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

All right. Good morning, everybody. This is the last fireside too that's standing between you and a mediocre boxed lunch. No, they're not bad -- they're not that bad. Heavy on the gluten though I've heard. We were sadly referring to the equity carnage of the JPMorgan Conference today. So I'm very pleased to present the management or the CEO, in this case, of the sole U.S. Airline equity that is up today.

So we saved the best for the 11:30 slot, I guess. But very happy to have Ben Minicucci here, returning to our stage once again. Let's kick things off because people are going to want to hear about the guide. If you could just bring us well, why is your stock up do you think?

Listen, I think we just issued our investor update, and it's a stronger Q1 that I think most people had predicted for us. And maybe I'll just take you back, Jamie, almost a year ago, when Q1 of last year, we lost $150 million, something I was not very happy about, and I told my team, look, Q1 is our seasonally weakest quarter, but we got to get closer to breakeven because we start with a $150 million hole. We're a very profitable airline, but eliminating that would make us, of course, even more profitable. So we had this goal of how do we get closer to breakeven. So one of the big things was reducing capacity in Q1, which were one of the first to do -- and then the second thing was network changes that would optimize Q1 to different markets and reducing some frequencies in some other markets. So I'm really pleased at Q1. And when we look at it in December, the revenue trends were strong. Of course, then Flight 1282 happened and of course, the MAX was grounded, it took us a month to get the MAX back in service and I'm sure we'll talk about that a little bit. But that notwithstanding, our February budget, even with all the book away in January, because I think it's 30 days to get the fleet back up. Even with all the book away in February that people were concerned about, February still beat budget for us. Just to give you a sense that Q1 is performing quite strong. And so when you look at -- if you exclude the MAX grounding, we believe that the $150 million we -- and we also have higher fuel than we did in our budget, we would have been in spinning distance of breaking even. So that is a massive turnaround from a $150 million loss. And I think it's just -- we knew that we had to make some changes for of the following year, and we did it, and I'm really proud of the team, and it really puts us in a strong footing for the rest of the year.

And how would you characterize overall demand in your network because there are a couple of moving pieces and comparisons that need to be drawn Southwest was up here. They guided down today on demand, but their view was that it was mostly self-inflicted forecast error on their part. You also have significant tech exposure with the San Francisco hub, all the various moving pieces, both premium low- and low-end consumer. How do we think about those various drivers of your top line in the first quarter. And more importantly, any glimpse into the second quarter that you're comfortable giving, I'm sure we would welcome.

Well, on the leisure side, leisure is strong, but it's really been helpful as a return of business and corporate traffic for us and our West Coast hubs and we kept saying on every analyst call, there's upside for us. There's dry powder as it starts coming back, and that's what we're seeing. We're seeing more business traffic come back. Obviously, with Amazon. Amazon is above 2019 levels for the first time, which is really good to see Microsoft, which is still down is 2x what they were last year, which is really positive. And so we're seeing this business travel finally starting to come back in our West Coast hubs. In terms of Q2, not a lot I can share right now, but what I would say is I think we're just optimistic that it's starting to return back to 2019 levels. And in combination with leisure, the strong leisure traffic we're seeing, we're in a good spot.

Good. We were joking before we came up here that it was quite a few years, since you attended and talked about your merger efforts. And yet here we are back on our stage talking about your merger efforts. And I don't want this to monopolize the conversation, but I would think it's probably one of the largest things on your plate at the moment. What gives -- what has evolved on the regulatory front, since your earnings call what other road mile markers should we be looking for? And can you confirm that there was -- I certainly didn't find anything in the JetBlue Spirit decision. -- in that legal brief that I could extract and apply to Alaska's effort with Hawaiian, maybe you have at this point, digging deeper into it. Just Yes, provide us as much of an update as your comfortable.

No, it's a great question. I think just on the JetBlue Spirit and what the judge's decision was to block it. I think it's a positive for us. I think the judge was clear in saying that he's blocking the deal because of the elimination of an ultra-low-cost carrier that has benefit to consumers in the country. In our deal, it's nowhere near that. Our deal is completely different. We're actually the low-cost, low-fare airline acquiring Hawaiian. So that's simply not the case. And our overlap markets, we have 12 overlap markets, 1,400 flights, so very few overlap markets. definitely going to give Hawaiian residents more choice, 3x more choice than they have today that connected a Continental U.S. more choice internationally with our oneworld partnership, and I think the other benefit for us is we become a little bit of a bigger carrier, but we had a few more arrows in our quiver with international capability now that's possible out of Seattle, which again provides more competition against Delta and other carriers. And because of our strong domestic presence in Seattle, we have over 300 flights a day. And so I think all this in context provides a great platform of why this still makes a lot of sense. And one of your questions is where we are in the process, second request from DOJ in terms of information, a ton of information has to be a mass to get to the DOJ. It will likely be to them sometime in the May time frame. We have 30 days to look at it. So we'll know more maybe in the June time frame, the next milestone. But like 1 of the things I will say is in terms of how it's being received, we've done a lot of work in that diligence process, but even talking to communities. We had an op-ed by the 4 mayors of the Big Islands, Maui, Oahu, Kauai and the island of Hawaii, who totally support the deal going through. So these are the 4 mayors of the Big Island saying we think this deal is good for residents and locals of Hawaii. And so we have their support -- and it's -- it's hard to say that there's a lot of negative with what we're trying to do. I think the 49th and 50th state, there's so many similarities in terms of serving remote communities. Just a lot of people don't know what we do in the state of Alaska, but there's -- it's a state that's 2.5x the state of Texas with 750,000 people and we flied in 19 different places in the state of Alaska. Only 3 have roads. And just -- so I just wanted just to give you a framework, how big this did of Alaska, the land is the ocean in the State of Alaska. And so we know how to serve remote communities in terms of how the loyalty that we have in the State of Alaska, it's only about 10% of our network, but we're committed. Our values come from there. And so there's a lot we can do to really have a great value proposition for alliance. The other thing is we're keeping the brand, as you know. So it's one of the things, it's going to be unique. We'll have a dual brand exterior with one platform in the background, which is something we're working through. There's going to be a lot of questions how we're going to pull that off. But I think it's a unique way of us positioning this acquisition versus the Spirit and JetBlue. So I hope that the merits of the case will shine through.

And just to be clear, a second data request is by no means unusual with the Virgin America transaction, I believe you had 2 requests and then entered a period of closed door or nonpublic negotiates during which your appeasements were settled on. I'm still just curious about the evolution, though, because for so many years post Virgin, obviously, the story was comparatively simple. Leaning so heavily into single fleet type, deleveraging didn't have a long-haul network to concern myself with modeling. I mean, did you just fall down and hit your head one day? And just come back with a different view on consolidate? I mean, how did it evolve?

A few ways in. First, like if I had to put it in context, we're just punching the accelerator for our long-term strategic plan. We're just pushing the accelerator to the floor. And look, we already have a $1 billion franchise to Hawaii, our existing franchise. It's something that was good for Alaska. It's something we wanted to build on. And so we said what are the possibilities of us looking at growing that? Or analysts ask us all the time. What's the next step for Alaska, where can...

That's fair. I fielded that question very well as an analyst...

Many times. Where you're going to enroute to. And Jamie, you know like you need where you grow, you need relevance, right? You need relevance and a startling fact is out of the top 25 cities in the country, top 25 hubs. 23 out of the 25 are dominated by the Big 4 airlines. There are only 2 cities that are not, Seattle, which Alaska has and Honolulu. So this was a play for us to say, now we can get relevance and 2 of the top 25 markets and actually do something pretty unique. Hawaiian on its own is constrained, as you know, to do more. They can't grow really in the Continental U.S. there's only some much you can grow. There's 1.4 million residents in Hawaii. But with the combination of Alaska with our network in the continental U.S., the pie starts to grow. And so I think this is what makes this unique for us. And when we looked at all this and I looked at the long-term strategic plan, look, we have 185 MAXs on order. The domestic plan was still there. But really how you win in this industry is through relevance and through loyalty. And so we looked at that from the loyalty lens, from the lens of relevance, and we thought this was a great play for us in terms of what we acquired Hawaiian for in terms of the dollars. Again, our balance sheet was strong. We're coming out of COVID. We're one of the most profitable airlines in the industry and we said, look, we have the balance sheet. We have the cash. We have the wherewithal to do this. And we think this fits nicely. It's always something we thought about, but we're just punching the accelerator and said this is the right time to do it. The team that did Virgin America is essentially all here. The scars are still all on my back on that one. And I said, "I know the mistakes we made, and we're not going to do those again. I know what we have to do right." One was the brand decision and one was just making decisions a lot quicker than we did before. So I feel really good with that. And again, we'll see where we land with the DOJ.

And just to be clear, behind the scenes, you do become one labor entity?

Right. Behind the scenes, we're one labor entity for sure. One labor...

So this is not a holding company, IAG type.

No, no, no. I -- it's not IAG type. Everyone kind of compares it, no, no. This is one set of labor rules, like one pilot group, one flight attendant group, one mechanic group, one operating certificate, our people can fly and work on different airplanes -- but the branding is going to be different. So the Hawaiian brand is so powerful. We wanted to retain that with the [ Polanieboke ] so much the Eskimo on the tail [ book ] so much. The overarching -- so we're going through a huge branding exercise right now. And look, I think one of the -- our strength is our brand and it's also a limiter for us. We know because when we ask people here in New York, even though we fly here quite a bit, people say, "Oh, I thought take you only flew in the state of Alaska" Right? So the brand is a limiter. We understand it. It's also a strength where we are in the Pacific Northwest. So we see this as an opportunity now to take 2 really regional, but strong brands with strong loyalty and say what is the overarching brand. Could it be the loyalty program. I always compare it to Marriott Bonvoy. When you open your app, the Marriott Bonvoy doesn't put up a hotel in front of you, they ask you, where do you want to go? And so if you think about what we want to do in the future with oneworld, our gateway will be the loyalty program and say, where do you want to go? And we'll say, "Well, if you want to go to Hawaii, if you want to go international, if you want to go anywhere you want to go here is Hawaiian, Alaska metal, Horizon metal, our regional and here is our oneworld international partner." So this is what we're trying to build going forward, really a bigger platform for Alaska. Again, a lot of questions we got, where is Alaska going. Alaska is going to be more of a national and global carrier going forward. And so we're putting the building blocks in place for that.

If you knew what a Starwood loyalist I was and how disappointed I was with Bonvoy, you might not have used that, but I get it. That's it's not them, it's me. I'm sure. So you brought up loyalty, and it's -- and that's been a theme all morning and will continue to be this afternoon. And I think for decades to come, it's fascinating to me that loyalty is actually proving a catalyst for consolidation because it -- I mean, that was certainly part of JetBlue's that well, it was part of Spirits thinking with Frontier initially. It was part of JetBlue's thinking, it's part of your thinking. Where would you rank your loyalty returns right now, just Alaska stand-alone the benchmark, and this came up earlier today, I mean, Delta is clearly in the lead with Amex. Where do you put your profit contribution relative to your other larger competitors? And then what are the contractual openers that will allow you to renegotiate that? And then what are the post-merger aspirations for loyalty?

That's a great question.

And correct me, if you don't agree loyalty is one of the biggest things that sort of separates the margin haves from the have-nots industry level, at least right now?

You're absolutely right, Jamie. I would say it's loyalty, and it has to be linked to relevance in your markets. I think those are the 2 things, which is what we have in Seattle and the Pacific Northwest and Portland. State of Alaska course. I mean that's what gives Alaska it's strength. If you look at -- I want to say like past the great Recession after 2008, we've been one of the most consistently profitable airlines with one of the best balance sheets, since 2008. And I think a lot of that has to do because of relevance in our markets and the loyalty that we have and what the loyalty program delivers, delivers up $1.5 billion of cash to Alaska. So it's very strong. There is more we can do. I agree, Delta is in the standard. It's the gold standard with Amex. But we just renegotiated with Bank of America and Visa. Really happy with the rates we have there. And we've got some things in the hopper we're going to do with -- which I'm not -- it's too early to discuss here, but we're working on to really extract more value from our loyalty program that we're working on. So we're excited about that. So that's coming. And post merger, look, we're excited about it. This was part of our synergies. There are some out of the $235 million, I think there's $80 million in loyalty. If you look at the 1.4 million people in Hawaii. Most of them have a Hawaiian card. Most of them also have a United or Delta card because Hawaiian cannot take them anywhere past the Continental U.S. So we believe, for us, not only will our goal. This is why the branding is so important that we want to retain the brand because Hawaiian's love the brand is retaining the existing loyalists, but then make a play for -- look, we can take you -- if you want to go to D.C., Hawaii can't take you to DC. For us, I can take you to DC from Seattle to Portland from San Francisco and LAX, I can take you to D.C. So we believe there's a big opportunity for us for Hawaiians to have one loyalty card in their wallet or their one-stop needs to take them out of Continental U.S. and also internationally with our 25 global partners that we have partnerships with, a lot of them which operate out of Honolulu, and of course, elsewhere. So -- so we believe that's the big play for us and there's a lot of value for there. But it is, like you said, it's -- Honolulu becomes our second largest base with this. So the relevance will be there, the loyalty will be there and we know what value that brings to the bottom line.

Were there any particular loyalty lessons that were learned with the Virgin acquisition because that was also very much about -- particularly -- I mean from my opinion, put California into play with rapid rewards or up against Rapid Rewards Southwest program.

I think everything we're doing today with this acquisition, are lessons learned from Virgin America. I would say, mistakes that we made with the loyalty program, with the branding, with a lot of the stuff. So right now, we're trying to create a company for the future that is capable with -- look, I can never see -- I believed Alaska blew, I can never see Alaska going away. And so when you think about growth and you think about being more of a national and even a global player now with we're going to have 787s traveling the world, you got to think about it in a certain context. So how do you retain this massive loyalty and strength you have with that brand, but grow into different things. So one of the things I know is just because something worked in the past. It doesn't necessarily work again in the future, but you have to keep what's good and recreate something that can build on that. So I think that's how we're thinking about branding. It's a big exercise we're doing right now. It's something that we hope to have more clarity that we can share in 6 or 9 months. I'm excited about it. Because I think it links in this loyalty that is so important and how to build on it going forward in the future.

Well, let's shift gears slightly. Obviously, a lot has changed since your last formal Investor Day, and I don't think you're on the calendar for anything coming up anytime soon. If memory serves 11% to 13% was the pretax margin aspiration. Should the folks in the room just sort of just guard that now for the next several years, do you expect returning to those types of a similar magnitude of targeted return going forward. I'm not going to hold you for it. I'm not asking for a formal guide. Should we just push 11% to 13% permanently out of our minds. How should we think about that?

No, absolutely. I will tell you Alaska's DNA is about setting the bar high. We are still focused on 11% to 13%, absolutely. A lot of things have changed over Alaska -- before we set those targets was pre-COVID, COVID, labor rates have gone through the roof, taking several margin points away from when we were producing those margins. But that's just the way the world changes. We have to figure out how we get back to those margins. And I think one of the things that I think we're distinguishing ourselves with and something we're going to talk more about as an airline, it's one of our big priorities this year is talking about premium and making sure people know that we are a premium carrier. We're not a carrier. We don't have the network carriers here. using your term, the LMA is here and Alaska is stuck in the middle. Now, we have a premium product. We have 300-some-odd airplanes between mainline and regional airplanes, all with a first class, a premium class. We have lounges across the country, full service on board. We are a premium carrier, and that's something that we're going to let people know. It's one of the reasons why, again, our margins without international tailwinds last year, and a refining margin that took [ $1.5 million ] of margin away from us is our margins were still near the top in the industry, with United and Delta. So why does Alaska perform that way? One of the reasons is that we have this premium product. And I think it's going to be a differentiator for us, 1 that we can go back as labor costs settle that we can gain this revenue premium that we need. And on top of it, for us, like we're -- if we got this mindset on cost, right? We are cost discipline. It's in our DNA. I've been 20 years with the company. We hammer productivity across our labor group. So even as labor rates become even across the industry, our goal is still to have a relative cost advantage to the network carriers. And our cost advantage of Southwest is almost -- it's close -- so that's our mindset. Cost discipline, high productivity, low overhead, a premium product and -- but also a great mainline -- main cabin saver fares. We have all that for cost-conscious travelers, but we have a beautiful product for people to trial. I don't know if you saw our latest commercial. Did you see our latest commercial?

I did not see your latest commercial, I don't stay up very late.

No, no, it's a commercial like we're trying to advertise our premium products. So what we say, so the person is in the seat and they lean back and say, I can cross my legs in premium, because we have the most pitch in premium. So -- it's one of the ways we're trying to advertise that Alaska has a premium product. It's not a fake premium. It's a real one. You can cross your legs. People can get out in and out. Same thing our first class. We have the most on the domestic class. We have the most pitch in our first class. And so we are really positioning this airline as a premium airline that can go toe to toe with anybody and with a lower cost structure we can compete vigorously and it's the reasons why we deliver the pretax margins we do.

Do you expect to be free cash flow positive this year? Because we have you slightly positive, but with everything going on in the OEM side, I mean, that's the metric that I find myself manipulating?

I think on the higher guide of EPS moving there and lower CapEx. I think we can get there. Now as you know, we can talk about Boeing a little bit. Look, we have 23 deliveries that are planned for this year, 24 next year, so 47 deliveries over the next 2 years. We're not going to get 47 delivery over the next 2 years. It's obvious. We have 23 deliveries in 2024. 10 airplanes are built awaiting delivery. Of course, Boeing is under FA scrutiny, DOJ investigation. It's going to take a while for us to get those 10 airplanes. I can tell you the delivery is going to be 10 to something less than 20. And so obviously, CapEx is going to be lower. I think Q1 with our better performance in Q1 is a good sign for us for -- in terms of margin -- so that's strong for us. So I believe free cash flow positive is very doable for '24. But a lot of things will have to fall in place. We still have a lot of things. But I can tell you, I am focused on free cash flow positive. It is something we have to get the rat through the snake in the last 2 years. Just to be honest, we had 65 or 72 Airbus that we have from the Virgin acquisition that we went single fleet. That's 72 to extremely bad leases that we have to get out of and then purchase replacement MAX airplanes. So that was massive capital that went through in the last couple of years. That rat is through the snake. And so now we're starting really with a single fleet of Boeing on the domestic front for our network. So we feel like we're in a really good position now with CapEx. The last thing I'll say on CapEx, too, with the Hawaiian acquisition is they have 65 airplanes. There is opportunity now to really rationalize and optimize the combined fleet. So I think there's more opportunity for us on the CapEx front. So -- but I will tell you, free cash flow positive is squarely in my sights and my leadership team sites.

Well, we have the near entirety of the aircraft leasing complex presenting tomorrow. So the folks that you need to talk to about those uncompetitive leases, stick around, book a hotel for the night. We got a few minutes left. Mark, I see your hand going up, and hopefully, it will be joined by some in the audience, we'll get to you in a second -- just because he's already walking up with the mic.

Yes. I'll make it quick, but Jamie, let me write to the point I wanted to make Ben. So when you bought Virgin, obviously, I don't knowm if you recall, it wasn't immediate goal. But clearly, the goal was to get to the single Boeing fleet and so forth, which you achieved with Hawaiian, it seems like a more difficult task. We do have all those lessors there. coming tomorrow. You did some creative swaps where they're leased and so forth on some of those Virgin aircraft. Would you envision is it a goal that if Hawaiian goes through that you'd like to follow the same path and maybe figure out some creative ways to get back to single fleet commonality, if you would?

Mark, great question. And with the Virgin and Hawaiian totally different, Virgin didn't own any airplanes or maybe just a handful with very onerous leases. Hawaiian owns 2/3 of their fleet, 40% of which unencumbered. So totally, totally different that gives us a lot more flexibility on what to do it. Is there opportunity for optimization rationalization? Yes. But at this point, there's not that sense of urgency with the virgin thing, with the Airbus and the Boeing, the reason we went single fleet is we had 2 aircraft types performing the same mission in the Lower 48. And we said, look, that's costing us 75. Again, here's where our cost discipline comes in as it's costing us $75 million to $100 million a year operating these dual fleet between pilot training and reserves and maintenance and parts and all that stuff and said, "Let's just eliminate that. Let's be the same one airplane for one mission." With Hawaiian, they have different airplanes performing different missions. Inter island, they have some domestic long-haul international now, they just got their first 787. So we have to look at that and just really understand, which airplanes play a certain role for us, and then we're going to rationalize but we've got time. The good thing is they're again, almost of their fleet, and it gives us more opportunity than we did than with Virgin.

Okay. Question? Had a question in the back?

I just wanted to ask quickly about your strategy in Portland. You mentioned Portland earlier. Obviously, a lot of investment between yourselves and the airport and creating a new product that's finally going to come to fruition this summer. On the other hand, a lot of growth from Delta, Southwest, United in that marketplace. Kind of curious as you think about the relevance point, where does Portland fit into your network strategy?

Great question. So one, I'm really excited about the investments in Portland. I think when the airport unveils its new airport, it's going to be one of the flagship airports in the country. It's going to be a gorgeous airport. I hope you get a chance to see it. Portland is still hugely, hugely important to Alaska, and we still have dominant relevance there. And the only -- we were slow to put back capacity because of all our big hubs. Portland and the Bay Area were the slowest to come out of COVID. So we're seeing a lot of signs of life now out of Portland in the Bay Area, so you're going to see us start adding back capacity. But our view is Portland is Alaska hub and will continue to be so going forward in the future.

If we have another one over here up front?

Thanks. Similar question on network. You talked about from a Hawaiian perspective about the opportunities to bring more people from Hawaiian East to the East Coast of the U.S. What about the combined network going west Asia, maybe Australia and New Zealand. Are you thinking about that on within your owned aircraft Hawaii and Alaska, whatever the brand is versus your oneworld partners?

Great question. I'm really excited about the opportunity from the West Coast to go west. And we're looking at that right now. So the network team has a big homework assignment for me to look at what the network is going to look like with the combined airline. And look, we are the -- we have a massive presence in Seattle. And that domestic feed is perfect for launching international flights from. So we think that going west and east, even South is a huge opportunity for us, and we're just exploring, which one makes the most sense. Hawaiian got its first 787 a few weeks ago. They're getting 4 this year and there's 12 firm coming. So there will be 12 airplanes in the fleet that -- and these are long range of 787-9s. These airplanes have long, long legs. And we're excited about what to do with those airplanes off the West Coast.

Last question from me. I've never been a fan of fuel hedging -- and I've always considered it maybe this is sort of warped but sort of a personal victory anytime an airline backs away and abandons fuel hedging, which you recently did. How did that -- was that a -- one, why? And two, was that a contentious internal debate or you're looking at your team, which makes me think it was.

I think it was all because of you, Jamie, but look, I doubt that. I'll be honest, I think in the last 5 years or so, I became very critical of our hedge program. The problem with the hedge program, the premiums just got higher. And the volatility for us on the West Coast wasn't in the oil that we were trying to protect. It was in the refining margins. So just last year alone, we have almost a $0.30 a gallon disadvantage from the industry because of the volatility of the refining margin. So I pretty much said, look, let's stop protecting against oil. Let's do something with the refining margin. So last year, we spent $60 million of hedges that produced us nothing, and we're going to take those funds and figure out how to reduce volatility, there's a whole team working on it, how to reduce volatility in refining margins that really cost us a couple of hundred million dollars. So if you look at -- again, if you look at our potential of profitability, last year, we lost [ $1.5 million ] of margin because of that volatility. So I agree with you. We're going to figure out. And the key is how do you take -- it's not developing a new hedge. It's how do you take volatility out of refining margins. There's a lot of things. I got the team working on it because it's just too much margin to go away on gas. So -- but we did have a lot of -- it's something -- look, it's something we did for almost 20 years and people I think, just get comfortable. And it's just because something worked in the past. And it did work for us somewhat in the past. But it wasn't working for it in the future. So those are the things it's hard as a leadership team, when you get comfortable with a certain way of doing things. It's like, no, you know what, a new path for -- we got to think differently, the world's changed and the industry is changing fast, and you got to adapt.

Well, and I did want to thank you. You were the first CEO to embrace my term LMA. So I can assure you that my inflated ego is intact. So thank you very much for that. Thank you.

Thank you, Jamie. My pleasure. I appreciate it.