Alaska Air Group, Inc. ($ALK)

Ben, it's great to see you. Thank you so much for making the trip. You're certainly no stranger to the JPMorgan Industrials Conference. It's great to have you back.

We've gotten several updates from your competitors this morning. The narrative is pretty good. In fairness, first quarter really didn't have that, given the refining lag, not that many days of really elevated fuel, but that's clearly been a challenge for Alaska in the past. How should we be thinking about the first quarter in light of everything going on in the world right now?

Yes. Well, thanks for having me, Jamie. Great to be here with everybody. At this point in time, we're not going to change our Q1 guidance. And just to give you some context, if not for the conflict in the last few weeks, it would have been better than our midpoint on our Q1 guidance. I would say, consistent with the commentary of others, demand is the bright spot and it continues to be for Alaska. The -- but let's talk about fuel for us. Fuel, we're a little disadvantaged on the West Coast because of refinery margins. I'm frustrated in California, two refinery margins closed in the last 6 months, one recently in San Francisco, in L.A., which really drives that volatility for us having fuel maybe $0.20 a gallon more than everyone else. And the bright spot was we got with the acquisition of Hawaii, we got fuel from Singapore, and we pay less per gallon for Hawaii fuel getting tankered there than we do on the West Coast. And if you just pause that, you say like how could that be? But that's just to give you the context of the disparity. And so that's where we're with fuel. But a few things that we're going to do on fuel is prior to Hawaiian, 65% of our fuel came from West Coast. post Hawaiian, it's 56%. And now we've got an initiative over the next 2 years to take that reliance down to somewhere in the low to mid-40s. And how we're going to do that is tanker fuel from Singapore to the Pacific Northwest to Seattle. So right now, we're working with some partners to build the infrastructure to how to tanker fuel to bring that reliance down and reduce our gap of what we pay per gallon down from the rest of the industry. So it's an audacious plan that we're working on, but we could see somewhere in the order of hopefully, a $0.10 impact per gallon within 2 years if it works. So we'll keep you guys posted. But what we have to do is really try and mitigate this disadvantage that we have.

And is there any expectation that West Coast refining spreads would just sort of normalize on their own as more production comes online? Or is it better to plan the business around the assumption that you're always going to be paying something of a penalty out there?

I wish there were more production coming online. At this point, that's nothing that we see with refinery margins coming in line with the rest of the country. We hope -- I mean, hope is not a strategy unfortunately. So that's why we're taking issues in our own hands. I think we'll see it stabilize. But at this point, we don't see it going lower than the rest of the country. And so I think it's something we're just -- we said, look, we got to live. It's going to be part of our business model, but how do we reduce that risk. And this is what we're going to do is we're going to try and build up some capacity for tankering from Singapore once -- I mean, right now, Singapore fuel is higher than West Coast fuel. So -- but that will normalize as well.

Remind me, did you disclose what your embedded fuel price assumptions or a range of assumptions were as part of the full year guide, $350 million to $650 million?

Yes. So we were -- as we exit '25 and January of '26, we were in the $250s, somewhere in the $250 range, $250-ish. So that's basically midpoint of the guide would assume like a $250-ish cost per gallon. And we'll see where it lands right now. I mean the good thing is there's -- as you know, there's been a couple of fare increases that have stuck. And the fun math, I was like keeping airline economics, math simple when we talk in the boardroom about stuff. So we spent about 100 million gallons of fuel, 1.2 billion gallons a year. So 100 million gallons of fuel a month. So if it goes up $1, it's $100 million of extra additional costs. It's a massive amount. And then when you balance that with the coupon revenue is we produce about $1 billion of coupon revenue a month, right? So roughly $12 billion, excluding loyalty, cargo and everything else. And so to offset $100 million fuel cost on $1 billion of coupon revenue, you essentially need 10% increase in coupon revenue. And that 10% on average. That's a fair number. It's a big number. On average fare of $200, it's $20. Now some people might say $20 is nothing, especially when you consider what people spend on an airport, can take on to the -- on an airplane, they're Starbucks and a muffin. I'm sure it's $20. And so you would say, well, that's nothing, but $20 on fare. So the question is right now, it's sticking. And you could see and say going forward, we're not touching guys because, look, right now, it's sticking and there's a possibility offsetting even if it's $1 per gallon at the worst case, but it would have to stick. And I think that's the question. So does it -- fares have to go up to offset fuel. And we've been pleased that we've been able to get people to buy at the higher level so far.

So a question that I've asked others at the conference. Are consumers purchasing tickets any differently given the reality of higher fuel? Is there a run in the bank? I guess that wouldn't really be the right term. But are people pulling forward their decisions because they have come to the conclusion that the longer they wait, the more it becomes? Or is that just giving the U.S. consumer a little bit too much credit? And I'm not trying to discredit by that, but I just don't know how the average price in this regard.

It's very -- it's an intuitive comment. I think when prices did spike, we did see a spike in demand. And maybe some folks are saying, look, we're going to go on a vacation anyway. Spring break is coming. But I think for Q2, I think we saw some likely accelerated bookings. I think they've leveled off now. But I think people got this initial, wow, if this thing is going to go crazy, I better book my fare now before fares go up. So I think we did see a little bit of that, just to be honest.

And you have a very small international footprint at this point. But are those flights subject -- domestic fuel surcharges aren't permitted internationally, they exist, particularly across the North Atlantic. Are -- is your handful of international capacity right now subject to that? And is that helping accelerate the recapture because of the formulaic nature?

It is subject to that. And we have seen higher fares, quality fares from our international -- the flights that we do have. I will say I am pleased with our international note, you mentioned it. We launched out of Seattle, Tokyo and Seoul last year. So in less than a year, for the spring breaks, we're seeing load factors into the 90s. And so we're super excited about that. And even more excited that the cabin isn't even ideal right now. We've got a life-like cabin, but there's not a premium economy yet in the 787s, which we're working on in the next 2 years, which will be further tailwinds for us. But we're seeing strong international demand and Rome launches in 5 weeks. I think you guessed it last time we met when I was trying to be KG and Minicucci, where does Minicucci want to fly out of Seattle?

Well, it was funny. We had an event out in Seattle. And I was like, "Oh, I bet the next market is Rome, and Ben wouldn't look me in the eye. I'd be like that's when I knew I might be run.

Shane, my CFO was like giving me the -- don't do it. Don't follow for it. No, we're excited. Rome is booking fantastic. We're seeing a ton of fantastic redemptions on it. And look, this was our thesis going in. We have massive loyalty in the Pacific Northwest. We were part of oneworld, but this is just an amplification of that where we're putting our own metal. People love us, and they're excited. Every time I meet people in the Seattle community, that's the first thing they tell me, "Hey, I book the flight to London, I book the flight to Rome. I'm on K I'm going to Tokyo, Seoul. And so we're excited. And this -- we're just in the initial stages of this. And like my view is that this is where the big carriers have made money leaning into premium and international in the last few years. We saw premium. We're well ahead of premium. Our premium story is strong. But international for me is something we're building from the foundation. And we'll have over 12 flights a day. We'll have like 40 wide-bodies at Alaska by into early 2030. So we've got 30 wide-bodies today, building up to 40, a fleet of 787s and 330s that will be super well configured and help, again, diversify our revenue streams going forward. So we feel really good about the strategy.

And I guess you don't really have a baseline to compare it to. I mean you flew to Russia, what, 35, 40 years ago. But I would think that given the advent of loyalty that the international markets would ramp more quickly than they otherwise would because presumably, to your point, a measurable percentage of your passenger base is already going to London. They've just not been doing it on you, and now they have that option. Is that the way -- as we think about the ramp of each international spoke you add from Seattle, is that how we should be thinking about it sort of an accelerated time line? Or is that reading too much into the law?

I think it's exactly how you should be reading it is, look, I think I always tell people, and this is why our employees 30,000 are so excited about what we're doing about our strategy. We have the highest engagement scores. The community is excited every time I go out is we have the loyalty. And right now, when they go international, they're giving the loyalty to someone else.

Somebody else.

And we have -- just to give you a sense, just out of the Seattle hub and not including Portland and all the small communities we fly to, is we have 2x the domestic capacity than any competitor there. So they're flying us domestically and they're loyalty members and they're gaining all these domestic miles they're going to redeem those going international. And then what we're seeing from corporate side, the corporate side is building as well because now they're saying, well, okay, Alaska flies to Tokyo and their flight to Seoul. They're going to London. And with our oneworld partnership, the connections through London through the different cities that we can fly from there, it's just building and growing and which makes this super, super exciting for us. So and the one thing like I tell people what makes you so excited? It's rare that you have -- and we have 30,000 people. We're the fifth largest airline, so -- but it's still pretty big, $15 billion in revenue. I can tell you, every time I fly, I can't tell you how engaged our people are. They want to make this thing work. They're saying, what can I do to help them make this work. They're excited about the vision, but they know that it's going to take work. You don't do anything bold and audacious without saying it's going to take work to build this international muscle, this international know-how. But everyone has rolled up their sleeves. They're with us. We have, if not the highest Net Promoter Scores in the industry. We had them for 15 years. We've had the best operations industry overall in the last 15 years. We've had strong financial performance. We have a fantastic balance sheet. So everything is in our favor to go make this thing work. And so I feel really good about it.

Okay. And actually building on that and your observations about the workforce, something that has come up at today's event. Delta for years, has talked about the moats around their business, largely nonunion workforce employment costs in Atlanta, the MRI. There are things that make that franchise different. And United has begun discussing that in recent years. What do you think are the moats around Alaska that differentiate the franchise from your competitors?

So one, and I know everyone says this, one, definitely our people and our culture. I think when people fly us, I get it over and again. We feel the difference. I just got an e-mail from a customer who's loyal to another airline and said, I flew you guys a few times, and the culture and the service is palpable on your airline. He says, people are nice. And I don't take that lightly. It's nice as a nice statement, but one of our core values is be kind and caring. We hire for that. And the interview process is made to look at a person's core DNA to say, is this person at the end of the day, kind and caring and do they really want to be in the customer service business. And if we throw -- if we don't hire that person. And sometimes we miss people get through. But having that kind and caring culture engenders loyalty. And so that's a big part of it. A big part is we know that having scale, relevance and loyalty matter. And so we focused on the West Coast. So in the Pacific Northwest, we have that. We've been going toe-to-toe with the largest competitor in the whole world for the last 10 years, protecting what we say is our home. That's our hometown, and we will never give it up, and we've done it. We have 2x domestic capacity. We've continued to build loyalty. We've launched a new loyalty program called Atmos Rewards, which at the launch of a premium credit card, we already have 90,000 sign-ups on a premium credit card that is doing fantastic for us. And so loyalty is the other big moat for us in the geographies we fly. The acquisition of Hawaiian, we had a $1 billion franchise and said, look, this is a fantastic franchise that we can build. It went from a $1 billion franchise to a $4 billion franchise. This is a premium leisure market where we fly 60 times a day from the West Coast from our hubs, all our hubs from Seattle, Portland, SFO, LAX, San Diego, 60 times a day. to Hawaii, owning that West Coast traffic. And then again, now with this introduction of international and now bringing some of those business and corporate travelers that maybe we lost because we didn't have that international, that moat continues to widen. So we feel like we're making that moat deeper and wider. It was deep and wide, but we're making it deeper in water with things that we've done and continue to lean in on what we've always done well and -- but actually adding new elements to our product and to our brand.

Let's talk about the path to $10. It's off on a rocky start given last year, given what's happening with oil prices right now. But when I kind of think back to when you first articulated that target, I'm trying to think about at the industry level and specific to Alaska, what's gotten better, what's gotten worse, what perhaps hasn't changed at all. I would think that corporate momentum may be in excess of what you embedded in your forecast. So I put corporate into the good category. Domestic capacity has only tightened since the time you articulated that. Again, I don't know what your underlying assumption was from the outset, but I would put the domestic capacity environment into the good category. I think that labor rate escalation is probably in the neutral to bad category. So I'd be interested, particularly some of the work rule challenges that you're going to be facing with the flight attendants. And of course, the buyback was not at least publicly articulated, might have been in the internal plan. So what are the other buckets in getting to $10 that fall into those 2 categories better and worse?

Yes. No, it's a great question. So what I will say is when we put Alaska Accelerate into place, what got us there was $1 billion of additional pretax profit that was going to be generated through synergies, revenue initiatives and cost savings and roughly 1/3, 1/3, 1/3 by year. And we are on track or better on that. So what I would say is the Hawaiian acquisition is doing extremely well for us. And if not for that, I think we'd be in a worse position for that. So I'd like to -- it's doing extremely well. What's changed in our assumption is the macro. So last year, what -- from the industry backdrop, the macro was a $500 million to $600 million headwind for us. So -- but for that macro, we would have been right on track. Now the assumption to '26 is we're going to recover maybe not all of that macro, that $600 million plus what it would have been going forward. Recover...

Why wouldn't you recover?

Well, it was just an assumption in terms of our guide that we recover a portion of it. So our guide would say, look, if you get all the macro -- and plus, of course, you get to the right side of the guide. But the midpoint of the guide would have been an assumption that you recover some portion of that macro. And so if the macro recovers and fuel stays relatively on the exit rate of the $2.50 to $2.60 range, we hit -- and we continue to execute on our initiatives. And with the buyback on top of it, there -- the math just falls into place and so you should get to a $10 EPS. Now the reality is the reality, right? We're facing right now, $350 a gallon. Fuel, not for the fare increases, we'll see how that pans out. And the macro, again, is on target, I think, some of the macro, we feel pretty good about so far. But the reason we had our range as well as we did. We said, look, we -- there's just a lot of volatility, right? And we don't know. So we wanted to give ourselves some leeway to be in that range. So we are still resolute on the $10 EPS. And we're going to do everything we can control to go get that $1 billion of pretax -- on the share buyback, we're -- we did $570 million last year. We're $100 million into this year. We're going to do up to $250 million this year by midyear. So we'll have $750 million out of the $1 billion done. We'll see where the economic picture looks like by the second quarter where fuel is at. If we want to continue to accelerate in '26 or do something different, and so what I would say -- and you talked about labor. Well, let me talk about the integration. We have one major big integration milestone coming up. This is the one where you integrate both reservation systems from both airlines. That's happening in April, April 22, I think. So a big, big milestone. And 3 big integration milestones will been done. We'll have then single operating certificate. We'll have then single loyalty, single reservation system. And the last one, which is always a big one, is collective -- it's one that's tough, right? It's joint collective bargaining agreements. And each union moves at a different pace depending where they are. And again, we're the only airline that's done -- the last two acquisitions is it's Alaska. We know what we're doing. We're good at it. And discussions are all in progress with our unions, and they'll take from 12 to 36 months to get done. And our view with labor is, look, we're going to pay -- we're a global airline now. We're a large domestic line. We're going to pay competitively with the big 4. And so we're not going to be at a disadvantage from a labor, but not like we were 15 years ago, we had an advantage. But now look, we realize we're a big player, and we got to pay our employees competitively.

But if I'm not mistaken, the wage differential between Alaska and Hawaiian and the cockpit is not particularly material. I mean you'll still have to work out seniority integration, what have you, and that can always be time consuming. But there are some fairly material differences in flight attendant work rules.

Yes. And on our flight attendant work rules, the big difference is at Alaska, we pay by trip versus by our traditionally. So Hawaiian has what everyone does, and our contract is pays by trip, just like Southwest does. And that's a legacy thing from a long, long time ago. And that's going to take time to merge. So that's the one that's probably going to take the longest. But we'll get there. Like we have a great group of people talking about it. The good part is people want to go execute this vision to go international. And so they realize that we're not reinventing the rules on how flight attendants have to run internationally. There are big airlines doing it out there. So there's a template, and we just have to figure out how the new combined airline needs to work within that template.

Excellent. Mark Streeter, you got a question?

Yes, I do. Ben, you mentioned that Alaska has had success consolidating the industry. When you look at Hawaiian going well, you obviously have the Virgin acquisition before that and so forth. Is there -- how should we think about the future for further U.S. industry consolidation. When would Alaska -- is there a green light that turns on in the executive suite that says we're ready to consider a new deal because we've reached -- the consolidation light turns green because you've further integrated Hawaiian or you've reached your milestones? How should we think about that?

There's a button under my table just where I sit, there's a green light, red light.

We're going to send you a lamp. Just so you understand why.

Okay. Mark, you just gave me a beautiful visual. Look, I'll share it with my team when I see them this week. No, look, I'll say a couple of things on that. Number one, we're focused on Alaska accelerated and $10 of EPS. We -- it's we've got to complete this integration. We're not going to get distracted and that is, first and foremost, what we're going to do. The same thing I'll say is -- and this is the discussion we have in -- at our Board meetings is Alaska, for as long as I've been there for over 20 years is we've always done what's best. No matter what goes on in the industry, we said, what is best for all the stakeholders of Alaska shareholders, employees, customers and the communities we serve. And we're a little unique there because State of Alaska, I think that's why we did so well with the acquisition of Hawaiian. We understood how unique and special Hawaiian was. But we will always do what's in the best interest of all our stakeholders as this industry, whether it changes, it evolves, we're going to look at it and say, what is best for all the stakeholders for Alaska.

Great. Let me ask one follow-up because you led me there with the discussion of the share repurchase program and the $1 billion, $750 million and so forth. When you and Shane and the Board sit down and talk about the long-term balance sheet goal to be investment grade or not. We've got sort of a very sort of binary camp, right? We've got United, we want it. We're going forward. We're trying to grab that investment-grade ring. You've made comments in the past like being investment grade would be great. But clearly, you've chosen in the near term to buy back more stock rather than push for upgrades. So what's the debate like in the boardroom about this?

Yes. I think the question is both. And we definitely within -- by the time we achieve Alaska Accelerate 2027, we want to be at -- like we're a notch below with two agencies for investment grade. The goal is to get to investment grade. I think with a $10 BPS with strong cash flows, paying down debt and reducing our net leverage is what we're going to be focused on going to the next couple of years. Right now, the balance sheet is strong. I would say whatever happens, like we've got $3 billion in liquidity. We've got $18 billion of unencumbered assets between over 100 airplanes and our loyalty program, which was actually priced at before Hawaiian. So you could say that there's -- that value is even higher. So we feel like we're in a great financial position, and we're just sequencing what we want to do. So given where the stock price is at, some of the -- when we go back in history, some of the regrets we've had is we should have taken advantage of the lows. And what we're doing now is we're taking advantage of the lows, knowing that the long-term goal is to get to investment grade. And as the plan continues to execute, that's the goal is to get there.

Well, and a follow-up on that, your share price has lost more than 30% fewer than 30 trading days, which historically is a buy signal for most airline stocks. On the other hand, there's a fuel problem at the industry level right now. Should you be leaning into the buyback more aggressively in light of the chart? Or does fuel sort of sober up that temper your desire or willingness, I should say?

Yes, we're going to do $250 million this year. And given the price, you'll probably see us do it a little quicker than we thought.

Okay. So last month, you placed -- well, 2 months ago, you placed your largest aircraft order in history. We don't have good line of sight into retirements and/or -- well, you don't have a lot of leased aircraft.

No.

Yes. So we don't have good line of sight into retirement. What should we think about sort of a longer-term capacity CAGR? And what internal measures do you look at before deciding to grow the franchise?

So I'm really pleased with the last big order we put with Boeing. With all the lack of slots available from the OEMs, we wanted to tie in the next 10 years. So this last order gave us 10 years. We go from 400 airplanes to 500 airplanes over 10 years, 41 of those wide-bodies and the rest narrowbodies. And that gives us a 4% growth rate per year, including somewhere in the order of 75 retirements. So that's kind of how you should think about it. We have the capacity to grow 4%. Now we can modulate that quicker or slower depending what's going on from a cash perspective. And the idea is we wanted to level set $1.5 billion CapEx a year. Give or take, as we go through. So now there's renewals of fleets. We've got an older 717 fleet that we have to address in the state of Hawaii that doesn't travel in flying. But -- and we have some older -- it's funny when you join the airline, you're like, gosh, I remember bringing that airplane in when I was in maintenance and pretty soon, I'm going to have to retire that airplane. It's kind of sobering, I've been here a long time. And so some of those older airplanes are going away. We got rid of our 900s. Some of the 800s are getting older. And so we just have a really good narrow-body fleet renewal program. The wide-bodies are coming in exactly when we want them to come in. And it all makes sense in terms of how we're going to manage cash flows and CapEx over the next 10 years.

And since you brought up the 717, Mark and I were recently skiing with a former Hawaiian executive, and we were talking about the 717s. And this individual's view was that the optimal aircraft was a 145-seat turboprop. Of course, that aircraft doesn't exist. So that's going to be a long wait for that airplane. So in light of that reality, good to see you, Charles. What do you think is the most logical replacement for the E2?

No, no. Listen, it's -- I've been clear with my people is I'm a maintenance and engineering guy from training, right? I said the one thing I care about when as you guys give me options, I want an engine that can last. That thing does a ton of cycles, and it's got to be a bulletproof engine and not an engine that's going to cost us a fortune that's not reliable. As we know the new engines of today, they save a lot of gas. We'll see what the maintenance costs are those engines from a life cycle perspective, but I want a bullet-proof engine. That is my number one requirement, bulletproof engine, and it's got to serve the needs of the residents have Hawaii in terms of seats and frequencies, and it needs to fall into our cost profile, obviously, of the overall Alaska. So I built the box, and I said, go solve the problem. And their job is to come back to me here in the next 12 months. I think we have a little time on the 717s, but not that much time to figure out what our options are going forward.

And I'll lead the witness one last time if there are no hands going up in the audience. So hopefully, you'll join us again next year. I'm going to ask you next year what role, what influence AI had since you and I last sat here, which is now, what do you think your answer will be next year? It may not be my opening question.

Yes. No. Look, I'm super excited what we're doing with AI. And a couple of things when you're an airline, you're so busy running an airline that it's hard to devote a lot of resources to AI. So we've partnered with a company called UP.Labs. They're a company that creates companies to go solve problems for the industry or for a certain company So for me, it's -- we're focused on a few parts of the business. One, safety, operational efficiency, the guest experience, back office, and the commercial side of our business. So those are five -- there are seven many companies that we've started that are focused on those five areas right there. And they're all in different phases of where they are, and I'm super excited on the safety one, for example, and this is how people report. How the data gets analyzed, how the data predicts where some of your safety issues are going to be. That's just one example that's close to launch. In the next 6 months, and I hope to say, look, this is a tool. We've got a few more that are making a ton of progress. I hope to say, look, these were seven projects. And I know not all of them are going to work. I'm just saying if I do 7 and 3 work and 3 end up bringing $100 million of benefit to the bottom line, which is not contemplated in the long-term goal, but I do believe AI is going to bring savings. That's what I'm looking for. So I'm super excited about this. We've got a dedicated team, small team working with this UP.Labs. I'm saying, look, let's not distract us running what we have to do, but let's work this in parallel and integrate it with the airline as it comes in. So I'll give you an update in 12 months.

All right. We'll see you then. I'm sure I'll talk to you before that. But thank you, Ben, and really appreciate it. Thanks, everybody.