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

8 a.m. So we might as well kick the day off. I want to thank -- I'll ask Air Group for coming here today. Thank you to Shane Tackett. Their CFO for coming all the way from Seattle and kicking the conference off this morning for us. Many things to touch on these days. And at least with Alaska, one thing we really don't have to talk about is the pilot deals, since you got that kind of taken care of at the end of last year. But maybe we can get started on demand, right? That's always everyone's #1 question in this group.

I haven't seen any sort of updates from you today. So I'm sure things continue to remain pretty steady. But I guess, we've been highlighting in our research and some of the bookings data that we get or some of the credit and debit card data that Bank of America sees. Just -- things certainly aren't accelerating anymore. I've been characterizing them in my researches -- maybe a little a little sluggish, certainly not a rolling over, but not what they might have been back earlier this year and throughout 2022. Maybe can you just walk through what you're seeing from a demand perspective as we head into this peak summer travel season?

Yes, for sure, Andrew. Thanks for having us and really excited to be here. Boston is like one of my favorite cities. So it's always fun to come out here. Demand...

I think you've got to see some experience the city a little bit less.

We got to experience [indiscernible] and it's not have their best game, but that's I still love -- Demand like I think it's a fair characterization. It's not running the way it did this time last year, which we didn't expect it to. We sort of knew at some point, there was going to be a lot of way off. You can sort of have last summer's levels of demand in perpetuity. But it's still very strong. I think the summer is going to -- and we said this on the call, it's going to be a really strong quarter for us, season for us. Planes are full. It was full coming out. I think we're full going back today. I think when you look at some of the earnings reports from retailers like they talk about folks sort of continue to be focused on experiences and services more so than buying goods, and that's what we're seeing as well. So all of the data tells us at least through this summer, we're going to have really strong demand. I seem like the last couple of weeks of bookings they've -- I think there was a tick down 2 weeks ago, came back this past week. We're holding a point or so of load factor ahead of where we would have been in 2019, which I hate to [count] to 2019, but it's still the most like rate...

[Indiscernible]

This quarter. Yes, for sure, certainly for April and May. And I think some of that was intentional. I think a lot of the airlines wanted to get just with the capacity coming on, people on the planes early so they didn't have to rely on close-in demand. That's been the choppiest part of the main curve as close in with sort of uncertain business return. But leisure has done really well. I think it's going to be a good summer. I think we're all sort of waiting to see how the fall shapes up. And a lot of that, I think, is going to be based on where the economy is.

Right. I guess on sort of that corporate leisure mix [lately] -- I mean, I've been fielding questions about your corporate mix for the past year or so. And when I was out visiting you guys in Seattle, I think it was at the end of September. I mean, West Coast corporate demand was the #1 question then, it continues to be the #1 question now. I doubt much -- I don't think much has changed from kind of the corporate focus kind of up in the Seattle, Portland area. But I guess, how would you characterize West Coast corporate demand? Where is it in the recovery? And how maybe try to frame for folks just how big that is for your overall corporate business?

Yes. Yes. It's stable, which is good. Like we all wanted to get back to pre-COVID levels at least by revenue at 75%, recovered by traffic, 85% or 90% by revenue still. It's been holding there for a few quarters, which is, I think, net-net, a good thing. It's not volatile as it had been last year throughout most of the year and certainly in 2021. So we're glad that it's stable. It's still -- and I think we characterized this on the call, well, like small, medium-sized businesses are largely fully back, if not more than 100% recovered. And for us, it's really large technology corporates that tend to be still pretty depressed. They're like 50% to 60% recovered. We talked on the call as well. We think that as these companies start to roll into new fiscal years and they get some of the things that they've done on the personnel side behind them, that, that will start to come back a little bit. But we're not expecting a big, huge step change in it. We haven't put any of that potential goodness into our forward sort of guide. But we do think throughout the balance of the year, it's going to start to tick back up on the technology side of the business.

Just curious on the SME side, how do you define that? Do you look at that just based on kind of smaller corporate contracts that you have with through TMCs or certain -- do you look at certain parts of the booking curve? Just curious how you kind of dissect this, because what I see from a bookings perspective, what I characterize as SME has a similar recovery profile to what you've talked about, but I know there are like a lot of things moving around in that.

Yes. Sort of all of those and another one, we have a product for small businesses that is well utilized in the State of Alaska less so as you get into the Seattle, Pacific Northwest area. But that -- what they're out and back Monday, Thursday, type travel pattern, where they're booking in the curve. Some of them we know just through years of loyalty. So there's different ways to try and go at it. It's not there's -- it does take some work to go tease out the numbers and the trends, but it's -- when you look at it, it's clear that those folks are backdropped.

Yes. when you talk to those folks, when you talk to the large technology companies in Seattle, what are they telling you about corporate travel and kind of their intentions going forward? Because I know, particularly among the large tech, that's where a lot of the layoffs and cost cuts are for.

Sure. Yes. What we've heard is when it comes to sales, service, they're going to go back to -- they're going to go travel, whatever is required in order for them to be with customers and selling product, they're not going to have restraint around that. That's been our basic understanding. I think it will differ a little bit company to company, but certainly the ones up in Seattle, that's what we're hearing. I think this traveling between sites is largely going to be not what it was pre-COVID. They're going to use their own technology to connect their employee groups. The other thing that's starting to come back is conferences,we're starting to see those book into San Francisco, certainly down into Vegas and [a fall]. So a lot of time left to see how that matures over the next few months. But at least early indications that you're going to see some of the bigger events come back into the large cities that we serve.

Yes. I think with our hotel has been seeing a little bit more of a resurgence in kind of those urban city centers probably driven a little bit by that group kind of conference business as well. Got it. And then just kind of taking that the -- what you're seeing in large corporate, obviously can a little bit more volatility in kind of their underlying trends. What do you see -- do you think any of that corporate softness bleeds into leisure at all, just given kind of -- we're seeing wage growth among higher income earners slowing a little bit. Obviously, that's where a little bit more of the layoffs are centered around [you] [indiscernible] what are you looking for to say that bleeds into leisure at all?

Yes. So I think, a, we're always like thoughtful about folks who end up getting into a RIP situation, which has been abnormal for the technology sector, and it's different for folks in Seattle and certainly down in San Francisco to experience. Right now, Andrew, in a lot of cases, I do think those employees have been fairly well taken care of. And it's still a relatively tight labor market -- like it large. So we haven't started to see like an impact on our forward bookings from some of the layouts that are going through. A lot of them aren't concentrated actually in Seattle or San Francisco, they're spread out throughout the broader sort of global footprint of these companies. And so while they're headquartered there, I think some people may make this mistake that it's all people in Seattle or San Francisco being impacted, but it's a relatively smaller amount. So right now, I think it'd be hard to predict that, that's going to show up in a big way at least this summer we're into the fall. But certainly, if it doesn't stabilize and if people are nervous about their job, that's what I would get more worried about, which is probably more of a not if the economy -- people believe that it's going to weaken, which I think they believe that for the last year to happen. It hasn't, but if people believe like really believe at this time, it may start to show up in like user travel trends that people are worried about their jobs, but we just haven't seen that yet.

Yes. Yes. I guess taking a step back, factoring in what you're seeing on the large corporate side, SME side. Do you think going forward over the next 3 to 5 years, corporate continues to remain a smaller piece of the pie versus what it was pre-pandemic. How are you guys thinking about kind of just how the demand buckets are going to change in this post-pandemic world? And are you adjusting the network accordingly?

Yes. No, great question. So for sure, the network is going to reflect where we've seen the best pockets of demand. And I think we -- and we said it on the call, I think we configure the network in the first quarter to be a little more ready for business recovery that didn't come. And I think if we had to do over, we would have on the margins down a little bit more flying in some of the more in-demand leisure spots in the network. I mean, I think for us, we still fully expect to get corporate revenue back to pre-COVID levels of contribution. So I think we believe we'll have a 100% recovery by revenue. And a lot of that is going to be helped along by the partnership with American OneWorld, and we're already starting to see that. We've talked about it for a while. We're just waiting for like the actual return of corporate strength West Coast, but I think that's a large tailwind for us that will help us sort of get over the 100% level in the next handful of quarters, hopefully.

Given your geography or that kind of oneworld partnership to really kick in, do you really need a strong age of recovery?

I mean it would be helpful for certain, and it continues to be more depressed -- that direction. But this is a lot of net new business for us in California throughout the West that we just didn't have access to before. We didn't have the network breadth that American and us together are able to bring to corporates today. So we've always done well in Seattle, Pacific Northwest Portland but we hadn't penetrated the California market as well, and that's where we get to start. And a lot of that is domestic travel. It's domestic companies, West Coast to East Coast wide type of stuff. So the Asia recover will just be additional sort of business for us. Most of that will accrue to our partners, which is good for them, and that is what we want as well. But certainly, if we can connect traffic in through L.A. and San Francisco and to our partners, we benefit from doing it.

When you think back to prepandemic and the strongest parts of your network, what markets routes are performing best today and which are still struggling?

Yes. So look, a lot of -- I think our best markets the last few months have been like Latin, Central America. Hawaii has been strong, but it's got a lot of capacity going into the islands right now. A lot of the sudden leisure destinations. Many of the things we're doing in Florida have been strong.

Much falling [indiscernible] to Florida?

More than we used to. We fly to all of the cities down in out of many points off the West Coast, even out of California, not tens of frequencies a day but a couple of new [indiscernible] and they're doing well. State of Alaska has been really good recently. It feels like recovered, very good summer up there. Pacific Northwest has just continued to be a really strong base of loyalty, of preference for us. And honestly, Portland has been really strong as well. I think the city hasn't come back as much. We're watching that. We're going to take our entire leadership team this fall down to Portland, downtown core, and we want to support whatever we can help the city come back. But our traffic down there has been good as well. So those have been doing really well. I'd mention like Hawaii is really strong load factors, but it's sort of a yield challenge right now just because of all the capacity that went there during the pandemic. That will -- it's always been a good market for us for many, many years, and we expect that it will be going as well. Some of the Bay Area TransCon, which do you guys see on the data as well. That's just been the weakest recovery market. And I'm not sure what to make of it will -- I just think it requires a little bit more business recovery in the downtown core of San Francisco, but it's certainly been the weakest, least recovered market.

Got it. Interesting. Maybe talk a little bit about the regional operation. I know that's the one part of the business that is still kind of well below where it was pre-pandemic and probably below where you want it to be. Maybe talk a little bit about the limitations that you have there and how you think about building that up.

Yes. Just for reference, we had, I think, pre-COVID fleet skyline of getting to like 115, 117 regional lines of flying, split between Horizon and SkyWest. Today, that's more like, call it, 90, 94 lines of flying. We're not doing that many today. That's sort of the skyline, principally because we did the Q400 retirement went single fleet at Horizon. That is now completely through. We actually got some LOIs to sell all these Q400s, not for a ton of money, but it will be nice to get them fully off the books. Horizon has been doing a fantastic job. We've actually seen much lower attrition than we had anticipated through the first quarter. I think it's temporary. I think it will step up again. But we've been able to.

Why do you think it steps up again something?

I just think the mainline hiring curves are sort of -- people have to free up space in their own training pipelines before they go do big hiring again. And typically, they'll -- like they'll be thinking about later this year in Q4 peaks or something like that, hire after the summer or something. But we'll see. It's been a good trend so far. We've added some block hours back to Horizon. I think we actually are going to run a month of over 10 hours of utilization, which is sort of amazing to get back there. We want to be a 10.5%, been as low as 8%, 8.5%. So 10.5% is like that's like a good use of a regional aircraft. I don't think it will stay there. It will probably bounce around a little bit, but we'll actually see ourselves get back to that level for a month or two, so the business is down 20%, 25%. I think it was down 20% last year, it would be down 25% to 30% this year. And I think it's going to, more or less stay around that level for a little while. Next year, you run into this issue of, are you -- do you have enough people qualified to become captains, and so you've got the -- and we've all known this was coming for a couple of .

It seems like the regionals are going -- they're really going through that right now.

Yes. Yes. So ours will start to hit here pretty soon. We'll see what the impact of that is. But right now, our assumption is we're down 20% to 30% in terms of volume. And once we get clear of next year, we'll start to build some of that back.

Okay. So it's a '24.

I think so.

I guess, moving on to capacity a little bit, right? So regional will still be depressed. So all your growth is coming from mainline, obviously. I think when we look at of your guidance, look at schedules back half of '23 capacity is beginning to pick up a little bit for you, pick up a bit for the industry. I know you said earlier in your comments, you like beyond the summer is kind of a little bit of unknown right now. But how do you think about the ability for the industry to absorb kind of your growth, industry growth as we go through this year?

Yes. It's a really good question. I think it's something we should all be thinking about. There is a fair amount of capacity meant to come in. For us, just as a reminder, it's 80% gauge and stage related, so a lot of this is flying longer lengths and then just taking the MAX aircraft, replacing A320's that we're doing in some of these markets before. So that has been like the most efficient way to grow airlines over the years, you know that, Andrew. And so I think for us, we feel like the capacity number sounds like a big number, but it's really by departures and block hours. It's not that much. And it's incremental seeds that we can put into the most in demand flights. And so I think for us, it's we're anticipating to fly really high load factors still. And I think the bigger question for us is what's the right level of growth next year. We've got another large tranche of MAXs meant to come. And we're starting to already think about where do we think demand is going to be, where do we think the economy is going to be and what's the right sort of growth rate for us next year. But look, the industry capacity is still under, I think, 2019 plus 3 years of growth of the economy demand at least for the next couple of quarters. At some point, if everybody is growing high single digits, we're going to outstrip that. But we haven't reached that yet, right? You'll keep asking this, everybody is, every quarter when we're going to do it, hasn't happened yet, it's probably sometime next year if people keep growing at sort of elevated rates, but we'll see if they do. The other thing I think I've mentioned before, a lot of the forward guides like the basic -- I think it's 100% of the time, the trend has been to revise that and take capacity.