UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 


x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2017March 31, 2022
 
OR


¨☐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 WA98188
Telephone: (206) 392-5040

Telephone:(206)392-5040
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTicker SymbolName of each exchange on which registered
Common stock, $0.01 par valueALKNew York Stock Exchange
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. Yes x☒  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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filerx
☒
Accelerated filer  ¨
☐
Non-accelerated filer   ¨

(Do not check if a smaller reporting company)
☐
Smaller reporting company  ¨
☐
Emerging growth company  ¨☐


If an emerging growth company, indicate by checkmark 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No x☒
 
The registrant has 123,044,897126,091,824 common shares, par value $0.01, outstanding at October 31, 2017.

April 30, 2022.


This document is also available on our website at http://investor.alaskaair.com.


ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017MARCH 31, 2022


TABLE OF CONTENTS

PART I.
4
ITEM 1.
4
ITEM 2.
21
ITEM 3.
4338
ITEM 4.
4339
4440
ITEM 1.
4440
ITEM 1A.
4440
ITEM 2.
4440
ITEM 3.
4440
ITEM 4.
4440
ITEM 5.
4441
ITEM 6.
4541
4541


As used in this Form 10-Q, the terms “Air Group,” the "Company,"“Company,” “our,” “we” and "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” and together as our “airlines.”
 

2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q 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. Some of the things that could cause our actual results to differ from our expectations are:


the competitive environment in our industry;
changes in our operating costs, including fuel, which can be volatile;
our ability to meet our cost reduction goals;
labor disputes and our ability to attract and retain qualified personnel;
operational disruptions;
an aircraft accident or incident;
general economic conditions, including the impact of those conditions on customer travel behavior;
the concentration of our revenue from a few key markets;
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
our reliance on automated systems and the risks associated with changes made to those systems;
changes in laws and regulations;
our ability to successfully integrate the operations of Virgin America into those of Alaska;
our ability to achieve anticipated synergies and timing thereof in connection with the acquisition of Virgin America.

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 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, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2016, and Item 1A. "Risk Factors" included herein.2021. Please consider our forward-looking statements in light of those risks as you read this report.





3

PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions)March 31, 2022December 31, 2021
ASSETS  
Current Assets  
Cash and cash equivalents$628 $470 
Marketable securities2,262 2,646 
Total cash and marketable securities2,890 3,116 
Receivables - net658 546 
Inventories and supplies - net78 62 
Prepaid expenses and other current assets348 196 
Total Current Assets3,974 3,920 
Property and Equipment  
Aircraft and other flight equipment8,244 8,127 
Other property and equipment1,529 1,489 
Deposits for future flight equipment283 384 
 10,056 10,000 
Less accumulated depreciation and amortization3,814 3,862 
Total Property and Equipment - Net6,242 6,138 
Other Assets
Operating lease assets1,541 1,453 
Goodwill and intangible assets2,042 2,044 
Other noncurrent assets411 396 
Total Other Assets3,994 3,893 
Total Assets$14,210 $13,951 


4

(in millions)September 30, 2017 December 31, 2016
ASSETS   
Current Assets   
Cash and cash equivalents$144
 $328
Marketable securities1,596
 1,252
Total cash and marketable securities1,740
 1,580
Receivables—net301
 302
Inventories and supplies—net57
 47
Prepaid expenses and other current assets116
 121
Total Current Assets2,214
 2,050
    
Property and Equipment 
  
Aircraft and other flight equipment7,590
 6,947
Other property and equipment1,187
 1,103
Deposits for future flight equipment531
 545
 9,308
 8,595
Less accumulated depreciation and amortization3,078
 2,929
Total Property and Equipment—Net6,230
 5,666
    
Goodwill1,934
 1,934
Intangible assets135
 143
Other noncurrent assets226
 169
Other Assets2,295
 2,246
    
Total Assets$10,739
 $9,962

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)March 31, 2022December 31, 2021
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$299 $200 
Accrued wages, vacation and payroll taxes367 457 
Air traffic liability1,643 1,163 
Other accrued liabilities659 625 
Deferred revenue1,038 912 
Current portion of operating lease liabilities272 268 
Current portion of long-term debt292 366 
Total Current Liabilities4,570 3,991 
Long-Term Debt, Net of Current Portion2,078 2,173 
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,357 1,279 
Deferred income taxes509 578 
Deferred revenue1,394 1,446 
Obligation for pension and post-retirement medical benefits302 305 
Other liabilities363 378 
Total Noncurrent Liabilities3,925 3,986 
Commitments and Contingencies (Note 7)00
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 - 135,437,808 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,087,864 shares; 2021 - 125,905,864 shares1 1 
Capital in excess of par value503 494 
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares(674)(674)
Accumulated other comprehensive loss(292)(262)
Retained earnings4,099 4,242 
 3,637 3,801 
Total Liabilities and Shareholders' Equity$14,210 $13,951 

5
(in millions, except share amounts)September 30, 2017 December 31, 2016
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current Liabilities   
Accounts payable$97
 $92
Accrued wages, vacation and payroll taxes345
 397
Air traffic liability1,103
 849
Other accrued liabilities886
 878
Current portion of long-term debt334
 319
Total Current Liabilities2,765
 2,535
    
Long-Term Debt, Net of Current Portion2,367
 2,645
Other Liabilities and Credits 
  
Deferred income taxes682
 463
Deferred revenue682
 640
Obligation for pension and postretirement medical benefits323
 331
Other liabilities429
 417
 2,116
 1,851
Commitments and Contingencies

 

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 - 129,860,836 shares; 2016 - 129,189,634 shares, Outstanding: 2017 - 123,387,158 shares; 2016 - 123,328,051 shares1
 1
Capital in excess of par value156
 110
Treasury stock (common), at cost: 2017 - 6,473,678 shares; 2016 - 5,861,583 shares(494) (443)
Accumulated other comprehensive loss(289) (305)
Retained earnings4,117
 3,568
 3,491
 2,931
Total Liabilities and Shareholders' Equity$10,739
 $9,962

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31,
(in millions, except per share amounts)20222021
Operating Revenues  
Passenger revenue$1,511 $659 
Mileage Plan other revenue112 94 
Cargo and other58 44 
Total Operating Revenues1,681 797 
Operating Expenses
Wages and benefits606 493 
Variable incentive pay36 33 
Payroll Support Program grant wage offset— (411)
Aircraft fuel, including hedging gains and losses347 203 
Aircraft maintenance135 81 
Aircraft rent73 62 
Landing fees and other rentals138 129 
Contracted services78 51 
Selling expenses58 33 
Depreciation and amortization102 97 
Food and beverage service41 23 
Third-party regional carrier expense42 30 
Other152 105 
Special items - fleet transition and related charges75 18 
Special items - restructuring charges— 11 
Total Operating Expenses1,883 958 
Operating Loss(202)(161)
Non-operating Income (Expense)
Interest income7 7 
Interest expense(27)(32)
Interest capitalized2 3 
Other - net14 10 
Total Non-operating Expense(4)(12)
Loss Before Income Tax(206)(173)
Income tax benefit(63)(42)
Net Loss$(143)$(131)
Basic Loss Per Share:$(1.14)$(1.05)
Diluted Loss Per Share:$(1.14)$(1.05)
Shares used for computation:
Basic125.984 124.299 
Diluted125.984 124.299 

6
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except per share amounts)2017 2016 2017 2016
Operating Revenues       
Passenger       
Mainline$1,562
 $1,073
 $4,390
 $3,036
Regional262
 249
 725
 682
Total passenger revenue1,824
 1,322
 5,115
 3,718
Freight and mail32
 31
 88
 82
Other—net264
 213
 768
 607
Total Operating Revenues2,120
 1,566
 5,971
 4,407
        
Operating Expenses     
  
Wages and benefits475
 340
 1,392
 1,008
Variable incentive pay40
 31
 98
 95
Aircraft fuel, including hedging gains and losses368
 225
 1,051
 593
Aircraft maintenance88
 64
 271
 197
Aircraft rent70
 25
 204
 80
Landing fees and other rentals124
 89
 338
 232
Contracted services76
 63
 234
 183
Selling expenses91
 58
 269
 162
Depreciation and amortization95
 101
 275
 281
Food and beverage service50
 31
 145
 93
Third-party regional carrier expense30
 25
 84
 72
Special items—merger-related costs24
 22
 88
 36
Other150
 92
 424
 267
Total Operating Expenses1,681
 1,166
 4,873
 3,299
Operating Income439
 400
 1,098
 1,108
        
Nonoperating Income (Expense)     
  
Interest income9
 7
 25
 20
Interest expense(26) (11) (77) (33)
Interest capitalized5
 6
 13
 21
Other—net—
 —
 (1) (2)
 (12) 2
 (40) 6
Income before income tax427
 402
 1,058
 1,114
Income tax expense161
 146
 397
 414
Net Income$266
 $256
 $661
 $700
        
Basic Earnings Per Share:$2.15
 $2.08
 $5.35
 $5.66
Diluted Earnings Per Share:$2.14
 $2.07
 $5.31
 $5.63
Shares used for computation:       
Basic123.467
 123.149
 123.501
 123.648
Diluted124.220
 123.833
 124.341
 124.393
        
Cash dividend declared per share:$0.30
 $0.275
 $0.90
 $0.825
See accompanying notes to condensed consolidated financial statements.

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
Three Months Ended March 31,
(in millions)20222021
Net Loss$(143)$(131)
Other comprehensive income (loss), net of tax
Marketable securities(40)(12)
Employee benefit plans1 6 
Interest rate derivative instruments9 6 
Total comprehensive loss, net$(173)$(131)




7
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions)2017 2016 2017 2016
Net Income$266
 $256
 $661
 $700
        
Other Comprehensive Income (Loss):       
Related to marketable securities:       
Unrealized holding gain (loss) arising during the period1
 (2) 5
 17
Reclassification of (gain) loss into Other—net nonoperating income (expense)(1) —
 —
 (1)
Income tax effect—
 —
 (2) (6)
Total—
 (2) 3
 10
        
Related to employee benefit plans:       
Reclassification of net pension expense into Wages and benefits5
 5
 16
 15
Income tax effect(2) (1) (5) (5)
Total3
 4
 11
 10
        
Related to interest rate derivative instruments:       
Unrealized holding gain (loss) arising during the period—
 1
 (2) (6)
Reclassification of (gain) loss into Aircraft rent2
 1
 4
 4
Income tax effect(1) (1) (1) 1
Total1
 1
 1
 (1)
        
Other Comprehensive Income4
 3
 15
 19
        
Comprehensive Income$270
 $259
 $676
 $719

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive LossRetained EarningsTotal
Balances at December 31, 2021125.906 $1 $494 $(674)$(262)$4,242 $3,801 
Net loss— — — — — (143)(143)
Other comprehensive loss— — — — (30)— (30)
Stock-based compensation— — 13 — — — 13 
Stock issued under stock plans0.182 — (4)— — — (4)
Balances at March 31, 2022126.088 $1 $503 $(674)$(292)$4,099 $3,637 

(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive LossRetained EarningsTotal
Balances at December 31, 2020124.217 $1 $391 $(674)$(494)$3,764 $2,988 
Net loss— — — — — (131)(131)
Other comprehensive loss— — — — — — — 
Stock-based compensation— — 12 — — — 12 
CARES Act warrant issuance— — 8 — — — 8 
Stock issued under stock plans0.225 — (2)— — — (2)
Balance at March 31, 2021124.442 $1 $409 $(674)$(494)$3,633 $2,875 

8


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31,
(in millions)20222021
Cash flows from operating activities:  
Net Loss$(143)$(131)
Adjustments to reconcile net loss to net cash provided by operating activities:  
Depreciation and amortization102 97 
Stock-based compensation and other5 12 
Special items - fleet transition and related charges75 18 
Special items - restructuring charges— 11 
Changes in certain assets and liabilities:
Changes in deferred tax provision(58)(39)
Increase in accounts receivable(112)(37)
Increase in air traffic liability480 224 
Increase in deferred revenue74 48 
Other - net(136)(36)
Net cash provided by operating activities287 167 
Cash flows from investing activities:  
Property and equipment additions:  
Aircraft and aircraft purchase deposits(207)(3)
Other flight equipment(24)(11)
Other property and equipment(57)(13)
Total property and equipment additions, including capitalized interest(288)(27)
Purchases of marketable securities(552)(1,243)
Sales and maturities of marketable securities880 732 
Other investing activities(1)(5)
Net cash provided by (used in) investing activities39 (543)
Cash flows from financing activities:  
Proceeds from issuance of debt— 189 
Long-term debt payments(170)(115)
Other financing activities2 8 
Net cash provided by (used in) financing activities(168)82 
Net increase (decrease) in cash, cash equivalents, and restricted cash158 (294)
Cash, cash equivalents, and restricted cash at beginning of period494 1,386 
Cash, cash equivalents, and restricted cash at end of the period$652 $1,092 
9

 Nine Months Ended September 30,
(in millions)2017 2016
Cash flows from operating activities:   
Net income$661
 $700
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Depreciation and amortization275
 281
Stock-based compensation and other43
 19
Changes in certain assets and liabilities:   
Changes in deferred tax provision217
 47
Increase in air traffic liability254
 116
Increase in deferred revenue46
 60
Other—net(139) (17)
Net cash provided by operating activities1,357
 1,206
    
Cash flows from investing activities: 
  
Property and equipment additions: 
  
Aircraft and aircraft purchase deposits(679) (408)
Other flight equipment(70) (35)
Other property and equipment(92) (66)
Total property and equipment additions, including capitalized interest(841) (509)
Purchases of marketable securities(1,408) (775)
Sales and maturities of marketable securities1,069
 638
Other investing activities38
 5
Net cash used in investing activities(1,142) (641)
    
Cash flows from financing activities: 
  
Proceeds from issuance of debt—
 1,546
Long-term debt payments(265) (93)
Common stock repurchases(50) (193)
Dividends paid(111) (102)
Other financing activities27
 22
Net cash provided (used) by financing activities(399) 1,180
Net increase (decrease) in cash and cash equivalents(184) 1,745
Cash and cash equivalents at beginning of year328
 73
Cash and cash equivalents at end of the period$144
 $1,818
    
Supplemental disclosure: 
  
Cash paid during the period for:   
Interest (net of amount capitalized)$68
 $12
Income taxes129
 321
Three Months Ended March 31,
(in millions)20222021
Cash paid during the period for:
Interest (net of amount capitalized)$35 $50 
Income taxes— — 
Non-cash transactions:
Right-of-use assets acquired through operating leases158 75 
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents628 1,076 
Restricted cash included in Prepaid expenses and other current assets24 16 
Total cash, cash equivalents, and restricted cash at end of the period$652 $1,092 


See accompanying notes to condensed consolidated financial statements.




10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization and Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska Horizon,and Horizon. The condensed consolidated financial statements also include McGee Air Services and, starting December 14, 2016, Virgin America.(McGee), 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 accordance with accounting principles generally accepted in the United States ("GAAP")(GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2016.2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2017March 31, 2022 and the results of operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021. Such adjustments were of a normal recurring nature.


In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses.expenses, including impairment charges. Due to the impacts of the coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 2017March 31, 2022 are not necessarily indicative of operating results for the entire year.


Recently Issued Accounting Pronouncements

NOTE 2. FLEET TRANSITION

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenuefirst quarter of 2022, the Company announced plans to accelerate the transition of mainline operations to an all-Boeing 737 fleet. It also announced new plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska will accelerate the retirement of its 30 operating Airbus A320 aircraft, with all expected to exit the fleet by early 2023. Alaska also operates ten A321neo aircraft, and is evaluating options to remove them from Contractsits fleet by the end of 2023, subject to agreement with Customers" (Topic 606),counterparties. Also by the end of 2023, Horizon will exit its Q400 fleet, which requires an entity to recognizeincludes 25 owned and 7 leased aircraft in operation at March 31, 2022.

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 revenuean asset or asset group may not be recoverable. The decisions made by the Company to accelerate the retirement of the A320 and Q400 aircraft represented a significant adverse change in the extent in which it expectsthose long-lived asset group would be used and an expectation that each asset group would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. Indicators of impairment were not present for the A321neo aircraft as the majority of these aircraft have contractual lease return dates through 2029 to 2031, and are high-demand assets given their relative age and desirable technology.

For the purposes of recoverability testing, assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company performed recoverability tests for the A320 and Q400 fleets, comparing the sum of estimated undiscounted future cash flows expected to be entitled fordirectly generated by each asset group to the transferasset group's carrying value. Future cash flows were estimated utilizing a combination of promised goods or services to customers. This comprehensive new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" to clarify the guidance on determining whether the Company is considered the principal or the agent in a revenue transaction where a third party is providing goods or services to a customer. Entities are permitted tohistorical data, forecasted results, and anticipated use either a full retrospective or cumulative effect transition method, and are required to adopt all parts of the new revenue standard usingaircraft as of March 31, 2022. The analysis indicated the same transition method. The new standard is effective for the Company on January 1, 2018.

At this time, the Company believes the most significant impact to the financial statements will be to Mileage Plan™ revenuesA320 fleet was recoverable and liabilities. The Company currently uses the incremental cost approach for miles earned through travel. As this approach will be eliminated with the standard,no impairment measurement was required. However, the Company will be required to allocate a portionadjust the useful lives of the ticket price through a relative selling price modelA320 aircraft and defer revenue recognition untilrelated assets to correspond with the ticket is flown or unused mileage credits expire. Additionally, unused companion certificates that were previously recognized at expiration will be subject to advanced breakage underanticipated cease-use date. The analysis indicated the new standard. The Company estimates a net increase to Mileage Plan deferred revenues of approximately $340 million to $380 million at the time of adoption. The allocated value to miles earned through travel will offset passenger revenue during the period they are issued, rather than recorded using the incremental cost approach. As the program is growing significantly, the Company expects revenue recognized under Topic 606 will be less on an annual basis than current accounting practice.Q400 fleet was not recoverable, and impairment measurement was required.

The adoption of the new standard is also expected to result in a change in income statement classification of the majority of ancillary revenues from Other revenue to Passenger revenue. This will affect common industry metrics, such as PRASM and RASM. Certain commission revenue from interline arrangements that were previously offset against related expense will now be classified as Other revenue, which will impact RASM and CASM. 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. This concept is referred to as ticket breakage. 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.


The Company continues to evaluate and modelevaluated the full impact of the standard and will apply the full retrospective transition method. The overall impact to equity as of the beginning of the retroactive reporting period, including the changes discussed above, as well as other less material changes, is expected to be between $160 million and $190 million.



In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use-asset representing its right to use the underlying assetfair market value for the lease term. For leasesQ400 fleet using available market price information with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assetsadjustments based on quantitative and lease liabilities. Atqualitative considerations. Based on this time,fair market value, the Company believesrecorded an impairment charge of $70 million, reflecting 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 airports and real estate, equipment, software and other miscellaneous leases continue to be assessed for impact of the ASU. The new standard is effective for the Company on January 1, 2019. Early adoption of the standard is permitted. The Company has determined that it will not early adopt the standard.

In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation" (Topic 718),amount by which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU was adopted prospectively as of January 1, 2017. Prior periods have not been adjusted. The adoption of the standard did not have a material impact on the Company's statements of operations or financial position.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other" (Topic 350), which eliminates step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the impliedcarrying value exceeded fair value of a reporting unit’s goodwillthe owned Q400 aircraft. This amount is included within the "Special items - fleet transition and related charges" line within the consolidated statement of
11

operations. In conjunction with the carrying amount of that goodwill. The ASU is effective forimpairment, the Company beginning January 1, 2019. Early adoptionadjusted the useful lives of Q400 aircraft and related assets to correspond with the standard is permitted. Beginning in fiscal 2017,anticipated cease-use date.

The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.

Other Special Items

In addition to the impairment described above, the Company will be requiredrecorded $5 million incremental expense to perform an impairment test for goodwill arising from its acquisition of Virgin America"Special items - fleet transition and has adoptedrelated charges" within 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 benefits in the statementscondensed consolidated statement 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 in assets.  The ASU is effective for the Company beginning January 1, 2018. ChangesThis includes adjustments related to the statementsoutstanding accrual for costs to return leased aircraft and a write-down of operations underright of use assets for two A320 aircraft for which return to service work was initiated but was subsequently ceased.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents 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 6 for the current componentsprimary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the co-branded credit card and other partners and certain interline frequent flyer revenue, net periodic benefit costs.

In August 2017, the FASB issued ASU 2017-12, "Derivativesof commissions. Cargo and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accountingother revenue includes freight and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact and has not yet determined whether it will early adopt.

NOTE 2. ACQUISITION OF VIRGIN AMERICA

Virgin America

On December 14, 2016, the Company acquired 100% of the outstanding common shares and voting interest of Virgin America for $57 per share, or total cash consideration of $2.6 billion. Virgin America offers scheduled air transportation throughout the United States and Mexico primarily from its hub cities of Los Angeles, San Franciscomail revenue, and to a lesser extent, Dallas Love Field, to other major businessancillary revenue products such as lounge membership and leisure destinations in Northcertain commissions.

In the first quarter of 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The Company believesamendment extended the acquisitionterm of Virgin America will provide broader national reachthe agreement into 2030 and position itresulted in modifications to better serve guests living on the West Coast. The combined airline has approximately 1,200 daily departures and leverages Alaska's strength in the Pacific Northwest with Virgin America's strength in California. The Company believes that combining loyalty programs and networks will provide greater benefits for its guests and expand its international partner portfolio, giving guests an even more expansive global reach.separately identifiable performance obligations.

Merger-related costs


The Company incurred pretax merger-related costsdisaggregates revenue by segment in Note 9. The level of $24detail within the Company’s condensed 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

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
Three Months Ended March 31,
20222021
Passenger ticket revenue, including ticket breakage, net of taxes and fees$1,232 $525 
Passenger ancillary revenue91 50 
Mileage Plan passenger revenue188 84 
Total Passenger revenue$1,511 $659 

Mileage Plan Loyalty Program

Mileage Plan revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended March 31,
20222021
Passenger revenue$188 $84 
Mileage Plan other revenue112 94 
Total Mileage Plan revenue$300 $178 

12

Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended March 31,
20222021
Cargo revenue$29 $27 
Other revenue29 17 
Total Cargo and other revenue$58 $44 

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $390 million and $22$136 million from the prior year-end air traffic liability balance for the three months ended September 30, 2017March 31, 2022 and 2016, respectively,2021.

Mileage Plan assets and $88 million and $36 million for the nine months ended September 30, 2017 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. liabilities

The Company expects to continue to incur merger-related costs inrecords a receivable for amounts due from the futureaffinity card partner and from other partners as mileage credits are sold until the integration continues.payments are collected. The Company had $108 million of such receivables as of March 31, 2022 and $64 million as of December 31, 2021. As demand for air travel remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.






Fair valuesThe table below presents a roll forward of the assets acquired and the liabilities assumed

The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires, among other things, assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. As of September 30, 2017 the fair values of property and equipment and certain liabilities, included in other accrued liabilities and other liabilities, goodwill, intangible assets and deferred income taxes have been prepared on a preliminary basis and are subject to further adjustments as the Company completes its analysis. There were no significant fair value adjustments made during the three and nine months ended September 30, 2017. The Company will finalize the amounts recognized by December 14, 2017.

Fair values of the assets acquired and the liabilities assumed as of the acquisition date of December 14, 2016, at September 30, 2017 and December 31, 2016 were as followstotal frequent flyer liability (in millions):
Three Months Ended March 31,
20222021
Total Deferred revenue balance at January 1$2,358 $2,277 
Travel miles and companion certificate redemption - Passenger revenue(176)(84)
Miles redeemed on partner airlines - Other revenue(9)(4)
Increase in liability for mileage credits issued259 136 
Total Deferred revenue balance at March 31$2,432 $2,325 
 September 30, 2017 December 31, 2016
Cash and cash equivalents$645
 $645
Receivables54
 44
Prepaid expenses and other current assets18
 16
Property and equipment—provisional561
 560
Intangible assets—provisional141
 143
Goodwill—provisional1,934
 1,934
Other assets89
 84
Total assets3,442
 3,426
 
  
Accounts payable22
 22
Accrued wages, vacation and payroll taxes54
 51
Air traffic liabilities172
 172
Other accrued liabilities—provisional197
 196
Current portion of long-term debt125
 125
Long-term debt, net of current portion360
 360
Deferred income taxes—provisional(307) (304)
Deferred revenue126
 126
Other liabilities—provisional97
 82
Total liabilities846
 830
 
  
Total purchase price$2,596
 $2,596

NOTE 3.4. 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 September 30, 2017,March 31, 2022, total cost basis for all marketable securities was $1.6$2.3 billion. There were no significant differences betweenIn the cost basis andthree months ended March 31, 2022, fair value of marketable securities declined by $57 million primarily due to changes in interest rates. Management does not believe any individual classunrealized losses are the result of marketable securities.expected credit losses based on its evaluation of available information as of March 31, 2022.

13


Fair values of financial instruments on the condensed consolidated balance sheet (in millions):
March 31, 2022December 31, 2021
Level 1Level 2TotalLevel 1Level 2Total
Assets
Marketable securities
U.S. government and agency securities$416 $— $416 $331 $— $331 
Equity mutual funds6 — 6 6 — 6 
Foreign government bonds— 29 29 — 38 38 
Asset-backed securities— 244 244 — 311 311 
Mortgage-backed securities— 190 190 — 232 232 
Corporate notes and bonds— 1,314 1,314 — 1,663 1,663 
Municipal securities— 63 63 — 65 65 
Total Marketable securities422 1,840 2,262 337 2,309 2,646 
Derivative instruments
Fuel hedge - call options— 203 203 — 81 81 
Interest rate swap agreements— 6 6 — — — 
Total Assets$422 $2,049 $2,471 $337 $2,390 $2,727 
Liabilities
Derivative instruments
Interest rate swap agreements— (2)(2)— (9)(9)
Total Liabilities$— $(2)$(2)$— $(9)$(9)
September 30, 2017Level 1 Level 2 Total
Assets     
Marketable securities     
U.S. government and agency securities$359
 $—
 $359
Foreign government bonds—
 48
 48
Asset-backed securities—
 232
 232
Mortgage-backed securities—
 113
 113
Corporate notes and bonds—
 828
 828
Municipal securities—
 16
 16
Total Marketable securities359
 1,237
 1,596
Derivative instruments     
Fuel hedge call options—
 10
 10
Interest rate swap agreements—
 8
 8
Total Assets359
 1,255
 1,614
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (11) (11)
Total Liabilities—
 (11) (11)
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
Total Marketable securities287
 965
 1,252
Derivative instruments     
Fuel hedge call options—
 20
 20
Total Assets287
 985
 1,272
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (5) (5)
Total Liabilities—
 (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 approach 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.


Activity and Maturities for Marketable Securities


Activity for marketable securities (in millions):  
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Proceeds from sales and maturities$528
 $280
 $1,069
 $638

Maturities for marketable securities (in millions):
March 31, 2022Cost BasisFair Value
Due in one year or less$628 $626 
Due after one year through five years1,651 1,597 
Due after five years34 33 
Total$2,313 $2,256 

As of March 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.

14
September 30, 2017Cost Basis Fair Value
Due in one year or less$193
 $193
Due after one year through five years1,367
 1,367
Due after five years through 10 years36
 36
Due after 10 years—
 —
Total$1,596
 $1,596


Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2017.

Fair Value of Other Financial Instruments


The Company uses 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, and Restricted Cash: CarriedCash 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 amortized cost, which approximates fair value.


Debt: The carrying amountCompany's restricted cash balances are primarily used to guarantee various letters of the Company's variable-rate debtcredit, 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. For

Debt: To estimate the fair value of all fixed-rate debt as of March 31, 2022, the Company uses the income approach to determine the estimated fair value, calculated as the sum of futureby discounting cash flows discounted ator 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 debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $750 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 that is not carried at fair value on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
March 31, 2022December 31, 2021
Total fixed-rate debt$1,752 $1,821 
Estimated fair value$1,770 $1,919 
 September 30, 2017 December 31, 2016
Carrying amount$1,024
 $1,179
Fair value1,034
 1,199


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. NoRefer to Note 2 for discussion regarding impairment was recognized incharges recorded during the three and nine months ended September 30, 2017 or September 30, 2016.March 31, 2022.



NOTE 4. FREQUENT FLYER PROGRAMS

Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):
 September 30, 2017 December 31, 2016
Current Liabilities:   
Other accrued liabilities$509
 $484
Other Liabilities and Credits:   
Deferred revenue682
 638
Other liabilities24
 21
Total$1,215
 $1,143
Frequent flyer program revenue included in the consolidated statements of operations (in millions):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Passenger revenues$94
 $73
 $276
 $215
Other—net revenues122
 107
 369
 318
Total$216
 $180
 $645
 $533


NOTE 5. LONG-TERM DEBT
 
Long-term debt obligations on the condensed consolidated balance sheet (in millions):
 March 31, 2022December 31, 2021
Fixed-rate notes payable due through 2029$150 $163 
Fixed-rate PSP notes payable due through 2031600 600 
Fixed-rate EETC payable due through 2025 & 20271,002 1,058 
Variable-rate notes payable due through 2029636 738 
Less debt issuance costs(18)(20)
Total debt2,370 2,539 
Less current portion292 366 
Long-term debt, less current portion$2,078 $2,173 
Weighted-average fixed-interest rate3.6 %3.7 %
Weighted-average variable-interest rate1.7 %1.3 %

 September 30, 2017 December 31, 2016
Fixed-rate notes payable due through 2028$1,024
 $1,179
Variable-rate notes payable due through 20281,693
 1,803
Less debt issuance costs(16) (18)
Total debt2,701
 2,964
Less current portion334
 319
Long-term debt, less current portion$2,367
 $2,645
    
Weighted-average fixed-interest rate4.3% 4.4%
Weighted-average variable-interest rate2.6% 2.4%
Approximately $396 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at March 31, 2022, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.3%.


During the ninethree months ended September 30, 2017,March 31, 2022, the Company made scheduled debt payments of $265$170 million.

15


Debt Maturity

At September 30, 2017,March 31, 2022, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 Total
Remainder of 2022$201 
2023334 
2024240 
2025261 
2026176 
Thereafter1,176 
Total$2,388 
 Total
Remainder of 2017$55
2018350
2019422
2020449
2021422
Thereafter1,016
Total$2,714



Bank Lines of Credit
 
The CompanyAlaska has three3 credit facilities with availability totaling $475 million. All three$486 million as of March 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. The second credit facility increased from $52 million to $75 million in September 2017. It expires in September 2018 with a mechanism for annual renewal and is secured by aircraft. The 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 2022 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 Company is$500 million. Alaska was in compliance with this covenant at September 30, 2017.March 31, 2022.


NOTE 6. EMPLOYEE BENEFIT PLANS


Net periodic benefit costs for the qualified defined-benefit plans includedinclude the following components (in millions):
Three Months Ended March 31,
 20222021
Service cost$11 $13 
Pension expense included in Wages and benefits11 13 
Interest cost16 14 
Expected return on assets(32)(31)
Recognized actuarial loss2 9 
Pension expense included in Nonoperating Income (Expense)$(14)$(8)
16
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Service cost$10
 $9
 $30
 $27
Interest cost19
 18
 55
 55
Expected return on assets(27) (27) (80) (81)
Amortization of prior service cost (credit)(1) (1) (1) (1)
Recognized actuarial loss (gain)7
 7
 20
 19
Total$8
 $6
 $24
 $19



The Company contributed $15 million to the defined-benefit pension plan during the three months ended September 30, 2017.

NOTE 7. COMMITMENTS AND CONTINGENCIES


Future minimum payments for commitments as of September 30, 2017March 31, 2022 (in millions):
Aircraft Commitments(a)
Capacity Purchase Agreements (b)
Remainder of 2022$1,159 $133 
20231,781 182 
2024414 188 
2025111 194 
202647 195 
Thereafter275 740 
Total$3,787 $1,632 
 Aircraft Leases Facility Leases Aircraft Purchase Commitments 
Capacity Purchase Agreements (a)
 Aircraft Maintenance Deposits Aircraft Maintenance and Parts Management
Remainder of 2017$77
 $34
 $168
 $21
 $15
 $8
2018342
 73
 956
 118
 61
 32
2019344
 65
 806
 151
 65
 35
2020317
 63
 352
 158
 68
 37
2021280
 55
 273
 165
 63
 40
Thereafter1,263
 204
 355
 1,250
 90
 —
Total$2,623
 $494
 $2,910
 $1,863
 $362
 $152
(a)Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease(a)Includes non-cancelable contractual commitments include future obligations for all of the Company's operating airlines—Alaska, Virgin America and Horizon, as well as aircraft leases operated by third-parties. At September 30, 2017, the Company had lease contracts for 10 Boeing 737 ("B737") aircraft, 55 Airbus aircraft, 15 Bombardier Q400 aircraft, and 21 Embraer 175 ("E175") with SkyWest Airlines, Inc. ("SkyWest"). The Company has an additional eight scheduled lease deliveries of A321neo aircraft through 2018, as well as 14 scheduled lease deliveries of E175 aircraft through 2018 to be flown by Skywest. All lease contracts have remaining non-cancelable lease terms ranging from 2017 to 2030. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft deliveries in 2020. Options to lease are not reflected in the commitments table above.



Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $145 millionengines, aircraft maintenance and $82 million forparts management. Contractual commitments do not reflect the three months ended September 30, 2017 and 2016, and $406 million and $226 million forimpact of the nine months ended September 30, 2017 and 2016.impending fleet transition. Option deliveries are excluded from minimum commitments until exercise.

(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.

Aircraft Purchase Commitments
 
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. AsIn March 2022, Alaska amended its aircraft purchase agreement with Boeing, adding the 737-8 and 737-10 models to its existing order book of September 30, 2017,737-9 aircraft. The amended agreement also includes options to purchase additional aircraft with deliveries between 2024 and 2026. Details are outlined in the Company hadtable below. Horizon also has commitments to purchase 48 B737 aircraft (16 B737 NextGen aircraft and 32 B737 MAX aircraft, with deliveries in the remainder of 2017 through 2023) and 2312 Embraer E175 aircraft with deliveries in 2018 through 2019, which reflects Horizon's deferral of three E175between 2022 and 2025. Future minimum contractual payments for these aircraft from 2017reflect the expected delivery timing, but are also subject to 2018. The Company also has cancelable purchase commitments for 30 Airbus A320neo 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 payments are not reflected in the table above.change.


Capacity Purchase Agreements ("CPAs")
Firm OrdersOptionsTotal
Aircraft Type2022-20252024-20262022 - 2026
Boeing 737-810—10
Boeing 737-9511162
Boeing 737-1064147
Embraer E17512—12
Total7952131
At September 30, 2017, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA with Alaska. In addition, Alaska has CPAs 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 based on a determination of their cost of operating those flights and other factors intended to approximate market rates 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.

Aircraft Maintenance Deposits

Virgin America is contractually required to make maintenance deposit payments to aircraft lessors, which represent maintenance reserves made solely to collateralize the lessor for future maintenance events should the Company not perform required maintenance. Most lease agreements provide that maintenance reserves 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 reserves 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 contract for management and repair of certain rotable parts to support airframe and engine maintenance and repair. This agreement requires monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third-party service provider. There are minimum payments under this agreement. Accordingly, payments could differ materially based on actual aircraft utilization.

Subsequent to September 30, 2017, Alaska entered into a similar contract for maintenance on its B737-800 aircraft engines. Payments under this agreement are not reflected in the table above.


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. 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 meritmerit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and intendsAlaska Airlines, as a successor-in-interest to defendVirgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment, again without awarding injunctive relief against Alaska. The determination of total judgment has not been completed as of the date of this lawsuit.

Managementfiling. Based on the facts and circumstances available, the Company believes the ultimate dispositionrange of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets.

17

Alaska is seeking a conclusive U.S. Supreme Court ruling that the California laws on which the judgment is based are invalid as applied to airlines pursuant to the U.S. Constitution and provisions of federal law that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case. If appeal efforts are unsuccessful, compliance with California and other states' laws may have an adverse impact on the Company's operations and financial position.

Like other U.S. airlines, Alaska and Horizon are involved in other litigation around the application of state and local employment laws. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None 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.additional disputes are material.




NOTE 8. SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2017, the Company declared and paid cash dividends of $0.30 per share, or $37 million. During the nine months ended September 30, 2017, the Company declared and paid cash dividends of $0.90 per share, or $111 million.


Common Stock Repurchase


In August 2015, the Board of Directors authorized a $1 billion share repurchase program. The program was paused inCompany repurchased 7.6 million shares for $544 million under this program. In March 2020, subject to restrictions under the second quarter of 2016 in anticipation ofCoronavirus Aid, Relief, and Economic Securities (CARES) Act, the acquisition of Virgin America. The Company resumedsuspended the share repurchase program inindefinitely.
CARES Act Warrant Issuances
As additional taxpayer protection required under the second quarter of 2017. As of September 30, 2017,Payroll Support Program (PSP) under the CARES Act, the Company has repurchased 4.7granted the Treasury a total of 1,455,438 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 a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, shares for $363 million under this program. Subsequent to September 30, 2017, the Company repurchased an additional 369,182 shares for $25 million.recorded in stockholders' equity at issuance.
Share repurchase activity (in millions, except share amounts):Total warrants outstanding are as follows as of March 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 March 31, 20221,882,518 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 Shares Amount Shares Amount Shares Amount Shares Amount
2015 Repurchase Program—$1 billion355,415
 $28
 —
 $—
 612,095
 $50
 2,594,809
 $193


Accumulated Other Comprehensive Loss
other comprehensive loss
Components of accumulated other comprehensive loss, net of tax (in millions):
Marketable SecuritiesEmployee Benefit PlanInterest Rate DerivativesTotal
Balance at December 31, 2021, net of tax effect of $83$(4)$(252)$(6)$(262)
Reclassifications into earnings, net of tax impact of $02 1 — 3 
Change in value, net of tax impact of $10(42)— 9 (33)
Balance at March 31, 2022, net of tax effect of $93$(44)$(251)$3 $(292)
Balance at December 31, 2020, net of tax effect of $160$23 $(498)$(19)$(494)
Reclassifications into earnings, net of tax impact of $2(4)6 — (2)
Change in value, net of tax impact of $(2)(8)— 6 2 
Balance at March 31, 2021, net of tax effect of $160$11 $(492)$(13)$(494)
18

 September 30, 2017 December 31, 2016
Marketable securities$—
 $(3)
Employee benefit plans(287) (299)
Interest rate derivatives(2) (3)
Total$(289) $(305)


Earnings (Loss) Per Share ("EPS")(EPS)


Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, and restricted stock units, and warrants, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and nine months ended September 30, 2017March 31, 2022 and 2016,March 31, 2021, anti-dilutive shares excluded from the calculation of EPS were not material.


NOTE 9. OPERATING SEGMENT INFORMATION


Alaska Air Group has threetwo operating airlines—airlines – Alaska Virgin America and Horizon. Each is regulated 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.


Under U.S. 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")(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 Cuba.
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 revenues 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 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 Air Group 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 CompanyCompany's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.



19

Operating segment information is as follows (in millions):
Three Months Ended March 31, 2022
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues   
Passenger revenues$1,243 $268 $— $— $1,511 $— $1,511 
CPA revenues— — 94 (94)— — — 
Mileage Plan other revenue100 12 — — 112 — 112 
Cargo and other57 — — 1 58 — 58 
Total Operating Revenues1,400 280 94 (93)1,681 — 1,681 
Operating Expenses
Operating expenses, excluding fuel1,194 262 99 (94)1,461 75 1,536 
Fuel expense381 73 — — 454 (107)347 
Total Operating Expenses1,575 335 99 (94)1,915 (32)1,883 
Non-operating Income (Expense)1 — (5)— (4)— (4)
Income (Loss) Before Income Tax$(174)$(55)$(10)$1 $(238)$32 $(206)
Three Months Ended March 31, 2021
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues$506 $153 $— $— $659 $— $659 
CPA revenues— — 104 (104)— — — 
Mileage Plan other revenue80 14 — — 94 — 94 
Cargo and other44 — — — 44 — 44 
Total Operating Revenues630 167 104 (104)797 — 797 
Operating Expenses
Operating expenses, excluding fuel893 265 88 (109)1,137 (382)755 
Fuel expense174 52 — (1)225 (22)203 
Total Operating Expenses1,067 317 88 (110)1,362 (404)958 
Non-operating Income (Expense)(7)— (5)— (12)— (12)
Income (Loss) Before Income Tax$(444)$(150)$11 $6 $(577)$404 $(173)
(a) Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
 Three Months Ended September 30, 2017
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$1,562
 $—
 $—
 $—
 $1,562
 $—
 $1,562
Regional—
 262
 —
 —
 262
 —
 262
Total passenger revenues1,562
 262
 —
 —
 1,824
 —
 1,824
CPA revenues—
 —
 112
 (112) —
 —
 —
Freight and mail30
 1
 1
 —
 32
 —
 32
Other—net242
 21
 1
 —
 264
 —
 264
Total operating revenues1,834
 284
 114
 (112) 2,120
 —
 2,120
Operating expenses             
Operating expenses, excluding fuel1,077
 219
 105
 (112) 1,289
 24
 1,313
Economic fuel328
 45
 —
 —
 373
 (5) 368
Total operating expenses1,405
 264
 105
 (112) 1,662
 19
 1,681
Nonoperating income (expense)             
Interest income11
 —
 —
 (2) 9
 —
 9
Interest expense(23) —
 (4) 1
 (26) —
 (26)
Other5
 —
 —
 —
 5
 —
 5
Total Nonoperating income (expense)(7) —
 (4) (1) (12) —
 (12)
Income (loss) before income tax$422
 $20
 $5
 $(1) $446
 $(19) $427
(b) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges.
(c) Includes Payroll Support Program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.
 Three Months Ended September 30, 2016
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$1,073
 $—
 $—
 $—
 $1,073
 $—
 $1,073
Regional—
 249
 —
 —
 249
 —
 249
Total passenger revenues1,073
 249
 —
 —
 1,322
 —
��1,322
CPA revenues—
 —
 109
 (109) —
 —
 —
Freight and mail30
 1
 —
 —
 31
 —
 31
Other—net190
 21
 1
 1
 213
 —
 213
Total operating revenues1,293
 271
 110
 (108) 1,566
 —
 1,566
Operating expenses             
Operating expenses, excluding fuel727
 202
 99
 (109) 919
 22
 941
Economic fuel188
 34
 —
 —
 222
 3
 225
Total operating expenses915
 236
 99
 (109) 1,141
 25
 1,166
Nonoperating income (expense)             
Interest income7
 —
 —
 —
 7
 —
 7
Interest expense(7) —
 (2) (2) (11) —
 (11)
Other5
 —
 —
 1
 6
 —
 6
Total Nonoperating income (expense)5
 —
 (2) (1) 2
 —
 2
Income (loss) before income tax$383
 $35
 $9
 $—
 $427
 $(25) $402




 Nine Months Ended September 30, 2017
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$4,390
 $—
 $—
 $—
 $4,390
 $—
 $4,390
Regional—
 725
 —
 —
 725
 —
 725
Total passenger revenues4,390
 725
 —
 —
 5,115
 —
 5,115
CPA revenues—
 —
 317
 (317) —
 —
 —
Freight and mail84
 3
 1
 —
 88
 —
 88
Other—net708
 57
 3
 —
 768
 —
 768
Total operating revenues5,182
 785
 321
 (317) 5,971
 —
 5,971
Operating expenses             
Operating expenses, excluding fuel3,101
 625
 324
 (316) 3,734
 88
 3,822
Economic fuel924
 120
 —
 —
 1,044
 7
 1,051
Total operating expenses4,025
 745
 324
 (316) 4,778
 95
 4,873
Nonoperating income (expense)             
Interest income27
 —
 —
 (2) 25
 —
 25
Interest expense(68) —
 (9) —
 (77) —
 (77)
Other11
 —
 1
 —
 12
 —
 12
Total Nonoperating income (expense)(30) —
 (8) (2) (40) —
 (40)
Income (loss) before income tax1,127
 40
 (11) (3) 1,153
 (95) 1,058
 Nine Months Ended September 30, 2016
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$3,036
 $—
 $—
 $—
 $3,036
 $—
 $3,036
Regional—
 682
 —
 —
 682
 —
 682
Total passenger revenues3,036
 682
 —
 —
 3,718
 —
 3,718
CPA revenues—
 —
 322
 (322) —
 —
 —
Freight and mail79
 3
 —
 —
 82
 —
 82
Other—net546
 57
 3
 1
 607
 —
 607
Total operating revenues3,661
 742
 325
 (321) 4,407
 —
 4,407
Operating expenses             
Operating expenses, excluding fuel2,107
 580
 305
 (322) 2,670
 36
 2,706
Economic fuel512
 90
 —
 —
 602
 (9) 593
Total operating expenses2,619
 670
 305
 (322) 3,272
 27
 3,299
Nonoperating income (expense)             
Interest income19
 —
 1
 —
 20
 —
 20
Interest expense(23) —
 (7) (3) (33) —
 (33)
Other15
 —
 —
 4
 19
 —
 19
Total Nonoperating income (expense)11
 —
 (6) 1
 6
 —
 6
Income (loss) before income tax1,053
 72
 14
 2
 1,141
 (27) 1,114
(a)Includes consolidating entries, 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 does not include certain income and charges.
(c)Includes merger-related costs and mark-to-market fuel-hedge accounting charges.




Total assets were as follows (in millions):
March 31, 2022December 31, 2021
Mainline$19,684 $19,258 
Horizon1,125 1,212 
Consolidating & Other(6,599)(6,519)
Consolidated$14,210 $13,951 

20
 September 30, 2017 December 31, 2016
Mainline$16,382
 $15,260
Horizon914
 690
Consolidating & Other(6,557) (5,988)
Consolidated$10,739
 $9,962

NOTE 10. SUBSEQUENT EVENTS

On October 30, 2017, the Company received a final decision from a third-party arbitration panel on increased wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America.


ITEM 2. 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")(MD&A) is intended to help the reader understand our company, segment operations and the 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 "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2021. This overview summarizes the MD&A, which includes the following sections:
 
Third•First Quarter Review—highlights from the thirdfirst quarter of 20172022 outlining some of the major events that happenedoccurred during the period and how they affected our financial performance.
 
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2017.March 31, 2022. 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 three and nine months ended September 30, 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 includes forward-looking statements regarding our view of the remainder of 2017. 
2022. 

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.


THIRDFIRST QUARTER REVIEW


OurBusiness Recovery and First Quarter Results

We recorded a consolidated pretax income was $427 million duringloss for the thirdfirst quarter of 2017,2022 of $206 million, compared to $402a pretax loss of $173 million in the thirdfirst quarter of 2016. The increase2021. On an adjusted basis, we reported a net loss for the quarter of $167 million, compared to an adjusted net loss of $436 million in pretax incomethe same period of $25 million was2021. We faced headwinds in January and February, with weaker demand and staffing challenges as a result of an outbreak of the omicron variant of COVID-19. As cases subsided and business and leisure demand rebounded, monthly operating revenues surpassed 2019 levels in the month of March, a first since the pandemic began.

As we ramp our operation back to flying 2019 capacity levels, we have seen increases to our non-fuel operating expenses. Non-fuel operating expense, excluding special items, rose 28% over the prior year period, primarily driven by an increase in revenues of $554 million, partially offset byincreased departure-related costs on 33% more capacity flown. Increased capacity, coupled with a $372 million increase in non-fuel expense and a $143 million24% increase in fuel expense.cost per gallon, drove additional fuel expense of $144 million as compared to 2021. We also incurred special charges of $75 million in the first quarter of 2022 related to our fleet transition, compared to a special benefit of $382 million recorded in 2021 primarily from Payroll Support Program grant wage offsets.


As we completed the acquisition of Virgin America on December 14, 2016, our results of operations for the three months ended September 30, 2017 include those of Virgin America and the impact of purchase accounting. Our results of operations for the three months ended September 30, 2016 do not include those of Virgin America.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses as compared to 2021, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.



Environmental, Social and Governance Updates


Operations Performance

DuringDelivering on our diversity, equity and inclusion goals is critical to our long-term success. In the thirdfirst quarter of 2017, our on-time performance was 85.0%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 Alaska, 73.3% for Virgin Americaa broader and 78.6% for Horizon. Air traffic control issues and airport runway construction have negatively impacted our on-time performance, particularly in Seattle, Los Angeles, and San Francisco wheremore diverse population of future pilots.

As a reflection of the importance of the commitments made, we have tied a large concentrationportion of flights. While these challenges negatively impact all airlines that operate in the affected markets,long-term executive compensation to achievement of diversity goals. Additionally, we plan to continue working to mitigate the impact in 2018. Additionally, pilot shortages at Horizon resulted in approximately 1,300 canceled flights andhave incorporated a reduction in scheduled servicecarbon emissions target into the fourth quarter and early 2018. As a result of these adjustments to the flight schedule and our recent pilot hiring efforts, we anticipate that operational headwinds will be behind us by year end.

New Markets

We launched 20 new routes during the quarter,company-wide Performance-Based Pay Plan, which is the most we have ever launched in one quarter. In total, we have announced approximately 40 new markets since the acquisition of Virgin America as we begincurrently tracking to realize the network and revenue synergies from bringing our two airlines together.target achievement.


Shareholder Return
21


During the third quarter of 2017, we paid cash dividends of $37 million and repurchased 355,415 shares for $28 million. Subsequent to September 30, 2017, we repurchased an additional 369,182 shares for $25 million.

Labor Update


Each of ourIn April 2022, Alaska's dispatchers represented groups, other than aircraft technicians, has been certified by the National Mediation Board as having single carrier status which allows for Virgin America teammates to be represented by unions that currently represent Alaska's work groups and enables work toward single collective bargaining agreements.

We were not able to come toTransport Workers Union ratified an agreement during negotiations or mediationthat includes increased pay with added steps to ensure wage rates remain competitive, enhanced benefits, and streamlined training.

Outlook and Strategic Updates

As we look to the second quarter and remainder of the year, we have turned focus to our pilots, so Alaska andstrategy for long-term sustainable growth. In the Air Line Pilots Association presented their respective positionsfirst quarter, we announced plans to accelerate our transition to a third-party arbitration panel during the third quarter. On October 30, 2017, we received a decision from the arbitration panel on new wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America. This award is binding and is effective November 1, 2017. The wage rates equate to an approximately 33% increase for top-of-scale captains at Virgin America and approximately 16% for top-of-scale captains at Alaska Airlines with a 3% increase in rates effective April 1, 2018 and April 1, 2019.

The decision increases contribution rates for pilots in defined contribution only retirement plans from 13.5%single fleet at Alaska, and 12%revealed new plans to transition our regional operations to a single fleet by retiring our Q400 fleet by the end of 2023. Moving to single fleet at Virgin AmericaAlaska and Horizon strengthens our low cost, high productivity competitive advantage, and contributes to 15% effective immediately and to 15.5% effective January 1, 2019.

We estimate the impact of this new contract over the status quo to be an incremental cost of approximately $24 million for the remainder of 2017, $150 million in 2018, and $180 million in 2019. Over the lifegreater operational excellence. As part of the contract,transition, we are also strategically upgauging our fleet as we backfill retired aircraft, supporting efficient growth and bringing with it more premium revenue opportunity.

In the average annualized impactfirst quarter, we announced a renewed co-brand credit card agreement with Bank of America extending to 2030. Throughout the pandemic, our loyalty program provided meaningful cash flow to our business, and has continued to grow in line with returning demand. The new agreement is approximately $160 millionexpected to $165 million compared to the $140 million estimate of our proposal at arbitration.

Outlook

We completed the acquisition of Virgin America on December 14, 2016, positioning us as the fifth largest airline in the U.S. with a unique ability to serve West Coast travelers. The acquisition of Virgin America provides a platform for growth of our low-fare, premium product, a powerful West Coast network forgenerate incremental cash flows from improved economics, while providing our guests and enhanced international partnerships. Additionally, Virgin America provides access to constrained gates, particularly on the East Coast, creating increased utility forwith expanded benefits.

To support our guests.



Wegrowth plans, we are focused on the successful integration of Virgin America, which includes obtaining a Single Operating Certificate ("SOC") in early 2018 and a single Passenger Service System ("PSS"), or more commonly known as the reservations system, in the second quarter of 2018. The single PSS has been accelerated from later in 2018 and is expected to bring forward approximately $20 million of revenue synergies into 2018. Our priority throughout the integration process is to runstaffing our airlines well and maintain a safe, compliant and low-cost operation, while providing a remarkable experiencedelivering the operational excellence for our guests. The combined airline will adopt Alaska’s name and logo, retiring the Virgin America name sometime in late 2019. Over the next several months we will focus on enhancing our guest experience and will adopt certain aspects of Virgin America’s brand elements, including enhanced inflight connectivity, inflight entertainment content, mood lighting, music and the relentless desire to make flying a different experience for guests. We will continue to enhance our fresh, healthy, West Coast-inspired onboard food and beverage menus and expect our First Class guests on Alaska will be able to pre-select meals before they fly starting this year. Alaska’s main cabin guests will also be able to pre-pay for their meals in advance in 2018, with Airbus flights soon to follow. Our onboard Free Chat service and free entertainment was added to Airbus flights in August 2017. We also plan to expand the premium class offering on our Airbus fleet beginning in 2018 and have our entire fleet equipped with high-speed satellite Wi-Fi by early 2020. 

In January 2018, Alaska Mileage Plan™ will become our sole loyalty program, offering guests more rewards, an expansive global partner network and the only major airline loyalty program that still rewards a mile flown with a mile earned on Alaska and Virgin America flights. 

We intend to minimize any disruption to our guests during the integration efforts by being transparent about the progresswhich we are making 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 changes.known. We remain focused on capturing the value and synergies created by combining these two great airlines.

Currently, we expect to grow our combined network capacity in 2017 by 7.2%. The growth rate compares 2017 system-wide capacity to historical Air Group and Virgin America combined capacity in 2016. Current schedules indicate competitive capacity will increase by approximately 5% in the fourth quarter of 2017, and approximately 9%faced challenges in the first quarter as the omicron variant caused disruptions in our pilot training throughput, which led to a shortage of 2018. We believepilots as we entered the second quarter. In response, management has moderated second quarter capacity plans to maintain operational integrity, and now plans to fly capacity that our product, our operation, our low-cost structure, our engaged employees, our award-winning service,is 6% to 9% below 2019 levels. Despite the drawdown in capacity, relative strength in the demand environment is expected to lift second quarter revenues to 5% to 8% above 2019 levels.

The guidance we have provided and our award-winningoutlook more broadly are sensitive to health trends, as well as regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. As we leverage our network, Mileage Plan™Plan program, combined withand fleet for growth, our people continue to focus on keeping costs low, running a strong balance sheet, giveoperation, and building brand love as we go. These are competitive advantages we have cultivated over many years that will continue to serve us the ability to compete effectivelywell in our markets.2022 and beyond.


Our current expectations for capacity and CASM excluding fuel and special items for the remainder of 2017 are summarized below. These expectations are from a "Combined Comparative" perspective, calculated as the sum of historical results for Alaska Air Group and Virgin America for the 2016 comparative periods:
 Forecast
Q4 2017		 
Q4 2016 Combined Comparative(a)
% Change
Capacity (ASMs in millions)15,950 - 16,000 14,404~ 11%
Cost per ASM excluding fuel and special items (cents) 
8.50¢ - 8.55¢ 8.25¢~ 3%
Fuel gallons (millions)204 184~ 11%
Economic fuel cost per gallon$1.95 $1.66~ 17.5%
 Forecast
Full Year 2017		 
2016 Combined Comparative(a)
% Change
Capacity (ASMs in millions)62,130 - 62,160 57,953~ 7.2%
Cost per ASM excluding fuel and special items (cents)8.19¢ - 8.21¢ 8.04¢~ 2%
Fuel gallons (millions)795 739~ 7.5%
Economic fuel cost per gallon$1.81 $1.54~ 17.5%
(a)
Refer to our Investor Update issued on October 25, 2017 on Form 8-K for further details of the calculation of the three and twelve months ended December 31, 2016 combined data.

We currently expect capacity growth of approximately 8% for the full year 2018. We expect unit costs to increase in 2018. This increase is driven by increases in pilot wages as a result of the pilot arbitration decision, a new engine services deal, our growing mix of regional flying, and continued costs associated with the integration.

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, Payroll Support Program grant wage offsets and other individual special revenues or expensesitems is useful information to investors because:


•By excluding fuel expense and certain specialother items (including merger-related costs)the Payroll Support Program grant wage offset and other special items) from our unit metrics, we believe it provides managementthat we have better visibility into the results of operations and our non-fuel cost initiatives.as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. 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")(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 special 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.



22


•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual cash 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, we do not (nor are we able to) evaluate unit revenues 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 revenues 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.


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, infrequent, or unusual in nature.

23


OPERATING STATISTICS SUMMARY (unaudited)
AsBelow are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
Three Months Ended March 31,
20222021Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)8,6944,66686.3%
RPMs (000,000) "traffic"10,5865,39396.3%
ASMs (000,000) "capacity"13,78310,39732.6%
Load factor76.8%51.9%24.9 pts
Yield14.27¢12.22¢16.8%
RASM12.20¢7.67¢59.1%
CASM excluding fuel and special items(b)
10.61¢10.93¢(2.9)%
Economic fuel cost per gallon(b)
$2.62$1.7946.4%
Fuel gallons (000,000)17312637.3%
ASMs per fuel gallon79.982.4(3.0)%
Average full-time equivalent employees (FTEs)21,58217,14025.9%
Mainline Operating Statistics:
Revenue passengers (000)6,5663,151108.4%
RPMs (000,000) "traffic"9,5124,589107.3%
ASMs (000,000) "capacity"12,3878,85339.9%
Load factor76.8%51.8%25.0 pts
Yield13.06¢11.02¢18.5%
RASM11.30¢7.11¢58.9%
CASM excluding fuel and special items(b)
9.64¢10.08¢(4.4)%
Economic fuel cost per gallon(b)
$2.61$1.7747.5%
Fuel gallons (000,000)1469849.0%
ASMs per fuel gallon85.090.3(5.9)%
Average FTEs16,33612,47331.0%
Aircraft utilization9.58.511.8%
Average aircraft stage length1,3341,3032.4%
Operating fleet(d)
22520124 a/c
Regional Operating Statistics:(c)
Revenue passengers (000)2,1281,51540.5%
RPMs (000,000) "traffic"1,07580433.7%
ASMs (000,000) "capacity"1,3961,544(9.6)%
Load factor77.0%52.1%24.9 pts
Yield24.96¢19.04¢31.1%
RASM20.04¢10.84¢84.9%
Operating fleet(d)
98944 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 acquisition closed on December 14, 2016, Consolidatedmost directly related GAAP measure in the accompanying pages.
(c)Data presented includes information related to flights operated by Horizon and Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 andthird-party carriers.
(d)Excludes all aircraft removed from operating service, as well as new aircraft which have not for the prior period.yet entered operating service.





24

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 
Change(d)
 2017 2016 
Change(d)
Consolidated Operating Statistics:(a)
           
Revenue passengers (000)11,645 9,054 28.6% 33,063 25,536 29.5%
RPMs (000,000) "traffic"13,811 9,601 43.8% 39,073 27,569 41.7%
ASMs (000,000) "capacity"16,164 11,212 44.2% 46,170 32,728 41.1%
Load factor85.4% 85.6% (0.2) pts 84.6% 84.2% 0.4 pts
Yield13.21¢ 13.77¢ (4.1)% 13.09¢ 13.49¢ (3.0)%
PRASM11.29¢ 11.79¢ (4.2)% 11.08¢ 11.36¢ (2.5)%
RASM13.12¢ 13.97¢ (6.1)% 12.93¢ 13.47¢ (4.0)%
CASM excluding fuel and special items(b)
7.98¢ 8.20¢ (2.7)% 8.09¢ 8.16¢ (0.9)%
Economic fuel cost per gallon(b)
$1.80 $1.58 13.9% $1.76 $1.47 19.7%
Fuel gallons (000,000)207 140 47.9% 592 410 44.4%
ASMs per fuel gallon78.1 80.1 (2.5)% 78.0 79.8 (2.3)%
Average full-time equivalent employees (FTEs)20,743 14,674 41.4% 19,723 14,500 36.0%
Mainline Operating Statistics:           
Revenue passengers (000)9,142 6,507 40.5% 25,875 18,432 40.4%
RPMs (000,000) "traffic"12,694 8,595 47.7% 36,046 24,767 45.5%
ASMs (000,000) "capacity"14,796 9,987 48.2% 42,398 29,216 45.1%
Load factor85.8% 86.1% (0.3) pts 85.0% 84.8% 0.2 pts
Yield12.31¢ 12.49¢ (1.4)% 12.18¢ 12.26¢ (0.7)%
PRASM10.56¢ 10.75¢ (1.8)% 10.36¢ 10.39¢ (0.3)%
RASM12.40¢ 12.96¢ (4.3)% 12.22¢ 12.53¢ (2.5)%
CASM excluding fuel and special items(b)
7.28¢ 7.28¢ —% 7.32¢ 7.21¢ 1.5%
Economic fuel cost per gallon(b)
$1.79 $1.57 14.0% $1.76 $1.46 20.5%
Fuel gallons (000,000)183 119 53.8% 526 350 50.3%
ASMs per fuel gallon80.9 83.9 (3.6)% 80.6 83.5 (3.5)%
Average FTEs15,862 11,397 39.2% 15,439 11,260 37.1%
Aircraft utilization11.4 10.6 7.5% 11.1 10.7 3.7%
Average aircraft stage length1,300 1,203 8.1% 1,296 1,218 6.4%
Operating fleet218 154 64 a/c 218 154 64 a/c
Regional Operating Statistics:(c)
           
Revenue passengers (000)2,503 2,547 (1.7)% 7,188 7,105 1.2%
RPMs (000,000) "traffic"1,117 1,006 11.0% 3,027 2,801 8.1%
ASMs (000,000) "capacity"1,368 1,225 11.7% 3,772 3,512 7.4%
Load factor81.7% 82.1% (0.4 pts) 80.2% 79.8% 0.4 pts
Yield23.48¢ 24.75¢ (5.1)% 23.95¢ 24.35¢ (1.6)%
PRASM19.17¢ 20.32¢ (5.7)% 19.22¢ 19.43¢ (1.1)%
Operating fleet83 69 14 a/c 83 69 14 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 most directly related GAAP measure in the accompanying pages.
(c)
Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)
See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2022 to 2019.


FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited)
Alaska Air Group, Inc.
Three Months Ended March 31,
20222019Change
Passenger revenue$1,511 $1,716 (12)%
Mileage plan other revenue112 110 2 %
Cargo and other58 50 16 %
Total operating revenues$1,681 $1,876 (10)%
Operating expense, excluding fuel and special items$1461 $1,405 4 %
Aircraft fuel, including hedging gains and losses347 420 (17)%
Special items75 26NM
Total operating expenses$1,883 $1,851 2 %
Total non-operating expense(4)(19)(79)%
Income (loss) before income tax$(206)$6 NM
Consolidated Operating Statistics:
Revenue passengers (000)8,69410,417(17)%
RPMs (000,000) "traffic"10,58612,449(15)%
ASMs (000,000) "capacity"13,78315,508(11)%
Load Factor76.8%80.3%(3.5) pts
Yield14.27¢13.78¢4 %
RASM12.20¢12.10¢1 %
CASMex10.61¢9.06¢17 %
FTEs21,58221,832(1)%






















25

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2022 TO THREE MONTHS ENDED SEPTEMBER 30, 2016MARCH 31, 2021


Our consolidated net incomeloss for the three months ended September 30, 2017March 31, 2022 was $266$143 million, or $2.14$1.14 per diluted share, compared to a net incomeloss of $256$131 million, or $2.07$1.05 per diluted share, for the three months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America for the three months ended September 30, 2017, but not for the comparable prior period.March 31, 2021.


Excluding the impact of merger-related costsspecial items and mark-to-market fuel hedge adjustments, our adjusted net incomeloss for the thirdfirst quarter of 20172022 was $278$167 million, or $2.24$1.33 per diluted share, compared to an adjusted net incomeloss of $272$436 million, or $2.20$3.51 per diluted share, in the thirdfirst quarter of 2016.2021. The following tables reconciletable reconciles our adjusted net income and adjusted earningsloss per diluted share ("EPS")(EPS) to amounts as reported in accordance with GAAP:
 Three Months Ended March 31,
 20222021
(in millions, except per share amounts)DollarsEPSDollarsEPS
GAAP net loss per share$(143)$(1.14)$(131)$(1.05)
Payroll Support Program grant wage offset— — (411)(3.31)
Mark-to-market fuel hedge adjustments(107)(0.85)(22)(0.18)
Special items - fleet transition and related charges75 0.60 18 0.14 
Special items - restructuring charges— — 11 0.09 
Income tax effect of reconciling items above8 0.06 99 0.80 
Non-GAAP adjusted net loss per share$(167)$(1.33)$(436)$(3.51)
 Three Months Ended September 30,
 2017 2016
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$266
 $2.14
 $256
 $2.07
Mark-to-market fuel hedge adjustments(5) (0.04) 3
 0.02
Special items—merger-related costs24
 0.20
 22
 0.18
Income tax effect on special items and fuel hedge adjustments(7) (0.06) (9) (0.07)
Non-GAAP adjusted net income and diluted EPS$278
 $2.24
 $272
 $2.20


CASM excluding fuel and special items reconciliation is summarized below:
 Three Months Ended March 31,
(in cents)20222021% Change
Consolidated:
CASM13.66 ¢9.21 ¢48 %
Less the following components:
Payroll Support Program grant wage offset— (3.95)NM
Aircraft fuel, including hedging gains and losses2.51 1.95 29 %
Special items - fleet transition and related charges0.54 0.17 NM
Special items - restructuring charges— 0.11 NM
CASM excluding fuel and special items10.61 ¢10.93 ¢(3)%
Mainline:
CASM11.89 ¢8.07 ¢47 %
Less the following components:
Payroll Support Program grant wage offset— (4.06)NM
Aircraft fuel, including hedging gains and losses2.21 1.72 29 %
Special items - fleet transition and related charges0.04 0.20 (80)%
Special items - restructuring charges— 0.13 NM
CASM excluding fuel and special items9.64 ¢10.08 ¢(4)%

26

 Three Months Ended September 30,
(in cents)2017 2016 % Change
Consolidated:     
CASM
10.40¢ 
10.40¢ — %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.27
 2.01
 12.9 %
Special items—merger-related costs0.15
 0.19
 (21.1)%
CASM excluding fuel and special items
7.98¢ 
8.20¢ (2.7)%
      
Mainline:     
CASM
9.63¢ 
9.41¢ 2.3 %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.19
 1.91
 14.7 %
Special items—merger-related costs0.16
 0.22
 (27.3)%
CASM excluding fuel and special items
7.28¢ 
7.28¢ — %

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The discussion below includes "Combined Comparative" results for the three months ended September 30, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed 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.



COMBINED COMPARATIVE OPERATING STATISTICS
 Three Months Ended September 30,
 2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:         
Revenue passengers (in 000)11,645 9,054 2,175 11,229 3.7%
RPMs (in 000,000)13,811 9,601 3,321 12,922 6.9%
ASMs (in 000,000)16,164 11,212 3,867 15,079 7.2%
Load Factor85.4% 85.6% (a) 85.7% (0.3) pts
PRASM11.29¢ 11.79¢ (a) 11.43¢ (1.2)%
RASM13.12¢ 13.97¢ (a) 13.34¢ (1.6)%
CASMex7.98¢ 8.20¢ (a) 7.90¢ 1.0%
FTEs20,743 14,674 2,888 17,562 18.1%
          
Mainline:         
RPMs (in 000,000)12,694 8,595 3,321 11,916 6.5%
ASMs (in 000,000)14,796 9,987 3,867 13,854 6.8%
Load Factor85.8% 86.1% (a) 86.0% (0.2) pts
PRASM10.56¢ 10.75¢ (a) 10.65¢ (0.8)%
(a)
2016 Combined operating statistics have been recalculated using the combined results.

COMBINED COMPARATIVE OPERATING REVENUES


Total operating revenues increased $554 $884 million, or 35%111%, during the thirdfirst quarter of 20172022 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $108 million or 5%.2021. The changes including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:
Three Months Ended March 31,
(in millions)20222021% Change
Passenger revenue$1,511 $659 129 %
Mileage Plan other revenue112 94 19 %
Cargo and other58 44 32 %
Total operating revenues$1,681 $797 111 %
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger           
Mainline$1,562
 $1,073
 $402
 $1,475
 $87
 5.9%
Regional262
 249
 —
 249
 13
 5.2%
Total passenger revenue1,824
 1,322
 402
 1,724
 100
 5.8%
Freight and mail32
 31
 —
 31
 1
 3.2%
Other—net264
 213
 44
 257
 7
 2.7%
Total operating revenues$2,120
 $1,566
 $446
 $2,012
 $108
 5.4%


Passenger Revenue—MainlineRevenue


On a consolidated basis, Mainline passengerPassenger revenue for the thirdfirst quarter of 20172022 increased by $489$852 million, or 46%129%, on a 48% increase in capacity driven by the acquisition of Virgin America, partially offset by a 2% decrease in unit revenues. On a Combined Comparative basis, Mainline passenger revenue for the third quarter of 2017 increased by 6%, due to a 7% increase in capacity, slightly offset by a 1% decrease in unit revenues compared to the combined third quarter of 2016. The increase in capacity was driven by our continued network expansion and aircraft added to our fleet since the third quarter of 2016. The decrease in PRASM was driven by decreased load factors coupled with lower ticket yields. The lower yields were impacted by our new market growth and by competitor pricing actions felt more acutely in our California markets.

Passenger Revenue—Regional

Regional passenger revenue increased 5% compared to the third quarter of 2016 primarily, driven by a 12% increase in capacity. The increase in capacity was offset by a 6% decrease in PRASM. The decrease in Regional PRASM was largely driven by growth and competitive pricing actions. The operational challenges at Horizon, due in large part to a shortage of pilot


s, resulted in a significant number of flight cancellations that led us to either refund or re-accommodate passengers. We estimate these cancellations resulted in lost revenues for Air Group of approximately $25 million to $30 million.

Other—Net

Other—net revenue increased $51 million, or 24%, from the third quarter of 2016. Frequent flyer revenue contributed $15 million of the increase, primarily driven by a significant increase in miles soldpassenger traffic and bolstered by a 17% improvement in ticket yields. January and February 2022 results were negatively impacted by the omicron variant; however, surging demand in March by both business and leisure travelers drove meaningful improvements to year-over-year results.

We expect to see continued growth to Passenger revenue as we progress through 2022 driven by high demand and increased capacity.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased by $18 million, or 19%, as compared to the same prior-year period. The change is largely due to an increase in commissions from our affinitybank card partners driven by our new co-branded credit card partneragreement and increased consumer spending and new card acquisitions.

We expect to see increases to Mileage Plan other revenue for the remainder of 2022, driven by higher commissions from the new co-branded credit card agreement.

Cargo and other

On a consolidated basis, Cargo and other revenue for the first quarter of 2022 increased by $14 million, or 32%, as compared to the same prior-year period as our dedicated freighters were running below full capacity in the Mileage Plan program. Thefirst quarter of 2021. Additional departures also provided incremental belly cargo activity in the first quarter of 2022 compared with the prior year.

We expect to see increases to cargo and other revenue for the remainder of the2022, driven by increased belly cargo activity as we increase was due to higher ancillary revenues. On a Combined Comparative basis, Other—net revenue increased $7 million, or 3%.scheduled departures.


COMBINED COMPARATIVE OPERATING EXPENSES


Total operating expenses increased $515$925 million, or 44%97%, compared to the thirdfirst quarter of 2016. On a Combined Comparative basis, total operating expenses increased $159 million, or 10%.2021. 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:
 Three Months Ended March 31,
(in millions)20222021% Change
Fuel expense$347 $203 71 %
Non-fuel operating expenses, excluding special items1,461 1,137 28 %
Payroll Support Program grant wage offset— (411)NM
Special items - fleet transition and related charges75 18 NM
Special items - restructuring charges— 11 NM
Total operating expenses$1,883 $958 97 %


27
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Fuel expense$368
 $225
 $81
 $306
 $62
 20.3%
Non-fuel expenses1,289
 919
 273
 1,192
 97
 8.1%
Special items—merger-related costs24
 22
 2
 24
 —
 —%
Total operating expenses$1,681
 $1,166
 $356
 $1,522
 $159
 10.4%


Fuel Expense


Aircraft fuel expense includes both raw fuel expense (as defined below) plus 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. Our aircraft fuel expense can be volatile 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 $143$144 million, or 64%71%, compared to the thirdfirst quarter of 2016. On a Combined Comparative basis, aircraft fuel expense increased $62 million or 20%.2021. The elements of the change are illustrated in the following table:
Three Months Ended March 31,
20222021
(in millions, except for per gallon amounts)Dollars Cost/GalDollars Cost/Gal
Raw or "into-plane" fuel cost$504 $2.91 $222 $1.77 
(Gain)/loss on settled hedges(50)(0.29)3 0.02 
Consolidated economic fuel expense$454 $2.62 $225 $1.79 
Mark-to-market fuel hedge adjustments(107)(0.62)(22)(0.18)
GAAP fuel expense$347 $2.00 $203 $1.61 
Fuel gallons173 126 

 Three Months Ended September 30,
 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$368
 $1.78
 $218
 $1.55
 $298
 $1.54
Losses on settled hedges5
 0.02
 4
 0.03
 5
 0.03
Consolidated economic fuel expense373
 1.80
 222
 1.58
 $303
 $1.57
Mark-to-market fuel hedge adjustments(5) (0.02) 3
 0.02
 3
 0.02
GAAP fuel expense$368
 $1.78
 $225
 $1.60
 $306
 $1.59
Fuel gallons207
   140
   192
  

OnRaw fuel expense increased 127% in the first quarter of 2022 compared to the first quarter of 2021 due to a Combined Comparative basis, rawcombination of increased fuel consumption and higher per gallon costs. Fuel consumption increased by 47 million gallons, consistent with an increase in departures. Raw fuel expense per gallon for the three months ended September 30, 2017 increased by 16%approximately 64% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil as well asand refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the thirdfirst quarter of 20172022 was primarily driven by a 76% increase in refining margins and an 8%64% increase in crude oil prices when compared to the prior year. Fuel gallons consumed increased by 15 million gallons, or 8%, in line with the increase in capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, 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 include includes 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 are 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.


WeGains recognized total losses of $5 million and $4 million for hedges that settled during the thirdfirst quarter were $50 million in 2022, compared to losses of 2017 and 2016 as reported.$3 million in the same period in 2021. These amounts represent the netcash received from hedges at settlement, offset by cash paid includingfor premium expense.

We expect to see continued pressure in aircraft fuel expense as we progress through 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the premium expense recognized for those hedges.second quarter to range between $3.20 and $3.25 per gallon. Based on expected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio during 2022. We expect the magnitude of the hedge benefit to be lesser in the second half of the year as the strike price of the portfolio approaches projected market cost per barrel.

28

Non-fuel Expenses and Non-special Items


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 other special items. Significant operating expense variances from 20162021 are more fully described below.
 Three Months Ended March 31,
(in millions)20222021% Change
Wages and benefits$606 $493 23 %
Variable incentive pay36 33 9 %
Aircraft maintenance135 81 67 %
Aircraft rent73 62 18 %
Landing fees and other rentals138 129 7 %
Contracted services78 51 53 %
Selling expenses58 33 76 %
Depreciation and amortization102 97 5 %
Food and beverage service41 23 78 %
Third-party regional carrier expense42 30 40 %
Other152 105 45 %
Total non-fuel operating expenses, excluding special items$1,461 $1,137 28 %
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages and benefits$475
 $340
 $72
 $412
 $63
 15.3 %
Variable incentive pay40
 31
 11
 42
 (2) (4.8)%
Aircraft maintenance88
 64
 17
 81
 7
 8.6 %
Aircraft rent70
 25
 48
 73
 (3) (4.1)%
Landing fees and other rentals124
 89
 28
 117
 7
 6.0 %
Contracted services76
 63
 16
 79
 (3) (3.8)%
Selling expenses91
 58
 34
 92
 (1) (1.1)%
Depreciation and amortization95
 101
 11
 112
 (17) (15.2)%
Food and beverage service50
 31
 13
 44
 6
 13.6 %
Third-party regional carrier expense30
 25
 —
 25
 5
 20.0 %
Other150
 92
 23
 115
 35
 30.4 %
Total non-fuel and non-special operating expenses$1,289
 $919
 273
 1,192
 97
 8.1 %


For the remainder of the year, we generally anticipate recognizing incremental costs as compared to 2021 as we continue to increase our capacity and scheduled departures, and hire additional employees at higher wage rates to staff our operation.

Wages and Benefits


Wages and benefits increased during the thirdfirst quarter of 20172022 by $135 million, or 40%. On a Combined Comparative basis, total wages and benefits increased by $63$113 million, or 15%.23%, compared to 2021. The primary components of wages and benefits, including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages$358
 $250
 $58
 $308
 $50
 16.2%
Pension—Defined benefit plans8
 6
 —
 6
 2
 33.3%
Defined contribution plans25
 16
 5
 21
 4
 19.0%
Medical and other benefits59
 50
 6
 56
 3
 5.4%
Payroll taxes25
 18
 3
 21
 4
 19.0%
Total wages and benefits$475
 $340
 $72
 $412
 $63
 15.3%

On a Combined Comparative basis, wages increased 16% with an 18% increase in FTEs. The increase in FTEs is attributable to the growth in our business, as well as the growth in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted services expense. Additionally, irregular operations and flight cancellations during the third quarter resulted in significant overtime for our customer service agents and reservations agents.



Depreciation and Amortization

Depreciation and amortization expense decreased by $6 million, or 6%, during the third quarter of 2017 compared to the same period in 2016. On a Combined Comparative basis, depreciation and amortization expense decreased by $17 million, or 15%. This decrease was primarily driven by 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 aircraft additions since September 30, 2016.

Other Operating Expenses
Other operating expenses increased by $58 million, or 63%, during the third quarter of 2017 compared to the same period in 2016. On a Combined Comparative basis, other operating expenses increased by $35 million, or 30%. The increase is primarily due to additional costs incurred for crew hotel costs, passenger disruption costs, training costs for front-line employees, scrapped parts inventory, and certain information technology costs. These increases were largely driven by the growth in our business and increased costs from flight cancellations and delays during the quarter. .

Nonoperating Income (Expense)

During the third quarter of 2017 we recorded nonoperating expense of $12 million compared to income of $2 million in the same period in 2016. On a Combined Comparative basis, nonoperating expense increased by $9 million, primarily due to interest expense incurred in the current year on the debt issued in 2016 to finance the acquisition of Virgin America.

Additional Segment Information

Refer to Note 9 of the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline recorded adjusted pretax profit of $422 million in the third quarter of 2017 compared to $383 million in the third quarter of 2016. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $48 million. 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:
 Three Months Ended September 30,  
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline         
Operating revenues$1,834
 $1,293
 $446
 $1,739
 $95
Non-fuel, non-special operating expenses1,077
 727
 273
 1,000
 77
Economic fuel328
 188
 81
 269
 59
Operating income429
 378
 92
 470
 (41)
Nonoperating income (expense)(7) 5
 (5) —
 (7)
Pretax profit$422
 $383
 $87
 $470
 $(48)

The $48 million decrease in Combined Comparative pretax profit was primarily driven by a $77 million increase in non-fuel operating expenses and a $59 million increase in economic fuel cost, partially offset by a $95 million increase in operating revenues. The increase in non-fuel expense was primarily driven by higher wages to support our growth and higher other operating expenses as described above. The increase in economic fuel expense was driven by higher raw fuel costs and refining margins. The increase in operating revenues was primarily driven by higher capacity and an increase in frequent flyer revenue as described above.

Regional

Our Regional operations contributed a pretax profit of $20 million in the third quarter of 2017 compared to $35 million in the third quarter of 2016. The decrease in pretax profit was attributable to higher non-fuel operating expense, due to increased capacity and the operational disruptions at Horizon during the third quarter. Increased costs were partially offset by a $13 million increase in operating revenues as described in Passenger Revenue—Regional.



Horizon

Horizon incurred a pretax profit of $5 million in the third quarter of 2017 compared to $9 million in the third quarter of 2016. The change in pretax profit was primarily driven by a $4 million increase in operating revenue, partially offset by higher non-fuel operating expenses attributable to higher wage and pilot training expense as a result of the increase in FTEs, along with other increased costs associated with flight cancellations during the current quarter.    

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2017 TO NINE MONTHS ENDED SEPTEMBER 30, 2016

Our consolidated net income for the nine months ended September 30, 2017 was $661 million, or $5.31 per diluted share, compared to net income of $700 million, or $5.63 per diluted share, for the nine months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America for the nine months ended September 30, 2017, but not for the prior periods.

Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our adjusted net income for the nine months ended September 30, 2017 was $721 million, or $5.79 per diluted share, compared to an adjusted net income of $717 million, or $5.77 per diluted share, in the nine months ended September 30, 2016. The following tables reconcile our adjusted net income and diluted EPS to amounts as reported in accordance with GAAP:
 Nine Months Ended September 30,
 2017 2016
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$661
 $5.31
 $700
 $5.63
Mark-to-market fuel hedge adjustments7
 0.06
 (9) (0.07)
Special items—merger-related costs88
 0.70
 36
 0.29
Income tax effect on special items and fuel hedge adjustments(35) (0.28) (10) (0.08)
Non-GAAP adjusted net income and diluted EPS$721
 $5.79
 $717
 $5.77



Our operating costs per ASM are summarized below:
 Nine Months Ended September 30,
(in cents)2017 2016 % Change
Consolidated:     
CASM
10.55¢ 
10.08¢ 4.7 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.27
 1.81
 25.4 %
Special items—merger-related costs0.19
 0.11
 72.7 %
CASM excluding fuel and special items
8.09¢ 
8.16¢ (0.9)%
      
Mainline:     
CASM
9.72¢ 
9.06¢ 7.3 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.19
 1.72
 27.3 %
Special items—merger-related costs0.21
 0.13
 61.5 %
CASM excluding fuel and special items
7.32¢ 
7.21¢ 1.5 %



COMBINED COMPARATIVE OPERATING STATISTICS
 Nine Months Ended September 30,
 2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:         
Revenue passengers (in 000)33,063 25,536 6,029 31,565 4.7%
RPMs (in 000,000)39,073 27,569 9,101 36,670 6.6%
ASMs (in 000,000)46,170 32,728 10,821 43,549 6.0%
Load Factor84.6% 84.2% (a) 84.2% 0.4 pts
PRASM11.08¢ 11.36¢ (a) 11.10¢ (0.2)%
RASM12.93¢ 13.47¢ (a) 12.95¢ (0.2)%
CASMex8.09¢ 8.16¢ (a) 7.98¢ 1.4%
FTEs19,723 14,500 2,771 17,271 14.2%
          
Mainline:         
RPMs (in 000,000)36,046 24,767 9,101 33,868 6.4%
ASMs (in 000,000)42,398 29,216 10,821 40,037 5.9%
Load Factor85.0% 84.8% (a) 84.6% 0.4 pts
PRASM10.36¢ 10.39¢ (a) 10.37¢ (0.1)%
(a)2016 Combined operating statistics have been recalculated using the combined results.




COMBINED COMPARATIVE OPERATING REVENUES

Total operating revenues increased$1.6 billion, or 35%, during the first nine months of 2017 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $330 million, or 6%. The changes, including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger           
Mainline$4,390
 $3,036
 $1,115
 $4,151
 $239
 5.8%
Regional725
 682
 —
 682
 43
 6.3%
Total passenger revenue5,115
 3,718
 1,115
 4,833
 282
 5.8%
Freight and mail88
 82
 —
 82
 6
 7.3%
Other—net768
 607
 119
 726
 42
 5.8%
Total operating revenues$5,971
 $4,407
 $1,234
 $5,641
 $330
 5.9%

Passenger Revenue—Mainline

Mainline passenger revenue for the first nine months of 2017increased45% on a 45%increase in capacity, driven primarily by the acquisition of Virgin America, and flat PRASM compared to the same period in 2016. On a Combined Comparative basis, mainline passenger revenue for the nine months ended September 30, 2017 increased 6%, primarily due to a 6% increase in capacity on flat PRASM. The increase in capacity was driven by our network expansion since September 30, 2016.

Passenger Revenue—Regional

Regional passenger revenue increased by $43 million, or 6%, compared to the first nine months of 2016, due to a 7%increase in capacity on more regional flying, partially offset by a 1%decrease in PRASM.

Other—Net

Other—net revenue increased$161 million, or 27%, from the first nine months of 2016. On a Combined Comparative basis, other—net revenue increased $42 million, or 6%. Mileage Plan revenue contributed $40 million of the increase primarily driven by an increase in miles sold to our affinity credit card partner.



COMBINED COMPARATIVE OPERATING EXPENSES

Total operating expenses increased$1.6 billion, or 48%, compared to the first nine months of 2016. On a Combined Comparative basis, total operating expenses increased $533 million, or 12%. 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:
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Fuel expense$1,051
 $593
 $229
 $822
 $229
 27.9%
Non-fuel expenses3,734
 2,670
 804
 3,474
 260
 7.5%
Special items—merger-related costs88
 36
 8
 44
 44
 100.0%
Total operating expenses$4,873
 $3,299
 $1,041
 $4,340
 $533
 12.3%

Fuel Expense

Aircraft fuel expense increased $458 million, or 77%, compared to the nine months ended September 30, 2016. On a Combined Comparative basis, aircraft fuel expense increased $229 million, or 28%. The elements of the change are illustrated in the following table: 
 Nine Months Ended September 30,
 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$1,030
 $1.74
 $590
 $1.44
 $801
 $1.44
Losses on settled hedges14
 0.02
 12
 0.03
 32
 0.06
Consolidated economic fuel expense1,044
 1.76
 602
 1.47
 $833
 $1.50
Mark-to-market fuel hedge adjustments7
 0.01
 (9) (0.02) (11) (0.02)
GAAP fuel expense$1,051
 $1.77
 $593
 $1.45
 $822
 $1.48
Fuel gallons592
   410
   554
  

On a Combined Comparative basis, the raw fuel price per gallon increased 21% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the first nine months of 2017 was driven by a 19% increase in crude oil prices and a 38% increase in refining margins.
We recognized losses of $14 million and $12 million for hedges that settled in the first nine months of 2017 and 2016 as reported. These amounts represent the cash paid for premium expense, offset by cash received from those hedges.

We currently expect our economic fuel price per gallon to be higher in the fourth quarter of 2017 compared to the fourth quarter of 2016 due to our current estimate of higher crude prices and higher refining margins.



Non-fuel Expense and Non- special items

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 and special items. Significant operating expense variances from 2016 are more fully described below.
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages and benefits$1,392
 $1,008
 $219
 $1,227
 $165
 13.4 %
Variable incentive pay98
 95
 25
 120
 (22) (18.3)%
Aircraft maintenance271
 197
 51
 248
 23
 9.3 %
Aircraft rent204
 80
 143
 223
 (19) (8.5)%
Landing fees and other rentals338
 232
 83
 315
 23
 7.3 %
Contracted services234
 183
 47
 230
 4
 1.7 %
Selling expenses269
 162
 96
 258
 11
 4.3 %
Depreciation and amortization275
 281
 29
 310
 (35) (11.3)%
Food and beverage service145
 93
 39
 132
 13
 9.8 %
Third-party regional carrier expense84
 72
 —
 72
 12
 16.7 %
Other424
 267
 72
 339
 85
 25.1 %
Total non-fuel and non-special operating expenses$3,734
 $2,670
 804
 3,474
 260
 7.5 %



Wages and Benefits

Wages and benefits increased during the first nine months of 2017 by $384 million, or 38%, compared to 2016. On a Combined Comparative basis, total wages and benefits increased by $165 million or 13%, compared to 2016. The primary components of wages and benefits are shown in the following table:
 Three Months Ended March 31,
(in millions)20222021% Change
Wages$467 $357 31 %
Pension - Defined benefit plans service cost11 13 (15)%
Defined contribution plans38 32 19 %
Medical and other benefits56 65 (14)%
Payroll taxes34 26 31 %
Total wages and benefits$606 $493 23 %

 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages$1,055
 $749
 $171
 $920
 $135
 14.7%
Pension—Defined benefit plans24
 19
 —
 19
 5
 26.3%
Defined contribution plans73
 49
 18
 67
 6
 9.0%
Medical and other benefits163
 135
 18
 153
 10
 6.5%
Payroll taxes77
 56
 12
 68
 9
 13.2%
Total wages and benefits$1,392
 $1,008
 $219
 $1,227
 $165
 13.4%

On a Combined Comparative basis, wagesWages increased $135$110 million, or 15%31%, on a 14%26% increase in FTEs. The increase in FTEs is attributable to the growth of our business and increased staffing during irregular operations, as well as the growth in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted services expense. The remainder of the increase is driven by higher wage rates for certain labor groups. The first nine months of 2017 also include $9 million of ratification bonus expense in connection with the agreement reached with Horizon's pilots during the second quarter.

For the full year, we expectIncreased wages and benefits to increase at a rate greater than capacity growth on a combined comparative basis, due to higher wage rates for certain labor groups and the continued growth of McGee Air Services. Our forecast includes the impact of the pilot arbitration decision which was received subsequent to quarter end, and results in an estimated $24 million of incremental costs in the fourth quarter of 2017.

Variable Incentive Pay

Variable incentive pay expense increased during the first nine months of 2017 by $3 million, or 3% compared to 2016. On a Combined Comparative basis, variable incentive pay decreased $22 million, or 18% due to expectations of lower performance-based pay as compared to the prior year based on how weperiod are trackingprimarily the result of the increase in relationFTEs as Alaska and Horizon continue their recovery from the pandemic and ramp up operations. Increased expense for defined contribution plans and payroll taxes are in line with the related increase to wages.

Medical and other benefits decreased as compared to 2021 as a result of an adjustment to prior-period reserves and structural changes to benefit programs.

Aircraft Maintenance

Aircraft maintenance expense increased $54 million, or 67%, compared to the current year's goals.first quarter of 2021. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.


ForAircraft Rent

Aircraft rent expense increased by $11 million, or 18%, during the full year, wefirst quarter of 2022 compared to the same period in 2021 primarily as a result of leased Boeing 737-9 deliveries in the second half of 2021 and first quarter of 2022.

29

We expect variable incentive payaircraft rent to increase in 2022 on the annualization of expense and additional deliveries of leased 737-9 aircraft and incremental aircraft flown by SkyWest under our long-term capacity purchase agreement.

Landing Fees and Other Rentals

Landing fees and other rentals increased by $9 million, or 7%, during the first quarter of 2022. The increase compared to be lower thanthe same period in 2016 on a combined comparative basis,2021 is due to lower achievement against performance-based pay metrics than prior year.an increase in departures as demand returns, partially offset by decreases in rates at some of the airports we service.


Depreciation and AmortizationContracted Services


Depreciation and amortization expense decreased $6Contracted services increased by $27 million, or 2%53%, during the first quarter of 2022 compared to 2016. On a Combined Comparative basis, depreciationthe same period in 2021 driven primarily by increased departures and amortization decreased $35passengers in line with increased demand, coupled with increased rates charged by vendor partners.

Selling Expense

Selling expense increased by $25 million, or 11%. This decrease was76%, during the first quarter of 2022 compared to the same period in 2021, primarily driven by a changean increase in distribution costs and credit card commissions incurred with 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 aircraft additions since September 30, 2016.overall revenue recovery.

For the full year, we expect depreciation and amortization to be 5-6% lower than in 2016 on a combined comparative basis for the same reasons mentioned above.


Food and Beverage Service


Food and beverage service expense increased $52by $18 million, or 56%. On a Combined Comparative basis, food and beverage service expense increased $13 million, or 10% due78%, during the first quarter of 2022 compared to increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products.

For the full year, we expect food and beverage expense to be approximately 11-12% higher thansame period in 2016 on a combined comparative basis,2021. This increase is in line with the 86% increase in revenue passengers inas compared to the current year, and enhancements to our onboard menu offerings.prior-year period.


Third-PartyThird-party Regional Carrier Expense


Third-party regional carrier expense, which represents payments made toexpenses associated with SkyWest and Pen Air under our CPAs,CPA, increased by $12 million, or 17%40%, during the first quarter of 2022 compared to 2016.the same period in 2021. The increase in expense is primarily due to the additional six E175 aircraft operatedincremental departures flown by SkyWest as compared to the prior-year period. In addition, a benefit was recorded in 2021 associated with the current year.pass through of CARES Act PSP funding that reduced expense, which did not recur in 2022.


For the full year, weWe expect Third-partythird-party regional carrier expense to increase duegrow in 2022 as compared to increased flying by our regional partners.

2021 as we bring incremental E175 aircraft into the CPA with SkyWest through the year.
Other Operating ExpensesExpense


Other operating expensesexpense increased by $157$47 million, or 59%45%, during the first quarter of 2022 compared to the first nine months of 2016. On a Combined Comparative basis, other operating expenses increased by $85 million, or 25%. The increase was due to higher costs associated with irregular operations, crew and training costs, higher IT costs, an increase in scrapped parts inventory, and higher property taxes. The first nine months of 2016 also included a benefit of an insurance claim reimbursement we received in the prior year.

For the full year, we expect other expenses to be higher than in 2016 in line with the trends described above.
Special Items—Merger-Related Costs

We recorded special items of $88 million for merger-related costs associated with our acquisition of Virgin America in the first nine months of 2017, compared to $36 million as reported and $44 million on a Combined Comparative basis in the first nine months of 2016. Costs incurred in the first nine months of 2017 consisted primarily of severance and retention and IT integration costs.

We expect to incur merger-related costs for the remainder of 2017, and continuing through 2019.

Nonoperating Income (Expense)



During the first nine months of 2017, we had nonoperating expense of $40 million, compared to income of $6 million in the same period in 2016. On a Combined Comparative basis, nonoperating2021. Increased expense increasedis primarily driven by $32incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity.

Special Items - fleet transition and related charges

We recorded non-recurring expense associated with fleet transition and related charges of $75 million primarily due to interest expense incurred in the current year onfirst quarter of 2022. Refer to Note 2 to the debt issued in 2016 to finance the acquisition of Virgin America.condensed consolidated financial statements for additional details.


Additional Segment Information

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.


Mainline


Mainline operations recorded an adjusted pretax profit was $1.13 billionloss of $174 million in the first nine monthsquarter of 2017,2022, compared to $1.05 billionan adjusted pretax loss of $444 million in the same period in 2016. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $111 million.first quarter of 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:
 Nine Months Ended September 30,  
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline         
Operating revenues$5,182
 $3,661
 $1,234
 $4,895
 $287
Non-fuel, non-special operating expenses3,101
 2,107
 804
 2,911
 190
Economic fuel924
 512
 231
 743
 181
Operating income1,157
 1,042
 199
 1,241
 (84)
Nonoperating income (expense)(30) 11
 (14) (3) (27)
Pretax profit$1,127
 $1,053
 $185
 $1,238
 $(111)

The $111$270 million decrease in Combined Comparative pretax profitimprovement was primarily driven by a $181$737 million increase in Passenger revenues as a result of increased demand for air travel, offset by a $301 million increase in non-fuel operating costs and a $207 million increase in economic fuel cost.

30

Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher economic fuel prices, combined with more gallons consumed, drove the increase in Mainline fuel expense,expense.

Regional

Regional operations recorded an adjusted pretax loss of $55 million in the first quarter of 2022, compared to an adjusted pretax loss of $150 million in the first quarter of 2021. Improved results were attributable to a $190$113 million increase in Mainline non-fuel operating expenses, andrevenues, partially offset by a $27$21 million increase in nonoperating expense. These increases were offsetfuel costs.

Regional passenger revenues increased significantly compared to the first quarter of 2021, primarily driven by increased load factors and a $287 million increase31% improvement in Mainline passenger revenue. yield.

Higher raweconomic fuel prices, and ancombined with a significant increase in gallons consumed, drove the increase in MainlineRegional fuel expense. Non-fuel operating expenses increased due to higher wages to support our growth and higher other operating expenses as described above. Nonoperating expense increased primarily due to increased interest expense. Mainline revenue increased due to higher capacity from the new routes we have added over the past twelve months.


RegionalHorizon


Our Regional operations contributed aHorizon recorded an adjusted pretax profitloss of $40$10 million in the first nine monthsquarter of 2017,2022, compared to $72 million in the first nine months of 2016. The decrease inan adjusted pretax profit was attributable to higher non-fuel operating expense, due in large part to increased capacity and higher raw fuel costs, partially offset by a $43 million increase in operating revenues as described in Passenger Revenue—Regional.

Horizon

Horizon incurred a pretax lossincome of $11 million in the first nine monthsquarter of 2017, compared2021. The shift to pretax profit of $14 million in the same period in 2016. The change wasadjusted loss is driven by higher non-fuel expenses and lower CPA Revenues (100% of which are from Alaskarevenue on decreased departures, combined with incremental maintenance expense on E175 aircraft and eliminated in consolidation). Non-fuel expenses increased primarily due to higher wage and training expense as a result of the increase in FTE’s, increasedbenefit costs associated with flight cancellations primarily due to a shortage of pilots necessary to fly the schedule, and a $9 million ratification bonus expense in connection with the agreement with Horizon's pilots.on incremental FTEs.




LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sources of liquidity are:

Our existing•Existing cash and marketable securities balance of $1.7$2.9 billion,, and our expected cash flows from operations;


Our 64•58 unencumbered aircraft in our operating fleet that could be financed, if necessary;


Our combined•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.

During the ninethree months ended September 30, 2017,March 31, 2022, we took free and clear delivery of ten B737-900ER aircraft and ten E175seven Boeing 737-9 aircraft. We also made debt payments totaling $265$170 million, ending the quarter with a debt-to-capitalization ratio of 50%, within our stated target range of 40% to 50%. Subsequent to quarter end, we received $184 million in federal tax refund as a result of carrying back losses from the 2020 tax year.

As the business returns to sustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and paid dividends totaling $111 million.reinforcing our balance sheet remain high priorities. Our capital expenditures for 2022 are expected to be approximately $1.6 billion to $1.7 billion, which we plan to fund with cash generated by operating activities and cash on hand.


We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, 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.
31


The table below presents the major indicators of financial condition and liquidity:
(in millions)March 31, 2022December 31, 2021Change
Cash and marketable securities$2,890 $3,116 (7) %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue47 %57 %(10) pts
Long-term debt, net of current portion2,078 2,173 (4)%
Shareholders’ equity$3,637 $3,801 (4)%
Debt-to-capitalization, adjusted for operating leases
(in millions)March 31, 2022December 31, 2021Change
Long-term debt, net of current portion$2,078 $2,173 (4)%
Capitalized operating leases1,629 1,547 5%
Adjusted debt, net of current portion of long-term debt$3,707 $3,720 —%
Shareholders' equity3,637 3,801 (4)%
Total invested capital$7,344 $7,521 (2)%
Debt-to-capitalization, including operating leases50 %49 %1 pt
(in millions)September 30, 2017 December 31, 2016 Change
Cash and marketable securities$1,740
 $1,580
 10.1 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue29% 31% (2) pts
Long-term debt, net of current portion$2,367
 $2,645
 (10.5)%
Shareholders’ equity$3,491
 $2,931
 19.1%
Long-term debt-to-capital including net present value of aircraft operating lease payments(a)
53% 59% (6) pts
Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)March 31, 2022December 31, 2021
Current portion of long-term debt$292 $366 
Current portion of operating lease liabilities272 268 
Long-term debt2,078 2,173 
Long-term operating lease liabilities, net of current portion1,357 1,279 
Total adjusted debt3,999 4,086 
Less: Cash and marketable securities(2,890)(3,116)
Adjusted net debt$1,109 $970 
(in millions)Twelve Months Ended March 31, 2022Twelve Months Ended December 31, 2021
GAAP Operating Income(a)
$644 $685 
Adjusted for:
Payroll Support Program grant wage offset and special items(468)(925)
Mark-to-market fuel hedge adjustments(132)(47)
Depreciation and amortization399 394 
Aircraft rent265 254 
EBITDAR$708 $361 
Adjusted net debt to EBITDAR1.6x2.7x
(a)Calculated using the present value of remaining aircraft lease payments for aircraft in our operating fleet as of the balance sheet date.

(a)Operating Income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

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


32

ANALYSIS OF OUR CASH FLOWS
 
Cash Provided by Operating Activities
 
For the first ninethree months of 2017,2022, net cash provided by operating activities was $1.4 billion,$287 million, compared to $1.2 billion$167 million during the same period in 2016.2021. The $151$120 million increase in our operating cash flows is primarily attributable to increased ticket sales for future travel compared to the prior year resulting from the overall growthbuild in our business andair traffic liability, as cash advance bookings in March 2022 reached the addition of Virgin America.highest monthly total in company history. This increase was partially offset by a decrease inuses of cash on increasing operating expenses and greater payout on our net income, which was impacted by higher fuel costs and $88 million of merger-related costs.performance based pay program as compared to 2021.

We typically generate positive cash flows from operations and expect to use that cash flow to purchase aircraft and capital equipment, make scheduled debt payments, and return capital to shareholders.

Cash Used in Investing Activities
 
Cash provided by investing activities was $39 million during the first three months of 2022, compared to $543 million used in investing activities was $1.1 billion during the first nine months of 2017, compared to $641 million during the same period of 2016. Our capital expenditures2021. The shift to cash provided by investing activities is primarily due to net sales of marketable securities, which were $841$328 million in the first ninethree months of 2017,2022, compared to net purchases of $511 million in the three months ended March 31, 2021. This activity was partially offset by an increase in cash used for capital expenditures of $332$261 million for aircraft purchase deposits and other property and equipment.

Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $168 million during the first three months of 2022, compared to the nine months ended September 30, 2016. This is primarily drivencash provided by more aircraft purchases and higher spend on other equipment compared tofinancing activities of $82 million during the same period of 2016. Our net purchases of marketable securities increased by $202 million from the prior year, primarily driven by stronger operating cash flows in 2021. During the first ninethree months of 2017.2022, we had no new proceeds from issuance of debt and utilized cash on hand to repay $170 million of outstanding long-term debt, compared to debt proceeds of $189 million and payments of $115 million during the same period in 2021.

The table below reflects our full-year expectation for capital expenditures
MATERIAL CASH COMMITMENTS
Aircraft Commitments
As of March 31, 2022, Alaska has firm orders to purchase 67 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease seven Boeing 737-9 aircraft with deliveries in 2022. Alaska also has an agreement with SkyWest Airlines to expand their long-term capacity purchase agreement by six Embraer E175 aircraft in 2022 and one in 2023. Horizon has commitments to purchase 12 Embraer E175 aircraft with deliveries between 2022 and 2025. Alaska has options to acquire up to 11 additional expenditures if options are exercised.Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries between 2024 and 2026. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.met over the long term.



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(in millions)2017 2018 2019
Aircraft and aircraft purchase deposits—firm$780
 $820
 $635
Other flight equipment100
 135
 170
Other property and equipment170
 240
 205
Total property and equipment additions$1,050
 $1,195
 $1,010
Option aircraft and aircraft deposits, if exercised(a)
$—
 $170
 $665
(a)We have options to acquire 37 B737 aircraft with deliveries from 2020 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2019 to 2021. Amounts above also include payments toward cancelable purchase commitments for 30 A320neo aircraft with deliveries from 2020 through 2022.

Cash Used by Financing Activities
Net cash used by financing activities was $399 million during the first nine months of 2017 compared to net cash provided by financing activities of $1.2 billion during the same period in 2016. The change is due to $1.5 billion of debt financing cash inflow in the prior period for the Virgin America acquisition. During the first nine months of 2017 we made debt payments of $265 million, dividend payments totaling $111 million, and had $50 million in common stock repurchases.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of September 30, 2017, we have firm orders to purchase or lease 93 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo with deliveries from 2020 through 2022. We could incur a loss of pre-delivery payments and credits as a cancellation fee. We also have options to acquire 37 B737 aircraft with deliveries from 2020 through 2024 and 30 E175 aircraft with deliveries from 2019 through 2021. In addition to the 21 E175 aircraft currently operated by SkyWest in our regional fleet, we have options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.

The following table summarizes expectedour anticipated fleet activitycount by year, as of September 30, 2017:March 31, 2022:
Actual Fleet
Anticipated Fleet Activity(a)
AircraftMarch 31, 20222022 Additions2022 RemovalsDec 31, 20222023 ChangesDec 31, 20232024 ChangesDec 31, 2024
737 Freighters(b)
3 — — 3 — 3 — 3 
B737-70011 — — 11 — 11 — 11 
B737-800(b)
61 — — 61 — 61 — 61 
B737-90012 — — 12 — 12 — 12 
B737-900ER79 — — 79 — 79 — 79 
B737-8— — — — 5 5 5 10 
B737-919 23 — 42 28 70 7 77 
B737-10— — — — — — 6 6 
A320(d)
30 — (14)16 (16)— — — 
A321neo10 — — 10 (10)— — — 
Total Mainline Fleet225 23 (14)234 7 241 18 259 
Q400 operated by Horizon(d)
32 — (8)24 (24)— — — 
E175 operated by Horizon30 3 — 33 6 39 — 39 
E175 operated by third party36 6 — 42 1 43 — 43 
Total Regional Fleet(c)
98 9 (8)99 (17)82 — 82 
Total323 32 (22)333 (10)323 18 341 
(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 Expected Fleet Activity
AircraftSeptember 30, 2017 Q4 2017 Additions Q4 2017 Removals December 31, 2017 2018-2019 Changes December 31, 2019
B737 Freighters & Combis(a)
5
 2
 (3) 4
 (1) 3
B737 Passenger Aircraft148
 4
 (1) 151
 19
 170
Airbus Passenger Aircraft65
 3
 —
 68
 4
 72
Total Mainline Fleet218
 9
 (4) 223
 22
 245
Q400 operated by Horizon52
 —
 —
 52
 (15) 37
E175 operated by Horizon(b)
10
 —
 —
 10
 23
 33
E175 operated by third party(c)
21
 2
 —
 23
 12
 35
Total Regional Fleet83
 2
 —
 85
 20
 105
Total301
 11
 (4) 308
 42
 350
(b)Excludes the planned addition of two 737-800 freighters following conversion from passenger aircraft, as well as the subsequent replacement of passenger aircraft.
(a)
Remaining 2017 changes reflect retirement of three combis and the reintroduction of two B737-700 aircraft as freighters.
(b)
Reflects recent deferral of three aircraft from 2017 to 2018.
(c)
Reflects third-quarter addition of ten aircraft flown by SkyWest under our CPA to be delivered in 2017 and 2018.

(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party, which are not yet contracted.
(d)In March 2022, management announced its intention to accelerate the removal of the A320 and Q400 aircraft from the operating fleet. Management continues to refine anticipated removal dates for individual aircraft, and as such, timing of removals may shift between 2022 and 2023.

For future firm orders and ifoption exercises, we exercise our options for additional deliveries, we mayintend to finance the aircraft through internally generated cash flow from operations or long-term debt or lease arrangements.debt.




Fuel Hedge Positions


All of our currentfuture 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 benefit fromare hedged against volatile crude oil price increases. During a period of decline in crude oil prices, as there is nowe only forfeit cash outlay other than the premiums we paypreviously paid for hedge premiums. We typically hedge up to enter into the contracts.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
Second Quarter 202250 %$71$3
Third Quarter 202250 %$80$3
Fourth Quarter 202240 %$83$5
Full Year 202247 %$78$4
First Quarter of 202330 %$84$6
Second Quarter of 202320 %$92$7
Third Quarter of 202310 %$100$8
Full Year 202315 %$90$7

34
 Approximate % of Expected Fuel Requirements Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
Fourth Quarter 201750% $61
 $2
First Quarter 201850% 62
 2
Second Quarter 201840% $61
 $2
Third Quarter 201830% 60
 2
Fourth Quarter 201820% 60
 2
Full Year 201835% 61
 2
First Quarter 201910% 62
 2
Total 20192% $62
 $2


Contractual Obligations
 
The following table provides a summary of our principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and othercontractual obligations as of September 30, 2017.March 31, 2022. For agreements with variable terms, amounts included reflect our minimum obligations.
(in millions)Remainder of 20222023202420252026Beyond 2026Total
Debt obligations$201 $334 $240 $261 $176 $1,176 $2,388 
Aircraft lease commitments(a)
235 255 198 193 188 710 1,779 
Facility lease commitments13 16 9 8 8 86 140 
Aircraft-related commitments(b)
1,159 1,781 414 111 47 275 3,787 
Interest obligations (c)
50 95 71 53 53 132 454 
Other obligations (d)
144 193 199 203 199 757 1,695 
Total$1,802 $2,674 $1,131 $829 $671 $3,136 $10,243 
(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)Remainder of 2017 2018 2019 2020 2021 Beyond 2021 Total
Current and long-term debt obligations$55
 $350
 $422
 $449
 $422
 $1,016
 $2,714
Operating lease commitments (a)
111
 415
 409
 380
 335
 1,467
 3,117
Aircraft maintenance deposits (b)
15
 61
 65
 68
 63
 90
 362
Aircraft purchase commitments (c)
168
 956
 806
 352
 273
 355
 2,910
Interest obligations (d)
18
 89
 77
 63
 48
 108
 403
Aircraft maintenance and parts management (e)
8
 32
 35
 37
 40
 —
 152
Other obligations (f)
22
 125
 158
 165
 172
 1,277
 1,919
Total$397
 $2,028
 $1,972
 $1,514
 $1,353
 $4,313
 $11,577
(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations. Contractual commitments do not reflect the impact of the impending fleet transition.
(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 that are operated by SkyWest under capacity purchase agreements.
(b)Aircraft maintenance deposits relate to leased Airbus aircraft.
(c)Represents non-cancelable contractual commitments for aircraft and engines.
(d)For variable-rate debt, future obligations are shown above using interest rates in effect as of September 30, 2017.
(e)Includes minimum obligations under engine and parts management and maintenance agreements with third-party vendors. Subsequent to September 30, 2017, the Company signed a parts management and maintenance agreement which includes minimum obligations of approximately $459 million over a nine-year period, not included in the table above.
(f)Includes minimum obligations associated with the SkyWest third-party CPA.

(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of March 31, 2022.
(d)Comprised of non-aircraft lease costs associated with capacity purchase agreements and other miscellaneous obligations.

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 contractually-specified level,agreement or if our cash and marketable securities balance fallsfell below $500 million.$500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fallsfell below $500 million.$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.



Leased Aircraft Return Costs


For many of our leased aircraft, we are required under the contractual 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 lease. 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. We anticipate recording material expenses and cash outflows to return aircraft in 2022 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.

Deferred 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 difference will reverse, including via asset impairment, 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 or loss and cash taxes payable and refundable in the short termshort-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, pendingany future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believe that we have the liquidity to make our future tax payments.


35

CRITICAL ACCOUNTING ESTIMATES


There have been no material changes to our critical accounting estimatesExcept as described below, for the three months ended September 30, 2017. For information onregarding our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2016.2021.


FREQUENT FLYER PROGRAMS

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

Following the amendment of our agreement with our co-brand bank card partner in the first quarter, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.

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

Following its review of significant Mileage Plan assumptions, the Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. At March 31, 2022, the deferred revenue balance associated with the Mileage Plan program was $2.4 billion. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $7 million impact on annual revenue recognized.


GLOSSARY OF AIRLINE 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 ratio - represents adjusted debt (long-term debt plus the present value of futurecapitalized operating lease payments)leases) divided by total equity plus adjusted debt


Diluted Earnings per Share - represents earnings per share ("EPS")(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 settled fuel-hedging contracts in the period


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 revenues and costs


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

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

36


RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage 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.SkyWest. In this segment, Regional records 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 Alaska and on behalf of 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


37

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
 
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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures


As of September 30, 2017,March 31, 2022, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, 2017.March 31, 2022.
 
Changes in Internal Control over Financial Reporting
 
Except as noted below, thereThere have been no changes in ourthe Company’s internal controlcontrols over financial reporting during the quarter ended September 30, 2017,March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.


In the fourth quarter of 2016, we acquired Virgin America (see Note 2). As permitted by Securities and Exchange Commission Staff interpretive guidance for newly acquired businesses, management excluded Virgin America from its annual evaluation ofOur internal control over financial reporting asis based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of December 31, 2016. We are implementing internal controls over significant processes specific to the acquisition that we believe are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the merger and merger-related transactions. AsSponsoring Organizations of the date of this Quarterly Report on Form 10-Q, we are in the process of further integrating the acquired Virgin America operations into our overall internal controls over financial reporting.Treadway Commission (the COSO Framework).

39




PART II


ITEM 1. LEGAL PROCEEDINGS
 
We areThe Company is a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these mattersits business and with respect to which no material liability is not likelyexpected. Liabilities for litigation related contingencies are recorded when a loss is determined to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant lawbe probable 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.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. 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. Virgin AmericaThe Company believes the claims in this case are without factual and legal meritmerit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and intendsAlaska Airlines, as a successor-in-interest to defendVirgin America, responsible for various damages and penalties sought by the class members. In February 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this lawsuit.filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets.


Alaska is seeking a conclusive U.S. Supreme Court ruling that the California laws on which the judgment is based are invalid as applied to airlines pursuant to the U.S. Constitution and provisions of federal law that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case. If appeal efforts are unsuccessful, compliance with California and other states' laws may have an adverse impact on the Company's operations and financial position.

Like other U.S. airlines, Alaska and Horizon are involved in other litigation around the application of state and local employment laws. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.

ITEM 1A. RISK FACTORS


There have been no material changes to theSee Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for a detailed discussion of risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.Alaska Air Group.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


This table provides certain information with respect to our purchases ofHistorically, the Company purchased shares of our common stock during the third quarter of 2017.
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)
July 1, 2017 - July 31, 20175,770
 $84.37
  
August 1, 2017 - August 31, 2017349,645
 78.52
  
September 1, 2017 - September 30, 2017—
 —
  
Total355,415
 $78.61
 $637

The shares were purchased 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 are effective until October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.


As of March 31, 2022, a total of 1,455,438 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $31.61 (928,127 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


None.

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ITEM 5. OTHER INFORMATION
 
None.




ITEM 6. EXHIBITS
 
The following documents are filed as part of this report:

1.
Exhibits: See Exhibit Index.


1.Exhibits: See Exhibit Index.

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.
ALASKA AIR GROUP, INC./s/ EMILY HALVERSON
Emily Halverson
/s/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller
November 2, 2017May 5, 2022
 

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EXHIBIT INDEX
Exhibit
Number		Exhibit
Description		FormDate of First FilingExhibit Number
3.110-QAugust 3, 20173.1
10.1†*10-Q
31.1†10-Q
31.2†10-Q
32.1†10-Q
32.2†10-Q
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.
101.SCH†XBRL Taxonomy Extension Schema Document
101.CAL†XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†XBRL Taxonomy Extension Label Linkbase Document
101.PRE†XBRL Taxonomy Extension Presentation Linkbase Document
†Filed herewith
*Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

42
Exhibit
Number
Exhibit
Description
FormDate of First FilingExhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-QAugust 3, 20173.1
10.1*
Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended February 14, 2017
10-QMay 5, 201710.1
10.2*
Alaska Air Group Performance Based Pay Plan, Amended and Restated January 18, 2017
10-QMay 5, 201710.2
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q  
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q  
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q  
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q  
101.INS†
XBRL Instance Document
   
101.SCH†
XBRL Taxonomy Extension Schema Document
   
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
   
     
†Filed herewith   
*Indicates management contract or compensatory plan arrangement   


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