Alaska Air Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2024 Second Quarter Earnings Call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speaker's remarks, we will conduct a question and answer session for analysts. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Planning, and Investor Relations, Ryan St. John.

Thank you, Operator, and good morning. Thank you for joining us for our second quarter 2024 earnings call. Yesterday, 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 second quarter gap net income of $220 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $327 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, Ryan, and good morning, everyone. As we closed out another strong quarter, we remain steadfast in executing on the key pillars that are paramount to our success, safety and operational excellence, financial strength and taking care of our guests and employees. A few highlights for the quarter include achieving $2.9 billion in revenue, the highest quarterly result in our history, with nearly a billion dollars generated from our premium segments. Our 15.8% adjusted pre-tax margin will likely lead the entire industry, differentiating us from other domestic-focused peers in terms of profitability. We continue to prove that our ability to achieve industry-leading profits during the second quarter and the summer peak is unmatched. And at the same time, we are actively working to improve margins in the seasonally weaker Q1 and Q4. We're happy to announce a record tentative agreement with our flight attendants, underscoring our deep appreciation for their vital role in our business. This includes a 32% increase in compensation aligning with industry standards and reflecting our commitment to their futures. This would mark the completion of our last major labor contract and pending ratification in August, it will conclude this labor cycle for us. Making investments in our people remains a focus and we look forward to the stability and alignment that our labor contracts bring as we focus on being best in class operators. Our resolute focus on cost management and productivity across the business remained strong, driving a unit cost result that is among the best in the industry, down nearly 2% year over year. This was even better than our expectations, reflecting the dedication of our teams and carrying out our aggressive internal plans. We ran a safe, reliable operation with a completion rate of 99.5% or better each month this quarter. as our teams were focused on delivering for our guests. And lastly, an update on our planned acquisition of Hawaiian Airlines. In the quarter, we submitted the DOJ's second request for information. We are maintaining close and transparent communication with the DOJ as they finalize their review process, expected to be completed by August 5th, when we anticipate learning more about potential next steps. Now turning to our business outlook. As we move into the second half of the year, we are adjusting the midpoint of our full year EPS guide by 25 cents to reflect the economics of our flight attendant deal, as well as the current domestic environment. That said, the fundamental drivers that have consistently placed us among the top margin producers in the industry remain unchanged. In terms of growth and aircraft deliveries, we have acquired 10 MAX aircraft from Boeing, while maintaining vigilant oversight of the production process to guarantee nothing but the highest quality aircraft are delivered to us. With line of sight and increased confidence to 2024 Boeing deliveries, we now expect full-year capacity growth to be less than 2.5%. Although lower than the level of growth we configured the business for this year, our teams are doing a great job managing costs and productivity. Operational excellence is core to our DNA. and we are committed to being best-in-class operators and delivering for our guests. We're off to a great start as we fly our largest-ever summer schedule and posted a 99.5% completion rate over the 4th of July holiday period, despite some challenging weather and airport construction projects. As a further testament to the care our employees provide for our guests and our commitment to run a safe, reliable, on-time airline with exceptional service, Recently released DOT data for 2023 shows Alaska generated the lowest number of customer complaints per 100,000 guests of any U.S. airline. This result is an improvement versus 2020, 75% better than the industry average and 35% better than the second ranked airline. Still, we're not sitting idle. We have more to do and continue to elevate our brand and travel experience. We're making the online process easier with 23 of our One World and global partners now available to book through alaskair.com. We're enhancing the in-person guest experience with new technology and a beautiful new terminal and lounge at San Francisco, where we are the second largest carrier and a state-of-the-art stunning and brand new lobby in Portland. We're also stepping up our premium exposure, given the strength and demand and shift in guest preferences towards this segment. With the first modification set to begin this September, this was a decision made some time ago. We'll be adding six premium class seats to our 737-900ER and MAX 9 fleets, and four first class seats to our 737-800 fleet, driving our total premium seat mix up three points to 28% when completed. I'm excited that we are making this investment as we continue to respond to guest preference and diversify our revenue base. This is a dynamic industry that requires constant adaptation and course corrections. Had it not been for the full $223 million impact from Flight 1282 and the fleet grounding to start the year, we'd be on track for improving full-year margins versus last year, even amidst a softer domestic demand environment and continued material step-ups in industry labor costs. And still, we expect to be a top three margin producer and far and away the strongest domestic focus carrier. I am grateful for the talented and dedicated team of employees here at Air Group and building a business model designed to excel and achieve long-term success. The underlying fundamentals are embedded in our DNA, a strong balance sheet, operational excellence, guest care, and a relentless focus on areas within our control. I am confident our investments going forward build on our unique competitive advantages, including the potential acquisition of Hawaiian Airlines, which if approved, we believe will enhance our strength as we broaden our presence in both domestic and international markets. At Alaska, we meet challenges head on, and we are committed to maintaining a track record of consistent success, day in and day out, just as we have done for years.