Alaska Air Group, Inc. (ALK) Earnings

Management highlights

- Integration & Technology Milestones * Successfully completed migration to a single passenger service system (PSS), creating the industry's first dual-brand PSS platform, completing the most complex technology milestone of the Hawaiian acquisition integration * Guest satisfaction increased 7 points quarter-over-quarter post-cutover, with Hawaii NPS up 10 points * Alaska Air Group now leads the U.S. airline industry in year-to-date on-time performance, up 5 points year-over-year in Q2 - Product & Experience Investments * One-third of the fleet is now equipped with Starlink Wi-Fi, with full fleet completion expected by 2027; guest satisfaction on Starlink-equipped flights is 20% higher, and nearly 75% of non-members sign up for Atmos loyalty accounts to access the benefit * All 737 cabin retrofits are complete, adding 1.3 million incremental first and premium class seats, which have been well absorbed by demand * The new premium subscription card program has nearly 50% more total account holders than expected, with over 60% of new accounts coming from outside the Pacific Northwest - Strategic Growth Initiatives * Launched first-ever transatlantic service from Seattle to Rome, London, and Reykjavik; each route carries 50%+ Atmos members, demonstrating strong loyalty demand for international expansion. New international premium cabin share is already meeting targets, with further growth expected after activating UK point-of-sale * Announced plan to retire the 717 fleet starting in 2028, transitioning Hawaiian neighbor island service to more fuel-efficient Boeing 737s to improve reliability, economics, and cargo capability in Hawaii * Cargo is a key strategic growth priority: after restructuring the Amazon contract to improve profitability, the company is expanding its owned dedicated cargo fleet to capture new market share, targeting an incremental 1 point of margin from cargo long-term - Leadership Update * Shane Tackett promoted to President of Alaska Airlines, retaining his CFO role, in recognition of his leadership through the Hawaiian acquisition and Alaska Accelerate strategy execution

Guidance

- Capacity: Full-year 2026 capacity growth is expected to be ~2% year-over-year, at the low end of the original 2-3% guidance range, after pulling 1 point of capacity from both Q3 and Q4 in response to elevated fuel prices. Q3 capacity is expected to grow 2-3% year-over-year, with all growth coming from intercontinental service; domestic capacity will remain roughly flat in the second half. - Fuel: Q3 average economic fuel price is expected to be $3.75 per gallon, based on recent spot prices of $3.60 for July and $3.85 for August/September. - Earnings: Q3 2026 earnings are expected to be between breakeven and $1 per share. The RASM to CASM ex-fuel spread is expected to improve several points sequentially from Q2's 2-point spread. - Hawaii: Q3 will still see a several-point unit revenue headwind from the combination of post-storm demand disruption and elevated industry capacity, but demand is already recovering, with September yields accelerating back to historical system levels. - Full-year 2026 earnings guidance will be updated at the Investor Day on September 29, 2026, due to ongoing fuel price volatility. - 2027 Long-Term: Management expects RASM growth will outpace CASM growth in 2027, supported by lapping Hawaii headwinds, a full year of international operation, full premium cabin deployment, Starlink expansion, and the implementation of network revenue management systems. The company reaffirmed its long-term target of $10+ earnings per share and double-digit margins.

Segment performance

Total company revenue for Q2 2026 was $4.1 billion, a 10% increase year-over-year on 1% capacity growth. Unit revenue (RASM) grew 8.6% year-over-year, though this included a 3-point drag from Hawaii rainstorms. Key revenue segments: 1) Premium products: Premium revenue grew 15% year-over-year, now representing 35% of total revenue (up 1.5 points this quarter), with over 50% of total revenue now coming from outside main cabin. 2) Cargo: Cargo revenue grew 21% year-over-year, outpacing system revenue growth, and the company plans to add four 737-800 freighters to double its dedicated freighter fleet to nine aircraft. 3) Loyalty: Co-brand remuneration reached $663 million in the quarter, up 19% year-over-year, with active Atmos members up 15% year-over-year. 4) Managed corporate: Large corporate share gains were seen, with Portland reaching over 50% managed corporate share (up 5 points) and San Diego up 4 points, with overall managed corporate revenue growing 9% year-over-year system-wide. GAAP net loss was $76 million, adjusted net loss was $102 million; the company returned to pre-tax profitability with double-digit margins in June 2026 despite 70% year-over-year higher fuel prices. Non-fuel unit cost (CASM ex-fuel) rose 6.5% year-over-year, with core cost growth in the low to mid-single digits after excluding transitory items.

Risks & headwinds

- Ongoing fuel price volatility: Crude oil prices have remained volatile between $70 and $90 per barrel, and elevated fuel prices were the primary driver of the Q2 net loss, creating uncertainty for near-term earnings. - Elevated industry capacity in Hawaii: Industry capacity in Hawaii is up 7-8% year-over-year, outpacing demand growth and creating ongoing unit revenue headwinds through the third quarter of 2026. - Upcoming cost pressures: The company expects increased maintenance costs for the new LEAP engine fleet starting in 2027, and ongoing rent costs for recently completed airport capital improvement projects through the end of the decade, requiring ongoing productivity optimization to offset these pressures. - Geopolitical uncertainty: Elevated geopolitical tensions contribute to market and fuel price volatility, prompting the company to hold liquidity at the high end of its target range until more stable conditions are sustained.

Analyst Q&A

• Q: Can you confirm whether Q4 2026 RASM will be higher than Q3, similar to peer expectations, and explain how Hawaii's September improvement splits between higher demand and easing competitive capacity? /

  A: Management declined to provide specific Q4 guidance, noting they will update full-year outlook at the September Investor Day. For Hawaii, management confirmed that incoming September yields are already above system levels, with strong demand recovery following the Q1 Kona storms. While industry capacity in Hawaii remains elevated, management highlighted that post-PSS integration tools (unified loyalty, oneworld access) position Alaska to outperform the market and strengthen its position in Hawaii long-term. Alaska remains fully committed to the Hawaii market, where it now holds ~50% of the premium segment, which is core to its long-term network strategy.

• Q: What is the strategic purpose of the four new 737-800 cargo freighters, and will they be owned by Alaska? /

  A: The four new freighters will be owned by Alaska Air Group, modified to match the existing freighter fleet, and operated under Alaska's brand by Alaska crew for Alaska-marketed cargo services. Two freighters will be deployed in Alaska and two in Hawaii to meet existing unmet demand for reliable small-community cargo service and improve operational resilience. This expansion is on track to deliver the incremental 1 point of long-term margin targeted for cargo under the Alaska Accelerate plan, and the new aircraft will be put into service immediately with existing committed demand.

• Q: How does management see 2027 RASM and CASM trajectory, and what idiosyncratic revenue levers support upside? /

  A: Management expects that 2027 will see RASM growth outpace CASM growth. Key levers include: lapping the temporary Hawaii demand and capacity headwinds, a full year of operation for the new international network (which will benefit from maturity and expanded point-of-sale), a full year of revenue benefits from the completed premium cabin retrofits, 100% fleet Starlink penetration, and the rollout of a new network revenue management system (which has delivered significant RASM lifts for other carriers that have implemented it). Management is confident in rapid earnings expansion as fuel prices normalize.

• Q: What is the timing for debt paydown after the recent $1 billion financing that lifted liquidity to the top of the target range, and how does new debt pricing compare to existing debt? /

  A: Management is eager to start paying down debt, but will wait for a sustained period of stable fuel prices and healthy recurring cash flows (likely one to two quarters) before acting. The recent first-time unsecured bond issuance was well received by the market, with only a modest increase in coupon aligned with the current interest rate environment, bringing the company's weighted average cost of debt to 5.3%. There is ample prepayable debt maturing in the near term to reduce liquidity once management is comfortable with market stability.

• Q: How are the new international routes performing, and what will their margin contribution look like as they mature? /

  A: Management reports that initial reception for the new Seattle-Europe routes has exceeded expectations, with Rome already on track to be profitable under normal fuel prices in its first season. Booked load factors for the Asian routes (Tokyo, Incheon) are significantly higher year-over-year, and UK point-of-sale for the London route was only recently activated, leaving further upside to come. International is still in the early build phase, with RASM expected to improve as the route network matures and market penetration grows.