Alaska Air Group, Inc. (ALK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Alaska Air Group Annual Shareholder Meeting. At this time, the meeting will begin, and it is my pleasure to turn the floor over to your host, Brad Tilden. Sir, the floor is yours.

Good afternoon, everybody, and welcome to Alaska Air Group's 2020 Annual Shareholders' Meeting. My name is Brad Tilden, and I want to thank you all for joining us today. We would typically use our shareholders' meeting to provide an update on our business, discuss our prior year's performance and lay out our strategic objectives for the year. But as is the case with many aspects of life these days, this simply does not make sense in the current environment. With that in mind, after we conduct the business of the meeting today, we plan to provide you with a very brief update on our present situation, including some of the actions we are taking to respond to the coronavirus crisis. We know that many of you will have tuned into our analyst call on Tuesday, will have reviewed recent investor presentations from our website, and some of you may also have reviewed our periodic filings with the SEC. Because of all of this activity, we do plan to keep today's business update very brief. And after the business update, we've set aside time to answer questions that are of interest to investors. If you are a stockholder, you can submit your questions at any time on our virtual meeting website. We will address as many questions as possible during the webcast. If we don't get to your question, please send it to the e-mail address listed in the proxy statement. We will post a full list of questions and answers on our Investor Relations page at alaskaair.com following today's meeting. I would now like to take a minute to briefly introduce our Director nominees. This year, there are 12 Director nominees, and each has agreed to serve a 1 year term. All are present for today's meeting, and their biographies appear in the proxy statement. Before I introduce the nominees, all of us here would like to recognize and thank Phyllis Campbell, who is stepping down from our Board after 18 years of service. She has been a fantastic Director, always pushing us to achieve what's best for the customers, employees, communities and investors that are relying on Alaska Air Group and always contributing thoughtfully to the Board's deliberations. We'll miss you, Phyllis, and we wish you and Bill all the best in the future. Now moving to the 2020 slate of Director nominees. Besides myself, this year's nominees are: Patty Bedient, who has been an Alaska Air Group Director since 2004. Patty serves as the Board's lead independent Director, and effective today as Chair of the Governance and Nominating Committee. Patty also sits on the Audit Committee. James Beer, who was appointed to the Board in 2017. He chairs our newly formed Innovation Committee and serves on the Safety Committee. Marion Blakey, who's been an Alaska Air Group Director since 2010. She chairs the Compensation and Leadership Development Committee and also serves on the Safety Committee. Ray Conner, who joined the Board in 2018. Ray serves on both the Safety Committee and the Compensation and Leadership Development Committee. Dhiren Fonseca, who's been on the Alaska Air Group Board since 2014, and he serves on both the Audit and Innovation Committee. Kathleen Hogan, who joined the Board in 2019. Kathleen serves on the Compensation and Leadership Development Committee. Susan Li, who joined the Board in 2018 and who serves on both the Audit and Innovation Committees. Ben Minicucci, who has held various leadership roles at Alaska Airlines for the last 15 years and who has been Alaska's President since 2016. Helvi Sandvik, who served on the Board since 2013 and who serves as Chair of the Safety Committee. Ken Thompson, who's been a Board member since 1999. Ken serves on both the Governance and Nominating Committee and the Compensation and Leadership Development Committee. And finally, Eric Yeaman, who's been a Board member since 2012. Eric chairs the Audit Committee and also serves on the Governance and Nominating Committee. Serving as a Director of Alaska Air Group is demanding, and these dedicated folks consistently rise to the challenge of the role. It is a privilege to have people of this caliber and diversity serving our company, and we're honored to have them all here. Shane Philpot and Dominique Barr of KPMG are the company's independent public accountants, and they are also here today. Ms. Barr and Mr. Philpot are available to respond to any questions you may have for KPMG regarding the company's financial statements. This is Shane's last year on the Alaska engagement. And while there's still a lot more work to be done in 2020, we wanted to thank Shane for the way he has served Alaska Air Group over the last 5 years. I will now call the meeting to order. Our General Counsel and Corporate Secretary, Kyle Levine, will take us through the business portion of the meeting and rule on any questions concerning the conduct and order of the meeting.

Thank you, Brad. This year's stockholders have been asked to vote on 5 proposals. All stockholders entitled to vote at this meeting were sent notice and proxy materials were available online and by hard copy upon request. After a preliminary count, more than 109 million shares or over 89% of the eligible shares are represented, which gives us a quorum. As soon as all the proposals in the proxy statement have been presented, we will take the vote. Stockholders who have already voted by proxy don't need to vote again, except to change a vote. Registered stockholders and stockholders with a legal proxy can vote during the meeting by clicking the Vote Here icon. As Brad mentioned, we will address questions of general interest to our shareholders following the vote. But if you have any questions regarding today's proposals, please submit them online now as we describe those proposals. Today's voting will conclude, and the polls will close, at 1:45 p.m. Pacific Daylight Time. We will report the preliminary results at the end of today's program. The first proposal is the election of 12 Directors. Brad introduced the Board's nominees, whose names and qualifications are set out in the company's proxy statement. Each of the Directors elected today will serve a 1-year term ending with the 2021 annual meeting. The second proposal is an advisory vote regarding the compensation of the company's named executive officers. While this vote is advisory in nature, the Compensation and Leadership Development Committee will take the results into consideration when deciding future executive compensation arrangements. The third proposal is the ratification of KPMG as the company's independent accountants for 2020. The fourth item of business is a stockholder proposal submitted by John Chevedden concerning disclosure of the company's political spending. The full proposal is set forth in the proxy statement. To ensure we keep our meeting on track and have adequate time for questions at the end of our call, we are limiting the time today for each proposal and question to 2 minutes per shareholder. We will let you know as the 2-minute mark approaches so that you have time to wrap up your remarks. If you go much beyond 2 minutes, we will need to place your line on mute so we can continue moving the meeting along. Thank you in advance for your understanding. Mr. Chevedden has requested the opportunity to present his proposal to stockholders directly. Moderator, please open the line for him. And welcome, Mr. Chevedden. [ Your line ] is ready.

Hello, this is John Chevedden. Can you hear me okay?

Yes, sir, go ahead.

Yes, there's just a point of order, the SEC rule 14a-8 allows 500 words, and it takes 3 minutes to read 500 words. So I want to make that point. And I'm going with this proposal for political spending disclosure. This proposal topic won 43% support at the 2019 Alaska Air Annual Meeting. Shareholders request that management provide a report disclosing the company's policies and procedures for making with corporate funds or assets, contributions, expenditures to participate in any campaign on behalf of or in opposition to any candidate for public office or influence the general public or any segment of the public with respect to an election or referendum. Monetary and nonmonetary contributions and expenditures used in the manner described above. As a long-term shareholder of Alaska Air, I support transparency and accountability in corporate electoral spending. This includes any activity considered intervention in a political campaign under the IRS code, such as direct and indirect contributions to political candidates, parties or organizations, and independent expenditures or electioneering communications on behalf of federal, state or local candidates. And I object to all this shuffling of papers and noises in the background. It's very distracting. It's disrespectful to shareholders. And I will continue. Disclosure is in the best interest of the company and its shareholders. The Supreme Court recognizes this in its 2010 Citizens United decision...

Sir, please start wrapping up your comments.

This disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages. Alaska Air publicly discloses their policy on corporate political spending but does not disclose any of its electoral-related spending from corporate funds. Public record show Alaska Air contributed at least $480,000 in corporate funds since the 2010 election cycle. The company's Board and shareholders need comprehensive disclosure in one place to fully evaluate the use of corporate assets in elections. This is important information that our Directors should have in one report. The 43% support for this proposal at the 2019 Annual Meeting may represent a majority vote from the shares that had access to independent proxy voting advice. Management should respect such an informed voice. In spite of this very substantial support, management did not make one baby step that it took in the direction of this proposal in the past year. Instead, management in effect suggests that Directors and individual shareholders go on their own treasure hunts to track down important political spending information that would take one employee less than a week to complete. Please vote for this important governance reform political spending disclosure, proposal 4.

Thank you, Mr. Chevedden. The company opposes this proposal for the reasons set forth in the proxy statement, so we won't repeat them here today. Finally, the fifth item of business is a stockholder proposal submitted by Service Employees International Union Pension Plans Master Trust. I'll refer to them as SEIU. The full proposal is set forth in the proxy statement. Ms. Maureen O'Brien has requested the opportunity to present the SEIU's proposal to stockholders directly. Ms. O'Brien, please begin when you're ready. And moderator, please open her line.

Thank you for allowing me the opportunity to present the proposal. This is Item 5 and it asks our company to provide a report on its state and federal lobbying expenditures, including indirect funding of lobbying through trade associations. Transparency and accountability in corporate spending to influence public policy are in the best interest of company's shareholders. Our company spent close to $4 million in 2 years at federal lobbying. This does not include state lobbying expenditures where the company also lobbies, but the disclosure is uneven or absent. Our company serves on the Board of Airlines for America which spent $15 million on lobbying for 2017 and 2018. The group's lobbying over passenger facility charges and against Massachusetts sick law leave has attracted media attention. In the context of COVID-19, we know that companies that fails to provide adequate protection to workers pose a health risk to the community and a risk to their ability to operate. Paid sick leave policies once a luxury are now a critical element of those of what will distinguish companies that will prevail through the shutdown and those that will shutter. Corporate contributions to trade associations that lobby indirectly on their behalf without specific disclosure lack accountability. The company fails to comprehensively disclose its trade association memberships or to disclose its trade association payments or the portion used for lobbying. Proxy adviser ISS supports this proposal noting that Alaska Air only discloses 2 of the tax-exempt political organizations it supports. It does not disclose any information about aggregate levels of direct lobbying spending on its website, the amount of its payments to lobbying organizations or the portion of its dues or other payments used for lobbying purposes. Further, the company does not provide information about how its management and Board oversee or review lobbying activities. There may be instances where lobbying for changes in legislation or regulation may provide short-term shareholder value, but may not be in the public's best interest exposing the company to regulatory and reputational risk over the long term. Additional information about the company's direct and indirect lobbying would allow shareholders to assess the company's management of its lobbying-related activities and to better understand the risks and benefits of those activities. The resolution warrants shareholder support. Our request for disclosure is a call for transparency and accountability, and we urge stockholders to vote in favor. Thank you.

Thank you, Ms. O'Brien. The company opposes the SEIU's proposal for the reasons set forth in our proxy statement, so we won't repeat them again today. Before moving -- before concluding the presentation, I'll say we did receive 2 questions related to the proposals. However, our proxy statement answered those questions in full on Pages 64 and 68 of the proxy with respect to why the Board recommended against those. This concludes the presentation of matters to be voted on.

Thanks, Kyle. That does conclude the business portion of our meeting, which is now officially adjourned. And we'd like to take you through a business update and then have a Q&A session. As we get into the business update, the first thing I would like to say, and this gets to a couple of the shareholder proposals that we had this year is that one of the things that we are really proud of at Alaska is the way we try to run this business, in a way that serves the needs of all of our stakeholders. And I'm coming up on 30 years now. And for the whole time I've been here, we've tried to run the business in a way that serves our communities, and our customers, and our employees and the owners of the business. And I think one look at the industry we're operating in today will tell anybody out there that it isn't easy to run, whether it's a bag fee that you're talking about, or something you're thinking about for employees or a share repurchase or a dividend. But it's -- I'll just say that -- I just sort of want to reassure the people listening that, that -- I'm not sure we're doing a good job or a bad job at it, but that is what we are trying to do. And I guess I would maybe go on to say that I actually do think that if you look at us over the -- you can argue in the short term, the whole airline industry is sort of on its heels right now, but I do think if you look at Alaska Airlines over 10 or 15 years, you would say, this company has been extremely responsible. We've been a good employer. We've provided good jobs. We've grown those jobs incredibly. We provide service to 120 communities. And it's not to discount the proposals at all. I just sort of want to get to the -- what we're trying to do when we come to work, that's what we're trying to do. Okay. Quick couple of slides for me. If you go to the first slide, it just briefly recaps 2019 statistically. You see it was a little bit of a slow growth year. We're very proud that we are a high-growth airline. Our growth has averaged 7% a year. It was only 2% last year. We're sort of struggling with finding a way to grow with 2 different mainline fleet types. The industry grew 3%. We did return to nice profitability. Of course, that is not what we would predict for 2020, but a 12% margin last year versus an industry average of 10%. Free cash flow conversion, our profit last year was almost $800 million, and our free cash flow was more than 133% of that figure. So really good free cash flow conversion. And our adjusted debt to capitalization was back down to 41%. Remember that figure escalated after our purchase of Virgin America but we were proud to have paid down $1.5 billion of that debt post acquisition. It's not on the chart, but we're extremely proud of our employees for the operation they continue to run, the way they run our operations safely and on-time and for the extraordinary service they deliver to our customers. As evidenced by a multitude of awards. And with that, I think I'm going to turn it over to Ben.

Thanks, Brad. I'd like to start by sharing how we're thinking about managing this crisis. What you see here is a model we've used to communicate with our employees for the last several weeks. And it's really, in simplest form, there are 4 high level stages to any crisis. The first stage is really to recognize that in the early moments, there is a significant impact to the business that may lead to extreme consequences. And while -- we're obviously past that stage today. The second stage involves taking immediate action to really steady the ship in light of what's going on. And we've taken a lot of actions to reduce capacity, to fortify liquidity and bring down our cash burn rate. Phase 3 is really where we are today. And the cash we brought in has allowed us to extend our focus beyond the days and weeks ahead to really think more deeply about what's needed in the months and years to come. The top near-term challenge we face is to reduce our current cash burn rate of $260 million a month to $200 million a month, and to get to our target of $0 cash burn rate by year-end. And the last stage of this crisis really involves the decisions on how we build Alaska for the future. We don't have detail yet to offer. We're in the modeling and analysis phase. But one thing we do know is the future is it's going to look different than it does today. The industry will be smaller and Alaska will be smaller. We're looking at our fleet. We're looking at our network. We're looking at people. We're looking at our guest value propositions as we chart the future. The next slide is really to showcase our competitive advantage and how we feel pretty good about weathering the storm. We're proud of the company we've built over the last few decades. We have low costs and low fares. We have just amazing, amazing employees that deliver award-winning service. We've got a fantastic loyalty program. We run a great operation, which is, by definition, low cost. And our culture, finally, is the glue that holds it all together. We fought hard to earn each of these advantages, and we'll have to fight to maintain them as we reshape our company for the future. And more than ever, we see a future where low fares and low cost matter. And we have resolved to strengthen our cost advantage as much as possible. And it's because of these competitive advantages that we're able to establish ourselves as the West Coast preferred airline, provide our employees a great place to work and our shareholders with a strong investment. One thing I will say is our culture really is the bright spot in these challenging times. It's amazing to see our employees rise to the occasion in so many incredible ways. The work they do to serve our guests and preserve the integrity of our operation is truly remarkable. So with that, I'm going to pass it over to Andy to briefly comment on the crisis and the impact to our people. Andy?

Thank you, Ben. Alaska has a long track record of building strong relationships with our employees and vendor partners. Our priority in this crisis is to ensure that our airline is here to support and serve our employees in the future. We're faced with some difficult challenges ahead, our company will likely be smaller than we were in 2019. We're committed to continually communicating candidly and frequently with our employees as we navigate the difficult decisions ahead. Facing the prospect of having to downsize a company is not something any of us would have wanted. But I believe we are all aligned in our desire to do what it takes for Alaska to emerge as a stronger company. The common enemy is a great catalyst for cultural alignment. Alaska employees have shown this in the past. When a competitor attempted to move into our largest hubs, Alaska and Horizon employees rallied together to defend and even grow our presence and succeeded in making this company even stronger. I believe we will get through the difficult times ahead, and once again rally towards its common goal of growing our company together. Shane will share with you how our balance sheet and cost structures will play into the future of Alaska.

Thanks, Andy. As everyone, I think, is aware, we've been committed to maintaining a conservative balance sheet for many years with a focus on maintaining strong liquidity and low leverage. As of the end of 2019, we had paid off about 3/4 of our acquisition debt when we had acquired Virgin America, and reestablished our position among the top of the industry from a debt to capitalization perspective. Our liquidity levels compared favorable to the industry coming into year. Of course, in the unprecedented situation we're in today, we're working to bolster liquidity even more as we work to bridge this downturn. To that point, in the past 8 weeks, we've accessed nearly $900 million in financing and still have attractive assets we can further collateralize. We also received cash from the U.S. government under the Payroll Support Program as part of the CARES Act. As Andy said, we're focused on making thoughtful decisions about the future of our company, and we're thankful for the flexibility these payroll support dollars afford us over the next 5 months. As we go to the next slide, it's important to note our success is largely due to the fact that we don't have to rely on high fares because, as Ben mentioned, we have low cost. The present crisis reinforces how smart this strategy was for us to adopt coming out of the 9/11 crisis almost 20 years ago, and it will see us through this one as well. And the final thing I wanted to mention on this next -- last slide is it may take a while for our business to normalize, but we have reacted quickly to the crisis. And on the slide, you can see a number of the actions we've already taken. We've got many more decisions left to navigate and a lot of work to get through this downturn, but I'm confident that we, as a team all 23,000 of us at Alaska, will do so. And with that, I will hand it back to Brad to close.

And just to close out, I will just say that the company and the industry certainly have their challenges, but here in Alaska, we are committed to being the West Coast preferred airline to providing great service, an industry-leading loyalty program. We're committed to our low fares, our industry-leading cost structure. We're committed to being a great employer, and being a place that our employees love to work and come here and be great for our customers. We're committed to doing the best that we can with our balance sheet, taking what we have today, improving liquidity and doing everything we can to manage the burn rate to ensure that the company does as well as possible through this crisis. And as we've said on multiple occasions, we really -- I think the next months and quarters are going to be extremely difficult for every airline, including Alaska, but I personally am ultimately very, very optimistic that Alaska is going to come through this better and stronger. And on the other side, we're going to return to sort of a full level of prosperity where everybody that is depending on this company, get something good out of the deal. So with that, Kyle, I think we'll turn it back to you for the Q&A session.

That's right. So we have just a couple of minutes left in the meeting. So before announcing preliminary results, I thought I would read and have answered the questions submitted in advance. The question is, why did you stop sponsoring the Iditarod? Several fellow Alaskans have taken issue with that decision. Is it something special for Alaskans -- excuse me, it is something special for Alaskans. And Alaska Airline's support was important. So Diana Birkett Rakow, who heads External Relations will answer.

Thanks, Kyle, and thanks for the question. A number of our employees participates with the Iditarod and it is something special in Alaska. We've been a grateful partner with the Iditarod and the mushers and dogs for many years, focused on safety as well as the travel of vets, veterinarians and the dogs. And we have been working closely with the Iditarod and appreciate the effort they put into continuing to improve and ensure safety and safety oversight over the last few years. In the last few years, we focused more of our own resources to support the community particularly focused on young people and education and career opportunities, such as the 3,500 young people we supported through the Alaska Native Science and Engineering Program. So we let the Iditarod know late last year that this spring's race would be our last year as sponsors. We are keeping those resources in the state to support other local needs for young people and communities, and we will continue to sponsor the 2 Iditarod qualifying races, the Kuskokwim 300 in Bethel and the Kobuk 440 in Kotzebue.

Thanks, Diana. One other question we received in advance is going to be answered by Shane Tackett, our CFO. The question is: fuel costs. Has Alaska Air taken advantage of depressed aviation fuel costs? If so, what do you project the impact being to your bottom line balance sheet?

So we do hedge normally 50% of our expected fuel consumption. We've done this for many, many years now. The type of mechanism we use are caps on the price of oil out in the future limiting our exposure to large rises in the fuel price. Right now, given the low price of fuel, none of those hedges are providing benefits. But we are taking advantage of the much lower jet fuel prices as we do operate the 20% of our schedule that we have been doing so in the last few months. As we look forward, there is an opportunity to purchase hedges at the current -- on the current market. However, they are very expensive. And as we are first and foremost focused on cash preservation, it doesn't make sense for us to change our approach right now as we are effectively hedged at over 100% of our planned consumption for the rest of the year. As the situation starts to improve, we'll be able to reevaluate the program. And if there's an opportunity to get value from lower fuel prices, we will take action to do so then.

Thank you, Shane. That concludes the Q&A portion of today's meeting. The votes have been tabulated, and the preliminary results indicate that the 12 Directors introduced earlier have each been elected to 1-year terms on the Board of Directors, with each Director receiving the approval of at least 85.73% of the shares present. Proposal 2, the advisory vote on the compensation of the committee's named executive officers received the approval of approximately 97.33% of the shares present and entitled to vote. Proposal 3, ratification of the company's independent accountants has passed, receiving the approval of approximately 99.11% of the shares present and entitled to vote. Proposal 4, the stockholder proposal concerning disclosure of the company's political spending has failed, receiving the approval of just 42% of the shares present and entitled to vote. And proposal 5. The stockholder proposal concerning disclosure of the company's lobbying activities has passed, receiving the approval of 52.25% of the shares present and entitled to vote. The final voting results will be filed with the SEC on Form 8-K within the next few business days and will be available at alaskaair.com. A recording of this meeting will also be available for replay on our website at alaskaair.com under Investor Relations. Thank you, everyone, for joining us today.

Well done.

Thank you, ladies and gentlemen, this does conclude today's shareholder meeting. Thank you for your participation, and have a wonderful day.