Alaska Air Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 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 like to now 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 second 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 second quarter gap net income of $240 million. Excluding special items and mark-to-market field hedge adjustments, Air Group reported adjusted net income of $387 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 cost excluding fuel. And as usual, we provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben. Thanks, Ryan, and good morning, everyone. Our solid second quarter results reflect the strength of the leisure demand environment to date, as well as our team's unwavering commitment to operational excellence and reliability. I am thankful for their focus, which has helped us capitalize on this busy travel season to produce these great results. Our 18.3% pre-tax margin will likely lead the industry, coming in above 2019 margins despite higher fuel and structurally higher costs. Our earnings per share of $3 was 83 cents higher than 2019 levels, bringing us above 2019 on a year-to-date basis. beating consensus by 11%. The strength of demand this quarter was evident on June 30th when we flew the most passengers in a single day in air group's history. And at a 99.5% completion rate, we ran one of the best operations in the country as we continued to prioritize completing flights and serving our guests with care. This was 1.7 points better than 2022 and 0.3 points better than 2019. Heading into the busy summer period, we have planned and prepared our airline for peak flying and our teams are executing. Over the 4th of July weekend, we led the industry in completion rate at 99.8% and on-time performance at 85.1% while flying a 90% load factor. As we approach the rest of the year and beyond, it is clear our environment is evolving as domestic leisure fairs have recently started to come down from their peaks. Delivering on our targets will not be without challenges, but we remain focused on restoring the tenets of our resilient business model, driving improvements in efficiency and productivity, and controlling unit costs to continue to deliver strong financial performance. We remain confident in hitting our financial targets this year, including our adjusted pre-tax margin of 9 to 12% and earnings per share of $5.50 to $7.50. Now turning to an update on our business priorities and progress. We have chosen to prioritize reliability and are running a strong operation like we have historically done. Not only do our guests deserve this level of commitment and excellence, but it is imperative to restoring stability, improving predictability, capturing revenue, and building a foundation to drive further improvement to the business. Our investments in training, aircraft, and staffing have enabled us to meet a higher level of flying. Higher completion rate performance has surpassed our initial expectations driving approximately half of the three-point increase of capacity in our full year guide. Productivity is also improving as we adjust to new work behaviors amidst a more stable operating environment and work to close the gap to 2019 levels. Boeing has also continued to be a great partner, delivering according to expectations despite continued disruptions within their supply chain. Earlier this month, we welcomed our 53rd MAX into the fleet. The upgaging benefit of these aircraft are significant. While departures were down 1.3% year over year this quarter, higher gauge coupled with mainline utilization exceeded 2019 levels by 4% at 11.5 hours per day and drove capacity up 9.9% year over year as we continue to leverage our fixed cost assets as much as possible. As we transition to a fully Boeing fleet at Alaska, this efficient growth has helped us de-risk our growth plan within a constrained industry operating environment. Given our expectation of continued strong operational execution, adequate staffing, and efficient growth, we have raised our full year capacity guide to 11 to 13% versus 2022. As we work to restore all areas of our network to pre-pandemic levels, we are confident in our resources to meet this higher level of flying and balance our growth aspirations with a consistent commitment to excellence. Our business is configured to compete, and we've doubled down on these core advantages to reinforce our foundation for profitable growth. We are returning to our historical strength as a single fleet operator and have rebuilt our foundation of operational excellence. We continue to push incrementally more on productivity and costs and still expect to be one of the only in the industry to drive unit costs lower year over year, even when factoring in our industry-leading performance-based pay, which several of our peers exclude. We are executing on our commercial roadmap and making progress on revenue initiatives. Our balance sheet remains unimpaired coming out of the crisis with leverage well within our long-term target range, and we have line of sight to full-year earnings per share on par with 2019, despite structurally higher labor costs and at least 30% higher fuel costs. For decades, Air Group has adapted and will continue to do so to produce consistent, profitable growth. As you well know, this industry is challenging, yet we remain focused on the drivers of our long-term success, restoring and strengthening are competitive advantages. Operational excellence, cost discipline, and high productivity in a consistent and measured way will continue to position us well now and far into the future. And with that, I'll turn it over to Andrew.