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

Good afternoon. Welcome to Alaska Air Group's annual Meeting of Shareholders. I would now like to introduce Board Chair, Brad Tilden.

Good afternoon, everyone, and welcome to Alaska Group's 2021 Annual Shareholders Meeting. My name is Brad Tilden, and I want to thank you all for joining us today. I'd like to start the meeting by welcoming our new CEO, Ben Minicucci. Ben assumed the CEO role earlier this year as part of a multiyear succession plan. Ben with Alaska -- has been with Alaska for over 17 years, and the rest of the Board and I could not be more confident in his ability to lead our 2 airlines all the way out of this pandemic and toward prosperous future growth. It goes without saying that this past year has been extremely challenging for our guests, our employees, our communities and our owners. The impact of COVID-19 has had an impact on our business that none of us could have imagined 15 months ago. But yes, we're very proud of how we've come out. We're proud of the strength of our balance sheet. We're proud of the team, the sense of team that we have, and we're very excited about the opportunities that lie before us. With this in mind, after we conduct the business portion of the meeting today, then we'll provide you with a brief update on where we are at the moment and highlight some of the actions we've taken over the past year or so to respond to the coronavirus crisis, and to position Air Group for a bright future. We know that many of you tuned into our analyst call on April 22 and that you review our periodic filings with the SEC. After the brief business update, we set aside time to answer questions that are of interest to our investors. If you are a stockholder, you can submit your questions at any time on our virtual meeting website. We'll address as many questions as possible during the webcast. If we don't get to your question, please send us the e-mail address listed in the proxy statement. We'll post a full list of questions and answers on the 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 13 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 do introduce the nominees, all of us here would like to recognize and thank Marion Blakey, who is stepping down from our Board after 11 years of extraordinary service. She's been a fantastic director, always reinforcing that safety comes above all else. She's been instrumental in pushing us to achieve what's best for our guests, our employees, our communities and our investors, all of whom rely on the Alaska Air Group. We're going to miss you, Marion, and we wish you to build the very best in the future. Now moving to the 2021 slate of Director nominees. Besides myself, this year's nominees are Patty Bedient, who's been an Alaska Director since 2004. She serves as the Board's lead independent Director and Chair of the Governance and Nominating Committee. Patty also sits on the audit compute. James Beer, who was appointed to the Board in 2017. He chairs our newly formed Innovation committee and he serves on the safety committee. Ray Conner, who joined the Board in 2018. Ray serves on the Safety Committee and each year, the compensation and leadership Development committee. Dan Elwell, who was appointed to the Board earlier this year and it serves on the Audit and innovation committees. Dhiren Fonseca, who's been on the Board since 2014, and he serves on the Audit and Innovation Committees. Kathleen Hogan, who joined the Board in 2019. Kathleen serves on the Compensation and Leadership Development Committee and on the Governance and Nominating Committee. Susan Li, who joined the Board in 2018, and serves on the Audit and Innovation Committee. Ben Minicucci, our new CEO, Ben served various leadership roles in Alaska for over 17 years and has been on the Board since 2020. Helvi Sandvik, who served on the Board since 2013 and serves as Chair of the Safety Committee and who also serves on the compensation and leadership Development Committee. Ken Thompson has been a Board member since 1999. Ken serves on the Governance and Nominating Committee and also the Compensation and Leadership Development Committee. And finally, Eric Yeaman, who's been a Board member since 2012. Eric chairs the Audit Committee. He also serves on the Governance and Nominating Committee. Serving as the 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. Brent Johnson and Dominique Barr of KPMG are the company's independent public accountants, and they are also present at today's meeting. Mr. Johnson and Ms. Barr are available to respond to any questions you may have for KPMG regarding the company's financial statements. This is Brent's first year on the Alaska engagement, and we'd like to welcome him. 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. Kyle?

Thank you, Brad. This year's stockholders have been asked to vote on 4 proposals. All stockholders entitled to vote at this meeting were sent notice that materials were available online and by hard copy on request. After our preliminary accounts, more than 103.5 million shares or over 83% 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 in, except to change your vote. Registered stockholders and stockholders with a legal proxy can vote during the meeting by clicking on the Vote Here icon. As Brad mentioned, we will address questions of general interest to our stockholders 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 1:15 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 13 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 2022 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 2021. The fourth item of business is the approval of an amended and restated 2016 performance incentive plan, the basis of our long-term incentive compensation program. We have received no questions directly related to those proposals. Therefore, this concludes the presentation of matters to be voted on.

Thank you, Kyle, and that concludes the business portion of our meeting, which is now officially adjourned. I'd now like to turn the call over to Ben Minicucci, who will take you through our business update for Alaska.

Thanks, Brad, and good afternoon, everyone. 2010 was a challenging year, and we're glad to have it behind us. Those who listened to our earnings call know that recently, we experienced a step change in recovery. I personally, am feeling very optimistic about what's to come. The work we did in 2020 positioned us well to take advantage of the recovery that is unfolding. Our balance sheet, which has long been a source of competitive advantage for us, remains intact despite the drastic decline in passengers and revenues that we experienced last year, raising significant capital [Technical Difficulty]

Ladies and gentlemen, this is the host. Please just stand by, just having a slight technical difficulty. We should be resuming momentarily. Thank you.

So going back to our debt-to-cap slide, raising significant capital was imperative for our business, and we accessed over $5 billion in new capital. Because we entered the crisis with a healthy balance sheet, or 61% debt to capitalization at the end of 2020 remained far below industry average. From the onset of the pandemic, we made it a top priority to reduce our cash burn as quickly and aggressively as possible. In doing so, we managed to keep our adjusted net debt flat from 2019, and we were the only airline to do so without issuing equity. With no impairment to our balance sheet, we are well positioned to capitalize on recovery. Now moving on to what we're seeing today. Since January, the rate of daily new vaccinations has increased to over 2 million per day, and we've seen health statistics like hospitalizations and that dropped dramatically. As these factors have improved, we've seen increases in demand for air travel. Passenger and payments were down just 35% in April compared to down 65% in January, and future bookings are at roughly 80% of pre-COVID levels. Those who listened to our first quarter earnings call, note that we have progressed from burning $4 million a day in the fourth quarter to generating $1 million a day in March under the same definition. Hitting this critical point in recovery has enabled us to turn our attention to the future. From here, we're focused on reinforcing our balance sheet strength with plans to begin reducing our debt levels in 2021. We're also developing a road map back to profitability, and our plans to fly 80% of 2019 levels in Q2 and to return to 100% levels no later than summer of 2022 as part of that road map. Taking a balanced approach to delivering for our employees, our guests, the communities we serve and our owners is important to the way we run our business. As CEO of Alaska, I plan to continue to nurture this approach and build on that legacy. Part of how we serve our stakeholders is by making strategic long-term investments that will support our path back to sustainable profitability and allow us to win in a highly competitive industry. We've recently celebrated progress on 2 such investments. First, we celebrated our official entry into oneworld, which will increase the breadth and depth that we can offer guests, adding value to our network and our loyalty program. Second, we're moving forward with our fleet transition. Last year, we announced our decision to replace most of our Airbus aircraft with Boeing MAX aircraft, and in Q1, began taking delivery of the new planes. These aircraft have over 20% better fuel efficiency, lower maintenance costs and significant revenue opportunity because of the higher gauge. The MAX will also help us to reduce our climate impact to lower emissions which is key to our commitment to deliver net 0 carbon emissions by 2040. If you're interested in other climate-related goals, I encourage you check out our sustainability site on alaskaair.com. These types of investments and the long-term success of Alaska are only possible because of all the fantastic people [indiscernible] bring our business to life. So it's also important that you know about our commitment to diversity, equity and inclusion. We recently published several goals around representation and cultivating an inclusive culture, which are a key part of our continuous journey to do right by our employees. Our commitments also extend to our guests and the communities we serve as well. We're putting our value to forefront by investing in education and create a pathway creation for at least 175,000 young people over the next 4 years. In fact, we recently unveiled a beautiful delivery in partnership with UNCF, highlighting this commitment and elevating the conversation on education and equity to the forefront. If you haven't seen it yet, you should check it out. In closing, I am incredibly optimistic about what is to come for this company. Turning the momentum we're seeing today into earnings over the long-term is imperative. And with that, let's turn it to Q&A.

Thanks, Ben.

Kyle, can I jump in? I do want to just apologize to one of our directors, Jessie Knight, who I forgot to mention during the readout of director names. Jessie is an extraordinary Director, served this company for a long time. Wound that up a couple of years ago. And then we talked to me the company back on to the Board roughly a year ago. So Jessie, I apologize for missing your name, but you are prominently mentioned in the proxy. Over to you, Kyle.

Thank you. We now have about 10 minutes for questions from stockholders. If you have a question of general interest, please submit it online. While stockholders submit their questions, I'd like to introduce our Vice President of Public Relations and Sustainability, Diana Birkett Rakow, who will help present the questions we receive.

Thanks, Kyle. So we have a few questions received already. The first one will be answered by Andrew Harrison. For the future of air travel, do you believe that vaccination passports will become the norm? And the questioner goes on to say, I personally have learned so much about the high quality -- high level of air quality inside airplanes. Andrew, what about vaccine passports?

The U.S. government has been exploring COVID-19 vaccine certifications, both internationally and domestically. Where we stand right now is that the international is more the priority. I think they've said that they won't do it domestically. For us, we're watching it very closely, but we mainly carry domestic travel, and we're staying close to our international partners on the international side of things, and we just need to see where this unfolds.

Thank you, Andrew. The second question is for Ben. What measures are being taken to keep Alaska Air in a leadership position to avoid adopting cancel culture behaviors so as to steer the company away from political influences that have appeared to infiltrate other companies.

Thanks, Diana. There are a lot of social issues out there that companies can take a position on. As we've discussed it internally, the way we're going to look at issues is to put them through 2 filters. The first filter are our values. And 2 of our biggest values is doing the right thing and being kindhearted. The second filter will be through the lens of our stakeholders. So our shareholders, our customers, our employees and our communities. So today, we know our shareholders ask us about what we -- how we feel about the environment, how we feel about social issues. And they require us to have a point of view. So as we put them through these 2 filters, we'll decide whether we're going to have a position and a point of view on that issue.

Thanks, Ben. Okay. The next question is for Shane Tackett, our CFO. Would you please speak to when the dividends might return for shareholders?

Yes. Thanks, Diana. So first -- just 2 points on this. First, we are precluded from issuing dividends or repurchasing ALK stock at least through September of 2022 as part of the payroll support programs that we've participated in over the past 12 or so months. And so there's one gating item. And then the second is we do need to rebuild the business back to a threshold level of profitability and cash flow that lets us buy plans and grow the company, continue to invest in the company. As Ben mentioned, maintain a really strong [indiscernible] balance sheet and then ultimately, to return to shareholder-focused capital allocation. And we hope to be one of the first to be able to do that in the industry. That's what we're focused on as a management team. It will be beyond 2022 at the earliest, but hopefully, shortly after that, we'll be in a position to really start making decisions like that.

Thank you, Shane. This next question is for Constance von Muehlen, our COO. Since Alaska Airlines has started enforcing the TSA's mask policy, I have felt an adversarial relationship has developed between me as the consumer and Alaska Airlines as a business. The questioner goes on to cite an example of an interaction between a passenger and a flight attendant that -- in which the flight attendant suggested that they would blacklist this passenger forever from flying Alaska airlines and asks what is the motive behind this response to mask? Constance?

Thanks for that question. Definitely challenging situations aboard, I think, our airplanes versus everyone else. What I will say is that Alaska Airlines is known for delivering kind and caring service, and our team is dedicated to doing that each and every day. That said, my and our company's top value is owning safety and certainly my job in operations is to integrate safety into everything we do every day. That's what we continue to do. So in this regard, we will continue to integrate the Federal mask mandate into our work, and that's what you see happening on our airplanes today. So while we continue to do that, we will also provide the kind and caring service that our guests come to expect from us and that we are known for. So we have a fantastic set of employees who balance those things professionally and skillfully. And I have all the confidence in the world that they do a really good job of doing just that.

Thank you, Constance. This next question will go back to Andrew Harrison, our Chief Commercial Officer. I have noticed a big difference in product quality between the old interiors on most 737 and the new ones on the Airbus and 737 MAX planes. I know the plan was to refurbish all planes with the new interiors and satellite Wi-Fi pre-COVID, but it seems like this was paused with the pandemic. When does Alaska plan to resume Wi-Fi and interior upgrades on the 737NG plane?

Yes. That's absolutely correct. We paused everything with COVID, but we have recommenced installing satellite on our aircraft. We have also got approved and going to be undertaking a refurbishment of our core 737 fleet, such as the 800, the 900ER. And we are also going to be refurbishing the remaining Q400s that need new carpets and seat covers. So you're going to see a whole new refresh look at our fleet over the next couple of years.

Thank you, Andrew. The last question is also for Constance. We have recently heard about unrolling hostile or inebriated and out-of-control passengers on air flights. How do you plan to handle these behaviors and reassure the rest of us that we will be safe to fly with you?

Thank you for that question, kind of along the lines of what we discussed a little bit earlier. I have full confidence in our staff, our flight attendants, our customer service agents professionally trained, have lots of experience in managing these types of situations. That said, they can be difficult, and they are difficult, and we continue to provide guidelines and kind of refresh our team with the very best de-escalation skills. So that all our guests can have a pleasant and memorable in a positive way, flight experience.

Thank you, Constance. This next question may go back to you, Constance or to Joe Sprague, President of Horizon. And I'm not honestly sure I completely understand the question. Any plans on eliminating subcontractor TSA with the professional airline employee, we're manning the smaller stations. Alaska guests need to experience a truly enjoyable flight journey. Perhaps maybe just address how we staff our smaller stations.

So both Horizon and Alaska, we have Horizon in smaller communities in the Pacific Northwest, Horizon staff, both the ramp functions as well as the airport functions. The reference to TSA, I'm not sure post 9/11, TSA has taken over all of the security functions at both large and small airports.

Yes. Thanks, Joe, and we don't attempt to do those TSA, but we make sure all of our staff are serving the other functions and taking great care of our guests. Thanks for these great questions. That concludes the list of questions received for the meeting, and I'll turn it back to Kyle Levine.

Thanks, Diana. That concludes the Q&A portion of today's meeting. The votes have been tabulated, and the preliminary results indicate that the 13 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 91% of the shares present. Proposal 2. The advisory vote on the compensation of the company's named executive officers received the approval of approximately 93% 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% of the shares present and entitled to vote. Proposal 4. The amended and restated 2016 performance incentive plan has passed, receiving the approval of 95% 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. Thanks, everybody, for joining us today.

Thank you. Alaska Air Group Annual Shareholder Meeting has concluded. Thank you for attending. You may now leave the virtual meeting.