Alaska Air Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 third 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 third quarter 2023 earnings call. This morning, we issued our earnings release along with several accompanying slides detailing our results, which are 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 third quarter gap net income of $139 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $237 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 have 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. Before getting to our results, I'd like to start by acknowledging the human aspect of the work we do. This past quarter, close to home, we saw wildfires bring devastation to the West Maui community. More recently, we've been horrified by the terrorist attacks in Israel, and we mourn for the innocent lives lost. I want to acknowledge that people are hurting, and while we share in the privilege of connecting families and communities, we also share in the pain of seeing those around the world suffer. Now turning to our results. Our third quarter performance continues to demonstrate the underlying strength of our business model, and our commitment to drive consistent, measured progress against our goals. During the quarter, we ran the best operation in the country, delivering a 99.7% completion rate and on-time rate of over 80%. On September 30th, we retired our last Airbus aircraft from service, marking our official return to single fleet. We drove unit cost down nearly 5% year-over-year, a strong performance that stands alone versus our peers in achieving year-over-year unit cost reductions. And our 11.4% adjusted pre-tax margin nearly led the industry, despite our lower direct exposure to record international demand, as well as significant fuel cost headwinds given our geographic exposure to the West Coast. Now moving to where we are today. Having been in this industry a long time, I know as well as anyone how volatile it can be, and we are seeing this now. Crude oil has risen 12% from last quarter, while L.A. refining margins have increased 70% overall and 60% over Gulf Coast levels, disproportionately increasing our economic fuel costs compared to peers, given the majority of our purchasing happens on the West Coast. While we expect this divergence to be temporary, it is nonetheless a near-term headwind. Absent this $50 million cost in Q3, we would have led the industry in adjusted pre-tax margin. Demand remains strong in peak periods but shoulder periods are becoming more susceptible to lower demand without a full return of corporate travel. Despite these near-term headwinds that will likely make the next quarters more challenging, I continue to believe we have a strong, fundamental, long-term setup for several reasons. One, our teams continue to deliver reliability. We now have two solid quarters in a row of industry-leading performance, and I can confidently say we have our operational muscle back. I want to thank all our employees for their hard work and effort. They have done an amazing job prioritizing and delivering a safe and reliable operation for our guests. Our completion rate not only led the industry, but set 20-year company records in all three months of the quarter during peak summer flying, continuing to surpass our planning expectations. Two, our relative cost advantage comes from decades of discipline and became a highlight in the third quarter. With visibility to another quarter of unit cost improvement year over year, we expect full-year CASMAX to be down 1% to 2%, likely the only carrier to achieve unit cost reductions for the year. Having retired our last Airbus aircraft in September, we brought our dual fleet chapter to a close and are poised to fully recognize the power of single fleet efficiencies as we move into 2024. Three, we have the most diversified revenue of domestic focused airlines, generating 45% of our revenue outside the main cabin. Our investments in fleet and premium seating have given us a domestic product that rivals any in the industry, including first and premium class lounges and global partnerships that will continue to serve us well going forward. And four, our growth is rational and disciplined. Having closed out a strong summer operation, our teams are turning their focus to winter preparedness and continuing to deliver strong operational performance for our guests throughout the holidays. Capacity discipline is the most relevant lever our industry has and will be necessary to support off-peak periods going forward. We are focused on optimizing our flying and moderating growth as a prudent measure to deliver results. For 2024, we are actively discussing where within our long-term 4% to 8% target growth range is most optimal given the higher fuel environment. To close, we produce solid third quarter results. Without our refining margin headwind, we would have had the best result in the industry. Our product set competes with the best, and as the international versus domestic demand mix and business travel ultimately normalize over time, we have the right business model to deliver strong results and outperform well into the future. Now, more than ever, we are focused on extracting efficiencies from both sides of the profitability equation with all the elements in place to drive strong relative results within our evolving industry. And with that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, my comments will focus on third quarter results, recent trends, and our outlook for the rest of the year. Third quarter revenues reached $2.8 billion, up four-tenths of a percent year over year, on 13.7% more capacity, which was approximately one point below our revenue guidance midpoint. Unit revenues were down 11.7% versus 2022 and up 12.2% versus 2019. We had three sources of headwinds impacting third quarter revenue performance. First, the strong close-in revenue performance we saw from April through most of August moderated as we moved into September. Close-in demand for leisure looks to have normalized and without further return of business demand, shoulder periods are more challenged than they have been the past couple of years. Second, we planned our network for relatively strong demand from summer into September as we experienced last year. However, that did not fully materialize. This led to modest load factor weaknesses in areas of our network where we deployed more capacity than we normally would during the shoulder. Third, the devastating Maui wildfires impacted third quarter revenue and therefore profit by approximately $20 million. For reference, Hawaii represents nearly 12% of our capacity, with one-third of that deployed to Maui. Following the wildfires in early August, bookings turned negative with high rates of cancellation. This reversed at the end of August as bookings to Maui began recovering. However, September bookings were still down 45% versus last year. As we move into the fourth quarter, we are seeing continuing recovery in Maui. However, we expect revenues to be negatively impacted by approximately $18 million and anticipate it will be several quarters before demand returns to normalised levels. Having cut a full frequency from Seattle and trimmed capacity from other hubs, we will continue capacity adjustments to match supply with demand while serving the people of Maui during the recovery process. Lastly, although not a part of our baseline, we saw no upside benefit from corporate travel as revenue continues to hold at about 85% of 2019 levels. Having covered our headwinds though, there were several positive results in the quarter as well. With respect to product, our premium cabins continue to materially outperform the main cabin with first and premium class revenues up 10% and 6% year over year respectively. Alaska is the only primarily domestic carrier to have both first class and premium economy across 100% of our mainline and regional fleets. These premium seats represent 25% of our total seats and continue to be an area of opportunity for us in sustaining higher yields than other domestic focus competitors, especially as travel preferences continue to move in a more premium direction. Total premium paid load factor was up three points year over year, but has increased over 10 points on 12% more seats versus 2019. Today, premium revenue represents 31% of our total revenue, contributing to the 45% of total revenue we generate outside the main cabin. Putting aside premium for a moment, we have also seen success with more guests buying out from Saver into our main cabin product, This buy-up has occurred at 22% higher fares versus last year. Loyalty remains a strong driver of revenue performance as well. Bank cash remuneration was up 11% versus the third quarter of 2022, outpacing system revenue that was only up four-tenths of a point. We continue to make solid progress on our strategy of being able to directly sell our One World and other partners on alaskaair.com. We launched 13 partners this year, bringing our total to 18 partners with over 500 destinations worldwide now being sold direct on our website. These efforts will continue as we enable selling all cabins on our partners and continue to upgrade the digital guest experience on our website and within our native app. This is another area where we are clearly differentiated from other domestic focus carriers. We are the only primarily domestic carrier that offers access to a portfolio of global partners where we offer elite status recognition, accrual and redemption, and airport lounge access. This capability, along with our premium cabin offerings, gives me confidence that we will have built the right commercial offerings to meet our guests' preferences and drive long-term value to Air Group. As we shared on our last call, we have continued to see our guests take advantage of our global partner network with total accrual and redemptions on our long-haul partners up 26% for the third quarter versus last year. Taking a step back, as illustrated in the supporting slides we published today, when comparing our unit revenue performance versus a 2019 baseline, it's clear that the differentiation of our products, including our premium offering and international connectivity, is a very positive story, which has resulted in unit revenues up 12% on capacity growth of 6%. This is a testament to the soundness of our business model and the success of changes we've made since 2019. Now, turning to fourth quarter guidance, we expect revenue to be up 1% to 4% on capacity that is up 11% to 14% year over year. In terms of bookings, Holidays are in line with our expectations with load factors up a couple of points and yield up double digits versus 2019. As I mentioned, non-peak shoulders are weaker than 2022's historic demand levels. In part driven by a return to more normal seasonality and a continued, but we believe temporary, demand shift towards international travel. Today, we have approximately 58% of November and 35% of December revenue booked. Given our fourth quarter outlook and current demand backdrop, we are narrowing our full year revenue guide to up 7% to 8%. Our guide implies that our unit revenue trajectory is improving sequentially in the fourth quarter versus 2022, up three points. And we believe the gap to legacy unit revenue performance is also closing sequentially. Our most significant step up in capacity occurred during the third quarter as we work to restore our pre-pandemic network. However, in the fourth quarter and into the first quarter of 2024, our growth follows more in line with normal seasonal patterns. After growing 6% above 2019 levels in Q3, our growth moderates to less than 3% above 2019 levels from the fourth quarter through February of 2024, which we believe should better support supply and demand dynamics in our market versus the industry. Looking ahead, we remain confident in our commercial plan and cognizant of our environment. Our team has taken a hard look at our first quarter network amidst high fuel prices as part of our commitment to improving Q1 profitability. We are focused on managing capacity prudently, including capitalizing on leisure destinations, including 15 new routes such as Seattle and Los Angeles to Nassau, which will bring in new revenue while also constraining our total capacity growth to low levels and reducing business heavy routes and frequencies. For example, we've trimmed our higher frequency Pacific Northwest and California business seats 22% versus January and February of last year. To wrap up, we have a solid commercial plan that is producing results. Our combination of premium products, Valuable loyalty program and global offerings through our partnerships in one world allows us to provide guests with what they want while producing strong financial results, and we're looking forward to building on that moving forward. And with that, I'll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. As we discussed on previous calls, for the past year, we have prioritized returning Alaska to operational excellence. This is what our guests deserve, and it allows us to have more predictability across the company, which we can ultimately leverage to improve efficiency and cost performance. It was encouraging to see during the quarter that, as we've delivered the industry's most reliable operation, our teams have begun to turn the corner on our cost profile as well. And while we acknowledge a more challenged near-term setup with temporary but elevated West Coast jet fuel refining margin cost, and a more typical demand profile in shoulder periods, we remain confident our business has the right configuration to deliver financial performance over the long term. For the third quarter, adjusted EPS was $1.83, and we delivered an adjusted pre-tax margin of 11.4%. Unit costs were down 4.9%, and economic fuel cost per gallon was $3.26. which was materially impacted by refining margins on the West Coast that averaged 30 cents higher than the rest of the country, which we believe will prove to be an anomaly, but materially impacted our performance relative to others. Absent this refining margin differential or the $20 million of lost profit due to the tragedy in Maui, Alaska would have led the industry in margin, despite not enjoying the current surge in international demand or further rebound of corporate traffic. Our balance sheet and liquidity, longtime pillars of strength for us through many cycles, remain stable and healthy. We generated approximately $270 million in cash flow from operations during the quarter, while total liquidity, inclusive of on-hand cash and undrawn lines of credit, stood at a healthy $3 billion. Debt payments for the quarter were approximately $93 million and are expected to be $45 million in the fourth quarter. Our debt to cap remains at 48%, unchanged from last quarter, while net debt to EBITDA finished the quarter at 1.1 times, both within our target range. We have also revised our full-year CapEx expectation to $1.7 billion for 2023 and fully expect 2024 to be below this amount as we are currently reshaping our near-term delivery stream with Boeing to accommodate a more conservative 2024 capacity plan. Our share repurchase program has, as intended, offset dilution year-to-date with spend reaching $70 million, while our trailing 12-month return on invested capital ended at 10.7% this quarter. Moving to costs, the third quarter marked a turning point for us in terms of our performance. CASMX ended down 4.9% year-over-year, coming in below our guided range of down 1% to 2%. This result includes the impact of a larger than initially anticipated market rate adjustment for our pilots, which added approximately $20 million to the third quarter and will annualize at $90 million. Speaking of labor deals, during the quarter, we also reached a tentative agreement with our aircraft technicians, and we are in the process and looking forward to reaching a deal with our flight attendants. Our unit cost performance was the result of nearly every department of the company coming in on or below their plan, which has been no easy feat to do over the past three years as we have re-ramped our operation. We saw productivity improve 2% year-over-year and will continue to work toward returning to 2019 levels. Other areas we saw good performance relative to our plan included maintenance, aircraft ownership, and selling expenses. ASMs were slightly ahead of guidance on the continued outperformance in our completion rate, providing a small additional benefit to unit costs. And lastly, we have lowered our anticipated performance-based pay accruals given the tougher setup in Q4, which also benefited Casamex Fuel this quarter. However, absent both of these last two impacts, unit costs would have still closed below our guide. As Ben mentioned, we crossed a significant milestone to end the third quarter as we retired our last Airbus from service. And in wrapping up our Airbus era, We announced this morning that we reached an agreement to sell the 10 A321s to our partner, American Airlines, and expect deliveries to occur over the next two quarters. Lastly, as I mentioned, fuel became a significant headwind during the third quarter. LA refining margins diverged materially from Gulf Coast levels, moving from less than $0.08 difference on average for the first half of the year to $0.30 during the third quarter, and at times exceeding $0.90. While we have every expectation this divergence is temporary, it has created a material headwind to our near-term profitability. Our economic fuel cost increased from the midpoint of our original guide, adding approximately $110 million of total cost to the quarter, with $50 million coming from refining margin disparity, or an approximately two-point margin headwind for the quarter. For the fourth quarter, we expect fuel price per gallon to be between $3.30 and $3.40 per gallon, which is an approximate four-point impact to margin compared to our expectations back in July. Fuel combined with pricing moderation have led us to revise our full-year adjusted pre-tax margin to 7% to 8%, approximately three points lower than the midpoint of our prior guide. We expect CASMX to be down 3% to 5% year-over-year in the fourth quarter, and our full-year CASMX to now be down 1% to 2% on capacity up 12% to 13%. To close, we have run an excellent operation for several quarters. Our pre-tax margin exceeded peers with greater international tailwinds despite a refining margin disadvantage and sizable impacts from the Maui wildfires. We delivered a strong unit cost result for the quarter and have visibility to another strong result next quarter. We remain focused on and very intentional about setting targets and ensuring we take the right steps to deliver against them. Our commercial offering, with premium cabins and global access through our alliances, is configured to compete in a way other domestically focused carriers cannot. Our operational strength has returned, and our cost management is outperforming the industry, all of which are fundamental drivers of sustained long-term success. 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 comes from Duane Fenigworth with Evercore ISI.

Hey, thanks. Good morning. So you gave an update, I think, a week or so into September. Can you just talk about, you know, what shifted over the, you know, over the latter part of the month, how that played out relative to kind of what you thought, what, September 9th?

Hey, Dwayne, it's Andrew. Yeah, I think that was like at the beginning of September, I think we had reiterated our guide, I think two things. We were still getting our hands around Hawaii, which was deeply negative bookings. And we're trying to get clarity about where that was going to end up. And I think the other part was there was also right around that time was sort of that transition coming off the back end of a peak of summer demand and also close in moving into the more traditional business season. And I think those couple of things combined, um, I think on 2.8 billion, it was probably like $15 million we're off. So that's, that's the main reason, but fundamentally, um, the business, um, you know, was where we thought we were going to be.

Okay. And then just, um, to segue to, um, to Hawaii, can you maybe play back some history and talk about, um, the current picture, and maybe delineate between Maui and non-Maui bookings. That would be very helpful.

Yeah, I think Maui obviously stands out significantly different, and we're making some capacity adjustments there. We did see during this horrible period of time some bookings continue to move to other islands, but as you know, Hawaii books well in advance. So essentially... Pretty much the rest of the year for Maui was sort of reset, but as we go into next year, we don't see any reason that Maui won't continue to recover, and we won't see traditional good, solid demand to our Hawaii franchise.

Okay. Sorry to be deliberate there. Hawaii bookings ex-Maui, would you characterize that as stable slash normal?

They're a little softer than historical, but we've seen that for some time. I think just as, you know, just the capacity into the islands and, of course, some of the pricing pressures in Hawaii, the cost of going to Hawaii. But overall, we feel pretty good about it being somewhat stable.

Thank you very much. Thanks, Dwayne.

And our next question will come from Savvy Sith with Raymond James.

Hey, good morning. I wonder if you could talk about the revenue trend where you are seeing kind of a better improvement than some of your peers that have reported. And you talked about some of the components like, you know, how your capacity is developing. But I was curious if you can kind of provide a little bit more color on the contributors of that, you know, sequential improvement and how we should think about it then as you go into the first quarter and you make more adjustments as well.

Yeah, thanks, Savi. It's very interesting. I think what's really positive in some of this sequential improvement is you just look at our capacity in the third quarter and how much higher it was versus 19 versus the fourth quarter. And then some of the, as I shared in my prepared remarks, where we had pushed summer capacity out into the fall in some of these mid-con markets and some of these other key areas, we brought that capacity back down starting in October, and we're already seeing the positive effects of doing that.

Got it. So that's a big driver. And if I might, on the growth plans that you kind of mentioned for next year, it sounds like you're still kind of evaluating between 4% and 8%. The first half kind of may be on the lower end of that 4%, it seems like, or how should we think about maybe early indications? I know you're probably not ready to give a full guide.

Yeah, I mean, that's correct. And we've been clear as we go into the first quarter, we're going to be around 3% or so over 19 levels. And again, we've looked really hard at our you know, lowest demand period for Alaska, at least in the January, February time period. And we feel like we've made some pretty good reductions there. And we made that well ahead of the bookings of those, you know, flights. So we feel really good about the setup as we go into the first quarter.

Well, thank you.

Thanks, Abby.

We'll move next to Andrew DeDora with B of A Global Research.

Hey, good morning, everyone. Andrew, in your prepared remarks, you said it seems like you're booked well ahead for November than another airline that reported earlier today. Is the 58% booked sort of a normal cadence for you, or is it more of how you're looking at close-in trending today and just wanting to book more of that a little bit further out than usual?

I think our comments were a little bit related to when you compare it back to, say, 2019, sort of Thanksgiving sort of falls within the month. But if you average it out between Thanksgiving and Christmas, sort of the November and December, we're probably a little higher on the bookings, but not very much. And right now we're just making sure that we manage that coming in with good solid yield to close out the year.

Okay, understood. And then also, Andrew, on the last call, I thought you shared some good statistics on the shift you were seeing to international bookings on your partners over the summer. Curious if you've begun to see more of a normalization there and maybe share shift back to domestic, or do you continue to see that elevated international demand booking on your partners? Thanks. Yeah.

Thanks. I think we're seeing exactly actually what we saw on the domestic front, whereas last year pushed well into the, you know, the shoulder season. I think that's what we're seeing, at least from our members on the international. So just to remind folks in the summer, we reported in that we were up sort of 50 percent of our members nationally. year over year, accruing and redeeming internationally. That number is only 26% for the fourth quarter. So we're certainly seeing it coming down. And so, of course, the question will be, will that get normalized by next year? What we're seeing right now is it's on its way to normalization.

Great. Thank you. Thanks, Andrew.

And we'll move next to Helene Becker with TD Cowan.

Thanks very much, Operator. Hi, everybody. Two questions. One, when you talk about, maybe this is for Andrew, when you talk about optimization of the network, can you just describe maybe more fully what you're talking about? I know some of it is not flying as much in the first quarter in 24 as you did in 23 because of the shifts in the way people are flying and the fact that corporate is probably back as far as it's going to go. I can't imagine that there are a lot of day trips between Seattle and Portland or Seattle and San Fran or San Fran, LA anymore, given the unreliability of exogenous pressures, right? So how should we think about what optimization exactly means?

Yeah, Helene, I think What I would say, when I talk about optimization, look, we're at a place now where we see where fuel is. It elevated and has been for some time. The whole industry has a new set of structural unit costs. And we're also seeing sort of the settling down of overall capacity across the country. So given those things, we're looking much harder at where we and business, as you raise as another point, we're looking much harder about where we're putting our airplanes in high frequency routes, leisure versus business time of year. You know, just to be frank, we've probably been less concerned about being more surgical during summer. But the reality is this past summer, you can certainly see as we get back to normalized booking patterns, there is definitely between July and September very significant changes in demand profile. So we're going to do a much better job going forward, and we're already on it, is just to realigning our supply of aircraft. So I think that's what I'm basically saying, and I think there's only goodness from doing that.

Okay, that's sort of helpful. until things kind of revert to more normalized behavior and you have to fix it again, but that's not a you problem. My other follow-up question on the A321s that are being, I thought those were actually going to be leased in aircraft, but they're being transferred over to American. So I didn't see it in the press release, but that doesn't mean anything. It just means I didn't see it. Can you talk about the accounting for that? Can you comment on the cost of what they're paying you or any information that would help us think about that for you guys?

Hey, Helene, it's Matt. Thanks for the question. I'd say this transaction is probably one of the more complicated ones that I've seen in my 25 years of doing this. But our thinking on it is really simple. We've been public in that there's six to eight years left above market leases that Alaska acquired as part of the Virgin transaction. And our objective was just to find a transaction and build it that economically offset those remaining obligations. We've been working it for twelve to eighteen months and just happy to get this process to a close because as you know this is the last unlock to truly get us to single fleet. um just like we don't comment on pricing on in the airline i'm not going to comment on pricing of what american is is paying us but we feel good about the economics and again covering what our pv of lease obligations was through the extended period of those leases and then i'm going to kick it to emily on the accounting side um just where that is thanks nat helene we have taken uh the vast majority of

which are associated with these transitions through D&L already. You've seen those in special charges over the last 12 to 18 months, as Nat noted. Cash-wise, we're about two-thirds of the way through the cash that we're going to incur with this, of course, as we've purchased the planes from the lessors, and then we sell the planes to America, and there will be cash inflows and outflows. So about two-thirds of the $300 to $350 million total cash exposure that we've shared with you guys previously We've already incurred that. And then the remaining one-third will happen over the next two quarters.

Great. That's very helpful. Thanks, Emily. Thanks, Nat and Andrew.

Thanks, Emily.

And we'll hear next from Connor Cunningham with Milius Research.

Hi, everyone. Thank you. Helene, maybe you could send me those notes on the account. 2024 is our first clean year, it seems like, on the cost-based side.

Could you just talk about the moving parts as you think about headwinds, you know, maybe fighting the conduct, and then also productivity offsets that are clearly in the cost structure now? Thank you.

Hey, Connor. Thanks. It's Shane. You were breaking up a tiny bit. I think you were asking about 2024 sort of puts and takes on cost. I'll be high level. I think we're not quite ready to fully discuss, you know, 24 or cost guidance or anything like that. But the areas that, you know, we'll have headwinds won't be a surprise. I think there's continued investment in airport infrastructure that we'll see come into the P&L next year, really across all of our major hubs. And that's just a generational reinvestment that is needed in these airports. There'll still be some labor cost headwinds. We've got to annualize the market rate adjustment we did with the pilots. We're really hopeful we get the TA with our mechanics fully ratified. We'll have that in the cost base next year. And then pretty much the entire industry needs to get contracts done with flight attendants, which we're really anxious to do and actively in the process of negotiating. I think on the other side, we've now got truly a single fleet. We should have almost every Airbus pilot trained over to the Boeing by the end of the year. And really, we need to start looking at leaning out the operation and focusing again on productivity that we started to do this quarter. I think we've got a good trend through the end of the year. We've been waiting for these trends. We're happy to see them now. We just need to leverage them into next year. So It's really about making the UI more efficient, taking some of the buffer out that we've got in there today. We'll go slow on it. We're not going to risk operational resilience at all. It took us a lot to get to where we are on the operation. We're going to keep operating well, but lots of opportunity to get more productive over the next couple of years.

Okay, that's helpful. And then you guys are being pretty rational in 24, it seems, versus an industry that's really not at the current moment. When you think about potential share losses versus protecting margins. Does that matter to you in the near term if it's potentially just a temporary thing? Just curious how you think about it, given the fact that you're pulling down so much growth relative to some of the others out there.

Thank you. You know, Connor, it's Ben. Of course, market share matters to us, especially in our key hubs. So we will protect our key hubs fiercely and maintain the market share. Of course, we're going to look at areas where, you know, there won't be such an impact to us. But again, you know, this industry is very capacity dependent and it has a huge leverage on profitability. So we're going to take a hard look. The teams are out there looking at next year's capacity. And like Andrew said, we're going to look at Q1 really hard, fringing, on days where we have to fringe, and flying hard where we can fly hard. So it's a delicate balance, but we're determined to get as close to right as we can on this.

Appreciate it. Thank you. Thanks. Thanks so much, Connor.

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

Thanks, everyone. So I know we're all chasing what normal seasonality is, and there are already a couple of questions on the call, but I'm wondering to what extent you think it's return to office that's kind of impacted shoulder season compared to the last couple of years, and kind of maybe that's restricting the ability of the so-called leisure travel, if you will, and that actually sets up for peakier peaks in the next couple of go-rounds.

Hey, Ravi.

So I just, you mentioned we turned office and I think, you know, we all see the public statistics sort of, I think, sort of slowly climbing its way back, but still a long way off. What I would share is that we have seen between September and October, especially in a high-tech where we've started to see in some places, for some accounts, a decent uptick in travel, albeit overall general yields are not where we have seen them historically. So I think this is still a moving subject. But I think if you just look at the macro size of our network and traditional business versus leisure, I think for us specifically, I think it's just beyond more some of this, you know, leisure traveler, you know, type conversation. But what we are seeing is beginning to see a little more strength come in on the corporate side. And again, we just have a lot of opportunity on our core high frequency routes to getting those to a place where they can support the current demand as well as the new unit cost of production that the industry now faces.

Got it. And maybe as a follow-up, you spoke about how you're being more rational than many of your peers on capacity growth for next year, but you also kind of mentioned a few headwinds. So if you were to rank the current softness in the domestic demand environment in extreme capacity growth plans by our competitors or fuel headwinds? What's the order of those three headwinds that would make you question your capacity growth plans next year relative to what you currently have in mind?

I think fuel for us is a big one, Ravi, especially with, like we talked about, the LA refining margins on the West Coast. We're paying You know, 30 cents a gallon more than everyone else across the country. So that is a huge headwind for us. You know, in terms of capacity, we can't control what our competitors do. What I can say is we're confident with our business model. Andrew talked about it in prepared remarks. We have a remarkable premium product. We may be low cost, but we're a premium brand airline. And I believe that we can always extract the higher revenues because of the brand we have, our premium offerings, lounges, and, you know, global access. So, you know, I would say fuels is the biggest headwind. The other thing I would say, even with cost up, we have cost discipline in our DNA. We've shown this year that, you know, we brought unit costs down. This is something that we're wired for. We're wired for high productivity of resources and assets. And so I feel confident we're going to get back to the place that we've been in single fleet. I am just ecstatic. starting October 1st, that we're now back to an all-Boeing fleet, and I think you're really going to start seeing those synergies come in. So those are the things, I think, for us that we can control, and I think we have the right setup in the business model to go execute.

Excellent. Thanks, guys. Thanks, Riley.

And we'll move next to Michael Linenberg with Georgia Bank.

Oh, hey. Good morning, everyone. Hey, Andrew, you talked about, you know, as you look out towards holiday travel, you mentioned that loads are up a couple points, yields are up double digits, so obviously that looks very good for the latter part of the year. Does that hold, or do you think some of that also reflects the shifting of the booking curve? Or maybe in the past we saw people booking closer in, and maybe this holiday season, as you've said before, you know, seasonality is returning faster, Booking curves are becoming more elongated. How much of that is possibly going to shift or change because of those factors?

Thanks, Mike. Just for clarity, the comments that you just shared that I had made was versus 2019. Okay. Last year, obviously, was very different, very different fair environment capacity set up. So we just wanted to anchor back in on 2019, which is a very stable, normalized year. And so we've been very encouraged what we've seen. And I think, you know, as we've seen, I think when you look at the industry right now, when you look at 2019, our unit revenues sequentially are flat Q3 to Q4 levels. where the industry is down anywhere from one to five points. And then if you look at 23, as we shared, we're up three points where the industry is sort of flat to up one. So we feel like, number one, I would say that what we are seeing at least in our network is outside of this business travel matter, back to sort of normal booking curves, normal demand environment. And I think some of the reduced capacity and reallocation of capacity is serving us very well. Okay, great.

And then just a quick second one. I don't know if you mentioned this or it was Shane who said, look, you know, the goal next year is to return back to 2019 levels on a productivity basis. So a little bit different than sort of a network optimization. But if we get back to 2019 productivity, help me translate that into like a chasm benefit. Is that like a point or two of chasm tailwind? And how long does it take to actually get to 2019? 2019 productivity? Is that through the year? Is that a 2025 type objective? Any call on that would be great. Thanks.

Hey, Mike. It's Shane. Yeah. Hey, Shane. One thing, let me, yeah, hi. I'll clarify. I think it's going to take us a couple of years to get back to 2019. We're going to work it you know, methodically. And like I said, a couple of answers ago, we're not going to overly stress the operation now that we've got it working really well. It's worth at least a couple of points, all else equal of unit costs. If there were, you know, no other puts and takes, I mean, I would say minimally, it's worth that. I think we size single fleet alone at 75 million of benefit. And then, you know, we have less productivity in many areas, whether it's aircraft utilization or other work groups. And all of those are opportunities to get better from where we are. I think we're doing better than the rest of our competitors generally. And I think, you know, our focus has been, will continue to be, to come out of all of this with the best relative change in cost structure. And I think we're well on our way to doing that. Great.

Great. Thanks, Shane. Thanks, Andrew.

Thanks, Mike.

Your next question will come from Jamie Baker with J.P. Morgan.

Hey, good morning, everybody. So the 45% of revenue outside of main cabin, can you break that down into various buckets? Is it as simple as premium being 31% and then the rest is just loyalty and cargo? Also, as part of the main cabin, so as part of the 55%, Any color on how SABRE contribution has changed year on year?

Thanks, Jamie. We're not going to go into the details of that, obviously. I think you've heard other airlines quote, we don't have MROs and other things, but we feel very diversified as it relates to what is not the main cabin. I think in our slides we provide some of that breakdown there. About 35% of it is premium cabins, and some carriers have 0%. So I think as we've shared all along, we feel like we live more in the group right now that has premium product carriers and global reach as it relates to our business model versus those that do not.

Yeah, I think, Jamie, I think the point here with those stats is just to differentiate us among domestic carriers. We are the only domestic carrier with that suite of offerings with the premium, again, lounges, the global access, you know, this accrual and redemption of miles and We do separate ourselves from, I think, what do you call them, low-margin carriers?

LMAs, low-margin airlines.

You came up with a new acronym. My point here is we are not in that group based on the offerings. We invest heavily in our product. We have over 300 airplanes in our fleet. Every airplane or fleet, including regional, has a first class, has a premium product. And again, when you add our one world membership, our global access, our lounges, it is a compelling product. And to be honest, Jamie, it's why our margin is equivalent to Delta and United and Q3, despite not having the international tailwinds and having the headwinds of Maui and the refining margins. So the business model is resilient.

And last, Jimmy, you asked about Saver. It's doing quite well, too. It's up strong double digits year over year. And I think it also speaks, and you've heard this from other airlines, we can access the price-sensitive part of the market really well, too.

Yeah, that was one reason I asked. Yeah, yeah. No, listen, I appreciate the color, but so let me press on premium. You cited, you know, you're obviously enthusiastic about it. It's an area for growth. You leaned into this when you answered Robbie's question a couple moments ago. Should we think about premium growth more as yield upside or as you think about that 4% to 8% capacity number You know, are you considering possibly expanding the cabin? I ask in part because, you know, American, you know, spoke to this just a couple of hours ago. So it's, you know, top of mind.

Yeah, I'll take that. I think I don't think you're going to see like a wholesale, you know, refurbishment of the interiors. I will say that. We're still working on our MAX 8 interior, and we would love to get 16 first-class seats in that. Our 8s carry 12 today. The rest of the mainline fleet carries 16. And, you know, it's relatively small but could have 59 airplanes. Yeah, 59 airplanes. And it could have a, you know, a good impact, obviously, for us once we get there. But that's a couple years off if we end up getting it done. Yeah.

Okay, cool. Thanks, gentlemen. Appreciate it. Take care. Thanks, Jamie.

And we'll hear next from Scott Group with Wolf Research.

Hey, thanks. So I just want to go back to this fourth quarter RASM reacceleration, just given the implied September trend. So I just want to understand, are you seeing this already show up in October or is this more of a November, December? And I guess that's a direct question. Just philosophically, like if we're slowing capacity down, and we're seeing sort of an immediate RASM benefit, like why even think about four to eight for next year? Why isn't it like we're not going to grow until we actually start, grow at all until we see positive RASM again?

Yeah, I'll add to that, Andrew. Yeah, no, no, I think it's a good question, Scott. Andrew can speak to the, you know, where we're seeing the sequential improvement if it's already on the books or sort of to come. I think on the capacity, I think the way to think about it is we've been pretty clear about our first quarter capacity being relatively modest, certainly versus 2019. Andrew mentioned in the script where we were up six points versus 2019 in Q3, two points in Q4. So at least From our view, Scott, I think what you're asking is exactly what we're doing. We're not ready to talk about full year next year yet, but right now, given fuel and where we see pricing, we're making the right decisions in terms of capacity management.

And the only other thing I would add there, Scott, and you don't see this obviously in the details, but Even the reduction in growth, relatively speaking, has been helpful for sure. We also had some regions with some very significant growth, and I mean very significant. And I think we've abated those back down to more normalized levels, and that's where we're seeing the greatest upside with some of this slowing capacity. So there's micro regions, which we've really dialed it back, and we're seeing immediate help from that.

So you are seeing some of it already in October? Yes. Okay. And then, Shane, you talked about working on pushing out some deliveries. What does that mean for overall CapEx next year?

Yeah, thanks, Scott. Just for color, so you guys sort of understand, and I mentioned this high level in the prepared remarks, we're going to be at $1.7 billion this year down from our original thoughts about CapEx in 2023. And it's going to be under that next year. I think we're not quite ready to say how much, but I would think in the couple hundred million dollar range, minimally. We'll say more about that in the January call. Nat can just very briefly speak to what we're doing with Boeing. They're great partners in this, and it speaks to the flexibility that we were able to build into this order book with them.

Hey, Scott, we are working with Boeing just to reshape 24 and even into 25 a bit to a capacity level that we think maximizes profitability. One of the other variables that we're managing is the MAX 10 certification. So that airplane originally scheduled to come to us next year, certification obviously is its own story and pushing out to the right. So Good common ground with us and Boeing to sort through when does that airplane come. The economics, we've been really clear on how much we like the MAX-10, and we want to take as many of those as we can. So it gave us the joint impetus to then let's reshape 24. And as a result, manage our capacity down a little bit. You've heard us talk before. We leverage the proximity with Boeing. We talk to them all the time. And it's really good partnership with great flexibility.

Thank you. Thanks, Scott.

And we'll take our next question from Brandon Oglinski with Barclays Capital.

Hi. Thanks for taking the question. So, you know, I heard some comments earlier about trying to be disciplined around growth. And I know you guys have mentioned that, you know, you're going to try to slow growth in the first quarter next year. But I guess just thinking through some of these trends that you're talking about with lower corporate, you know, shoulder demand being a little bit less than you would have thought, is this just, you know, looking forward, should we expect margins at Alaska are just going to be lower in 4Q and 1Q structurally? I mean, they have historically, but should we expect even more volatility in the future? And does that reshape your commercial focus, I guess, during your peak periods? Do you take more price then? I mean, how do you reshape the formula to get the prior margin targets that you guys had set out?

Yeah, thanks, Brandon. I actually think about it a little bit the opposite. I think the work that Andrew is doing and his team are doing in the first quarter is meant to improve the margin profile of the first quarter. I think we talked two calls ago that Ben had given the commercial team a challenge to, over the course of a few years, move back towards break-even in the first quarter. We are the most seasonal airline, the sort of peakiest airline we have been through basically all cycles. So we understand when and where we make all of our money, and I think we're really good at managing capacity in the peak environments. Q4, honestly, I think this Q4 is a bit of an aberration. I think the results are really a consequence of this refining margin differential in fuel price and the continued but normalizing surge in international demand. And I think once that normalizes, we're set up really well to do good. And Q4 will probably you know, be somewhat lower than some of the other carriers who tend to have less peakiness in their year, but I think we'll be more competitive on a relative basis as we move forward.

Okay, I appreciate that response, but I guess as you reshape, you know, the first quarter, that's kind of at odds with the prior view that, you know, long-term chasm could actually decline in the out years, right? Is that why I heard you say, you know, it's going to take a couple of years to get back to those productivity targets?

Well, look, I think it's very correct to think that there's a correlation between capacity deployment and unit costs. The more we deploy capacity, the easier it is to see unit costs decline. But we haven't lifted it off of the idea of, you know, unit costs ultimately going down over time. We'll say more about 2024 and the trajectory when we're talking about guidance for next year, Brandon. But this is something we're thinking about a lot. I'll just reiterate, as we come out of all of this, we're going to have exposure to all segments of demand, including premium. We're going to increasingly be attractive from an international perspective to our partners. And I think we're going to have the best relative cost structure story of anybody in the industry. And so I think our setup is really good to continue to be a margin and financial performance leader over the long term.

All right. Thank you, Shane. Thanks, Brandon.

Our next question comes from Catherine O'Brien with Goldman Sachs.

Hey, good afternoon, everyone. Thanks for the time. So, you know, we've heard from two of your peers so far that the tech sector and San Francisco in particular have seen a recent uptick in corporate travel. It sounds like you didn't see that in the third quarter. I think your comment was a stable. But then just mentioned to Robbie, there's been some momentum in October. Can you just help us size, order magnitude that improvement you've seen? And is that coming from San Brandon Tech or anything else you'd want to highlight in the recent improvement? Thanks.

Thanks, Katie. Yeah, I mean, and certainly, excuse me, some of the larger technology companies have seen quite a significant movement in volume. And, of course, it depends where they fly. As I said, some of the yield environment right now has offset some of those volumes, but for sure there has been positive movement in California, Pacific Northwest. You know, these big techs cover both regions, actually. So, you know, some promising signs there.

Okay, great. And then maybe for Shane, pardon the modeling question, but just trying to get a sense of, you know, the aircraft rent tailwind into next year. Is there further downsides to the 3Q, $48 million in aircraft rents and some of those aircraft exit in September? Can you just help us think about what the right exit rate is for this year on that line item? And, you know, are there any additions on leased aircraft we should be thinking about into next year? Thanks so much.

Hey, Katie, this is Emily. What you saw this quarter in terms of aircraft rent was a pretty good normalized level. now removed all the Airbus-leased aircraft from the books, so you're not seeing that rent come through. We've taken delivery of all the MAX-leased aircraft that we're going to have, which is the 13, I believe 13, over the last year. So that's pretty normalized now. You will start to see, from an ownership perspective, depreciation will tick up to offset some of that as we've taken on so many new MAX aircraft, and those will start depreciating through the books.

Very helpful. Thank you. Thanks, Katie.

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

Hey, thanks. Good morning, guys. Andrew, when I look at Alaska's network in California, it looks like the state is only about 80% recovered relative to the footprint that was there in 2019. So it looks like a pretty big revenue hole that has yet to recover. And if I'm not mistaken, I believe it accounts for about 23% of Alaska's seats. So My question really is, if that part of the network were fully restored, what is the size of that revenue hole that could eventually go away, or however you can size it would be helpful?

Well, I think, if I'm understanding your question, Dan, I think, again, we're not going to put seats into a state where there's no demand. So your observations are absolutely correct as far as capacity, and we're down, and I think other carriers are down as well. I think what I'm still seeing here is even on tech and non-tech, and I repeat, non-tech business recovery, has not been as good at all versus what's happening in the Pacific Northwest. So we're going to, again, we talked about the network. We're going to be very disciplined and thoughtful about how we maintain our network and where we fly our seats. But, again, as we've maintained for some time, I don't think that's going to be forever, and we're going to be very prepared and in a good position now as demand begins to strengthen and crawl back up that demand curve back to 2019 levels to be able to serve that demand.

Yeah, understood. And then, Shane, I think I'm at risk of kicking a dead horse here. My question is really the same as others here, and that's just to really just to close the circle on the path back to low double-digit pre-tax margin. I think you touched on fleet commonality at $75 million. It looks like Maui annualized might be close to 80 million or so. So it looks like maybe one and a half points to pre-tax margins there. Or please correct me, but from where you sit, what are the biggest revenue and cost opportunities that get you where you want to be?

Thanks, Dan. And I want to underscore what Andrew said a second ago, just so we don't lose the point. One of the things I think you all should be thinking about in terms of Alaska setup is we're still in the least recovered portion of the country and still fighting for industry's best margins. So I just think there's goodness to come overall for the company. In terms of your question, yeah, the cost side is really leaning out the company, getting rid of not all of the buffer we've put in, but starting to work that back, getting closer to the 2019 productivity levels. Um, I think there is opportunity to further leverage technology and, um, automate more of what the guests do. And we're certainly going to be working on that over the next few years, uh, as I think every company, uh, is going to be doing, uh, on the, on the revenue side, like once we see sort of where demand normalizes, um, And in addition to the recovery we expect in the international domestic demand mix in the West Coast recovery and business recovery, there's a lot more that Andrew and his team are starting to think about and look at from a commercial initiative perspective. They've done a great job. Delivering, and we don't get to talk a lot about them on the calls, but delivering on many initiatives this year. We're selling things like exit row seats now that we've not done before. A huge uptick in first class and premium class load factors while yields in those cabins are going up. That is both demand and things that the e-commerce and distribution and pricing team are doing. And there's more of those types of things that we're thinking about for the next year or two. And we'll talk more about that as we firm plans up and include them in our guidance and or get to an investor day at some point in 2024.

Yeah, very good. Thanks for the time, you guys.

Thanks, Dan. And thank everyone for joining us for our call. We'll talk to you next quarter. For those we didn't get to, our IR team will be in contact with you. Thanks, everybody.

This concludes today's conference call. Thank you for attending.