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

Okay. Good morning, everybody. It's me, Helane Becker. I am Cowen's senior airline analyst, and welcome to the 14th Annual Global Transportation Conference and Sustainable -- I guess, we're doing -- we added Sustainable Mobility last year. This morning, we're joined by Shane Tackett, Alaska Airlines -- Alaska Air Group, actually, Chief Financial Officer; and Net Pieper, Senior Vice President, Fleet, Finance and Alliances. And thank you very much, gentlemen, for being here and for supporting our conference. We really appreciate your time. So you guys did your 8-K on Friday, but Shane, did you want to make any introductory comments before we head into Q&A.

Helane, other than just saying we appreciate you having us and wouldn't miss it for the world, and we wish we were there in Boston in person with you all. I think we only have a half hour. So I'll just stick to no comments but you ask Nat whatever is on your mind and get into as many questions as you've got.

Okay. That's fair enough. Yes, I'm sad that we're not together. Nobody was more surprised than me to find out we wouldn't be able to do this because I personally have moved on from this pandemic. I decided to -- I've got my vaccine so I am ignoring the rest of it. So the 8-K, you talked a little bit about third quarter, but how are things -- so I'll just start with general. How are things shaping up for like the rest of the year in terms of demand, maybe too early for holiday demand, but maybe what are you seeing?

Yes. No, it's definitely a different trajectory than when we were sort of talking late in July and early August. And I think -- I mean, look, the fact that we're not in Boston is a good example of travel that all of us expected to do and then it didn't happen because of the variance. So I think a lot of the sort of choppiness in the last few weeks in terms of advanced bookings is primarily related to the Delta variant and just sort of people taking a pause on some of the business travel that was going to come back that we had anticipated sort of being relatively stronger than we originally had thought it might have been 6 or 8 months ago into September. I think October is going to be a pretty lean travel month, all told. I do think most schools are back in person, and I think families and parents are sort of focused on sort of making that work this year and just sort of getting reintroduced to the normal routine of getting kids off to school and whatnot. It will see -- I think you're right, Helane, it's a bit early the peak holiday travel sort of appears to know exactly what's going to happen. At this point, most of those peaks are still booked ahead of 2019 loads. So there's been strong demand there. We haven't seen cancel activity out of the Thanksgiving period or the Christmas period at all in any material numbers. So I think -- we think there's still really robust sort of underlying demand in terms of leisure travel and a desire for business travel to pick back up. We've just got to get through this wave and sort of hope that there's not another one or hope that we've all adopted Helane's view of life which we've got the vaccine and we're moving on because I'm totally with you there.

Yes. Yes. That's -- it's the only way to go. That's my -- that's what I decided to just get back to like [ sunshine ] or whatever my new normal is. The other thing, when you think about your network, you changed it a lot in pandemic, you took it down. You've started to build it back up. How are you thinking about like geographically rebuilding the network over, I don't know which one if you wants to answer, but over the next, say, couple of years, you pulled out of some markets that you had gone into, maybe there's less experimentation in the short term. So I don't know, maybe talk a little bit about that.

Yes. No, I'll start, and Nat can jump in and I know there's a lot of -- there's a number of topics Nat is going to be addressing, I'm sure with the Fleet and Alliances. Yes, I think really we want to get sort of all of our network back to pre-pandemic size. We have sort of remixed a lot of the California flying to be more connected to the Northwest, and that's going to stick with us. I think that was a really good network decision. Those markets and flights are doing quite well out of the gate. And then I think you'll probably see fewer new cities. I mean there's always a few out there that we're looking at. But I think over the next 2 or 3 years, there's going to be more breadth just frequency, sort of filling out where we only have a couple of frequencies a day getting to patterns that are going to be more supportive of business travel and just sort of more supportive of network depth. That's certainly going to be the case in Seattle, where we really -- we're flying to all of those and needs that we need to and want to, maybe again, save for 1 or 2. But even in California, I think we'll focus ultimately more on breadth than a lot of a wide roster of new cities like we did after Virgin. I think we'll go slow on the new dots on the map and sort of be more focused on filling up the patterns of timing of the markets we already serve. I think this sort of reorientation to leisure will probably stick around for a while until business comes back to a point and sort of tells us to go put those assets somewhere else. I think flights to Florida, any additional frequencies into Mexico, those sorts of things have been really good for the network ultimately. And we'll continue to sort of focus on those cities as long as the demand is pretty strong. I think you may already know, Helane, we're pretty much back to pre-COVID levels, if not a little above in Seattle, and that has been our intent all along. The demand has been relatively robust out of Seattle. I think that we've been really fortunate to see the loyalty that we've had run relatively high load factors versus competitors out of Seattle as we should. And that was the first order of business to take care of is getting Seattle all the way back. And then we'll sort of roll down the coast essentially. California demand was the sort of the last geography of ours to really reopen and sort of come back strong and just as soon as it did reopen and come back strong, we have the Delta variant. So we'll probably be a little more measured in capacity in California until that demand is fully stabilized.

The only thing I'd add to that, Helane, is some of the strengths we've seen in the Pacific Northwest through the pandemic, always been big in Seattle and Portland. But in Idaho and Montana and Oregon and using the E175 to connect Boise and Redmond into California, places that are strongholds for us on both ends. And I think that's worked really well and we continue to do some more of that.

Will there be an opportunity to avoid a connection and just fly nonstop into some of those routes from. I mean I feel like a lot of people relocated to Idaho and Montana. Those were specifically mentioned as growing -- fast-growing markets that are affordable.

Demographically, absolutely right. And so we've done some work with the 76 seat plane, even 75 with nonstops. And I think our success has been really good through the pandemic with them.

Got you. And then what about Hawaii? How is that going? I feel like I'm at attach with Hawaii because the governor closed the state, then every county did something different, then they opened and then the governor suggested maybe you don't want to come. So what are you seeing in the -- in those Hawaiian markets?

Yes. Those are the ones that are struggling the most right now. I think even when a public official, the governor of the state makes a public statement, and that sort of asked people to not -- to consider not coming. There's enough people who will listen to that and sort of make a choice to not go. Hopefully, the case counts there now I think what our information suggest is it's not travelers bringing COVID in. As you know, they still have a requirement to test before you go into Hawaii. So I think it's probably more local spread as it is the case around most of the country right now. So hopefully, over the next little bit, those case counts stabilize. They don't have an issue with the health care system and they're able to kind of lift that very sort of soft restriction, I would say, and sort of give people confidence that it's okay to go back to Hawaii. Again, we haven't seen the cancellations out of the peak holiday seasons, really more of a lack of bookings more near in September, October, where we would have expected to be looking a little bit stronger than we are right now. But it's definitely the weakest region we got for closer bookings right now.

Got you. Well, I think the whole thing is the fact that the Delta variant was here anyway shows you that and should show the governments that you can't keep it out. The virus is mutating. And so why bother to keep your borders closed, why bother to close your state. The whole thing makes very sense to me, but whatever. In the end, nobody and government asked me my opinion.

They don't call us either.

It is what it is. Okay. So Alaska is a really great brand. And one of the things that you guys are doing is the American codeshare that kind of had to give up after the Virgin acquisition, but now you're able to do it again. And Shane, you mentioned going back into California. Can you just talk about like 3 things. One is how you're seeing that and how that's developing? And two, the loyalty, the credit card specifically, how that's shaping up, card acquisitions, especially in California, where you wanted it to be? And then opportunities, I guess, with historically, Alaska Air was not part of an alliance. Now you're part of oneworld. Maybe how that's going given the fact that you've always done more interline agreements with different international airlines that were flying into Seattle. So there's like a lot of questions there for you to answer or not.

Maybe we'll have Nat sort of take codeshare, oneworld, sort of America and how that's going and then I'll jump on the loyalty stuff.

All right. Let's start there. Helane, the good thing about you asking a lot of questions is no matter what I say, it will be relevant to at least one of those. So that's I think just first and foremost, we are still subject to some of the codeshare restrictions that came down as part of the Virgin America acquisition. And so those are still in place. But we have with American established some nice codeshare cooperation, traditional things that make sense in terms of expanding each other's network scope and being able to connect our guests to places that are too small for us to serve nonstop in the Pacific Northwest. And then for American, the Alaska network has added a lot of utility up and down the West Coast where they're not as strong. So domestically, it's been a good story, and I think one that both parties are eager to expand as we move forward. From a oneworld perspective, it's funny. I mean we got approval, in essence, to do the American partnership and enter into oneworld back in February of 2020. Vasu of American and I were in D.C. on Valentine's Day, not exactly the date that I want, for him either. But obviously, COVID happened 3, 4 weeks later, oneworld, the essence for Alaska is to give us a global network, we could sell and market as our own. But obviously, the pandemic had a huge impact on international flying to the West Coast and to Seattle. So what we've done through that process, March 2020 to March 2021, where we formally joined the alliance is starting to build the bilateral relationships and the wiring, the technology infrastructure that's got to be behind all of these partnerships to help us deliver the seamless connections that we want to be able to do for our guests. And so it's almost like we're ready for -- to run out of the tunnel and get on the field. And as international travel and flights start to come back, we'll be ready to go. And so a lot of relationship building, a lot of the good discussions commercially, codeshare announcements. Qatar has been a great story as they started Doha, Seattle in January, a new partner for Alaska. And they are in the top 3 for us of connecting partners already. So there's a huge amount of potential. We're really excited about it. But it's also -- we're kind of anxious to get it going and once international travel starts to come back will be ready, not only in Seattle, little bit in Portland, but obviously, Los Angeles and San Francisco as well. The Alaska network fits these international nonstops from Asia, from Europe really effectively. And I think there's -- these will be good partnerships.

And I don't know if you have a follow-up on that, we'll do that first Helane or I can get to loyalty.

No, I think the whole idea of being -- of having enough capacity on your aircraft to handle the influx of people because you weren't flying fairly full. And then when the international borders reopen at some point, how do you wind up accommodating everybody. Yes, I guess that's it, how do you wind up accommodating everybody?

I'll take that one. I think one of the things that Alaska, consistent with many other of our competitors see a pretty substantial upgauge of our fleet over the next handful of years as we replace 150-seat A320s with 178 seat, 737-9. And so upgauge into those markets obviously create some additional seats for alliance partners that will traditionally deliver pretty good yields as well. So I think we've got enough bandwidth to be able to accommodate. It all works out. Well, we've got a really good fleet plan to bring on growth units as well. And that's sort of what we hope is that we're sort of getting a larger share of the total demand pool, and we'll just go get more plans.

As Shane said, actually earlier in response to your network. And that's a great example of adding depth to a network, more frequencies in place that, in essence, can time up with international arrivals and ability to spot another flight in there just creates more good connecting opportunities.

Got you.

On the loyalty piece, Helane, we started to think about there's 3 key metrics we look at. One is just acquisitions in total for a credit card, it's really the area we focus on. And I think our most recent month acquisitions are actually outpacing 2019. So it's a really good story on the acquisition side of the business. And then the other 2, we look at are just sort of the penetration of Mileage Plan folks on planes and the penetration of credit cards -- credit card holders on your airplanes. And the share of traffic, both Mileage Plan and credit card holders is higher right now than it was in 2019 in all of our geographies, including California. And obviously, California have a lower baseline that we're working from but it's encouraging to see that we're up above 2019 levels across the board. I think just to be totally transparent. There's a question is the folks who are in the loyalty program and hold the credit cards tend to be folks who travel more. And so maybe they're the first ones who came back to travel. And when we have the full demand back, we'll have to relook at some of these ratios and make sure that we are getting the penetration we want to be getting. But you'll see us continue to be pretty intentional about our efforts in California. We're cognizant of some of the new deals that others have done in the loyalty space, and we'll be sort of thinking about our own program and our partner. We have a phenomenal partner in the Bank of America. And so there's probably an opportunity for us over the next several years as well, just in terms of the way we've structured our partnership with them. So I think loyalty has been a really bright spot through the entire pandemic for us. And the cash flows from the loyalty program has been really robust and strong and stable, and they're looking quite good right now.

Okay. And then is -- are you seeing in some of your newer markets, card acquisition picking up again?

Yes. No, really, it's -- there was obviously an acquisition will, I would say, 8 to 12 months ago, but came back into the summer when we saw people flying again, and we saw acquisition across all geographies really stair step up. And like I said, I think our July result was actually higher in terms of total acquisition miles. The bank purchased from us some new credit cards than we had in 2019 to the same month. So yes, it's been good sort of across the board. We have a somewhat unique program where we have flight attendants, we have a pretty well-developed marketing technique on the aircraft. And it's not too in your face or something, but our fight attendants are pretty passionate about the product, and they do a great job distributing it.

Got you. And then -- okay. So let's shift gears a little bit and talk about your capacity growth. I think you exercised some options recently. How are you thinking about financing those aircraft? And are they replacement versus growth aircraft? I don't know, maybe, Nat, you want to answer some of those.

I'll start that one, Helane, and we'll go from there. So back in December of 2020, yes, we announced our fleet transaction with Boeing 68 firm 737-9s 52 options. And then in May of this past year, we exercised the first 13 options and then another 12 in August. And the first thing I'd say is we have 5 737-9s at service right now and really, really happy with the performance of the airplane. It's delivering the fuel savings, in fact, exceeding what was advertised replacing A320s, much, much more efficient airplane, more seats on the airplane as well. So we're seeing a fuel per-seat improvement of up to 25%, 27%, 28%, which is amazing. So thrilled with that. And I think as we look at the fleet going forward, now with firm aircraft commitments all the way through 2024, we added some more options in place through 2026. And in really good stead, we'll be down to A320s out of the fleet by the end of 2023. And so some of those airplanes will certainly be replacement. And then from there, we'll obviously see what the growth trajectory is for Alaska, what does the economy look like and where we want to go. The thing I take comfort in is that we're taking delivery of the most efficient airplane in the sky. And that front, whether it's rising fuel costs, however it plays out, it gives me comfort from a unit cost perspective that we've got those airplanes coming in. We also, from a replacement perspective, I'd say, 2025 older 737-700s and 737-900 classes that kind of in the '24, '25, '26 period hit 25 years of age and start for that replacement timing. So could be growth airplanes in those years, could be some replacement as well. Flexibility is the key one, as you know, with the fleet plans. And so we've got some good track doors there to adjust to the economic conditions that prevail. From a financing perspective, we've got $3.3 billion in total liquidity right now. Seven more deliveries to take this year and then 31 next year. Our current plan is based on our forecast is to pay cash for those airplanes and start to taper it down. Shane and I get questions from our Board, from our internal team all the time, what's your steady-state new normalized level of liquidity to carry. And we know it's lower than where we are right now and looking to taper that down over time, what are your normal uses of cash. We could do prepay debt. But in reality, we don't have much expensive debt. We've got double ATC that we can't find any flexibility into prepay. And the rest of what we have is really low-cost mortgage debt that doesn't make any sense to repay. And so our current plan is to, in essence, we know our cash balance down by paying cash for these airplanes through the end of 2022. And then based on our forecast, we'll see what happens with 2023. If we generate sufficient operating cash flow, we may continue to do that and pay cash for airplanes. It builds assets for the unencumbered closet, and that's a good thing too for the next rainy day.

Yes. It was good. you anticipated my next question about balance sheet and capital allocation because if you go back over the last decade, last year was really aggressive in share repurchases. Every program was about 10% of the market cap of the company until you got the big one. And then the $1 billion share repurchase and then the acquisition of Virgin America, which added debt, but you were able to self-finance that actually and then the pandemic hit. So maybe you're in a better position. And it looks like based -- even based on the guidance, you'll be profitable in the third quarter. So I guess things are kind of going, okay for you. So I thought let's see, and we should talk a little bit about sustainability and how you're approaching. How you're approaching that in terms of investment or thinking about next generation of aircraft that are probably in the second half of the decade, maybe into the next decade. You have a pretty aggressive plan to be net, I think, carbon neutral by 2040, maybe 2050, but I thought it was 2040. So maybe you could talk a little bit about that. I don't know, Shane, do you want to start it.

Yes. Yes, 2040 is the commitment. So we're aggressive. It's consistent with a lot of the sort of large companies here in Seattle, the Amazon sort of pledged to get to net-zero by 2040. Helane, this has gone from sort of something that was on the radar but not taking a lot of time and attention 2 years ago to be one of the key and most important topics that we're talking about, which appropriately so. But it's really moving quite fast. And so we've got -- we put out public commitments over the summer in terms of both ESG, inclusive of some diversity and equity goals, both short term between now and 2025 and then the long-term goal of net zero by 2040. We've got a 5-point plan to get there. And in similar terms, it's operational efficiency, which is a small but important contributor, ultimately. It is sort of new novel propulsion that's way later in the cycle, it's some other form of creating lift and power in these aircraft. And then a big, big component of it has got to be sustainable aviation fuel. I think the industry is starting to come together collectively with some other interested parties, the Boeings of the world and GEs of the world to really start to look at the infrastructure needed to not only get refined, sustainable aviation fuel, but then deliver it plan plane side. And I think that right now is the going to be the biggest contributor to ultimately getting to sort of green aviation, which we need to get to. And we need, I think, support of public policy to do that. We've got to get sort of political officials to understand the approach and to agree with it. And to be willing to incentivize both private investment and simulation aviation fuel and the infrastructure to deliver it to airports. So all that work, like I said, has gone from sort of 0 to 100 miles an hour over the last 12 months. I think this is a topic you'll hear more and more about every quarter from Diana who leads this effort of the company, will be on earnings calls from this point forward, answering questions on this topic. And we're excited about it. We're in the early stages where there's like, we all want to move really fast, but the sort of need to get a coalition to get a plan that everybody can support to get the right approaches out there and then to get sort of political backing and that stuff takes time. So that's the work that's going on now is how do we get an idea out there that everybody can support and move forward with versus kind of arguing about it for another 2 or 3 years. I think that industry is collectively getting close to really rallying around staff as the primary way to go right now. Some of the stuff, I think, that you see other airlines doing in terms of really early interest and investment and support for electric propulsion and sort of alternative forms of flight. We're certainly beginning to get interest on that stuff and look at it and try to get educated on those things as well. And I think as an industry, it's smart for us to all sort of get close to the innovation that's happening in these areas. There's a lot of smart people who have a lot of passion to figure out how to help aviation get greener over the next generation. And I think that is an area that's going to explode in terms of investment over the next 5 or 10 years as well. So I'm an optimist, Helane. I think that this country is very ingenious when it puts its mind towards something. And even though we don't have a clear path to it today. I just have faith that smart people will have breakthrough ideas, the science will move fast, the investment, will get there, political support will get there. And once we figure this out as a country, and it will be a good thing. It will be a nice thing to look back on and say, hey, 10 or 20 years ago, we started on this path and then look we got there. So we're excited about it. It's a big sort of focus of ours, and we'll be talking with you and others about this a lot over the next several years. I will tell you last thing, it's also on the mind of owners and banks. We hear this all the time now in our one-on-ones and other meetings with investors and financial investors and that increasingly in bank calls yesterday and the topic was -- every call and 6, 9 months ago it wasn't a topic still.

Yes. Yes, I find that amazing. It went -- to your point, Shane, it went from 0 to 1,000, right, 100 whatever, really quickly. And it did so during the pandemic. I know we're just about out of time. And it did so during the pandemic at a point in time when you would have thought it would have been put on the back burner instead, it was accelerated. And we didn't really talk about the another issue, which is how the weather affected Seattle this specifically, this past summer. You had more 100-degree days than we did here in the East when we would normally be getting them. I think you had more 100-degree days than in Florida, too. So sorry about that. I think we just had garbage pickup come by -- one of the...

Hot and humid, Helane which is not humid typically here in Seattle.

Yes. Humidity is the worse. It makes my hair stand up literally. Okay. I'm going to have to let you guys go because we're out of time. But thanks very much for supporting the conference. I'm really sorry, we weren't in person. But next year, to your point earlier, everybody has to be flexible. So there we were being flexible.

No problem at all. We cannot wait to get out there my favorite restaurant is in North Boston and Little Italy. I'm a little bummed that I didn't get to go this week, but we'll go next year when we come out.

We'll try it again next year, and maybe we'll just do an NDR in the first half of the year and get out there. So that would be fun, too. I still have to make it out to Bainbridge Island that's like high on my list of things to do this year. I guess, until maybe next year, but anyway. All right, you guys. Thank you.

Bye.