarter, and our loss is primarily a reflection of our current network seasonality. In the past, Alaska has found ways to break even or earn a small profit in the first quarter. Therefore, we are setting a target to reduce our first quarter profit seasonality over the next few years. 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 and February across all our geographies, including California, led to higher cancellation rates than normal. Additionally, volcanic ash in Alaska and the Pacific Northwest 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. 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 were in the order of $13 million. But most importantly this quarter, we delivered on metrics that were squarely within our control. First quarter capacity, revenue, and unit cost excluding fuel all landed within our originally guided ranges. I am particularly encouraged to see less close invariability and greater stability when forecasting company performance than we've seen in the past three years. 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, disciplined 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. 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. Our absentee 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. We have improved fuel efficiency by 4% year-over-year this quarter, or the equivalent of $25 million and 7 million 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 already constrained operating environment. As a result, we are now producing 20% more ASMs per aircraft than we did at this time last year. Finally, our balance sheet continues to be a pillar of strength. 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 of shareholder returns, and during the first quarter, we officially restarted our share repurchase program to offset dilution and remain on target to spend at least $100 million 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. 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 pre-tax margins this quarter. And assuming a stable economy, we remain confident that we will deliver our full year adjusted pre-tax margin of nine to 12% 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. This positions us well in any environment to continue to deliver on our financial commitments and drive our long-term success. And with that, I'll turn it over to Andrew.