UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
 
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172022
 
OR


¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to        
             
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
Delaware91-1292054
(State of Incorporation)(I.R.S. Employer Identification No.)
19300 International Boulevard, Seattle, Washington 98188
Telephone: (206) 392-5040

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 Par ValueALKNew York Stock Exchange
 Securities registered pursuant to Sectionsection 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yesx☒   No  ¨☐ 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨☐      No  x☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesx ☒  No  ¨☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act: 
Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐
Large accelerated filerx  Accelerated filer  ¨     Non-accelerated filer   ¨  SmallerIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting company   ¨under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No x☒
 
As of January 31, 2018,2023, shares of common stock outstanding totaled 122,996,587.127,542,279. The aggregate market value of the shares of common stock of Alaska Air Group, Inc. held by nonaffiliates on June 30, 2017,2022, was approximately $11.1$5.1 billion (based on the closing price of $89.76$40.05 per share on the New York Stock Exchange on that date). 




DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement relating to 20182023 Annual Meeting of Shareholders are incorporated by reference in Part III.






ALASKA AIR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20172022
 
TABLE OF CONTENTS
PART I
4
ITEM 1.
OUR BUSINESS
4
ITEM 1A.
RISK FACTORS
20
ITEM 1B.
UNRESOLVED STAFF COMMENTS
2728
ITEM 2.
PROPERTIES
2728
ITEM 3.
LEGAL PROCEEDINGS
2829
ITEM 4.
2829
PART II
2829
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
2830
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA[RESERVED]
3130
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3330
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
5947
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
5948
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
9487
ITEM 9A.
CONTROLS AND PROCEDURES
9487
ITEM 9B.
OTHER INFORMATION
9791
PART IIIITEM 9C.
9791
91
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
9791
ITEM 11.
EXECUTIVE COMPENSATION
9791
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
9791
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
9891
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES 
9891
PART IV
9891
ITEM 15.
EXHIBITS
9891
SIGNATURES
9993


 
As used in this Form 10-K, the terms “Air Group,” the "Company," “our,” “we” and "us,""us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc. and Horizon Air Industries, Inc. are referred to as “Alaska,” "Virgin America"“Alaska” and “Horizon,” respectively,“Horizon” and together as our “airlines."airlines.”
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
 


You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.

Our forward-looking
2

statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and otherour risk factors, in this Form 10-K, see “Item 1A: RiskItem 1A. "Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.



3
Table of Contents
PART I
ITEM 1. OUR BUSINESS


Alaska Air Group (the "Company" or "Air Group") is a Delaware corporation incorporated in 1985 that operates threetwo airlines, Alaska and Horizon. Alaska was organized in 1932 and incorporated in 1937 in the state of Alaska. Horizon is a Washington corporation that was incorporated and began service in 1981, and was acquired by Air Group in 1986. Air Group acquired Virgin America and Horizon.in 2016, then legally merged the entity with Alaska in 2018, at which time the airlines' operating certificates were also combined. The Company also includes McGee Air Services, an aviation services provider isthat was established as a wholly-owned subsidiary of Alaska. TogetherAlaska in 2016, and other subsidiaries.

Alaska and Horizon operate as separate airlines, with individual business plans, competitive factors and economic risks. We organize the business and review financial operating performance by aggregating our business in three operating segments, which are as follows:

•Mainline - includes scheduled air transportation on Alaska's Boeing and Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Mexico, Costa Rica and Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under capacity purchase agreements (CPA). This segment includes the actual revenue and expenses associated with regional partner airlines, we fly to 118 destinations with 1,200 daily departures throughflying, as well as an expansive network across the United States, Mexico, Canada, and Costa Rica. With global airline partners, we provide our guests with a networkallocation of more than 900 destinations worldwide. During 2017, we carried an all-time high 44 million guests and earned consolidated net income of $1.0 billion, which represents a 27% increase over net income of $814 million in 2016. Our adjusted net income was $823 million, which excludes special items and merger-related costs of $118 million, and a $280 million benefit from new tax laws enacted in 2017.

Our mission is "creating an airline people love." The "ing" is to recognize that we are never done; we are continually working to improve. We believe our success dependscorporate overhead incurred by Air Group on our ability to provide safe air transportation, develop relationships with guests by providing exceptional customer service and low fares, and maintain a low cost structure to compete effectively. It is important to us that we achieve our objective as a socially responsible company that values not just performance, but people, the communities we serve, and environment.

In 2017 we focused much of our energy on integrating Virgin America. We achieved several milestones, including merging most back office functions, kicking off station co-locations and launching technology that enables our front-line employees to be agile between Alaska and Virgin America applications. In January 2018, Alaska and Virgin America obtained a single operating certificate from the Federal Aviation Administration (FAA), our most significant integration milestone to date. These accomplishments will ease our transition to a single Passenger Service System (PSS) in the Spring of 2018, which will help us unlock manybehalf of the revenue synergies expected fromregional operations.
•Horizon - includes the acquisition. We remain on trackcapacity sold to complete all of our integration milestones on schedule,Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and continue to be optimistic about the value of our combined company.maintenance costs.


With the integration well underway,Together we remain committed to our strategic focus to become the go-to airline for people on the West Coast. The acquisition of Virgin America positioned us asare the fifth largest airline in the U.S., with anUnited States, offering unparalleled abilityguest service, connectivity and schedules from our hub markets along the West Coast. With our regional partners, we fly to serve West Coast travelers. To do so, we believe we need to meet our guest's evolving needs through innovation in our onboard offerings and provide uniquemore than 120 destinations with better schedules, while retaining the best of both the Alaska and Virgin America brand experiences.throughout North America. We have begun to implement this strategyoperated in a number of ways, including merging our loyalty programs, allowing us to bringhighly competitive and often challenging industry for 90 years. Our top priority as an airline is ensuring the award winning benefitssafety of our Mileage Plan™ programguests and employees, an area that we continually invest in. Our success over many decades and resilience in difficult times is attributable to Virgin America's loyal customer base; rolling out Free Moviesour people, business model, and Free Chatcommitment to Virgin America's entire fleet;sustainable growth over the long-term.

In 2022, we outlined three strategic priorities to enhance our competitive advantage and kicking offsupport future growth. First, strengthening operational integrity across the firstnetwork was key to providing guests with reliable service during a period of several cabin enhancementshistoric travel demand. We finished the year with completion and on-time performance rates near the top of Alaska'sthe industry. Second, we focused on updating labor contracts with represented labor groups to ensure our employees receive market competitive rates, and to recognize their valuable contributions to our success. The five contracts signed during the year include significant improvements for our employees and position us well to focus on the future. Third, we prioritized transitioning our Mainline and Regional operations to single fleets. The single fleet operating models, anchored by Boeing MAX aircraft for the Mainline fleet and Embraer E175 aircraft for the Regional fleet, will drive more productivity and cost efficiency in the business.

The execution of these priorities, in combination with expressive mood lighting.a strong demand environment and success of our commercial initiatives, enabled Air Group to deliver record-breaking revenue for the year of $9.6 billion and unit revenue improvements of 23% vs 2019. Although our airlines experienced significant cost pressures during 2022 driven by higher fuel prices, increased labor expenses, supply chain constraints, and effects from inflation, we generated $1.4 billion in operating cash flows for the year.


While aircraftThe improved results in 2022 set a foundation for our return to pre-COVID flying levels early in 2023 and technology enable ussustainable growth thereafter. Our 2025 Plan is ambitious, including aligning our growth strategy with environmental, social, and governance targets. Instrumental to provide air transportation, we recognizeachieving this is fundamentally a people business. Our employees maintain and strengthen our relationshipsrestructured fleet agreement with guests, and our success depends on our employees working together to successfully execute our strategy. In 2017, Alaska was once again named one of America's Best Employers by Forbes MagazineBoeing, which includes firm orders for the third year in a row. We know that engaged employees provide excellent service. In that vein, in 2017, Alaska ranked highest in J.D. Power and Associates annual survey of customer satisfaction among traditional network carriers for the tenth year in a row. Virgin America was also recognized for excellent service by Conde Nast Traveler and Travel + Leisure magazine also for the tenth year in a row. Customer service matters, and we believe the combination of Alaska and Virgin America will only enhance the experience for our guests.

Operationally, Alaska held the No. 1 spot in the Wall Street Journal's "Middle Seat" scorecard for U.S. airlines for four consecutive years and the No. 2 spot for 2017. Although we were not the leader in on-time performance in 2017, we led the industry for on-time performance among major airlines for the previous seven years. We are focused on becoming the industry leader in operational performance once again as we fully integrate Alaska and Virgin America operations and we are off to a great start in 2018. For achieving safety, customer service, operational and financial goals, we rewarded our employees with $135 million for their service in 2017.

In support of the communities that we serve, we strive105 owned B737 aircraft to be an industry leader in environmental and community stewardship. Our combineddelivered through 2027, with rights for 105 additional aircraft through 2030. In January 2023, we removed the last Airbus A320 aircraft from operating service. The ten A321neo aircraft are expected to exit the fleet is oneno later than the end of the youngest, most fuel-efficient fleets in North America and we look forward to further enhancements in this area. As2023. A single fleet of Boeing MAX aircraft will significantly improve per-seat economics as a result of larger gauge and improved fuel efficiency. This advantage will serve as the baseline for high-margin capacity growth over the next several years. Although we have ambitious growth plans, we will continue to deploy capacity in a disciplined manner that is responsive to changing demand trends.

In 2022, recovery of leisure demand continued to outpace recovery of business demand. Responding to these trends, we adapted our environmental and corporate sustainability leadership,network to take our guests where they want to fly. With new routes launched in 2022, we ranked higherserve 100 nonstop destinations from Seattle-Tacoma International Airport, more than any other North American airline in this year's Dow Jones Sustainability Index. We are also proudcarrier. As a member of the oneworld® alliance, we provide our community stewardship - Air Group donated $14 millionguests with global access to over 1,300 charitable organizations, and our employees volunteered more than 32,000 hours of community service, focused900 destinations in 170 territories. As we grow our West Coast hubs, we plan to
4

maximize connectivity to partner airlines, allowing our guests greater global connectivity. Alaska guests are able to access over 100 weekly nonstop flights to Europe from the West Coast on youth and education, medical research, and transportation and community outreach in 2017.oneworld partners.


One of our leadership principles is to "give back" and we are proud of the efforts and voluntarism of our employees across the system.

We continued to generate strong profits in 2017, marking our 14th consecutive annual profit on an adjusted basis. Our liquidity and capital position remain strong, positioning us among those of high-quality industrial companies. Due to our strong financial health and outlook, we are one of only three U.S. airlines with investment grade credit ratings. With the cash generatedsuccess over 90 years has been fueled by our continued success,dedicated and engaged employees. In 2022, we have been able to invest in our business to achieve profitable growth and to enhance the guest experience.

As we look to the future, we will build on our success by executing our strategic plan in the following areas:

Be Safe and On time
We have an unwavering commitment to run a safe operation, and we will not compromise this commitment in the pursuit of other initiatives. Alaska and Horizon were the first U.S. major airlines to receive FAA validation and acceptance of our Safety Management System (SMS) in 2016. In 2017, Virgin America adopted SMS, ensuring a consistent safety process across our carriers. Additionally, all Virgin America employees received training for the Alaska Air Group SMS, our "Ready, Safe, Go" principles, and our mobile safety reporting system. Once again, in 2017, 100% of our Alaska and Horizon aircraft technicians completed the requirements for the FAA's "Diamond Certificate of Excellence" award. This is the 16th consecutive year Alaska Airlines has received the award and the 16th time in the last 18 years Horizon has received this award. We also believe that maintaining safe operations, through adherence to well-defined processes, and ensuring every Air Group employee is aware of their individual contribution to our operation, is critical to ensuring on-time performance. The rigor we apply to running a safe operation has resulted in Alaska consistently being one of the top airlines in North America for on-time performance.

Focus on People
Our business is fundamentally a people business, and our success depends on ourhired nearly 23,000 employees. Engaged employees deliver higher productivity, superior execution and better customer service. In merging Alaska Airlines and Virgin America employees and labor groups, we kept a vigilant focus on creating an unbeatable culture. In January 2017, we rolled out "Momentum" training for all Virgin America8,000 employees to help bridgesupport our growth. Additionally, the two airlinesfive labor contracts signed during the year provide improvements and blendstability for our cultures. We implemented Culture Champion initiatives to help employees build relationships across airlines, allowing them to share concerns and feedback directly with executive leadership. Similarly, our "QX Factor" program brought new energy to the Horizon employee experience. Our people programs and integration plan are focused on ensuring employees feel valued, informed and engaged in meaningful ways as we build our future.

people. Aligning our employees' goals with Air Group'sthe Company's goals is importantcritical in achieving success. All permanentTo that end, Alaska and Horizon employees of our airlines participate in our Performance-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which encouragereward employees toacross all work together to achievegroups based on metrics related to profitability, safety, profitability,sustainability, low costs, on-time performance, low costs, customer loyalty, and customer satisfaction. Over the last five years, ourIn 2022, employees earned a record award payout of $257 million under these incentive programs have paid out on average more than one month's pay, for most employees.programs.


Build a deep emotional connection for our brand
To be the go-to airline for people on the West Coast, we must be recognized for creating an airline that people love. In 2017, we built upon the strong brand connection we have with our guests in our Pacific Northwest markets and the state of Alaska by broadening our focus to include California. We rolled out fresh, modern marketing campaigns showcasing benefits such as our network growth, low fares, our Buy One Get One companion fare credit card promotional offer, and unique onboard experience elements. We are enthusiastic about our plans for continued investment in key products that will provide meaningful improvements to our guests, such as Gogo satellite internet which we will begin installing in early 2018. Additionally, we partnered with key sponsors in the Bay Area, including sports franchises such as the San Francisco Giants and the San Jose Sharks, as well as noted professional athletes including Kevin Durant of the Golden State Warriors.

We continue to invest in key products that will provide meaningful improvements to our guests and further drive an emotional connection to our brand. This includes Free Chat and Free Movies and the launch of Gogo satellite service, already mentioned above. We’ve rolled out new digital products to improve the guest experience, including a new inflight entertainment portal and the beta launch of First Class meal pre-select. We’ve nearly completed retrofits of our Boeing fleet to include Premium Class, while adding larger overhead bins to many of our aircraft. Expanding our airport lounge portfolio, we’ve opened a third lounge at Sea-Tac airport and plan to open a lounge at JFK in 2018. Finally, guests can also look forward to an integrated onboard food and beverage program in 2018, which will emphasize fresh and local West Coast products on our aircraft.


Defend and grow our customer base
Competition in our markets is fierce and we know we must defend our customer base as we grow our network presence, by providing our guests with an increased choice of schedule times and fares, and allowing us to effectively compete for new guests. We will continue to introduce guests to our award-winning service, Mileage Plan™ program, and Visa signature credit card as we grow our network. We work hard to ensure our guests have a great experience on our airlines and provide an exceptional product at a low fare.

Win with low costs and low fares
We believe that our low-fare model gives us a competitive advantage by providing value to, and building trust with our guests. We also know that, in order to provide low fares in our growing network, while returning value to our shareholders, it is imperative for us to maintain a competitive cost structure. In 2017, our unit costs, excluding fuel and special items, remained flat year over year on a consolidated basis. We understand the importance of low costs to the business model and the success of the company and we have a long track record of reducing unit costs. Although our unit costs are expected to rise in 2018 primarily due to pilot wages and maintenance costs, we continue to focus on productivity, cost management, low overhead and leveraging capacity growth. We also manage increasing fuel costs by flying larger, more fuel-efficient aircraft, which have increased our fuel efficiency as measured by available seat miles flown per gallon by 3.5% over the last five years. As we continue to integrate Virgin America into our operations, we are committed to achieving our stated cost and revenue synergy goals. It is critical that we achieve these goals in order to continue our cost reduction efforts.

During fiscal 2017, we added 44 new markets to the combined network. For 2018, we plan to grow our system-wide capacity approximately 7.5% as compared to 2017. Approximately 70% of growth in 2018 is attributable to existing routes and locations, with the rest attributable to our plans to fly 13 daily departures from Paine Field-Snohomish County Airport in Everett, Washington to eight West Coast markets starting in fall 2018.

AIR GROUP


Our airlines operate different aircraft and missions. Alaska Air Group isoperates a Delaware corporation incorporated in 1985 and the holding company of Alaska, Virgin America, Horizon, McGee Air Services, a wholly-owned subsidiary of Alaska, and other business units. Alaska, Virgin America and Horizon operate as airlines however, the business plans, competition and economic risks differ substantially for Horizon in comparison to Alaska and Virgin America. McGee Air Services operates as an aviation services provider, focused on providing ground and ramp handling services to airlines. Alaska Airlines is an Alaska corporation that was organized in 1932 and incorporated in 1937. Virgin America is a Delaware corporation that was incorporated in 2004 and acquired by Air Group on December 14, 2016. Horizon is a Washington corporation that began service and was incorporated in 1981. It was acquired by Air Group in 1986. McGee Air Services is a Delaware corporation that was incorporated in 2016. Alaska and Virgin America operate fleetsfleet of narrowbody passenger jets. Together, the operations ofjets on primarily longer stage-length routes. Alaska and Virgin America are referred to as "mainline" operations. Alaska also contracts with Horizon and SkyWest Airlines, Inc. (SkyWest) and Peninsula Airways, Inc. (PenAir) for regionalshorter-haul capacity such that Alaskaand receives all passenger revenue from those flights. Horizon began operatingoperates Embraer E175 regional jet aircraft in 2017 in addition to its fleet ofand Bombardier Q400 turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase agreementCapacity Purchase Agreement (CPA). Horizon removed all Q400 aircraft from operating service in January 2023. The majority of our revenues arerevenue is generated by transporting passengers.

The percentage of revenuesrevenue by category is as follows:
 202220212020
Passenger revenue91 %89 %85 %
Mileage Plan other revenue6 %7 %10 %
Cargo and other revenue3 %4 %5 %
Total100 %100 %100 %
 2017 
2016(a)
 2015 2014 2013
Mainline passenger revenue74% 69% 70% 70% 70%
Regional passenger revenue12% 15% 15% 15% 16%
Other revenue13% 14% 13% 13% 12%
Freight and Mail revenue1% 2% 2% 2% 2%
Total100% 100% 100% 100%
100%
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.


We attempt to deploy aircraft into the network in ways that we believe will best optimize our revenuesrevenue and profitability and reduce ourthe impacts of seasonality.



The percentage of our capacity by region is as follows:
 202220212020
West Coast(a)
27 %31 %32 %
Transcon/midcon43 %37 %41 %
Hawaii13 %16 %10 %
Alaska11 %11 %11 %
Latin America6 %5 %5 %
Canada— %— %1 %
Total100 %100 %100 %
(a)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.
 2017 
2016(a)
 2015 2014 2013
West Coast28% 34% 36% 36% 34%
Transcon/midcon43% 29% 24% 22% 22%
Hawaii and Costa Rica13% 17% 18% 18% 19%
Alaska10% 14% 15% 15% 16%
Mexico5% 5% 6% 6% 7%
Canada1% 1% 1% 3% 2%
Total100% 100% 100% 100% 100%
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.


MAINLINE


Our mainlineMainline operations include Boeing 737 (B737) and Airbus A320 family (A319, A320,(A320 and A321neo) jet service offered by Alaska and Virgin America.Alaska. We offer extensive passenger service from the western U.S. throughout the contiguous United States, Alaska, Hawaii, Canada, Mexico, Costa Rica, and Costa Rica.Belize. Our largest concentrationconcentrations of departures are in Seattle, Portland, and the Bay Area. We also offer cargo service throughout our network and have three dedicated cargo aircraft that operate primarily to and within the state of Alaska.
In 2017,2022, we carried 3532 million revenue passengers in our mainline operations.Mainline operations, up from 23 million in 2021, on improved demand for air travel.
During the year, we announced plans to accelerate the transition of our Mainline operations to an all-Boeing 737 fleet. At December 31, 2017,2022, our mainlineMainline operating fleet consisted of 154 B737203 Boeing 737 jet aircraft and 6722 Airbus A320 family jet aircraft. All A320 aircraft comparedwere retired from our fleet in January 2023; our ten A321neo aircraft are expected to 155 B737exit the operating fleet no later than the end of 2023. We continue to actively seek agreements to move the aircraft and 63 Airbus aircraft as of December 31, 2016.to interested counterparties.

5

The percentage of mainlineMainline passenger capacity by region and average stage length is presented below:
 202220212020
West Coast(a)
22 %24 %22 %
Transcon/midcon46 %40 %47 %
Hawaii14 %18 %12 %
Alaska11 %12 %13 %
Latin America7 %6 %6 %
Total100 %100 %100 %
Average Stage Length (miles)1,347 1,324 1,272 
(a)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.
 2017 
2016(a)
 2015 2014 2013
West Coast24% 30% 31% 31% 28%
Transcon/midcon45% 30% 27% 25% 25%
Hawaii15% 19% 20% 20% 21%
Alaska11% 15% 16% 16% 18%
Mexico5% 6% 6% 7% 7%
Canada—% —% —% 1% 1%
Total100% 100% 100% 100% 100%
          
Average Stage Length1,301
 1,225
 1,195
 1,182
 1,177
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.


REGIONAL
 
Our regionalRegional operations consist of flights operated by Horizon SkyWest and PenAir.SkyWest. In 2017,2022, our regionalRegional operations carried approximately 910 million revenue passengers, primarily in the states of Washington, Oregon, Idaho, and California. Horizon is the largest regional airline in the Pacific Northwest and carriescarried approximately 74%58% of Air Group's regionalRegional revenue passengers.


Based on 20172022 Horizon passenger enplanements on regionalRegional aircraft, our most significant concentration of regionalRegional activity was in Seattle and Portland.

During the year, we announced plans to transition our regional operations to an all-Embraer fleet. At December 31, 2017,2022, Horizon’s operating fleet consisted of 10 Embraer 175 (E175) jet33 E175 aircraft and 50 Bombardier11 Q400 turboprop aircraft. The regionalRegional fleet operated by SkyWest consisted of 2342 E175 aircraft. All Bombardier Q400 turboprop aircraft were retired from our fleet in January 2023.




The percentage of regionalRegional passenger capacity by region and average stage length is presented below:
 202220212020
West Coast75 %74 %75 %
Pacific Northwest8 %7 %9 %
Canada2 %— %1 %
Alaska3 %3 %1 %
Transcon/midcon12 %16 %14 %
Total100 %100 %100 %
Average Stage Length (miles)488 521 524 

 2017 2016 2015 2014 2013
West Coast59% 60% 62% 66% 66%
Pacific Northwest13% 16% 19% 19% 21%
Canada4% 5% 7% 8% 9%
Alaska3% 4% 5% 4% 2%
Midcon21% 15% 6% 2% 1%
Mexico—% —% 1% 1% 1%
Total100% 100% 100% 100% 100%
          
Average Stage Length422
 381
 348
 339
 329

FREQUENT FLYER PROGRAM

In 2017, we maintained two frequent flyer plans: the Alaska Airlines Mileage Plan™ and Virgin America Elevate®. To provide consistency and clarity to our guests, we merged the two programs throughout the year, and Elevate® was officially sunset in December 2017.


Alaska Airlines Mileage Plan™ provides members with a comprehensive suite of frequent flyer benefits. Members can earn miles by flying on our airline, which are awarded based on distance traveled. Awarding based on distance, not spend, is unique and provides the program a competitive advantage over other airlines' programs as miles accumulate faster. Miles can also be earned by flying on our airlines or onwith one of our 18 airline partners,partner airlines, by using the Alaska Airlinesco-branded credit card, or through other non-airline partners. Alaska's extensive listMiles awarded do not expire and can accumulate until such time a member chooses to redeem. Members can redeem miles earned for flights on our airlines or partner airlines, hotel stays, or for first class upgrades on Alaska Airlines.

For the most frequent flyers, the program offers multiple tiers of airline partners includes carriers associated with eachMVP status, including MVP Gold, MVP Gold 75K, and MVP Gold 100K, which can be achieved annually by earning qualifying miles or by flying a specified number of segments on Alaska or any of our 24 partner airlines. For those achieving MVP tier status, the three major global alliances, making it easier for our members to earn miles and reach elite status in our frequent flyer program. Through Alaska and our global partners, Mileage Plan™ members have access to a large network of over 900 worldwide travel destinations. Further, members can receive 30,000program offers benefits, including bonus miles upon signing upon flown segments, complimentary upgrades, free checked bags, and priority boarding. Members qualifying for higher tiers are offered incremental benefits. As a member of oneworld, Mileage Plan members with tier status are provided reciprocal status and benefits when flying on other oneworld members.

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Alaska has an agreement with Bank of America N.A which offers Mileage Plan members in the United States the Alaska Airlines Visa Signature card and meeting a minimum(co-branded credit card). Cardholders receive miles for spend threshold, and earn triple miles on Alaska Airlines and Virgin America purchases. Alaska Airlines Visa Signature cardholders and small business cardholders in the U.S., and Platinum and World Elite Mastercard holders in Canada, also receivecard, as well as an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black-out dates, and a free first checked bag for up to seven people traveling inon the same itinerary. EarnedThe co-branded credit card agreement provides the Company a material cash inflow on an annual basis, and is an important source of value for Mileage Plan members.

In 2022, Mileage Plan members redeemed miles can be redeemedand companion certificates for flights6.4 million award tickets on our airlines, or partner airlines, or for upgrades to First Class on Alaska Airlines. We believe all of these benefits give ourairlines. Mileage Plan™ members more value for their travel.

Mileage Plan™ and Elevate® revenuesPlan revenue, including those in the Passenger revenue income statement line item, represented approximately 11%16% of Air Group's total revenuesrevenue in 2017.2022. Accounting policies for Mileage Plan™ helps drivePlan revenue growth by attracting new customers and building customer loyalty throughare described more fully in Note 3 to the benefits that we provide.consolidated financial statements.


MARKETING AGREEMENTS WITH OTHER AIRLINES


Our marketing agreements with other airlines fall into three different categories: frequent flyer, codeshare, and interline.

•Frequent Flyer, Codeshare and Interline agreements. Frequent Flyerflyer agreements offer mileage credits and redemptions forenable our Mileage Plan™ members. Alaska offers one of the most comprehensive frequent flyer programsPlan members to accrue miles and redeem them for our Mileage Plan™ members through frequent flyer partnerships with 18 domestic and international carriers.flights on partner airlines.


•Codeshare agreements allow one or more marketing carriers to sell seats on a single operating carrier that services passengers under multiple flight numbers. The sale of codeshare seats can vary depending on the sale arrangement. For example, in a free-sale arrangement, the marketing carrier sells the operating carrier's inventory without any restriction; whereas in a block spaceblock-space arrangement, a fixed amount of seats are sold to the marketing carrier by the operating carrier. The interchangeability of the flight code between carriers provides a greater selection of flights for customers, along with increased flexibility for mileage accrual and redemption.


•Interline agreements allow airlines to jointly offer a competitive, single-fare itinerary to customers traveling via multiple carriers to a final destination. An interline itinerary offered by one airline may not necessarily be offered by the other, and the fares collected from passengers are prorated and distributed to interline partners according to preexisting agreements between the carriers.

Frequent flyer, codeshare, and interline agreements help increase our traffic and revenue by providing a more route choicesdiverse network and schedule options to our guests.


Alaska has marketing alliances withAs a numberoneworld member, Alaska's elite Mileage Plan members now receive tier status matching across member airlines. Depending on tier status, guests can enjoy a variety of airlines that provide frequent flyerprivileges, including access to more than 620 international first and codesharing opportunities. business class lounges, fast track through security, priority baggage benefits, priority check-in desks, upgrades, and priority boarding.

Alliances are an important part of our strategy and enhance our revenuesrevenue by:


 
•offering our guests more travel destinations and better mileage credit/credit and redemption opportunities, including elite qualifying miles on U.S. and international airline partners;


giving our frequent flyer program•providing a competitive advantage becauseconsistent and seamless guest experience whether flying on Alaska or one of our partnership with carriers from all three of the major global alliances;partners;
 
•giving us access to more connecting traffic from other airlines; and
 
•providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska Virgin America and our regional partners while earning mileage credit in our partners’ programs.
 
Most of our codeshare relationships are free-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time. Our codeshare and interline agreements generated 5%, 2%, and 3% of our total marketed flight revenue for the years ended December 31, 2022, 2021, and 2020.


The
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A comprehensive summary of Alaska's alliances with other airlines is as follows:
Codeshare
 AirlineFrequent
Flyer
Agreement		Alaska Flight # on
Flights Operated by
Other Airline		Other Airline Flight #
on Flights Operated by
Alaska or CPA Partners
Aer LingusYesNoNo
Air Tahiti NuiYesYesYes
American AirlinesYesYesYes
British AirwaysYesNoYes
Cathay Pacific AirwaysYesNoYes
Condor Airlines(a)
YesNoNo
EL AL Israel AirlinesYesNoYes
Fiji Airways(a)
YesNoYes
FinnairYesNoYes
Hainan AirlinesYesNoNo
IberiaYesNoYes
IcelandairYesNoYes
Japan AirlinesYesNoYes
Korean AirYesNoYes
LATAMYesNoYes
Malaysia AirlinesYesNoNo
QantasYesYesYes
Qatar AirwaysYesYesYes
Ravn AlaskaYesNoNo
Royal Air MarocYesNoNo
Royal JordanianYesNoNo
S7 Airlines(b)
SuspendedNoNo
Singapore AirlinesYesNoYes
Southern Airways Express/Mokulele Airlines(a)
YesNoNo
SriLankan AirlinesYesNoNo
Codeshare
Frequent
Flyer
Agreement
Alaska Flight # on
Flights Operated by
Other Airline
Other Airline Flight #
on Flights Operated by
Air Group
Major U.S. or International Airlines
American AirlinesYesYesYes
Air France(b)
YesNoYes
British AirwaysYesNoYes
Cathay Pacific AirwaysYesNoYes
Condor Airlines(a)
YesNoNo
EmiratesYesNoYes
FinnairYesNoNo
IcelandairYesNoYes
Hainan AirlinesYesNoNo
Japan AirlinesYesNoNo
KLM(b)
YesNoYes
Korean AirYesNoYes
LATAMYesNoYes
Fiji Airways(a)
YesNoYes
QantasYesNoYes
Singapore AirlinesYesNoNo
Regional Airlines
Ravn Alaska(c)
YesYesNo
PenAir(a)
YesYesNo
China Airlines(d)
NoNoYes
China Eastern(d)
NoNoYes
China Southern(d)
NoNoYes
Virgin Australia(d)
NoNoYes
(a)
These airlines do not have their own frequent flyer program. However, Alaska's Mileage PlanTM members can earn and redeem miles on these airlines' route systems.
(b)Codeshare agreements with Air France & KLM terminate on March 31, 2018; frequent flyer agreements terminate on April 30, 2018.
(c)Alaska has temporarily suspended codeshare activity with Ravn (effective July 1, 2017) while Ravn takes steps to address certain operational considerations. The Frequent Flyer Agreement with Ravn has remained in place during this time.
(d)These codeshare agreements were established with Virgin America on their reservations platform. After the conversion to a single Passenger Service System (PSS) in Q2 2018, these agreements will no longer exist.


(a)These airlines do not have their own frequent flyer program. However, Alaska's Mileage Plan members can earn and redeem miles on these airlines' route systems.

(b)Effective April 19, 2022, S7 Airlines' membership in the oneworld alliance was suspended indefinitely, including earning and redeeming miles on Alaska Airlines.
The following is the financial impact of our marketing alliances:
 2017 
2016(a)
 2015 2014 2013
Air Group Marketed Revenues94% 92% 90% 91% 90%
          
Codeshare Agreements:         
American Airlines1% 3% 4% 3% 2%
Delta Air Lines1% 1% 2% 2% 4%
Others1% 1% 1% 1% 1%
Interline Agreements:         
Domestic Interline1% 2% 2% 2% 2%
International Interline2% 1% 1% 1% 1%
Total Operating Revenue100% 100% 100% 100% 100%
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.

CARGO AND OTHER REVENUE


Other revenue consists ofThe Company provides freight and mail certain frequent flyerservices (cargo). The majority of cargo services are provided to commercial businesses and ancillary revenue. While some of our product features are included in our base pricing, we have unbundled certain ancillary features that our guests separately value. Major ancillarythe United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue products include checked bag fees, change fees and lounge memberships. Wewhen the shipment arrives at its final destination, or is transferred to a third-party carrier for delivery.

The Company also promote and sell products in-flight to enhance the guest experience, including our Tom Douglas signature meals, snacks, alcoholic beverages, in-flight entertainment and Wi-Fi. Totalearns other revenue excluding frequent flyer program revenue, represents about 7% of our total revenues.for lounge memberships, hotel and car commissions, travel insurance, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue.


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GENERAL


The airline industry is highly competitive and subject to various uncertainties, includingpotentially volatile business cycles, resulting from factors such as uncertain economic conditions, volatile fuel prices, industry instability, new competition,pandemics, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation—including taxes and fees, and potential aircraft incidents. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership, and facilities rents. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact onto our operating and financial results. Passenger demand and ticket prices are, in large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity.


In 2017, the airline industry's profits declined when compared to the record setting year of 2016, primarily due to rising fuel prices, higher labor costs, and increased competitive fare actions reducing ticket prices. Despite some of these headwinds, the industry continued to report strong profits in 2017. In the current strong industry environment, airlines are making significant investments in airports, in more fuel-efficient planes and in new services to differentiate their customer service offering. Thus, the level of competition is expected to continue to increase.

FUEL


Our business and financial results are highly affectedimpacted by the price and the availability of aircraft fuel. Aircraft fuel expense includes raw fuel expense, or the price that we generally pay at the airport, including taxes and fees, plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. The cost of aircraft fuel is volatile and outside of our control, and it can have a significant and immediate impact on our operating results. Over the past fivethree years, aircraft fuel expense ranged from 18%14% to 34%28% of operating expenses. Fuel prices are impacted by changes in both the price of crude oil and refining marginscosts and can vary by region in the U.S.
The prices we have paid forprice of crude oil on an average annual basis for the past fivethree years havehas ranged from a low of $43$39 per barrel in 20162020 to a high of $98$94 in 2013.2022. For us, a $1 per barrel change in the price of oil equates to approximately $19$18 million of raw fuel cost annually.expense annually based on 2022 consumption levels. Said another way, a one-cent change in our fuel price per gallon will impactwould have impacted our expected annual2022 raw fuel costexpense by approximately $8 million per year.million.


Refining margins, which represent the price of refining crude oil into aircraft fuel, are a smaller portion of the overall price of jet fuel, but have also contributed to the price volatility in recent years. AverageOver the last three years, average annual West Coast refining margin prices have fluctuated between $13 per barrel and $36from a low of $11 per barrel in the last five years, and averaged $182020 to a high of $48 per barrel in 2017.2022.




Generally, West Coast jet fuel prices are somewhat higher and more volatile than prices in the Gulf Coast or on the East Coast. Our average raw fuel cost per gallon increased 21%73% in 2017,2022, after increasing 37% in 2021 and decreasing 19%29% in 2016 and 39% in 2015.2020.


The percentages of our aircraft fuel expense by crude oil and refining margins, as well as the percentage of our aircraft fuel expense of operating expenses, are as follows:
 202220212020
Crude oil64 %84 %64 %
Refining margins35 %16 %16 %
Other(a)
1 %— %20 %
Total100 %100 %100 %
Aircraft fuel expense28 %23 %14 %
(a)Other includes gains and losses on settled fuel hedges, unrealized mark-to-market fuel hedge gains or losses, taxes and other into-plane costs.
 2017 
2016 (a)
 2015 2014 2013
Crude oil66% 69% 62% 72% 71%
Refining margins23% 20% 26% 18% 19%
Other(b)
11% 11% 12% 10% 10%
Total100% 100% 100% 100% 100%
          
Aircraft fuel expense22% 18% 22% 32% 34%
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.
(b)Other includes gains and losses on settled fuel hedges, unrealized mark-to-market fuel hedge gains or losses, taxes and other into-plane costs.


We use crude oil call options as hedges to decreaseagainst our exposure to the volatility of jet fuel prices. Call options effectively cap our pricingprice for crude oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With call options, we are hedged against spikes in crude oil prices, and during a period of declinedeclines in crude oil prices, we only forfeit cash previously paid for hedge premiums. We begin hedging approximately 18 months in advance of crude oil consumption.


In 2020, Alaska began using sustainable aviation fuel (SAF) for certain flights departing from San Francisco International Airport. SAF prices are currently higher than traditional fuel prices as the market is developing. We are evaluating options for obtaining the volume of SAF that we expect will be necessary to move us toward our long-term sustainability goals. These options include partnerships with alternative fuel companies and industry groups focused on ways to accelerate innovation in this area.

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We believe that operating fuel-efficient aircraft isand executing on operational best practices are the best hedgehedges against high fuel prices. Alaska operates an all-Boeing 737Maintaining a young, fuel-efficient fleet Virgin America operates an all-Airbus A320 family fleet, and Horizon currently operates a fleet including Embraer 175 jet aircraft and Bombardier Q400 turboprop aircraft. Air Group's fuel-efficiency rate expressed in available seat miles flown per gallon (ASMs/g) improved from 75.3 ASMs/g in 2013 to 77.9 ASMs/g in 2017. These improvements have not only reducedhelps reduce our fuel consumption rate, but alsoas well as the amount of greenhouse gases and other pollutants that our aircraft emit.


COMPETITION


Competition in the airline industry iscan be intense and unpredictable. Our competitors consist primarily of other airlines and, to a lesser extent, other forms of transportation. Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport. We compete with other domestic airlines and a limited number of international airlines on nearly all of our scheduled routes. Our largest competitor is Delta who has significantly increased its capacity in Seattle over the past few years.Air Lines Inc. (Delta). Approximately 75% of our capacity to and from Seattle competes with Delta. As we growhave grown in California and expandhave expanded our transcontinental route offerings, United Airlines and Southwest Airlines have also become large competitors and have increased their capacity in markets we serve. Our California and transcontinental routes have a higher concentration of competitors when compared to our historical route structure, which was predominately concentrated in the Pacific Northwest. Based on schedules filed with the U.S. Department of Transportation, we expect the amount of competitive capacity overlap with all carriers to increase by more than 6% in the first half of 2018, weighted based on our network.


We believe that the following principal competitive factors are importantmatter to our guests:guests when making an air travel purchase decision:
 
Safety record•Routes served, flight schedules, codesharing and interline relationships, and frequent flyer programs


We compete with other airlines based on markets served, the frequency of service to those markets and frequent flyer opportunities. Some airlines have more extensive route structures than we do, and they offer significantly more international routes. In order to expand opportunities for our guests, we enter into codeshare and interline relationships with other airlines that provide reciprocal frequent flyer mileage credit and redemption privileges. These relationships allow us to offer our guests access to more destinations than we can on our own, gain exposure in markets we do not serve and allow our guests more opportunities to earn and redeem frequent flyer miles. Our Mileage Plan offers some of the most valuable benefits in the industry, allowing our members the ability to earn and redeem miles on 24 partner carriers.

Our membership in the oneworld alliance provides our guests increased global network utility and benefits, and positions us to capture an incremental share of global travelers and corporate accounts. Through oneworld, guests can travel to more than 900 destinations in 170 territories and can enjoy privileges on member airlines including upgrades, lounge access, priority boarding, and more.

•Safety

Safety is our top priority and is at the core of everything we do. In 2017,2022, we wereheld our inaugural Safety Day in order to reaffirm our commitment to safety across our company. In its most recent rankings for 2023, AirlineRatings.com has again ranked by AirlineRatings.comAlaska as onethe safest U.S. airline within its ranking of only two U.S. airlines in the Top 20 safest airlines in the world. We also received our 16th22nd Diamond Award of Excellence from the Federal Aviation Administration (FAA), recognizing both Alaska and Horizon aircraft technicians for their commitmentdedication to training.

Customer service and reputation

We compete with other airlines in areas of customer service such as on-time performance, guest amenities—including first class and other premium seating, quality of on-board products, aircraft type and comfort. In 2017, Alaska Airlines ranked highest in customer satisfaction among traditional network carriers by J.D. Power and Associates for the tenth year in a row. We have installed Boeing Space Bins on the majority of our Boeing 737-900ER fleet, providing additional overhead bin space for our guests. In 2017, we launched a Premium Class of service on our B737 aircraft that provides extra


legroom, early boarding, premium snacks and a complimentary alcoholic beverage. Additionally, in 2017 we increased the distance between seats in our first class cabins on the Alaska B737-900 and B737-900ER fleet, providing significantly more space for guests flying in the First Class cabin. We expect to fully complete the First Class cabin upgrades on the B737-900 and B737-900ER fleet in early 2018.

Starting in 2018, we will begin reconfiguring the interior and livery of the Airbus fleet. The new livery and interior reconfiguration will provide guests a consistent brand experience across the Mainline fleet. The projects are expected to be complete in late 2019.

Our employees are a key element of our product. We have a highly engaged workforce that strives to provide a high degree of service and hospitality to our guests both at the airport and in flight. We heavily emphasize our service standards with our employees through training and education programs and monetary incentives related to operational performance and guest surveys.
•Fares and ancillary services


FareTicket and other fee pricing is a significant competitive factor in the airline industry, and the increased availability of fare information on the Internet allows travelersindustry. Travelers are able to easily compare fares and identify competitor promotions and discounts. Pricing is driven by a variety of factors including, but not limited to, market-specific capacity, market share per route/geographic area, cost structure, fare vs. ancillary revenue strategies, and demand.


For example, airlinesAirlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares. These factors can reduce our pricing power and that of the airline industry as a whole.


Domestic airline capacity is dominated by four large carriers, representing over 80%78% of total seats. Accordingly, if theseOne of our advantages is that we offer low fares and a premium value product and experience. However, given the large concentration of industry capacity, some carriers in our markets may discount their fares substantially to develop or enter intoincrease market share. Fares that are substantially below our core markets, we must match those fares in ordercost to maintain our load factors, often resulting in year-over-year decreases in our yields.operate can be harmful if sustained over a long period of time. We will defend our position in our core markets and, if necessary, redeployadjust capacity to better match supply with demand. We believe the restructuring we've completed over the past decade has decreased our costs, enablingOur strong financial
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position and low cost advantage have historically enabled us to offer competitive fares while still earning returns for our shareholders.

Routes served, flight schedules, codesharing•Customer service and interline relationships, and frequent flyer programsreputation


We also compete with other airlines basedin areas of customer service such as on-time performance and guest amenities - including first class and other premium seating, quality of on-board products, aircraft type and comfort. By April 2023, we expect to complete our installation of satellite Wi-Fi on markets served,nearly all aircraft in the frequencyMainline fleet. In 2024, we will begin installing satellite Wi-Fi on our Regional fleet, becoming the first major airline to do so.

Our employees are a critical element of our reputation. We have a highly engaged workforce that strives to provide genuine and caring service to those markets and frequent flyer opportunities. Some airlines have more extensive route structures than we do, and they offer significantly more international routes. In order to expand opportunities for our guests, we enter into codesharingboth at the airport and interline relationshipsonboard. We heavily emphasize our service standards with other airlines that provide reciprocal frequent flyer mileage creditour employees through training and redemption privileges. These relationships allow useducation programs and monetary incentives related to offer our guests access to more destinations than we can on our own, gain exposure in markets we don't serveoperational performance and allow our guests more opportunities to earn and redeem frequent flyer miles. The Mileage Plan™ offers some of the most comprehensive benefits to our members with the ability to earn and redeem miles on 18 partner carriers.guest satisfaction.


In addition to domestic or foreign airlines that we compete with on most of our routes, we compete with ground transportation in our short-haul markets. To some extent, ourOur airlines also compete with technology, such as video conferencing and internet-based meeting tools. We expect that the advancement and increased utilization of these tools that have changedwill eliminate the need for or frequency of, face-to-face business meetings.some business-related travel.


TICKET DISTRIBUTION
 
Our tickets are distributed through three primary channels:
 
•Direct to customer: Itcustomer: Selling direct at alaskaair.com is less expensive for us to sellthan other channels. We believe direct sales through our direct channels at alaskaair.com and virginamerica.com. As a result, we continue to take steps to drive more business to our websites. In addition, we believe these channelsthis channel are preferable from a branding and customer-relationshipcustomer relationship standpoint in thatbecause we can establish ongoing communication with the customerguest and tailor offers accordingly.
As a result, we prioritize efforts that drive more business to our website.
 
•Traditional and online travel agencies:agencies: Both traditional and online travel agencies typically use Global Distribution Systems (GDS) to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee


that is charged to the airline. Many of our large corporate customers require us to use these agencies. Some of our competitors do not userely on this distribution channel to a lesser extent than we do, and, as a result, may have lower ticket distribution costs.
 
•Reservation call centers:centers: Our call centers are located in Phoenix, AZ, Kent,Seattle, WA, and Boise, ID. We generally charge a $15 fee for booking reservations through the call centers.


Our sales by channel are as follows: 
 202220212020
Direct to customer64 %68 %73 %
Traditional agencies18 %12 %12 %
Online travel agencies7 %9 %9 %
Reservation call centers11 %11 %6 %
Total100 %100 %100 %
 2017 
2016 (a)
 2015 2014 2013
Direct to customer62% 61% 60% 57% 55%
Traditional agencies22% 23% 23% 25% 27%
Online travel agencies11% 11% 11% 12% 13%
Reservation call centers5% 5% 6% 6% 5%
Total100% 100% 100% 100% 100%
(a)
Includes results for Virgin America for the period December 14, 2016 through December 31, 2016.


SEASONALITY AND OTHER FACTORS


Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. OurIn typical years, our profitability is generally lowest during the first and fourth quarters due principally to fewer departures and passengers. Profitability typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel, including increased activity intravel. In a typical year, some of the stateimpacts of Alaska. However, we have significantly improved the seasonality of our operationsare offset by our continued growthtravel from the West Coast to leisure destinations, like Hawaii and Costa Rica, and expansion to leisure and business destinations in the mid-continental and eastern U.S. Seasonality and operational fluctuations are not predictable in the current environment and may be permanently changed post-pandemic.


In a typical year, in addition to passenger loads, factors that could cause our quarterly operating results to vary include:  


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•pricing initiatives by us or our competitors,


•      changes in fuel costs,


•increases in competition at our primary airports,


•general economic conditions and resulting changes in passenger demand, and
 
•increases or decreases in passenger and volume-driven variable costs.costs, and

•air space and Air Traffic Control delays, particularly in Seattle and San Francisco.
 
Many of the markets we serve experience inclement weather conditions in the winter, causing increased costs associated with deicing aircraft, canceling flights and accommodating displaced passengers. Due to our geographicgeographically concentrated area of operations, we can be more susceptible to adverse weather conditions, particularly in the state of Alaska and the Pacific Northwest, than some of our competitors who may be better able to spread the impact of weather-related risks over larger route systems. We also are susceptible to Air Traffic Control due to our heavy concentration of departures from Seattle and San Francisco.


No material part of our business, or that of our subsidiaries, is dependent upon a single customer, or upon a few high-volume customers.


EMPLOYEESSUSTAINABILITY


SUSTAINABILITY INITIATIVES

Taking responsibility for our impact on the environment is an integral part of delivering value for all those who depend on us – employees, guests, owners, and communities. To that end, we are focused on mitigating or reducing our most significant environmental impacts. Our sustainability goals are anchored by our commitment to reduce our carbon emissions. We have both short and long-term targets, with the long-term aim to reach net-zero carbon emissions by 2040. Our roadmap for achieving this goal includes the following focus areas:

•Increasing operational efficiency - Alaska and Horizon take pride in consistently delivering top-of-industry operational performance, which is part of optimizing fuel efficiency and thus avoiding carbon emissions. Alaska's use of Required Navigational Performance provides more direct and fuel-efficient approaches and reduces weather-related diversions. Alaska was also the first in the industry to adopt Flyways AI, a technology which leverages artificial intelligence and machine learning to optimize air traffic and enable more fuel-efficient flight paths. In 2022, Horizon began to adopt Flyways AI for its flights as well.

•Renewing our fleet with more efficient airplanes - Alaska received 26 B737-9 aircraft in 2022 and has firm commitments to take 109 additional B737 aircraft. Alaska has also secured 105 additional rights for B737 aircraft through 2030. These aircraft will provide improved fuel efficiency compared to the aircraft they are slated to replace, and enable fuel-efficient growth as well. Alaska has also partnered with Boeing on the B737-9 ecoDemonstrator program, which tests advanced technologies designed to enhance the safety and sustainability of air travel.

•Using SAF - Among available technologies, SAF has the greatest potential for enabling near-term progress towards our net-zero emissions goal, as it can be used alongside traditional jet fuel as a drop-in fuel but with lower carbon emissions on a lifecycle basis. Currently, there are supply constraints in the SAF market and expanding our use of SAF at the quantities necessary to reach our sustainability goals is dependent on its reliable availability. Alaska is working with others in the aviation community, companies in the private sector, and governments at the federal and state levels towards advancing the scalability of SAF production and reducing its cost.

Alaska currently offtakes SAF from Neste at San Francisco International Airport. In 2022, Alaska signed agreements to purchase approximately 200 million gallons of SAF to be delivered between 2025 and 2030. Additionally, Alaska launched a SAF program to join with business travel customers to support the development of the SAF market.

•Increasing the use of electric or alternative power - We have invested in electric ground-service equipment (GSE) and have partnered with our airports to install electric charging infrastructure. Successfully increasing our use of electric GSE is in part dependent on the sufficient availability of this infrastructure at airports. In 2021, we launched
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Alaska Star Ventures LLC (ASV), an investment arm with a primary focus on identifying and funding companies working on emerging green technologies. In 2022, ASV contributed $7 million in funding to venture capital groups focused on sustainable transportation technology. ASV has additional contribution commitments of $22 million in cash and in-kind investments through 2028. Alaska also announced a collaboration with ZeroAvia to begin development on a hydrogen-electric powertrain engine capable of flying regional aircraft in excess of 500 nautical miles.

•Harnessing carbon offset and carbon removal technology - To close any remaining gaps on the path to net-zero, we have partnered with industry experts to develop criteria for assessing credible, high-quality carbon offsetting and carbon removal technologies. Alaska does not currently purchase or invest in any carbon offsets or carbon removal technology. We will continue to evaluate various strategies, including these technologies, as we refine our plans to achieving net-zero.

This roadmap and our net-zero ambitions require technologies not yet fully developed or available at the scale required to decarbonize our industry. In these areas, we are focused on doing our part to aid in their development and growth as well as galvanizing support from both public and private sectors through public policy and capital investment.

In 2022, we included a carbon emissions metric in our company-wide Performance-Based Pay program, as we believe it is important to embed these critical targets into the incentives that align all of our employees. This metric was paid out at maximum achievement for the year.

Aside from our commitments to reducing our airlines' carbon footprint, we also recognize the impact our operation has in generating waste. Specific measures in recent years include replacing plastic water bottles and cups with plant-based cartons and recyclable paper cups, as well as ending the use of plastic straws and stir sticks. Alaska leads the industry in inflight recycling, and continues to evaluate new ways to further reduce inflight waste.

SUSTAINABILITY GOVERNANCE

The Governance, Nominating, and Corporate Responsibility Committee of the Board of Directors oversees Air Group’s Environmental, Social, and Governance (ESG) program and is responsible for oversight of the strategy, goals, and public disclosures on ESG matters. The Committee regularly reviews performance on publicly reported sustainability goals and climate-related issues. The Board has a dedicated Climate Working Group to oversee management’s climate strategy and path to net zero. This working group is comprised of four members from the board who bring deep expertise in energy, aviation, finance, and governance. The Audit Committee of the Board of Directors oversees Air Group's financial reporting process, including disclosures on ESG matters within the Company's financial statements.

We have formalized governance and oversight of ESG at the management level. As a member of the Executive Committee, the Senior Vice President (SVP) of Public Affairs and Sustainability is responsible for leading ESG strategy and development. The SVP also chairs Air Group’s ESG Executive Steering Committee, which includes leaders from many different groups within the Company. This Committee is responsible for overseeing the performance toward our climate goals and providing input on Air Group’s climate strategy.


HUMAN CAPITAL

OUR PEOPLE

Our business is labor intensive. As of December 31, 2017,2022, we employed 23,156 (13,89625,469 active employees (19,549 at Alaska, 3,538 at Virgin America, 3,9433,281 at Horizon, and 1,7792,639 at McGee Air Services) active. Of those employees, 90% are full-time and part-time employees.10% are part-time. Wages and benefits, including variable incentive pay, represented approximately 39%42% of our total non-fuel operating expenses in 20172022 and 40%56% in 2016.2021.


Most major airlines, including Alaska Virgin America, and Horizon, have employee groups that are covered by collective bargaining agreements (CBA).agreements. Airlines with unionized work forcesworkforces generally have higher labor costs than carriers without unionized work forces, and theyworkforces. Those with unionized workforces may not have the ability to adjust labor costs downward quickly enough to respondin response to new competition or slowing demand.



As part of the integration, we have been working to bring represented Alaska Airlines and Virgin America work groups under single collective bargaining agreements. The process for combining workgroups begins with the union filing a petition with the National Mediation Board (NMB), at which point the NMB performs a review to assess a ‘single carrier determination’ for the airlines. Following this single carrier determination, the NMB makes a representation determination depending on size of the pre-merger bargaining units and will either extend the certification if one is significantly larger than the other or require a vote.  Once representation is determined, the NMB certifies the union as the bargaining representative for the work group. The parties must also work together to achieve agreed upon single collective bargaining agreements.  Integration also requires the pre-merger work groups to agree upon and finalize integrated seniority lists. As of December 31, 2017 we have labor integration agreements with pilots and clerical, office, and passenger services employees, meaning all agreements are completed to define how and when we will combine the Alaska and Virgin America groups into one. The remaining work groups are still in process of completing similar such agreements. The time frame to reach single CBA and full transition to work rules for each group will vary.

At December 31, 2017,2022, labor unions represented 84%86% of Alaska’s, 84% of Virgin America's, 44% of Horizon’s, and 90%87% of McGee Air Services' employees.


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Our relations with U.S. labor organizations are governed by the Railway Labor Act (RLA). Under the RLA, collective bargaining agreements do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the NMBNational Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self-help.



In 2022, we reached five new labor agreements with our employees. Alaska employees represented by the Transport Workers Union, the International Association of Machinists and Aerospace Workers, and the Air Line Pilots Association ratified new contracts. Horizon employees represented by the Aircraft Mechanics Fraternal Association ratified a new contract and Horizon pilots represented by the International Brotherhood of Teamsters ratified a pilot retention agreement.


Alaska’s union contracts at December 31, 20172022 were as follows:
UnionEmployee GroupNumber of EmployeesContract Status
Air Line Pilots Association, International (ALPA)Pilots1,9703,292 
Amendable 4/1/202010/17/2025
Association of Flight Attendants (AFA)(a)
Flight attendants4,3926,620 
Amendable 12/17/2019
2022
International Association of Machinists and Aerospace Workers (IAM)Ramp service and stock clerks673789 
Amendable 7/19/20189/27/2026
IAMClerical, office and passenger service3,7334,907 
Amendable 1/1/20199/27/2026
Aircraft Mechanics Fraternal Association (AMFA)Mechanics, inspectors and cleaners706973 
Amendable 10/17/20212023
Mexico Workers Association of Air Transport(b)
Mexico airport personnel106109 
Amendable 2/1/20189/29/2019
Transport Workers Union of America (TWU)Dispatchers5299 
Amendable 3/24/20192027

(a)Negotiations with AFA for an updated collective bargaining agreement are ongoing as of the date of this filing.
Virgin America's(b)As a result of amendments to Mexican labor laws, the Company has up to four years to make changes to the existing labor agreements. During that time, the existing contracts remain in place.

Horizon’s union contracts at December 31, 20172022 were as follows:
UnionEmployee GroupNumber of EmployeesContract Status
ALPAInternational Brotherhood of Teamsters (IBT)Pilots858625 
Amendable 4/1/202012/31/2024
AFAInflight teammatesFlight attendants1,209549 
Not completedAmendable 4/30/2024
IAMAMFAClerical, officeMechanics and passenger servicerelated classifications865216 
Amendable 1/1/20195/10/2024
TWUUniforDispatchersStation personnel in 
Vancouver and Victoria, BC, Canada		3641 
Not completedExpires 5/9/2025
TWUDispatchers25 Amendable 1/29/2026


Horizon’sMcGee Air Services union contractscontract at December 31, 2017 were2022 was as follows:
UnionEmployee GroupNumber of EmployeesContract Status
International Brotherhood of Teamsters (IBT)IAMPilotsFleet and ramp service729
Amendable 12/14/2024
AFAFlight attendants660
Amendable 7/18/2019
IBTMechanics and related classifications283
Amendable 12/16/2020
UniforStation personnel in 
Vancouver and Victoria, BC, Canada		37
Amendable 2/14/2019
TWUDispatchers21
Amendable 8/26/2018

McGee Air Services union contract at December 31, 2017 was as follows:
2,297 
UnionEmployee GroupNumber of EmployeesContract Status
IAMFleet and ramp1,596
Amendable 7/19/20232025




Alaska and Horizon invest in employee programs and training that aid advancement throughout the Company. Our Pilot Pathways Program provides a clear and direct path for Horizon pilots to progress to Mainline flying. Since its inception in 2018, 365 pilots have advanced through the program. In 2022, we launched a new Leader Academy program to help Alaska and Horizon supervisors and managers further develop their leadership and communication skills. Providing meaningful advancement opportunities to employees throughout Air Group is important, and we continue to evaluate new programs which support our people and advance our long-term strategic goals.

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DIVERSITY, EQUITY, AND INCLUSION

At Alaska and Horizon, we believe that every person deserves respect regardless of race, ethnicity, capability, age, gender, or sexual orientation. We are committed to advancing equity in all forms, and have set specific and measurable goals to deliver on our commitments to racial equity and diversity by 2025. Our primary goals in this arena are to increase racial diversity in our leadership team and build a culture of inclusion for all employees. As a reflection of the importance of these commitments, a portion of long-term executive compensation has been tied to achievement of these goals.

We are working with existing partners such as United Negro College Fund (UNCF) to create career pathways for at least 175,000 young people. Progress to this goal ramped in 2022, as we held in-person Aviation Days and career panels designed to educate young people on careers in the aviation industry. Also in 2022, we launched the Ascend Pilot Academy, in partnership with the Hillsboro Aero Academy, which will provide aspiring pilots a simpler and more financially accessible path to become a pilot at Horizon. This academy will help make careers in aviation possible for a broader and more diverse population of future pilots.

COMMUNITY INVOLVEMENT

Alaska and Horizon are dedicated to actively supporting the communities we serve. In 2022, Air Group companies donated $6 million in cash and in-kind travel to approximately 1,500 charitable organizations, and our employees volunteered more than 26,000 hours of community service related to youth and education, medical research and transportation.

The Alaska Airlines Foundation provides grants to nonprofits that offer educational and career-development programs to young people. Organizations are invited to apply bi-annually for grants ranging from $5,000 to $20,000, with preference given to organizations that can demonstrate partnership and long-term program sustainability. Since inception in 1999, the Foundation has donated more than $4 million in grants, including more than $500,000 in 2022.

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EXECUTIVE OFFICERS
 
The executive officers of Alaska Air Group, Inc. and executive officers ofits primary subsidiaries, Alaska Virgin AmericaAirlines, Inc. and Horizon Air Industries, who have significant decision-making responsibilities, their positions and their respective ages are as follows:
Name Position Age 
Air Group
or Subsidiary
Officer Since
Bradley D. Tilden Chairman and Chief Executive Officer of Alaska Air Group, Inc., Chairman of Alaska Airlines, Inc. and Virgin America Inc., Chairman of Horizon Air Industries, Inc. 57 1994
       
Benito Minicucci President and Chief Operating Officer of Alaska Airlines, Inc. and Chief Executive Officer of Virgin America Inc. 51 2004
       
Brandon S. Pedersen Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc., and Chief Financial Officer of Virgin America Inc. 51 2003
       
Andrew R. Harrison Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. 47 2008
       
Kyle B. Levine Vice President Legal, General Counsel and Corporate Secretary of Alaska Air Group, Inc. and Alaska Airlines, Inc. and Chief Ethics and Compliance Officer of Alaska Air Group, Inc. 46 2016
       
David L. Campbell Former President and Chief Executive Officer of Horizon Air Industries, Inc. 56 2014
       
Gary L. Beck President and Chief Executive Officer of Horizon Air Industries, Inc. 70 2018
       
Peter D. Hunt President and Chief Operating Officer of Virgin America Inc. 48 2017
       
Shane R. Tackett Senior Vice President, Revenue and E-commerce of Alaska Airlines, Inc. 39 2017
       
Andrea L. Schneider Vice President People of Alaska Airlines, Inc. 52 2017
       
Diana Birkett Rakow Vice President External Relations of Alaska Airlines, Inc. 40 2017
NamePositionAgeAir Group
or Subsidiary
Officer Since
Benito MinicucciPresident and Chief Executive Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.562004
Shane R. TackettExecutive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.442011
Kyle B. LevineSenior Vice President Legal, General Counsel and Corporate Secretary of Alaska Air Group, Inc., Alaska Airlines, Inc. and Horizon Air Industries, Inc., and Chief Ethics and Compliance Officer of Alaska Air Group, Inc.512016
Joseph A. SpraguePresident of Horizon Air Industries, Inc.542019
Andrew R. HarrisonExecutive Vice President and Chief Commercial Officer of Alaska Airlines, Inc.532008
Constance E. von MuehlenExecutive Vice President and Chief Operating Officer of Alaska Airlines, Inc.552021
Andrea L. SchneiderSenior Vice President People of Alaska Airlines, Inc.572003
Diana Birkett-RakowSenior Vice President Public Affairs and Sustainability of Alaska Airlines, Inc.452017
 
Mr. Tilden joined Alaska Airlines in 1991, became ControllerMinicucci was elected President and Chief Executive Officer (CEO) of Alaska Air Group effective March 31, 2021, and Alaska Airlines in 1994 and was named Vice President/Finance at Alaska Airlines in January 1999 and at Alaska Air Group in February 2000. He was elected Alaska Airlines Chief Financial Officer in February 2000, Executive Vice President/Finance and Chief Financial Officer of both companies in January 2002 and Executive Vice President/Finance and Planning of Alaska Airlines in April 2007. Mr. Tilden was namedhas been President of Alaska Airlines insince May 2016. Prior to that he was Executive Vice President/Operations of Alaska Airlines from December 2008 to May 2016, and in May 2012, he was elected President and CEOAlaska’s Chief Operating Officer from December 2008 until November 2019. He was Chief Executive Officer of Alaska Air Group and Alaska Airlines and CEO of Horizon Air.Virgin America Inc. from December 2016 to July 2018, when Virgin America was merged into Alaska. He leads Air Group’s Management Executive Committee, and was elected to the Alaska Air Group Board of Directors in 2010 and became Chairman of the Board in January 2014. In December 2017, May 2020.

Mr. Tilden Tackett was elected as PresidentChief Financial Officer in March 2020 and CEO of Horizon Air, effective January 5, 2018, until Mr. Beck was elected effective January 15, 2018.

Mr. Minicucci joined Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering and was promoted to Vice President of Seattle Operations in June 2008. He was elected Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines in December 2008. In May 2016, he was named President of Alaska Airlines and, in December 2016, Chief Executive Officer of Virgin America. He is a member of Air Group’s Management Executive Committee.

Mr. PedersenTackett joined Alaska Airlines in 2003 as Staff2000 and has served in a number of roles including Managing Director Financial Planning and Analysis (2008-2010), Vice President/FinancePresident Labor Relations (2010-2015), Vice President Revenue Management (2016), Senior Vice President Revenue and Controller of Alaska Air Group and Alaska Airlines and was elected Vice President/Finance and Controller for both entities in 2006. He was elected Chief Financial Officer of Alaska Air Group and Alaska Airlines in June 2010E-commerce (2017-2018), and Executive Vice President/FinancePresident Planning and Chief FinancialStrategy (2018-2020).



Officer of both entities in 2014. In December 2016, he was named Chief Financial Officer of Virgin America Inc. He is a member of Air Group's Management Executive Committee.

Mr. Harrison joined Alaska Airlines in 2003 as the Managing Director of Internal Audit andLevine was elected Vice President of Planning and Revenue Management in 2008. He was elected Senior Vice President of Planning and Revenue Management in 2014. He was elected Executive Vice President and Chief Revenue Officer in February 2015 and named Executive Vice President and Chief Commercial Officer in August 2015. He is a member of Air Group's Management Executive Committee.

Mr. Campbell resigned as President and CEO of Horizon Air Industries, Inc. effective January 5, 2018. He joined Horizon Air in 2014 as President and Chief Operating Officer and was named President and Chief Executive Officer in May 2016. Prior to joining Horizon Air, Mr. Campbell served more than 25 years in maintenance and flight operations. He was a member of Air Group's Management Executive Committee.

Mr. Levine was elected Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines in January 20162020 and is a member of Air Group’s Management Executive Committee. Mr. Levine was previously Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines (January 2016 - January 2020). He was elected Corporate Secretary of Alaska Air Group and Alaska Airlines in August 2017.2017 and of Horizon Air in January 2020. Mr. Levine joined Alaska Airlines in February 2006 as a Senior Attorney. He also served as Associate General Counsel and Managing Director Commercial Law and General Litigation from July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016. He was appointed Assistant Corporate Secretary of Horizon Air in August 2017 and Virgin America in November 2017.


Mr. BeckSprague was elected President and CEO of Horizon Air effective January 15, 2018November 6, 2019 and is a member of Air Group’s Management Executive Committee. Mr. BeckSprague previously served as Senior Vice President Flight Operations atExternal Relations of Alaska Airlines Inc.from May 2014 until retiringhis resignation in June 2015. Since then, he has provided consulting services toSeptember 2017. Mr. Sprague also served Alaska Airlines Inc.as Vice President of Marketing from March 2010 to April 2014 and Vice President of Alaska Air Cargo from April 2008 to March 2010.
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Mr. Harrison was elected Executive Vice President and Chief Commercial Officer in connection withAugust 2015. He is a member of Air Group's Management Executive Committee. Mr. Harrison joined Alaska Airlines in 2003 as the integration to a single operating certificate with Virgin America Inc.

Mr. HuntManaging Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008. He was elected Senior Vice President of Planning and Revenue Management in 2014 and Executive Vice President and Chief Revenue Officer in February 2015.

Ms. von Muehlen was elected Executive Vice President and Chief Operating Officer of Virgin America Inc. in December 2016, effective with the merger of Alaska Airlines Inc.effective April 3, 2021 and Virgin America Inc. He becameis a member of Air Group’s Management Executive Committee in January 2017. Mr. Hunt previouslyCommittee. Prior to that she served as Senior Vice President of Maintenance and Engineering of Alaska Airlines from January 2019 to April 2021. Ms. von Muehlen served as Chief FinancialOperating Officer at Virgin America (2011 - 2016). PriorHorizon Air from January 2018 to joining Virgin America, Mr. Hunt was Vice PresidentJanuary 2019, and CFOManaging Director of PinnacleAirframe, Engine, Components MRO at Alaska Airlines Corp. (2004-2011).from December 2012 to January 2018.


Mr. Tackett Ms. Schneider was elected Senior Vice President of Revenue and E-commerce in August 2017 and became a member of Air Group’s Management Executive Committee at that time. Mr. Tackett previously served in a number of capacities since joining Alaska Airlines in 2000, including Managing Director Financial Planning and Analysis, (2008-2010), Vice President Labor Relations (2010-2015) and Vice President Revenue Management in 2016.

Ms. Schneider was elected Vice President of People at Alaska Airlines in August 2017June 2019 and becameis a member of Air Group’s Management Executive Committee at that time.Committee. Ms. Schneider was previously Vice President of People at Alaska (August 2017-May 2019) Vice President of Inflight Services at Alaska (2011-2017), and later also takingtook responsibility for Call Centers at Alaska (February 2017). She began her career at Alaska as Manager of Financial Accounting in 1989. Since that time,1989 and she has held a number of positions includinguntil her election as an officer in 2003.

Ms. Birkett-Rakow was elected Senior Vice President of PeoplePublic Affairs and Customer ServicesSustainability at Horizon Air Industries (2009-2011).

Ms. Birkett RakowAlaska Airlines in November 2021. She was previously elected Vice President of Public Affairs and Sustainability in February 2021 and also served as Vice President of External Relations at Alaska Airlines infrom September 2017 and becameto February 2021. Ms. Birkett Rakow is a member of Air Group’sGroup's Management Executive Committee at that time. She was previously Vice President of Public Affairs, Communications and Brand Management for Kaiser Permanente (2017). From 2006-2017, Ms. Birkett Rakow held a number of positions at Group Health Cooperative, including Executive Vice President, Marketing and Public Affairs (2014-2017), Vice President Marketing and Public Affairs (2014) and Vice President Public Affairs (2013-2014). From 2003-2006, Ms. Birkett Rakow was a member of the United States Senate Finance Committee as its Health Policy Advisor.Committee.


REGULATION
 
GENERAL
 
The airline industry is highly regulated, most notably by the federal government. The Department of Transportation (DOT), the Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA) and the FAA exercise significant regulatory authority over air carriers.
 


•DOT: In order to provide passenger and cargo air transportation in the U.S., aA domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT.DOT in order to provide passenger and cargo air transportation in the U.S. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U.S. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates. While airlines are permitted to establish their own fares without government regulation, the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes. International treaties may also contain restrictions or requirements for flying outside of the U.S. and impose different carrier liability limits than those applicable to domestic flights. The DOT has been active in implementing a variety of “consumer protection”consumer protection regulations and directives, covering subjects such as advertising, passenger communications, denied boarding compensation, and tarmac delay response.response, ticket refunds, family seating requirements, and fee disclosures for ancillary services. Following operational difficulties across the industry, the DOT has increased its review of airline operational performance. Airlines are subject to enforcement actions that are brought by the DOT from time to time for alleged violations of consumer protection and other economic regulations. We are not aware of any regulatory investigations or enforcement proceedings that could either materially affect our financial position or impact our authority to operate.


•FAA: The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations, we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate. Each maintenance program provides for the ongoing maintenance of the relevant aircraft type, ranging from frequent routine inspections to major overhauls. From time to time,Periodically, the FAA issues airworthiness directivesAirworthiness Directives (ADs) that must be incorporated into our aircraft maintenance program and operations. All airlines are subject to enforcement actions that are brought by the FAA from time to time for alleged violations of FARs or ADs. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.


•TSA: Airlines serving the U.S. must operate a TSA-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations. Under TSA authority, we are required to collect a September
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11 Security Fee of $5.60 per one-way trip from passengers and remit that sum to the government to fund aviation security measures.Airlines are subject to enforcement actions that are brought by the TSA from time to time for alleged violations of the AOSSP, SDs or security regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.


The Department of Justice and DOT have jurisdiction over airline antitrustcompetition matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the Railway Labor Act.RLA. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies and international treaties.


ENVIRONMENTAL AND OCCUPATIONAL SAFETY MATTERS
We are subject to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency, OSHA and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations. We maintain our safety health and environmentalhealth programs in order to meet or exceed these requirements.


In
ENVIRONMENTAL
We are also subject to various laws and government regulations concerning environmental matters, both domestically and internationally. Domestic regulations that have an impact to our operations include the futureAirport Noise and Capacity Act of 1990, the Clean Air Act, Resource Conservation and Recovery Act, Clean Water Act, Safe Drinking Water Act, the Comprehensive Environmental Response and Compensation Liability Act, the National Environmental Policy Act (including Environmental Justice), Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act. Many state and local environmental regulations exceed these federal regulations. We expect there mayto be continued incremental legislation to reduce carbon and otheraimed at further reduction of greenhouse gas emissions. Over the course of several years, we have transitioned to more fuel-efficient aircraft fleetsemissions, hazardous substances, and reduced our emissions with the goal of continuing that trend.additional focus on environmental justice.


The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions.

AlthoughThe domestic US airline industry committed to carbon neutral growth starting in 2020 for both domestic and international growth. The mechanism to comply with this commitment internationally is through the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a global, market-based measure that allows for eligible emissions offsets or the use of CORSIA-eligible sustainable aviation fuel to mitigate the growth emissions. The program is regulated by the FAA who then affirms compliance to the International Civil Aviation Organization. The FAA has approved both Alaska and Horizon's monitoring, verification, and reporting plans.

As a result of the COVID-19 pandemic, the growth baseline year was modified and set to 85% of 2019 carbon dioxide emissions during the initial phase. This does not have a direct impact on domestic flights, however the EPA finalized a rule in 2020 on aircraft emission standards which aligns with the international agreements. Additional commitments to decarbonize through the Paris Climate Accord and domestic carbon neutrality remain a potential impact to our industry.

The federal government has proposed rules that would expand required disclosures discussing the impact of environmental change. While the rules are not yet final at the time of this filing, costs associated with compliance could be significant. Except for these proposed rules, we do not currently anticipate that these regulatory matters, individuallyadverse financial impacts from specific existing or collectively, will have a material effect onpending environmental regulation or reporting requirements, new regulations, related to our financial condition, results ofexisting or past operations, or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations, or cash flows in future periods.




INSURANCE


We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements. The insurance policies principally provide coverage for Airline Hull, Sparesairline hull, spares and Comprehensive Legal Liability, Warcomprehensive legal liability, war and Allied Perils,allied perils, and Workers’ Compensation.workers’ compensation. In addition, we currently carry a Cyber Insurancecyber insurance policy in the event of security breaches from malicious parties.


We believe that our emphasis on safety and our state-of-the-art flight deck safety technology help to control the cost of our insurance.


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WHERE YOU CAN FIND MORE INFORMATION
 
Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports are electronically filed with, or furnished to, the Securities and Exchange Commission.SEC. The information contained on our website is not a part of this annual report on Form 10-K.
 
GLOSSARY OF TERMS


Adjusted Net Debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Adjusted Net Debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit


Aircraft Stage Length - represents the average miles flown per aircraft departure


ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown


CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items


CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control


Debt-to-capitalization ratioDebt-to-Capitalization Ratio - represents adjusted debt (long-term debt plus the present value of futurecapitalized operating lease payments)liabilities) divided by total equity plus adjusted debt


Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised


Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program


Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers


Mainline - represents flying Boeing 737, and Airbus 320 family and Airbus 321neo jets and all associated revenuesrevenue and costs


PRASM - passenger revenue per ASM; commonly called “passenger unit revenue”

Productivity - number of revenue passengers per full-time equivalent employee


RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile


Regional - represents capacity purchased by Alaska from Horizon SkyWest and PenAir. InSkyWest. Financial results in this segment Regional recordsinclude actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon SkyWest and PenAirSkyWest under the respective capacity purchased arrangement (CPAs)(CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by AlaskaAir Group and on behalf of Horizon.Horizon




RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM


Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile


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ITEM 1A. RISK FACTORS
 
If any of the following occurs, our business, financial condition, and results of operations could suffer.be harmed. The trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.


We have adopted an enterprise-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives, as well asand align these risks with Board oversight. These enterprise-wide risks have been alignedalign to the risk factors discussed below.


SAFETY, COMPLIANCE, AND OPERATIONAL EXCELLENCE


Our reputation and financial results could be harmed in the event of an airline accident or incident.
 
An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve a significant loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities. We could experience significant claims from injured passengers, bystanders and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if it is fully insured and does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives. This would harm our business.


Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our business, financial condition, and results of operations.


As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.


Factors that might impact our operations include:


•contagious illness and fear of contagion;

•congestion, and/orconstruction, space constraints at airports, specifically in our hub locations of Seattle, Los Angeles, and San Francisco;

and/or air traffic control problems;problems, all of which many restrict flow;


•lack of adequate staffing or other resources within critical third parties;

•adverse weather conditions;

•lack of operational approval (e.g. new routes, aircraft deliveries, etc.);

adverse weather conditions;
 
•increased security measures or breaches in security;

contagious illness and fear of contagion;
 
•changes in international treaties concerning air rights;


•international or domestic conflicts or terrorist activity;

•interference by modernized telecommunications equipment with aircraft navigation technology;

•disruption or failure of systems or infrastructure under the control of third parties, including government entities; and




•other changes in business conditions.


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Due to ourthe concentration of flights along the West Coast and Alaska, we believe a large portion of our operation is more susceptible to air traffic control delays. Additionally, due to our concentration of flights in the Pacific Northwest and Alaska, we believe a large portion of our operation is more susceptible to adverse weather conditions.conditions than other carriers with networks that cover a larger geographic area. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition and results of operations.


We rely on vendors and third parties for certain critical activities and sourcing, which could expose us to disruptions in our operation or unexpected cost increases.
We rely on vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing, among others. We also rely on government-controlled systems such as air traffic control technology that could malfunction for reasons out of our control.
Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, for reasons such as supply chain delays, or workforce shortages, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.

Impacts of climate change, including legal, regulatory, or market responses, may have a material adverse result on our operations and financial position.

Concerns regarding climate change, including the impacts of a gradual increase in global temperatures leading to more severe weather conditions, continue to rise. Increased frequency or duration of extreme weather conditions could cause significant and prolonged impacts to our operation, disrupt our supply chain, and influence consumer travel decisions. These disruptions may result in increased operating costs and lost revenue should we be unable to operate our published schedules.

Many aspects of our operation are subject to increasing regulation driven by environmental change. The federal government has proposed rules that would significantly expand required disclosures discussing the impact of environmental change. These regulations and requirements may be difficult to implement and the cost of compliance, or failure to comply, could adversely impact our operations and financial position. Increased governmental regulation involving aircraft emissions and environmental investigation and remediation costs coupled with public expectations for reductions in greenhouse gas emissions may require us to make significant investments in emerging and yet unproven technologies. Should these technologies not prove ready, not gain approval, or not be sufficiently available for use in our operation, our results of operations may be adversely impacted, and we may be required to direct new investments to different technologies. Public interest in U.S. airlines' response to climate change has continued to grow. Failure to address the concerns of our guests and our shareholders may lead to a reduction in demand for our services in favor of competitors that customers perceive to be more sustainable. This could adversely impact our financial position, our results of operations, or our stock price.

Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions.
 
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significantsubstantial operational impacts and compliance costs. In the last severalrecent years, Congress has passed laws, and the U.S. DOT, the TSA and the FAAregulators have issued regulations or mandates concerning airline operations or consumer rights that have required significant expenditures relating to maintenanceincreased the cost and complexity of aircraft, operation of airlinesour business and broadening of consumer protections.involve greater civil enforcement and legal liability exposure.


Similarly, there are a number of legislative and regulatory initiatives and reforms at the federal, state, and local levels. These initiativeslevels include increasingly stringent environmental, governance, and workers’ benefits laws.In some instances, it is impossible for us to comply with federal, state, and local laws simultaneously, exposing us to protect the environment, minimum wage requirements, mandatory paid sick or family leave,greater liability and health care mandates. They couldoperational complexity.These laws also affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs. New employee health and welfare initiatives with employer-funded costs, specifically those impacting Washington state, could disproportionately increase our cost structure as compared to our competitors. In recent years, the airline industry has experienced an increase in litigation over the application of state and local employment laws, particularly in

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California.Application of these laws may result in operational disruption, increased litigation risk and expense, and undermining of negotiated labor agreements.

Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers to reflect higher costs of security, updates to infrastructure, and other.other expenses. Additional laws, regulations, taxes, airport rates, and airport charges may be occasionally proposed that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price willcould influence consumerpurchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business. Additionally, changes in laws and regulations at the local level may be difficult to track and maintain compliance. Any instances of non-compliance could result in additional fines and fees.


The airline industry continues to face potential security concerns and related costs.


Terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a significant negative effect on the airline industry, including us, and could:
 
•significantly reduce passenger traffic and yields as a result of a potentially dramatic drop in demand for air travel;
 
•significantly increase security and insurance costs;
 
•make war risk or other insurance unavailable or extremely expensive;
 
•increase fuel costs and the volatility of fuel prices;
 
•increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and
 
•result in a grounding of commercial air traffic by the FAA.
 
The occurrence of any of these events would harm our business, financial condition and results of operations.

The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and could continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.

Our financial condition and results of operations have been, and could continue to be, adversely affected by the COVID-19 pandemic. Although our operation has largely recovered from the impacts of the COVID-19 pandemic, the pace of recovery has varied. Our strategies for encouraging air travel or managing future pandemic-related issues, such as a resurgence of adverse health conditions or other factors, may evolve over time and will be responsive to new information or regulatory guidance. At this time, we are unable to predict how COVID-19 will influence future customer behavior, and whether any changes in behavior are temporary or permanent. These new strategies may require further investment, and if not successful, may not generate related revenue to offset these costs.

STRATEGY

The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected.

The U.S. airline industry is characterized by substantial competition. Airlines compete for market share through competitive pricing, increasing or decreasing their capacity, route systems and markets served, and products and services offered to guests. We have significant capacity overlap with several of our competitors in locations we serve, particularly in our key West Coast markets. This dynamic may be exacerbated by competition among airlines to attract passengers during periods of economic recovery. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity if we are unable to attract and retain guests.

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We strive toward maintaining and improving our competitive cost structure by setting aggressive unit cost-reduction goals. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital. If we are unable to maintain our cost advantage over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns. Therefore, our financial results may suffer.

The airlineindustry may undergo further consolidation or restructuring. In addition, regulatory, policy, and legal developments could impact the extent to which airlines can merge, or form and maintain marketing alliances and joint ventures with other airlines, particularly U.S. carriers. These factors could have a material adverse effect on our business, financial conditions, and results of operations.

We continue to face strong competition, mainly from other U.S. carriers. In many instances, our competitors have been able to grow and increase their competitive influence by merging with other airlines, as Alaska did with Virgin America in 2016. Some competitors have also benefited from the ability to reduce their cost structures through the U.S. bankruptcy process and restructuring laws.Competitors have also improved their competitive positions by entering marketing alliances and/or joint ventures with other airlines.Certain airline joint ventures promote competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits that can be extended to consumers, achieving many of the benefits of consolidation.

In recent years, the U.S. antitrust authorities have been increasingly reluctant to approve airline mergers, cooperative marketing arrangements, and joint ventures. The proposed joint venture between American Airlines, with which Alaska has its own alliance, and JetBlue is subject to a pending legal challenge that could impact the landscape for other airline ventures.The continuation of merger-adverse antitrust policy and/or the finality of legal rulings limiting airline mergers, joint marketing activities, and joint ventures could have a material adverse effect on our business, financial, and results of operations.

Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations.
Our strategy involves a high concentration of our business in key West Coast markets. A significant portion of our flights occur to and from our Seattle, Portland, and Bay Area hubs. In 2022, passengers to and from Seattle, Portland, and the Bay Area accounted for 82% of our total guests.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition and results of operations.

We are dependent on a limited number of suppliers for aircraft and parts.
Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly dependent on Embraer. Additionally, each carrier is dependent on sole suppliers for aircraft engines for each aircraft type. As a result, we are vulnerable to issues associated with the supply of those aircraft and parts including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or actions by the FAA. Should we be unable to resolve known issues with certain aircraft or engine suppliers, it may result in the inability to operate our aircraft for extended periods. Additionally, if effects of the ongoing supply chain backlog causes our limited vendors to have performance problems, reduced or ceased operations, bankruptcies, workforce shortages, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

Should these suppliers be unable to manufacture, obtain certification for, and deliver new aircraft, we may not be able to grow our fleet at intended rates, which could impact our financial position. Boeing has significant production constraints and regulatory delays for the B737 family of aircraft, which may impact the timing of deliveries. If we are unable to receive these aircraft and future aircraft in a timely manner, our growth plans could be negatively impacted. Additionally, further consolidation amongst aircraft and aircraft parts manufacturers could further limit the number of suppliers. This could result in production instability in the locations in which the aircraft and its parts are manufactured or an inability to operate our aircraft.

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We rely on third-party vendorspartner airlines for certain critical activities.codeshare and frequent flyer marketing arrangements.
 
Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners," including an expanded relationship with American and other oneworld carriers. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. Refer to Item 1 above for details regarding these codeshare agreements. In addition, the agreements generally provide that members of Alaska’s Mileage Plan program can earn credit on or redeem credit for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our loyalty program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenue or the attractiveness of our Mileage Plan program, which we believe is a source of competitive advantage.

Our membership in the oneworld global alliance may limit options to bring non-oneworld carrier partners into our Mileage Plan program. Further, maintaining an alliance with another U.S. airline may expose us to additional regulatory scrutiny. Failure to appropriately manage these partnerships and alliances could negatively impact future growth plans and our financial position.

We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and frequent flyer program enhancements, and will continue to pursue these commercial activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.

Economic uncertainty, including a recession, would likely impact demand for our product and could harm our financial condition and results of operations.
The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are dependent on U.S. consumer confidence and the health of the U.S. economy. Unfavorable U.S. economic conditions have historically resulted in reduced consumer spending and led to decreases in both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as video conferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs. Additionally, reduced consumer spending would adversely impact revenue and cash flows from our co-branded credit card agreements. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.

TECHNOLOGY
We rely heavily on outside vendors for a variety of services and functions criticalautomated systems to operate our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computerexpanded reliance on systems managed or hosted by third parties. Failure to invest in new technology or a disruption of our current systems or their operators could harm our business.
We heavily depend on automated systems to operate our business. This includes our airline reservation system, hosting,check-in kiosks, website, telecommunication systems, maintenance systems, airline operations control systems, flight deck/route optimization systems, planning and scheduling, mobile applications and devices, and many other systems. These systems require significant investment of employee time and cost for maintenance and upgrades. Some of these systems are operated by government authorities, which limits our ability to switch vendors if issues arise. Failure to appropriately maintain and upgrade these systems may result in service disruptions or system failures. Additionally, as part of our commitment to innovation and providing an attractive guest travel experience, we invest in new technology to ensure our critical systems are reliable, scalable, and secure.

We continue to expand our reliance on third party providers for management or hosting of operational and financial systems. Should these providers fail to meet established service requirements or provide inadequate technical support, we could experience disruptions in our operation, ticketing or financial systems. All of our automated systems cannot be completely protected against events beyond our control, including natural disasters, computer viruses, cyberattacks, other security breaches, or telecommunications failures.

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Substantial or repeated failures or disruptions to any of these critical systems could reduce the attractiveness of our services or cause our guests to do business with another airline. Disruptions, failed implementations, untimely or incomplete recovery, or a breach of these systems or the data centers/cloud infrastructure they run on could result in the loss of important data, an increase in our expenses, loss of revenue, impacts to our operational performance, or a possible temporary cessation of our operations.

Additionally, we rely on the FAA and its systems for critical aspects of flight operations. The failure of these systems could lead to increased delays and inefficiencies in flight operations, resulting in an adverse impact to our financial condition and results of operations.

We continue to monitor emerging technologies, including technologies which may have disruptive impacts which are out of our control, such as the introduction of 5G wireless service. We will continue to work with regulatory agencies and other air carriers to mitigate potential impacts of these technologies on the safety and security of air travel.

Failure to appropriately comply with evolving and expanding information technology infrastructuresecurity rules and services,regulations or to safeguard our employee or guest data could result in damage to our reputation and deicing.cause us to incur substantial legal and regulatory cost.

Even thoughAs part of our core business, we striveare required to formalize agreementscollect, process, store and share personal and financial information from our guests and employees. Under current or future privacy legislation, we are subject to significant legal risk should we not appropriately protect that data. Our membership in the oneworld alliance exposes us to incremental global regulation and therefore risk. In addition, we continue to expand our reliance on third-party software providers and data processors, including cloud providers. Unauthorized access of personal and financial data via fraud or other means of deception could result in data loss, theft, modification, or unauthorized disclosure. To the extent that either we or third parties with whom we share information experience a data breach, fail to appropriately safeguard personal data, or are found to be out of compliance with applicable laws, and regulations, we could be subject to additional litigation, regulatory risks and reputational harm. Further, as regulation of the collection and storage of personal and financial information continues to evolve and increase, we may incur significant costs to bring our systems and processes into compliance.

Cyber security threats have and will continue to impact our business. Failure to appropriately mitigate these vendorsrisks could negatively impact our operations, onboard safety, reputation and financial condition.
Our sensitive information is securely transmitted over public and private networks.  Our systems are subject to increasing and evolving cyber security risks. Unauthorized parties have attempted and continue to attempt to gain access to our systems and information, including through fraudulent misrepresentation and other means of deception. Methods used by unauthorized parties are continually evolving and may be difficult to identify. Because of these ever-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices. However, the nature of these attacks means that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, replacement servicesproper policies, technical controls, and education may not be readily available at competitive rates,enough to prevent all unauthorized access. Emerging cybercrime threats include the loss of functionality of critical systems through ransomware, denial of service, or at all. If oneother attacks.A compromise of our systems, the security of our infrastructure, or those of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative


public perception ofother business partners that result in our airline. Vendor bankruptcies, unionization, regulatory compliance issuesinformation being accessed or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These eventsstolen by unauthorized persons could result in disruptions in our operations or increases in our cost structure.

INTEGRATION OF VIRGIN AMERICA

We may be unable to effectively integrate Virgin America’s businesssubstantial costs for response and realize the anticipated benefits of the acquisition.

We must devote significant management attention and resources to integrating the business practices and operations of Virgin America. Potential difficulties we may encounter as part of the integration process include the following:

the challenges associated with integrating Virgin America employees into Alaska's workforce, including seniority list integration, and negotiation of transition process agreements, while maintaining our focus on providing consistent, high quality customer service;

the inability to successfully attract and retain Virgin America guests upon integration with Alaska;

the challenges associated with integrating complex systems, technology, aircraft fleets, networks, facilities and other assets in a seamless manner that minimizes any adverse impact on guests, suppliers, employees and other constituents; and

the challenges associated with operating aircraft types new to our operations, specifically the Airbus A319, A320, and A321neo.

Any of the foregoing factors could adversely affect our ability to maintain relationships with guests, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition on a timely basis, or at all. These factors could also reduce our earnings or otherwise adversely affect our business and financial results. In addition, integration requirements have caused, and may continue to cause, a delay of other strategic initiatives.

The need to integrate Virgin America’s workforce into collective bargaining agreements with Alaska's workforce presents the potential for delay in achieving expected synergies and other benefits or labor disputes that couldremediation, adversely affect our operations and costs.

The successful integration of Virgin Americaour reputation, and achievement of the anticipated benefits of the acquisition depend significantly on integrating Virgin America’s employees into Alaska and on maintaining productive employee relations. Failureexpose us to do so presents the potential for delayslitigation, regulatory enforcement, or other legal action. A cybersecurity attack impacting our onboard or other operational systems may result in achieving expected synergies and other benefits of integrationan accident or labor disputes thatincident onboard or significant operational disruptions, which could adversely affect our reputation, operation and financial position. Further, a significant portion of our office employees have maintained remote work arrangements, which increases our exposure to cyberattacks, and could compromise our financial or operational systems.

FINANCIAL CONDITION AND FINANCIAL MARKETS

Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs or significant disruptions in the supply of jet fuel would harm our business.
Fuel costs constitute a significant portion of our total operating expenses. Future increases in the price of jet fuel may harm our business, financial condition, and results of operations unless we are able to increase fares and fees or add ancillary services to attempt to recover increasing fuel costs.

We are unable to predict the future supply of jet fuel, which may be impacted by various factors, included but not limited to geopolitical conflict, economic sanctions against oil-producing countries, natural disasters, or staffing and equipment shortages in the oil industry. Any of these factors could adversely impact our operations and costs. The process for integrating labor groups in an airline merger is governed by a combination of the Railway Labor Act, the McCaskill-Bond Act, and where applicable, the existing provisions of our CBAs, in addition to internal union policies.financial results.


As part of the transition agreement with the pilot workgroup, there is a temporary “fence” between Alaska and Virgin America pilots requiring that only Alaska pilots operate Boeing aircraft and only Virgin America pilots operate Airbus aircraft. Through the implementation of the recent Joint Collective Bargaining Agreement that now applies to all pilots from both airlines, this fence will be removed when the two groups are combined into a single scheduling system later in 2018.In addition, flight attendants, dispatchers, and mechanics cannot be fully integrated until transition agreements have been reached and single seniority lists have been provided to the Company by each workgroup. Achievement of expected synergies and other benefits will be delayed until the time that operational integration is obtained.
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We will need to launch certain branding or rebranding initiatives in connection with the integration that may takehave a significant amount of timedebt and involve substantial costsfixed obligations. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position. Additionally, increases in interest rates may mean that may not be favorably received byfuture borrowings are more costly for the Company, which could harm our guests.future financial results.


We carry, and will continue to carry for the foreseeable future, a substantial amount of debt and aircraft operating lease commitments. Although we aim to keep our leverage low, due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenue could result in a disproportionately greater decrease in earnings. Similarly, a material increase in market interest rates could mean future borrowings are more costly for the Company.

Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures or working capital; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions. Further, should we incur incremental obligations, issuers may incur substantial costs as a resultrequire future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

In response to the COVID-19 pandemic, the Company, Alaska, Horizon, and McGee entered agreements with the United States Department of rebranding Virgin America’s productsthe Treasury (Treasury) to secure financing under the Coronavirus Aid, Relief, and services, including updatingEconomic Security (CARES) Act Payroll Support Program (PSP). In addition to our financial commitments under the aircraft liveryCARES PSP program, we remain subject to limitations on compensation and configuration,severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 through April 1, 2023. This may notadversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate at market-competitive levels and retain key personnel.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to achieve or maintain brand name recognition or status that is comparabledo so in the future. If we fail to the recognitiondo so, our business could be harmed.

Our maintenance costs will increase as our fleet ages, and status previously enjoyed by Virgin America in any of Virgin America’s markets. The failure of any such rebranding initiatives could adversely affect our ability to attract and retain guests, which could cause us not to realize some or all of the anticipated benefits contemplated to result from the acquisition.



We are expected towe will periodically incur substantial expenses relatedmaintenance costs due to the integration of Virgin America.

We are expected to continue to incur substantial integration and transition expenses in connection with the acquisition of Virgin America, including the necessary costs associated with integrating the operations of Alaska and Virgin America. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including ticketing/distribution, maintenance and flight operations. While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of maintenance events of our aircraft.

As of December 31, 2022, the integration expenses. Moreover, manyaverage age of our Boeing Next Gen passenger aircraft (B737-700, -800, -900, -900ERs) was approximately 11.9 years, the expenses thataverage age of our B737-9 aircraft was approximately 0.8 years, the average age of our A321neo aircraft was approximately 4.7 years, and the average age of our owned E175 aircraft was approximately 4.2 years. Typically, our newer aircraft require less maintenance than they will be incurred are, by their nature, difficult to estimate accurately. Thesein the future. Any significant increase in maintenance expenses could particularly in the near term, exceed the financial benefits we expect to achieve from the acquisition, including the eliminationhave a material adverse effect on our results of duplicativeoperations. In addition, expenses and the realization of economies of scale and cost savings. These integration expenses likely will continue tofor aircraft coming off lease could result in us taking charges against earningsincremental maintenance expense as we are required to return leased planes in future periods, and the amount and timing of such charges are uncertain at present.a contractually specified condition.


The application of the acquisition method of accounting resulted in us recording a significant amount of goodwill, which could result in significant future impairment charges and negatively affect our financial results.


In accordance with applicable acquisition accounting rules, we recorded goodwill on our consolidated balance sheet to the extent the Virgin America acquisition purchase price exceeded the net fair value of Virgin America’s tangible and identifiable intangible assets and liabilities as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties. We can provide no assurance that a significant impairment charge will not occur in one or more future periods. Any such charges may materially negatively affect our financial results.


We obtain our rights to use the Virgin brand under agreements with certain entities affiliated with the Virgin Group, and we would lose those rights if these agreements are terminated or not renewed.
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Virgin America is a party to license agreements with certain entities affiliated with the Virgin Group pursuant to which we obtain rights to use the Virgin brand. The licensor may terminate the agreements upon the occurrence of a number of specified events including if Virgin America commits a material breach of its obligations under the agreements that is uncured for more than 10 business days or if it materially damages the Virgin brand. If we lose our rights to use the Virgin brand, our current plan to discontinue use of the Virgin America trademarks gradually would need to be accelerated, which could have an adverse impact on our financial condition.

The Virgin brand is not under our control, and negative publicity related to the Virgin brand name could materially adversely affect our business.

Virgin America licenses rights to the Virgin brand from certain entities affiliated with the Virgin Group on a non-exclusive basis. The Virgin brand is also licensed to and used by a number of other companies, including two airlines, Virgin Atlantic Airways and Virgin Australia Airlines, operating in other geographies. We rely on the general goodwill of consumers and our employees towards the Virgin brand. Consequently, any adverse publicity in relation to the Virgin brand name, its principals, particularly Sir Richard Branson who is closely associated with the brand, or another Virgin-branded company over which we have no control or influence could have a material adverse effect on our business.

STRATEGY

The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected.

The U.S. airline industry is characterized by substantial price competition. In recent years, the market share held by low-cost carriers and ultra low-cost carriers has increased significantly and is expected to continue to increase. Airlines also compete for market share by increasing or decreasing their capacity, route systems, and the number of markets served. Several of our competitors have increased their capacity in markets we serve, particularly in our key West Coast markets. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity.



We continue to strive toward maintaining and improving our competitive cost structure by setting aggressive cost-reduction goals. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital. If we are unable to maintain our cost advantage over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns. Therefore, our financial results may suffer.

The airline industry may undergo further restructuring, consolidation, or the creation or modification of alliances or joint ventures, any of which could have a material adverse effect on our business, financial condition and results of operations.

We continue to face strong competition from other carriers due to restructuring, consolidation, and the creation and modification of alliances and joint ventures. Since deregulation, both the U.S. and international airline industries have experienced consolidation through a number of mergers and acquisitions. Carriers may also improve their competitive positions through airline alliances, slot swaps/acquisitions and/or joint ventures. Certain airline joint ventures further competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits, achieving many of the benefits of consolidation.

Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations.
Our strategy includes being the premier carrier for people living on the West Coast. This results in a high concentration of our business in key West Coast markets. A significant portion of our flights occur to and from our Seattle, Portland, and Bay Area hubs. In 2017, passengers to and from Seattle, Portland, and the Bay Area accounted for 81% of our total guests.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition and results of operations.

We are dependent on a limited number of suppliers for aircraft and parts.
Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Virgin America is similarly dependent on Airbus, and Horizon is dependent on Bombardier and Embraer. Additionally, each carrier is dependent on sole suppliers for aircraft engines for each aircraft type. As a result, we are more vulnerable to issues associated with the supply of those aircraft and parts including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA. Additionally, further consolidation amongst aircraft and aircraft parts manufacturers could further limit the number of suppliers. This could result in an inability to operate our aircraft or instability in the foreign countries, in which the aircraft and its parts are manufactured.

We rely on partner airlines for codeshare and frequent flyer marketing arrangements.
Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners." These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska or Virgin America codeshare flights. In addition, the agreements generally provide that members of Alaska’s Mileage Plan™ program can earn credit on or redeem credit for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our frequent flyer program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenues or the attractiveness of our Mileage Plan™ program, which we believe is a source of competitive advantage.

We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and frequent flyer program enhancements, and may have future discussions with other airlines regarding similar activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.



Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.
The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are also highly dependent on U.S. consumer confidence and the health of the U.S. economy. Unfavorable U.S. economic conditions have historically driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as videoconferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.

INFORMATION TECHNOLOGY
We rely heavily on automated systems to operate our business, and a failure to invest in new technology or a disruption of our current systems or their operators could harm our business.
We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our check-in kiosks, mobile devices, and other systems. Substantially all of our tickets are issued to our guests as electronic tickets, and the majority of our customers check in using our website, airport kiosks, or our mobile application. We depend on our reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, we must continue to invest in new technology to ensure that our website, reservation system and check-in systems are able to accommodate a high volume of traffic, maintain information security and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems failures or service disruptions could reduce the attractiveness of our services and cause our guests to do business with another airline. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs. We also plan to move our primary data center location. Disruptions, failed migration, untimely recovery, or a breach of these systems or the data center could result in the loss of important data, an increase of our expenses, an impact on our operational performance, or a possible temporary cessation of our operations.

If we do not maintain the privacy and security of our information, we could damage our reputation and incur substantial legal and regulatory costs.

We accept, store and transmit information about our guests, our employees, our business partners, and our business.  In addition, we frequently rely on third-party hosting sites and data processors, including cloud providers. Our sensitive information relies on secure transmission over public and private networks.  A compromise of our systems, the security of our infrastructure or those of other business partners that result in our information being accessed or stolen by unauthorized persons could adversely affect our operations and our reputation.

FINANCIAL CONDITION AND FINANCIAL MARKETS

Our business, financial condition and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs would harm our business.
Fuel costs constitute a significant portion of our total operating expenses. Future increases in the price of jet fuel may harm our business, financial condition and results of operations unless we are able to increase fares and fees or add additional ancillary services to attempt to recover increasing fuel costs.

Our indebtedness and other fixed obligations could lead to liquidity constraints that may restrict our activities.

We incurred a significant amount of new debt to finance our acquisition of Virgin America. We now have, and will continue to have for the foreseeable future, a substantial amount of debt. Due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenues would result in a disproportionately greater decrease in earnings.



Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures, working capital or other purposes; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.

Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the timing of maintenance events of our aircraft.

As of December 31, 2017, the average age of our NextGen aircraft (B737-800, -900, -900ERs) was approximately 7.5 years, the average age of our A319, A320, and A321neo aircraft was approximately 7.3 years, the average age of our Embraer E175 aircraft was approximately 1.2 years, and the average age of our Q400 aircraft was approximately 11 years. Our relatively new aircraft require less maintenance currently than they will in the future. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations.

Our ability to use Virgin America’s net operating loss carryforwards to offset future taxable income for U.S. federal and state income tax purposes may be limited if we are unable to earn adequate taxable income in future periods.

Our ability to use the net operating loss carryforwards (NOLs) will depend on the amount of taxable income generated in future periods. The NOLs may expire before we can generate sufficient taxable income to utilize the NOLs.

BRAND AND REPUTATION


As we evolve our brand to appeal to a changing demographic and grow into new markets, we will engage in strategic initiatives that may not be favorably received by all of our guests.

We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers. These efforts could include significant enhancements to our in-airport and on-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile) and optimization of our customer loyalty programs.

In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base.
LABOR RELATIONSThe Company's brand and reputation could be harmed if it is exposed to significant negative publicity.

We operate in a highly visible industry that has significant exposure to social media and other media channels. Negative publicity, including as a result of misconduct by our guests or employees, failure to address our environmental, social, and governance goals, or other circumstances, can spread rapidly through such channels. Should the Company not respond in a timely and appropriate manner to address negative publicity, the Company's brand and reputation may be significantly harmed. Such harm could have a negative impact on our financial results.

PEOPLE AND LABOR STRATEGY


A significant increase in labor costs, unsuccessful attempts to strengthen our relationships with union employees, or loss of key personnel could adversely affect our business and results of operations.

Labor costs areremain a significant component of our total expenses. Each of Alaska, Horizon, Virgin America, and McGee Air Service'sIn addition to costs associated with represented employee groups, has a separate collective bargaining agreement. In relation to the Virgin America integration, the workgroups that have not yet reached a transition agreement could make demands that would increase our operating expenses and adversely affect our financial performance if we agree to them. The same result could apply if we experience a significant increase in vendor labor costs including wage rate increases, which could ultimately flow throughalso increase for non-unionized employees and via vendor agreements as we work to us undercompete for highly skilled and qualified employees against the applicable services agreement.major U.S. airlines and other businesses in a competitive job market. Labor costs have recently increased significantly driven by inflationary pressure on wages.


Ongoing and periodic negotiations with labor unions could result in job actions, such as slow-downs, sick-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during negotiations. Although unlawful until after lengthy mediation attempts, the operation could be significantly impacted. Although we have a long track record of fostering good communications, negotiating approaches, and developing other strategies to enhance workforce engagement in our long-term vision, future uncertainty around open contracts-including the collective bargaining negotiations for the integration of Alaska's and Virgin America's represented work groups-could be a distraction, affecting employee focus on our business and divertingunsuccessful attempts to strengthen relationships with union employees could divert management’s attention from other projects and issues.issues and negatively impact the business. In addition, our bargained-for labor agreement terms for flight crew are increasingly coming into conflict with state and local laws purporting to govern benefits and duties.


We compete against the major U.S. airlinesOur executive officers and other businesses for labor in many highly skilled positions.senior management personnel are critical to the long-term success of our business. If we are unableexperience significant turnover and loss of key personnel, and fail to hire, train and retain qualified employees at a reasonable cost, achieve and sustain employee engagement infind suitable replacements with comparable skills, our strategic vision, or if we are unsuccessful at implementing succession plans for our key staff, we mayperformance could be unable to grow or sustain our business.adversely impacted.



Employees could also engage in job actions such as slow-downs, work-to-rule campaigns, sick-outs or other actions designed to disrupt our normal operations in an attempt to pressure us to acquiesce to wage or other demands during Section 6 negotiations or transition agreement discussions. Although the Railway Labor Act makes such “self-help” unlawful until the National Mediation Board releases the parties following lengthy mediation attempts, such actions could cause significant harm even if we were ultimately successful in seeking injunctive relief or other remedies.


The inability to attract, retain and train regional pilotsqualified personnel, or maintain our culture, could result in guest impactimpacts and adversely affect our business and results of operations.


In recent years,We compete against other major U.S. airlines for pilots, aircraft technicians and other labor. Recently, there have been shortages of pilots for hire in the regional market and there is an anticipated pilot shortage in hiringmore pilots in the mainline markets in the next two to three years.industry are approaching mandatory retirement age. Attrition beyond normal levels, or the inability to attract new pilots, could negatively impact our operating results of operations. The shortage of pilots and opportunities at other carriers could mean that our business prospects could be harmed. In addition,captains and first officers leave our airlines more often than forecast. Additionally, the ability to train pilot candidates in a timely manner to support Alaska’s operational needsindustry, including related vendor partners, has experienced and may continue to experience challenges in hiring and retaining other labor positions, such as aircraft technicians, ground handling and customer service agents, and flight attendants. The Company's or our vendor partners' inability to attract and retain personnel for these positions could negatively impact our results of operations, which may harm our growth plans. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions. This would result in increased overall costs and may adversely impact our guest experience and financial position.

Our success is also dependent on cultivating and maintaining a challengeunified culture with cohesive values and goals. Much of our continued success is tied to our guest loyalty. Failure to maintain and grow the Alaska culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies. As part of this process, we may continue to incur substantial costs for Horizon Air. Dueemployee programs.
27


REGULATION

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the high volumeselection of turnover, partially drivenan alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of our company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, or as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the hiring needsinternal affairs doctrine. This exclusive forum provision is intended to apply to claims arising under Delaware state law and would not apply to claims brought pursuant to the Exchange Act or the Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in our certificate of mainline carriers, pilot trainingincorporation will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

This exclusive forum provision may face added stress associated with ensuring initial training, recurrent training and upgrades from first officerlimit a stockholder’s ability to captain are accomplishedbring a claim in a manner timely enoughjudicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to support Alaska’s operational needs. Any of these outcomes would possibly result in guest impactbring the action, and harmsuch judgments or results may be more favorable to our business, financial condition and results of operations.company than to our stockholders.


ITEM 1B. UNRESOLVED STAFF COMMENTS


 None.


ITEM 2. PROPERTIES


AIRCRAFT
 
The following table describes the aircraft we operate and their average age at December 31, 2017:2022:
Aircraft Type (a)
SeatsOwnedLeasedTotalAverage
Age in
Years
B737 Freighters—3 — 3 21.9 
B737 Next Gen124-178153 10 163 11.9 
B737-917827 10 37 0.8 
A320150— 12 12 13.2 
A321neo190— 10 10 4.7 
Total Mainline Fleet183 42 225 10.0 
Q4007610 1 11 12.9 
E1757633 42 75 4.5 
Total Regional Fleet43 43 86 5.6 
Total226 85 311 8.8 
(a) The table above does not include 24 Airbus and 21 Q400 non-operating aircraft, which have been permanently removed from operating service as of January 2023.
Aircraft TypeSeats Owned Leased Total 
Average
Age in
Years
B737 Freighters— 3
 —
 3
 17.5
B737 NextGen124-181 141
 10
 151
 7.5
A319119 —
 10
 10
 10.2
A320146-149 10
 43
 53
 7.3
A321neo185 —
 4
 4
 0.4
Total Mainline Fleet  154
 67
 221
 7.6
Q40076 35
 15
 50
 11.0
E17576 10
 23
 33
 1.2
Total Regional Fleet  45
 38
 83
 7.1
Total  199
 105
 304
 7.4


“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft. “Liquidity and Capital Resources" provides more information about aircraft that are used to secure long-termlong-
28

term debt arrangements or collateralize credit facilities. Note 7 to the consolidated financial statements provides more information regarding leased aircraft as capitalized on our consolidated balance sheets.


Alaska’s leased B737 Next Gen aircraft have lease expiration dates between 20182026 and 2026. Virgin America's2028. Alaska's leased B737-9 aircraft have lease expiration dates between 2031 and 2034. Alaska’s leased A319 and A320 aircraft have lease expiration dates between 2023 and 2025, including those aircraft that have been permanently removed from our operating fleet, but have not been returned to lessors. A321neo aircraft have lease expiration dates between 20192029 and 2029.2031. Horizon’s leased Q400 aircraft have lease expiration dates between 2018 and 2021.in 2023. The leased E175 aircraft are through oursupport Alaska's capacity purchase agreement with SkyWest.SkyWest, and are under agreement through 2034. Alaska Virgin America and Horizon havehas the option to extend some of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the fair-market value of the aircraft.periods.




GROUND FACILITIES AND SERVICES
 
We own terminal buildings inIn various cities in the state of Alaska, we own terminal buildings and hangars. We also own or lease several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac) near Seattle, WA.. These include a multi-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, an information technology office anda data center, and various other commercial office buildings. Additionally, in 2017

At the majority of the airports we entered into a contract to acquire property near our existing headquarters facility for the development of additional office space.

Weserve, we lease ticket counters, gates, cargo and baggage space, ground equipment, office space, and other support areas at the majority of the airports we serve.areas. Airport leases contain provisions for periodic adjustments of lease rates. We are typically responsible for maintenance, insurance and other facility-related expenses and services under these agreements. We also lease operations, training, administrative, and data center facilities in Burlingame, CA; Long Beach, CA; Portland, OR; Puyallup, WA; Quincy, WA; Renton, WA; Seattle, WA; and Spokane, WA, as well as line maintenance stations in Boise, ID; Bellingham, WA; Eugene, OR; San Jose, CA; Medford, OR; Redmond, OR; Seattle, WA; Kent, WA; and Spokane, WA. Further, we lease call center facilities in SeaTac, WA; Phoenix, AZ,AZ; and Boise, ID.ID, and hangars in Portland, OR and Everett, WA.


ITEM 3. LEGAL PROCEEDINGS
 
We areThe Company is a party to routinevarious litigation matters incidental to our business. Other than as described in Note 10 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, Management believes the ultimate dispositionoutcome of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.


In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws.  Plaintiffs received class certification in November 2016. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds.  In January 2017, the Court denied in part and granted in part Virgin America’s motion.  The Company believes the claims in this case are without factual and legal merit and intends to defend this lawsuit.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.




PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of December 31, 2017,2022, there were 129,903,498136,883,042 shares of common stock of Alaska Air Group, Inc. issued, 123,060,638127,533,916 shares outstanding, and 2,0442,394 shareholders of record. In 2017, we paid quarterlyMarch 2020, the Company suspended the payment of dividends of $0.300 per share in March, June, September and December.indefinitely. Our common stock is listed on the New York Stock Exchange (symbol: ALK). The following table shows the trading range of Alaska Air Group, Inc. common stock on the New York Stock Exchange: 
 2017 2016
 High Low High Low
First Quarter$101.43
 $86.22
 $83.05
 $61.58
Second Quarter93.16
 82.03
 83.09
 54.53
Third Quarter95.75
 71.17
 71.57
 56.47
Fourth Quarter82.68
 61.10
 91.88
 65.60


SALES OF NON-REGISTERED SECURITIES
 
None.




PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS


Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely; these restrictions ended on October 1, 2022. In December 2022, the Company announced plans to resume share repurchases in early 2023. The plan has remaining authorization to purchase an additional $456 million in shares.
29
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs 
Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)
October 1, 2017 - October 31, 2017 (a)
369,182
 $67.72
 369,182
  
November 1, 2017 - November 30, 2017—
 —
 —
  
December 1, 2017 - December 31, 2017—
 —
 —
  
Total369,182
 $67.72
 369,182
 $612
(a)
Purchased pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.




PERFORMANCE GRAPH
 
The following graph compares our cumulative total stockholder return since December 31, 20122017 with the S&P 500 Index and the Dow Jones U.S. AirlinesNYSE ARCA Airline Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2012.2017.


alk-20221231_g1.jpg




ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

As the acquisition of Virgin America closed on December 14, 2016, results below include Virgin America for the twelve months ended December 31, 2017, but only for the period December 14, 2016 through December 31, 2016 in the twelve months ended December 31, 2016.



Year Ended December 31 (in millions, except per-share amounts):2017 2016 2015 2014 2013
CONSOLIDATED OPERATING RESULTS (audited)
         
Operating Revenues$7,933
 $5,931
 $5,598
 $5,368
 $5,156
Operating Expenses6,673
 4,582
 4,300
 4,406
 4,318
Operating Income1,260
 1,349
 1,298
 962
 838
Nonoperating income (expense), net of interest capitalized(a)
(53) (4) 14
 13
 (22)
Income before income tax1,207
 1,345
 1,312
 975
 816
Net Income$1,034
 $814
 $848
 $605
 $508
Average basic shares outstanding123.211
 123.557
 128.373
 135.445
 139.910
Average diluted shares outstanding123.854
 124.389
 129.372
 136.801
 141.878
Basic earnings per share$8.39
 $6.59
 $6.61
 $4.47
 $3.63
Diluted earnings per share$8.35
 $6.54
 $6.56
 $4.42
 $3.58
Cash dividends declared per share$1.20
 $1.10
 $0.80
 $0.50
 0.20
CONSOLIDATED FINANCIAL POSITION (audited)
 
  
  
  
  
At End of Period (in millions): 
  
  
  
  
Total assets$10,740
 $9,962
 $6,530
 $6,059
 $5,719
Long-term debt, including current portion$2,569
 $2,964
 $683
 $798
 $865
Shareholders' equity$3,721
 $2,931
 $2,411
 $2,127
 $2,029
OPERATING STATISTICS (unaudited)(d)
 
  
  
  
  
Consolidated:(b)
         
Revenue passengers (000)44,034 34,289 31,883 29,287 27,414
RPMs (000,000) "traffic"52,338 37,209 33,578 30,718 28,833
ASMs (000,000) "capacity"62,072 44,135 39,914 36,078 33,672
Load factor84.3% 84.3% 84.1% 85.1% 85.6%
Yield13.03¢ 13.45¢ 14.27¢ 14.91¢ 14.80¢
PRASM10.98¢ 11.34¢ 12.01¢ 12.69¢ 12.67¢
RASM12.78¢ 13.44¢ 14.03¢ 14.88¢ 14.74¢
CASMex(c)
8.23¢ 8.23¢ 8.30¢ 8.36¢ 8.47¢
Mainline:         
Revenue passengers (000)34,539 24,838 22,869 20,972 19,737
RPMs (000,000) "traffic"48,238 33,489 30,340 27,778 26,172
ASMs (000,000) "capacity"56,945 39,473 35,912 32,430 30,411
Load factor84.7% 84.8% 84.5% 85.7% 86.1%
Yield12.14¢ 12.24¢ 12.98¢ 13.58¢ 13.33¢
PRASM10.29¢ 10.38¢ 10.97¢ 11.64¢ 11.48¢
CASMex(c)
7.47¢ 7.30¢ 7.39¢ 7.45¢ 7.54¢
Regional (b):
         
Revenue passengers (000)9,495 9,452 9,015 8,306 7,677
RPMs (000,000) "traffic"4,101 3,720 3,238 2,940 2,661
ASMs (000,000) "capacity"5,127 4,662 4,002 3,648 3,261
Load factor80.0% 79.8% 80.9% 80.6% 81.6%
Yield23.41¢ 24.42¢ 26.37¢ 27.40¢ 29.20¢
PRASM18.72¢ 19.49¢ 21.34¢ 22.08¢ 23.83¢
(a)ITEM 6. [RESERVED]Capitalized interest was $17 million, $25 million, $34 million, $20 million and $21 million for 2017, 2016, 2015, 2014 and 2013.
(b)Includes flights under Capacity Purchase Agreements operated by SkyWest and PenAir.
(c)See reconciliation to the most directly related Generally Accepted Accounting Principles (GAAP) measure in the "Results of Operations" section.
(d)See "Glossary of Terms" for definitions of the abbreviated terms.



None.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:
 
•Year in Review—highlights from 20172022 outlining some of the major events that happened during the year and how they affected our financial performance.
 
30

•Results of Operations—an in-depth analysis of our revenuesrevenue by segment and our expenses from a consolidated perspective for the threemost recent two years presented in our consolidated financial statements. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. As Virgin America was acquired on December 14, 2016, its financial and operational results are reflected in the year ended December 31, 2017, but not in the comparative prior period. However, for comparability purposes, we have added "Combined Comparative" information for the prior year, which is more fully described below. This section also includes forward-looking statements regarding our view of 2018. Further information about the acquisition of Virgin America can be found in Note 2 to the consolidated financial statements.
2023. 

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, sources and uses of cash, contractual obligations and commitments, and off-balance sheet arrangements.


•Critical Accounting Estimates—a discussion of our accounting estimates that involve significant judgment and uncertainties.


This section of the Form 10-K covers discussion of 2022 and 2021 results, and comparisons between those years. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

YEAR IN REVIEW


In 2017, we expanded our network at a record pace, adding 44 new markets across the network during the year. Additionally, we devoted a significant amount of energy and resources to integrating Alaska and Virgin America. We achieved many integration milestones, including merging many back-office functions, co-locating many stations, and launching technology for front-line employees to enable them to serve our customers seamlessly between carriers.2022 Results


In 2017, we posted our 14th consecutive annual profit on an adjusted basis. OurAir Group's recorded consolidated pretax income was $1.2 billion, compared to $1.3 billion in 2016. Our 2017under GAAP of $79 million and consolidated pretax income on an adjusted basis (a non-GAAPof $736 million, or 7.6%. This industry leading financial measure)performance reflects the strength and resilience of our business model. Strong demand for air travel underpinned our results and enabled record breaking full year revenue of $9.6 billion, 10% above 2019 levels, despite flying capacity 9% below 2019 levels. As we ramped our operation significantly in 2022, we encountered disruptions including pilot training throughput issues in the spring, and weather related irregular operations in the winter. Despite these challenges, we had one of the industry's best completion rates and on-time performance rates for the year. As a result of the strength of our results, our employees earned a historic performance-based pay award, amounting to $257 million in 2022.

During 2022 our teams focused on several strategic priorities designed to strengthen our competitive advantages and set the stage for future growth. We signed five new labor contracts, we invested in fortifying our operational reliability, and we executed our single fleet transitions at both Alaska and Horizon. This progress positions our airlines well for the future. During the year we incurred $580 million in special charges, primarily driven by our fleet transitions and contract ratification bonuses paid to Alaska's pilots.

Fuel is a significant component of our cost structure, and significant increases in fuel costs in 2022 impacted our financial results. Economic fuel cost per gallon was 69% above prior year levels, at $3.42 per gallon for the year, inclusive of a $0.22 per gallon hedge benefit. As a result of elevated fuel prices and increased consumption, total economic fuel cost incurred was $1.3 billion a decrease of 9% from 2016. Adjusted pretax income for 2017 excludes $118 million of merger-related costs associated with our acquisition of Virgin America and $7 million of mark-to-market fuel hedge benefit.higher than 2021.


The decrease in adjusted pretax income was driven largely by an increase inNon-fuel operating expenses,expense, excluding fuel and special items, of $1.5 billion, and an increaseincreased 23% in fuel expense of $616 million. The increase2022 over the prior year period, while capacity was up 16%. Increases in non-fuel operating expense waswere primarily due to the full-year impact of Virgin America in our financial results. The increasedhigher employee wages and related costs, were partially offset by an increase in operating revenues of $2.0 billion.

The growth in revenues of $2.0 billion was driven by increased staffing levels relative to our level of flying, increased training, and the growth in our business, attributable to the inclusionimpacts of Virgin America in our results for the full year, as well as our expansion into 44 new markets entered into during the year. On the regional sidelabor deals.

See “Results of our business, Horizon began flying the new Embraer E175 regional jets in 2017 — the first 10 of 33 aircraft scheduled for delivery over a three year period. We believe we have a strong future ahead of us and look forward to the many new opportunities our combined networks will bring our company.

See “Results of Operations”Operations” below for further discussion of changes in revenuesrevenue and operating expenses as compared to 2021, and our reconciliation of Non-GAAPnon-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of Item 1.



Labor Update


Accomplishments and Highlights

Recognition and Awards -At Alaska,
Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2017 by J.D. Power for the tenth year in a row.
Ranked first in the U.S. News & World Report's list of Best Travel Rewards Programs for the third consecutive year.
Won the "Best Rewards Program" for Mileage Plan™ for carriers in the "Americas" region in the sixth annual FlyerTalk Award.
Mileage Plan™ ranked Best Airline Elite Status Program in the U.S. by The Points Guy.
Ranked among Forbes' 2017 "America's Best Employers" for the third year in a row.
Received 16th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.
Ranked by AirlineRatings.com as one of only two U.S. airlines in the Top 20 safest airlines in the world.
Rated "Best Airline Staff in North America" and "Best Regional Airline in North America" by Skytrax World Airline Awards.
Awarded TripAdvisor's 2017 Travelers' Choice Award for second-best midsize and low-cost airlines in North America and one of the top 10 best airlines in the world.
Recognized employees represented by the Puget Sound Business Journal as the 2017 Board Diversity Champion, as well asTransport Workers Union, International Association of Machinists and Aerospace Workers, and Airline Pilots Association all ratified new agreements. At Horizon, mechanics represented by the Women Corporate Directors Global Institute for diversity among our Directors.
Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI), receiving perfect scores for “efficiency”Aircraft Mechanics Fraternal Association and “reliability.”
Recognized as No. 1 in fuel efficiency for U.S. airlinespilots represented by the International CouncilBrotherhood of Teamsters also reached new agreements during the year. All agreements provide increased pay and enhanced benefits designed to remain competitive with the market.

31

Outlook

The work executed in 2022 on Clean Transportationnew labor deals and the single-fleet transition sets the foundation for growth and expanding earnings in 2023. Our growth is predominantly enabled by increases in aircraft gauge and the 7th consecutive year.
Named onestage lengths we fly. As a result, it is highly leveraged to improve productivity without much incremental cost. As we work through our remaining transition training in early 2023, we are scheduled to return to pre-pandemic levels of capacity in the first half of the overall five-star major regional airlinesyear.

Given these factors, we anticipate first quarter 2023 capacity will grow versus 2022 by 11% to 14%, with unit costs flat to down 2% year over year. For full year 2023, we expect capacity to be up 8% to 10%, with unit costs down 1% to 3%, both versus 2022. Early in 2023, the demand for future travel has remained strong, and we anticipate full year revenue will be up 8% to 10% versus 2022. As a result, we anticipate full-year adjusted pretax margin will range from 9% to 12%. We also introduced earnings per share guidance of $5.50 to $7.50 for 2023, which implies restoration of pre-COVID earnings levels at the Passenger Choice Awards during the APEX EXPO.midpoint.
Ranked fifth of most engaged companies in the U.S. by Forbes Insights, which measured social media engagement, net promoter scores, and year-over-year sales growth.

Recognition and Awards - Virgin America
Rated Best U.S. Airline by Conde Nast Traveler in their "Annual Readers' Choice Awards" for the tenth year in a row.
Rated Best Domestic Airline in Travel + Leisure "World's Best Awards" for the tenth year in a row.
Received a five-star rating for low-cost carrier, and received a top honor with a Passenger Choice Award for “Best Seat Comfort” during the APEX EXPO.


Our People and Communities
Awarded $135 million in incentive pay to employees for 2017.
Awarded employees a $1,000 bonus in January 2018 in connection with the passing of the Tax Cuts and Jobs Act, amounting to approximately $25 million.
Donated over $14 million and contributed more than 32,000 volunteer hours to support nonprofits in our local communities, focusing on youth and education, medical (research/transportation) and community outreach.

Shareholder Return

In 2017, we paid cash dividends of $148 million and repurchased approximately 981 thousand shares of our common stock for $75 million under the $1 billion share repurchase program authorized by our Board of Directors in August 2015. As of December 31, 2017, the Company has repurchased approximately 5 million shares for $388 million under this program.



Since 2007, we have repurchased 60 million shares of common stock for $1.6 billion for an average price of approximately $26.72 per share. In 2017, we increased our quarterly dividend 9% from $0.275 per share to $0.300 per share, and, subsequent to December 31, 2017, we announced a 7% increase to $0.32 per share for 2018. Overall, we returned $223 million to shareholders during 2017. We expect toplans will continue to return capitalbe responsive to shareholders in 2018, primarily inemerging information and the form of dividends.

Outlook
In 2018guidance above continues to be subject to greater uncertainty than pre-pandemic. As we leverage our network, Mileage Plan program, and beyond, wefleet for growth, our people are focused on successfully completing the integration of Virgin America with Alaska. In January 2018 Alaskakeeping costs low and Virgin America receivedrunning a Single Operating Certificate (SOC), our most significant integration milestone to date. The integration milestones achieved thus far will help to ease our transition to a single Passenger Service System (PSS) on April 25, 2018. This will allow us to provide one reservation system, one website and one inventory of flights to our guests, which will help unlockstrong operation. These are competitive advantages we have cultivated over many of the revenue synergies expected from the acquisition. In conjunction with PSS, at all gates, ticketing and check-in areas, guests will be greeted with Alaska branding.

Weyears that will continue to make investments to enhance our onboard guest experience. Some of the more notable projects underway include adding satellite connectivity to our entire Boeingserve us well in 2023 and Airbus fleets to offer high-speed satellite Wi-Fi, further upgrades to our onboard menu offerings, updating and expanding airport lounges in the JFK and Seattle airports, and investmentbeyond. We are confident in our Seattle hub airportability to open a state-of-the-art 20-gate North Terminal facility.

In 2018,execute on our strategic plans, which we expect to continue to experience cost pressure, due in large part to pilot wage increases, which became effective in the fourth quarter of 2017, and a new maintenance cost-per-hour agreement that will result in higher maintenance costs in 2018, but will help to reduce the volatility of maintenance expense over the next several years. We also expect to continue to incur further costs associated with the ongoing integration of Virgin America. For the first quarter of 2018, we expect unit revenues (RASM) to decline 3.5% - 4.5% and unit costs, excluding fuel and special items (CASM, ex fuel) to increase approximately 6%. In addition, we expect the price per gallon of jet fuel to increase approximately 21% from the prior-year period. Based on these current estimates, we are likely to report a loss in the first quarter although we expect our unit costs and unit revenues to improve throughout 2018.drive continued industry out-performance.


Our priority throughout the integration process is to run two great airlines and to maintain safe and compliant operations, while providing a great experience for our guests. We are particularly focused on merging the Alaska and Virgin America cultures and brands that our guests respect and trust. We intend to minimize any disruption to our guests during our integration efforts by being transparent about our progress and how the changes may affect them. Employee engagement throughout the integration will remain a top priority as well, ensuring that employees remain engaged, informed and excited about the new Company's future. Additionally, we will remain focused on capturing the value and synergies created by combining these two great airlines.

We expect to grow our combined network capacity in 2018 by approximately 7.5%, compared to a 7.1% combined growth in 2017. Current schedules indicate competitive capacity will be roughly 6 points higher in the first quarter of 2018. We believe that our product, our operation, our engaged employees, our award-winning service, and our competitive Mileage Plan™, combined with our strong balance sheet, give us the ability to compete vigorously in our markets.




RESULTSOF OPERATIONS


ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE AMOUNTS


We believe disclosure of earnings excluding the impact of merger-related costs, mark-to-market gains or losses oraircraft fuel, the Payroll Support Program grant wage offset, and other individual special revenues or expensesitems is useful information to investors because:


•By excluding fuel expense and certain other items, such as the Payroll Support Program grant wage offset and other special items, (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction and our non-fuel costproductivity initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.


•Cost per ASM (CASM) excluding fuel and certain specialother items, such as merger-related costs,the Payroll Support Program grant wage offset and other special items, is one of the most important measures used by management and by the Air Groupour Board of Directors in assessing quarterly and annual cost performance.


Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.

•CASM excluding fuel and certain specialother items is a measure commonly used by industry analysts and we believe it is an important metric by which they comparehave historically compared our airlinesairline to others in the industry. The measure is also the subject of frequent questions from investors.


•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual incentive plan, which covers the majority of employees within the Alaska Air Group organization.

•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certainthese items such as merger-related costs and mark-to-market hedging adjustments,noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.


•Although we disclose our passenger unit revenues,revenue, we do not, (nornor are we able to)to, evaluate unit revenuesrevenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenuesrevenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.


32

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring,nonrecurring, infrequent, or unusual in nature.


20172022 COMPARED WITH 20162021


Our consolidated net income for 20172022 was $1 billion,$58 million, or $8.35$0.45 per diluted share, compared to a net income of $814$478 million,, or $6.54$3.77 per diluted share, in 2016. As the acquisition of Virgin America closed on December 14, 2016, our 2016 financial results include Virgin America for the period of December 14, 2016 through December 31, 2016 and the impact of purchase accounting as of December 14, 2016. Refer to the "Critical Accounting Estimates" section for further information regarding purchase accounting.2021.


Excluding the impact of merger-related costs,special items, mark-to-market fuel hedge adjustments, and a special tax benefit as a result of tax reform,the Payroll Support Program grant wage offset, our adjusted consolidated net income for 20172022 was $823$556 million,, or $6.64$4.35 per diluted share, compared to an adjusted consolidated net incomeloss of $911$256 million,, or $7.32$2.03 per share, in 2016.2021. The following table reconciles our adjustedreported GAAP net income and earnings per diluted share (EPS) during the full year 20172022 and 20162021 to amounts as reported in accordance with GAAP.adjusted amounts.

 Twelve Months Ended December 31,
 20222021
(in millions, except per-share amounts)DollarsDiluted EPSDollarsDiluted EPS
GAAP net income per share$58 $0.45 $478 $3.77 
Payroll Support Program grant wage offset— — (914)(7.21)
Mark-to-market fuel hedge adjustments76 0.60 (47)(0.37)
Special items - fleet transition and other496 3.88 (1)(0.01)
Special items - labor and related84 0.66 (10)(0.08)
Income tax effect of reconciling items above(158)(1.24)238 1.87 
Non-GAAP adjusted net income (loss) per share$556 $4.35 $(256)$(2.03)


CASMex is reconciled to CASM below:
 Twelve Months Ended December 31,
(in cents)2022 2021 % Change
Consolidated:
CASM15.76 ¢10.47 ¢51%
Less the following components:
Payroll Support Program grant wage offset— (1.75)(100)%
Aircraft fuel, including hedging gains and losses4.39 2.44 80%
Special items - fleet transition and other0.82 — NM
Special items - labor and related0.14 (0.02)NM
CASM excluding fuel and special items10.41 ¢9.80 ¢6%
Mainline:
CASM14.42 ¢9.52 ¢51%
Less the following components:
Payroll support program grant wage offset— (1.75)(100)%
Aircraft fuel, including hedging gains and losses4.11 2.33 76%
Special items - fleet transition and other0.71 — NM
Special items - labor and related0.15 (0.02)NM
CASM excluding fuel and special items9.45 ¢8.96 ¢5%

33
 Twelve Months Ended December 31,
 2017 2016
(in millions, except per-share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$1,034
 $8.35
 $814
 $6.54
Mark-to-market fuel hedge (benefit)/expense(7) (0.06) (13) (0.11)
Special items—merger-related costs and other(a)
118
 0.95
 117
 0.94
Income tax effect on special items and fuel hedge adjustments(b)
(42) (0.34) (24) (0.19)
Special tax (benefit)/expense(c)
(280) (2.26) 17
 0.14
Non-GAAP adjusted net income and diluted EPS$823
 $6.64
 $911
 $7.32
(a)Refer to Note 10 to the consolidated financial statement for the description of special items.
(b)Certain merger-related costs are non-deductible for tax purposes, resulting in a smaller income tax effect for 2016 adjusting items.
(c)Special tax (benefit)/expense in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments. In 2016 it represents discrete impacts of adjustments to our position on income sourcing in various states.


CASM is summarized below:
 Twelve Months Ended December 31,
 2017 2016 % Change
Consolidated:     
Total CASM
10.75¢ 
10.38¢ 3.6 %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.33
 1.88
 23.9 %
Special items—merger-related costs and other(a)
0.19
 0.27
 (29.6)%
CASM, excluding fuel and special items
8.23¢ 
8.23¢ — %
 

    
Mainline:     
Total CASM
9.92¢ 
9.39¢ 5.6 %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.24
 1.79
 25.1 %
Special items—merger-related costs and other(a)
0.21
 0.30
 (30.0)%
CASM, excluding fuel and special items
7.47¢ 
7.30¢ 2.3 %
(a)Refer to Note 10 to the consolidated financial statement for the description of special items.

Impact of Accounting Changes

The following discussion of 2017 compared with 2016 results reflects balances as reported within this 10-K. On January 1, 2018 we will implement ASU 2014-09, "Revenue from Contracts with Customers," and ASU 2017-07, "Compensation- Retirement Benefits." We have elected to apply both standards using the full retrospective approach, which will require us to restate prior period financial information under the new standards. When providing forward looking guidance on line items that will be recast under the new standards, we have included provisional recast amounts herein.

Under the new revenue recognition standard, the primary changes to our financial information relate to Mileage Plan™ accounting, ticket breakage, and ancillary revenue geography.

Mileage Plan™ miles earned through travel have historically been accounted for using the incremental cost approach. Under the new standard, we will allocate a portion of the ticket price to deferred revenue.
Ticket breakage was historically recognized at time of expiration. Under the new standard, ticket breakage will be recorded based on an estimate at the original departure date.
Ancillary revenues related to passenger travel, which were historically presented as Other revenue, will be reclassified to Passenger Revenue.

As a result of the new revenue recognition standard, we expect to restate 2017 and 2016 financial information in our future filings. We expect 2017 reported revenues will be reduced by approximately $41 million, and reported non-fuel operating costs will increase by approximately $13 million, resulting in a net reduction of $54 million to reported adjusted pretax profit. We expect a similar impact in 2018.



Although less significant, the new retirement benefits accounting standard is also effective January 1, 2018. Under this new standard, all components of net periodic benefit cost will be presented in Nonoperating income (expense), except service cost, which will remain in Wages and benefits. This change has an impact on CASM.

Management believes it is useful to compare forecasted results with the restated results under the new standards, as noted in the impacted areas below. The implementation of the new standards will impact common industry metrics such as PRASM, RASM, and CASM excluding fuel and special items. We will provide restated metrics in a separate filing.


OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.

Below are operating statistics we use to measure performance. As
Twelve Months Ended December 31,
20222021Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)41,46832,40728.0%
RPMs (000,000) "traffic"51,33038,59833.0%
ASMs (000,000) "capacity"60,77352,44515.9%
Load factor84.5%73.6%10.9 pts
Yield17.16¢14.25¢20.4%
RASM15.87¢11.78¢34.8%
CASMex(b)
10.41¢9.80¢6.3%
Economic fuel cost per gallon(b)
$3.42$2.0269.3%
Fuel gallons (000,000)75865615.5%
ASMs per gallon80.279.90.3%
Departures (000)4043777.2%
Average full-time equivalent employees (FTEs)22,56419,37516.5%
Employee productivity (PAX/FTEs/months)153.1139.49.9%
Mainline Operating Statistics:
Revenue passengers (000)31,79523,26836.6%
RPMs (000,000) "traffic"46,81233,75538.7%
ASMs (000,000) "capacity"55,22445,74120.7%
Load factor84.8%73.8%11.0 pts
Yield15.92¢13.07¢21.8%
RASM14.91¢10.99¢35.7%
CASMex(b)
9.45¢8.96¢5.5%
Economic fuel cost per gallon(b)
$3.40$2.0169.2%
Fuel gallons (000,000)64653021.9%
ASMs per gallon85.586.2(0.8)%
Departures (000)24420717.9%
Average full-time equivalent employees (FTEs)17,22414,36619.9%
Aircraft utilization9.99.72.1%
Average aircraft stage length1,3471,3241.7%
Operating fleet(d)
2252178 a/c
Regional Operating Statistics:(c)
Revenue passengers (000)9,6739,1395.8%
RPMs (000,000) "traffic"4,5184,842(6.7)%
ASMs (000,000) "capacity"5,5496,704(17.2)%
Load factor81.4%72.2%9.2 pts
Yield29.97¢22.49¢33.3%
RASM25.34¢17.12¢48.0%
Departures (000)160170(5.9)%
Operating fleet (d)
8694(8) a/c
(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)See reconciliation of this non-GAAP measure to the acquisitionmost directly related GAAP measure in the accompanying pages.
(c)Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)Excludes all aircraft removed from operating service as of Virgin America closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the twelve months ended December 31, 2017, but only for the period December 14, 2016 through2022 and December 31, 2016 in the twelve months ended December 31, 2016 results below. We often refer to unit revenues and adjusted unit costs, which is a non-GAAP measure.2021.
34

 Twelve Months Ended December 31,
 2017 2016 Change 2015 Change
Consolidated Operating Statistics:(a)
         
Revenue passengers (000)44,034 34,289 28.4% 31,883 7.5%
RPMs (000,000) "traffic"52,338 37,209 40.7% 33,578 10.8%
ASMs (000,000) "capacity"62,072 44,135 40.6% 39,914 10.6%
Load factor84.3% 84.3% — 84.1% 0.2 pts
Yield13.03¢ 13.45¢ (3.1)% 14.27¢ (5.7)%
PRASM10.98¢ 11.34¢ (3.2)% 12.01¢ (5.6)%
RASM12.78¢ 13.44¢ (4.9)% 14.03¢ (4.2)%
CASM excluding fuel and special items(b)
8.23¢ 8.23¢ —% 8.30¢ (0.8)%
Economic fuel cost per gallon(b)
$1.82 $1.52 19.7% $1.88 (19.1)%
Fuel gallons (000,000)797 554 43.9% 508 9.1%
ASM's per gallon77.9 79.7 (2.3)% 78.6 1.4%
Average number of full-time equivalent employees (FTEs)20,183 14,760 36.7% 13,858 6.5%
          
Mainline Operating Statistics:         
Revenue passengers (000)34,539 24,838 39.1% 22,869 8.6%
RPMs (000,000) "traffic"48,238 33,489 44.0% 30,340 10.4%
ASMs (000,000) "capacity"56,945 39,473 44.3% 35,912 9.9%
Load factor84.7% 84.8% (0.1) pts 84.5% 0.3 pts
Yield12.14¢ 12.24¢ (0.8)% 12.98¢ (5.7)%
PRASM10.29¢ 10.38¢ (0.9)% 10.97¢ (5.4)%
CASM excluding fuel and special items(b)
7.47¢ 7.30¢ 2.3% 7.39¢ (1.2)%
Economic fuel cost per gallon(b)
$1.82 $1.52 19.7% $1.87 (18.7)%
Fuel gallons (000,000)706 474 48.9% 439 8.0%
ASM's per gallon80.7 83.3 (3.1)% 81.8 1.8%
Average number of FTEs15,653 11,447 36.7% 10,750 6.5%
Aircraft utilization11.2 10.5 6.7% 10.8 (2.8)%
Average aircraft stage length1,301 1,225 6.2% 1,195 2.5%
Mainline operating fleet at period-end221 a/c 218 a/c 3 a/c 147 a/c 71 a/c
          
Regional Operating Statistics:(c)
         
Revenue passengers (000)9,495 9,452 0.5% 9,015 4.8%
RPMs (000,000) "traffic"4,101 3,720 10.2% 3,238 14.9%
ASMs (000,000) "capacity"5,127 4,662 10.0% 4,002 16.5%
Load factor80.0% 79.8% 0.2 pts 80.9% (1.1) pts
Yield23.41¢ 24.42¢ (4.1)% 26.37¢ (7.4)%
PRASM18.72¢ 19.49¢ (4.0)% 21.34¢ (8.7)%
(a)
Except for FTEs, data includes information related to regional CPA flying with Horizon, SkyWest and PenAir.
(b)
See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section.
(c)
Data presented includes information related to regional CPAs.




We
Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results on a combined basiscompared to 2019 provides more meaningful year-over-year comparisons.insight. The discussiontable below includes "Combined Comparative"comparative results for 2016, determined as the sum of the historical consolidated results of Air Group and Virgin America. Virgin America's financial information has been conformedfrom 2022 to reflect Air Group's historical financial statement presentation. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.2019.


COMBINED COMPARATIVE OPERATING STATISTICS
FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared with 2019 (unaudited)
Alaska Air Group, Inc.
20222019Change
Passenger revenue$8,808 $8,095 9%
Mileage Plan other revenue590 465 27%
Cargo and other revenue248 221 12%
Total Operating Revenue$9,646 $8,781 10%
Operating expense, excluding fuel and special items$6,328 $5,796 9%
Aircraft fuel, including hedging gains and losses2,668 1,884 42%
Special items580 38 NM
Total Operating Expenses$9,576 $7,718 24%
Total Non-operating Income (Expense)9 (47)119%
Income Before Income Tax$79 $1,016 (92)%
Consolidated Operating Statistics:
Revenue passengers (000)41,46846,733(11)%
RPMs (000,000) "traffic"51,33056,040(8)%
ASMs (000,000) "capacity"60,77366,654(9)%
Load factor84.5%84.1%0.4 pts
Yield17.16¢14.45¢19%
RASM15.87¢13.17¢21%
CASMex10.41¢8.70¢20%
Average full-time equivalent employees (FTEs)22,56422,1262%













35

 Twelve Months Ended December 31,
 2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:         
Revenue passengers (in 000)44,034 34,289 7,658 41,947 5.0%
RPMs (in 000,000)52,338 37,209 11,545 48,754 7.4%
ASMs (in 000,000)62,072 44,135 13,818 57,953 7.1%
Load Factor84.3% 84.3% (a) 84.1% 0.2 pts
PRASM10.98¢ 11.34¢ (a) 11.08¢ (0.9)%
RASM12.78¢ 13.44¢ (a) 12.93¢ (1.2)%
CASMex8.23¢ 8.23¢ (a) 8.04¢ 2.4%
FTEs20,183 14,760 2,618 17,378 16.1%
          
Mainline:         
RPMs (in 000,000)48,238 33,489 11,545 45,034 7.1%
ASMs (in 000,000)56,945 39,473 13,818 53,291 6.9%
Load Factor84.7% 84.8% (a) 84.5% 0.2 pts
PRASM10.29¢ 10.38¢ (a) 10.34¢ (0.5)%
(a)
2016 Combined operating statistics have been recalculated using the combined results.

OPERATING REVENUE
OPERATING REVENUES

Total operating revenues revenue increased$2.0 $3.5 billion,, or 34%56%, during 20172022 compared to the same period in 2016.  On a Combined Comparative basis, total operating revenues increased $438 million or 6%.2021. The changes including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Passenger revenue$8,808 $5,499 60 %
Mileage Plan other revenue590 461 28 %
Cargo and other revenue248 216 15 %
Total Operating Revenue$9,646 $6,176 56 %

 Twelve Months Ended December 31, Change
(in millions)2017 2016 as Reported 2016 Pre-Acquisition Virgin America 2016 Combined $ Combined % Combined
Passenger           
Mainline$5,858
 $4,098
 $1,414
 $5,512
 $346
 6.3%
Regional960
 908
 —
 908
 52
 5.7%
Total passenger revenue$6,818
 $5,006
 $1,414
 $6,420
 $398
 6.2%
Freight and mail114
 108
 —
 108
 6
 5.6%
Other—net1,001
 817
 150
 967
 34
 3.5%
Total operating revenues$7,933
 $5,931
 $1,564
 $7,495
 $438
 5.8%

Passenger Revenue—Mainline


On a consolidated basis, Mainline passengerPassenger revenue for 20172022 increased by $1.8$3.3 billion, or 43%60%, on a 44%33% increase in capacity driven by the acquisition of Virgin America, partially offset bypassenger traffic and a 1% decrease in unit revenues compared to 2016. On a Combined Comparative basis, Mainline passenger revenue increased by $346 million or 6%, due to a 7%20% increase in capacity, partially offset by a 1% decreaseticket yield. The improvement in unit revenue compared to the combined Mainline results for 2016. The increase in capacitytraffic was driven by our continued network expansion and aircraft added to our fleetrobust leisure demand. The improvement in the current year. The decrease in PRASMyield was


driven by a decrease in ticket yields on relatively flat load factors. Lower ticket yields (pricing) were impacted, in large part, bycombination of increased demand and capacity constraints, leading to higher fares. Although our new market growthairlines experienced some operational volatility, demand for both leisure and by competitor pricing actions felt more acutely in our California markets.business travel continued to drive revenue results to historic levels.


We anticipate Passenger Revenue—Regional

Regional passenger revenue increased by $52 million, or 6%,for 2023 will increase compared to 2016 due to2022 on increased capacity and our commercial initiatives, consistent with our overall growth plan.

Mileage Plan Other Revenue

On a 10%increase in capacity, partially offset by a 4% decrease in PRASMconsolidated basis, Mileage Plan other revenue increased $129 million, or 28%, as compared to 2016. The increase in capacity is2021, largely due to an increase in departurescommissions from our bank card partners driven by increased consumer spending and improved economics from our new E175 deliveries,co-branded credit card agreement.

Cargo and Other Revenue

On a consolidated basis, Cargo and other revenue increased $32 million, or 15%, from 2021.Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed due to greater use of belly capacity, which grew on an increase in average aircraft stage lengthscheduled departures.

We expect Cargo and the annualization of new routes introduced over the past twelve months. The decreaseother revenue to increase in Regional PRASM was primarily2023 as compared to 2022, driven by the significant growth in our regionalcargo business and competitive pricing actions.greater ancillary revenue.

Other—Net

Other—net revenue increased $184 million, or 23%, from 2016, primarily due to increases in frequent flyer program revenue. Frequent flyer program revenue increased $53 million or 12%, due to an increase in miles sold to our affinity card partner in the the current year. On a Combined Comparative basis, Other—net revenue increased $34 million, or 4%.

Under the new revenue recognition standard, our 2017 recast revenues will decrease by approximately $41 million. We expect competitive pressures on unit revenues to continue into 2018. However, given our projected capacity growth, we expect total revenue will increase in 2018 as we expect to grow our capacity approximately 7.5%.


OPERATING EXPENSES


Total operating expenses increased $2.1$4.1 billion, or 46%74%, compared to 2016. On a Combined Comparative basis, total operating expenses increased $749 million, or 13% primarily as a result of higher wages and benefits and higher fuel costs, among other increases.2021. We believeconsider it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Aircraft fuel, including hedging gains and losses$2,668 $1,279 109 %
Non-fuel operating expenses, excluding special items6,328 5,137 23 %
Payroll Support Program grant wage offset— (914)NM
Special items - fleet transition and other496 (1)NM
Special items - labor and related84 (10)NM
Total Operating Expenses$9,576 $5,491 74 %

 Twelve Months Ended December 31, Change
(in millions)2017 2016 as Reported 2016 Pre-acquisition Virgin America 2016 Combined $ Combined % Combined
Fuel expense$1,447
 $831
 $293
 $1,124
 $323
 28.7 %
Non-fuel expenses5,108
 3,634
 1,028
 4,662
 446
 9.6 %
Special items—merger-related costs118
 117
 21
 138
 (20) (14.5)%
Total Operating Expenses$6,673
 $4,582
 $1,342
 $5,924
 $749
 12.6 %

Significant operating expense variances from 20162021 are more fully described below.

36

Aircraft Fuel


Fuel Expense

Aircraft fuel expense includes both raw fuel expense (as defined below) andplus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases. AircraftOur aircraft fuel expense can be volatile even between quarters,based on fuel consumption and because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease.

Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.




Aircraft fuel expense increased $616 million,$1.4 billion, or 74%109%, compared to 2016. On a Combined Comparative basis, aircraft fuel expense increased $323 million, or 29%.2021. The elements of the change are illustrated in the following table:
Twelve Months Ended December 31,
2022 2021
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$2,761 $3.64  $1,383 $2.11 
(Gain)/loss on settled hedges(169)(0.22) (57)(0.09)
Consolidated economic fuel expense$2,592 $3.42  $1,326 $2.02 
Mark-to-market fuel hedge adjustments76 0.10  (47)(0.07)
GAAP fuel expense$2,668 $3.52  $1,279 $1.95 
Fuel gallons758  656 
 Twelve Months Ended December 31,
 2017 2016 as Reported 2016 Combined
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$1,437
 $1.80
 $828
 $1.49
 $1,105
 $1.49
Losses on settled hedges17
 0.02
 16
 0.03
 34
 0.05
Consolidated economic fuel expense$1,454
 $1.82
 $844
 $1.52
 $1,139
 $1.54
Mark-to-market fuel hedge adjustments(7) —
 (13) (0.02) (15) (0.02)
GAAP fuel expense$1,447
 $1.82
 $831
 $1.50
 $1,124
 $1.52
Fuel gallons797
   554
   739
  


On a Combined Comparative basis, rawRaw fuel expense increased 100% in 2022 compared to 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel priceper gallon increased 21%73% due primarily to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as the refining margins associated with the conversion of crude oil to jet fuel. The increase in rawCrude oil prices have risen 37% while refining margins are four times as high as 2021. Increased fuel price per gallon during 2017 wascosts were also driven by a 38%16% increase in refining margins andgallons consumed compared to 2021, consistent with a 17%16% increase in crude oil prices, compared to the prior year. Fuel gallons consumed increased by 58 million, or 8%, consistent with the increase in capacity of 7% on a Combined Comparative basis.capacity.


We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economicEconomic fuel expense we includeincludes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices haveare currently having on our business becauseas it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.


LossesGains recognized for hedges that settled during the year were $17$169 million in 2017,2022, compared to lossesgains of $16$57 million in 2016.2021. These amounts represent cash received from settled hedges, offset by cash paid for the premium expense, offset by any cash received from those hedges at settlement.cost on related call options.


As of the date of this filing weWe expect our economic fuel pricecost per gallon to increase approximately 21% in the first quarter of 2018 as compared2023 to the first quarter of 2017 due to higher crude oil pricesrange between $3.15 and refining margins. As both oil prices and refining margins are volatile, we are unable to forecast the full-year cost with any certainty.$3.35 per gallon based on current market West Coast jet fuel prices.




Non-fuel Expense and Non-special itemsExpenses


The table below provides the reconciliation of the impact of Virgin America on the comparative results for each of our operating expense line items, excluding fuel, the Payroll Support Program grant wage offset and special items. Significant operating expense variances from 2021 are more fully described below.

37

Twelve Months Ended December 31, Change Twelve Months Ended December 31,
(in millions)2017 2016 as Reported 2016 Pre-acquisition Virgin America 2016 Combined $ Combined % Combined(in millions)20222021% Change
Wages and benefits$1,924
 $1,382
 284
 1,666
 258
 15.5 %Wages and benefits$2,640 $2,218 19 %
Variable incentive pay135
 127
 32
 159
 (24) (15.1)%Variable incentive pay257 151 70 %
Aircraft maintenance391
 270
 80
 350
 41
 11.7 %Aircraft maintenance424 364 16 %
Aircraft rent274
 114
 170
 284
 (10) (3.5)%Aircraft rent291 254 15 %
Landing fees and other rentals460
 320
 107
 427
 33
 7.7 %Landing fees and other rentals581 555 5 %
Contracted services314
 247
 60
 307
 7
 2.3 %Contracted services329 235 40 %
Selling expenses357
 225
 123
 348
 9
 2.6 %Selling expenses295 173 71 %
Depreciation and amortization372
 363
 37
 400
 (28) (7.0)%Depreciation and amortization415 394 5 %
Food and beverage service195
 126
 49
 175
 20
 11.4 %Food and beverage service197 139 42 %
Third-party regional carrier expense121
 95
 —
 95
 26
 27.4 %Third-party regional carrier expense182 147 24 %
Other565
 365
 86
 451
 114
 25.3 %Other717 507 41 %
Total non-fuel, non-special operating expenses$5,108
 $3,634
 $1,028
 $4,662
 $446
 9.6 %
Total non-fuel operating expenses, excluding special itemsTotal non-fuel operating expenses, excluding special items$6,328 $5,137 23 %


Wages and Benefits


Wages and benefits increased during 20172022 by $542$422 million,, or 39%19%, compared to 2016. On a Combined Comparative basis, total wages and benefits increased by $258 million or 15%.2021, excluding the impact of the Payroll Support Program grant wage offset. The primary components of wagesWages and benefits including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Wages$2,024 $1,643 23 %
Pension - Defined benefit plans45 52 (13)%
Defined contribution plans160 126 27 %
Medical and other benefits263 275 (4)%
Payroll taxes148 122 21 %
Total wages and benefits$2,640 $2,218 19 %

 Twelve Months Ended December 31, Change
(in millions)2017 2016 as Reported 2016 Pre-acquisition Virgin America 2016 Combined $ Combined % Combined
Wages$1,468
 $1,022
 $224
 $1,246
 $222
 17.8%
Medical and other benefits216
 192
 23
 215
 1
 0.5%
Defined contribution plans103
 67
 22
 89
 14
 15.7%
Pension—Defined benefit plans32
 25
 —
 25
 7
 28.0%
Payroll taxes105
 76
 15
 91
 14
 15.4%
Total wages and benefits$1,924
 $1,382
 $284
 $1,666
 $258
 15.5%

OnWages and payroll taxes increased by a Combined Comparative basis, wages increased $222combined $407 million, withor 23%, on a 16% increase in FTEs. The17% increase in FTEs is attributableas Alaska, Horizon, and McGee hired to support the ramp up in operations. The ratification of five labor agreements during the year resulted in significant wage increases for the represented groups. As a result of the new agreements, the Company recorded $97 million in incremental wage expense during the year, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates. Increased expense for defined contribution plans and payroll taxes are consistent with the change in wages.

We expect wages and benefits expense to be higher in 2023 compared to 2022 given expected growth in overall FTEs needed to support our planned capacity growth, as well as the annualization of cost increases due to the growthfive labor agreements in our business and the growth in McGee Air Services, which has brought certain airport ground service positions in-house2022. Our new ALPA contract also includes a clause that were previously reflected in Contracted Services expense. Additionally, wage rates for pilots at Alaska and Virgin America increased significantly in November 2017could further increase pay-rates as a result of other airlines' new contract rates stemming fromlabor agreements following a decision reached by a third-party arbitration panel during the fourth quarter of 2017.

Costs associated with our defined contribution plans increased $14 million, or 16%, on a Combined Comparative basis, due to FTE growth and increased participation throughout all labor groups. Additionally, due to the arbitration decision reachedmarket comparison that will occur in the fourth quarter 2023. Our guidance does not include the impacts of 2017, pilots at Alaska and Virgin America began receiving contributions at a higher rate.



Pension expense increased 28% compared to the same period in the prior year. The increase is due to the change in certain assumptions used at December 31, 2016, particularly discount rates which were lowered by 60 to 72 basis points, resulting in higher expense recognition in 2017.

Under the new retirement benefits accounting standard, 2017 recast wages and benefits will increase approximately $7 million. On a recast basis, we expect wages and benefits to grow at a greater rate than projected capacity growth in 2018. Alaska and Virgin America pilot wage increases are the primary drivers of this increase. The remainder is due to the expected growth in FTEs to support our capacity growth, along with higher wage rates, medical costs and higher pension costs. Furthermore,any future agreements we may reach a new agreementin 2023, most notably with our mainlineMainline flight attendants which would also resultwhose contract became amendable in higher wages.December 2022.


Variable Incentive Pay


Variable incentive pay expense increased to $135 million in 2017 from $127$257 million in 2016. On a Combined Comparative basis, variable incentive pay decreased $242022 from $151 million or 15%,in 2021. The increase is primarily due to lower achievement against performance-based pay metricshigher payouts achieved under the Performance Based Pay Plan. The higher payouts were achieved by exceeding certain profitability, safety, and emissions targets, as compared towell as by finishing the prior year.year with the highest adjusted pretax margin among U.S. airlines.


Aircraft Maintenance


Aircraft maintenance costs increased by $121$60 million, or 45%, compared to 2016. On a Combined Comparative basis,2021. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft maintenance costs increased $41 million, or 12%. Maintenance costs increased primarily due to timing of scheduled maintenance eventsrecorded in 2017, as well as a power-by-the-hour maintenance agreement that began during the fourthfirst quarter of 2017.2022 and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.


38

We expect aircraft maintenance expense to increase, consistent with capacity growthbe higher in 2018. We will have an increase in engine maintenance costs primarily2023 due to the full year impact of theincreased aircraft utilization and a new power-by-the-hour engine maintenance arrangement oncontract for our B737-800 aircraft as noted above, as well as general maintenance expenditures increases as we continue to add capacity to our network.B737-900ER fleet.


Aircraft Rent


Aircraft rent expense increased $160$37 million, or 140%15%, compared to 2016. On a Combined Comparative basis, aircraft rent2021. Increased expense decreased $10 million, or 4%, primarilyis due to the resettingdelivery of straight-linefive leased B737-9 aircraft rent resulting from purchase price accounting for leases heldand ten leased Embraer E175 aircraft operated by Virgin America, partially offset by the addition of four A321neos added to our mainline fleet and eight E175s added to our regional fleet.SkyWest since December 31, 2021.


We expect aircraft rent to increasedecrease in 2018 at a greater rate than our forecasted capacity growth due to additional2023 driven by lease terminations in 2022 for certain Airbus and Q400 aircraft, partially offset by incremental deliveries of leased A321neoB737-9 aircraft during 2023 and E175 aircraft scheduled for deliverythe annualization of expense of lease deliveries in 2018.2022.


Landing Fees and Other Rentals


Landing fees and other rental expenses increased $140$26 million, or 44%5%, compared to 2016. On a Combined Comparative basis,2021. Landing fees rose significantly in Seattle and San Francisco, driven by rate and departure increases. Airport rents rose significantly in Seattle, Portland, and the New York metropolitan area, driven by passenger increases. These increases were partially offset by favorable resolution for certain pandemic period airport accruals, as well as decreases to landing fees and airport rents in other rental expenses increased $33 million, or 8%, primarily due to increased flying in 2017, aslocations we increased capacity by 7% on a combined basis, and entered into 44 new markets.serve.


We expect landing fees and other rental expense to grow at a slightly greater rate than capacityincrease in 20182023 as we continue to addincrease capacity in our network and enter new markets. Additionally, we expect continued rate increases at airportsdepartures across our network.


Contracted Services


Contracted services increased$67 by $94 million,, or 27%40%, when compared to 2016. On a Combined Comparative basis, contracted services2021, driven primarily by increased $7 million, or 2%, primarily due todepartures and passengers in line with increased flying at stations where we use vendors to assist us. Additionally, wagedemand, coupled with increased rates for ourcharged by vendor employees have increased due to higher minimum wage laws in many locations we serve. These cost increases were partially offset by insourcing some of the ground services at many airports to McGee Air Services, whose costs are now included in other financial statement line items, particularly wages and benefits.partners.


We expect contracted services to increase in 2018, consistent with2023 as we continue to increase capacity and departures throughout our projected capacity growth. The increases are primarily due to higher wage rates in locations where we use vendor employees, and ongoing information technology and facilities projects that we use outside contractors to assist with.network.




Selling Expenses


Selling expenses increased by $132$122 million,, or 59%71%, compared to 2016. On a Combined Comparative basis, selling expenses increased $9 million, or 3%, mostly due2021 primarily driven by higher credit card commissions and distribution costs incurred from both an increase in bookings and an increase in fares as demand for travel returned. Commissions and fees associated with alliances and business travel also contributed to increased promotional and advertising activities, as well as new sponsorships which became effective in the current year.increase.


Under the new revenue recognition standard, our 2017 recast selling expense will increase by approximately $13 million. We expect selling expense to decreaseincrease in 2018 on a recast basis,2023, due primarily to a decrease in advertising spend forecasted as well as decreased Mileage Plan partner airline expense due to the termination of certain partnerships with other airlines.

Depreciationhigher sales and Amortization

Depreciation and amortization expenses increased by $9 million, or 2%, compared to 2016. On a Combined Comparative basis, depreciation and amortization expense decreased $28 million, or 7%, primarily due to a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by the addition of 14 B737-900ERs and 10 E175s to our fleet since December 31, 2016.

We expect depreciation and amortization expense toan increase in line with capacity growth in 2018 compared to 2017, primarily due to scheduled B737-900ER and E175 aircraft deliveries in 2018.marketing costs as we expand our network.


Food and Beverage Service


Food and beverage service expense increased by $69$58 million, or 55%42%, compared to 2016. On a Combined Comparative basis, food and beverage service expenses increased $20 million, or 11%, due2021, primarily driven by the 28% increase in revenue passengers as well as additional offerings of on-board products as compared to the increased number of passengers, premium class offeringsprior-year period. Higher costs for food, food service supplies, and enhancementstransportation also contributed to our onboard menu offerings to provide higher quality food and beverage products.the increase.


We expect food and beverage expensesservice to increase in line with capacity growth in 2018 compared to 2017, primarily due to an expected increase in number of passengers2023 as we continue to growincrease capacity and departures throughout our network and higher product costs.network.


Third-party regional carrier expenseRegional Carrier Expense


Third-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPA agreements, increased $26$35 million, or 27%24%, in 20172022 compared to 2016.2021. The increase in expense is primarily due to the addition of eight E175 aircraft operatedincremental departures flown by SkyWest with ten additional aircraft in operating service, as well as the current year.prior year impact of CARES Act PSP funding for SkyWest pilot and flight attendance wages.


We expect third-party regional carrier expense to increasebe higher in 2018 as we add2023 on the annualization of expense for the ten E175 aircraft to be operated by SkyWest and continue to expand our regional network.deliveries in 2022 under the CPA with SkyWest.


39

Other Operating ExpensesExpense


Other operating expenses expense increased$200 $210 million,, or 55%41%, compared to 2016. On a Combined Comparative basis, other operating expenses2021. The most significant drivers of the increased $114cost were training events and related travel costs, crew hotel stays, and crew per diem. Increases in crew-related costs are consistent with the rise in departures. The increase within Other expense also includes $28 million or 25%, primarily dueincurred for employee recognition related to higher costs associated with crew costs such as hotels and per diems, training, higher IT costs, an increase in scrapped parts inventory, and higher property taxes.the 90,000 mile gift granted to all employees.


We expect other operating expensesexpense to increase consistent with capacity growth in 2018 driven primarily by increased personnel costs such2023 as mealswe increase departures and hotels.hire more employees, resulting in incremental crew costs.


Special Items—Merger-Related CostsItems - fleet transition and Otherother


We recorded expenses associated with fleet transition and other of $496 million in 2022. Refer to Note 2 to the consolidated financial statements for additional details.

We will continue recording special items of $118 million for merger-related costscharges in 2023 associated with our acquisition of Virgin Americamainline fleet transition in 2017, compared to $117 million in 2016, which reflects the results of Virgin America from December 14, 2016 through December 31, 2016, and $138 million on a Combined Comparative basis in 2016. Costs incurred in 2017 consisted primarily of severance and retention costs, and IT integration costs. We expect to continue to incur merger-related costs through 2019.

Consolidated Nonoperating Income (Expense)

During 2017 we recorded nonoperating expense of $53 million, compared to nonoperating expense of $4 million in 2016. On a Combined Comparative basis, nonoperating expense increased by $30 million,2023, primarily due to interestthe expected retirement of the Airbus A321neo aircraft.

Special items - labor and related

We recorded an expense incurredof $84 million in 2022 primarily for a one-time bonus for Alaska pilots following the current year on the debt issued in 2016 to finance the acquisitionratification of Virgin America.a new collective bargaining agreement.



ADDITIONAL SEGMENT INFORMATION


Refer to Note 12 of13 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.


Mainline


Mainline operations reported an adjusted pretax profit was $1.3 billionof $855 million in 20172022, compared to $1.3 billion in 2016. On a Combined Comparative basis, Mainlinean adjusted pretax profit decreased by $253 million.loss of $179 million in 2021. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger-related costs and mark-to-market fuel-hedge accounting charges:
 Twelve Months Ended December 31, Change
(in millions)2017 2016 as Reported 2016 Pre-acquisition Virgin America 2016 Combined $ Combined
Mainline         
Operating revenues$6,890
 $4,940
 $1,564
 $6,504
 $386
Non-fuel, non-special operating expenses4,257
 2,883
 1,028
 3,911
 346
Economic fuel1,282
 719
 293
 1,012
 270
Operating income1,351
 1,338
 243
 1,581
 (230)
Nonoperating income (expense)(39) 3
 (19) (16) (23)
Pretax profit$1,312
 $1,341
 $224
 $1,565
 $(253)

The $253 million decrease in Combined Comparative pretax profit$1 billion improvement was primarily driven by a $270 million$3.2 billion increase in Mainline fuel expense, a $346 million increase in Mainline non-fuel operating expenses, and a $23 million increase in nonoperating expense. These increases were partiallyPassenger revenue, offset by a $386 million$1.1 billion increase in economic fuel cost and a $1.1 billion increase in non-fuel operating costs.

As compared to the prior year, higher Mainline passenger revenue.revenue is primarily attributable to a 39% increase in traffic and a 22% increase in yield, driven by a historically strong demand environment. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Higher raw fuel prices, and an increase incombined with more gallons consumed, to support additional flying, drove the increase in Mainline fuel expense. Non-fuel operating expenses increased due
Regional

Regional operations reported an adjusted pretax loss of $76 million in 2022, compared to higher wages to support our growth, and higher operating expenses as described above. Nonoperating expense increased primarily duean adjusted pretax loss of $210 million in 2021. Improved results were attributable to increased interest expense. Mainlineoperating revenue increased due toof $259 million driven by higher capacity from new routes added over the past twelve months.

Regional

Our Regional operations contributed a pretax profit of $15 million in 2017 compared to $93 million in 2016. The $78 million decrease in pretax profit was attributable to $82 million higher non-fuel operating expense due in large part to increased capacity,demand and higher raw fuel costs,yields, partially offset by a $51$136 million increase in operating revenues as described in Passenger Revenue—Regional.fuel expense driven by higher fuel prices.


Horizon


Horizon incurred areported an adjusted pretax loss of $8$46 million in 2017 compared to pretax profit of $14 million in 2016. The change was primarily driven by $20 million higher non-fuel expenses. Non-fuel expenses increased primarily due to higher wage and training expense as a result of the increase in FTE’s, increased costs associated with flight cancellations, and a $9 million ratification bonus expense in connection with the agreement reached with Horizon's pilots.



2016 COMPARED WITH 2015

Our consolidated net income for 2016 was $814 million, or $6.54 per diluted share, compared to net income of $848 million, or $6.56 per diluted share, in 2015. Our financial results include results of Virgin America for the period from December 14, 2016 through December 31, 2016 and the impact of purchase accounting as of December 14, 2016. Refer to the "Critical Accounting Estimates" section for further information regarding purchase accounting.

Excluding the impact of mark-to-market fuel hedge adjustments and special items, our adjusted consolidated net income for 2016 was $911 million, or $7.32 per diluted share,2022 compared to an adjusted consolidated net incomepretax profit of $842$12 million, or $6.51 per share, in 2015.2021. The following tables reconcile ourshift to adjusted net income and earnings per diluted share (EPS) during the full year 2016 and 2015 to amounts as reported in accordance with GAAP.
 Twelve Months Ended December 31,
 2016 2015
(in millions, except per-share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$814
 $6.54
 $848
 $6.56
Mark-to-market fuel hedge (benefit) expense(13) (0.11) —
 —
Special items—merger-related costs and other(a)
117
 0.94
 32
 0.25
Income tax effect of special items(b)
(24) (0.19) (12) (0.10)
Special income tax (benefit) expense(c) 
17
 0.14
 (26) (0.20)
Non-GAAP adjusted net income and diluted EPS$911
 $7.32
 $842
 $6.51
(a)Refer to Note 10 to the consolidated financial statement for the description of special items.
(b)Certain merger-related costs are non-deductible for tax purposes, resulting in a smaller income tax effect for adjusting items.
(c)Special tax benefit represents the discrete impacts of adjustments to our position on income sourcing in various states.

CASMpretax loss is summarized below:
 Twelve Months Ended December 31,
 2016 2015 % Change
Consolidated:     
Total operating expenses per ASM (CASM)
10.38¢ 
10.77¢ (3.6)%
Less the following components: 
    
Aircraft fuel, including hedging gains and losses1.88
 2.39
 (21.3)%
Special items—merger-related costs and other(a)
0.27
 0.08
 237.5 %
CASM, excluding fuel and special items
8.23¢ 
8.30¢ (0.8)%
      
Mainline:     
Total operating expenses per ASM (CASM)
9.39¢ 
9.77¢ (3.9)%
Less the following components: 
    
Aircraft fuel, including hedging gains and losses1.79
 2.29
 (21.8)%
Special items—merger-related costs and other(a)
0.30
 0.09
 233.3 %
CASM, excluding fuel and special items
7.30¢ 
7.39¢ (1.2)%
(a)Refer to Note 11 to the consolidated financial statement for the description of special items.



OPERATING REVENUES

Total operating revenues increased $333 million, or 6%, during 2016 compared to the same period in 2015. The changes are summarized in the following table:
 Twelve Months Ended December 31,
(in millions)2016 2015 % Change
Passenger     
Mainline$4,098
 $3,939
 4.0%
Regional908
 854
 6.3%
Total passenger revenue$5,006
 $4,793
 4.4%
Freight and mail108
 108
 —%
Other—net817
 697
 17.2%
Total operating revenues$5,931
 $5,598
 5.9%

Passenger Revenue—Mainline

Mainline passenger revenue for 2016increased by 4% due to a 10% increase in capacity, partially offset by a 5% decrease in PRASM compared to 2015. The increase in capacity was driven by new routeslower CPA revenue on decreased departures, combined with higher wage and growth in our operating fleet. Virgin America capacitybenefit costs on incremental FTEs and increased wage rates resulting from the acquisition date through December 31, 2016 represented approximately 2 points of capacity increase from 2015. The decrease in PRASM was driven by a 6% decrease in ticket yield due to competitive pressures and our own growth, offset by a slight increase in load factor. Furthermore, the decline in fuel prices during 2016 contributed to lower ticket prices.new collective bargaining agreements with Horizon employees.


Passenger Revenue—Regional
40

Regional passenger revenue increased by $54 million, or 6%, compared to 2015 due to a 17% increase in capacity, partially offset by a 9% decrease in PRASM compared to 2015. The increase in capacity was due to an increase in departures from new E175 deliveries, an increase in average aircraft stage length and the annualization of new routes introduced over the past twelve months. The decrease in PRASM was due to a 7% decrease in ticket yield, as well as a decrease in load factor of 1.1 points. The decrease in yield was due to an increase in competitive capacity in our regional markets and our own growth, as well as an increase in the average trip length of our regional flights.
Other—Net

Other—net revenue increased$120 million, or 17%, from 2015, primarily due to increases in Mileage Plan™ revenue. Mileage Plan™ revenue increased $100 million, or 30%, due to increased miles sold and improved compensation terms with our Mileage Plan™ affinity credit card partner as a result of a contract extension effective January 1, 2016. Additionally, Mileage Plan™ revenue earned from our partner airlines increased as compared to the prior year.

OPERATING EXPENSES

Total operating expenses increased $282 million, or 7%, compared to 2015, primarily as a result of higher wages and benefits and $117 million of merger-related costs, partially offset by lower fuel costs. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
 Twelve Months Ended December 31,
(in millions)2016 2015 % Change
Fuel expense$831
 $954
 (12.9)%
Non-fuel expenses3,634
 3,314
 9.7 %
Special items117
 32
 265.6 %
Total Operating Expenses$4,582
 $4,300
 6.6 %


Significant operating expense variances from 2015 are more fully described below.



Wages and Benefits

Wages and benefits increased during 2016 by $128 million, or 10%, compared to 2015. The primary components of wages and benefits are shown in the following table:
 Twelve Months Ended December 31,
(in millions)2016 2015 % Change
Wages$1,022
 $945
 8.1 %
Medical and other benefits192
 153
 25.5 %
Defined contribution plans67
 60
 11.6 %
Pension—defined benefit plans25
 28
 (10.7)%
Payroll taxes76
 68
 11.8 %
Total wages and benefits$1,382
 $1,254
 10.2 %

Wages increased 8% on a 7% increase in FTEs. The increase in wages was primarily attributable to FTE growth to support our growth and an increase in the average wages per employee.

Medical and other benefits increased 25% compared to the prior year. The increase was primarily due to an increase in the number of employees and high-cost medical claims.

Defined contribution plans increased 12% due to FTE growth and increased participation throughout all labor groups.

Pension expense decreased 11%, compared to the same period in the prior year. The decrease was due to a change in several assumptions used at December 31, 2015, including a higher discount rate, updated retirement age assumptions, future salary increase assumptions and others that resulted in lower expense recognition in 2016.

Variable Incentive Pay

Variable incentive pay expense increased to $127 million in 2016 from $120 million in 2015. The increase was primarily due to a higher wage base.

Aircraft Fuel

Aircraft fuel expense decreased$123 million, or 13%, compared to 2015. The elements of the change are summarized in the following table: 
 Twelve Months Ended December 31,
 2016 2015
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$828
 $1.49
 $935
 $1.84
Losses on settled hedges16
 0.03
 19
 0.04
Consolidated economic fuel expense$844
 $1.52
 $954
 $1.88
Mark-to-mark fuel hedge adjustments(13) (0.02) —
 —
GAAP fuel expense$831
 $1.50
 $954
 $1.88
Fuel gallons554
   508
  

Fuel gallons consumed increased 9% in line with the 11% increase capacity, partially offset by a 1% improvement in fuel efficiency as measured by ASMs per gallon.

The raw fuel price per gallon decreased 19% as a result of lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and the refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during 2016 was due to a decline in crude oil prices of 11% and a decrease in refining margins of 36%, when compared to the prior year.



Losses recognized for hedges that settled during the year were $16 million in 2016, compared to losses of $19 million in 2015. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Aircraft Maintenance

Aircraft maintenance costs increased by $17 million, or 7%, compared to 2015. Maintenance costs increased primarily due to more engine and airframe maintenance events than in 2015. Additionally, in 2015 we received vendor credits, which offset expense, for engine maintenance that had been previously completed on the B737 fleet.

Aircraft Rent

Aircraft rent expense increased by $9 million, or 9%, compared to 2015, primarily due to the addition of rent expense on the 53 Airbus aircraft leased by Virgin America for the period December 14, 2016 to December 31, 2016.

Landing Fees and Other Rentals

Landing fees and other rental expenses increased$24 million, or 8%, primarily due to increased flying in 2016 as we increased capacity and entered into new markets.

Contracted Services

Contracted services increased $33 million, or 15%, when compared to 2015. The increase was primarily due to increased flying at stations where we use vendors to assist us. Additionally, wage rates for our vendor employees have increased due in part to higher minimum wage laws in many locations we serve. We also had several information technology and facilities projects that required contracted support.

Selling Expenses
Selling expenses increased by $14 million, or 7%, compared to 2015, mostly due to increased promotional and advertising activities, as well as new sponsorships which became effective in 2016.

Depreciation and Amortization

Depreciation and amortization expenses increased by $43 million, or 13%, compared to 2015. The increase was primarily due to the addition of 19 B737-900ERs to our fleet since December 31, 2015, partially offset by a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which became effective October 1, 2016.

Food and Beverage Service

Food and beverage service expenses increased by $13 million, or 12%, due to the increased number of passengers and upgrades to our onboard menu, offering higher quality food and beverage products.

Third-Party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPAs, increased $23 million, or 32%, in 2016 compared to 2015. The increase was primarily due to the significant increase in regional capacity in 2016 through the introduction of E175 flying.

Other Operating Expenses

Other operating expenses increased$9 million, or 3%, compared to 2015.  The increase was primarily due to increases in property and other taxes, personnel costs for our flight crews and an increase in fines and penalties.

Special Items—Merger-Related Costs and Other

We recorded special items of $117 million for merger-related costs associated with our acquisition of Virgin America. These costs consisted primarily of legal expenses, investment banking fees and severance costs. Our 2015 special items of $32 million consisted of a non-cash pension settlement expense and costs related to ongoing litigation.



Consolidated Nonoperating Income (Expense)

During 2016, we recorded nonoperating expense of $4 million, compared to nonoperating income of $14 million in 2015. In 2016, we incurred more interest expense associated with the financing obtained to fund the acquisition of Virgin America. This expense was partially offset by additional interest income earned during the period we held those funds in advance of the acquisition close date.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 12 of the consolidated financial statements for a detailed description of each segment. Below is a summary of each segments' profitability.

Mainline

Pretax profit for Mainline was $1.3 billion in 2016 compared to $1.2 billion in 2015. This segment includes financial results of Virgin America from the date of acquisition through December 31, 2016. The $135 million increase was due to an increase in operating revenues of $277 million, offset by an increase in operating expenses of $126 million. Revenue growth was primarily driven by the $159 million increase in passenger revenues and the $100 million increase in Mileage Plan™ revenue, both described previously. Growth in operating expenses was due to higher wages to support our network growth, higher ramp and passenger handling due to increased flying and higher wage rates at stations where we use vendors to assist us, higher depreciation related to our fleet growth, and selling expenses related to increased advertising. Economic fuel cost, as defined above, decreased due to lower raw fuel costs and increased fuel efficiency, slightly offset by an 8% increase in consumption.

Regional

Pretax profit for Regional was $93 million in 2016 compared to $105 million in 2015. The $12 million decrease in pretax profit was driven by a $74 million increase in non-fuel operating expenses in 2016 to support additional departures, partially offset by a $56 million increase in revenue and a $6 million decrease in fuel expense when compared to the prior year period.
Horizon

Pretax profit for Horizon was $14 million in 2016 compared to $28 million in 2015. CPA Revenues (100% of which are from Alaska and eliminated in consolidation) increased due to additional capacity added in 2016. The $32 million increase in Horizon's non-fuel operating expenses was largely driven by higher medical costs due to an increased number of large medical claims, increased volume of engine overhaul and heavy airframe work, employee signing bonuses and overhead restructuring costs.

LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sources of liquidity are:

Our existing•Existing cash and marketable securities balance of $1.6 billion, and our expected cash$2.4 billion;

•Cash flows from operations;

Our 72•73 unencumbered aircraft in the operating fleet as of December 31, 2017, that could be financed, if necessary; and


Our combined•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. Information about these facilities can be foundmillion

Improved results and increased demand in Note 52022 allowed us to the consolidated financial statements.

In 2017, we took delivery of 14 B737-900ER and 10 E175 aircraft and made debt payments totaling $397 million. We also continued to return capital tostrengthen our shareholders by paying dividends totaling $148 million and repurchasing $75 million of our common stock. Because of our strong balance sheet and financial performance,available liquidity as we are oneprepare for growth in 2023 and thereafter. Key liquidity and capital resources updates from the year include:

•Generated positive operating cash flow of only three airlines$1.4 billion, bolstered by improved advance bookings in a historic demand environment as well as our co-branded credit card agreement with Bank of America. Operating cash flows included $295 million in federal income tax refunds;

•Repaid $385 million in debt and ended the U.S.year with investment grade credit ratings.a debt-to-capitalization ratio of 48%;


•Took free and clear delivery of 21 owned B737-9 aircraft and 3 owned E175 aircraft;

•Announced plans to resume share repurchases in early 2023, to be made pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015, which has remaining authorization of $456 million.

We anticipate funding our planned 2023 capital expenditures of $1.8 billion to $2.0 billion with cash and marketable securities on-hand. We believe that our current cash and marketable securities balance, combined with future cash flows from operations and otheravailable sources of liquidity, will be sufficient to fund our operations, and meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.




In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.


The table below presents the major indicators of our financial condition and liquidity: 
(in millions)December 31, 2022December 31, 2021Change
Cash and marketable securities$2,417 $3,116 $(699)
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue29 %57 %(28) pts
Long-term debt, net of current portion$1,883 $2,173 $(290)
Shareholders’ equity$3,816 $3,801 $15 

41

(in millions, except per share and debt-to-capital amounts)December 31, 2017 December 31, 2016 Change
Cash and marketable securities$1,621 $1,580 $41
Cash, marketable securities and unused lines of credit as a percentage of trailing twelve months revenue25% 31% (6) pts
Long-term debt, net of current portion2,262 2,645 (383)
Shareholders’ equity3,721 2,931 790
Long-term debt-to-capital including net present value of aircraft operating lease payments(a)
51% 59% (8) pts
Debt-to-capitalization, adjusted for operating leases
(in millions)December 31, 2022December 31, 2021Change
Long-term debt, net of current portion$1,883 $2,173 (13)%
Capitalized operating leases1,621 1,547 5%
Adjusted debt$3,504 $3,720 (6)%
Shareholders' equity3,816 3,801 —%
Total invested capital$7,320 $7,521 (3)%
Debt-to-capitalization, including operating leases48%49%
(a)Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date.

Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)December 31, 2022December 31, 2021
Current portion of long-term debt$276 $366 
Current portion of operating lease liabilities228 268 
Long-term debt1,883 2,173 
Long-term operating lease liabilities, net of current portion1,393 1,279 
Total adjusted debt3,780 4,086 
Less: Cash and marketable securities(2,417)(3,116)
Adjusted net debt$1,363 $970 
(in millions)December 31, 2022December 31, 2021
GAAP Operating Income$70 $685 
Adjusted for:
Special items and Payroll Support Program grant wage offset580 (925)
Mark-to-market fuel hedge adjustments76 (47)
Depreciation and amortization415 394 
Aircraft rent291 254 
EBITDAR$1,432 $361 
Adjusted net debt to EBITDAR1.0x2.7x

The following discussion summarizes the primary drivers of the increasedecrease in our cash and marketable securities balance and our expectation of future cash requirements.


ANALYSIS OF OUR CASH FLOWS
 
Cash Provided by Operating Activities
 
Net cash provided by operating activities was $1.6 billion in 2017 compared to $1.4 billion in 2016. 2022 compared to $1 billion in 2021. Cash provided by ticket sales and from our co-branded credit card agreement are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state and local taxing authorities.

42

The increase of $204$388 million is primarily due to annet increase in our net income.

In 2016, we generated $1.4 billion in operating cash flows compared to $1.6 billion in 2015. The decrease of $200 million wasis due to a decline in operating results primarily driven by an increase in non-fuel operating expenses—including $117 millioncombination of factors. Increased remuneration from our co-branded credit card provided $374 million in merger-related costs associated with the acquisitionincremental cash as compared to 2021 on improved economics and increased volumes. Additionally, in 2022 we received $295 million in federal income tax refunds. The prior year also included a nonrecurring voluntary contribution of Virgin America—$100 million to Alaska pilots' defined benefit plan. These amounts were partially offset by higher revenues and lower fuel costs.uses of cash on increasing operating expenses as the business returned flying capacity.

We typically generate positive cash flows from operations, and expect to use that cash flow to buy aircraft and capital equipment, to make debt payments, and to return capital to shareholders. During 2016, we paused our share repurchase program as we prepared for the acquisition of Virgin America. We resumed our share repurchase program in the second quarter of 2017.

Cash Used in Investing Activities
Cash used in investing activities was $1.1 billion during 2017, compared to $2.6 billion in 2016. In 2016, cash from investing activities included approximately $2 billion of cash paid for the acquisition of Virgin America, which drove a decrease in cash used for investing activities in 2017 when compared to the prior year. Our capital expenditures were $1 billion, or $348 million higher than in 2016 primarily as a result of the purchase of more aircraft in the current year. During 2017 we took delivery of 14 B737-900ERs and 10 E715 aircraft. This compares to the delivery of 19 B737-900ERs in the prior year. Our future expected capital expenditures are summarized in the Contractual Obligations and Commitments section.


Cash used in investing activities was $2.6$1.2 billion during 2016,2022 compared to $930$1 billion in 2021. Cash used in capital expenditures for aircraft purchase deposits and other property and equipment was $1.7 billion in 2022, compared to $292 million in 2015. We2021. This increase in cash used $2 billion to acquire Virgin America, representing $2.6 billion consideration paid,in capital expenditures was partially offset by $645marketable securities activity, which amounted to $455 million of cash acquired. Our capital expenditures were $678net sales in 2022, compared to $706 million of net purchases in 2016, $153 million lower than in 2015.2021.




Cash Provided byUsed in Financing Activities
 
Cash used in financing activities was $592$325 million during 2017,2022 compared to cash provided by financing activities of $1.5 billion$914 million in 2016.2021. During the year, we madehad no new proceeds from issuance of debt and utilized cash on hand to make $385 million in debt payments, of $397 million, repurchased $75 million of our common stock and paid cash dividends of $148 million. In 2016, we securedcompared to debt proceeds of $2 billion for the acquisition of Virgin America, made debt$363 million and payments of $249 million, stock repurchases of $193 million and made cash dividend payments of $136 million. In 2015, we made debt payments of $116 million, stock repurchases of $505 million and cash dividend payments of $102 million.$1.3 billion in the prior year.
 
We plan to meet our future capital

MATERIAL CASH COMMITMENTS

Material cash requirements include the following contractual and operating commitments through our cash and investments on hand, internally generated cash from operations, along with additional debt financing if necessary.other obligations: 
Bank Lines of Credit
We have three credit facilities with availability totaling $475 million, including one $250 million credit facility, one $150 million credit facility, and one $75 million credit facility. We have secured letters of credit against the $75 million facility but have no plans to borrow using either of the two remaining facilities.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Purchase and Lease Commitments
 
As of December 31, 2017, we have2022, Alaska has firm orders to purchase or lease 85 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2020 through 2022. We could incur a loss of pre-delivery payments and credits of up to $15 million as a cancellation fee. We also have options to acquire up to 37 additional105 B737 aircraft with deliveries between 2023 and 2027 and firm commitments to lease four B737-9 aircraft with deliveries in 2023. Alaska also has rights for 105 additional B737 aircraft through 2030.

Alaska has received information from 2020 through 2024 and 30Boeing that certain B737 deliveries in 2023 are expected to be delayed into 2024. The anticipated fleet count outlined below reflects the expected impact of these delays. Alaska will continue to work with Boeing on delivery timelines that support Alaska's plans for growth.

Horizon has commitments to purchase 17 Embraer E175 aircraft with deliveries from 2020between 2023 and 2026. Horizon has options to 2022. In addition to the 23acquire 13 Embraer E175 aircraft currently operated by SkyWest in our regional fleet,between 2025 and 2026.

Options will be exercised only if we have firm orders to lease 12 E175 aircraft with deliveries in 2018, and options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.believe return on invested capital targets can be met over the long term.
We expect capital expenditures to be approximately $1 billion in 2018 and approximately $750 million in 2019 and 2020. We currently expect delivery of eight owned Mainline jet aircraft and 13 owned regional jet aircraft in 2018.  

43

The following table summarizes our expectedanticipated fleet count by year, as of February 14, 2018:the date of this filing:
 Actual Fleet Count
Anticipated Fleet Activity(a)
AircraftDec 31, 2021Dec 31, 20222023 ChangesDec 31, 20232024 ChangesDec 31, 20242025 ChangesDec 31, 2025
B737-700 Freighters3 3 — 3 — 3 — 3 
B737-800 Freighters— — 1 1 1 2 — 2 
B737-70011 11 — 11 — 11 — 11 
B737-80061 61 (2)59 — 59 — 59 
B737-90012 12 — 12 — 12 — 12 
B737-900ER79 79 — 79 — 79 — 79 
B737-8— — 3 3 7 10 — 10 
B737-911 37 34 71 12 83 5 88 
B737-10— — — — 6 6 21 27 
A32030 12 (12)— — — — — 
A321neo10 10 (10)— — — — — 
Total Mainline Fleet217 225 14 239 26 265 26 291 
Q400 operated by Horizon32 11 (11)— — — — — 
E175 operated by Horizon30 33 8 41 3 44 3 47 
E175 operated by third party32 42 — 42 — 42 1 43 
Total Regional Fleet(b)
94 86 (3)83 3 86 4 90 
Total311 311 11 322 29 351 30 381 
(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted or agreed to by counterparties yet.
 Actual Fleet Count 
Contractual Deliveries(a)
AircraftDec 31, 2016 Dec 31, 2017 2018 Changes Dec 31, 2018 2019 Changes Dec 31, 2019
B737 Freighters6
 3
 —
 3
 —
 3
B737 Passenger Aircraft149
 151
 8
 159
 13
 172
Airbus Passenger Aircraft63
 67
 4
 71
 1
 72
Total Mainline Fleet218
 221
 12
 233
 14

247
Q400(b)
52
 50
 (13) 37
 (10) 27
E175(b)
15
 33
 25
 58
 10
 68
Total Regional Fleet67
 83
 12
 95
 —
 95
Total285
 304
 24
 328
 14
 342
(a)
The expected fleet counts at December 31, 2018 and 2019 are subject to change.We intend to reduce the capital investment spend driven by fleet counts above, specifically in 2018, 2019 and 2020, which may require deferral of certain aircraft deliveries.
(b)
Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party.

(b)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party.
For
We intend to finance future firm ordersaircraft deliveries and option exercises we may finance the aircraft throughusing cash flow from operations or long-term debt, or lease arrangements.debt.




Future Fuel Hedge Positions


All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases;increases and, during a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. Our crude oil positions are as follows:
 Approximate % of Expected Fuel RequirementsWeighted-Average Crude Oil Price per BarrelAverage Premium Cost per Barrel
First Quarter 202350%$93$6
Second Quarter 202350%$97$7
Third Quarter 202340%$101$8
Fourth Quarter 202330%$99$8
Total 202343%$97$7
First Quarter 202420%$89$8
Second Quarter 202410%$86$8
Total 20247%$88$8

44
 Approximate % of Expected Fuel Requirements Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
First Quarter 201850% $62 $2
Second Quarter 201850% $63 $1
Third Quarter 201840% $62 $2
Fourth Quarter 201830% $62 $2
   Full Year 201842% $62 $2
First Quarter 201920% $64 $1
Second Quarter 201910% $65 $2
   Full Year 20197% $65 $2


Contractual Obligations
 
The following table provides a summary of our obligations as of December 31, 2017.2022. For agreements with variable terms, amounts included reflect our minimum obligations. Discussion of these obligations follow the table below.
(in millions)20232024202520262027BeyondTotal
Debt obligations$280 $244 $296 $176 $535 $643 $2,174 
Aircraft lease commitments(a)
285 230 225 222 218 741 1,921 
Facility lease commitments20 10 9 9 8 98 154 
Aircraft-related commitments(b)
1,846 1,580 1,262 689 337 606 6,320 
Interest obligations(c)
104 76 74 67 67 103 491 
CPA and other obligations(d)
209 216 220 217 218 739 1,819 
Total$2,744 $2,356 $2,086 $1,380 $1,383 $2,930 $12,879 
(a) Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.
(in millions)2018 2019 2020 2021 2022 Beyond Total
Current and long-term debt obligations$310
 $393
 $449
 $414
 $247
 $768
 $2,581
Operating lease commitments(a)
431
 423
 391
 338
 296
 1,163
 3,042
Aircraft maintenance deposits(b)
61
 65
 68
 64
 52
 39
 349
Aircraft purchase commitments (c)
955
 816
 377
 268
 193
 145
 2,754
Interest obligations(d)
89
 81
 64
 47
 35
 69
 385
Aircraft maintenance and parts management98
 102
 105
 121
 76
 80
 582
Other obligations136
 158
 166
 172
 180
 1,099
 1,911
Total$2,080
 $2,038
 $1,620
 $1,424
 $1,079
 $3,363
 $11,604
(a)
Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. Included here are E175 aircraft operated by SkyWest under a capacity purchase agreement.
(b)
Aircraft maintenance deposits relate to leased Airbus aircraft, and the power-by-the-hour agreement for the B737-800 fleet.
(c)
Represents non-cancelable contractual payment commitments for aircraft and engines. We intend to reduce the capital investment from these levels, specifically in 2018, 2019 and 2020, which may require deferral of certain aircraft deliveries.
(d)
For variable-rate debt, future obligations are shown above using interest rates forecast as of December 31, 2017.

(b) Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
Defined Benefit Pensions(c) For variable-rate debt, future obligations are shown above using interest rates forecast as of December 31, 2022.

(d) Primarily comprised of nonlease costs associated with capacity purchase agreements.

Debt Obligations and Interest Obligations

The table above excludes contributionsCompany primarily issues debt to fund purchases of aircraft or other capital expenditures. In 2022, we repaid $385 million in debt, including prepayments of $17 million. At December 31, 2022, our debt portfolio carries a weighted average interest rate of 3.7%. Interest is paid with regular debt service. Debt service obligations in 2023 is expected to be approximately $384 million, inclusive of interest and principal. Refer to Note 6 to the consolidated financial statement for further discussion of our debt and interest balances.

CPA and Other Obligations

We have obligations primarily associated with our capacity purchase agreements between Alaska and SkyWest, as well as other various pension plans, for which theresponsorship agreements and investment commitments.

Leased Aircraft Return Costs

For many of our leased aircraft, we are no minimum required contributions givenunder the funded statuscontractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the plans. The unfunded liabilitylease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is
removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. In 2022, we recorded expense of $238 million for our qualified defined-benefit pension plans was $304estimated costs to return the Airbus A320 fleet. A total of $277 million is accrued at December 31, 2017, compared2022, including costs recorded in prior year periods. Additional charges to a $197 million unfunded position at December 31, 2016. This resultsbe recorded in an 87% funded status on a projected benefit obligation basis compared2023 will reflect adjustments to 90% fundedestimated costs to return the A320 fleet, as well as remaining costs to retire our ten A321neo aircraft, which remain subject to negotiation with counterparties. We anticipate recording material cash outflows to return aircraft in 2023 in conjunction with expected lease terminations and the accelerated exit of December 31, 2016. We contributed approximately $15 million in 2017 to the plans.Airbus aircraft from Alaska's fleet.


Credit Card Agreements
 
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.



45

Deferred
Sustainability Commitments

As part of our efforts to reach net-zero carbon emissions by 2040, we have made commitments related to sustainability initiatives that will require significant cash outlays. These commitments include, but are not limited to, purchasing SAF, increasing our use of electric ground equipment in our operation, and making investments through Alaska Star Ventures. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of SAF to be delivered between 2025 and 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within Other obligations in the above table, as appropriate.

Income Taxes


For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid.


While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income and cash taxes payable in the short-termshort term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control.


In 2017, we made2022, the Company received a net refund of tax payments net of refunds, totaling $177 million, and$270 million. The Company had an effective tax rate of 14.3% largely due to the impact of the Tax Cuts and Jobs Act. We expect our effective tax rate to be approximately 24.5% for 2018 and the effective rate of cash paid for income taxes to be approximately 10%-15% of book income, although these estimates are subject to change.26.2%. We believe that we will have the liquidity available to make our future tax payments.


In August 2022, the Inflation Reduction Act ("IRA") bill was signed into law, effective for tax years beginning after December 31, 2022. The IRA includes a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted income during the most recently-completed three-year period exceeds $1 billion. We will continue to evaluate the provisions within the IRA, but at this time we do not believe it will have a material impact on our financial statements.
46

CRITICAL ACCOUNTING ESTIMATES
 
The discussion and analysis of our financial position and results of operations in this MD&A are based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See Note 1 to the consolidated financial statements for a description of our significant accounting policies.


Critical accounting estimates are defined as those that reflect significant management judgment and uncertainties and that potentially may lead to materially different results under varying assumptions and conditions. Management has identified the following critical accounting estimatesestimate and has discussed the development, selection and disclosure of these policies with our audit committee.
 
FREQUENT FLYER PROGRAMS
 
Alaska's Mileage Plan™Plan loyalty program awards mileage credits, referred to as miles, to members who fly on our airlines and our airline partners. We also sell services, including miles for transportation, Companion Fare™ certificates, priority boarding, bag fee waivers, and access to our brand and customer lists to major banks that offer Alaska co-branded credit cards. To a lesser extent, miles for transportation are also sold to other non-airline partners, such as hotels, and car rental agencies and a major bank that offers Alaska affinity credit cards. In either case, the outstandingagencies. Outstanding miles may be redeemed for travel on our airlines or any of oureligible airline partners.partners, and for non-airline products such as hotels. As long as the Mileage Plan™Plan is in existence, we have an obligation to provide this future travel.
For miles earned by guests who fly on us or our airline partners, we recognize a liability and a corresponding selling expense representing the incremental cost associated with the obligation to provide travel in the future. For services sold through one of our non-airline partners, the sales proceeds that represent award transportation and certificates for discounted companion travel are deferred and recognized when the transportation is delivered,Mileage credits and the remaining componentsvarious other services we sell under our loyalty program represent performance obligations that are recorded as commissionpart of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price model to allocate consideration received to the material performance obligations in other—net revenue inthese contracts. Our relative standalone selling price models are refreshed when contracts originate or are materially modified. Absent a change to relevant contracts, we review the period the services are performed. Commission revenue recognizedmodel for the years ended December 31, 2017, 2016 and 2015 was $396 million, $329 million and $280 million, respectively. The deferred revenue is recognized as passenger revenue when the award travel occurs, or the miles expire, and as other—net revenue for awards issued and flownpotential updates annually based on partner airlines.observed volumes.
 
At December 31, 2017,2022, we had approximately 220319 billion miles and points outstanding, resulting in an aggregate liability and deferred revenue balance of $1.2 billion. Both the liability and the$2.5 billion. The deferred revenue are determined based on several assumptions that requireresulting from our relative selling price allocations requires significant management judgment to estimate and formulate.judgment. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition or expenses. The most significant assumptions in accounting for the Mileage Plan™ are described below.

1.The rate at which we defer sales proceeds related to services sold:

1.The rate at which we defer sales proceeds related to services sold through non-airline partners:
 
We useestimate the relativestandalone selling price method for the deferral of sales proceeds. For contracts that were modified after the effective date of Accounting Standards Update 2009-13, "Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force" (ASU 2009-13), we determined our best estimate of selling priceeach performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded, and the number of miles redeemed. We estimatedestimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables. This relative allocation is evaluated annually and updated according to changes

Following the amendment of our agreement with one of our co-branded bank card partners in the assumptionsfirst quarter of 2022, the volumeCompany updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of related deliverables. A 1% shift between the allocation of cash proceeds to travel deliverables from marketing deliverables would defer the timing of revenue recognition by approximately $9 million.January 1, 2022.

2.The number of miles that will not be redeemed for travel (breakage):

2.The liability for outstanding Mileage Plan™ mileage credits includes all mileage credits that are expected to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level to redeem an award. Our estimate of the number of miles that will not be redeemed for travel (breakage) considers historical activity in our members’ accounts and other factors. Based on statistical analysis of historical data, our current breakage rate is 17.4%. A hypothetical 1% change in our estimate of breakage has approximately a $10 million effect on the liability.:

3.The number of miles used per award:
 
We estimate how many miles will be used per award. For example, our members may redeem creditmileage credits for award travel to various locations or choose between a highly restricted award and an unrestricted award. Our estimates are based on the current requirements in our Mileage Plan™Plan program and historical and future award redemption patterns.

4.The number of awards redeemed for travel on our airlines versus other airlines:
The cost for us to carry an award passenger is typically lower than the cost we will pay to our travel partners. We estimate the number of awards that will be redeemed on our airlines versus on our travel partners and accrue the estimated costs based on historical redemption patterns. If the number of awards redeemed on our travel partner is higher or lower than estimated, we may need to adjust our liability and corresponding expense.

5.The costs that will be incurred to provide award travel for miles earned by guests who fly on us or our airline partners:
When a frequent flyer travels on his or her award ticket on one of our airlines, incremental costs such as food, fuel and insurance are incurred to carry that passenger. We estimate what these costs will be (excluding any contribution to overhead and profit) and accrue a liability. If the guest travels on another airline on an award ticket, we often must pay the other airline for carrying the guest. The other airline costs are based on negotiated agreements and are often substantially higher than the costs we would incur to carry that guest. We estimate how much we will pay to other airlines for future travel awards based on historical redemptions and settlements with other carriers and accrue a liability accordingly. The costs actually incurred by us or paid to other airlines may be higher or lower than the costs that were estimated and accrued, and therefore we may need to adjust our liability and recognize a corresponding expense.

We regularly review significant Mileage Plan™Plan assumptions on an annual basis, or more frequently should circumstances indicate a need, and change our assumptions if facts and circumstances indicate that a change is necessary. Any such change in assumptions could have a significant effect on our financial position and results of operations.

See further discussion belowThe Company updated its breakage estimate for the impact to the accountingportion of frequent flyer programs due to the new revenue recognition accounting standard.

PENSION PLANS
Our actuarial estimates of pension liability, the related expense and the associated significant assumptions are discussed in Note 7 to the consolidated financial statements.   

The calculation of pension expense and the corresponding liability requires the use of a number of key assumptions, including theloyalty mileage credits not expected long-term rate of return on plan assets and the assumed discount rates to be used in the calculation of the projected


benefit obligation and the interest and service cost. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

Pension liability and future pension expense decrease as the discount rate used for the obligation increases. We discounted future pension obligations using rates between 3.69% and 3.78% at December 31, 2017 and between 4.29% and 4.50% at December 31, 2016. The discount rates were determined using current rates earned on high-quality, long-term bonds with maturities that correspond with the estimated cash distributions from each one of the defined-benefit pension plans. The discount rates we use are based on a yield curve that uses a pool of higher-yielding bonds estimated to be more in line with settlement rates, as we have taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future. If the discount rate decreased by 0.5%, our projected benefit obligation at December 31, 2017 would increase by approximately $163 million.

Pension expense normally increases as the expected rate of return on pension plan assets decreases. As of December 31, 2017, we estimate that the pension plan assets will generate long-term rates of return between 4.25% and 5.50%, which compares to 5.5% and 6.00% at December 31, 2016. We regularly review the actual asset allocation and periodically rebalance investments as appropriate. This expected long-term rate of return on plan assets at December 31, 2017 is based on an allocation of U.S. and non-U.S. equities, U.S. fixed-income securities, and real estate. A decrease in the expected long-term rate of return of 0.5% would increase our estimated 2018 pension expense by approximately $10 million.

All of our defined-benefit pension plans are now closed to new entrants. Additionally, benefits in our non-union defined-benefit plans were frozenredeemed, effective January 1, 2014.
Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities. We cannot predict what these factors will be in the future.

See further discussion below for the impact to the accounting2022. This update was made following a study that used a statistical analysis of pension plans due to the new retirement benefits accounting standard.
BUSINESS COMBINATION ACCOUNTING, GOODWILL AND INTANGIBLES

To record the value of assets acquired and liabilities assumed as a result of our acquisition of Virgin America on December 14, 2016, we have performed a purchase price allocation utilizing the best information available to management. The purchase price allocation is final as of December 14, 2017. The fair values of the assets acquired and liabilities assumed were determined using market, income or cost methods. Our consolidated balance sheet reflects goodwillhistorical data. A hypothetical 1% change in the amount of $1.9 billion at December 31, 2017, representing the excess of the purchase price over the fair value of Virgin America’s tangible and identifiable intangible assets and liabilities. Identifiable intangible assets recorded totaledoutstanding miles estimated to be redeemed would result in an approximately $141$9 million at December 31, 2017 and consisted of customer relationships, airport slots and gates. With the exception of airport slots, all of the identified intangible assets are finite-lived and are being amortized over their estimated economic useful lives. Goodwill and indefinite-lived intangible assets are not amortized, but will be tested for impairment at least annually (in the fourth quarter), or more frequently if events or circumstances indicate that an impairment may exist.

Our impairment analysis may include a qualitative assessment to determine whether it is more likely than not that a reporting unit or intangible asset group is impaired. If we do not perform a qualitative assessment, or if we determine it is more likely than not that the fair value of the reporting unit or intangible asset group exceeds its carrying amount, we will calculate the estimated fair value of the reporting unit or intangible asset group and an impairment charge would be recorded to reduce the carrying value to the estimated fair value.

Qualitative factors that might indicate a need to perform an impairment analysis outside of the regular annual assessment could include, but are not limited to: 1) reduced passenger demand as a result of domestic or global economic conditions; 2) significantly ongoing higher prices for jet fuel; 3) significant ongoing lower fares or passenger yields as a result of increased competition or lower demand; 4) a significant increase in future capital expenditure commitments; and 5) significant disruptions to our operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by employees, or further industry regulation.

Our business combination accounting, as well as future impairment analyses, require management to make assumptions and apply judgment. Key assumptions include, but are not limited to, estimating future cash flows, selecting discount rates and selecting valuation methodologies. These estimates and assumptions are highly subjective and our ability to realize the future cash flows used in our fair value calculations may be affected by changes in economic condition, our economic performance or business strategies.



ADOPTION OF NEW ACCOUNTING STANDARDS

The new Revenue Recognition standard issued by the Financial Accounting Standards Board (FASB) replaces most existing revenue recognition guidance in U.S. GAAP, and is effective for the Company beginning January 1, 2018.

The most significant change to the financial statements resulting from the new standard is revenue recognition related to the frequent flyer program revenues and liabilities. Historically, we have used the incremental cost approach for miles earned through travel. This approach has been eliminated with the new standard. Instead, we are required to allocate a portion of the ticket price for each ticket flown, or miles earned, through a relative selling price model and defer revenue recognition until a mileage award is redeemed and flown, or unused mileage credits expire. As our Mileage Plan™ program is growing, the Company expects revenue deferred will exceed revenue earned under the new standard for miles earned through travel.

Further, unused ticket revenue that was previously recorded at the time of expiration will now be recorded at the original departure date if that ticket has not been changed or refunded prior to that date, based on estimates of expected expiration using historical patterns. We estimate the change in ticket breakage methodology will not have a significant impact on the statements of operations, but will result in a reduction in air traffic liability compared to previously reported balances.annual revenue recognized.


The new standard also requires us to present ancillary revenues related to passenger travel as Passenger Revenue. Historically, such ancillary revenues have been presented as Other Revenues. Further, some ancillary revenues related to passenger travel will be recognized at the date of travel rather than the date of sale under the new standard.

It is worth noting that the standard impacts the timing of revenue recognition, and is not indicative of a weaker revenue environment. Additionally, the standard does not impact the timing of cash flows.

Although less significant, the new retirement benefits accounting standard is also effective January 1, 2018. Under this new standard, all components of net periodic benefit cost will be presented in Nonoperating income (expense), except service cost, which will remain in Wages and benefits. This change has an impact on CASM excluding fuel and special items. Management believes it is useful to compare forecasted results with the restated results under the new standards.

We have provisionally modeled the impacts of the revenue recognition standard and the pension accounting standard, and expect the following changes to the statements of operations for the years ending December 31, 2016 and December 31, 2017. All adjustments and recast amounts below are subject to finalization upon implementation in 2018.
Provisional impact of new accounting standards to the 2016 Statement of Operations:
 FY 2016 Adjustments - Adjustments - FY 2016
 As Reported Revenue Recognition Retirement Benefits As Recast
Passenger Revenue$5,006
 $391
 $—
 $5,397
Other Revenue925
 (398) —
 527
Total Operating Revenue5,931
 (7) —
 5,924
Operating Expense4,582
 24
 12
 4,618
Nonoperating Income (Expense)(4) —
 12
 8
Income Before Income Tax$1,345
 $(31) $—
 $1,314



Provisional impact of new accounting standards to the 2017 Statement of Operations:
 FY 2017 Adjustments - Adjustments - FY 2017
 As Reported Revenue Recognition Retirement Benefits As Recast
Passenger Revenue$6,818
 $487
 $—
 $7,305
Other Revenue1,115
 (528) —
 587
Total Operating Revenue7,933
 (41) —
 7,892
Operating Expense6,673
 13
 7
 6,693
Nonoperating Income (Expense)(53) —
 7
 (46)
Income Before Income Tax$1,207
 $(54) $—
 $1,153

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
 
We have interest-rateinterest rate risk on our variable-ratevariable rate debt obligations and our available-for-sale marketable investment portfolio, and commodity-price risk in jet fuel required to operate our aircraft fleet. We purchase the majority of our jet fuel at prevailing
47

market prices and seek to manage market risk through execution of our hedging strategy and other means. We have market-sensitive instruments in the form of fixed-ratefixed rate debt instruments and financial derivative instruments used to hedge our exposure to jet-fueljet fuel price increases and interest-rateinterest rate increases. We do not purchase or hold any derivative financial instruments for trading purposes.
 
Aircraft Fuel
 
Currently, our fuel-hedgingfuel hedging portfolio consists of crude oil call options. Call options effectively cap our pricing for the crude oil component of jet fuel, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With call options, we are hedged against volatile crude oil price increases, and, during a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We believe there is risk in not hedging against the possibility of fuel price increases. We estimate that a hypothetical 10% increase or decrease in the forward curve for crude oil prices as of December 31, 20172022 would change the fair value of our crude oil hedge portfolio to approximately $55$74 million or $6 million, respectively.$23 million.


OurThe portfolio value of our fuel hedge contracts was $22$44 million at December 31, 20172022 compared to a portfolio value of $20$81 million at December 31, 2016.2021. We dodid not have any collateral held by counterparties toon these agreements as of December 31, 2017.2022.
 
We continue to believe that our fuel hedge program is an important part of our strategy to reduce our exposure to volatile fuel prices. We expect to continue to enter into these types of contracts prospectively, although significant changes in market conditions could affect our decisions. For more discussion, see Note 34 to our consolidated financial statements.
 
Interest Rates
 
We have exposure to market risk associated with changes in interest rates related primarily to our debt obligations, andwhich include variable rate instruments, as well as our short-term investment portfolio. Our debt obligations include variable-rate instruments, which have exposure to changes in interest rates. In order to mitigate the risk of interest rate fluctuations, we have a number of interest rate swaps that fix the interest rates on certain variable-ratevariable rate debt agreements. A hypothetical 10% change in the average interest rates incurred on average variable-ratevariable rate debt held during 20172022 would have correspondingly changed our net earnings and cash flows associated with these items by less than $4$2 million. Our variable-ratevariable rate debt represents approximately 63%24% and 61%29% of our total long-term debt as of December 31, 20172022 and December 31, 2016, respectively.2021. Approximately $302 million of the Company's total variable rate notes payable were effectively fixed via interest rate swaps at December 31, 2022.


Our exposure to interest rate variability is further mitigated through our variable-ratevariable rate investment portfolio. We also have investments in marketable securities, which are exposed to market risk associated with changes in interest rates. If short-term interest rates were to average 1one point more than they did in 2017,2022, interest income would increase by approximately $16$24 million.


Our variable rate instruments, including long-term debt, interest rate swaps, and credit facilities, make reference to the London Interbank Offered Rate (LIBOR) and Secured Overnight Financing Rate (SOFR) as the interest rate benchmark. In June 2023, LIBOR will be discontinued as a reference rate. We have started to transition LIBOR-based contracts to SOFR, which effectively places the Lenders and the Company in the same economic position that existed immediately prior to the discontinuation of LIBOR. At this time, we do not anticipate that the discontinuance of LIBOR will materially impact our liquidity or financial position.

Inflationary Risk

Inflation in the United States in 2022 was among the highest it has been in the past 30 years. Although a large portion of our operating costs are contractual with escalation clauses capped at specific increases, a portion of our costs are subject to a greater degree of inflationary pressures. Examples include fuel costs, goods and services for which we do not have existing contracts, wages for employees, airport costs based on cost recovery models, and certain vendor costs that include wage increase clauses, among others. Elevated inflation rates for a prolonged period of time, without the ability to increase our fares at a similar rate, may have a significant impact to our financial results.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 


SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (unaudited)
48
 First Quarter Second Quarter Third Quarter Fourth Quarter
(in millions, except per share)2017 2016 2017 2016 2017 2016 2017 2016
Operating revenues$1,749
 $1,347
 $2,102
 $1,494
 $2,120
 $1,566
 $1,962
 $1,524
Operating income166
 290
 493
 418
 439
 400
 162
 241
Net income99
 184
 296
 260
 266
 256
 373
 114
Basic earnings per share(a)
0.80
 1.47
 2.40
 2.11
 2.15
 2.08
 3.03
 0.92
Diluted earnings per share(a)
0.79
 1.46
 2.38
 2.10
 2.14
 2.07
 3.02
 0.92
(a)

For earnings per share, the sum of the quarters may not equal the total for the full year due to rounding.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the StockholdersShareholders and Board of Directors of
Alaska Air Group, Inc.:


Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Alaska Air Group, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 14, 201813, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
KPMG LLP
Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of Mileage Plan model

As discussed in Note 3 to the consolidated financial statements, the Company has a Mileage Plan loyalty program which provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. The Company utilizes a complex model to account for the Mileage Plan program, which involves numerous inputs and assumptions. Deferred revenues related to the Mileage Plan program were $2.5 billion as of December 31, 2022. Associated Mileage Plan revenues recognized from deferred revenue and recorded in passenger revenue were $931 million for the year ended December 31, 2022.

We identified the assessment of the Mileage Plan model as a critical audit matter. This was due to the high degree of auditor judgment required to assess that sufficient audit evidence was obtained over the model as well as the key inputs
49

and assumptions used to develop the estimates of Mileage Plan revenue and deferred revenue due to the complex design of the model. Key inputs include miles credited and miles redeemed and key assumptions include estimated breakage and the relative standalone selling prices for performance obligations in a co-branded affinity agreement.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s Mileage Plan model. This included controls related to the integrity of the model as well as the key inputs and key assumptions utilized in the model. We checked the accuracy of key calculations utilized in the Mileage Plan model. We tested the completeness and accuracy of information technology system data used to determine the miles credited and miles redeemed inputs. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the statistical and valuation models utilized to derive the breakage estimate and the relative standalone selling prices for performance obligations in the co-branded affinity agreement, respectively. We considered changes in the Mileage Plan program terms and customer behavior for potential changes in the breakage rate. We evaluated fluctuations in Mileage Plan balances in relation to program changes, economic conditions, and observed industry trends and events.

In addition, we evaluated the sufficiency of audit evidence obtained over the Mileage Plan model by assessing the results of procedures performed.


We have served as the Company’sCompany's auditor since 2004.

Seattle, Washington
February 14, 201813, 2023

/s/ KPMG LLP









 
 


 

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CONSOLIDATED BALANCE SHEETS
As of December 31 (in millions)
20222021
ASSETS  
Current Assets  
Cash and cash equivalents$338 $470 
Marketable securities2,079 2,646
Total cash and marketable securities2,417 3,116
Receivables - net296 546
Inventories and supplies - net104 62
Prepaid expenses163 120
Other current assets60 76 
Total Current Assets3,040 3,920
Property and Equipment  
Aircraft and other flight equipment9,053 8,127
Other property and equipment1,661 1,489
Deposits for future flight equipment670 384
 11,384 10,000
Less accumulated depreciation and amortization4,127 3,862
Total Property and Equipment - Net7,257 6,138
Other Assets
Operating lease assets1,471 1,453 
Goodwill and intangible assets2,038 2,044 
Other noncurrent assets380 396
Total Other Assets3,889 3,893
Total Assets$14,186 $13,951 



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As of December 31 (in millions)
2017 2016
ASSETS   
Current Assets   
Cash and cash equivalents$194
 $328
Marketable securities1,427
 1,252
Total cash and marketable securities1,621
 1,580
Receivables—less allowance for doubtful accounts of $1 and $1341
 302
Inventories and supplies—net57
 47
Prepaid expenses and other current assets127
 121
Total Current Assets2,146
 2,050
    
Property and Equipment 
  
Aircraft and other flight equipment7,559
 6,947
Other property and equipment1,222
 1,103
Deposits for future flight equipment494
 545
 9,275
 8,595
Less accumulated depreciation and amortization2,991
 2,929
Total Property and Equipment—Net6,284
 5,666
    
Other Assets   
Goodwill1,943
 1,934
Intangible assets—net133
 143
Other noncurrent assets234
 169
Total Other Assets2,310
 2,246
    
Total Assets$10,740
 $9,962
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31 (in millions except share amounts)
20222021
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$221 $200 
Accrued wages, vacation and payroll taxes619 457
Air traffic liability1,180 1,163
Other accrued liabilities846 625
Deferred revenue1,123 912
Current portion of operating lease liabilities228 268 
Current portion of long-term debt276 366
Total Current Liabilities4,493 3,991
Long-Term Debt, Net of Current Portion1,883 2,173
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,393 1,279 
Deferred income taxes574 578
Deferred revenue1,374 1,446
Obligation for pension and post-retirement medical benefits348 305
Other liabilities305 378
Total Noncurrent Liabilities3,994 3,986
Commitments and Contingencies (Note 10)
Shareholders' Equity  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding— — 
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,883,042 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 127,533,916 shares; 2021 - 125,905,864 shares1 1 
Capital in excess of par value577 494 
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares(674)(674)
Accumulated other comprehensive loss(388)(262)
Retained earnings4,300 4,242
 3,816 3,801
Total Liabilities and Shareholders' Equity$14,186 $13,951 


See accompanying notes to consolidated financial statements.



CONSOLIDATED BALANCE SHEETS (continued)
52
As of December 31 (in millions except share amounts)
2017 2016
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current Liabilities   
Accounts payable$120
 $92
Accrued wages, vacation and payroll taxes418
 397
Air traffic liability937
 849
Other accrued liabilities918
 878
Current portion of long-term debt307
 319
Total Current Liabilities2,700
 2,535
    
Long-Term Debt, Net of Current Portion2,262
 2,645
    
Other Liabilities and Credits 
  
Deferred income taxes454
 463
Deferred revenue699
 640
Obligation for pension and postretirement medical benefits453
 331
Other liabilities451
 417
Total Other Liabilities and Credits2,057
 1,851
    
Commitments and Contingencies (Note 8)

 

    
Shareholders' Equity 
  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding—
 —
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2017 - 129,903,498 shares; 2016 - 129,189,634 shares, Outstanding: 2017 - 123,060,638 shares; 2016 - 123,328,051 shares1
 1
Capital in excess of par value164
 110
Treasury stock (common), at cost: 2017 - 6,842,860 shares; 2016 - 5,861,583 shares(518) (443)
Accumulated other comprehensive loss(380) (305)
Retained earnings4,454
 3,568
 3,721
 2,931
Total Liabilities and Shareholders' Equity$10,740
 $9,962


CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 (in millions, except per share amounts)
202220212020
Operating Revenue   
Passenger revenue$8,808 $5,499 $3,019 
Mileage Plan other revenue590 461 374 
Cargo and other revenue248 216 173 
Total Operating Revenue9,646 6,176 3,566 
Operating Expenses   
Wages and benefits2,640 2,218 2,053 
Variable incentive pay257 151 130 
Payroll Support Program grant wage offset— (914)(782)
Aircraft fuel, including hedging gains and losses2,668 1,279 723 
Aircraft maintenance424 364 321 
Aircraft rent291 254 299 
Landing fees and other rentals581 555 417 
Contracted services329 235 181 
Selling expenses295 173 101 
Depreciation and amortization415 394 420 
Food and beverage service197 139 90 
Third-party regional carrier expense182 147 128 
Other717 507 407 
Special items - fleet transition and other496 (1)627 
Special items - labor and related84 (10)220 
Special items - merger-related costs— — 6 
Total Operating Expenses9,576 5,491 5,341 
Operating Income (Loss)70 685 (1,775)
Non-operating Income (Expense)   
Interest income53 25 31 
Interest expense(108)(128)(98)
Interest capitalized14 11 11 
Special charges - net non-operating— — (26)
Other - net50 36 17 
Total Non-operating Income (Expense)9 (56)(65)
Income (Loss) Before Income Tax79 629 (1,840)
Income tax expense (benefit)21 151 (516)
Net Income (Loss)$58 $478 $(1,324)
Basic Earnings (Loss) Per Share$0.46 $3.82 $(10.72)
Diluted Earnings (Loss) Per Share$0.45 $3.77 $(10.72)
Shares used for computation:  
Basic126.657 125.063 123.450 
Diluted127.899 126.775 123.450 

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF OPERATIONS
53
Year Ended December 31 (in millions, except per-share amounts)
2017 2016 2015
Operating Revenues     
Passenger     
Mainline$5,858
 $4,098
 $3,939
Regional960
 908
 854
Total passenger revenue6,818
 5,006
 4,793
Freight and mail114
 108
 108
Other—net1,001
 817
 697
Total Operating Revenues7,933
 5,931
 5,598
      
Operating Expenses 
  
  
Wages and benefits1,924
 1,382
 1,254
Variable incentive pay135
 127
 120
Aircraft fuel, including hedging gains and losses1,447
 831
 954
Aircraft maintenance391
 270
 253
Aircraft rent274
 114
 105
Landing fees and other rentals460
 320
 296
Contracted services314
 247
 214
Selling expense357
 225
 211
Depreciation and amortization372
 363
 320
Food and beverage service195
 126
 113
Third-party regional carrier expense121
 95
 72
Other565
 365
 356
Special items—merger-related costs and other118
 117
 32
Total Operating Expenses6,673
 4,582
 4,300
Operating Income1,260
 1,349
 1,298
      
Nonoperating Income (Expense) 
  
  
Interest income34
 27
 21
Interest expense(103) (55) (42)
Interest capitalized17
 25
 34
Other—net(1) (1) 1
 (53) (4) 14
Income Before Income Tax1,207
 1,345
 1,312
Income tax expense453
 514
 490
Special income tax expense (benefit)(280) 17
 (26)
Total Income Tax Expense$173
 $531
 $464
Net Income$1,034
 $814
 $848
      
Basic Earnings Per Share$8.39
 $6.59
 $6.61
Diluted Earnings Per Share$8.35
 $6.54
 $6.56
Shares used for computation:   
  
Basic123.211
 123.557
 128.373
Diluted123.854
 124.389
 129.372
      
Cash dividend declared per share$1.20
 $1.10
 $0.80

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Year Ended December 31 (in millions)
202220212020
Net Income (Loss)$58 $478 $(1,324)
Other comprehensive income (loss), net of tax
Marketable securities(76)(27)14 
Employee benefit plans(67)246 (29)
Interest rate derivative instruments17 13 (14)
Total other comprehensive income (loss), net of tax(126)232 (29)
Total Comprehensive Income (Loss), net of tax$(68)$710 $(1,353)
Year Ended December 31 (in millions)
2017 2016 2015
      
Net Income$1,034
 $814
 $848
      
Other Comprehensive Income (Loss):     
Related to marketable securities:     
Unrealized holding gains (losses) arising during the period(4) 1
 (6)
Reclassification of (gains) losses into Other-net nonoperating income (expense)1
 (1) 1
Income tax benefit (expense)1
 —
 2
Total(2) —
 (3)
      
Related to employee benefit plans:     
Actuarial gains (losses) related to pension and other postretirement benefit plans(123) (43) 10
Reclassification of net pension expense into Wages and benefits22
 20
 14
Income tax benefit (expense)24
 12
 (14)
Total(77) (11) 10
      
Related to interest rate derivative instruments:     
Unrealized holding gains (losses) arising during the period1
 8
 (5)
Reclassification of losses into Aircraft rent5
 6
 6
Income tax benefit (expense)(2) (5) (1)
Total4
 9
 —
      
Other Comprehensive Income (Loss)(75) (2) 7
      
Comprehensive Income$959
 $812
 $855


See accompanying notes to consolidated financial statements.





54

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2019123.000 $1 $305 $(643)$(465)$5,133 $4,331 
2020 net loss— — — — — (1,324)(1,324)
Other comprehensive loss— — — — (29)— (29)
Common stock repurchases(0.538)— — (31)— — (31)
Stock-based compensation— — 34 — — — 34 
CARES Act warrant issuances— — 14 — — — 14 
Cash dividend declared ($0.375 per share)— — — — — (45)(45)
Stock issued for employee stock purchase plan1.524 — 41 — — — 41 
Stock issued under stock plans0.231 — (3)— — — (3)
Balances at December 31, 2020124.217 $1 $391 $(674)$(494)$3,764 $2,988 
2021 net income— — — — — 478 478 
Other comprehensive income— — — — 232 — 232 
Stock-based compensation0.010 — 44 — — — 44 
CARES Act warrant issuances— — 16 — — — 16 
Stock issued for employee stock purchase plan1.255 — 48 — — — 48 
Stock issued under stock plans0.424 — (5)— — — (5)
Balances at December 31, 2021125.906 $1 $494 $(674)$(262)$4,242 $3,801 
2022 net income— — — — — 58 58 
Other comprehensive loss— — — — (126)— (126)
Stock-based compensation0.016 — 35 — — — 35 
Stock issued for employee stock purchase plan1.293 — 54 — — — 54 
Stock issued under stock plans0.318 — (6)— — — (6)
Balances at December 31, 2022127.533 $1 $577 $(674)$(388)$4,300 $3,816 
(in millions)Common Stock Outstanding Common Stock Capital in Excess of Par Value Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
Balances at December 31, 2014131.481
 $1
 $296
 $(4) $(310) $2,144
 $2,127
2015 net income—
 —
 —
 —
 —
 848
 848
Other comprehensive income (loss)—
 —
 —
 —
 7
 —
 7
Common stock repurchase(7.208) —
 (259) (246) —
 —
 (505)
Stock-based compensation—
 —
 17
 —
 —
 —
 17
Cash dividend declared—
 —
 —
 —
 —
 (102) (102)
Stock issued for employee stock purchase plan0.281
 —
 13
 —
 —
 —
 13
Stock issued under stock plans0.621
 —
 6
 —
 —
 —
 6
Balances at December 31, 2015125.175
 1
 73
 (250) (303) 2,890
 2,411
2016 net income—
 —
 —
 —
 —
 814
 814
Other comprehensive income (loss)—
 —
 —
 —
 (2) —
 (2)
Common stock repurchase(2.595) —
 —
 (193) —
 —
 (193)
Stock-based compensation—
 —
 19
 —
 —
 —
 19
Cash dividend declared—
 —
 —
 —
 —
 (136) (136)
Stock issued for employee stock purchase plan0.309
 —
 17
 —
 —
 —
 17
Stock issued under stock plans0.439
 —
 1
 —
 —
 —
 1
Balances at December 31, 2016123.328
 1
 110
 (443) (305) 3,568
 2,931
2017 net income—
 —
 —
 —
 —
 1,034
 1,034
Other comprehensive income (loss)—
 —
 —
 —
 (75) —
 (75)
Common stock repurchase(0.981) —
 —
 (75) —
 —
 (75)
Stock-based compensation—
 —
 34
 —
 —
 —
 34
Cash dividend declared—
 —
 —
 —
 —
 (148) (148)
Stock issued for employee stock purchase plan0.407
 —
 24
 —
 —
 —
 24
Stock issued under stock plans0.307
 —
 (4) —
 —
 —
 (4)
Balances at December 31, 2017123.061
 $1
 $164
 $(518) $(380) $4,454
 $3,721


See accompanying notes to consolidated financial statements.

55



CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (in millions)
202220212020
Cash Flows from Operating Activities:   
Net income (loss)$58 $478 $(1,324)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Depreciation and amortization415 394 420 
Stock-based compensation and other42 51 24 
   Special items - impairment charges and other496 (1)627 
   Special items - restructuring charges— (10)220 
Changes in certain assets and liabilities:
Changes in deferred income taxes22 104 (300)
(Increase) decrease in accounts receivable(45)(69)(168)
Increase in air traffic liability17 90 173 
Increase in deferred revenue139 81 288 
Pension contribution— (100)— 
Federal income tax refund295 3 8 
Other - net(21)9 (202)
Net cash provided by (used in) operating activities1,418 1,030 (234)
Cash Flows from Investing Activities:   
Property and equipment additions   
Aircraft and aircraft purchase deposits(1,272)(68)(64)
Other flight equipment(208)(126)(55)
Other property and equipment(191)(98)(103)
Total property and equipment additions(1,671)(292)(222)
Purchases of marketable securities(1,797)(4,301)(2,962)
Sales and maturities of marketable securities2,252 3,595 2,318 
Proceeds from disposition of assets4 2 279 
Other investing activities(6)(12)(6)
Net cash used in investing activities(1,218)(1,008)(593)
Cash Flows from Financing Activities:   
Proceeds from issuance of long-term debt, net of issuance costs— 363 2,564 
Long-term debt payments(385)(1,334)(565)
Common stock repurchases— — (31)
Cash dividend paid— — (45)
Other financing activities60 57 58 
Net cash provided by (used in) financing activities(325)(914)1,981 
Net increase (decrease) in cash and cash equivalents(125)(892)1,154 
Cash, cash equivalents, and restricted cash at beginning of year494 1,386 232 
Cash, cash equivalents, and restricted cash at end of year$369 $494 $1,386 
56

Year Ended December 31 (in millions)
2017 2016 2015
Cash flows from operating activities:     
Net income$1,034
 $814
 $848
Adjustments to reconcile net income to net cash provided by operating activities: 
  
  
Depreciation and amortization372
 363
 320
Stock-based compensation and other55
 26
 25
Changes in certain assets and liabilities:     
Changes in deferred tax provision19
 94
 56
(Increase) decrease in accounts receivable(39) (46) 47
Increase (decrease) in air traffic liability88
 9
 38
Increase (decrease) in deferred revenue63
 83
 57
Changes in pension and other postretirement benefits17
 23
 36
Other—net(19) 20
 157
Net cash provided by operating activities1,590
 1,386
 1,584
Cash flows from investing activities: 
  
  
Property and equipment additions: 
  
  
Aircraft and aircraft purchase deposits(804) (528) (681)
Other flight equipment(96) (53) (79)
Other property and equipment(126) (97) (71)
Total property and equipment additions(1,026) (678) (831)
Acquisition of Virgin America, net of cash acquired—
 (1,951) —
Purchases of marketable securities(1,569) (960) (1,327)
Sales and maturities of marketable securities1,388
 962
 1,175
Proceeds from disposition of assets and changes in restricted deposits75
 5
 53
Net cash used in investing activities(1,132) (2,622) (930)
Cash flows from financing activities: 
  
  
Proceeds from issuance of long-term debt, net of issuance costs—
 2,044
 —
Long-term debt payments(397) (249) (116)
Common stock repurchases(75) (193) (505)
Cash dividend paid(148) (136) (102)
Other financing activities28
 25
 35
Net cash provided by (used in) financing activities(592) 1,491
 (688)
Net increase (decrease) in cash and cash equivalents(134) 255
 (34)
Cash and cash equivalents at beginning of year328
 73
 107
Cash and cash equivalents at end of year$194
 $328
 $73
      
Supplemental disclosure: 
  
  
Cash paid during the year for:     
Interest, net of amount capitalized$84
 $24
 $8
Income taxes, net of refunds received177
 459
 349

Supplemental disclosure:   
Cash paid during the year for:
Interest, net of amount capitalized$71 $109 $50 
Income taxes, net of refunds received— 48 — 
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents$338 $470 $1,370 
Restricted cash included in Other noncurrent assets31 24 16 
Total cash, cash equivalents, and restricted cash at end of the period$369 $494 $1,386 
See accompanying notes to consolidated financial statements.

57



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and Basis of Presentation
 
The consolidated financial statements include the accounts of Alaska Air Group (Air Group, or the Company,Company), and its primary subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon and Virgin America.Air Industries, Inc. (Horizon). Our consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and their preparation requires the use of management’s estimates. Actual results may differ from these estimates.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.


Cash and Cash Equivalents
 
Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates market value. The Company reduces cash balances when funds are disbursed. Due to the time delay in funds clearing the banks, the Company normally maintains a negative balance in its cash disbursement accounts, which is reported as a current liability. The amount of the negative cash balance was $10$9 million and $15$7 million at December 31, 20172022 and 2016 respectively,2021, and is included in accounts payable, with the change in the balance during the year included in other financing activities in the consolidated statements of cash flows.


The Company's restricted cash balances are not material and are classified as Other noncurrent assets. Restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consistsThey consist of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.


Marketable Securities


Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in market value excluding other-than-temporary impairments, are reflected in accumulated other comprehensive loss (AOCL).


Investments are considered to be impaired whenThe Company evaluates the investment portfolio on a decline in fair value is judged to be other-than-temporary.quarterly basis for expected credit losses. The Company uses a systematic methodology that groups assets by relevant market sector, and considers available quantitative and qualitative evidence in evaluating potential impairment.allowances for credit losses. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, the Company's intent and ability to hold, or plans to sell, the investment. Once a decline in fair value is determined to be other-than-temporary,the result of an impairment chargeexpected credit loss, an allowance is recorded to Other—net in the consolidated statements of operationsoperations.

Receivables—net

Receivables primarily consist of amounts due from taxing authorities, credit card processors, and a new cost basis in the investment is established.Company's affinity card partner stemming from income tax returns, sales of tickets to customers and bank purchased miles, respectively. Given the nature of these receivables, reserves are immaterial to the overall balance.


Inventories and Supplies—net
 
Expendable aircraft parts, materials and supplies are stated at average cost and are included in inventoriesInventories and supplies—net. An obsolescence allowance for expendable parts is accrued based on estimated lives of the corresponding fleet type and salvage values. The allowance for expendable inventories was $38$55 million and $36$49 million at December 31, 20172022 and 2016, respectively.2021. Removals from the reserve in 2022 were immaterial. Inventory and supplies— - net also includes fuel inventory of $23$38 million and $16$21 million at December 31, 20172022 and 2016, respectively.2021. Repairable and rotable aircraft parts inventories are included in flight equipment.



58



Property, Equipment and Depreciation
 
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives less an estimated salvage value, which are as follows:
Estimated Useful LifeEstimated Salvage Value
Aircraft and other flight equipment:
Boeing 737, Airbus A319/320,B737 and E175 aircraft20-2520 to 25 years10%
Bombardier Q400 aircraft(a)
15 years10%5%
Buildings25 - 30to 40 years—%10%
Minor building and land improvements10 years—%
Capitalized leases and leasehold improvements
Generally shorter of lease term or

estimated useful life
0-10%—%
Computer hardware and software3-103 to 10 years—%
Other furniture and equipment5-105 to 10 years—%

(a) As a result of the early retirement of the Bombardier Q400 fleet, all aircraft and related flight equipment were depreciated to their salvage values in 2022 depending on the scheduled retirement dates.

Near the end of an asset's estimated useful life, management updates the salvage value estimates based on current market conditions and expected use of the asset. Repairable and rotable aircraft parts are included in Aircraft and other flight equipment, and are depreciated over the associated fleet life.

In 2016, the Company changed its accounting estimate for the expected useful life of the B737 NextGen aircraft, which includes the B737-700, -800, -900, -900ER aircraft and the related parts, from 20 years to 25 years. The change in estimate was precipitated by management's annual accounting policy review, which considered market studies, asset performance and intended use, as well as industry benchmarking. The change in estimate was applied prospectively effective October 1, 2016.
 
Capitalized interest, based on the Company’s weighted-average borrowing rate, is added to the cost of the related asset, and is depreciated over the estimated useful life of the asset.


Maintenance and repairs, other than engine maintenance on B737-800 and E175 engines, are expensed when incurred. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use. Maintenance on B737-800 and E175 engines isare covered under a power-by-the-hour agreementagreements with a third party beginning in the fourth quarter of 2017,parties, whereby the Company pays a determinable amount, and transfers risk, to a third party. TheBeginning in 2023, maintenance on B737-900ER aircraft will also be covered under a power-by-the-hour agreement with a third party. For these agreements, the Company expenses the contract amounts based on engine usage.
 
The Company evaluates long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable. The Company groups assets for purposes of such reviews at the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.liabilities, which is generally the fleet level. An impairment loss is considered when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount. If the asset or asset group is not considered recoverable, a write-down equal to the excess of the carrying amount over the fair value will be recorded.recorded. For these purposes, the fair value is estimated using a combination of Level 2 inputs, including published market value estimates for the assets being assessed, and Level 3 inputs, including Company-specific and asset-specific indicators.

Goodwill


Goodwill represents the excess of purchase price over the fair value of the related net assets acquired in the Company's acquisition of Virgin America and is not amortized. AsThe total balance of December 31, 2017 the goodwill balance was $1.9 billion, and is associated with the Mainline reporting unit. The Company reviews goodwill for impairment annually in Q4,the fourth quarter, or more frequently if events or circumstances indicate thanthat an impairment may exist. The assessment utilizes either a qualitative or quantitative approach. The qualitative approach considers factors such as Alaska Air Group market capitalization and other market trends, and unobservable inputs, including Company specific cash flow and performance information. If it is determined that it is more likely than not that the asset may be impaired, management utilizes a quantitative approach to assess the asset's fair value and the amount of the reporting unit does not exceed the carrying amount, an impairment and a charge may be recorded. In 2017,2022, the fair value of the Mainline reporting unit with goodwill substantially exceeded its carrying value.


59


Intangible Assets


Intangible assets are comprised primarily of indefinite-lived airport slots and finite-lived customer relationships recorded in conjunction with the acquisition of Virgin America consist primarily of indefinite-lived airport slots, finite-lived airport gates and finite-lived customer relationships.America. Finite-lived intangibles were recorded at fair value upon acquisition and are amortized over their estimated useful lives. Indefinite-lived intangibles were recorded at fair value upon acquisition and are not amortized, but are tested at least annually for impairment using a similar methodology to property, equipment and goodwill, as described above.



Aircraft Maintenance Deposits


Deferred Revenue
Deferred revenue results primarily fromCertain Airbus leases include contractually required maintenance deposit payments to the sale of Mileage Plan™ miles to third-parties. It also includes Virgin America's Elevate® flown points outstanding atlessor, which collateralize the acquisition date that were recorded at their estimated fair value as part of purchase price accounting. Recognition of this deferred revenue occurs when award transportation is provided or overlessor for future maintenance events should the termCompany not perform required maintenance. Most of the applicable agreement.

Operating Leases
lease agreements provide that maintenance deposits are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance deposits held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event. The Company leases aircraft, airport and terminal facilities, office space and other equipment under operating leases. Airport and terminal facility leases are variable basedestablishes accounting maintenance deposits as assets on volumes and expensed as incurred. Some of these lease agreements contain rent escalation clauses or rent holidays. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the termsbalance sheet using estimates of the leasesanticipated timing and cost of the specific major maintenance events, such that the accounting deposits do not exceed the amount qualified for reimbursement. Aircraft maintenance deposits recorded on the consolidated balance sheets were $140 million and $175 million as of December 31, 2022 and December 31, 2021.

Any expense associated with aircraft maintenance deposits which may not ultimately be claimable in the standard course of operating the aircraft is included in Aircraft maintenance in the consolidated statements of operations. Following the Company's decision in early 2022 to exit the Airbus fleet before contractual return timelines, expense associated with aircraft maintenance deposits, including impairment of those deposits which will not be claimed, was recognized ratably over the remaining operating period of the respective aircraft, and classified within Special items - fleet transition and other in the consolidated statement of operations. See Note 2 for further discussion of these special items.
 
Leased Aircraft Return Costs
 
Cash payments associated withCosts of returning leased aircraft begin accruing when the costs are accrued when it is probable that a cash payment will be made and that amount is reasonably estimable, usually no sooner than after the last scheduled maintenance eventbeginning at least twelve months prior to lease return. Any accrualreturn, and are recognized over the remaining operating life of the aircraft. If a leased asset is removed from operation and no lease return cost has previously been estimated, an estimate of the cost to return the asset is accrued at the time of removal. These estimates are based on the time remaining on the lease, planned aircraft usage, and the provisions included in the lease agreement,terms, although the actual amount due to any lessor upon return may not be known with certainty until lease termination.


As leased aircraft are returned, any payments are charged againstmade reduce the established accrual. The accrualoutstanding lease return liability. Of the total outstanding liability as of December 31, 2022, $186 million is part of other current and long-termincluded in Other accrued liabilities and was not material$91 million is included in Other liabilities on the consolidated balance sheets, compared to $53 million included in Other accrued liabilities and $114 million included in Other liabilities as of December 31, 2017 and December 31, 2016. The expense2021.

Expense associated with lease returns in the standard course of operating the aircraft is included in Aircraft maintenance in the consolidated statements of operations.

Revenue Recognition
Passenger revenue Expense associated with lease returns when aircraft are permanently parked or anticipated to be removed from the fleet before its contractual return date is recognized when the passenger travels. Tickets sold but not yet used are reportedrecorded as air traffic liability until travel or date of expiration. Air traffic liability includes approximately $106 million and $62 million related to credits for future travel, as of December 31, 2017 and December 31, 2016, respectively. These credits are recognized into revenue either when the passenger travels ora charge at the date the aircraft is permanently parked, regardless of expiration, whichcontractual return date, and is twelve months from issuance. Commissions to travel agents and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are recorded as a prepaid expense. Taxes collected from passengers, including transportation excise taxes, airport and security feesclassified within Special items - fleet transition and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized as revenue using estimates regarding bothFollowing the timingannouncement in early 2022 of the revenue recognition and the amount of revenueCompany's intent to be recognized. These estimates are based on the Company’s historical data.

Freight and mail revenues are recognized when the related services are provided.

Other—net revenues are primarily relatedmove to the Mileage Plan™ program. They are recognized as described in the “Mileage Plan” paragraph below. Other—net also includes certain ancillary or non-ticket revenues, such as checked-bag fees, reservations fees, ticket change fees, on-board food and beverage sales, and, to a much lesser extent, commissions from car and hotel vendors and sales of travel insurance. These items are recognized as revenue when the related services are provided.  Airport lounge memberships are recognized as revenue over the membership period.
Frequent Flyer Programs
Alaska operates the Mileage Plan™ frequent flyer program, and Virgin America operated the Elevate frequent flyer program for the duration of 2017. Both programs provide travel awards to members based on accumulated mileage or points. For miles earned by flying on the Company's airlines, and through airline partners, the estimated cost of providing award travel is recognized as a selling expense and accrued as a liability, as miles are earned and accumulated.

single fleets at Alaska and Virgin America also sell services, including miles or pointsHorizon, all anticipated lease return charges were recorded within Special items - fleet transition and other. See Note 2 for transportation, to non-airline partners, such as hotels, car rental agencies and major banks that offer Alaska's affinity credit card. The Company defers revenue related to air transportation and certificates for discounted companion travel until the transportation is delivered. The deferred proceeds are recognized as passenger revenue for awards redeemed and flown on the Company's airlines and as Other—net revenue forfurther discussion of these special items.



awards redeemed and flown on other airlines (less the cost paid to the other airlines based on contractual agreements). The elements that represent use of the Alaska and Virgin America brands and access to frequent flyer member lists and advertising are recognized as commission income in the period that those elements are sold and included in Other—net revenue in the consolidated statements of operations.

Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):
 2017 2016
Current Liabilities:   
Other accrued liabilities$519
 $484
Other Liabilities and Credits: 
  
Deferred revenue699
 638
Other liabilities26
 21
Total$1,244
 $1,143

The amounts recorded in other accrued liabilities relate primarily to deferred revenue expected to be realized within one year, which includes Mileage Plan™ awards that have been issued but not yet flown for $47 million and $43 million at December 31, 2017 and 2016.
Frequent flyer program revenue included in the consolidated statements of operations (in millions):
 2017 2016 2015
Passenger revenues$380
 $293
 $267
Other—net revenues
482
 429
 329
Total frequent flyer program revenues$862
 $722
 $596

Other—net revenue includes commission revenues of $396 million, $329 million, and $280 million in 2017, 2016, and 2015.
SellingAdvertising Expenses
 
SellingThe Company's advertising expenses include credit card fees, global distribution systems charges, the estimated cost of frequent flyer travel awards earned through air travel, advertising, sponsorship and promotional costs, commissions and incentives.costs. Advertising production costs are expensed as incurred. Advertising expense was $91$85 million, $61$63 million, and $55$41 million during the years ended December 31, 2017, 2016,2022, 2021 and 2015.2020.

Derivative Financial Instruments
 
The Company's operations are significantly impacted by changes in aircraft fuel prices and interest rates. In an effort to manage exposure to these risks, the Company periodically enters into fuel and interest rate derivative instruments. These derivative instruments are recognized at fair value on the balance sheet and changes in the fair value are recognized in AOCL or in the consolidated statements of operations, depending on the nature of the instrument.

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The Company does not apply hedge accounting to its derivative fuel hedge contracts, nor does it hold or issue them for trading purposes. For cash flow hedges related to interest rate swaps, the effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in interest expense.
Fair Value Measurements


Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:


Level 1 - Quoted prices in active markets for identical assets or liabilities.




Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company has elected not to use the fair value option provided in the accounting standards for non-financial instruments. Accordingly, those assets and liabilities, including property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities are carried at amortized cost. For financial instruments, the assets and liabilities are carried at fair value, which is determined based on the market approach or income approach, depending upon the level of inputs used.

Assets The leveling of inputs for financial and liabilities recognized ornon-financial instruments are disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities. The Company determines the fair value of these items using Level 3 inputs, as described in Note 2this note, and Note 4.5.


Income Taxes
 
The Company uses the asset and liability approach for accounting for and reporting income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized. As of December 31, 2017,2022, there is noa partial valuation allowance against net deferred tax assets. The Company accounts for unrecognized tax benefits in accordance with the applicable accounting standards.


Virgin America has substantial federal and state net operating losses (NOLs) for income tax purposes. The Company's ability to utilize Virgin America's NOLs could be limited if Virgin America had an “ownership change,” as defined in Section 382 of the Internal Revenue Code and similar state provisions. In general terms, an ownership change can occur whenever there is a collective shift in the ownership of a company by more than 50% by one or more “5% stockholders” within a three-year period. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change. The acquisition constituted an ownership change and the potential for further limitations following the acquisition. See Note 68 to the consolidated financial statements for more discussion of the calculation.income taxes.


Stock-Based Compensation
 
Accounting standards require companies to recognize as expense over the service period based on the fair value of stock options and other equity-based compensation issued to employees estimated as of the grant date. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look-back provision and allows employees to purchase stock at a 15% discount. All stock-based compensation expense is recorded in wages and benefits in the consolidated statements of operations.


Earnings Per Share (EPS)


Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. In 2017, 2016,2022 and 2015, antidilutive2021, anti-dilutive stock options excluded from the calculation of EPS were not material.


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Recently IssuedAdopted Accounting Pronouncements


In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers"(Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This comprehensive new standard will


replace most existing revenue recognition guidance in U.S. GAAP. In March 2016,2020, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers2020-04, "Reference Rate Reform (Topic 606)848), Principal versus Agent Considerations"" which provides temporary optional expedients and exceptions to clarify the current guidance on determining whethercontract modifications and hedge accounting to ease the financial reporting burden related to the market transition from LIBOR to alternative reference rates. In January 2021, the FASB updated Topic 848, providing additional clarification and scope relating to transition to alternative reference rates. The guidance was effective upon issuance and the Company is considered the principal or the agent in a revenue transaction where a third party is providing goods or serviceshas started to a customer. Entities are permittedtransition its LIBOR-based contracts to use either a full retrospective or cumulative effect transition method, and are required to adopt all parts of the new revenue standard using the same transition method. The new standard became effective for the Company on January 1, 2018.

Under the new standard, the Company estimates a net increase to Mileage Plan™ deferred revenues of approximately $345 million to $365 million as of the beginning of the retroactive reporting period (January 1, 2016) at the time of adoption. Additionally, the Company estimates the change in ticket breakage methodology will not have a significant impact on the statements of operations, but will decrease air traffic liability by approximately $70 million to $80 million at adoption of the standard. The overall impact to equity as of the beginning of the retroactive reporting period, including these, as well as other less material changes, is expected to be between $165 million and $175 million.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)." This standard makes several changes, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for the Company beginning January 1, 2018.an alternative reference rate. The Company does not expect the adoption of ASU 2016-01and transition to have a material impact on itsour consolidated financial statements.


NOTE 2. FLEET TRANSITION

In February 2016,2022, the FASB issued ASU 2016-02, "Leases" (Topic 842),Company announced plans to accelerate the transition of its Mainline operations to an all-Boeing 737 fleet. The Company also announced plans to transition Horizon's Regional operations to an all-Embraer fleet. The Company operated 12 leased A320 aircraft, ten leased A321neo aircraft, ten owned Q400 aircraft, and one leased Q400 aircraft as of December 31, 2022. All A320 and Q400 aircraft were removed from operating service in January 2023. Alaska also operates ten A321neo aircraft, and plans to remove them from its operating fleet by no later than the end of 2023.

Valuation of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable. In 2022, the Company recorded an impairment charge of $70 million related to the Q400 fleet, reflecting the amount by which requires lessees to recognizecarrying value exceeded fair value of the owned Q400 aircraft. The Company evaluated the fair market value for the Q400 fleet using available market price information with adjustments based on quantitative and qualitative considerations. This amount is recorded within the Special items - fleet transition and other line in the consolidated statement of operations.

The Company adjusted useful lives and depreciation schedules for Airbus and Q400 capitalized leasehold improvements, spare engines, inventory, and other fixed assets, as well as the amortization schedules for the right of use assets and liabilitiesaircraft rent expenses. These accelerated schedules reflect the dates the aircraft are removed from operating service. Incremental costs associated with the accelerated schedules are recognized within the Special items - fleet transition and other line item.

The Company has estimated future lease return costs for leases currently classifiedthe leased Airbus aircraft. Costs of returning leased aircraft begin accruing when the costs are probable and reasonably estimable, and are recognized over the remaining operating life of the aircraft. These estimates are based on the time remaining on the lease, planned aircraft usage, and lease terms. These estimates may change as operating leases. Underactual amounts due to any lessor upon return may not be known with certainty until lease termination. In 2022, all lease return costs are recorded within the new standardSpecial items - fleet transition and other line in the consolidated statement of operations.

A summary of special charges for fleet transition activities is included below for 2022. The impairment charges were one-time in nature, while the other special charges were recorded consistent with the schedules described above. The Company continues to evaluate options for the ten leased A321neo aircraft, and anticipates recording incremental special charges in 2023 as those decisions evolve.

Twelve Months Ended December 31, 2022
(in millions)AirbusQ400Total
Lease return costs and other expenses$238 $— $238 
Accelerated aircraft ownership expenses140 33 173 
Impairment of long-lived assets— 70 70 
Special items - fleet transition and other$378 $103 $481 

In 2020, the Company recorded $22 million to the Special items - fleet transition and other line in the consolidated statement of operations as a lessee will recognizecontingency in the Bernstein v. Virgin America litigation. In 2022, in light of a damages ruling issued by the federal district court after remand from the Ninth Circuit Court of Appeals, the Company recorded an additional $15 million to the Special items - fleet transition and other line to reflect what the Company considers its probable and estimable liability exposure as of December 31, 2022. Refer to Note 10 to the consolidated financial statements for additional details.

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NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue is passenger ancillary revenue such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from our co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

In 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The amendment extended the term of the agreement into 2030 and resulted in modifications to the separately identifiable performance obligations.

The Company disaggregates revenue by segment in Note 13. The level of detail within the Company’s consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

The primary performance obligation on a typical passenger ticket is to provide air travel to the passenger. Ticket revenue is collected in advance of travel and recorded as air traffic liability on the consolidated balance sheet representingsheets. The Company satisfies its performance obligation and recognizes ticket revenue for each flight segment when the lease payments owed,transportation is provided.

Ancillary passenger revenue relate to items such as checked-bag fees, ticket change fees (prior to 2021), and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.

Revenue is also recognized for tickets that are expected to expire unused, a right-of-use-asset representingconcept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the intended travel date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications. Differences between advance passenger ticket breakage estimates and actual expirations are recognized as revenue when changes to estimate assumptions are observed or when tickets are no longer valid.

In addition to selling tickets on its rightown marketed flights, Alaska has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to use the underlying assetpartner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the lease term. full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.

A portion of revenue from the Mileage Plan program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation to the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the LoyaltyMileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.

Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within Passenger revenue in the consolidated statements of operations.

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Passenger revenue recognized in the consolidated statements of operations (in millions):
Twelve Months Ended December 31,
202220212020
Passenger ticket revenue, including ticket breakage and net of taxes and fees$7,430 $4,533 $2,428 
Passenger ancillary revenue447 327 245 
Mileage Plan passenger revenue931 639 346 
Total Passenger revenue$8,808 $5,499 $3,019 

As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent $201 million and $167 million on the consolidated balance sheets as of December 31, 2022 and 2021.

For leasesperformance obligations with performance periods of less than one year, GAAP provides a term of 12 months or less, a lessee is permitted to make an accounting policy electionpractical expedient that allows the Company not to recognize lease assetsdisclose the transaction price allocated to remaining performance obligations and lease liabilities. At this time,the timing of related revenue recognition. As passenger tickets expire one year from ticketing, if unused or not exchanged, the Company believeselected to apply this practical expedient.

Mileage Plan Loyalty Program

Loyalty mileage credits

The Company’s Mileage Plan loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the most significant impact to the financial statements will relate to the recording of a right of use asset associated with leased aircraft. Other leases, including airportsMileage Plan co-branded credit card and real estate, equipment, software andpurchases from other miscellaneous leases continue to be assessed for impact as it relates to the ASU. The new standard is effective forparticipating partners. In 2022, the Company on January 1, 2019.ceased expiry of outstanding mileage credits. The Company will not early adopt the standard.

In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation" (Topic 718), which simplifies several aspectsoffers redemption of accounting for employee share-based payment awards, including the accounting for income taxes, forfeituresmileage credits through free, discounted or upgraded air travel on flights operated by Alaska and statutory tax withholding requirements,its regional partners or on one of its 24 partners, as well as classificationredemption at partner hotels.

The Company uses a relative standalone selling price to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown, the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.

Revenue related to air transportation is deferred in the statement of cash flows. The ASU was adopted prospectively as of January 1, 2017. Prior periods have not been adjusted. The adoptionamount of the standard didrelative standalone selling price allocated to the loyalty mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed and the related air transportation is delivered.

The Company estimates breakage for the portion of loyalty mileage credits not haveexpected to be redeemed using a material impactstatistical analysis of historical data, including source of mileage credit earn, slow-moving and low-credit accounts, among other factors. In 2022, the Company updated its breakage methodology in conjunction with the elimination of mileage expiry, and now recognizes breakage proportionally as mileage credits are redeemed. The Company reviews the breakage rate used on an annual basis.

Co-branded credit card agreements and other

In addition to mileage credits, the co-branded credit card agreements, referred to herein as the Agreements, also include performance obligations for waived bag fees, Companion Fare offers to purchase an additional ticket at a discount, marketing, priority boarding, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The co-branded card bank partners are the customer for some elements, including the brand and marketing, while the Mileage Plan member is the customer for other elements such as mileage credits, bag waivers, priority boarding and companion fares.

At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods
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including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded, and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.

Consideration received from the banks is variable and is primarily from consumer spend on the Company'scard, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, companion fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage Plan other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.

In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. The travel performance obligation is deferred until the transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage, and the brand performance obligation is recognized using the residual method as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.

Partner airline loyalty

Alaska has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on flights operated by Alaska and its regional partners. When a Mileage Plan member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which is netted against the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.

Mileage Plan revenue included in the consolidated statements of operations (in millions):
Twelve Months Ended December 31,
202220212020
Passenger revenue$931 $639 $346 
Mileage Plan other revenue590 461 374 
Total Mileage Plan revenue$1,521 $1,100 $720 

Mileage Plan other revenue is primarily brand and marketing revenue from our affinity card products.

Cargo and Other Revenue

The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or financial position.is transferred to a third-party carrier for delivery.


In January 2017,The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the FASB issued ASU 2017-04, "Intangibles—Goodwillprice paid by the customer.

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Cargo and Other" (Topic 350), which eliminates step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The ASU is effective for the Company beginning January 1, 2019. Early adoption of the standard is permitted. In 2017, the Company performed an impairment test for goodwill arising from its acquisition of Virgin America and adopted the standard effective January 1, 2017.

In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits" (Topic 715), which will require the Company to present the service cost component of net periodic benefit cost as Wages and benefitsother revenue included in the statements of operations. All other components of net periodic benefit cost will be required to be presented in Nonoperating income (expense) in the statements of operations. These components will not be eligible for capitalization.  The ASU is effective for the Company beginning January 1, 2018. Changes to theconsolidated statements of operations under the ASU are applicable retrospectively. The adoption of this standard will have no impact on Income before income tax or Net income for the periods subject to retrospective reclassification. See Note 7 for the current components of the Company's net periodic benefit costs.(in millions):
Twelve Months Ended December 31,
202220212020
Cargo revenue$133 $124 $112 
Other revenue115 92 61 
Total Cargo and other revenue$248 $216 $173 


In August 2017, the FASB issued ASU 2017-12, "DerivativesAir Traffic Liability and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accountingDeferred Revenue

Passenger ticket and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019. ancillary services liabilities

The Company will not early adoptrecognized Passenger revenue of $700 million and $703 million from the standard.



NOTE 2. ACQUISITION OF VIRGIN AMERICA INC.

Virgin America

On December 14, 2016, the Company acquired 100% of the outstanding common shares2021 and voting interest of Virgin America for $57 per share, or total cash consideration of $2.6 billion.

Fair values of the assets acquired and the liabilities assumed

The transaction was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized on the2020 year-end air traffic liability balance sheet at their fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. There were no significant fair value adjustments made during the twelve months ended December 31, 2017.2022 and 2021.


Fair values ofMileage Plan liabilities

The total deferred revenue liability included on the assets acquiredconsolidated balance sheets represents the remaining transaction price that has been allocated to Mileage Plan performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the liabilities assumedlong-term amounts will be recognized as revenue over a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.

The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $83 million and $64 million of such receivables as of the acquisition date, December 14, 2016, at December 31, 20172022 and December 31, 20162021.

Mileage credits are combined into one homogeneous pool and are not specifically identifiable once deposited. As such, loyalty revenue disclosed earlier in this Note are comprised of miles that were as followspart of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions):
Twelve Months Ended December 31,
20222021
Total Deferred Revenue balance at January 1$2,358 $2,277 
Travel miles and companion certificate redemption - Passenger revenue(878)(639)
Miles redeemed on partner airlines - Other revenue(65)(43)
Increase in liability for mileage credits issued1,082 763 
Total Deferred Revenue balance at December 31$2,497 $2,358 

 December 31, 2017 December 31, 2016
Cash and cash equivalents$645
 $645
Receivables53
 44
Prepaid expenses and other current assets18
 16
Property and equipment571
 560
Intangible assets141
 143
Goodwill1,943
 1,934
Other assets89
 84
Total assets3,460
 3,426
    
Accounts payable22
 22
Accrued wages, vacation and payroll taxes54
 51
Air traffic liabilities172
 172
Other accrued liabilities198
 196
Current portion of long-term debt125
 125
Long-term debt, net of current portion360
 360
Deferred income taxes(300) (304)
Deferred revenue126
 126
Other liabilities107
 82
Total liabilities864
 830
    
Total purchase price$2,596
 $2,596
Selling Costs


Intangible Assets

Of the $141 million of acquired intangible assets, $89 million represents airport slots. Airport slots are rights to take-off or land at a slot-controlled airport during a specific time period and are a means by which the FAA manages airspace/airport congestion. The Company acquired slots at threeCertain costs such airports—John F. Kennedy International, LaGuardia and Ronald Reagan Washington National. These slots either have no expiration dates or are expected to be renewed indefinitely in line with the FAA's past practice. They require no maintenance and do not have an established residual value. As the demand for air travel at these airports has remained very strong, the Company expects to use these slots in perpetuity and has determined these airport slots to be indefinite-lived intangible assets. They will not be amortized but rather tested for impairment annually, or more frequently when events and circumstances indicate that impairment may exist.

Of the remaining $52 million, $37 million represents customer relationships, subject to amortization on a straight-line basis over the estimated economic life of seven years, $1 million representsas credit card agreements amortized on a straight-line basis over


one year,fees, travel agency and $14 million represents airport gates to be amortized on a straight-line basis over the remaining lease term of eleven years.

The Company considered examples of intangible assets that the FASB believes meet the criteria for recognition apart from goodwill,other commissions paid, as well as any other intangible assets common toGlobal Distribution Systems booking fees, are incurred when the airline industry,Company sells passenger tickets and did not identify any other such intangible assets acquiredancillary services in the transaction.

Goodwill

Goodwill of $1.9 billion represents the excessadvance of the purchase price over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment.

Merger-related costs

travel date. The Company incurred pretax merger-relateddefers such costs of $118and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $33 million and $117$37 million as of December 31, 2022 and December 31, 2021. The Company recorded related expense on the consolidated statements of operations of $311 million, $90 million and $43 million for the twelve months ended December 31, 20172022, 2021 and 2016, respectively. Costs classified as merger-related are directly attributable to merger activities and are recorded as "Special items—merger-related costs" within the Statements of Operations. Refer to Note 10 for further information on special items. The Company expects to continue to incur merger-related costs in the future as the integration continues.2020.


Pro forma impact of the acquisition

The unaudited pro forma financial information presented below represents a summary of the consolidated results of operations for the Company including Virgin America as if the acquisition of Virgin America had been consummated as of January 1, 2015. The pro forma results do not include any anticipated synergies, or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2015.
(in millions, except per share amounts)Years Ended December 31,
 2016 2015
Revenue$7,511
 $7,111
Net Income1,008
 914

NOTE 3.4. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT


Fuel Hedge Contracts


The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil.

As of December 31, 2017,2022, the Company had outstanding fuel hedge contracts covering 434approximately 421 million gallons of crude oil that will be settled from January 20182023 to June 2019.2024.

66



Interest Rate Swap Agreements


The Company is exposed to market risk from adverse changes in variable interest rates on long term debt and certain aircraft lease agreements.long-term debt. To manage this risk, the Company periodically enters into interest rate swap agreements. As of December 31, 2017,2022, the Company has outstanding interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rates on lease agreements for six B737-800 aircraft, as well as two10 interest rate swap agreements with third parties designed to hedge the volatility of the underlying variable interest rates on $265$302 million of the debt obtained in 2016.debt. All of the interest rate swap agreements stipulate that the Company pay a fixed interest rate and receive a floating interest rate over the term of the underlying contracts. The interest rate swap agreements expire from February 2020 through March 2021 to coincide with the lease termination dates, and October 2022 through September 2026 to coincide with the debt maturity dates. All significant terms of the swap agreements match the terms of the underlying hedged items and have been designated as qualifying hedging instruments, which are accounted for as cash flow hedges.




As qualifying cash flow hedges, the interest rate swaps are recognized at fair value on the balance sheet, and changes in the fair value are recognized in accumulated other comprehensive income (loss).loss. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is recognized in interest expense, if material.


Fair Values of Derivative Instruments


Fair values of derivative instruments on the consolidated balance sheet (in millions):
20222021
Fuel hedge contracts (not designated as hedges)
Other current assets$33 $71 
Other assets11 10 
Interest rate swaps (designated as hedges)
Other current assets8 — 
Other noncurrent assets7 — 
Other accrued liabilities— (6)
Other liabilities— (3)
Gains (losses) in accumulated other comprehensive loss (AOCL)23 17 

 2017 2016
Fuel hedge contracts (not designated as hedges)   
Prepaid expenses and other current assets$19
 $17
Other assets3
 3
Interest rate swaps (designated as hedges)   
Prepaid expenses and other current assets1
 —
Other noncurrent assets8
 —
Other accrued liabilities(3) (5)
Other liabilities(5) —
Losses in accumulated other comprehensive loss (AOCL)(2) (5)

The net cash received from settlements offset by cash paid for new fuel hedge positions was $130 million during 2022, compared to net cash received of $38 million during 2021 and received from settlements was $12net cash paid of $14 million, $19 million and $17 million during 2017, 2016, and 2015, respectively.2020.

Pretax effect of derivative instruments on earnings and AOCL (in millions):
202220212020
Fuel hedge contracts (not designated as hedges)
Gains (losses) recognized in Aircraft fuel$93 $104 $(10)
Interest rate swaps (designated as hedges)
Losses recognized in Aircraft rent— — (3)
Gains (losses) recognized in other comprehensive income (OCI)23 17 (21)

 2017 2016 2015
Fuel hedge contracts (not designated as hedges)     
Gains (losses) recognized in Aircraft fuel$(6) $(3) $(19)
Interest rate swaps (designated as hedges)     
Gains (losses) recognized in Aircraft rent(5) (6) (6)
Gains (losses) recognized in other comprehensive income (OCI)1
 8
 (5)

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. No gains or lossesLosses related to interest rate swaps on variable rate debt have beenof $2 million were recognized in interest expense during 2017.2022. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period. The Company expects $3 millionto be reclassifiedreclassify from OCI to aircraft rent and $1$8 million toin interest income within the next twelve months.




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NOTE 4.5. FAIR VALUE MEASUREMENTS


In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis


As of December 31, 2017, the total cost basis for marketable securities was $1.4 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):
December 31, 2022December 31, 2021
Level 1Level 2TotalLevel 1Level 2Total
Assets
Marketable securities
U.S. government and agency securities$505 $— $505 $331 $— $331 
Equity mutual funds5 — 5 6 — 6 
Foreign government bonds— 25 25 — 38 38 
Asset-backed securities— 261 261 — 311 311 
Mortgage-backed securities— 196 196 — 232 232 
Corporate notes and bonds— 1,025 1,025 — 1,663 1,663 
Municipal securities— 62 62 — 65 65 
Total Marketable securities510 1,569 2,079 337 2,309 2,646
Derivative instruments
Fuel hedge contracts - call options— 44 44 — 81 81 
Interest rate swap agreements— 15 15 — — — 
Total Assets$510 $1,628 $2,138 $337 $2,390 $2,727 
Liabilities
Derivative instruments
Interest rate swap agreements— — — — (9)(9)
Total Liabilities$— $— $— $— $(9)$(9)
December 31, 2017Level 1 Level 2 Total
Assets     
Marketable securities     
U.S. government and agency securities$328
 $—
 $328
Foreign government bonds—
 43
 43
Asset-backed securities—
 209
 209
Mortgage-backed securities—
 99
 99
Corporate notes and bonds—
 726
 726
Municipal securities—
 22
 22
Derivative instruments     
Fuel hedge contracts—call options—
 22
 22
Interest rate swap agreements—
 9
 9
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (8) (8)

December 31, 2016Level 1 Level 2 Total
Assets     
Marketable securities     
U.S. government and agency securities$287
 $—
 $287
Foreign government bonds—
 36
 36
Asset-backed securities—
 138
 138
Mortgage-backed securities—
 89
 89
Corporate notes and bonds—
 691
 691
Municipal securities—
 11
 11
Derivative instruments     
Fuel hedge contracts—call options—
 20
 20
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (5) (5)


The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.


The Company uses the market approach and the income approachesapproach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to


credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts isare determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

The Company has no other financial assets that are measured at fair value on a nonrecurring basis at December 31, 2017.


Activity and Maturities for Marketable Securities


As of December 31, 2022, total cost basis for marketable securities was $2.2 billion, compared to a fair value of $2.1 billion. Unrealized losses from marketable securities are primarily attributable to changes in interest rates.

The Company completes an analysis of the marketable securities portfolio using both quantitative and qualitative methods to identify potential expected credit losses. Management does not believe any remainingunrealized losses represent other-than-temporary impairmentsare the result of expected credit losses based on the Company's evaluation of available evidence as of December 31, 2017.2022. Refer to Note 1 for additional information about this analysis.


Activity for
68


Proceeds from sales of marketable securities (in millions):were $2.3 billion, $3.6 billion, and $2.3 billion in 2022, 2021, and 2020.

 2017 2016 2015
Proceeds from sales and maturities$1,388
 $962
 $1,175

Maturities for marketable securities (in millions):
December 31, 2022Cost BasisFair Value
Due in one year or less$431 $421 
Due after one year through five years1,717 1,624 
Due after five years30 28 
Total$2,178 $2,073 

December 31, 2017Cost Basis Fair Value
Due in one year or less$113
 $113
Due after one year through five years1,272
 1,264
Due after five years through 10 years50
 50
Total$1,435
 $1,427
As of December 31, 2022, $6 million of total marketable securities do not have a maturity date and are therefore excluded from the total fair value of maturities for marketable securities above.


Fair Value of Other Financial Instruments


The Company useduses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.


Cash, and Cash Equivalents,: Carried at amortized costs which approximate fair value.

Debt: Debt assumed in the acquisition and Restricted Cash: Cash equivalents consist of Virgin America was subject to a non-recurring fair valuation adjustmenthighly liquid investments with original maturities of three months or less, such as partmoney market funds, commercial paper and certificates of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt isdeposit. They are carried at cost.cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: To estimate the fair value of all fixed-rate debt as of December 31, 2017,2022, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the weightedremaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $566 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as certain inputs used are unobservable.it is not actively traded and is valued using discounted cash flows which is an unobservable input.


Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
December 31, 2022December 31, 2021
Total fixed rate debt$1,660 $1,821 
Estimated fair value$1,473 $1,919 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded in the year.

69
 2017 2016
Fixed rate debt at cost$956
 $1,175
Non-recurring purchase price accounting fair value adjustment3
 4
Total fixed rate debt$959
 $1,179
    
December 31, 2017 estimated fair value$959
 $1,199





NOTE 5.6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 2017 2016
Fixed-rate notes payable due through 2028$959
 $1,179
Variable-rate notes payable due through 20281,625
 1,803
Less debt issuance costs(15) (18)
Total debt2,569
 2,964
Less current portion307
 319
Long-term debt, less current portion$2,262
 $2,645
    
Weighted-average fixed-interest rate4.2% 4.4%
Weighted-average variable-interest rate2.8% 2.4%
 20222021
Fixed-rate notes payable due through 2029$113 $163 
Fixed-rate PSP note payable due through 2031600 600 
Fixed-rate EETC payable due through 2025 & 2027947 1,058 
Variable-rate notes payable due through 2029514 738 
Less debt issuance costs(15)(20)
Total debt2,159 2,539 
Less current portion276 366 
Long-term debt, less current portion$1,883 $2,173 
Weighted-average fixed-interest rate3.5 %3.7 %
Weighted-average variable-interest rate5.8 %1.3 %
 
During 2017,Approximately $302 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at December 31, 2022, resulting in an effective weighted-average interest rate for the full debt decreased $395 million, primarily due toportfolio of 3.7%.

During 2022, the Company made scheduled debt payments of $397$368 million in 2017, including the prepaymentand prepayments of $74 million of debt. Approximately $2.2 billion of the loans are secured by a total of 113 aircraft and two spare engines. An additional $392 million is secured by Air Group's interest in certain aircraft purchase deposits.$17 million.


The Company's variable-rate debt bears interest at a floating rate per annum equal to a margin plus the three or six-month LIBOR in effect at the commencement of each semi-annual or three-month period, as applicable. As of Debt Maturity

At December 31, 2017, none of the Company's borrowings were restricted by financial covenants.

Long-term2022, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 Total
2018$310
2019393
2020449
2021414
2022247
Thereafter768
Total principal payments$2,581
 Total
2023$280 
2024244 
2025296 
2026176 
2027535 
Thereafter643 
Total principal payments$2,174 
 
Bank LineLines of Credit
 
The CompanyAlaska has three credit facilities with availability totaling $475 million. All three$486 million as of December 31, 2022. One of the credit facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility increased from $100for $150 million to $250 million in June 2017. It expires in June 2021 and is secured by aircraft. A second credit facility increased from $52 million to $75 million in September 2017. It expires in September 2018, has a mechanism for annual renewal, and is secured by aircraft. A third credit facility increased from $100 million to $150 million in March 2017. It expires in March 20222025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The CompanyA second credit facility for $250 million expires in June 2024 and is secured by aircraft. Both facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June 2023 and is secured by aircraft.

Alaska has secured letters of credit against the $75 millionthird facility, but has no plans to borrow using either of the other two other facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The CompanyAlaska was in compliance with this covenant at December 31, 2017.2022.


NOTE 6.7. LEASES

The Company leases property and equipment through operating leases and categorizes these leases into five asset classes: aircraft, capacity purchase arrangements for aircraft operated by third-party carriers (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the consolidated balance sheet as of December 31, 2022 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Operating rent expense is recognized on a straight-line basis over the term of the lease.

70


The Company has elected the practical expedient under ASC 842 - Leases, allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of twelve months or less. Such expense was not material for the twelve months ended December 31, 2022, 2021, and 2020.

Operating lease assets balance by asset class was as follows (in millions):
December 31, 2022December 31, 2021
Aircraft$701 $782 
CPA Aircraft683 600 
Airport and terminal facilities21 16 
Corporate real estate and other66 55 
Total Operating Lease Assets$1,471 $1,453 

Aircraft

At December 31, 2022, Alaska had operating leases for ten B737-800, ten B737-9, four A319, 32 A320, and ten A321neo aircraft. No A319 or A320 aircraft leases had remaining asset balances. Four A319 and 20 A320 aircraft, not operating at December 31, 2022, are still awaiting return to the lessor. Alaska is currently evaluating options for the A321neo leases. Remaining lease terms for B737 aircraft extend up to 12 years and remaining lease terms for A321neo aircraft extend up to nine years. Some leases have options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. Horizon had operating leases for six Q400 aircraft. Of these, five, which were not operating at December 31, 2022, are awaiting return to the lessor and had no remaining asset balance. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft for the twelve months ended December 31, 2022, 2021, and 2020 was $10 million, $5 million, and $1 million.

Capacity purchase agreements with aircraft (CPA aircraft)

At December 31, 2022, Alaska had CPAs with two carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has a CPA with SkyWest covering 42 E175 aircraft to fly certain routes in the Lower 48 and Canada. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard.

Remaining lease terms for CPA aircraft extend up to 12 years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft which is capitalized. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the twelve months ended December 31, 2022, 2021, and 2020 was not material.

Airport and terminal facilities

The Company leases ticket counters, gates, cargo and baggage space, lounge space, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense for the twelve months ended December 31, 2022, 2021, and 2020 was $381 million, $377 million, and $286 million.

Starting in 2018, the Company leased twelve airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. Starting in 2022, the Company leased one airport gate at Dallas Love Field Airport to a third party. For these leases, the Company recorded $15 million, $16 million, and $14 million of lease income during the twelve months ended December 31, 2022, 2021, and 2020.

71


Corporate real estate and other leases

Leased corporate real estate is primarily for office space in hub cities, training centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators, ground equipment, and spare engines. Variable lease expense related to corporate real estate and other leases for the twelve months ended December 31, 2022, 2021, and 2019 was $27 million, $17 million, and $12 million.

Sale-leaseback transaction

In 2020, Alaska entered into a transaction to sell ten owned A320 aircraft and replace those aircraft with 13 new leased B737-9 aircraft. Also included in the transaction was the leaseback of all ten A320 aircraft in the interim period between the sale of those aircraft and delivery of the first ten B737-9 aircraft. As of December 31, 2022, the leases for the ten A320 aircraft were terminated and the aircraft had no remaining asset balance.

In 2022, Alaska executed an agreement to sell two owned B737-800 aircraft to be converted into freighters and leased back to Alaska. The sale to the lessor, conversions, and subsequent delivery of these aircraft to Alaska are all expected to occur in 2023 and 2024, and as a result there were no amounts recorded related to this transaction for the twelve months ended December 31, 2022.

Components of Lease Expense

The impact of leases, including variable lease cost, was as follows (in millions):
Classification202220212020
Expense
Aircraft(a)
Aircraft rent$191 $174 $215 
CPA AircraftAircraft rent100 80 80 
Airport and terminal facilitiesLanding fees and other rentals384 379 288 
Corporate real estate and otherLanding fees and other rentals33 21 19 
Total lease expense$708 $654 $602 
Revenue
Lease incomeCargo and other revenue(15)(16)(14)
Net lease impact$693 $638 $588 
(a)Aircraft lease expense for the year ended December 31, 2022 does not include the portion of aircraft rent that was accelerated due to the fleet transition decision and recorded within the Special items - fleet transition and other line within the consolidated statement of operations. Refer to Note 2 to the consolidated financial statements for additional information.

Supplemental Cash Flow Information

During the year ended December 31, 2022, the Company paid $354 million for capitalized operating leases. The Company also acquired $461 million of operating lease assets in exchange for assumption of the same total of operating lease liabilities, inclusive of lease extensions.

Lease Term and Discount Rate

As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at December 31, 2022.
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Weighted Average IBRWeighted Average Remaining Lease term
Aircraft4.4 %7.9
CPA Aircraft7.0 %8.8
Airports and terminal facilities4.4 %7.9
Corporate real estate and other4.7 %27.5

Maturities of Lease Liabilities

Future minimum lease payments under non-cancellable leases as of December 31, 2022 (in millions):
Aircraft(a)
CPA AircraftAirport and Terminal FacilitiesCorporate Real Estate and Other
2023$173 $112 $3 $17 
2024118 112 3 7 
2025113 112 3 6 
2026110 112 3 6 
2027106 112 3 5 
Thereafter356 385 10 88 
Total Lease Payments(b)
$976 $945 $25 $129 
Less: Imputed interest(156)(238)(4)(61)
Total$820 $707 $21 $68 
(a) Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service as the Company remains obligated under existing terms.
(b) Future minimum lease payments in the table above are inclusive of incentive credits related to leased B737-9 aircraft. As a result, the operating lease liabilities presented on the consolidated balance sheet exceed total future payments. This difference will exist until all leased B737-9 aircraft are delivered.

As of December 31, 2022, we have entered into but not yet commenced leases for B737-9 aircraft, B737-800 freighter aircraft, E175 aircraft, as well as real estate. The liabilities associated with these leases are expected to be approximately $213 million. These leases will commence between 2023 and 2027 with lease terms ranging from 2028 to 2042.

NOTE 8. INCOME TAXES


Deferred Income Taxes


Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The Company has a net deferred tax liability, primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes.



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Deferred tax (assets) and liabilities comprise the following (in millions):
 20222021
Excess of tax over book depreciation$1,312 $1,145 
Intangibles - net17 19 
Operating lease assets356 351 
Other - net49 76 
Deferred tax liabilities1,734 1,591 
Mileage Plan(436)(416)
Inventory obsolescence(21)(17)
Employee benefits(145)(127)
Net operating losses(28)(25)
Operating lease liabilities(392)(374)
Leasehold maintenance(67)(40)
Other - net(88)(34)
Deferred tax assets(1,177)(1,033)
Valuation allowance17 20 
Net deferred tax liabilities$574 $578 
 2017 2016
Excess of tax over book depreciation$964
 $1,282
Intangibles—net14
 39
Other—net43
 26
Gross deferred tax liabilities1,021
 1,347
    
Mileage Plan™(208) (310)
Inventory obsolescence(16) (23)
Deferred gains(5) (8)
Employee benefits(154) (196)
Acquired net operating losses(127) (289)
Other—net(57) (62)
Gross deferred tax assets(567) (888)
Valuation allowance—
 4
Net deferred tax (assets) liabilities$454
 $463

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act changed many aspects of the U.S. corporate income taxation, including but not limited to, a reduction in the corporate income tax rate from 35% to 21% and accelerated depreciation that will allow for full expensing of qualified property. ASC 740 requires a company to record the effects of a tax law change in the period of enactment.

The Company evaluated the impact of the Tax Cuts and Jobs Act and other law changes and recorded a discrete adjustment in our 2017 income tax expense of $280 million. The Company will continue to evaluate the impact of the new law and future guidance as issued.


At December 31, 2017,2022, the Company hadhas paid taxes of $38 million and does not expect to pay any additional tax for 2022. The Company received $285 million in federal tax refunds as a result of carrying back losses from the 2020 tax year and other various amendments of prior year tax returns. The Company also received $10 million in a refund for an overpayment on their 2021 Federal Form 1120 and an additional $12 million in cash was received for various state amended returns. The Company also has gross state NOLs of approximately $525$325 million that expire beginning in 20292027 and continuing through 2036, and state NOLs of approximately $254 million that expire beginning in 2028 and continuing through 2035.2042.

Virgin America experienced multiple “ownership changes” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the most recent being its acquisition by the Company. Section 382 of the Code imposes an annual limitation on the utilization of pre-ownership change NOLs. Any unused annual limitation may, subject to certain limits, be carried over to later years. The combined Company’s ability to use the NOLs will also depend on the amount of taxable income generated in future periods.


Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. AsThe Company assesses available positive and negative evidence regarding the ability to realize its deferred tax assets. The Company has determined that, based on evidence, a resultportion of the Company’s assessmentstate NOL carryforward may not be realized and, therefore, has provided a valuation allowance of the realization$17 million for that portion as of deferred income tax assets, theDecember 31, 2022. The Company has likewise concluded that it is more likely than not that all of its federal and the remaining state deferred income tax assets will be realized and thus no additional valuation allowance is necessary. The change from 2016 to 2017 was due to the reversal of the valuation allowance related to state NOL carryforwards.has been recorded. The Company reassesses the need for a valuation allowance each reporting period.




Components of Income Tax Expense (Benefit)


The components of income tax expense were(benefit) are as follows (in millions): 
 202220212020
Current income tax expense (benefit):   
Federal$(11)$40 $(212)
State(3)16 (11)
Total current income tax expense (benefit)(14)56 (223)
Deferred income tax expense (benefit):   
Federal32 80 (246)
State3 15 (47)
Total deferred income tax expense (benefit)35 95 (293)
Income tax expense (benefit)$21 $151 $(516)

74
 2017 2016 2015
Current income tax expense:     
Federal$127
 $392
 $397
State35
 48
 30
Total current income tax expense162
 440
 427
      
Deferred income tax expense (benefit): 
  
  
Federal(30) 77
 60
State41
 14
 (23)
Total deferred income tax expense (benefit)11
 91
 37
Income tax expense$173
 $531
 $464



Income Tax Rate Reconciliation


Income tax expense (benefit) reconciles to the amount computed by applying the 2022 U.S. federal rate of 35%21% to income (loss) before income tax and the 2018 US federal rate of 21% for deferred taxes as follows (in millions):
 202220212020
Income (loss) before income tax$79 $629 $(1,840)
Expected tax expense (benefit)17 132 (386)
Nondeductible expenses11 10 9 
State income tax expense (benefit)5 20 (62)
Tax law changes— (14)(93)
Valuation allowance(4)1 18 
Tax credits(5)(2)— 
FIN48 reserve change(3)3 (2)
Other - net— 1 — 
Actual tax expense (benefit)$21 $151 $(516)
Effective tax rate(a)
26.2 %24.0 %28.0 %
(a)Figures in the table above are rounded to the nearest million. As a result, a manual recalculation of the effective tax rate for 2022 using these rounded figures will not agree directly to the Company's actual effective tax rate for 2022 of 26.2%.
 2017 2016 2015
Income before income tax$1,207
 $1,345
 $1,312
      
Expected tax expense422
 471
 459
Nondeductible expenses5
 20
 4
State income taxes29
 28
 19
State income sourcing9
 13
 (15)
Tax law changes(280) —
 —
Other—net(12) (1) (3)
Actual tax expense$173
 $531
 $464
      
Effective tax rate14.3% 39.5% 35.4%

AsIn 2021, the Company recorded a current tax benefit of $14 million as a result of provisions outlined in the CARES Act. In 2020, as a result of tax changes signed into law during 2017, with final regulations issued in 2019, the Company recorded a deferredcurrent tax benefit of $280 million as a result of the reduction in future corporate income tax rate and other state law changes.$93 million.

The Company incurred $39 million of acquisition-related costs that are not deductible under U.S. federal tax law in 2016. These expenses are included in Special items—merger-related costs and other on the Company’s consolidated statement of operations and are reflected as a permanent unfavorable adjustment for the year ended December 31, 2016, in the table above.

In the fourth quarter of 2015, the Company filed amended state tax returns for the years 2010 through 2013 to change the Company’s position on income sourcing in various states. These positions were also taken on 2014 and subsequent filings, unless guidance or rules changed. In 2017, adjustments were made to the Company's position on income sourcing in various states due to updated guidance from state taxing authorities. The impact of this guidance is reflected as an increase in income tax expense of approximately $9 million for the year ended December 31, 2017.




Uncertain Tax Positions


The Company has identified its federal tax return and its state tax returns in Alaska, Oregon and California as “major” tax jurisdictions. A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:
JurisdictionPeriod
Federal
2007 to 2016 (a)(b)
2021
Alaska20122018 to 20162021
California
20062007 to 2016(a)
2021
Oregon
20032015 to 2016(a)
2021
(a)
The 2007-2012 Federal and California Virgin America tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2012 and later years. The 2003, 2004, 2008-2010 and 2011 Oregon tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2010 and later years.
(b)
Income tax years 2012 and 2013 are currently under exam by the Internal Revenue Service.


Certain tax years are open to the extent of net operating loss carryforwards.

Changes in the liability for gross unrecognized tax benefits during 2017, 20162022, 2021 and 20152020 are as follows (in millions):
202220212020
Balance at January 1$41 $35 $40 
Additions related to prior years— 3 1 
Releases related to prior years(1)— (1)
Additions related to current year activity1 3 — 
Releases due to settlements(20)— (4)
Releases due to lapse of statute of limitations— — (1)
Balance at December 31$21 $41 $35 
 2017 2016 2015
Balance at January 1,$40
 $32
 $3
Additions related to prior years16
 —
 29
Releases related to prior years(2) —
 —
Additions related to current year activity2
 —
 —
Additions from acquisitions—
 8
 —
Releases due to settlements(11) —
 —
Releases due to lapse of statute of limitations(2) —
 —
Balance at December 31,$43
 $40
 $32


As of December 31, 2017,2022, the Company had $43$21 million of accrued tax contingencies, of which $36$19 million, if fully recognized, would decrease the effective tax rate. As of December 31, 2017, 20162022, 2021 and 2015,2020, the Company has accrued interest and penalties, net of federal income tax benefit, of $5 million, $3 million, $8 million, and zero.$6 million. In 2017, 2016,2022, 2021, and 2015,2020, the Company recognized ana benefit of $5 million, expense of $2 million, $3and benefit of $1 million, and zero for interest and penalties, net of
75


federal income tax benefit.tax. At December 31, 2017,2022, the Company has unrecognized tax benefits recorded as a liability and some reducing deferred tax assets.liability. The Company added $3 million ofdecreased its reserves for uncertain tax positions in 2017,2022 by $20 million, primarily due to changes in income sourcing forsettlements on state income taxes. These uncertain tax positions could change as a resultbecause of the Company's ongoing audits, settlement of issues, new audits, and status of other taxpayer court cases. The Company cannot predict the timing of these actions. Due to the positions being taken in various jurisdictions, the amounts currently accrued are the Company's best estimate as of December 31, 2017.2022.


NOTE 7.9. EMPLOYEE BENEFIT PLANS
 
Four qualified defined-benefit plans, one non-qualified defined-benefit plan, and seven defined-contribution retirement plans cover various employee groups of Alaska, Virgin America,Horizon, and McGee Air Services and Horizon.Services.


The defined-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement. The qualified defined-benefit pension plans are closed to new entrants.
 
Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirementpost-retirement plan as an asset or liability in the consolidated financial statements and requires recognition of the funded status in AOCL.
 
Qualified Defined-Benefit Pension Plans


The Company’s four qualified defined-benefit pension plans are funded as required by the Employee Retirement Income Security Act of 1974. The defined-benefit plan assets consist primarily of marketable equity and fixed-income securities. The work groups covered by qualified defined-benefit pension plans include salaried employees, pilots, clerical, office, and


passenger service employees, and mechanics, and related craft employees. The Company uses a December 31 measurement date for these plans. All plans are closed to new entrants.


Weighted average assumptions used to determine benefit obligations:


The rates below vary by plan and related work group.
 20222021
Discount rates5.41% to 5.42%2.82% to 2.90%
Rate of compensation increases2.01% to 2.35%2.02% to 2.38%
 2017 2016
Discount rates3.69% to 3.78% 4.29% to 4.50%
Rate of compensation increases2.11% to 3.00% 2.12% to 2.59%


Weighted average assumptions used to determine net periodic benefit cost:


The rates below vary by plan and related work group.
 202220212020
Discount rates2.82% to 2.90%2.43% to 2.58%3.33% to 3.47%
Expected return on plan assets3.00% to 5.25%3.00% to 5.50%3.25% to 5.50%
Rate of compensation increases2.02% to 2.38%2.02% to 2.43%2.11% to 5.44%

 2017 2016 2015
Discount rates4.29% to 4.50% 4.55% to 4.69% 4.20%
Expected return on plan assets5.50% to 6.00% 6.00% to 6.50% 6.50%
Rate of compensation increases2.12% to 2.59% 2.06% to 2.65% 2.85% to 3.91%

The discount rates are determined using current interest rates earned on high-quality, long-term bonds with maturities that correspond with the estimated cash distributions from the pension plans. At December 31, 2017,2022, the Company selected discount rates for each of the plans using a pool of higher-yielding bonds estimated to be more reflective of settlement rates, as management has taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.


76


Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets. The target and actual asset allocation of the funds in the qualified defined-benefit plans, by asset category, are as follows: 
Salaried Plan(a)
All Other Plans
 Target20222021Target20222021
Asset category:  
Domestic equity securities2%-12%7 %7 %29%-39%35 %38 %
Non-U.S. equity securities0%-8%3 %3 %9%-19%15 %16 %
Fixed income securities85%-95%90 %90 %37%-57%45 %42 %
Real estate—%— %— %—%-10%5 %4 %
Plan assets100 %100 %100 %100 %
(a)As our Salaried Plan is frozen and fully funded, our investment strategies differ significantly from that of our other outstanding plans. Investments are in lower-risk securities, with earnings designed to maintain a fully-funded status.
 Target 2017 2016
Asset category:     
Domestic equity securities5% - 33% 25% 30%
Non-U.S. equity securities1% - 16% 11% 12%
Fixed income securities48% - 95% 59% 53%
Real estate2% - 8% 4% 5%
Cash equivalents0% 1% —%
Plan assets  100% 100%


The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate.


Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expediencyexpedient method outlined in the accounting standards. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance.




Plan assetassets by fund category (in millions):
 2017 2016 Fair Value Hierarchy
Fund type:     
U.S. equity market fund$515
 $545
 1
Non-U.S. equity fund226
 218
 1
Credit bond index fund1,232
 989
 1
Plan assets in common commingled trusts$1,973
 $1,752
  
Real estate97
 91
 (a)
Cash equivalents13
 3
 1
Total plan assets$2,083
 $1,846
  
(a)In accordance with Subtopic 820-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.

 20222021Fair Value Hierarchy
Fund type:  
U.S. equity market fund$568 $885 1
Non-U.S. equity fund242 370 1
Credit bond index fund1,001 1,342 1
Plan assets in common commingled trusts$1,811 $2,597 
Real estate76 92 (a)
Cash equivalents7 6 1
Total plan assets$1,894 $2,695 
(a)In accordance with Subtopic 820-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
77



The following table sets forth the status of the qualified defined-benefit pension plans (in millions):
 20222021
Projected benefit obligation (PBO)  
Beginning of year$2,758 $2,934 
Service cost46 56 
Interest cost66 56 
Plan amendments(a)
9 — 
Actuarial (gain)/loss(628)(171)
Benefits paid(172)(117)
End of year$2,079 $2,758 
Plan assets at fair value  
Beginning of year$2,695 $2,488 
Actual return on plan assets(629)224 
Employer contributions— 100 
Benefits paid(172)(117)
End of year$1,894 $2,695 
Unfunded status$(185)$(63)
Percent funded91 %98 %
(a)In conjunction with the 2022 collective bargaining agreement with ALPA, certain participants had credited service restored for leave periods which were previously ineligible for accrual.
 2017 2016
Projected benefit obligation (PBO)   
Beginning of year$2,043
 $1,898
Service cost39
 37
Interest cost74
 73
Actuarial loss300
 104
Benefits paid(69) (69)
End of year$2,387
 $2,043
    
Plan assets at fair value 
  
Beginning of year$1,846
 $1,737
Actual return on plan assets291
 178
Employer contributions15
 —
Benefits paid(69) (69)
End of year$2,083
 $1,846
Unfunded status$(304) $(197)
    
Percent funded87% 90%

The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $2.2$2.0 billion and $1.9$2.7 billion at December 31, 20172022 and 2016.2021. During 2022 actuarial gains decreased the benefit obligation primarily due to the increase in discount rates, offset by changes in demographic assumptions. Plan assets also decreased in 2022 on negative returns on plan assets.


The amounts recognized in the consolidated balance sheets (in millions): 
2017 2016 20222021
Accrued benefit liability-long term$335
 $225
Accrued benefit liability-long term$(240)$(155)
Plan assets-long term (within Other noncurrent assets)(31) (28)Plan assets-long term (within Other noncurrent assets)55 92 
Total liability recognized$304
 $197
Total liability recognized$(185)$(63)
 
The amounts not yet reflected in net periodic benefit cost and included in AOCL (in millions):
 20222021
Prior service cost (credit)$6 $(4)
Net loss438 316 
Amount recognized in AOCL (pretax)$444 $312 

Defined benefit plans with projected benefit obligations and accumulated benefit obligations exceeding fair value of plan assets are as follows (in millions):
 20222021
Projected benefit obligation$1,332 $1,750 
Accumulated benefit obligation1,267 1,685 
Fair value of plan assets1,092 1,595 

78
 2017 2016
Prior service credit$(9) $(10)
Net loss597
 509
Amount recognized in AOCL (pretax)$588
 $499





The expected amortization of prior service credit and net loss from AOCL in 2018 is $1 million and $31 million, respectively, for the qualified defined-benefit pension plans.
Net pension expense for the qualified defined-benefit plans included the following components (in millions): 
 202220212020
Service cost$45 $52 $46 
Interest cost65 56 75 
Restructuring charges(a)
— — 11 
Expected return on assets(128)(122)(110)
Amortization of prior service credit(1)(1)(1)
Recognized actuarial loss8 37 35 
Net pension expense (benefit)$(11)$22 $56 
 2017 2016 2015
Service cost$39
 $37
 $41
Interest cost74
 73
 84
Expected return on assets(106) (108) (122)
Amortization of prior service credit(1) (1) (1)
Recognized actuarial loss26
 25
 26
Settlement expense (special item)
—
 —
 14
Net pension expense$32
 $26
 $42
(a)In 2015,conjunction with the workforce reductions stemming from the COVID-19 pandemic, the Company recognized a settlement chargerecorded additional expense for employees accepting incentive leaves of $14 million related to lump sum settlements offered to terminated, vested plan participants. The result was a reductionabsence. Such expense is included in Special items - restructuring charges on the projected benefit obligationconsolidated statement of $62 million. The settlement charge reflectsoperations for the remaining unamortized actuarial loss in AOCL associated with the settled obligation.year-ended December 31, 2020.


There are no current statutory funding requirements for the Company’s plans in 2018.2023.
 
Future benefits expected to be paid over the next ten years under the qualified defined-benefit pension plans from the assets of those plans (in millions): 
 Total
2018$97
2019101
2020116
2021116
2022130
2023– 2027723
Total
2023$116 
2024114 
2025133 
2026142 
2027156 
2028-2032835 
 
Nonqualified Defined-Benefit Pension Plan
 
Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This plan uses a December 31 measurement date. The assumptions used to determine benefit obligations and the net periodperiodic benefit cost for the nonqualified defined-benefit pension plan are similar to those used to calculate the qualified defined-benefit pension plan. The plan's unfunded status, PBO, and accumulated benefit obligation are immaterial. The net pension expense in prior year and expected future expense is also immaterial.


PostretirementPost-retirement Medical Benefits
 
The Company allows certain retirees to continue their medical, dental and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims. The accumulated postretirementpost-retirement benefit obligation for this subsidy is unfunded. The accumulated postretirementpost-retirement benefit obligation was $85$89 million and $76$125 million at December 31, 20172022 and 2016, respectively.2021. The net periodic benefit cost was not material in 20172022 or 2016.2021.


Defined-Contribution Plans


The seven defined-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code. All of these plans require Company contributions. Total expense for the defined-contribution plans was $103$160 million,, $67 $125 million and $60$126 million in 2017, 2016,2022, 2021, and 2015, respectively.  2020.  




The Company also has a noncontributory, unfunded defined-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined-benefit pension plan. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheets at December 31, 20172022 and 2016.2021.


79


Pilot Long-term Disability Benefits


Alaska maintains a long-term disability plan for its pilots. The long-term disability plan does not have a service requirement. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long-term basis as of December 31, 20172022 and does not include any assumptions for future disability. The liability includes the discounted expected future benefit payments and medical costs.  The total liability was $28$69 million and $25$77 million,, which was recorded net of a prefunded trust account of $3$11 million and $3$8 million,, and included in long-term other liabilities on the consolidated balance sheets as of December 31, 20172022 and December 31, 2016, respectively.2021.


Employee Incentive-Pay Plans
 
The Company has employee incentive plans that pay employees based on certain financial and operational metrics. These metrics are set and approved annually by the Compensation and Leadership Development Committee of the Board of Directors. The aggregate expense under these plans in 2017, 20162022, 2021 and 20152020 was $135$257 million,, $127 $151 million and $120 million.$130 million. The Air Groupincentive plans are summarized below.
 
•Performance-Based Pay (PBP) is a program that rewards the majority of Air GroupAlaska and Horizon employees. The program is based on six separatevarious metrics that adjust periodically, including those related to Air Group profitability, costs, cash flow, safety, loyalty Mileage Plan™ and credit card growth, achievement of unit-cost goals and employee engagement as measured by customer satisfaction.
sustainability. The program also includes the potential for additional payout if Air Group profitability finishes among the highest in the industry.


•The Operational Performance Rewards Program(OPR) entitles the majority of Air GroupAlaska and Horizon employees to quarterly payouts of up to $300$450 per person if certain monthly operational, and customer service, and safety objectives are met.


NOTE 8.10. COMMITMENTS AND CONTINGENCIES


Future minimum payments for commitments as of December 31, 2017the date of this filing (in millions):
 
Aircraft Commitments(a)
Capacity Purchase Agreements and Other Obligations(b)
2023$1,846 $209 
20241,580 216 
20251,262 220 
2026689 217 
2027337 218 
Thereafter606 739 
Total$6,320 $1,819 
(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
 Aircraft Leases Facility Leases Aircraft Purchase Commitments 
Capacity Purchase Agreements (a)
 Aircraft Maintenance Deposits Aircraft Maintenance and Parts Management
2018$354
 $77
 $955
 $129
 $61
 $98
2019356
 67
 816
 151
 65
 102
2020330
 61
 377
 159
 68
 105
2021285
 53
 268
 165
 64
 121
2022262
 34
 193
 173
 52
 76
Thereafter1,021
 142
 145
 1,079
 39
 80
Total$2,608
 $434
 $2,754
 $1,856
 $349
 $582
(a)
Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease commitments include future obligations for all(b)Primarily comprised of the Company's operating airlines—Alaska, Virgin America and Horizon,nonlease costs associated with capacity purchase agreements, as well as aircraft leases operated by third parties. At December 31, 2017, the Company had lease contracts for 10 B737 (B737) aircraft, 57 Airbus aircraft, 15 Bombardier Q400 aircraft,other various sponsorship agreements and 23 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc. (SkyWest). The Company has an additional six scheduled lease deliveries of A321neo aircraft through 2018, as well as 12 scheduled lease deliveries of E175 aircraft through 2018 to be operated by SkyWest. All lease contracts have remaining non-cancelable lease terms ranging from 2018 to 2030. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries in 2020. Options to lease are not reflected in the commitments table above.investment commitments.

Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $552 million, $315 million and $295 million, in 2017, 2016 and 2015.




Aircraft Purchase Commitments
 
Aircraft purchase commitments include non-cancelable contractual commitments for aircrafts and engines. As of December 31, 2017, the Company had commitmentsIn 2022, Alaska executed an agreement with Boeing to exercise options to purchase 4452 B737 aircraft (12 B737 NextGenfor delivery between 2024 and 2027. The agreement also secures rights for 105 additional aircraft through 2030. Also in 2022, Horizon amended its aircraft purchase agreement with Embraer, adding eight firm E175 deliveries between 2023 and 32 B737 MAX2026 and 13 options to purchase additional aircraft with deliveries in 2018 through 2023)between 2025 and 232026. The aircraft covered by the amendment may be assigned by Horizon to another entity. Horizon intends to take delivery of and operate all firm E175 aircraft with deliveries in 2018 through 2019. The Company also has cancelable purchase commitmentsaircraft.

Details for 30 Airbus A320neocontractual aircraft with deliveries from 2020 through 2022. In addition, the Company has options to purchase 37 B737 aircraft and 30 E175 aircraft. The cancelable purchase commitments and option paymentsother rights as of December 31, 2022 are not reflectedoutlined in the table above.below:

80

The Company expects to defer certain purchase commitments in 2019 and beyond, which is not currently reflected in the contractual aircraft purchase commitments above.

Firm OrdersOptions and Other RightsTotal
Aircraft Type2023-20272025-20302023-2030
B737105105210
E175171330
   Total122118240
Capacity Purchase Agreements (CPAs)
At December 31, 2017, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. In addition, Alaska has CPAsreceived information from Boeing indicating that certain B737 deliveries in 2023 are expected to be delayed to 2024. The fleet commitments outlined above reflect the expected impact of these delays. Alaska will continue to work with SkyWest to fly certain routes in the Lower 48 and Canada and with Peninsula Airways, Inc. (PenAir) to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is basedBoeing on a determination of their cost of operating those flights and other factors intended to approximate market ratesdelivery timelines that support Alaska's plans for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.growth.


Aircraft Maintenance Deposits

Certain Airbus leases include contractually required maintenance deposit payments to the lessor, which collateralize the lessor for future maintenance events should the Company not perform required maintenance. Most of the lease agreements provide that maintenance deposits are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance deposits held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event.


Aircraft Maintenance and Parts Management

Through its acquisition of Virgin America, the Company has a separate maintenance-cost-per-hour contractmaintenance commitments include contractual commitments for management and repair of certain rotable parts to support Airbus airframe and engine maintenance and repair. On October 1, 2017, Alaska entered into a similar contract for maintenance on its B737-800 aircraft engines. These agreements requirerequiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft, and, inaircraft. In turn, the agreement transfersthese maintenance agreements transfer certain risks to the third-party service provider. There areAlaska has a contract for maintenance on its B737-800 aircraft engines through 2033. In 2022, Alaska entered into a contract for maintenance on its B737-900ER aircraft engines with minimum payments under both agreements, which are reflected in the table above. Accordingly, payments could differ materially basedeffective 2023 through 2033. Horizon has a contract for maintenance on actualits E175 aircraft utilization.engines through 2033.


Contingencies
 
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.


In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Plaintiffs receivedThe court certified a class certificationof approximately 1,800 flight attendants in November 2016. The Company pursued numerous appeal paths following a February 2019 federal district court order against Virgin America filedand Alaska Airlines awarding plaintiffs approximately $78 million including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the PAGA penalties and total judgment value, remanding the matter to the district court for further consideration. In December 2022, the district court issued a motionfinal total judgment amount of $31 million. Additional proceedings will determine the attorneys’ fee award due to plaintiffs’ counsel. The Company holds an accrual for summary$37 million in Other accrued liabilities on the condensed consolidated balance sheets.

In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment seekingis based are invalid as applied to dismissairlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines, and, in fact, a lawsuit based on similar claims to those asserted in Bernstein has been initiated by Washington-based Alaska Airlines flight attendants. The Company plans to assert all claimsavailable legal defenses, but to date has not determined its probable and estimable liability in this matter.

The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of these solutions may have an adverse impact on various federal preemption grounds. In January 2017, the Court deniedCompany’s operations and financial position due in part to the unresolved conflicts between the laws and granted infederal regulations applicable to airlines.

As part Virgin America’s motion. In January 2018,of the 2016 acquisition of Virgin America, filedAlaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a motionminimum annual royalty through 2039, adjusted annually for inflation. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. The Virgin Group asserts that payments are required without regard to decertifyactual use of the classmark. A trial was held in October 2022 and Plaintiffs filed a motion for summary judgment seekingruling is expected in the court to rule in their favor on all remaining claims.coming weeks. The Company believes the claims in thisthe case are without factual and legal merit, and intends to defend this lawsuit.a position supported by Virgin America’s representations during pre-merger due diligence.


Management believes the ultimate disposition of these matters is not likely to materially affect the Company's financial position or results of operations. This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries.
81





NOTE 9.11. SHAREHOLDERS' EQUITY

Common Stock Changes

During the second quarter of 2017, shareholders voted to increase the number of authorized shares of common stock from 200 million to 400 million.


Dividends


During 2017,In March 2020, the BoardCompany suspended the payment of Directors declared dividends of $1.20 per share. Theindefinitely. Prior to the suspension, the Company paid dividends of $148 million, $136 million and $102$45 million to shareholders of record during 2017, 2016 and 2015.2020. These restrictions ended on October 1, 2022.

Subsequent to year-end, the Board of Directors declared a quarterly cash dividend of $0.32 per share to be paid in March 2018 to shareholders of record as of February 20, 2018. This is a 7% increase from the most recent quarterly dividend of $0.30 per share.

Common Stock Repurchase


In May 2014, the Board of Directors authorized a $650 million share repurchase program, which was completed in October 2015. In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of December 31, 2017, theThe Company has repurchased 5.17.6 million shares for $388$544 million under this program. In March 2020, subject to restrictions under the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Company suspended the share repurchase program indefinitely. These restrictions ended on October 1, 2022. The Company announced plans to resume share repurchases in 2023. The program has remaining authorization of $456 million. Prior to the suspension, the Company repurchased $31 million, or 538,078 shares, in 2020.


At December 31, 2017,2022, the Company held 6,842,8609,349,944 shares in treasury. Management does not anticipate retiring common shares held in treasury for the foreseeable future.


Share repurchase activity (in millions, except shares):CARES Act Warrant Issuance

 2017 2016 2015
 Shares Amount Shares Amount Shares Amount
2015 Repurchase Program – $1 billion981,277
 $75
 2,594,809
 $193
 1,517,277
 $120
2014 Repurchase Program – $650 million—
 —
 —
 —
 5,691,051
 385
Total981,277
 $75
 2,594,809
 $193
 7,208,328
 $505
As additional taxpayer protection required under the PSP programs under the CARES Act, the Company granted the Treasury a total of 1,455,437 warrants to purchase ALK common stock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.

The value of the warrants was estimated using the Black-Scholes option pricing model. The total fair value of the warrants of $30 million, recorded in stockholders' equity at issuance.
Total warrants outstanding are as follows as of December 31, 2022:
Number of shares of ALK common stockStrike Price
PSP 1928,127 31.61
CARES Act loan warrants427,080 31.61
PSP 2305,499 52.25
PSP 3221,812 66.39
Outstanding December 31, 20221,882,518 
Accumulated Other Comprehensive Loss (AOCL)
AOCL consistedA roll forward of the following (in millions,amounts included in accumulated other comprehensive loss, net of tax):  
 2017 2016
Related to marketable securities$(5) $(3)
Related to employee benefit plans(376) (299)
Related to interest rate derivatives1
 (3)
 $(380) $(305)

In relation totax (in millions), is shown below for the Tax Cuts and Jobs Act, amounts recognized in other comprehensive income subsequent to the December 22, 2017 enactment date, are taxed at the revised federal income tax rates. The Company's actuarial adjustments for employee benefit plans occur annually attwelve months ended December 31, and therefore are tax effected at the new lower rates. Accordingly, the effective tax rate for employee benefit plan amounts recognized in other comprehensive income at December 31, 2017 is lower than it historically has been.2022:


Marketable SecuritiesEmployee Benefit PlanInterest Rate DerivativesTotal
Balance at December 31, 2019, net of tax effect of $150$9 $(469)$(5)$(465)
Reclassifications into earnings, net of tax effect of ($5)(11)23 2 14 
Change in value, net of tax effect of $1525 (52)(16)(43)
Balance at December 31, 2020, net of tax effect of $160$23 $(498)$(19)$(494)
Reclassifications into earnings, net of tax effect of ($6)(4)25 — 21 
Change in value, net of tax effect of ($71)(23)221 13 211 
Balance at December 31, 2021, net of tax effect of $83$(4)$(252)$(6)$(262)
Reclassifications into earnings, net of tax effect of ($4)6 2 — 8 
Change in value, net of tax effect of $43(82)(69)17 (134)
Balance at December 31, 2022, net of tax effect of $122$(80)$(319)$11 $(388)

NOTE 10. SPECIAL ITEMS

In 2017, the Company recognized special items of $118 million for merger-related costs associated with its acquisition of Virgin America. Costs classified as merger-related are directly attributable to merger activities. The Company also recognized a special tax benefit of $280 million due to the remeasurement of net deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, partially offset by certain state tax law enactments.

In 2016, the Company recognized $117 million in merger-related costs. $39 million of these costs were not deductible under the U.S. federal tax law, as discussed in Note 6. The Company recognized a special tax expense of $17 million representing the impact of adjustments to the Company's position on income sourcing in various states.

In 2015, the Company recognized special items of $32 million in aggregate. The special items included expense of $14 million for a lump sum settlements offered to terminated and vested participants in the qualified defined benefit pension plans and a litigation-related matter. See Note 7 for more information regarding the pension settlement charge. The Company also recognized a special tax benefit of $26 million representing the discrete impacts of adjustments to the Company's position on income sourcing in various states.

The following breaks down merger-related costs incurred in 2017 and 2016 (in millions):
82
 2017 2016
Consulting and professional services$52
 $32
Severance and retention benefits40
 22
Banking fees—
 36
Legal and accounting fees3
 22
Other merger-related costs(a)
23
 5
Total Merger-related Costs$118
 $117
(a)Other merger-related costs consist primarily of costs for marketing and advertising, IT, training and skill development, employee appreciation and company sponsored events, moving expenses, supplies, and other immaterial expenses.



NOTE 11.12. STOCK-BASED COMPENSATION PLANS


The Company has various equity incentive plans under which it may grant stock awards to directors, officers and employees. The Company also has an employee stock purchase plan.plan (ESPP).


The table below summarizes the components of total stock-based compensation (in millions):
202220212020
Stock options$3 $5 $4 
Stock awards14 20 14 
Deferred stock awards1 1 1 
Employee stock purchase plan17 18 15 
Stock-based compensation$35 $44 $34 
Tax benefit related to stock-based compensation$9 $11 $8 
 2017 2016 2015
Stock options$3
 $2
 $2
Stock awards24
 11
 11
Deferred stock awards1
 1
 1
Employee stock purchase plan6
 5
 3
Stock-based compensation$34
 $19
 $17
      
Tax benefit related to stock-based compensation$13
 $7
 $7
    
Unrecognized stock-based compensation for non-vested options and awards and the weighted-average period the expense will be recognized (in(dollars in millions):
AmountWeighted-Average
Period
Stock options$3 0.2
Stock awards12 1.0
Unrecognized stock-based compensation$15 1.2

 Amount 
Weighted-Average
Period
Stock options$3
 1.2
Stock awards34
 1.7
Unrecognized stock-based compensation$37
 1.7

The Company is authorized to issue 1720 million shares of common stock under these plans, of which 10,927,82412,076,777 shares remain available for future grants of either options or stock awards as of December 31, 2017.2022.




Stock Options
 
Stock options to purchase common stock are granted at the fair market value of the stock on the date of grant. The stock options granted have terms of up to ten years.
 
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants:
 2017 2016 2015
Expected volatility51% 51% 53%
Expected term6 years
 6 years
 6 years
Risk-free interest rate2.04% 1.23% 1.67%
Expected dividend yield1.10% 1.50% 1.25%
Weighted-average grant date fair value per share$41.19
 $27.14
 $28.71
Estimated fair value of options granted (millions)$4
 $2
 $3
 202220212020
Expected volatility44 %43 %34 %
Expected term6 years6 years6 years
Risk-free interest rate1.91 %0.68 %1.03 %
Expected dividend yield— %— %1.73 %
Weighted-average grant date fair value per share$23.36 $23.66 $14.11 
Estimated fair value of options granted (millions)$4 $4 $6 
 
The expected market price volatility and expected term are based on historical results. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected dividend yield is based on the estimated weighted average dividend yield over the expected term. The expected forfeiture rates are based on historical experience.


83


The tables below summarize stock option activity for the year ended December 31, 2017:2022:
 SharesWeighted-
Average Exercise Price Per Share		Weighted-
Average
Contractual Life (Years)		Aggregate Intrinsic
Value
(in millions)
Outstanding, December 31, 20211,179,227 $62.11 6.7$3 
Granted171,450 54.84   
Exercised(4,110)31.73   
Canceled(35,871)71.62 
Forfeited or expired(79,939)54.01   
Outstanding, December 31, 20221,230,757 $61.45 5.6$1 
Exercisable, December 31, 2022758,220 $63.90 4.5$1 
Vested or expected to vest, December 31, 20221,230,230 $61.45 5.6$1 

 Shares 
Weighted-
Average Exercise Price Per Share
 
Weighted-
Average
Contractual Life (Years)
 
Aggregate Intrinsic
Value
(in millions)
Outstanding, December 31, 2016453,674
 $40.02
 6.2 $22
Granted88,580
 94.67
    
Exercised(91,013) 31.31
    
Canceled—
 —
    
Forfeited or expired(9,774) 60.33
    
Outstanding, December 31, 2017441,467
 $52.34
 6.0 $11
        
Exercisable, December 31, 2017229,233
 $32.08
 4.9 $9
Vested or expected to vest, December 31, 2017441,467
 $52.34
 6.0 $11
 (in millions)202220212020
Intrinsic value of option exercises$— $3 $2 
Fair value of options vested$4 $4 $3 


Cash received from stock option exercises was not material for the year ended December 31, 2022.
 (in millions)2017 2016 2015
Intrinsic value of option exercises$6
 $9
 $14
Cash received from stock option exercises3
 3
 4
Tax benefit related to stock option exercises2
 3
 5
Fair value of options vested3
 3
 3

Stock Awards
 
Restricted Stock Units (RSUs) are awarded to eligible employees and entitle the grantee to receive shares of common stock at the end of the vestvesting period. The fair value of the RSUs is based on the stock price on the date of grant. Generally, RSUs “cliff vest” after three years, or the period from the date of grant to the employee’s retirement eligibility, and expense is recognized accordingly. Performance Share Units (PSUs) are awarded to certain executives to receive shares of common stock if specific performance goals and market conditions are achieved. There are several tranches of PSUs which vest when performance goals and market conditions are met.




The following table summarizes information about outstanding stock awards:
 Number
of Units		Weighted-Average Grant Date Fair ValueWeighted-
Average
Contractual
Life (Years)		Aggregate
Intrinsic
Value (in
millions)
Non-vested, December 31, 2021546,480 $52.81 1.3$36 
Granted457,243 59.72   
Vested(494,882)54.44   
Forfeited(402,081)62.38   
Non-vested, December 31, 2022106,760 $53.97 2.9$11 
 
Number
of Units
 Weighted-Average Grant Date Fair Value 
Weighted-
Average
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value (in
millions)
Non-vested, December 31, 2016440,093
 $63.86
 1.4 $39
Granted433,340
 88.43
    
Vested(286,138) 61.47
    
Forfeited(62,150) 65.06
    
Non-vested, December 31, 2017525,145
 $85.47
 1.6 $39


Deferred Stock Awards
 
Deferred Stock Units (DSUs) are awarded to members of the Board of Directors as part of their retainers. The underlying common shares are issued upon retirement from the Board, but require no future service period. As a result, the entire intrinsic value of the awards is expensed on the date of grant.


Employee Stock Purchase Plan
 
The ESPP allows employees to purchase common stock at 85% of the stock price on the first day of the offering period or the specified purchase date, whichever is lower. Employees may contribute up to 10% of their base earnings during the offering period to purchase stock. Employees purchased 406,628, 308,9201,292,489, 1,254,393 and 281,0581,524,194 shares in 2017, 20162022, 2021 and 20152020 under the ESPP.


84


NOTE 12.13. OPERATING SEGMENT INFORMATION
 
Alaska Air Group has threetwo operating airlines—Alaska Virgin America and Horizon. Each is a regulated airline by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon as well as with third-party carriersand SkyWest, and PenAir, under which Alaska receives all passenger revenues.revenue.


Under U.S. General Accepted Accounting Principles,GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:
•Mainline - includes Alaska's and Virgin America’s scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, Costa Rica and Latin America.
Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under CPAs.a CPA. This segment includes the actual revenuesrevenue and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.


The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.


The "Consolidating and Other" column reflects parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.



85



Operating segment information is as follows (in millions):
Year Ended December 31, 2022
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenue   
Passenger revenue$7,454 $1,354 $— $— $8,808 $— $8,808 
CPA revenue— — 359 (359)— — — 
Mileage Plan other revenue538 52 — — 590 — 590 
Cargo and other revenue244 — — 4 248 — 248 
Total Operating Revenue8,236 1,406 359 (355)9,646 — 9,646 
Operating Expenses
Operating expenses, excluding fuel5,216 1,085 383 (356)6,328 580 6,908 
Fuel expense2,195 397 — — 2,592 76 2,668 
Total Operating Expenses7,411 1,482 383 (356)8,920 656 9,576 
Non-operating Income (Expense)30 — (22)1 9 — 9 
Income (Loss) Before Income Tax$855 $(76)$(46)$2 $735 $(656)$79 
Pretax Margin7.6 %0.8 %
Year Ended December 31, 2021
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenue   
Passenger revenue$4,411 $1,088 $— $— $5,499 $— $5,499 
CPA revenue— — 406 (406)— — — 
Mileage Plan other revenue402 59 — — 461 — 461 
Cargo and other revenue212 — — 4 216 — 216 
Total Operating Revenue5,025 1,147 406 (402)6,176 — 6,176 
Operating Expenses
Operating expenses, excluding fuel4,101 1,096 373 (433)5,137 (925)4,212 
Fuel expense1,065 261 — — 1,326 (47)1,279 
Total Operating Expenses5,166 1,357 373 (433)6,463 (972)5,491 
Non-operating Income (Expense)(38)— (21)3 (56)— (56)
Income (Loss) Before Income Tax$(179)$(210)$12 $34 $(343)$972 $629 
Pretax Margin(5.6)%10.2 %
86


Year Ended December 31, 2017Mainline Regional Horizon 
Consolidating & Other(b)
 
Air Group Adjusted(c)
 
Special Items(d)
 Consolidated
Operating revenues             
Passenger             
Mainline$5,858
 $—
 $—
 $—
 $5,858
 $—
 $5,858
Regional—
 960
 —
 —
 960
 —
 960
Total passenger revenues5,858
 960
 —
 —
 6,818
 —
 6,818
CPA revenues—
 —
 426
 (426) —
 —
 —
Freight and mail110
 4
 —
 —
 114
 —
 114
Other-net922
 74
 4
 1
 1,001
 —
 1,001
Total operating revenues6,890
 1,038
 430
 (425) 7,933
 —
 7,933
              
Operating expenses             
Operating expenses, excluding fuel4,257
 851
 427
 (427) 5,108
 118
 5,226
Fuel expense1,282
 172
 —
 —
 1,454
 (7) 1,447
Total operating expenses5,539
 1,023
 427
 (427) 6,562
 111
 6,673
              
Nonoperating income (expense)             
Interest income39
 —
 —
 (5) 34
 —
 34
Interest expense(92) —
 (13) 2
 (103) —
 (103)
Other14
 —
 2
 —
 16
 —
 16
 (39) —
 (11) (3) (53) —
 (53)
Income (loss) before income tax$1,312
 $15
 $(8) $(1) $1,318
 $(111) $1,207
Year Ended December 31, 2020
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenue   
Passenger revenue$2,350 $669 $— $— $3,019 $— $3,019 
CPA revenue— — 386 (386)— — — 
Mileage Plan other revenue309 65 — — 374 — 374 
Cargo and other revenue170 — — 3 173 — 173 
Total Operating Revenue2,829 734 386 (383)3,566 — 3,566 
Operating Expenses
Operating expenses, excluding fuel3,630 993 323 (399)4,547 71 4,618 
Fuel expense569 162 — — 731 (8)723 
Total Operating Expenses4,199 1,155 323 (399)5,278 63 5,341 
Non-operating Income (Expense)(19)— (22)2 (39)(26)(65)
Income (Loss) Before Income Tax$(1,389)$(421)$41 $18 $(1,751)$(89)$(1,840)
Pretax Margin(49.1)%(51.6)%

(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain charges.
(c)Includes special items, mark-to-market fuel-hedge accounting adjustments, and Payroll Support Program grant wage offsets.

202220212020
Depreciation and amortization:
Mainline$351 $323 $346 
Horizon64 71 74 
Consolidated$415 $394 $420 
Capital expenditures:
Mainline$1,544 $236 $210 
Horizon127 56 12 
Consolidated$1,671 $292 $222 
Total assets at end of period:   
Mainline$19,733 $19,258 
Horizon1,157 1,212 
Consolidating & Other(6,704)(6,519)
Consolidated$14,186 $13,951 

Year Ended December 31, 2016
Mainline(a)
 Regional Horizon 
Consolidating & Other(b)
 
Air Group Adjusted(c)
 
Special Items(d)
 Consolidated
Operating revenues             
Passenger             
Mainline$4,098
 $—
 $—
 $—
 $4,098
 $—
 $4,098
Regional—
 908
 —
 —
 908
 —
 908
Total passenger revenues4,098
 908
 —
 —
 5,006
 —
 5,006
CPA revenues—
 —
 424
 (424) —
 —
 —
Freight and mail104
 5
 —
 (1) 108
 —
 108
Other-net738
 74
 4
 1
 817
 —
 817
Total operating revenues4,940
 987
 428
 (424) 5,931
 —
 5,931
              
Operating expenses             
Operating expenses, excluding fuel2,883
 769
 407
 (425) 3,634
 117
 3,751
Fuel expense719
 125
 —
 —
 844
 (13) 831
Total operating expenses3,602
 894
 407
 (425) 4,478
 104
 4,582
              
Nonoperating income (expense)             
Interest income26
 —
 1
 —
 27
 —
 27
Interest expense(42) —
 (9) (4) (55) —
 (55)
Other19
 —
 1
 4
 24
 —
 24
 3
 —
 (7) —
 (4) —
 (4)
Income (loss) before income tax$1,341
 $93
 $14
 $1
 $1,449
 $(104) $1,345


Year Ended December 31, 2015Mainline Regional Horizon 
Consolidating & Other(b)
 
Air Group Adjusted(c)
 
Special Items(d)
 Consolidated
Operating revenues             
Passenger             
Mainline$3,939
 $—
 $—
 $—
 $3,939
 $—
 $3,939
Regional—
 854
 —
 —
 854
 —
 854
Total passenger revenues3,939
 854
 —
 —
 4,793
 —
 4,793
CPA revenues—
 —
 408
 (408) —
 —
 —
Freight and mail103
 5
 —
 —
 108
 —
 108
Other-net621
 72
 4
 —
 697
 —
 697
Total operating revenues4,663
 931
 412
 (408) 5,598
 —
 5,598
              
Operating expenses             
Operating expenses, excluding fuel2,653
 695
 375
 (409) 3,314
 32
 3,346
Fuel expense823
 131
 —
 —
 954
 —
 954
Total operating expenses3,476
 826
 375
 (409) 4,268
 32
 4,300
              
Nonoperating income (expense)             
Interest income19
 —
 —
 2
 21
 —
 21
Interest expense(28) —
 (10) (4) (42) —
 (42)
Other28
 —
 1
 6
 35
 —
 35
 19
 —
 (9) 4
 14
 —
 14
Income (loss) before income tax$1,206
 $105
 $28
 $5
 $1,344
 $(32) $1,312
(a)As the acquisition of Virgin America closed on December 14, 2016, Mainline financial results, presented above include Virgin America for the twelve months ended December 31, 2017, and not for the prior period. Financial results also reflect the impacts of purchase accounting.
(b)Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units.
(c)
The Air Group Adjusted column excludes certain charges described in (d) and represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations.
(d)Includes accounting adjustments related to mark-to-market fuel hedge accounting charges (all years), merger-related costs (2017 and 2016), pension settlement charge (2015), and a litigation-related matter (2015).
 2017 2016 2015
Depreciation and amortization:     
Mainline$308
 $296
 $268
Horizon64
 67
 52
Consolidated$372
 $363
 $320
      
Capital expenditures:     
Mainline$734
 $608
 $821
Horizon292
 70
 10
Consolidated$1,026
 $678
 $831
      
Total assets at end of period: 
  
  
Mainline$16,650
 $15,260
  
Horizon929
 690
  
Consolidating & Other(6,839) (5,988)  
Consolidated$10,740
 $9,962
  



ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.    CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act
87


Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Except as noted below, thereThere have been no changes in the Company’sCompany's internal controls over financial reporting during the quarteryear ended December 31, 2017,2022, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal controls over financial reporting.

Our internal control over financial reporting except as noted below.

On December 14, 2016,is based on the Company completed2013 framework in Internal Control - Integrated Framework issued by the acquisitionCommittee of Virgin America. In 2017 we integrated policies, processes, people, technology and operations for the combined company. Our integration included internal controls over financial reporting. As the integration continues and business processes evolve, management will continue to evaluate the existing internal controls over financial reporting for change.

Also during 2017 the Company implemented internal controls to ensure it has adequately assessed the impactSponsoring Organizations of the new accounting standard related to revenue recognition to prepare for adoption on January 1, 2018. The modified and new controls have been designed to address risks associated with recognizing revenue under the new standard.Treadway Commission (the COSO Framework).

88
There have been no other changes in the Company's internal controls over financial reporting during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.





MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officerPrincipal Executive Officer and principal financial officer,Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2022.
 
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis, and to improve these controls and procedures over time, and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures.
 
The Company's independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2017.2022.




89


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the StockholdersShareholders and Board of Directors
Alaska Air Group, Inc.:


Opinion on Internal Control Over Financial Reporting

We have audited Alaska Air Group, Inc. and subsidiaries’subsidiaries' (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 14, 201813, 2023 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
KPMG LLP
Seattle, Washington
February 14, 201813, 2023




/s/ KPMG LLP
90


ITEM 9B.    OTHER INFORMATION


NoneOn February 13, 2023, Susan J. Li informed the Company that she will not stand for reelection to the Board of Directors at the May 4, 2023 annual meeting of stockholders, in order to focus on her responsibilities as chief financial officer of Meta. Ms. Li has been on the Board since 2018, and serves on the Audit Committee and the Innovation Committee.


Jessie J. Knight, Jr., who has served on the Board for more than 17 years, and currently sits on the Safety Committee and the Compensation & Leadership Development Committee, will retire effective on the 2023 annual meeting of stockholders in accordance with the Company’s director age limits.

In connection with these departures, the Boards of the Company and its principal subsidiaries Alaska Airlines, Inc. and Horizon Air, Inc. approved a reduction in the number of director seats from 13 to 11 effective on the 2023 annual meeting of stockholders.

ITEM 9C.    DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
See “Executive Officers” under Item 1, “Our Business,” in Part I of this Form 10-K for information on the executive officers of Air Group and its subsidiaries. Except as provided herein, the remainder of the information required by this item is incorporated herein by reference from the definitive Proxy Statement for Air Group's 20182023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 20172022 (hereinafter referred to as our “2018“2023 Proxy Statement”).
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this item is incorporated herein by reference from our 20182023 Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Securities Authorized for Issuance Under Equity Compensation Plans
 Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan category(a) (b) (c)
Equity compensation plans approved by security holders
1,311,899(1)

 
$52.34(2) 
 10,927,824
Equity compensation plans not approved by security holders—
 Not applicable —
Total1,311,899
 $52.34 10,927,824
(1)Of these shares, 354,475 and 86,992 were subject to options then outstanding under the 2008 Plan and 2016 Plan, respectively, 386,869 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2008 Plan and 483,553 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2016 Plan. Outstanding performance awards are reflected in the table assuming that the target level of performance will be achieved.
(2)This number does not reflect the 870,432 shares that were subject to outstanding stock unit awards granted under the 2008 and 2016 Plans.
(3)Of the aggregate number of shares that remained available for future issuance, no shares were available under the 2008 Plan, 5,129,157 shares were available under the 2016 Plan and 5,798,667 shares were available under the ESPP. Subject to certain express limits of the 2016 Plan, shares available for award purposes under the 2016 Plan generally may be used for any type of award authorized under that plan including options, stock appreciation rights, and other forms of awards granted or denominated in shares of our common stock including, without limitation, stock bonuses, restricted stock, restricted stock units and performance shares. Full-value shares issued under the 2016 Plan are counted against the share limit as 1.7 shares for every one share issued. This table does not give effect to that rule.

OtherThe information required by this item is set forth under the heading “Beneficial Ownership of Securities” inincorporated herein by reference from our 20182023 Proxy Statement and is incorporated by reference.Statement.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated herein by reference from our 20182023 Proxy Statement.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Our independent registered public accounting firm is KPMG LLP, Seattle, WA, Auditor Firm ID: 185.

The information required by this item is incorporated herein by reference from our 20182023 Proxy Statement.
 
PART IV
 
ITEM 15. EXHIBITS
 
The following documents are filed as part of this report:

91
1.
Exhibits: See Exhibit Index.






1.Exhibits: See Exhibit Index.

92


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALASKA AIR GROUP, INC.
By:/s/ BRADLEY D. TILDENBENITO MINICUCCIDate:February 14, 201813, 2023
Bradley D. TildenBenito Minicucci
President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 14, 201813, 2023 on behalf of the registrant and in the capacities indicated.


93


/s/ BRADLEY D. TILDENBENITO MINICUCCI
ChairmanPresident and Chief Executive Officer
(Principal Executive Officer)
CEO Alaska Air Group, Inc. and Alaska Airlines, Inc.
Bradley D. TildenBenito Minicucci
/s/ BRANDON S. PEDERSENSHANE R. TACKETT
Executive Vice President/Finance and Chief Financial Officer

(Principal Financial Officer)
Brandon S. PedersenShane R. Tackett
/s/ CHRISTOPHER M. BERRYEMILY HALVERSON
Vice President Finance and Controller

(Principal Accounting Officer)
Christopher M. BerryEmily Halverson
/s/ PATRICIA M. BEDIENTDirectorChair, Alaska Air Group, Inc; Chair, Alaska Airlines; Chair, Horizon Air Industries, Inc
Patricia M. Bedient
/s/ JAMES A. BEERDirector
James A. Beer
/s/ MARION C. BLAKEYDirector
Marion C. Blakey
/s/ PHYLLIS J. CAMPBELLDirector
Phyllis J. Campbell
/s/ RAYMOND L. CONNERDirector
Raymond L. Conner
/s/ DANIEL K. ELWELLDirector
Daniel K. Elwell
/s/ DHIREN R. FONSECADirector
Dhiren R. Fonseca
/s/ DENNIS F. MADSENKATHLEEN T. HOGANDirector
Dennis F. MadsenKathleen T. Hogan
/s/ JESSE J. KNIGHT, JR.Director
Jesse J. Knight, Jr.
/s/ SUSAN J. LIDirector
Susan J. Li
/s/ ADRIENNE R. LOFTONDirector
Adrienne R. Lofton
/s/ HELVI K. SANDVIKDirector
Helvi K. Sandvik
/s/ J. KENNETH THOMPSONDirector
J. Kenneth Thompson
/s/ ERIC K. YEAMANDirector
Eric K. Yeaman




94


EXHIBIT INDEX
Certain of the following exhibits have been filed with the Securities and Exchange Commission and are incorporated by reference from the documents below. Certain others are filed with this Form 10-K. The exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
Number		Exhibit
Description		FormDate of
First Filing		Exhibit
Number		File
Number
3.110-QAugust 3, 20173.1
4.1*10-KFebruary 26, 20214.1
4.2*10-KFebruary 26, 20214.2
4.3*10-KFebruary 26, 20214.3
4.4*10-KFebruary 26, 20214.4
4.510-QAugust 3, 20214.1
4.610-QAugust 3, 20214.2
4.710-QAugust 3, 20214.3
4.810-QAugust 3, 20214.4
4.910-QAugust 3, 20214.5
4.1010-QAugust 3, 20214.6
10.1#10-QNovember 4, 202110.1
10.2#10-KFebruary 26, 202110.1
10.3#10-KFebruary 14, 201310.8
10.4#10-KFebruary 11, 202210.4
10.5#10-KFebruary 11, 202210.5
10.6#10-KFebruary 11, 202210.6
10.7#10-KFebruary 11, 202210.7
10.8#10-KFebruary 11, 202210.8
10.9#10-KFebruary 11, 202210.9
10.10#10-KFebruary 11, 202210.10
10.11#10-KFebruary 11, 202210.11
10.12#10-QMay 4, 201810.3
10.13#10-KFebruary 11, 202210.13
10.14#10-KFebruary 11, 202210.14
10.15#10-KFebruary 11, 202210.15
10.16#10-KFebruary 11, 202210.16
10.17#10-KFebruary 11, 202210.17
10.18#10-QMay 6, 202110.1
95
Exhibit
Number
Exhibit
Description
Form
Date of
First Filing
Exhibit
Number
File
Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-QAugust 3, 20173.1 
10.1#
Aircraft General Terms Agreement, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc.
10-QAugust 5, 200510.1 
10.2#
Purchase Agreement No. 2497, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc.
10-QAugust 5, 200510.2 
10.3#
Supplemental Agreement No. 23 to Purchase Agreement No. 2497 between The Boeing Company and Alaska Airlines, Inc.
10-Q/AAugust 2, 201110.1 
10.4#
Supplemental Agreement No. 29 to Purchase Agreement No. 2497 between The Boeing Company and Alaska Airlines, Inc.
10-KFebruary 14, 201310.1 
10.5#
Purchase Agreement No. 3866 between The Boeing Company and Alaska Airlines, Inc.
10-KFebruary 14, 201310.2 
10.6#
Supplemental Agreement No. 39 to Purchase Agreement No. 2497 between The Boeing Company and Alaska Airlines, Inc.
10-QMay 7, 201510.1 
10.7#
Purchase Agreement, dated April 11, 2016, between Embraer S.A. and Horizon Air Industries, Inc.
10-QMay 9, 201610.1 
10.8^
A320 Aircraft Purchase Agreement, dated as of December 29, 2010, between Airbus S.A.S. and Virgin America Inc.
S-1/A^October 7, 201410.15 
10.9*
Alaska Air Group, Inc. 2008 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement
10-QAugust 4, 201110.3 
10.10*
Alaska Air Group, Inc. 2008 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement
10-QAugust 4, 201110.4 
10.11*
Alaska Air Group, Inc. 2008 Performance Incentive Plan, Form of Stock Unit Award Agreement
10-QAugust 4, 201110.5 
10.12*
Alaska Air Group, Inc. 2008 Performance Incentive Plan, Amended for Stock-Split
10-KFebruary 11, 201610.10 
10.13*
Alaska Air Group, Inc. 2016 Performance Incentive Plan
8-KMay 18, 201610.1 
10.14*
Alaska Air Group, Inc. 2016 Performance Incentive Plan, Form of Nonqualified Stock Option Agreement
10-QAugust 2, 201610.1 
10.15*
Alaska Air Group, Inc. 2016 Performance Incentive Plan, Form of Incentive Stock Option Agreement
10-QAugust 2, 201610.2 
10.16*
Alaska Air Group, Inc. 2016 Performance Incentive Plan, Form of Performance Stock Unit Award Agreement
10-QAugust 2, 201610.3 
10.17*
Alaska Air Group, Inc. 2016 Performance Incentive Plan, Form of Stock Unit Award Agreement
10-QAugust 2, 201610.4 
10.18*
Alaska Air Group, Inc. 2010 Employee Stock Purchase Plan, as Amended for the Offering Period Commencing March 1, 2017
10-KFebruary 28, 201710.18 
10.19*
Alaska Air Group, Inc. Stock Deferral Plan for Non-Employee Directors
10-KFebruary 11, 201610.12 
10.20*
Alaska Air Group, Inc. Nonqualified Deferred Compensation Plan, as amended
10-QAugust 4, 201110.1 
10.21*
1995 Elected Officers Supplementary Retirement Plan, as amended
10-QAugust 4, 201110.2 
10.22*
Form of Alaska Air Group, Inc. Change of Control Agreement for named executive officers, as amended and restated October 16, 2014
10-KFebruary 11, 201610.15 
10.23*
Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended February 14, 2017
10-QMay 5, 201710.1 
10.24*
Alaska Air Group Performance Based Pay Plan, Amended and Restated January 18, 2017
10-QMay 5, 201710.2 
10.25*†
Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended January 17, 2018
    
10.26*†
Alaska Air Group Performance Based Pay Plan, Amended and Restated January 17, 2018
    
10.27*†
Executive Employment Agreement between Horizon Air Industries, Inc. and Gary L. Beck
    
21†
Subsidiaries of Registrant
    




23.1†10.19#10-QAugust 3, 202110.3
10.20#10-QAugust 3, 202110.4
10.21#10-QNovember 4, 202110.3
10.22#10-QMay 5, 202210.1
10.23#10-QAugust 2, 202210.1
10.24#†10-K
10.25#10-QMay 9, 201610.1
10.26#10-KFebruary 11, 202210.23
10.27#10-KFebruary 11, 202210.24
10.28#10-KFebruary 11, 202210.25
10.29#10-KFebruary 11, 202210.26
10.30#10-KFebruary 11, 202210.27
10.31#10-KFebruary 11, 202210.28
10.32#10-KFebruary 11, 202210.29
10.33#10-KFebruary 11, 202210.30
10.34#10-KFebruary 11, 202210.31
10.35#10-KFebruary 11, 202210.32
10.36#10-KFebruary 11, 202210.33
10.37#10-KFebruary 11, 202210.34
10.38#10-KFebruary 11, 202210.35
10.39#10-KFebruary 11, 202210.36
10.40#10-QAugust 3, 202110.5
10.41#10-QNovember 4, 202110.2
10.42#10-KFebruary 11, 202210.39
10.43#10-KFebruary 11, 202210.40
10.44#10-QAugust 2, 202210.2
10.45*10-QAugust 4, 201110.3
10.46*10-QAugust 4, 201110.4
10.47*10-KFebruary 11, 201610.10
10.48*8-KMay 18, 201610.1
10.49*10-QAugust 2, 202210.3
10.50*10-KFebruary 11, 201610.12
96


10.51*10-QAugust 4, 201110.1
10.52*10-QAugust 4, 201110.2
10.53*10-KFebruary 11, 202210.49
10.54*10-KFebruary 12, 202010.24
10.55*10-QAugust 3, 202110.7
10.56*10-KFebruary 26, 202110.19
10.57*10-QAugust 3, 202110.1
10.58*10-QAugust 3, 202110.2
10.59*10-KFebruary 26, 202110.20
10.60*10-KFebruary 26, 202110.21
10.61*10-KFebruary 11, 202210.57
10.62*10-KFebruary 11, 202210.58
10.63*10-KFebruary 11, 202210.59
10.64*10-KFebruary 11, 202210.60
21†10-K
23.1†10-K
31.1†10-K
31.2†10-K
32.1†10-K
32.2†10-K
101.INS†XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.10-K
101.SCH†XBRL Taxonomy Extension Schema Document10-K
101.CAL†XBRL Taxonomy Extension Calculation Linkbase Document10-K
101.DEF†XBRL Taxonomy Extension Definition Linkbase Document10-K
101.LAB†XBRL Taxonomy Extension Label Linkbase Document10-K
101.PRE†XBRL Taxonomy Extension Presentation Linkbase Document10-K
†Filed herewith
*Indicates management contract or compensatory plan or arrangement.
#Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.
^Filed by Virgin America Inc., File Number 333-197660


102
97