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

Hey, everybody. Thanks for continuing today with us here. I'm Hunter Keay, Wolfe Research. It is 9:10 in the morning, Eastern Time on May 25. I'm here with Alaska Air Group. We're going to talk for 0.5 hour in a fireside chat format. We have CEO, Ben Minicucci; and CFO, Shane Tackett, and IR back there, Emily Halverson. Hello. You can join us if you want. She's going to chill back there. So anyway, we're going to have you guys maybe say hello for a few minutes and get right into it. And type questions in. I see them right here. I can ask them anonymously. Please don't be shy. And I guess take it away, start it. Thanks for coming here.

Hunter, yes. Thanks for having us, and we're excited to be here, Shane and I. No, I just want to start off by saying we're feeling good about where Alaska is positioned today given the events over the last couple of months and what we're seeing in the next few months. So like we said on our earnings call, a huge swing from Q1 to what we're going to see in Q2 in terms of losses to something close to breakeven. We're hoping to profitability in the third quarter. So amazing how that pendulum swings so quickly. And so we're feeling good, optimistic. And we're not going to say we're out of this, but so far, I think we're on the right path.

Yes. Just a couple -- okay, I guess these guys did file an investor update last night. I guess let's just flush in a couple of questions now to get it out of the way. You improved your operating cash flow guidance for 2Q besides the better bookings, some PSP and your other thing. But what was the mix of the improvement in the operating cash flow between bookings and PSP timing?

Yes. I think it's mostly into that line of sight to PSP. I think there's a small top-up from [indiscernible] the second round or something. But a lot of that was future bookings into really Q3 more than Q2. So that was the primary driver.

Okay. When you say profitability, positive pretax margins, is that -- that's on a non-GAAP basis or is that a GAAP number?

So let's just -- we're always talking about sort of our non-GAAP results.

It is what it sounds like.

Yes. Exactly.what it sounds like. Yes, yes. I was trying to do the GAAP math to my head. It probably is [ 2 ] but...

I don't think there's any PSP at [indiscernible] so...

Yes. That's the thing I was...

It's probably like a real profit. I get you. All right. [ Super ] to taking questions on that if you want a to get it out of the way. So Ben, you took CEO at the end of March. Congratulations.

Thank you.

What has surprised you the most as being CEO that you did not expect?

It's -- I've been in the company for so long, 17 years, and I've worked side-by-side with Brad, Shane. We've been together for my entire career. So we really tracked the progress, built the company together over the last 15 years to where it is today. So there's not a lot that surprised me in terms of the new role. There is a lot more demands on my time in terms of just other commitments, like committee commitments, political commitments and those sorts of things. But in terms of the job itself, I couldn't be more happy, I couldn't be more energized about it and honored leading this company.

Yes. But what does your e-mail -- what does your inbox look like, now?

It's way more text and e-mail and all that stuff. It's just -- it's overflowing. So I've got a great [indiscernible] it helps me prioritize those e-mails.

And Alaska has always been good over the years, I've been covering and laying out sort of a 5-year plan goals. What is -- what are your priorities over the next 5 years as CEO?

Yes. There's a few things I want to get done in the next 5 years. We had our strategic plan complete right before the pandemic. And we really didn't put it on hold. I mean we had to get cash burn at the control, which we did. But the strategic plan has 3 basic elements. It has a growth pillar, which you know has been a big part of our strategy. We've got a people pillar, and we got a business model pillar. Another the growth pillar, a couple of things we got done right away was our fleet transition to a single fleet of following, which is big. Oneworld alliance, [indiscernible] alliance that established, which is going to be great for our future. And then more -- a few more elements. There's 40 initiatives under the strategic plan, which in the name a handful of them. One is on the brand. We really want to unlock the value of our brand. I think we have a great value proposition that is recognized in the Pacific Northwest, but we want to really expose in California. Innovation is going to be a big part of our strategy over the next 5 years. Under the people side, I'm a big believer in leadership development. So we're going to set the leadership academy to develop succession and leadership across all levels of the company, focused on firstly the inclusion. That's going to be a big part. We're putting money where our mouth is. So right now, 1/3 of our workforce is BIPOC. Only 60% of our leadership is BIPOC. Over the next 5 years, we're going to even that out. And 20% of our PSUs or performance stock units are going to be tied to that goal. On the environmental side, we've made commitments on net zero for 2040 by making short-term commitments to be the most fuel-efficient airline in the country. We've tied that to our performance-based plan as well. And then on the business model side, just what we're also known for them is something you really have to continue to hold is operational excellence and safety, high productivity, low cost on the operations side, and then long term, having 12% to 15% margins sustainable in the long term. So we want to get back to it as soon as we can.

Okay. You talked about ESG a little bit. Seattle is very green, and I would imagine that they're going to be on the forefront of many of these initiatives. How are you thinking about that? There's been a green new deal drawn from the city of Seattle, which hasn't really gotten a ton of traction much later. But how are you thinking about sort of the perception of air travel as it relates to how the city of Seattle thinks about taxing and trading community, things like that? Is there any specific risk that you guys feel or do you guys to sort of push forward harder as many more?

We haven't seen anything in particular that's high risk for Seattle. I think what we're trying to do, Hunter, we're trying to get ahead of it. So we're trying to be really vocal with our commitments on the environment and on the climate. We just -- the little things that we're doing is boxed water. We introduced boxed water in our First Class and Premium Class. I think sustainable fuels is -- we have -- we got a partnership with Microsoft. These are sustainable fuels for employees of Microsoft traveling from the Pacific Northwestern California. So what we want to do is really a couple of our sustainable fuels, I think, is a big one. Virgin technology is a big one that we want to explore. And I think that's where there's opportunity to collaborate with government and industry to do something that's going to help us in that.

You also -- you said on the earnings call, too, that you said you need to be -- do things better in a few areas, maybe a little different in the brand initiatives.

I think the brand, we can do better, Hunter. I think -- like on diversity, equity and inclusion, we unveiled Our Commitment airplane. And that was an emotional event, Hunter. We -- after the events of last year, the death -- the tragic death of George Floyd, [indiscernible] and Breonna Taylor. When we held those listing sessions for our employees, we realized that for -- as good as our intentions were the last 10 years, we hadn't moved the needle on D&I as much as we should have. So that airplane, we call it Our Commitment airplane just because we're going to hold ourselves accountable to actually moving the needle at this time. This is why we're putting goals out there and saying, "these are the goals. We're going to have skin in the game in terms of our comp is going to be tied to some of those goals." And we got to move the needle. And that airplane reminds us every day, it's flying over the country, that those goals are real and become a [indiscernible] now.

What did you learn from the Delta codeshare that -- I don't want to see it in the past, but what -- it did -- it was great either way, that you can apply to the American codeshare to maybe have it not end as badly?

And I mean that was a long time ago. I think what you learned with those relationships is that whatever you put together in terms of the business relationship, there has to be incentives and values for both parties. So as we entered the American, American was -- we were winding that down for we wanted to back up in because we realized that, look, both sides need to be incentivized, and we decide to get value out of this relationship. And I think that's the construct of the new deal. So we're pretty excited about it. And we're excited about bringing value to American and bringing value to us. And especially with oneworld, I think it's going to lock so much potential on the corporate business side for us in Seattle and some of our other hubs.

The prior sort of we had a long relationship with Northwest. We just sort of grew organic [indiscernible] damage. And I think that was probably not just [indiscernible] companies that we're cognizant of relative value for both parties. And just nobody did anything intentionally. It just sort of became what it was. And as Ben said, like this one, we're very intentional about. America needs to get a lot of value out of it, so does Alaska. That's the way that it was constructed. That's who we were. I think [indiscernible] got the reason to be super successful companies.

Do you have any restrictions on the codeshare, the partnership from the Virgin deal that are still mutual, if they're still in place? Have they [ wavered ] off at some point?

Perpetual [indiscernible] essentially [indiscernible].

How does Love Field fit into the network? Does it make sense to serve [indiscernible] W and Love Field, especially now with the American codeshare? Or now does it make even more sense as you're looking about the American codeshare? I mean how much of a cost drag of certainty where it's safe to say?

I don't think the cost is sort of like he issue serve it with different equipment. It's -- the interesting thing is like airport real estate is such -- so constrained. So the hard part is thinking about sort of giving up any real estate because Love Field is [indiscernible]. So long term, there's value to it. Strategically, it's not super important. And that's it there. And then we've done some things to draw down service there, [indiscernible] as you know. So I don't -- it's not a central part of our thinking right now. But we didn't get it with the Virgin acquisition, so we don't want to. We'll be smart about how we...

Strategic fly.

Yes.

I don't have a problem with, for the record. Strategic flying is underrated. But would you ever consider flying in or around [indiscernible]?

That's not on our radar right now. I think we're pretty happy with our point-to-point philosophy of our West Coast points of strength, and that's worked well for us right now, and we're going to really win this thing.

How much of CASMex drag -- well, I shouldn't say CASMex drag. It could actually be CASM-accretive, but how much is sort of an overall cost or operational for [indiscernible] A321s? I mean they're -- it's small. Is it something that if you were to get rid of it tomorrow, you would?

Yes. I think -- so 2 ways to look at it. One is they are the most expensive plane we've got on the team right now. And I think the problem we have above markets, which we would love to not sort of have to absorb. But they have 190 seats out of -- they have long [indiscernible] planes, I think, from a sort of CASM perspective, they worked totally fine for us. And maybe the other piece of that is to fully get to see benefits. Ultimately, we're going to have to dispose of those. You don't need to get rid of them to get to see as the benefit. They're not a lot is value single speed. I think it's just the last little bit. But yes, somebody came forward, and there's a way to swap aircraft now or something like that. So [ now one of ] A321s if we take volumes. We'd look at that -- we're not looking at it actively right now. The one thing I could say, certainly over the next couple of years, we're not interested in moving down in shell count. So it's unlikely that we just flat out dispose of them without a replacement to those units. So right now, we're thinking we're going to operate them for the next 5 to 10 years. We've got a strategy to do it efficiently. And they're not going to be -- you won't hear us talking about the drag on profits, earnings or anythings on that small scale.

They have some performance advantages they get into D.C., a full load of Boeing. So not like the 321, but it's specific [indiscernible].

But it doesn't even -- doesn't having the potential to order more Airbus A320 have a little bit of an impact of relationship with Boeing, just knowing that you've done it for how the potential to take this lead up in. I was just thinking about the best pricing following, and somebody else can sell at the price somewhere else, I don't know if you can adjust that in your contract, but how does the existence of the A321 fit in your graph? How is it impacting [indiscernible] margin position?

Yes. I think there's airlines that are really good at sort of using the digital supplier intention to get the deals that make sense for them. We historically haven't done that. We are pretty certain our phenomenal commercial terms with Boeing. I think there's a lot of history between the 2 companies. Boeing produces the aircraft in our backyard. It's hard to quantify, but I think the relationship means a lot between both parties. And it's not a philosophy of ours that we need to aggressively compete manufacturers against each other in the best terms. And I think our last -- the order last December was another example of not needing to do that. And we have thought obviously about putting down any both [indiscernible] of series of manufacturers. It ended up making more sense for us to direct the deal with Boeing to what we can dig into, which we did, and so we're consummating the deal. So I get it, it sort of intuitively makes sense to have the deal supplier just needing that [indiscernible] sort of Boeing gives us confidence that we're getting good terms with them.

Horizon, even going into COVID, was not making one -- strategic flying back to that, which I. -- but does the existence of the Horizon subsidiary and the CPA that you have with SkyWest, can you compete those 2 against each other? And do you?

Yes. We do, do that. It gives us a barometer of where rates should be. So I think over the last several years, we're seeing huge improvement from [indiscernible] as they brought their cost structure down, their flights getting more profitable. And I'll tell you, in the pandemic, we pretty much flew the entire region fleet through the pandemic. So also being a close subsidiary of Alaska, we hired 1/3 of our pilots from Horizon, that's something called the pathways program. So we hire a pilot that can be directly an Alaska pilot. There are a lot of advantages with both [indiscernible] Horizon, but there's no doubt that -- Shane makes it clear that the cost structure needs to be competitive and see rates need to be competitive. And Horizon has stepped up, and I would say in the last couple of years performed quite admirably.

Okay. Shane, why did you not pay back the CARES Act model?

It's funny. I was asking Nat to put it on the calendar Just COVID and just literally have [indiscernible] for somebody and do it to. And so he's working on it. Honestly, we were going to sort of purposely wait until May just to make sure that we didn't want to go forward and try anything else out of that program. I think we never wanted to draw any more out of it, probably as early as late March that line of sight that we need to. So we've just been up to other things. It hasn't been a total priority, but that will be paid off before September.

All right. I think -- okay. So that's. Yes, if you think about managing ATL going forward. Building again, obviously, that's good. But are you going to think about talking about your minimum cash, including the ATL going forward? I mean, are you going to consider that to be your money? Or as this -- because, look, I mean, I think the possibility of revenue being down 80% again is not playing with a bad headline out there, something like that. I know you've got this ATL, which you managed. How do you think about that going forward in the context of your [indiscernible] cash balance?

For sure, we have so much cash today. It's not an immediate need or concern, but as we think about like what the current hold is, I mean assuming that there could be a sort of refund run on the bank in the future, is part of the lot that's got to go into it. I think that, plus the potential for larger credit facilities, will ultimately be how we think about liquidity sort of minimum liquidity. Because it was over 55 days of net negative flows in terms of sales, just refunds over new sales. And we ended up with a balance of $600 million to $700 million of credits, which we've been generous extending, and people are starting to use it at a pretty good rate right now. So I feel good about that, but had people really have not been able to go down the credit path and all of that needs to be by the company, it could have been a much more deployed [indiscernible] they had. So we'll be conservative. We don't want to hoard cash. We want to actively sort of producing results in the business. So I don't -- I bet we carry a little more than we did before, have higher credit facilities. I don't think it's going to be [indiscernible].

But the ATL itself, do you think of that as your cash from now on?

Yes. I mean I -- look, this is a once in a 100 -- I don't know, once in a some-odd-year number of events, so I don't want to overdirect. And I think it's been a very consistent source of deposit working capital forever. And...

Is there a way to hedge that?

But we want the money to do it, like -- it's just -- it's been so reliable, right? Even through past [indiscernible], it's never been an issue like it is right now. So it takes something where literally governments say, no travel. Going forward, they tend to be a problem. Even that [indiscernible] sort of cycles have never really added to -- it's never been an issue. So I -- we won't overdirect. We'll probably be a little conservative for years coming out of this. I don't think it's going to be totally changed philosophy.

And what about -- what percentage of the ATL right now is [indiscernible] at this point?

Well, it's 40%.

Around $500 million.

Yes. $500 million. It's about 40%.

40%, yes.

Yes. So of that $500 million, would you -- how much of that would you like to see bring -- how much would you like to see [indiscernible]?

Well, I think the reality is -- there's a couple of buckets. There's a bunch -- let's call it half of the $500 million that's sitting in [indiscernible] a number of accounts. We hope all of that gets used, ultimately, and redeemed. We want the engagement. We don't want to see those folks all sit not fine, right? The other half is really on expected. It's essentially that we have a long-term relationship with us and ophthalmology and accounts. We don't really, in some cases, they are just like bought it through a [indiscernible] its some other distributor. I hope those folks can go travel as well. I have -- I do hope people fly. Our guess is a lot of that will bring ultimately, just based on historical sort of knowledge and patterns...

A problem? It's harder for the brand.

It's not great. And we've talked a lot about it. That's why we've been generous with extensions, and people call back out even if they technically expire to give them their flight. We want people to get out and fly, we want to [indiscernible] things up. And if we do it under sort of redemption of credit, we're fine with that. So we don't sit around hoping things will break. It's not a business strategy to break it. I do think a lot of it will be bringing to -- ultimately, the accounting will drive that like -- and it kind of will require to break it into revenue over the course of the year. But like I said, if they call us in 6 months, even if we've broken their ticket, we'll [indiscernible] likely. And that's surprising to see that.

Well, what is it about your typical Hawaiian customer that might be a little bit different from other airlines in service, if anything. There might not be anything at all. Is it like -- by that I mean, are these people that are higher-frequency users? Are these people that have a lot of second homes on the islands, at least people -- are you disproportionately lower redemption? Just is there anything unique about your Hawaii business, relative to the people that are...

I don't know -- Shane, I don't know if there's anything unique, but we feel quite the loyalty to Hawaii, and we've got a great relationship with the state of Hawaii, so good that we were one of the first to start pretty clear with the [indiscernible] folks on Hawaii, so people know that they play with [ class, ] we're going to take care Hawaii. We've done this for a lot of time. We do it well. We fly to every point-to-point from a lot of our hubs. So I think people have a lot of confidence in us taking them to Hawaii and back. We know how to do this. We know to do it well. I think our product is really well suited to Hawaii. So our First Class gets put up -- people actually complain that they can't get First Class in Hawaii, and our Premium Class gets booked up. So I'm not sure if there's one -- people have homes -- I know a lot of people like who have homes there from the West Coast but...

It's fairly typical is what you're saying.

Yes.

Yes. That's fair. Would you ever change anything in your airline?

No. No, I won't. Maybe I'll just expand that a little bit. I -- like our brand is very strong [indiscernible] fast lane. We have massive loyalty that I think has carried the airline through a ton of rough times if -- we are sales [indiscernible] airline. We're strong in a lot of Pacific Northwest cities. And I think our -- one of the things that I wanted for the next 3 to 5 years going back to brand is like I want to be a national brand. It's just what we need to do. And to do that is we need to get people in California across the country to see what people in the Pacific Northwest see, that we're a brand that provides a lot of value. We have a great loyalty program, the most generous. We have low fares. We treat you extremely well, kind, caring service. We're extremely reliable. If something goes wrong, we'll follow the sort. We'll take care of it for you. We're just an airline that cares. And what we need to do now is translate that to the rest of the country. And I don't think it matters what the name is. The name -- our name needs to be synonymous with values and service and just a great brand overall that cares about, not just about making money but cares about its employees. Who cares a lot customers, who cares about its communities, who cares about doing what's right. And I think that's what I want the brand to be in the next 3 to 5 years.

When you say a national brand, I mean does that mean bigger on the East Coast? How does that comment inform your network choices? And you want those DCA now [indiscernible] slots back?

So when I say national brand, it's because my marketing team pushed me back, only thing is we have to be everywhere. I said, no. I said what I want is us to be known everywhere. Even if there's a place that we don't fly, what I want that place to say is I want Alaska to fly here because I've heard some many good things about them. The places like New York, once we ramp our capacity back up about 30 flights a day. And I don't think in New York, we have the brand presence that we should have. So we have 30 flights a day into New York. So we've got work to do in New York. We've got work to do in California. We've got work to do in other places where we have a presence that people need to say, "Wow, this Alaska brand is quite unique and it's quite special. Who is that guy on that tail?" But people see that go on that tail, I want them to feel something, they should think [ I am ] the tail.

So you want the DCA slots back? Or -- if you get it back at a premium [indiscernible], it's coming up.

It's coming up. I think we'll get Andrew to think about it.

You can get them back if you want it, right? What is it, 10 years?

Yes.

Well, we'll talk about it in 4 years, I guess. But last question for you. The -- I'm asking every airline this question. Shane, or anyone, how concerned -- on a scale of 1 to 10, how concerned are you about inflation over the next few years? Maybe I'll interpret that question, or...

Yes. I would like probably a 3 or something like that, but maybe up from what I would have said a couple of months ago. I think it's -- there's a lot of liquidity just generally in the economy right now. A lot of what we've been talking with [indiscernible]. The problem right now is nobody knows what sort of the new normal is going to be coming out of this period of huge sort of government economic support worldwide. And it's probably Q4 before you really start to see that come through. But like in Seattle, it's hard to get folks in entry-level jobs out to work right now just because of the extra support that -- as we provided for -- to those folks. And there's a chance that before all of that runs through business is how to go and start to increase compensation and those sorts of things. And those become real if they stay in and [indiscernible].

Just trying to go [indiscernible] so this stimulus is hurting you from hiring people by helping people buy airplanes. A sugar rush, feel great right now but probably -- are you seeing bookings when stimulus checks go out?

Yes. Not -- you don't see us near step in flatline. But certainly, the stimulus has helped things. And I think even the PPP program has helped businesses have done okay as well and in general. So yes, I'm a little nervous about it, not losing sleep, no.

There's plenty of other things on. No. Thank you. We're out of time. Thank you, guys, for participating. And thank you, Ben, Shane, for this [indiscernible]...

Thanks, Hunter.

I'm trying to [indiscernible] first one of these.

Yes.

It's really great, though. Thank you.

All right.

All right.