Alaska Air Group, Inc. (ALK) Earnings

Management highlights

- Thanked over 30,000 employees for their focus. - Operating backdrop had rapid shifts with higher fuel prices and network disruption. - Remain convicted in Alaska Accelerate strategy, citing past periods of disruption leading to growth. - Completed preparations for single passenger service system cutover, Hawaiian Airlines joined One World, network expanded with new routes, premium retrofits on 737 fleet near complete, regional fleet retrofitted with Starlink Wi-Fi, loyalty platform gained momentum with multi-year extension with Bank of America and Amazon deal, first quarter had industry's number one on-time performance and high net promoter scores.

Guidance

- Suspended full-year guide until conditions stabilize. - Second quarter unit costs about 1.5 points above first quarter result. - Expect unit revenues of 10% in second quarter assuming continued demand strength. - EPS estimate of loss of approximately $1 per share for second quarter. - Fuel price assumptions add $600 million of expense to second quarter, impacting EPS by $3.60 alone. - Paused share repurchases to evaluate outlook.

Segment performance

Air Group reported a first quarter GAAP net loss of $193 million. Excluding special items, adjusted net loss was $192 million. Total Q1 revenues reached $3.3 billion, up 5% year-over-year on capacity growth of just 1.7%. Unit revenues were up 3.5%. First quarter unit costs were up 6.3% year over year. Second quarter unit costs will be modestly higher than first quarter result, with three transitory areas driving this, and unit costs will inflect down in Q3 and Q4 to low single digits. Revenues from outside main cabin now more than half, expected to keep growing.

Risks & headwinds

- Fuel price volatility and geopolitical events creating uncertainty. - Network disruption from events like Hawaii rainstorms and Puerto Vallarta civil unrest. - Uncertainty in fuel supply and pricing, especially with West Coast jet A supply issues.

Analyst Q&A

• Q: When thinking about the Rasmus commentary, what would the core RASM be without synergies and initiatives?

  A: Probably a couple of points.

• Q: On the PSS cutover, is the number of P&Rs to port over by hand consistent with expectations?

  A: Very small number, around 10,000.

• Q: Unpack the puts and takes on the second half cost trajectory?

  A: Second quarter has near-term headwinds like capacity cut, crew buildup for 787, employee recognition, lapping asset sales, but second half will see unit wages exit year at lower rate, third-party costs reduce, aircraft maintenance perform well, selling expenses have structural lower cost.

• Q: Conviction level on $10 figure?

  A: Absent fuel, company is firing on all cylinders, Alaska Accelerate initiatives are executing, new Bank of America deal adds value, believe can hit $10 EPS target if fuel moderates and fare increases stick.

• Q: Are there areas of demand elasticity?

  A: Yes, seen in fare increases with RM managing buckets and finding sweet spot.

• Q: Industry consolidation thoughts?

  A: Consolidation needs to be pro-consumer and pro-competitive, focused on organic growth now.

• Q: Hawaiian long-haul operation progress?

  A: Improved year-over-year, moved Narita to Seattle, will welcome One World benefits.

• Q: Cargo update?

  A: Amazon contract improved, started own single cargo system, cargo was a bright spot in first quarter.

• Q: Thoughts on fuel RASM relationship different this time?

  A: Rapid fare increases, stable bookings, people want to travel, industry needs to get healthier, factors suggest could be stickier depending on economy.

• Q: Bank deal elaboration and cadence?

  A: Refreshed agreement helps with Hawaii acquisition, Atmos Rewards launch, long-haul network growth, half point of margin this year, full point next year, more portfolio growth possible.

• Q: Network hubs performance?

  A: Seattle and Honolulu are large hubs, improvement in economics there, portland and san diego seen as valuable.

• Q: Cost for 2027 and fuel supply disruption?

  A: Long-term view on cost, core cost inflation 4-5%, need to get to 3-4% through optimization, no immediate fuel supply disruption foreseen, but long-term work on West Coast jet A supply.

• Q: Profit swing from route network changes?

  A: Movement from Honolulu to Narita to Seattle-Narita has increased profitability, meaningful change to underlying economics.

• Q: Corporate revenue growth breakdown?

  A: Majority still domestic, international connectivity growing, early innings in corporate travel growth.

• Q: Positioning for West Coast challenges?

  A: More resilient, bigger, stronger airline with strong hubs, Singapore fuel source and Seattle infrastructure work for future.

• Q: Pilot training changes?

  A: Majority in Q1 for Seattle International Flying, Alaska side has modest incremental costs for training, attrition not a component.

• Q: Cargo headwind and goal?

  A: Focus on generating decent returns, not break-even, excited about belly cargo and freight market share growth.