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

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

For the quarterly period ended SeptemberJune 30, 20192020
 
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
1-8957
ALASKA AIR GROUP, INC.
Delaware91-1292054
(State of Incorporation)(I.R.S. Employer Identification No.)

19300 International Boulevard,Seattle,WA98188

Telephone:(206)392-5040

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTicker SymbolName of each exchange on which registeredTicker Symbol
Common stock, $0.01 par valueALKNew York Stock ExchangeALK
 
19300 International Boulevard,Seattle,WA98188
Telephone:(206)392-5040

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 ☒  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 ☒ 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 filer☒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 ☒
 
The registrant has 123,173,426123,639,730 common shares, par value $0.01, outstanding at OctoberJuly 31, 2019.2020.

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

1



ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20192020

 TABLE OF CONTENTS

PART I.
4
ITEM 1.
4
ITEM 2.
23
ITEM 3.
4144
ITEM 4.
4245
4346
ITEM 1.
4346
ITEM 1A.
4346
ITEM 2.
4348
ITEM 3.
4348
ITEM 4.
4448
ITEM 5.
4448
ITEM 6.
4449
4449

As used in this Form 10-Q, the terms “Air Group,” the “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. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, 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 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;
our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;
our ability to successfully integrate the Boeing and Airbus operations;
labor disputes and our ability to attract and retain qualified personnel;
operational disruptions;
general economic conditions, including the impact of those conditions on customer travel behavior;
the concentration of our revenue from a few key markets;
an aircraft accident or incident;
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.


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, 2018,2019, and Item 1A. "Risk Factors" included herein.of Part II of this Form 10-Q. 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)June 30, 2020December 31, 2019
ASSETS  
Current Assets  
Cash and cash equivalents$1,509  $221  
Marketable securities1,294  1,300  
Total cash and marketable securities2,803  1,521  
Receivables - net280  323  
Inventories and supplies - net56  72  
Prepaid expenses and other current assets105  121  
Total Current Assets3,244  2,037  
Property and Equipment  
Aircraft and other flight equipment8,257  8,549  
Other property and equipment1,381  1,306  
Deposits for future flight equipment591  533  
 10,229  10,388  
Less accumulated depreciation and amortization3,434  3,486  
Total Property and Equipment - Net6,795  6,902  
Operating lease assets1,568  1,711  
Goodwill1,943  1,943  
Intangible assets - net109  122  
Other noncurrent assets339  278  
Other Assets3,959  4,054  
Total Assets$13,998  $12,993  


4
(in millions)September 30, 2019 December 31, 2018
ASSETS   
Current Assets   
Cash and cash equivalents$237
 $105
Marketable securities1,382
 1,131
Total cash and marketable securities1,619
 1,236
Receivables - net377
 366
Inventories and supplies - net63
 60
Prepaid expenses and other current assets143
 125
Total Current Assets2,202
 1,787
    
Property and Equipment 
  
Aircraft and other flight equipment8,492
 8,221
Other property and equipment1,272
 1,363
Deposits for future flight equipment463
 439
 10,227
 10,023
Less accumulated depreciation and amortization3,393
 3,242
Total Property and Equipment - Net6,834
 6,781
    
Operating lease assets1,647
 —
Goodwill1,943
 1,943
Intangible assets - net123
 127
Other noncurrent assets234
 274
Other Assets3,947
 2,344
    
Total Assets$12,983
 $10,912





CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)June 30, 2020December 31, 2019
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$102  $146  
Accrued wages, vacation and payroll taxes284  470  
Air traffic liability1,131  900  
Deferred payroll support program grant361  —  
Other accrued liabilities327  431  
Deferred revenue555  750  
Current portion of operating lease liabilities273  269  
Current portion of long-term debt1,087  235  
Total Current Liabilities4,120  3,201  
Long-Term Debt, Net of Current Portion1,549  1,264  
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,376  1,439  
Deferred income taxes619  715  
Deferred revenue1,519  1,240  
Obligation for pension and postretirement medical benefits581  571  
Other liabilities373  232  
 4,468  4,197  
Commitments and Contingencies
Shareholders' Equity  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding—  —  
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2020 - 132,989,258 shares; 2019 - 131,812,173 shares, Outstanding: 2020 - 123,639,314 shares; 2019 - 123,000,307 shares1  1  
Capital in excess of par value350  305  
Treasury stock (common), at cost: 2020 - 9,349,944 shares; 2019 - 8,811,866 shares(674) (643) 
Accumulated other comprehensive loss(458) (465) 
Retained earnings4,642  5,133  
 3,861  4,331  
Total Liabilities and Shareholders' Equity$13,998  $12,993  

5
(in millions, except share amounts)September 30, 2019 December 31, 2018
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current Liabilities   
Accounts payable$120
 $132
Accrued wages, vacation and payroll taxes391
 415
Air traffic liability1,032
 788
Other accrued liabilities476
 416
Deferred revenue794
 705
Current portion of operating lease liabilities268
 —
Current portion of long-term debt265
 486
Total Current Liabilities3,346
 2,942
    
Long-Term Debt, Net of Current Portion1,444
 1,617
    
Noncurrent Liabilities 
  
Long-term operating lease liabilities, net of current portion1,376
 —
Deferred income taxes708
 512
Deferred revenue1,177
 1,169
Obligation for pension and postretirement medical benefits467
 503
Other liabilities213
 418
 3,941
 2,602
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: 2019 - 131,770,976 shares; 2018 - 130,813,476 shares, Outstanding: 2019 - 123,277,911 shares; 2018 - 123,194,430 shares1
 1
Capital in excess of par value297
 232
Treasury stock (common), at cost: 2019 - 8,493,065 shares; 2018 - 7,619,046 shares(621) (568)
Accumulated other comprehensive loss(421) (448)
Retained earnings4,996
 4,534
 4,252
 3,751
Total Liabilities and Shareholders' Equity$12,983
 $10,912



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(in millions, except per share amounts)2020201920202019
Operating Revenues    
Passenger revenue$309  $2,111  1,790  3,827  
Mileage Plan other revenue73  118  182  228  
Cargo and other39  59  85  109  
Total Operating Revenues421  2,288  2,057  4,164  
Operating Expenses  
Wages and benefits472  567  1,084  1,124  
Variable incentive pay16  44  23  79  
Payroll support program grant wage offset(362) —  (362) —  
Aircraft fuel, including hedging gains and losses59  502  443  922  
Aircraft maintenance45  115  160  235  
Aircraft rent74  82  155  165  
Landing fees and other rentals83  113  214  245  
Contracted services30  70  102  142  
Selling expenses4  87  59  159  
Depreciation and amortization107  105  215  211  
Food and beverage service7  53  56  102  
Third-party regional carrier expense26  42  63  83  
Other78  136  221  274  
Special items - merger-related costs1  8  4  34  
Special items - impairment charges and other69  —  229  —  
Total Operating Expenses709  1,924  2,666  3,775  
Operating Income (Loss)(288) 364  (609) 389  
Nonoperating Income (Expense)  
Interest income7  11  16  20  
Interest expense(17) (20) (30) (42) 
Interest capitalized1  3  4  7  
Other—net6  (7) 11  (17) 
Total Nonoperating Income (Expense)(3) (13) 1  (32) 
Income (Loss) Before Income Tax(291) 351  (608) 357  
Income tax (benefit) expense(77) 89  (162) 91  
Net Income (Loss)$(214) $262  $(446) $266  
Basic Earnings (Loss) Per Share:$(1.74) $2.12  $(3.62) $2.15  
Diluted Earnings (Loss) Per Share:$(1.73) $2.11  $(3.60) $2.14  
Shares used for computation: 
Basic123.296  123.418  123.058  123.355  
Diluted123.965  124.301  123.685  124.179  

6
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except per share amounts)2019 2018 2019 2018
Operating Revenues       
Passenger revenue$2,211
 $2,043
 6,038
 5,724
Mileage Plan other revenue118
 114
 346
 329
Cargo and other60
 55
 169
 147
Total Operating Revenues2,389
 2,212
 6,553
 6,200
Operating Expenses     
  
Wages and benefits608
 549
 1,732
 1,629
Variable incentive pay46
 27
 125
 104
Aircraft fuel, including hedging gains and losses486
 513
 1,408
 1,397
Aircraft maintenance106
 107
 341
 320
Aircraft rent82
 82
 247
 233
Landing fees and other rentals143
 135
 388
 371
Contracted services72
 70
 214
 227
Selling expenses77
 79
 236
 245
Depreciation and amortization106
 99
 317
 290
Food and beverage service57
 53
 159
 158
Third-party regional carrier expense42
 38
 125
 114
Other137
 141
 411
 423
Special items - merger-related costs5
 22
 39
 67
Special items - other—
 —
 —
 25
Total Operating Expenses1,967
 1,915
 5,742
 5,603
Operating Income422
 297
 811
 597
Nonoperating Income (Expense)     
  
Interest income11
 11
 31
 29
Interest expense(18) (22) (60) (71)
Interest capitalized4
 5
 11
 14
Other—net(3) (7) (20) (20)
Total Nonoperating Income (Expense)(6) (13) (38) (48)
Income Before Income Tax416
 284
 773
 549
Income tax expense94
 67
 185
 135
Net Income$322
 $217
 $588
 $414
        
Basic Earnings Per Share:$2.61
 $1.76
 $4.76
 $3.36
Diluted Earnings Per Share:$2.60
 $1.75
 $4.74
 $3.34
Shares used for computation:       
Basic123.280
 123.224
 123.330
 123.216
Diluted124.067
 123.864
 124.051
 123.804



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(in millions)2020201920202019
Net Income (Loss)$(214) $262  $(446) $266  
Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period31  13  30  27  
Reclassification of (gain) loss into Other - net nonoperating income (expense)(6) —  (9) 2  
Income tax effect(6) (3) (5) (7) 
Total19  10  16  22  
Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)8  8  15  16  
Income tax effect(2) (2) (4) (4) 
Total6  6  11  12  
Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period(2) (7) (27) (12) 
Reclassification of loss into Aircraft rent—  —  1  1  
Income tax effect1  2  6  3  
Total(1) (5) (20) (8) 
Other Comprehensive Income (Loss)24  11  7  26  
Comprehensive Income (Loss)$(190) $273  $(439) $292  




7
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions)2019 2018 2019 2018
Net Income$322
 $217
 $588
 $414
        
Other Comprehensive Income (Loss):       
Related to marketable securities:       
Unrealized holding gain (loss) arising during the period4
 (2) 31
 (19)
Reclassification of (gain) loss into Other - net nonoperating income (expense)(5) 2
 (3) 5
Income tax effect—
 1
 (7) 4
Total(1) 1
 21
 (10)
        
Related to employee benefit plans:       
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)8
 7
 24
 21
Income tax effect(2) (2) (6) (5)
Total6
 5
 18
 16
        
Related to interest rate derivative instruments:       
Unrealized holding gain (loss) arising during the period(5) —
 (17) 8
Reclassification of loss into Aircraft rent1
 2
 2
 3
Income tax effect—
 (1) 3
 (3)
Total(4) 1
 (12) 8
        
Other Comprehensive Income1
 7
 27
 14
        
Comprehensive Income$323
 $224
 $615
 $428






CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(in millions)Common Stock Outstanding Common Stock Capital in Excess of Par Value Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
Balances at December 31, 2018123.194
 $1
 $232
 $(568) $(448) $4,534
 $3,751
Cumulative effect of accounting changes(a)
—
 —
 —
 —
 —
 3
 3
Net income—
 —
 —
 —
 —
 4
 4
Other comprehensive income (loss)—
 —
 —
 —
 15
 —
 15
Common stock repurchase(0.215) —
 —
 (13) —
 —
 (13)
Stock-based compensation—
 —
 12
 —
 —
 —
 12
Cash dividend declared
($0.35 per share)		—
 —
 —
 —
 —
 (43) (43)
Stock issued for employee stock purchase plan0.391
 —
 20
 —
 —
 . 20
Stock issued under stock plans0.134
 —
 (3) —
 —
 —
 (3)
Balances at March 31, 2019123.504
 $1
 $261
 $(581) $(433) $4,498
 $3,746
Net income—
 —
 —
 —
 —
 262
 262
Other comprehensive income (loss)—
 —
 —
 —
 11
 —
 11
Common stock repurchase(0.194) —
 —
 (12) —
 —
 (12)
Stock-based compensation—
 —
 9
 —
 —
 —
 9
Cash dividend declared
($0.35 per share)		—
 —
 —
 —
 —
 (43) (43)
Stock issued under stock plans0.028
 —
 —
 —
 —
 —
 —
Balances at June 30, 2019123.338
 $1
 $270
 $(593) $(422) $4,717
 $3,973
Net income—
 —
 —
 —
 —
 322
 322
Other comprehensive income (loss)—
 —
 —
 —
 1
 —
 1
Common stock repurchase(0.465) —
 —
 (28) —
 —
 (28)
Stock-based compensation—
 —
 7
 —
 —
 —
 7
Cash dividend declared
($0.35 per share)		—
 —
 —
 —
 —
 (43) (43)
Stock issued for employee stock purchase plan0.394
 —
 20
 —
 —
 —
 20
Stock issued under stock plans0.011
 —
 —
 —
 —
 —
 —
Balances at September 30, 2019123.278
 $1
 $297
 $(621) $(421) $4,996
 $4,252

(a)Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.
















(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2019123.000$1  $305  $(643) $(465) $5,133  $4,331  
Net loss—  —  —  —  —  (232) (232) 
Other comprehensive income (loss)—  —  —  —  (17) —  (17) 
Common stock repurchase(0.538) —  —  (31) —  —  (31) 
Stock-based compensation—  —  9—  —  —  9  
Cash dividend declared
($0.375 per share)
—  —  —  —  —  (45) (45) 
Stock issued under stock plans0.123—  —  —  —  —  —  
Balances at March 31, 2020122.585$1  $314  $(674) $(482) $4,856  $4,015  
Net loss—  —  —  —  —  (214) (214) 
Other comprehensive income (loss)—  —  —  —  24  —  24  
Stock-based compensation—  —  2—  —  —  2  
CARES Act warrant issuance—  —  7—  —  —  7  
Stock issued for employee stock purchase plan1.000  —  27  —  —  —  27  
Stock issued under stock plans0.054—  —  —  —  —  —  
Balances at June 30, 2020123.639$1  $350  $(674) $(458) $4,642  $3,861  
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2018123.194  $1  $232  $(568) $(448) $4,534  $3,751  
Cumulative effect of accounting changes(a)
—  —  —  —  —  3  3  
Net income—  —  —  —  —  4  4  
Other comprehensive income (loss)—  —  —  —  15  —  15  
Common stock repurchase(0.215) —  —  (13) —  —  (13) 
Stock-based compensation—  —  12  —  —  —  12  
Cash dividend declared
($0.35 per share)
—  —  —  —  —  (43) (43) 
Stock issued for employee stock purchase plan0.391  —  20  —  —  —  20  
Stock issued under stock plans0.134  —  (3) —  —  —  (3) 
Balances at March 31, 2019123.504  $1  $261  $(581) $(433) $4,498  $3,746  
Net income—  —  —  —  —  262  262  
Other comprehensive income (loss)—  —  —  —  11  —  11  
Common stock repurchase(0.194) —  —  (12) —  —  (12) 
Stock-based compensation—  —  9  —  —  —  9  
Cash dividend declared
($0.35 per share)
—  —  —  —  —  (43) (43) 
Stock issued under stock plans0.028  —  —  —  —  —  —  
Balances at June 30, 2019123.338  $1  $270  $(593) $(422) $4,717  $3,973  

(a)Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.
8
(in millions)Common Stock Outstanding Common Stock Capital in Excess of Par Value Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
Balances at December 31, 2017123.061
 $1
 $164
 $(518) $(380) $4,193
 $3,460
Reclassification of tax effects to Retained Earnings—
 —
 —
 —
 (62) 62
 —
Net income—
 —
 —
 —
 —
 4
 4
Other comprehensive income (loss)—
 —
 —
 —
 2
 —
 2
Common stock repurchase(0.186) —
 —
 (13) —
 —
 (13)
Stock-based compensation—
 —
 12
 —
 —
 —
 12
Cash dividend declared
($0.32 per share)		—
 —
 —
 —
 —
 (40) (40)
Stock issued for employee stock purchase plan0.312
 —
 17
 —
 —
 —
 17
Stock issued under stock plans0.163
 —
 (3) —
 —
 —
 (3)
Balances at March 31, 2018123.350
 $1
 $190
 $(531) $(440) $4,219
 $3,439
Net income—
 —
 —
 —
 —
 193
 193
Other comprehensive income (loss)—
 —
 —
 —
 5
 —
 5
Common stock repurchase(0.204) —
 —
 (13) —
 —
 (13)
Stock-based compensation—
 —
 9
 —
 —
 —
 9
Cash dividend declared
($0.32 per share)		—
 —
 —
 —
 —
 (39) (39)
Stock issued under stock plans0.058
 —
 (1) —
 —
 —
 (1)
Balances at June 30, 2018123.204
 $1
 $198
 $(544) $(435) $4,373
 $3,593
Net income—
 —
 —
 —
 —
 217
 217
Other comprehensive income (loss)—
 —
 —
 —
 7
 —
 7
Common stock repurchase(0.193) —
 —
 (12) —
 —
 (12)
Stock-based compensation—
 —
 8
 —
 —
 —
 8
Cash dividend declared
($0.32 per share)		—
 —
 —
 —
 —
 (40) (40)
Stock issued for employee stock purchase plan0.320
 —
 18
 —
 —
 —
 18
Stock issued under stock plans0.030
 —
 —
 —
 —
 —
 —
Balances at September 30, 2018123.361
 $1
 $224
 $(556) $(428) $4,550
 $3,791

















CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
(in millions)20202019
Cash flows from operating activities:  
Net income (Loss)$(446) $266  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization215  211  
Stock-based compensation and other7  16  
Special items - impairment charges and other229  —  
Payroll support program grant wage offset(362) —  
Changes in certain assets and liabilities:
Payroll support program grant funding723  —  
Changes in deferred tax provision(98) 62  
Increase in air traffic liability231  385  
Increase in deferred revenue84  75  
Other - net(262) 18  
Net cash provided by operating activities321  1,033  
Cash flows used in investing activities:  
Property and equipment additions:  
Aircraft and aircraft purchase deposits(58) (172) 
Other flight equipment(43) (83) 
Other property and equipment(67) (78) 
Total property and equipment additions, including capitalized interest(168) (333) 
Purchases of marketable securities(1,004) (885) 
Sales and maturities of marketable securities1,038  663  
Other investing activities10  25  
Net cash used in investing activities(124) (530) 
Cash flows from financing activities:  
Proceeds from issuance of debt1,265  254  
Common stock repurchases(31) (25) 
Dividends paid(45) (86) 
Long-term debt payments(125) (532) 
Other financing activities27  26  
Net cash provided by (used in) financing activities1,091  (363) 
Net increase in cash, cash equivalents, and restricted cash1,288  140  
Cash, cash equivalents, and restricted cash at beginning of year232  114  
Cash, cash equivalents, and restricted cash at end of the period$1,520  $254  
Cash paid during the period for:
Interest (net of amount capitalized)$25  $34  
Income taxes—  —  
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents$1,509  $244  
Restricted cash included in Prepaid expenses and other current assets11  10  
Total cash, cash equivalents, and restricted cash at end of the period$1,520  $254  

9
 Nine Months Ended September 30,
(in millions)2019 2018
Cash flows from operating activities:   
Net income$588
 $414
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Depreciation and amortization317
 290
Stock-based compensation and other20
 34
Changes in certain assets and liabilities:   
Changes in deferred tax provision187
 122
Increase in air traffic liability244
 144
Increase in deferred revenue97
 106
Pension contribution(65) —
Other—net(7) (124)
Net cash provided by operating activities1,381
 986
Cash flows from investing activities: 
  
Property and equipment additions: 
  
Aircraft and aircraft purchase deposits(286) (349)
Other flight equipment(125) (76)
Other property and equipment(116) (129)
Total property and equipment additions, including capitalized interest(527) (554)
Purchases of marketable securities(1,446) (672)
Sales and maturities of marketable securities1,228
 857
Other investing activities37
 36
Net cash used in investing activities(708) (333)
Cash flows from financing activities: 
  
Proceeds from issuance of debt356
 —
Long-term debt payments(752) (544)
Common stock repurchases(53) (37)
Dividends paid(129) (118)
Other financing activities40
 33
Net cash used in financing activities(538) (666)
Net increase (decrease) in cash, cash equivalents, and restricted cash135
 (13)
Cash, cash equivalents, and restricted cash at beginning of year114
 197
Cash, cash equivalents, and restricted cash at end of the period$249
 $184
    
Cash paid during the period for:   
Interest (net of amount capitalized)$48
 $60
Income taxes, net of refunds received2
 —
    
Reconciliation of cash, cash equivalents, and restricted cash at end of the period   
Cash and cash equivalents$237
 $174
Restricted cash included in Prepaid expenses and other current assets12
 10
Total cash, cash equivalents, and restricted cash at end of the period$249
 $184



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 (including Virgin America in 2018) and Horizon. The condensed consolidated financial statements also include McGee Air Services (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) 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, 2018.2019. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of SeptemberJune 30, 20192020 and the results of operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. Such adjustments were of a normal recurring nature.


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

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 COVID-19 pandemic on the Company's business, these estimates and assumptions require more judgment than they would be 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 ninesix months ended SeptemberJune 30, 20192020 are not necessarily indicative of operating results for the entire year.


Recently Adopted Accounting Pronouncement

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an "expected credit loss model" on certain financial instruments. The ASU also amends the impairment model for available-for-sale debt securities, and requires the estimation of credit losses to be recorded as allowances instead of reductions to amortized cost. The ASU was effective for the Company beginning January 1, 2020, and was adopted prospectively, but it did not have a significant impact on the Company's financial statements and disclosures.

NOTE 2. COVID-19 PANDEMIC

The public health and economic crises resulting from the outbreak of the novel coronavirus (COVID-19) beginning in the first quarter of 2020 has had an unprecedented impact on the Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Consistent with expectations, the financial impact to the second quarter was more significant than the first quarter. There continue to be travel restrictions in place throughout the United States, and the resurgence in COVID-19 cases threatens to halt or reverse progress towards reopening in many states and cities. It is uncertain when these restrictions may lift and when demand may return.

In response to the COVID-19 pandemic, the Company implemented a "Peace-of-Mind" waiver, which allows travelers to book tickets for travel for a specified period of time that can be changed or canceled without incurring change fees. In the second quarter, the waiver has been extended to cover all ticketed travel purchased through September 8, 2020. Cancellations and postponement of travel exceeded new bookings in March and April, and had a material impact on second quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.

The Company has taken decisive action to reduce costs and preserve cash and liquidity. In the first quarter, the Company implemented a company-wide hiring freeze, reduced salaries of senior management and hours for management employees, suspended annual pay increases and solicited voluntary leaves of absence. In addition to these payroll saving measures, the Company has actively negotiated with vendor partners to reduce contractual minimums and spending in line with the reduction in demand.

With demand dramatically depressed, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from service. As of June 30, 2020, 101 mainline aircraft were temporarily grounded. The
10

Company made the decision in the first quarter of 2020 to permanently remove 12 Airbus aircraft from the operating fleet. As of June 30, 2020, all operating regional aircraft were in service.

Valuation of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable.

To determine if impairment exists, a recoverability test is performed comparing the sum of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.

Given the temporary and permanent parking of certain aircraft described above, the Company performed impairment tests on certain long-lived assets as of March 31, 2020 and again as of June 30, 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in the first quarter of 2020.

In the first quarter, the Company recorded an impairment charge of $83 million for the 12 permanently parked Airbus aircraft, which was comprised of operating lease right of use assets, estimable return costs, and related leasehold improvements. In the second quarter, the Company identified additional estimable return costs relating to those permanently parked aircraft, and recorded an additional $70 million charge.

Also in the first quarter, the Company recorded an impairment charge of $58 million reflecting the amount for which carrying value exceeded fair value of the Q400 fleet. The Company also recorded additional impairment charges relating to 2 non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.

A summary of the impairment charges recorded for aircraft and other flight equipment in the condensed consolidated statement of operations for the six months ended June 30, 2020 is as follows (in millions):
Airbus AircraftQ400 AircraftTotal Impairment
Aircraft and other flight equipment, net$11  $58  $69  
Operating lease assets62  —  62  
Inventory and supplies - net2  —  2  
Prepaid expenses and other current assets—  3  3  
Other accrued liabilities78  —  78  
Total impairment charges - Long-lived assets$153  $61  $214  

The Company will continue to evaluate the need for further impairment of long-lived assets as expectations of future demand, market conditions and fleet decisions evolve.

Valuation of intangible assets and goodwill

The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.

Given strain in the general economic environment and a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types as of March 31, 2020 and again as of June 30, 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $10 million was recorded in the first quarter. No additional impairment charges were identified for definite-lived intangibles as a result of the June 30, 2020 impairment test.

Other considerations

The Company also evaluated outstanding receivable balances for risk of non-payment. The Company identified a $5 million receivable from a vendor that filed for bankruptcy during the first quarter. The Company fully expects to file a bankruptcy claim but, as the note is unsecured, management determined that collectability is not probable. Therefore, the full $5 million
11

was reserved and charged to Special charges - impairment charges and other in the condensed consolidated statement of operations in the first quarter.

For the three and six months ended June 30, 2020, the Company concluded that the use of a year-to-date effective tax rate estimate was more appropriate than the annual effective tax rate method as estimates of the Company's full-year loss is not reliable at this time given the uncertainty of the travel demand environment.

Although it is not certain when the impacts of COVID-19 will subside and demand for air travel will return, the Company has implemented meaningful plans to reduce expenses, build liquidity and preserve cash. At June 30, 2020, given the balance of cash, cash equivalents and marketable securities, as well as anticipated access to liquidity and cash flows from future operations, the Company expects it will meet all cash obligations, as well as remain in compliance with the financial debt covenants in its existing financing arrangements, for the next 12 months. Refer to Note 5. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.

CARES Act Funding

During the second quarter, Alaska, Horizon, and McGee finalized agreements with the U.S. Department of the Treasury through the payroll support program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under the PSP and associated agreements, Alaska and Horizon received $992 million in the second quarter. Similarly, McGee entered into an agreement to receive a total of $30 million, of which $15 million was received in the second quarter, with the remainder expected to be received in two installments in the third quarter.

The funds are to be used exclusively toward continuing to pay employee salaries, wages and benefits. Upon receipt of the funds, the Company is subject to various conditions, including, but not limited to, refraining from conducting involuntary furloughs or reducing employee rates of pay through September 30, 2020 and placing limits on executive compensation. Other conditions also prohibit the Company from repurchasing common stock and from paying dividends until September 30, 2021, and require the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation.

The funds received took the form of debt, warrants and a grant. The secured debt portion of $276 million was recorded at par. An additional $5 million of debt is expected to be issued in the third quarter as the remaining $15 million in funding is received by McGee. See Note 5 for further discussion. Warrants of $7 million were recorded on the condensed consolidated balance sheet at fair value determined using the Black-Scholes model. The residual amount of $723 million was recorded as grant proceeds on the condensed consolidated balance sheet as a deferred wage offset. The grant will be recognized into earnings as eligible wages, salaries and benefits are incurred. During the three months ended June 30, 2020, the Company recognized $362 million of the PSP grant proceeds as a wage offset.

NOTE 3. REVENUE

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

The Company disaggregates revenue by segment in Note 9. The details within the Company’s 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.

12

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Passenger ticket revenue, including ticket breakage and net of taxes and fees$222  $1,792  $1,435  $3,231  
Passenger ancillary revenue31  147  147  271  
Mileage Plan passenger revenue56  172  208  325  
Total Passenger revenue$309  $2,111  $1,790  $3,827  
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Passenger ticket revenue, including ticket breakage and net of taxes and fees$1,868
 $1,744
 $5,099
 $4,864
Passenger ancillary revenue157
 146
 428
 401
Mileage Plan passenger revenue186
 153
 511
 459
Total Passenger revenue$2,211
 $2,043
 $6,038
 $5,724




Mileage Plan™ Loyalty Program

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Passenger revenue$56  $172  $208  $325  
Mileage Plan other revenue73  118  182  228  
Total Mileage Plan revenue$129  $290  $390  $553  
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Passenger revenue$186
 $153
 $511
 $459
Mileage Plan other revenue118
 114
 346
 329
Total Mileage Plan revenue$304
 $267
 $857
 $788


Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Cargo revenue$28  $38  $52  $68  
Other revenue11  21  33  41  
Total Cargo and other revenue$39  $59  $85  $109  
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Cargo revenue$36
 $36
 $104
 $96
Other revenue24
 19
 65
 51
Total Cargo and other revenue$60
 $55
 $169
 $147


Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $19$484 million and $27$563 million from the prior year-end air traffic liability balance for the threesix months ended SeptemberJune 30, 20192020 and 2018,2019.

Given the ongoing reduction in demand for air travel stemming from the COVID-19 pandemic, the Company has observed unprecedented declines in advance bookings and $582associated cash receipts. The Company also saw significant cancellations beginning in March 2020, which has led to cash refunds or the issuance of credits for future travel. Since the onset of the pandemic, the Company has issued cash refunds of $363 million and $540credits for future travel of $695 million. At June 30, 2020, such credits, which are included in the air traffic liability balance, totaled $568 million, net of breakage. In April 2020, the Company announced updated expiration terms for these credits, extending to July 2021. At this time, the nine months ended September 30, 2019Company is unable to estimate how and 2018.when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demand for air travel.

Mileage PlanTM assets and liabilities

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $103 $42 million of such receivables as of SeptemberJune 30, 20192020 and $119$105 million as of December 31, 2018.2019. Consistent with the significant cancellation activity outlined above, the Company saw a substantial number of redeposits in the second quarter. Given the uncertainty around the return in demand for air travel, the Company is unable to determine how and when mileage credits will be recognized in earnings.
13


The table below presents a roll forward of the total frequent flyer liability (in millions):
  Nine Months Ended September 30,
  2019 2018
Total Deferred Revenue balance at January 1 $1,874
 $1,725
Travel miles and companion certificate redemption - Passenger revenue (511) (459)
Miles redeemed on partner airlines - Other revenue (84) (66)
Increase in liability for mileage credits issued 692
 631
Total Deferred Revenue balance at September 30 $1,971
 $1,831

Six Months Ended June 30,
20202019
Total Deferred Revenue balance at January 1$1,990  $1,874  
Travel miles and companion certificate redemption - Passenger revenue(208) (325) 
Miles redeemed on partner airlines - Other revenue(21) (51) 
Increase in liability for mileage credits issued313  451  
Total Deferred Revenue balance at June 30$2,074  $1,949  
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 SeptemberJune 30, 2019,2020, total cost basis for all marketable securities was $1.4$1.3 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):
June 30, 2020December 31, 2019
Level 1Level 2TotalLevel 1Level 2Total
Assets
Marketable securities
U.S. government and agency securities$281  $—  $281  $330  $—  $330  
Equity mutual funds5  —  5  6  —  6  
Foreign government bonds—  22  22  —  31  31  
Asset-backed securities—  197  197  —  211  211  
Mortgage-backed securities—  214  214  —  176  176  
Corporate notes and bonds—  546  546  —  523  523  
Municipal securities—  29  29  —  23  23  
Total Marketable securities286  1,008  1,294  336  964  1,300  
Derivative instruments
Fuel hedge—call options—  5  5  —  11  11  
Interest rate swap agreements—  —  —  —  3  3  
Total Assets$286  $1,013  $1,299  $336  $978  $1,314  
Liabilities
Derivative instruments
Interest rate swap agreements—  (33) (33) —  (10) (10) 
Total Liabilities$—  $(33) $(33) $—  $(10) $(10) 
 September 30, 2019 December 31, 2018
 Level 1 Level 2 Total Level 1 Level 2 Total
Assets           
Marketable securities           
U.S. government and agency securities$379
 $—
 $379
 $293
 $—
 $293
Equity mutual funds5
 —
 5
 —
 —
 —
Foreign government bonds—
 25
 25
 —
 26
 26
Asset-backed securities—
 201
 201
 —
 190
 190
Mortgage-backed securities—
 142
 142
 —
 92
 92
Corporate notes and bonds—
 609
 609
 —
 520
 520
Municipal securities—
 21
 21
 —
 10
 10
Total Marketable securities384
 998
 1,382
 293
 838
 1,131
Derivative instruments           
Fuel hedge—call options—
 7
 7
 —
 4
 4
Interest rate swap agreements—
 2
 2
 —
 10
 10
Total Assets$384
 $1,007
 $1,391
 $293
 $852
 $1,145
            
Liabilities           
Derivative instruments           
Interest rate swap agreements—
 (14) (14) —
 (7) (7)
Total Liabilities$—
 $(14) $(14) $—
 $(7) $(7)

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
14

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 is 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

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairmentsare the result of expected credit losses based on its evaluation of available information as of SeptemberJune 30, 2019.2020.










Maturities for marketable securities (in millions):
June 30, 2020Cost BasisFair Value
Due in one year or less$133  $134  
Due after one year through five years1,063  1,094  
Due after five years through 10 years60  61  
Total$1,256  $1,289  
September 30, 2019Cost Basis Fair Value
Due in one year or less$244
 $244
Due after one year through five years1,105
 1,118
Due after five years through 10 years15
 15
Total$1,364
 $1,377


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, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

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

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of SeptemberJune 30, 2019,2020, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
June 30, 2020December 31, 2019
Fixed-rate debt at cost$444  $473  
Non-recurring purchase price accounting fair value adjustment2  2  
Total fixed-rate debt$446  $475  
Estimated fair value$463  $483  
 September 30, 2019 December 31, 2018
Fixed-rate debt at cost$567
 $639
Non-recurring purchase price accounting fair value adjustment2
 3
Total fixed-rate debt$569
 $642
    
Estimated fair value$584
 $641


Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded during the three and six months ended June 30, 2020. No material impairment charges were taken inrecorded during the three and ninesix months ended SeptemberJune 30, 2019 and September 30, 2018.

2019.

15


NOTE 4.5. LONG-TERM DEBT
 
Long-term debt obligations on the condensed consolidated balance sheet (in millions):
 June 30, 2020December 31, 2019
Fixed-rate notes payable due through 2029$446  $475  
Fixed-rate PSP notes payable due through 2030276  —  
Variable-rate notes payable due through 20291,925  1,032  
Less debt issuance costs(11) (8) 
Total debt2,636  1,499  
Less current portion1,087  235  
Long-term debt, less current portion$1,549  $1,264  
Weighted-average fixed-interest rate2.4 %3.3 %
Weighted-average variable-interest rate2.0 %2.9 %
 September 30, 2019 December 31, 2018
Fixed-rate notes payable due through 2029$569
 $642
Variable-rate notes payable due through 20291,150
 1,473
Less debt issuance costs(10) (12)
Total debt1,709
 2,103
Less current portion265
 486
Long-term debt, less current portion$1,444
 $1,617
    
Weighted-average fixed-interest rate3.4% 4.1%
Weighted-average variable-interest rate3.2% 3.9%


Approximately $745$666 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at SeptemberJune 30, 2019.

2020.

During the ninesix months ended SeptemberJune 30, 2019, the Company made debt payments of $752 million, including the prepayment of $532 million of debt. During the nine months ended September 30, 2019,2020, the Company obtained additional secured debt financing of $356$589 million from multiple lenders. The new debt is secured by a total of 1232 aircraft. The Company also made scheduled debt payments of $125 million during the six months ended June 30, 2020.
The $276 million PSP note is an unsecured senior term loan with a 10-year term, bearing an interest rate of 1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The loan is prepayable at par at any time. Alaska and Horizon PSP proceeds were deposited into an account which will be drawn down over time for payroll expenses. That account and the balance of the proceeds will serve as the only collateral for the loan.


At SeptemberJune 30, 20192020 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 Total
Remainder of 2020$529  
2021742  
2022281  
2023245  
2024153  
Thereafter695  
Total$2,645  
 Total
Remainder of 2019$63
2020268
2021313
2022274
2023234
Thereafter565
Total$1,717
Subsequent to quarter end, the Company obtained $1.2 billion in private funding through the issuance of Enhanced Equipment Trust Certificates (EETC). The EETCs are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft.

Bank Lines of Credit
 
The Company has 3 credit facilities with availabilitycapacity totaling $516 million, and availability of $509 million, as of SeptemberJune 30, 2019.2020. All 3 facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. A second credit facility with capacity of $150 million and availability of $143 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The secondthird credit facility for $116 million expires in July 2020, with a mechanism for annual renewal, and is secured by aircraft. A third

16

During the six months ended June 30, 2020, the Company drew $400 million on the first 2 existing facilities. In the second quarter, the Company repaid $7 million on the second credit facility for $150 million expires in March 2022facility. The Company has drawn the full availability of both facilities, and the outstanding balance is secured by certain accounts receivable, spare engines, spare parts and ground service equipment.classified as short-term on the condensed consolidated balance sheet. The Company also has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities.facility. All 3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million.$500 million. The Company was in compliance with this covenant at SeptemberJune 30, 2019.2020.

NOTE 5. LEASES

In 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for certain operating leases. Under the new standard, a lessee must recognize a liability on the balance sheet representing the lease payments owed, and a lease asset representing its right to use the underlying asset for the lease term. In 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)," which amended Topic 842 to provide a transition method that would not require adjusting comparative period financial information.
The Company transitioned to the new lease accounting standard effective January 1, 2019 utilizing the alternative transition method. Upon transition, the Company recorded a cumulative-effect adjustment to the opening balance of retained earnings of $3 million. The new standard eliminated build-to-suit lease accounting guidance and resulted in the derecognition of build-to-suit assets and liabilities of approximately $150 million each.


The Company elected certain practical expedients under the standard, including the practical expedient allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of 12 months or less. Such expense was not material for the nine months ended September 30, 2019. Additionally, the Company elected the available package of practical expedients allowing for no reassessment of lease classification for existing leases, no reassessment of expired contracts, and no reassessments of initial direct costs for existing leases.
The Company has five asset classes for operating leases: aircraft, capacity purchase arrangements with aircraft (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the condensed consolidated balance sheet as of September 30, 2019 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Consistent with past accounting, operating rent expense is recognized on a straight-line basis over the term of the lease.
At September 30, 2019, the Operating lease assets balance by asset class was as follows (in millions):
 Operating lease assets
Aircraft$974
CPA aircraft609
Airport and terminal facilities18
Corporate real estate and other46
Total Operating lease assets$1,647

Aircraft
At September 30, 2019, the Company had operating leases for 10 Boeing 737 (B737), 62 Airbus, and 8 Bombardier Q400 aircraft. Additionally, the Company operates 32 Embraer 175 (E175) aircraft through its capacity purchase arrangement with SkyWest Airlines, Inc. (SkyWest). Remaining lease terms for these aircraft extend up to 12 years, with options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft was $1 million and $4 million for the three and nine months ended September 30, 2019, respectively.
Capacity purchase agreements with aircraft (CPA aircraft)
At September 30, 2019, Alaska had CPAs with three carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada, and with Peninsula Aviation Services, 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. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard. The agreement with PenAir does not contain a leasing arrangement, resulting in no asset or liability recognized.
Remaining lease terms for CPA aircraft range from 8 years to 11 years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft and is capitalized under the new lease accounting standard. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the three and nine months ended September 30, 2019 was not material.
Airport and terminal facilities
The Company leases ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense was $86 million and $231 million for the three and nine months ended September 30, 2019, respectively.
In 2018, the Company leased 12 airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. For these leases, the Company recorded $3 million and $9 million of lease income during the three and nine months ended September 30, 2019, respectively.



Corporate real estate and other leases
Leased corporate real estate is primarily for office space in hub cities, data centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators and spare engines. Variable lease expense related to corporate real estate and other leases for the nine months ended September 30, 2019 was $8 million.
Components of Lease Expense
The impact of leases, including variable lease cost, on earnings for the three and nine months ended September 30, 2019 was as follows (in millions):
 ClassificationThree Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Expense    
AircraftAircraft rent$62
 $186
CPA aircraftAircraft rent20
 61
Airport and terminal facilitiesLanding fees and other rentals87
 233
Corporate real estate and otherLanding fees and other rentals5
 14
Total lease expense $174
 $494
Revenue    
Lease incomeCargo and other revenues(3) (9)
Net lease impact $171
 $485

Total rent expense for the three and nine months ended September 30, 2018 was $165 million and $455 million, respectively.
Supplemental Cash Flow Information
Supplemental cash flow information related to leases was as follows (in millions):
 Nine Months Ended September 30, 2019
Cash paid for capitalized operating leases$259
Operating lease assets obtained in exchange for lease obligations$47

Lease Term and Discount Rate
As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at September 30, 2019:
 Weighted Average IBR Weighted Average Remaining Lease Term
Aircraft4.1% 6.7
CPA aircraft4.3% 9.5
Airports and terminal facilities4.1% 10.2
Corporate real estate and other4.3% 36.4







Maturities of Lease Liabilities
Future minimum lease payments under non-cancellable leases as of September 30, 2019 (in millions):
 Aircraft CPA Aircraft Airport and Terminal Facilities Corporate Real Estate & Other
Remainder of 2019$63
 $20
 1
 $2
2020234
 79
 3
 7
2021196
 79
 3
 6
2022171
 79
 2
 4
2023116
 79
 2
 4
Thereafter330
 408
 12
 77
Total lease payments$1,110
 $744
 $23
 $100
Less: Imputed interest(140) (135) (4) (54)
Total operating lease liabilities$970
 $609
 $19
 $46

All future lease contracts have remaining non-cancelable lease terms ranging from 2019 to 2031.
NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): 
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Service cost$13  $10  $26  $21  
Pension expense included in Wages and benefits13  10  26  21  
Interest cost19  22  38  44  
Expected return on assets(27) (23) (55) (47) 
Recognized actuarial loss8  9  17  18  
Pension expense included in Nonoperating Income (Expense)$—  $8  $—  $15  
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Service cost$11
 $12
 $32
 $36
Pension expense included in Wages and benefits11
 12
 32
 36
        
Interest cost23
 20
 67
 59
Expected return on assets(24) (27) (71) (80)
Amortization of prior service cost (credit)(1) (1) (1) (1)
Recognized actuarial loss9
 9
 27
 25
Pension expense included in Nonoperating Income (Expense)$7
 $1
 $22
 $3


The Company made a voluntary contribution of $65 million to three defined-benefit pension plans during the three months ended September 30, 2019.


NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments excluding operating leases, as of SeptemberJune 30, 20192020 (in millions):
Aircraft Commitments(a)
Capacity Purchase Agreements (b)
Aircraft Maintenance Deposits
Remainder of 2020$335  $36  $12  
2021554  166  53  
2022337  174  45  
2023186  179  24  
202418  184  6  
Thereafter25  880  2  
Total$1,455  $1,619  $142  
 
Aircraft Commitments(a)
 
Capacity Purchase Agreements (b)
 Aircraft Maintenance Deposits
Remainder of 2019$111
 $34
 $16
2020504
 145
 73
2021475
 166
 63
2022333
 174
 54
2023194
 179
 29
Thereafter36
 1,065
 10
Total$1,653
 $1,763
 $245
(a)Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements. In the second quarter, Alaska entered into an agreement with SkyWest to defer a portion of 2020 payments and eliminate contractual minimums through September 30, 2020.

(a)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.
In the second quarter, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations and rates. The impact of those negotiations on our leases was not material to the operating lease liability. The Company has also deferred the payment of remaining 2020 contractual aircraft commitments, including those related to the B737 MAX9, to periods beyond 2020.

Aircraft Commitments
 
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of SeptemberJune 30, 2019, the Company2020, Alaska had commitments to purchase 32 B737 MAX9 aircraft, with contracted deliveries inbetween 2020 and 2023. As a result of the remainder ofgrounding order mandated by the FAA on March 13, 2019, through 2023.the delivery schedule for these MAX aircraft is subject to change. Future minimum contractual payments for these aircraft have been updated to reflect the most current anticipatedpossible delivery timing, for B737 MAX9 aircraft, which has been delayed as a result of the grounding order mandated by the FAA on March 13, 2019. The Companybut are also subject to change. Horizon also has commitments to purchase 3 E175 aircraft with deliveries in 2023 and2023. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 20232024 through 2025.2026. In addition, the CompanyAlaska has options to purchase 37 B737 MAX aircraft, from 2021 through 2024 and Horizon has options to purchase 30 E175 aircraft from 2021 through 2023. The Companyaircraft. Alaska also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries after 2021. in 2022.
17


The cancelable purchase commitments and option payments are not reflected in the table above. Given the current COVID-19 pandemic, the Company is in discussion with aircraft manufacturers regarding these purchase commitments and delivery timelines.

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. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin 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.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles 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 and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.

The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. 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.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.




NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of SeptemberJune 30, 2019,2020, the Company has repurchased 6.77.6 million shares for $491$544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.
CARES Act Warrant Issuance
As additional taxpayer protection required under the PSP, the Company granted the Treasury Department 874,344 warrants to purchase Alaska Air Group (ALK) common stock at a strike price of $31.61, based on the closing price on April 9, 2020. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a five year term. Additional warrants to purchase 14,327 shares of Air Group common stock will be issued to Treasury in connection with McGee's receipt of the remaining second and third installments of PSP funds in the third quarter.
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss, net of tax (in millions):
September 30, 2019 December 31, 2018June 30, 2020December 31, 2019
Related to marketable securities$10
 $(11)Related to marketable securities$25  $9  
Related to employee benefit plans(422) (440)Related to employee benefit plans(458) (469) 
Related to interest rate derivatives(9) 3
Related to interest rate derivatives(25) (5) 
Total$(421) $(448)Total$(458) $(465) 

18

Earnings Per Share (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, using the treasury-stock method. For the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, anti-dilutive shares excluded from the calculation of EPS were not material.


NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) 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 carriers, 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) 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 3 reportable operating segments:
•
•Mainline - includes 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, and Costa Rica.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under 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.

 - includes 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, and Costa Rica.
•
Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. 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 Company'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 June 30, 2020
Three Months Ended September 30, 2019MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Operating RevenuesOperating Revenues   
Passenger revenues$1,850
 $361
 $—
 $—
 $2,211
 $—
 $2,211
Passenger revenues$225  $84  $—  $—  $309  $—  $309  
CPA revenues—
 —
 112
 (112) —
 —
 —
CPA revenues—  —  81  (81) —  —  —  
Mileage Plan other revenue107
 11
 —
 —
 118
 —
 118
Mileage Plan other revenue56  17  —  —  73  —  73  
Cargo and other58
 1
 —
 1
 60
 —
 60
Cargo and other39  —  —  —  39  —  39  
Total operating revenues2,015
 373
 112
 (111) 2,389
 —
 2,389
Operating expenses             
Total Operating RevenuesTotal Operating Revenues320  101  81  (81) 421  —  421  
Operating ExpensesOperating Expenses
Operating expenses, excluding fuel1,226
 275
 94
 (119) 1,476
 5
 1,481
Operating expenses, excluding fuel746  210  68  (82) 942  (292) 650  
Economic fuel411
 75
 —
 —
 486
 —
 486
Economic fuel45  20  —  —  65  (6) 59  
Total operating expenses1,637
 350
 94
 (119) 1,962
 5
 1,967
Nonoperating income (expense)             
Total Operating ExpensesTotal Operating Expenses791  230  68  (82) 1,007  (298) 709  
Nonoperating Income (Expense)Nonoperating Income (Expense)
Interest income17
 —
 —
 (6) 11
 —
 11
Interest income11  —  —  (4) 7  —  7  
Interest expense(18) —
 (7) 7
 (18) —
 (18)Interest expense(18) —  (5) 6  (17) —  (17) 
Interest capitalized4
 —
 —
 —
 4
 —
 4
Interest capitalized1  —  —  —  1  —  1  
Other - net(3) —
 —
 —
 (3) —
 (3)Other - net6  —  —  —  6  —  6  
Total nonoperating income (expense)—
 —
 (7) 1
 (6) —
 (6)
Income (loss) before income tax$378
 $23
 $11
 $9
 $421
 $(5) $416
Total Nonoperating Income (Expense)Total Nonoperating Income (Expense)—  —  (5) 2  (3) —  (3) 
Income (Loss) Before Income TaxIncome (Loss) Before Income Tax$(471) $(129) $8  $3  $(589) $298  $(291) 
Three Months Ended June 30, 2019
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating RevenuesOperating Revenues
Passenger revenuesPassenger revenues$1,767  $344  $—  $—  $2,111  $—  $2,111  
CPA revenuesCPA revenues—  —  112  (112) —  —  —  
Mileage Plan other revenueMileage Plan other revenue105  13  —  —  118  —  118  
Cargo and otherCargo and other57  —  —  2  59  —  59  
Total Operating RevenuesTotal Operating Revenues1,929  357  112  (110) 2,288  —  2,288  
Operating ExpensesOperating Expenses
Operating expenses, excluding fuelOperating expenses, excluding fuel1,167  268  95  (116) 1,414  8  1,422  
Economic fuelEconomic fuel422  77  —  —  499  3  502  
Total Operating ExpensesTotal Operating Expenses1,589  345  95  (116) 1,913  11  1,924  
Nonoperating Income (Expense)Nonoperating Income (Expense)
Interest incomeInterest income17  —  —  (6) 11  —  11  
Interest expenseInterest expense(19) —  (7) 6  (20) —  (20) 
Interest capitalizedInterest capitalized3  —  —  —  3  —  3  
Other - netOther - net(7) —  —  —  (7) —  (7) 
Total Nonoperating Income (Expense)Total Nonoperating Income (Expense)(6) —  (7) —  (13) —  (13) 
Income (Loss) Before Income TaxIncome (Loss) Before Income Tax$334  $12  $10  $6  $362  $(11) $351  
 Three Months Ended September 30, 2018
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger revenues$1,727
 $316
 $—
 $—
 $2,043
 $—
 $2,043
CPA revenues—
 —
 128
 (128) —
 —
 —
Mileage Plan other revenue104
 10
 —
 —
 114
 —
 114
Cargo and other53
 —
 2
 —
 55
 —
 55
Total operating revenues1,884
 326
 130
 (128) 2,212
 —
 2,212
Operating expenses             
Operating expenses, excluding fuel1,126
 267
 118
 (131) 1,380
 22
 1,402
Economic fuel438
 70
 —
 —
 508
 5
 513
Total operating expenses1,564
 337
 118
 (131) 1,888
 27
 1,915
Nonoperating income (expense)             
Interest income15
 —
 —
 (4) 11
 —
 11
Interest expense(20) —
 (6) 4
 (22) —
 (22)
Interest capitalized4
 —
 1
 —
 5
 —
 5
Other - net(5) (2) —
 —
 (7) —
 (7)
Total nonoperating income (expense)(6) (2) (5) —
 (13) —
 (13)
Income (loss) before income tax$314
 $(13) $7
 $3
 $311
 $(27) $284




 Nine Months Ended September 30, 2019
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger revenues$5,039
 $999
 $—
 $—
 $6,038
 $—
 $6,038
CPA revenues—
 —
 340
 (340) —
 —
 —
Mileage Plan other revenue312
 34
 —
 —
 346
 —
 346
Cargo and other163
 2
 1
 3
 169
 —
 169
Total operating revenues5,514
 1,035
 341
 (337) 6,553
 —
 6,553
Operating expenses             
Operating expenses, excluding fuel3,545
 817
 286
 (353) 4,295
 39
 4,334
Economic fuel1,191
 218
 —
 —
 1,409
 (1) 1,408
Total operating expenses4,736
 1,035
 286
 (353) 5,704
 38
 5,742
Nonoperating income (expense)             
Interest income50
 —
 —
 (19) 31
 —
 31
Interest expense(58) —
 (22) 20
 (60) —
 (60)
Interest capitalized11
 —
 —
 —
 11
 —
 11
Other - net(20) —
 —
 —
 (20) —
 (20)
Total nonoperating income (expense)(17) —
 (22) 1
 (38) —
 (38)
Income (loss) before income tax$761
 $—
 $33
 $17
 $811
 $(38) $773

 Nine Months Ended September 30, 2018
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger revenues$4,879
 $845
 $—
 $—
 $5,724
 $—
 $5,724
CPA revenues—
 —
 375
 (375) —
 —
 —
Mileage Plan other revenue301
 28
 —
 —
 329
 —
 329
Cargo and other142
 1
 4
 —
 147
 —
 147
Total operating revenues5,322
 874
 379
 (375) 6,200
 —
 6,200
Operating expenses             
Operating expenses, excluding fuel3,392
 755
 345
 (378) 4,114
 92
 4,206
Economic fuel1,237
 190
 —
 —
 1,427
 (30) 1,397
Total operating expenses4,629
 945
 345
 (378) 5,541
 62
 5,603
Nonoperating income (expense)             
Interest income39
 —
 —
 (10) 29
 —
 29
Interest expense(64) —
 (16) 9
 (71) —
 (71)
Interest capitalized12
 —
 2
 —
 14
 —
 14
Other - net(9) (11) —
 —
 (20) —
 (20)
Total nonoperating income (expense)(22) (11) (14) (1) (48) —
 (48)
Income (loss) before income tax$671
 $(82) $20
 $2
 $611
 $(62) $549
(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges.
(c)Includes merger-related costs, mark-to-market fuel-hedge accounting adjustments, and other special items.

20


Six Months Ended June 30, 2020
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues1,459  331  —  —  1,790  —  1,790  
CPA revenues—  —  186  (186) —  —  —  
Mileage Plan other revenue154  28  —  —  182  —  182  
Cargo and other83  —  —  2  85  —  85  
Total Operating Revenues1,696  359  186  (184) 2,057  —  2,057  
Operating Expenses
Operating expenses, excluding fuel1,905  479  160  (192) 2,352  (129) 2,223  
Economic fuel358  82  —  —  440  3  443  
Total Operating Expenses2,263  561  160  (192) 2,792  (126) 2,666  
Nonoperating Income (Expense)
Interest income25  —  —  (9) 16  —  16  
Interest expense(30) —  (10) 10  (30) —  (30) 
Interest capitalized4  —  —  —  4  —  4  
Other - net12  —  —  (1) 11  —  11  
Total Nonoperating Income (Expense)11  —  (10) —  1  —  1  
Income (Loss) Before Income Tax(556) (202) 16  8  (734) 126  (608) 
Six Months Ended June 30, 2019
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues3,189  638  —  —  3,827  —  3,827  
CPA revenues—  —  228  (228) —  —  —  
Mileage Plan other revenue205  23  —  —  228  —  228  
Cargo and other105  1  1  2  109  —  109  
Total Operating Revenues3,499  662  229  (226) 4,164  —  4,164  
Operating Expenses
Operating expenses, excluding fuel2,319  542  192  (234) 2,819  34  2,853  
Economic fuel780  143  —  —  923  (1) 922  
Total Operating Expenses3,099  685  192  (234) 3,742  33  3,775  
Nonoperating Income (Expense)
Interest income33  —  —  (13) 20  —  20  
Interest expense(40) —  (15) 13  (42) —  (42) 
Interest capitalized7  —  —  —  7  —  7  
Other - net(17) —  —  —  (17) —  (17) 
Total Nonoperating Income (Expense)(17) —  (15) —  (32) —  (32) 
Income (Loss) Before Income Tax383  (23) 22  8  390  (33) 357  
(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges.
(c)Includes payroll support program grant wage offsets, special items and mark-to-market fuel hedge accounting adjustments.


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Total assets were as follows (in millions):
June 30, 2020December 31, 2019
Mainline$20,261  $19,207  
Horizon1,199  1,266  
Consolidating & Other(7,462) (7,480) 
Consolidated$13,998  $12,993  
 September 30, 2019 December 31, 2018
Mainline$19,129
 $16,853
Horizon1,231
 1,229
Consolidating & Other(7,377) (7,170)
Consolidated$12,983
 $10,912


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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) 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, 2018.2019, and in Item 1A. "Risk Factors" of Part II of this Form 10-Q. This overview summarizes the MD&A, which includes the following sections:
•Second Quarter Review—highlights from the second quarter of 2020 outlining some of the major events that happened during the period and how they affected our financial performance.
 
•
Third
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and six months ended June 30, 2020. 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. This section includes forward-looking statements regarding our view of the remainder of 2020.  Quarter Review—highlights from the third quarter of 2019 outlining some of the major events that happened 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, 2019. 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. This section includes forward-looking statements regarding our view of the remainder of 2019. 

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

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

SECOND QUARTER REVIEW

COVID-19 Impacts and Response

The impacts of COVID-19 on our business have been unprecedented, and have presented us with some of the greatest challenges in our 88-year history. The cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country beginning in March 2020, and continuing through to June 2020, has driven demand for air travel to historic lows.

As we entered the second quarter, passenger counts were approximately 5% of prior year levels. Throughout the quarter, we began to see slight improvements in demand and new bookings, with daily passenger counts peaking around 20% of prior year levels, primarily driven by leisure travelers.

Currently, we are planning a capacity reduction of about 50% in the third quarter and about 35% in the fourth quarter, although that is subject to change based on demand. Given the significant reduction to capacity, it is critical that we take action to address the size of our workforce. In an effort to mitigate the need for involuntary furloughs, we have initiated various early-out and voluntary furlough programs for most frontline workers and provided incentive leave options to our pilots. To date, we have had approximately 4,000 volunteers for these programs. In addition, we made the difficult decision to reduce our non-union management positions by approximately 300 management positions. In total these changes are expected to result in a cost of $250 million to $300 million, which will be recognized in the third quarter. We sent WARN notices on August 1 to approximately 4,000 employees, who may be potentially impacted if we determine furloughs are needed to adjust the workforce to fit the new size of the business.

Changes to our workforce is one of the ways we will reduce costs as we restructure our business. These and other cost reduction measures are critical to reaching our monthly cash burn goals. In the second quarter, we reduced our cash burn rate from approximately $400 million as we exited March to $120 million in June. We remain focused on our goal to achieve cash break-even by year end. To reach this goal, our planning assumption is that cash bookings will recover to 40% to 60% of prior year levels by December. Our capacity and cash bookings planning assumptions do not represent guidance, and we will adjust our plans if demand trends don't support these assumptions.

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Maintaining a significant liquidity balance is also paramount to preserving our financial strength. In addition to the $1 billion in CARES Act funding obtained in the second quarter of 2020, we have also sourced $589 million in secured financing, drawn $400 million from our existing credit facilities, and issued $1.2 billion in EETCs which were finalized on July 2, 2020. We also have available to us an additional $1.1 billion in CARES Act loans, should we choose to participate. As of August 4, 2020, our cash and marketable securities balance was approximately $3.8 billion.

Our commitment to the health and safety of our guests and employees remains our top priority. In response to the crisis, we have partnered with experts to build our Next-Level Care initiative. In doing so, we have added layers of safety with over 100 safety measures through all stages of travel. Some examples of measures that are helping our guests build confidence include:

•Making the pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;

•Requiring masks for both guests aged 12 and older and employees, and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so;

•Using the latest air filtration technology and hospital grade filters to remove particulates and fully recycle air in the cabin every 2 to 3 minutes;

•Exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmission on board, and;

•Providing for adequate social distancing in our airports and on-board, including blocking middle seats on mainline aircraft through September 30, 2020.

oneworld Invitation

In July 2020, we received our formal invitation to join the oneworld alliance. Upon entrance to the alliance, Alaska guests will be able to access the full range of customer services and benefits, and Mileage Plan members will be able to earn and redeem rewards on all oneworld member airlines. The Company is working to accelerate its timeline for entrance into the alliance, with a focus on completion as early as the end of 2020.

Financial Overview

Our consolidated pretax incomeloss was $416$291 million during the thirdsecond quarter of 2019,2020, compared to $284pretax profit of $351 million in the thirdsecond quarter of 2018.2019. The increase inshift to pretax profitloss was driven primarily by an increasea decrease in operating revenues of $177$1.9 billion stemming from the sharp decline in demand and $69 million andin special charges from asset impairment, offset by a decrease in non-fuel operating expenses of $772 million, including wage offsets from the payroll support program of the CARES Act of $362 million. Pretax loss was also offset by a decrease in fuel expense of $27 million, offset by an increase in non-fuel operating expenses of $79$443 million.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Shareholder Return

During A glossary of financial terms can be found at the third quarter of 2019, we paid cash dividends of $43 million and repurchased 465,354 shares for $28 million.

Labor Update

In June 2019, we reached a tentative agreement with the Aircraft Mechanics Fraternal Association (AMFA) to integrate Airbus technicians into the collective bargaining agreement with Boeing technicians, as well as extend the term by two years. This tentative agreement was subsequently ratified by our technicians in July 2019. Also in June 2019, we reached a tentative agreement with the International Association of Machinists (IAM) for new five-year contracts for clerical, office, passenger service, ramp service and stores agents employees, which was subsequently ratified in September 2019. Both the IAM and AMFA agreements included signing bonuses and wage rate increases that were implemented in the third quarter. The annual impact of these contracts thereafter is expected to be approximately $50 million. During the third quarter, we recognized $24 million in one-time costs for both the AMFA and IAM agreements.



Income Taxes

In September 2019, the Internal Revenue Service clarified certain tax laws relating to bonus depreciation. The resultend of this clarification was a $10 million one-time decrease to our income tax expense in the third quarter.Item 2.

Outlook

With the integration largely behind us, we are focused on improving our returns with the long-term goal of achieving 13% to 15% pretax margins over the business cycle. Current year revenue initiatives, including our Saver Fare product, are providing meaningful revenue growth. We continue to benefit from the full synergies expected as a result of the merger, with the full run rate expected by 2021. Through cross-fleeting we have moved larger gauge, lower unit cost aircraft into markets with high demand, which we anticipate will continue to benefit our results into 2020. This flexibility with our fleet allows us to evaluate all existing and potential new routes, including aircraft type, so that we can maximize our margins and provide the best network utility for our guests.

As we move through 2019, we continue to work on a number of notable guest experience projects. By year-end, we expect that more than half of our Mainline fleet will be equipped with high-speed satellite Wi-Fi, and that more than half of our Airbus fleet will be retrofitted with updated cabin interiors. These important projects will provide our guests with a more cohesive and connected Alaska experience. In July, we opened our new flagship lounge in the North Satellite of Sea-Tac Airport, and are working closely with the Port of Seattle to open a state-of-the-art 20-gate North Satellite Concourse by Summer 2021. During the third quarter, we also began work on our new lounge at San Francisco International Airport, which is expected to open in early 2020. These projects, along with our ongoing rotation of on-board menu offerings, refreshed aircraft interiors, and expanded and updated airport lounges, demonstrates our commitment to providing our guests more options and significant value. Combined, we expect our revenue initiatives and synergies will contribute $330 million of revenue in 2019.

We expect to grow our combined network capacity by approximately 2.1% in 2019, and approximately 3% - 4% in 2020. Current schedules indicate competitive capacity will increase by approximately 2% in the fourth quarter of 2019, and increase approximately 4% in the first quarter of 2020. We believe that our product, operation, engaged employees, award-winning service, and competitive Mileage Plan™ program, combined with our strong balance sheet and focus on low costs, give us a competitive advantage in our markets.

Other events

On November 6, 2019, the Board of Directors of Horizon Air elected Joseph A. Sprague to serve as President of Horizon Air, effective immediately.  Mr. Sprague previously retired from Alaska Airlines after serving at the company for 17 years in a variety of key leadership positions, including senior vice president of external relations, vice president of marketing and vice president of Alaska Air Cargo.  Mr. Sprague will succeed Gary L. Beck who has been elected by the Board of Directors of Alaska Airlines to serve as Executive Vice President and Chief Operating Officer of Alaska, effective immediately.  Prior to his time at Horizon Air, Mr. Beck was vice president of Alaska’s flight operations division from 2008 to 2015.  Mr. Beck will report to Ben Minicucci, who will continue to serve as Alaska’s President.  Both Mr. Sprague and Mr. Beck will serve on the Company’s Executive Committee.   



RESULTS OF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of the payroll support program grant wage offset, impairment and other charges, merger-related costs, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

•By excluding fuel expense and certain special items (including the payroll support program grant wage offset, impairment charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important
24

for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•Cost per ASM (CASM) excluding fuel and certain special items, such as the payroll support program grant wage offset, impairment charges and merger-related costs, is one of the most important measures used by management and by the Air Group 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 annual cash incentive plan, which covers the majority of employees within the Air Group organization.

•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 compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

•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 certain items, such as the payroll support program grant wage offset, impairment charges, merger-related costs, and mark-to-market hedging adjustments, 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 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.

25

OPERATING STATISTICS SUMMARY (unaudited)
Below 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 June 30,Six Months Ended June 30,
20202019Change20202019Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)1,48512,026(87.7)%10,41722,442(53.6)%
RPMs (000,000) "traffic"1,65414,638(88.7)%12,31027,087(54.6)%
ASMs (000,000) "capacity"4,30716,980(74.6)%19,61232,487(39.6)%
Load factor38.4%86.2%(47.8) pts62.8%83.4%(20.6) pts
Yield18.68¢14.43¢29.5%14.54¢14.13¢2.9%
RASM9.77¢13.48¢(27.5)%10.49¢12.82¢(18.2)%
CASM excluding fuel and special items(b)
21.87¢8.33¢162.5%12.00¢8.68¢38.2%
Economic fuel cost per gallon(b)
$1.20$2.27(47.1)%$1.77$2.20(19.5)%
Fuel gallons (000,000)54220(75.5)%248419(40.8)%
ASMs per fuel gallon79.877.23.4%79.177.52.1%
Average full-time equivalent employees (FTEs)15,83621,921(27.8)%19,15521,876(12.4)%
Mainline Operating Statistics:
Revenue passengers (000)9059,206(90.2)%7,58017,070(55.6)%
RPMs (000,000) "traffic"1,27613,207(90.3)%10,85824,379(55.5)%
ASMs (000,000) "capacity"3,36315,241(77.9)%17,06029,114(41.4)%
Load factor37.9%86.7%(48.8) pts63.6%83.7%(20.1) pts
Yield17.63¢13.38¢31.8%13.44¢13.08¢2.8%
RASM9.52¢12.66¢(24.8)%9.94¢12.02¢(17.3)%
CASM excluding fuel and special items(b)
22.19¢7.65¢190.1%11.17¢7.96¢40.3%
Economic fuel cost per gallon(b)
$1.20$2.26(46.9)%$1.78$2.19(18.7)%
Fuel gallons (000,000)38187(79.7)%201356(43.5)%
ASMs per fuel gallon88.581.58.6%84.981.83.8%
Average FTEs12,34016,551(25.4)%14,57916,504(11.7)%
Aircraft utilization5.611.1(49.5)%8.810.7(17.8)%
Average aircraft stage length1,1441,311(12.7)%1,2701,308(2.9)%
Operating fleet(d)
225238(13) a/c225238(13) a/c
Regional Operating Statistics:(c)
Revenue passengers (000)5802,820(79.4)%2,8375,372(47.2)%
RPMs (000,000) "traffic"3781,431(73.6)%1,4522,708(46.4)%
ASMs (000,000) "capacity"9451,739(45.7)%2,5523,373(24.3)%
Load factor40.0%82.3%(42.3 pts)56.9%80.3%(23.4 pts)
Yield22.12¢24.06¢(8.1)%22.80¢23.57¢(3.3)%
RASM10.63¢20.51¢(48.2)%14.07¢19.62¢(28.3)%
Operating fleet9494— a/c9494— 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)Excludes 12 aircraft permanently parked in March 2020.

26
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 Change 2019 2018 Change
Consolidated Operating Statistics:(a)
           
Revenue passengers (000)12,574 12,128 3.7% 35,018 34,685 1.0%
RPMs (000,000) "traffic"15,026 14,386 4.4% 42,113 41,272 2.0%
ASMs (000,000) "capacity"17,519 16,943 3.4% 50,006 49,256 1.5%
Load factor85.8% 84.9% 0.9 pts 84.2% 83.8% 0.4 pts
Yield14.71¢ 14.20¢ 3.6% 14.34¢ 13.87¢ 3.4%
RASM13.64¢ 13.05¢ 4.5% 13.10¢ 12.59¢ 4.1%
CASM excluding fuel and special items(b)
8.43¢ 8.15¢ 3.4% 8.59¢ 8.35¢ 2.9%
Economic fuel cost per gallon(b)
$2.13 $2.33 (8.6)% $2.18 $2.26 (3.5)%
Fuel gallons (000,000)227 218 4.1% 646 631 2.4%
ASMs per fuel gallon77.2 77.7 (0.6)% 77.4 78.1 (0.9)%
Average full-time equivalent employees (FTEs)22,247 21,804 2.0% 22,000 21,575 2.0%
Mainline Operating Statistics:           
Revenue passengers (000)9,655 9,435 2.3% 26,725 27,107 (1.4)%
RPMs (000,000) "traffic"13,538 13,096 3.4% 37,917 37,677 0.6%
ASMs (000,000) "capacity"15,702 15,343 2.3% 44,816 44,730 0.2%
Load factor86.2% 85.4% 0.8 pts 84.6% 84.2% 0.4 pts
Yield13.66¢ 13.18¢ 3.6% 13.29¢ 12.95¢ 2.6%
RASM12.83¢ 12.28¢ 4.5% 12.30¢ 11.90¢ 3.4%
CASM excluding fuel and special items(b)
7.81¢ 7.34¢ 6.4% 7.91¢ 7.58¢ 4.4%
Economic fuel cost per gallon(b)
$2.13 $2.32 (8.2)% $2.17 $2.25 (3.6)%
Fuel gallons (000,000)193 189 2.1% 549 549 —%
ASMs per fuel gallon81.4 81.2 0.2% 81.6 81.5 0.1%
Average FTEs16,789 16,499 1.8% 16,599 16,330 1.6%
Aircraft utilization11.3 11.4 (0.9)% 10.9 11.4 (4.4)%
Average aircraft stage length1,281 1,291 (0.8)% 1,298 1,293 0.4%
Operating fleet238 231 7 a/c 238 231 7 a/c
Regional Operating Statistics:(c)
           
Revenue passengers (000)2,919 2,693 8.4% 8,293 7,578 9.4%
RPMs (000,000) "traffic"1,488 1,290 15.3% 4,196 3,595 16.7%
ASMs (000,000) "capacity"1,817 1,600 13.6% 5,190 4,526 14.7%
Load factor81.9% 80.6% 1.3 pts 80.8% 79.4% 1.4 pts
Yield24.23¢ 24.50¢ (1.1)% 23.81¢ 23.49¢ 1.4%
RASM20.51¢ 20.41¢ 0.5% 19.93¢ 19.32¢ 3.2%
Operating fleet94 89 5 a/c 94 89 5 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.



COMPARISON OF THREE MONTHS ENDED SEPTEMBERJUNE 30, 20192020 TO THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182019

Our consolidated net incomeloss for the three months ended SeptemberJune 30, 20192020 was $322$214 million, or $2.60$1.73 per diluted share, compared to net income of $217$262 million, or $1.75$2.11 per diluted share, for the three months ended SeptemberJune 30, 2018.

2019.

Excluding the impact of merger-related coststhe payroll support program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net incomeloss for the thirdsecond quarter of 20192020 was $326$439 million, or $2.63$3.54 per diluted share, compared to an adjusted net income of $237$270 million, or $1.91$2.17 per diluted share, in the thirdsecond quarter of 2018.2019. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS) to amounts as reported in accordance with GAAP:
 Three Months Ended June 30,
 20202019
(in millions, except per share amounts)DollarsDiluted EPSDollarsDiluted EPS
GAAP net income (loss) and diluted EPS$(214) $(1.73) $262  $2.11  
Payroll support program grant wage offset(362) (2.92) —  —  
Mark-to-market fuel hedge adjustments(6) (0.05) 3  0.02  
Special items - impairment charges and other69  0.56  —  —  
Special items - merger-related costs1  0.01  8  0.06  
Income tax effect of reconciling items above73  0.59  (3) (0.02) 
Non-GAAP adjusted net income (loss) and diluted EPS$(439) $(3.54) $270  $2.17  
 Three Months Ended September 30,
 2019 2018
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
GAAP net income and diluted EPS$322
 $2.60
 $217
 $1.75
Mark-to-market fuel hedge adjustments—
 —
 5
 0.04
Special items - merger-related costs5
 0.04
 22
 0.18
Income tax effect of reconciling items above(1) (0.01) (7) (0.06)
Non-GAAP adjusted net income and diluted EPS$326
 $2.63
 $237
 $1.91

CASM reconciliation is summarized below:
 Three Months Ended June 30,
(in cents)20202019% Change
Consolidated:
CASM16.46 ¢11.33 ¢45 %
Less the following components: 
Payroll support program grant wage offset(8.40) —  NM
Aircraft fuel, including hedging gains and losses1.37  2.96  (54)%
Special items - merger-related costs0.02  0.04  (50)%
Special items - impairment charges and other1.60  —  NM
CASM excluding fuel and special items21.87 ¢8.33 ¢163 %
Mainline:
CASM15.79 ¢10.50 ¢50 %
Less the following components: 
Payroll support program grant wage offset(9.69) —  NM
Aircraft fuel, including hedging gains and losses1.16  2.79  (58)%
Special items - merger-related costs0.02  0.06  (67)%
Special items - impairment charges and other2.11  —  NM
CASM excluding fuel and special items22.19 ¢7.65 ¢190 %

27
 Three Months Ended September 30,
(in cents)2019 2018 % Change
Consolidated:     
CASM
11.23¢ 
11.30¢ (1)%
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.77
 3.02
 (8)%
Special items - merger-related costs0.03
 0.13
 (77)%
CASM excluding fuel and special items
8.43¢ 
8.15¢ 3 %
      
Mainline:     
CASM
10.46¢ 
10.37¢ 1 %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.62
 2.89
 (9)%
Special items - merger-related costs0.03
 0.14
 (79)%
CASM excluding fuel and special items
7.81¢ 
7.34¢ 6 %


OPERATING REVENUES

Total operating revenues increased $177 million,decreased $1.9 billion, or 8%82%, during the thirdsecond quarter of 20192020 compared to the same period in 2018.2019. The changes are summarized in the following table:
Three Months Ended June 30,
(in millions)20202019% Change
Passenger revenue$309  $2,111  (85)%
Mileage Plan other revenue73  118  (38)%
Cargo and other39  59  (34)%
Total operating revenues$421  $2,288  (82)%
 Three Months Ended September 30,
(in millions)2019 2018 % Change
Passenger revenue$2,211
 $2,043
 8%
Mileage Plan other revenue118
 114
 4%
Cargo and other60
 55
 9%
Total operating revenues$2,389
 $2,212
 8%



Passenger Revenue

On a consolidated basis, Passenger revenue for the thirdsecond quarter of 2019 increased2020 decreased by $168$1.8 billion, or 85%, on an 89% decline in traffic. Decreased revenue year-over-year is primarily due to the near complete loss of demand, driven by the COVID-19 pandemic, which began significantly impacting revenues in March 2020 and continued throughout the second quarter. In response to the decline in demand we reduced capacity 75%, and experienced a 48-point decrease in load factor.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue decreased $45 million, or 8%38%, as compared to the same prior-year period primarily on a 3.6% increasereduction in yieldmiles purchased by our affinity card partner, consistent with an overall reduction in consumer spending.

Cargo and Other Revenue

On a 3.4% increase in traffic.consolidated basis, Cargo and other revenue for the second quarter of 2020 decreased by $20 million, or 34%, as compared to the same prior-year period. The increase in yielddecrease is primarily a result of current year revenue initiatives, implemented as a broader plandue to drive revenue growth, realized synergies from our acquisition of Virgin America, and a 16% increase in premium seat revenue, including First and Premium class product offerings. Increased traffic wasreduced belly cargo activity driven by new routes andthe schedule reductions for passenger aircraft, added toas well as continued capacity limitations in our fleet since the third quarter of 2018.freighters.

OPERATING EXPENSES

Total operating expenses increased $52 million,decreased $1.2 billion, or 3%63%, compared to the thirdsecond quarter of 2018.2019. 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 June 30,
(in millions)20202019% Change
Fuel expense$59  $502  (88)%
Non-fuel operating expenses, excluding special items942  1,414  (33)%
Payroll support program grant wage offset(362) —  NM
Special items - merger-related costs1  8  (88)%
Special items - impairment charges and other69  —  NM
Total operating expenses$709  $1,924  (63)%
 Three Months Ended September 30,
(in millions)2019 2018 % Change
Fuel expense$486
 $513
 (5)%
Non-fuel operating expenses, excluding special items1,476
 1,380
 7 %
Special items - merger-related costs5
 22
 (77)%
Total operating expenses$1,967
 $1,915
 3 %

Fuel Expense

Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio 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.

28

Aircraft fuel expense decreased $27$443 million, or 5%88%, compared to the thirdsecond quarter of 2018.2019. The elements of the change are illustrated in the following table: 
Three Months Ended June 30,
20202019
(in millions, except for per gallon amounts)Dollars Cost/GalDollars Cost/Gal
Raw or "into-plane" fuel cost$60  $1.11  $495  $2.25  
Losses on settled hedges5  0.09  4  0.02  
Consolidated economic fuel expense65  1.20  $499  $2.27  
Mark-to-market fuel hedge adjustments(6) (0.11) 3  0.01  
GAAP fuel expense$59  $1.09  $502  $2.28  
Fuel gallons54  220  
 Three Months Ended September 30,
 2019 2018
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$481
 $2.11
 $520
 $2.38
(Gains) losses on settled hedges5
 0.02
 (12) (0.05)
Consolidated economic fuel expense486
 2.13
 $508
 $2.33
Mark-to-market fuel hedge adjustments—
 —
 5
 0.02
GAAP fuel expense$486
 $2.13
 $513
 $2.35
Fuel gallons227
   218
  

Raw fuel expense per gallon for the three months ended SeptemberJune 30, 20192020 decreased by approximately 11%51% due to lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during the thirdsecond quarter of 20192020 was primarily driven by a 19%53% decrease in crude oil prices partially offset byand a 4% increase75% decrease in refining margins, when compared to the prior year. Fuel gallons consumed increasedCrude oil prices have been dramatically impacted by 9the COVID-19 pandemic and the related reduction in demand. The decrease is also due to a year-over-year decline in consumption of 166 million gallons, or 4%75%, primarily dueon a significant reduction to increased capacity.flight time and block hours.

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 economic fuel expense, we include 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 as 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.

Losses recognized for hedges that settled during the thirdsecond quarter were $5 million in 2019,2020, compared to gainslosses of $12$4 million in the same period in 2018.2019. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.

Non-fuel Expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel, the payroll support program grant wage offset and special items. Significant operating expense variances from 20182019 are more fully described below.
 Three Months Ended June 30,
(in millions)20202019% Change
Wages and benefits$472  $567  (17)%
Variable incentive pay16  44  (64)%
Aircraft maintenance45  115  (61)%
Aircraft rent74  82  (10)%
Landing fees and other rentals83  113  (27)%
Contracted services30  70  (57)%
Selling expenses4  87  (95)%
Depreciation and amortization107  105  2 %
Food and beverage service7  53  (87)%
Third-party regional carrier expense26  42  (38)%
Other78  136  (43)%
Total non-fuel operating expenses, excluding special items$942  $1,414  (33)%

29
 Three Months Ended September 30,
(in millions)2019 2018 % Change
Wages and benefits$608
 $549
 11 %
Variable incentive pay46
 27
 70 %
Aircraft maintenance106
 107
 (1)%
Aircraft rent82
 82
 — %
Landing fees and other rentals143
 135
 6 %
Contracted services72
 70
 3 %
Selling expenses77
 79
 (3)%
Depreciation and amortization106
 99
 7 %
Food and beverage service57
 53
 8 %
Third-party regional carrier expense42
 38
 11 %
Other137
 141
 (3)%
Total non-fuel operating expenses, excluding special items$1,476
 $1,380
 7 %


Wages and Benefits

Wages and benefits increaseddecreased during the thirdsecond quarter of 20192020 by $59$95 million, or 11%17%, compared to 2018.2019. The primary components of Wages and benefits are shown in the following table:
 Three Months Ended June 30,
(in millions)20202019% Change
Wages$350  $421  (17)%
Pension - Defined benefit plans service cost13  11  18 %
Defined contribution plans30  35  (14)%
Medical and other benefits54  69  (22)%
Payroll taxes25  31  (19)%
Total wages and benefits$472  $567  (17)%
 Three Months Ended September 30,
(in millions)2019 2018 % Change
Wages$460
 $412
 12 %
Pension—Defined benefit plans service cost10
 12
 (17)%
Defined contribution plans34
 30
 13 %
Medical and other benefits71
 65
 9 %
Payroll taxes33
 30
 10 %
Total wages and benefits$608
 $549
 11 %

Wages increased $48decreased $71 million, or 12%17%, on a 2% growth28% reduction in FTEs. The increasedecrease is primarily due to the recognitionvoluntary leaves of approximately $24 million during the quarter in one-time costs following the ratification of the AMFA and IAM contracts,absence accepted by more than 6,000 employees, as well as reduction in executive pay and hours for management employees, and reducing represented employees work hours to minimums.

Medical and other benefits expense decreased $15 million, or 22%, primarily due to a significant reduction in elective procedures and adjustments to reserves for high-dollar value medical claims.

Variable Incentive Pay

Variable incentive pay expense decreased $28 million, or 64%, during the impactsecond quarter of increased wage rates for our labor groups2020 compared to the same period in 2019, due to the expectation that key financial metrics will not be achieved under the performance based pay program.

Aircraft Maintenance

Aircraft maintenance expense decreased by $70 million, or 61%, during the second quarter of 2020 compared to the same period in 2019. The decrease is primarily due to fewer engine events and heavy checks as compared to the prior year, period.as well as lower power-by-the-hour expense on reduced second quarter utilization of covered aircraft. These decreases were offset by costs incurred in the temporary grounding of certain aircraft.

MedicalLanding fees and other benefits expense increased $6rentals

Landing fees and other rentals decreased by $30 million, or 9%27%, during the second quarter of 2020 compared to the same period in 2019 on a 67% decrease in departures. Decreased departure-related costs were offset by rate increases at many of our airports.

Contracted Services

Contracted services decreased by $40 million, or 57%, during the second quarter of 2020 compared to the same period in 2019 driven primarily due to increased volume of high-dollar value medical claimsby decreased departures and passengers as compared to the prior-year period and an overall cost increase in medical services and products.as a result of the COVID-19 pandemic.

Variable Incentive PaySelling Expense

Variable incentive paySelling expense increased $19decreased by $83 million, or 70%95%, during the thirdsecond quarter of 20192020 compared to the same period in 2018. The increase is2019, primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs also contributed to the result of adjustments takenyear-over-year decline given COVID-19 related delays in the third quarter of 2018 to revise the estimate of full year performance-based pay based on tracking in relation to 2018 goals.professional sports seasons.



Food and Beverage Service

Landing feesFood and other rentals

Landing fees and other rental expense increasedbeverage service decreased by $8$46 million, or 6%87%, during the thirdsecond quarter of 20192020 compared to the same period in 2018. The increase2019. This decrease is primarily due to an increasein-line with the overall reduction in capacity of 3.4%revenue passengers as compared to the prior yearprior-year period, as well as rate increases at manythe temporary closure of the majority of our West Coast airports, includingairport lounges.


30


Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our hub airports.

Depreciation and Amortization

Depreciation and amortization increasedCPA, decreased by $7$16 million,, or 7%38%, during the thirdsecond quarter of 20192020 compared to the same period in 2018,2019. The reduction in expense is primarily due to a 41% reduction in departures flown by SkyWest as compared to the additionprior-year period, a reduction in departure-related contractual rates, and the elimination of 14 owned E175s and six owned B737-900ERs to our fleet since the third quarter of 2018.PenAir flying.

Special Items - Merger-related CostsImpairment and other charges

We recorded special itemsimpairment and other charges of $5$69 million in the thirdsecond quarter of 2019 for merger-related2020, consisting of our updated estimate of costs associated with our acquisition of Virgin America, comparedrequired to $22 millionreturn leased Airbus aircraft that were permanently parked in the same period of 2018. Costs incurred in the third quarter of 2019 are primarily a result of certain technology integration costs.first quarter.

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 recorded a pretax loss of $471 million in the second quarter of 2020, compared to a pretax profit of $378$334 million in the thirdsecond quarter of 2019, compared2019. The $805 million shift to $314 million in the third quarter of 2018. The $64 million increase in pretax profitloss was primarily driven by a $123 million increase$1.5 billion decrease in Passenger revenues as a result of the COVID-19 pandemic, offset by a $421 million decrease in non-fuel operating costs and a $27$377 million decrease in economic fuel cost, partially offset by a $100 million increase in non-fuel operating expenses.cost.

The increasedecrease in Mainline passenger revenue for the thirdsecond quarter of 20192020 was primarily driven by a 90% decline in traffic on a 78% decrease in capacity. The overall decrease in both traffic and capacity are driven by the impactsignificant reduction in demand as a result of our revenue initiatives and synergies,the COVID-19 pandemic.

Non-fuel operating expenses decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as well as continued improvementdecreased wages and benefits expense from voluntary leaves of absence and a reduction in our trans-con markets as compared to the prior year.

hours for management employees. Lower raw fuel prices, partially offset bycombined with a slight increase80% decrease in gallons consumed, drove the decreasedecline in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages and benefits as a result of new wage rates and signing bonuses following the ratification of the AMFA and IAM contracts, increased variable pay expense as described further above, and higher aircraft ownership costs as we continue to add to our Mainline fleet.

Regional

Regional operations generated a pretax profitloss of $23$129 million in the thirdsecond quarter of 2019,2020, compared to a pretax lossprofit of $13$12 million in the thirdsecond quarter of 2018.2019. The shift toincrease in the pretax profitloss was attributable to a $47$256 million increasedecline in operating revenues, partially offset by a $5$57 million increasedecrease in fuel costs and an $8$58 million increasedecrease in non-fuel operating expenses.

Regional passenger revenue increased 14%decreased 76% compared to the thirdsecond quarter of 2018,2019, primarily driven by a 14% increase74% decline in traffic on a 46% decrease in capacity. The increaseoverall decrease in both traffic and capacity is due to an increaseare driven by the significant reduction in departures from new E175 deliveries, and an increase in average aircraft stage length.demand as a result of the COVID-19 pandemic.

The increasedecrease in non-fuel operating expenses is primarily due to the 14% increase46% decline in capacity.capacity, as well as elimination of costs for PenAir flying in the state of Alaska.

Horizon

Horizon achieved a pretax profit of $11$8 million in the thirdsecond quarter of 2019,2020, compared to a pretax profit of $7$10 million in the thirdsecond quarter of 2018. Increased2019. Profit recorded by Horizon in the second quarter is primarily the result of incremental flying as a proportion of overall Air Group capacity as compared to the prior year. Horizon revenues are recorded based upon purchased capacity, and are not impacted by changes to ticket prices and customer demand. Horizon profit is primarily duealso the result of significant cost reduction efforts implemented in response to a reduction in operating costs on higher productivity, combined with increased flying over the prior year.COVID-19 pandemic.


31

COMPARISON OF NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020 TO NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20182019

Our consolidated net incomeloss for the ninesix months ended SeptemberJune 30, 20192020 was $588$446 million, or $4.74$3.60 per diluted share, compared to net income of $414$266 million, or $3.34$2.14 per diluted share, for the ninesix months ended SeptemberJune 30, 2018.2019.

Our adjusted net incomeloss for the ninesix months ended SeptemberJune 30, 20192020 was $617$541 million, or $4.97$4.37 per diluted share, compared to an adjusted net income of $461$291 million, or $3.72$2.34 per diluted share, in the ninesix months ended SeptemberJune 30, 2018.2019. The following tables reconcile our adjusted net income and adjusted diluted EPS to amounts as reported in accordance with GAAP:
Six Months Ended June 30,
20202019
(in millions, except per share amounts)DollarsDiluted EPSDollarsDiluted EPS
Reported GAAP net income (loss) and diluted EPS$(446) $(3.60) $266  $2.14  
Payroll support program grant wage offset(362) (2.93) —  —  
Mark-to-market fuel hedge adjustments3  0.03  (1) (0.01) 
Special items - merger-related costs4  0.03  34  0.27  
Special items - impairment charges and other229  1.85  —  —  
Income tax effect of reconciling items above31  0.25  (8) (0.06) 
Non-GAAP adjusted net income (loss) and diluted EPS$(541) $(4.37) $291  $2.34  
 Nine Months Ended September 30,
 2019 2018
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$588
 $4.74
 $414
 $3.34
Mark-to-market fuel hedge adjustments(1) (0.01) (30) (0.24)
Special items - merger-related costs39
 0.31
 67
 0.54
Special items - other(a)
—
 —
 25
 0.20
Income tax effect of reconciling items above(9) (0.07) (15) (0.12)
Non-GAAP adjusted net income and diluted EPS$617
 $4.97
 $461
 $3.72

Our operating costs per ASM are summarized below:
 Six Months Ended June 30,
(in cents)20202019% Change
Consolidated:
CASM13.59 ¢11.62 ¢17 %
Less the following components:
Payroll support program grant wage offset(1.85) —  NM
Aircraft fuel, including hedging gains and losses2.26  2.84  (20)%
Special items - merger-related costs0.01  0.10  (90)%
Special items - impairment charges and other1.17  —  NM
CASM excluding fuel and special items12.00 ¢8.68 ¢38 %
Mainline:
CASM12.39 ¢10.76 ¢15 %
Less the following components:
Payroll support program grant wage offset(1.91) —  NM
Aircraft fuel, including hedging gains and losses2.12  2.68  (21)%
Special items - merger-related costs0.02  0.12  (83)%
Special items - impairment charges and other0.99  —  NM
CASM excluding fuel and special items11.17 ¢7.96 ¢40 %

32

 Nine Months Ended September 30,
(in cents)2019 2018 % Change
Consolidated:     
CASM
11.48¢ 
11.38¢ 1 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.82
 2.84
 (1)%
Special items - merger-related costs0.07
 0.14
 (49)%
Special items - other(a)
—
 0.05
 (100)%
CASM excluding fuel and special items
8.59¢ 
8.35¢ 3 %
      
Mainline:     
CASM
10.65¢ 
10.49¢ 2 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.65
 2.70
 (2)%
Special items - merger-related costs0.09
 0.15
 (40)%
Special items - other(a)
—
 0.06
 (100)%
CASM excluding fuel and special items
7.91¢ 
7.58¢ 4 %
(a)
Special items - other is the employee tax reform bonus awarded in January 2018
.



OPERATING REVENUES

Total operating revenues increased$353 million,decreased $2.1 billion, or 6%51%, during the first ninesix months of 20192020 compared to the same period in 2018.2019. The changes are summarized in the following table:
Six Months Ended June 30,
(in millions)20202019% Change
Passenger revenue$1,790  $3,827  (53)%
Mileage Plan other revenue182  228  (20)%
Cargo and other85  109  (22)%
Total operating revenues$2,057  $4,164  (51)%
 Nine Months Ended September 30,
(in millions)2019 2018 % Change
Passenger revenue$6,038
 $5,724
 5%
Mileage Plan other revenue346
 329
 5%
Cargo and other169
 147
 15%
Total operating revenues$6,553
 $6,200
 6%

Passenger Revenue

On a consolidated basis, Passenger revenue for the first ninesix months of 2019 increased2020 decreased by $314 million,$2 billion, or 5%53%, on a 2% increase40% decrease in capacity, 3% higher ticket yields and a slight increase21 point decrease in load factor. The increaseDecreased revenue year-over-year is primarily due to the near complete loss of demand due to the COVID-19 pandemic. Load factors and unit revenues in the first two months of 2020 were in-line with our original expectations. In March 2020, demand deteriorated at an unprecedented level, and in response we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Although a moderate recovery was driven byobserved in June 2020, the resurgence of cases throughout the United States is expected to continue to have significant impacts to our continued network expansion and fleet growth. Increased yields are largely the result of current year revenue initiatives implemented as a broader plan to drive revenue growth and the realization of synergies from our acquisition of Virgin America.throughout 2020.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased $17decreased $46 million, or 5%20%, in the first ninesix months of 20192020 compared to the first ninesix months of 2018,2019, due largely to increaseda reduction in purchased miles and decreased commissions received from our affinity card partner, from growthconsistent with fewer new affinity card holders in 2020 and an overall cardholders.reduction in consumer spending.

Cargo and other

On a consolidated basis, Cargo and other revenue increased $22decreased $24 million, or 15%22%, in the first ninesix months of 20192020 compared to the first ninesix months of 2018.2019. The increasedecrease is primarily attributabledue to increased freight and mail volumes onreduced belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters as a result of new contracts entered into in late 2018 and revenue from our subleased slots at LaGuardia and Reagan National airports.freighters.

OPERATING EXPENSES

Total operating expenses increased $139 million,decreased $1.1 billion, or 2%29%, compared to the first ninesix months of 2018.2019. 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:
 Six Months Ended June 30,
(in millions)20202019% Change
Fuel expense$443  $922  (52)%
Non-fuel operating expenses, excluding special items2,352  2,819  (17)%
Payroll support program grant wage offset(362) —  NM
Special items - merger-related costs4  34  (88)%
Special items - impairment charges and other229  —  NM
Total operating expenses$2,666  $3,775  (29)%

33
 Nine Months Ended September 30,
(in millions)2019 2018 % Change
Fuel expense$1,408
 $1,397
 1 %
Non-fuel operating expenses, excluding special items4,295
 4,114
 4 %
Special items - merger-related costs39
 67
 (42)%
Special items - other—
 25
 NM
Total operating expenses$5,742
 $5,603
 2 %




Fuel Expense

Aircraft fuel expense increased $11decreased $479 million, or 1%52%, compared to the ninesix months ended SeptemberJune 30, 2018.2019. The elements of the change are illustrated in the following table: 
Six Months Ended June 30,
20202019
(in millions, except for per gallon amounts)Dollars Cost/GalDollars Cost/Gal
Raw or "into-plane" fuel cost$430  $1.73  $916  $2.18  
Losses on settled hedges10  0.04  7  0.02  
Consolidated economic fuel expense440  1.77  $923  $2.20  
Mark-to-market fuel hedge adjustments3  0.01  (1) —  
GAAP fuel expense$443  $1.78  $922  $2.20  
Fuel gallons248  419  
 Nine Months Ended September 30,
 2019 2018
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$1,397
 $2.16
 $1,450
 $2.30
(Gains) losses on settled hedges12
 0.02
 (23) (0.04)
Consolidated economic fuel expense1,409
 2.18
 $1,427
 $2.26
Mark-to-market fuel hedge adjustments(1) —
 (30) (0.05)
GAAP fuel expense$1,408
 $2.18
 $1,397
 $2.21
Fuel gallons646
   631
  

The raw fuel price per gallon decreased 6%21% due to lower 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 decrease in raw fuel price per gallon during the first ninesix months of 20192020 was driven by a 15%36% decrease in crude oil prices partially offset byand a 15% increase56% decrease in refining margins.

Losses recognized for hedges that settled in the first ninesix months of 20192020 were $12$10 million, compared to gainslosses of $23$7 million in the same period in 2018.2019. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.

We currently expect our economic fuel pricecost per gallon to be approximately 8% lower in the fourththird quarter of 2019to range between $1.35 and $1.40 per gallon on a significant decrease in consumption as compared to the fourth quarter of 2018 due to our current estimate of lower crude prices, partially offset by increased refining margins.prior-year period.

Non-fuel Expense and Non- special items
 Six Months Ended June 30,
(in millions)20202019% Change
Wages and benefits$1,084  $1,124  (4)%
Variable incentive pay23  79  (71)%
Aircraft maintenance160  235  (32)%
Aircraft rent155  165  (6)%
Landing fees and other rentals214  245  (13)%
Contracted services102  142  (28)%
Selling expenses59  159  (63)%
Depreciation and amortization215  211  2 %
Food and beverage service56  102  (45)%
Third-party regional carrier expense63  83  (24)%
Other221  274  (19)%
Total non-fuel operating expenses, excluding special items$2,352  $2,819  (17)%

34
 Nine Months Ended September 30,
(in millions)2019 2018 % Change
Wages and benefits$1,732
 $1,629
 6 %
Variable incentive pay125
 104
 20 %
Aircraft maintenance341
 320
 7 %
Aircraft rent247
 233
 6 %
Landing fees and other rentals388
 371
 5 %
Contracted services214
 227
 (6)%
Selling expenses236
 245
 (4)%
Depreciation and amortization317
 290
 9 %
Food and beverage service159
 158
 1 %
Third-party regional carrier expense125
 114
 10 %
Other411
 423
 (3)%
Total non-fuel operating expenses, excluding special items$4,295
 $4,114
 4 %




Wages and Benefits

Wages and benefits increaseddecreased during the first ninesix months of 20192020 by $103$40 million,, or 6%4%. The primary components of wages and benefits are shown in the following table:
 Six Months Ended June 30,
(in millions)20202019% Change
Wages$803  $845  (5)%
Pension—Defined benefit plans service cost26  21  24 %
Defined contribution plans68  66  3 %
Medical and other benefits130  132  (2)%
Payroll taxes57  60  (5)%
Total wages and benefits$1,084  $1,124  (4)%
 Nine Months Ended September 30,
(in millions)2019 2018 % Change
Wages$1,305
 $1,230
 6 %
Pension—Defined benefit plans service cost31
 36
 (14)%
Defined contribution plans100
 88
 14 %
Medical and other benefits203
 186
 9 %
Payroll taxes93
 89
 4 %
Total wages and benefits$1,732
 $1,629
 6 %

Wages increased $75decreased $42 million, or 6%5%, on a 2% increase12% decrease in FTEs. The increasedecrease is primarily due to the recognitionvoluntary leaves of approximately $24 million during the third quarter in one-time costs following the ratification of the AMFA and IAM contracts,absence accepted by more than 6,000 employees, as well as the impact ofreduction in executive pay and hours for management employees. These decreases were offset by increased wage rates following the mid-2019 ratification of new contracts for our labor groups as compared toemployees represented by the prior year period.Aircraft Mechanics Fraternal Association and the International Association of Machinists.

Costs associated with our defined contribution plans increased $12 million, or 14%, primarily due to a step increase in employer contributions for our pilot workgroup, as well an overall increase to the eligible wage base.

Medical and other benefits expense increased $17 million, or 9%, primarily due to increased volume of high-dollar value medical claims as compared to the prior-year period as well as FTE growth.

For the full year, we expect wages and benefits will decline compared to increase at a rate greater than capacity growth, duethe prior year as we reduce scheduled flying and executive salaries, and realize savings generated from our reduction in workforce necessary to higher wage rates for certain labor groups and higher medical and defined-contribution costs.align with our expectation of demand.

Variable Incentive Pay

Variable incentive pay expense increased $21decreased $56 million, or 20%71%, during the first ninesix months of 20192020 as compared to the same period in 2018.2019. The increasedecrease is primarily due to the result of a higher wage base and expectation of a higher payout rate for our annual bonus in 2019 as compared to 2018.that key financial metrics will not be achieved under the performance based pay program.

Aircraft Maintenance

Aircraft maintenance expense increaseddecreased by $21$75 million, or 7%32%, during the first ninesix months of 20192020 compared to the same period in 2018.2019. The increasedecrease is primarily due to heavier volumes froma significant reduction in engine events and heavy checks, as well as reduced power-by-the-hour expense on reduced utilization in covered aircraft.

We expect full year aircraft maintenance expense to be lower than 2019 on reduced aircraft utilization and parking of certain aircraft.

Landing fees and other rentals

Landing fees and other rentals decreased by $31 million, or 13%, during the timingfirst six months of maintenance events, specifically from our Airbus aircraft, as2020 compared to the prior-year period.same period in 2019, primarily due to a 35% decrease in departures, offset by increased rates at certain of our airports.

For the full year, we expect aircraft maintenance expenselanding fees and other rentals to be approximately 2 - 3% higher than in 2018, fordecrease as compared to 2019, however, not at the reasons mentioned above.same rate as decreased departures. We expect to see continued rate increases at many of our airports, as well as negative net settlements to cover airport operating costs.

Aircraft RentContracted Services

Aircraft rent expense increasedContracted services decreased by $14$40 million, or 6%28%, during the first ninesix months of 20192020 compared to the same period in 2018, primarily due to the annualization of expense for our leased E175s under our CPA agreement with SkyWest, and leased A321neos delivered in 2018 and 2019.

For the full year, we expect aircraft rent expense to be approximately 5 - 6% higher than in 2018, for the reasons mentioned above.

Contracted Services

Contracted services decreased by $13 million, or 6%, during the first nine months of 2019 compared to the same period in 2018. This decrease is primarily a result of lower contractorreduced vendor spend directly correlating to reduced year-over-year departures and consulting spend due topassengers as a result of the timing of certain project work and an overall reduction in pricing from many of our vendor partners.COVID-19 pandemic.



For the full year, we expect contracted services expense to be approximately 6 - 7%significantly lower than in 2018, for the reasons mentioned above.2019, given our ongoing cost reduction efforts and significant reduction in departures.
35

Depreciation and Amortization

Selling Expense
Depreciation and amortization increased $27
Selling expense decreased by $100 million, or 9%63%, during the first ninesix months of 20192020 compared to the same period in 2018,2019. primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs given the continued delay in professional sports also contributed to the year-over-year decline.

We expect full year selling expense will decrease in-line with the reduction to revenue as a result of reduced distribution costs on lower bookings, as well as reduced sponsorship costs.

Food and beverage service

Food and beverage service decreased by $46 million, or 45%, during the first six months of 2020 compared to the same period in 2019. This decrease is primarily due to the addition55% decrease in revenue passengers as compared to the prior-year period, as well as the temporary closure of 14 owned E175s and six owned B737-900ERs tothe majority of our fleet sinceairport lounges in the thirdsecond quarter of 2018.2020.

For the full year, weWe expect depreciationfood and amortizationbeverage service to be approximately 8 - 9% higher than 2018 for the reasons mentioned above.decrease as compared to 2019, consistent with our expectation of reduced passengers throughout 2020.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPAs, increased $11CPA, decreased $20 million, or 10%24%, during the first ninesix months of 20192020 compared to the same period in 2018.2019. The increasedecrease is primarily due to a 6.4% increase30% decrease in capacity flown by SkyWest as compared to the prior year.

For the full year, we expect third-party regional carrier expense to be higherlower than 20182019 due to increaseddecreased flying by our regional partners.and reduced contractual rates.

Special Items—Merger-Related Costs

We recorded special items of $39$4 million in the first ninesix months of 20192020 for merger-related costs associated with our acquisition of Virgin America, compared to $67$34 million in the first ninesix months of 2018.2019. Costs incurred in the first ninesix months of 20192020 are primarily a resultcomprised of expenses associated with Airbus flight attendant and pilot vacation balances, which were subject to a one-time true-up in accordance with the integrated labor agreements, as well as certain technology integration costs. We expect to2020 will be the final year in which we incur merger-relatedintegration related charges.

Special Items - Impairment and other charges

We recorded impairment and other charges of $229 million in the second quarter of 2020, driven by our current expectation of decreased future cash flows stemming from the COVID-19 pandemic. Impairment and other charges primarily consist of the full write-down of the operating lease assets and related spare inventory and parts, as well as estimated lease return costs for certain Airbus aircraft which were permanently parked, the remainderwrite-down of 2019, althoughour owned Q400 fleet to fair value, and the full write-off of gate assets at a lesser rate.Dallas Love Field.

Additional impairment charges may be recorded as we execute further capacity reductions beyond those already scheduled and potentially permanently park additional aircraft.

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 adjusted pretax profitloss was $761$556 million in the first ninesix months of 2019,2020, compared to $671pretax profit of $383 million in the same period in 2018.2019. The $90$939 million increase inshift to pretax profitloss was driven by a $192 million increase$1.8 billion decrease in Mainline operating revenuerevenues, offset by a $414 million decrease in Mainline non-fuel operating expense and a $46$422 million decrease in Mainline fuel expense. These improvements were primarily offset by a $153 million increase in Mainline non-fuel operating expenses.

36

As compared to the prior year, increasedlower Mainline revenues are primarily attributable to a 3% increase55% decrease in yields,traffic and a 20 point decrease in capacity, driven by our revenue initiatives and pricing improvementsthe significant reduction in manydemand as a result of our markets.the COVID-19 pandemic. Non-fuel operating expenses increased primarily due to increased aircraft ownership,decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as well as decreased wages and maintenance costs as compared to the prior year.benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lower raw fuel prices, combined with decreased consumption from the reduction in flying, drove the decrease in Mainline fuel expense.

Regional

Our Regional operations broke evengenerated a pretax loss of $202 million in the first ninesix months of 2019,2020, compared to a pretax loss of $82$23 million in the first ninesix months of 2018.2019. The improvementincrease in the pretax loss was attributable to a $161$303 million increasedecrease in operating revenues, partially offset by a $28$61 million increasedecrease in fuel costs and a $62$63 million increasedecrease in non-fuel operating expenses. The increasedecrease in non-fuel operating expensesregional revenues is primarily due to the 15% increase24% decrease in capacity.capacity, spurred by the COVID-19 pandemic.

Horizon

Horizon achieved a pretax profit of $33$16 million in the first ninesix months of 2019,2020, compared to pretax profit of $20$22 million in the same period in 2018,2019, primarily due to improvedsignificant cost management through better productivity and improved operational performance.reduction efforts implemented in response to the COVID-19 pandemic.




LIQUIDITY AND CAPITAL RESOURCES
 
Our primaryAs a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, increase liquidity and help to preserve the relative strength of our balance sheet. From the onset of the pandemic, we have taken the following key actions to enhance and preserve our liquidity:

•Obtained $1 billion in CARES Act funding to offset wage and benefit expense;

•Raised $589 million in secured financing collateralized by 32 aircraft;

•Drew $400 million from existing credit facilities;

•Suspended our share repurchase program and quarterly dividend indefinitely, and;

•Reduced planned capital expenditures by nearly $600 million for 2020, including suspension of pre-delivery payments and deferral of non-essential capital projects.

Subsequent to quarter end, we obtained $1.2 billion in financing through the issuance of EETCs in July 2020. The EETCs are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft.

We have significant remaining borrowing capacity, supported by our remaining 33 unencumbered aircraft, real estate and slot assets, and our loyalty program. Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors.

In the second quarter, we notified the U.S. Department of the Treasury (Treasury) of Alaska and Horizon’s intent to apply for loans under the CARES Act, which enables us to access up to $1.1 billion of additional financing. In July 2020, we signed a non-binding letter of intent with the Treasury, anticipating that Mileage Plan assets may be used as loan collateral, and that definitive terms would be negotiated before September 30, 2020. As we continue our negotiations with Treasury, we are also considering other possible sources of liquidity are:

To preserve liquidity, we have continued our focus on reducing cash burn. We have successfully reduced our monthly cash burn rate from $400 million as we exited March to $120 million in June. We define cash burn as all cash flows, excluding the impact of any CARES Act funding or proceeds from new borrowings, plus net activities from marketable securities.






37

Our existingdaily cash burn for the three and marketable securities balance of $1.6 billion, and our expected cash from operations;

Our 123 unencumbered aircraft that could be financed, if necessary;

Our combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.

During the ninesix months ended SeptemberJune 30, 2019, we took free and clear delivery2020, is reconciled from our statement of four B737-900ER and four E175 aircraft. We made net debt payments totaling $396 million, includingcash flows as follows:
(in millions)Six Months Ended June 30, 2020
Three Months Ended March 31, 2020(a)
Three Months Ended June 30, 2020(b)
Net cash provided by operating activities$321  $33  $288  
Net cash provided by (used in) investing activities(124) (127) 3  
Net cash provided by financing activities1,091  $684  407  
Net increase in cash, cash equivalents and restricted cash1,288  590  698  
Adjusted to remove:
Payroll support program grant723  —  723  
Payroll support program note and equity284—  284
Secured debt issuances589425164
Credit facility draws400400  —  
Net marketable security activity(5) (24) 19  
Total adjustments1,991  801  1,190  
Adjusted cash burn$(703) $(211) $(492) 
Days in the period1829191  
Average daily cash burn$(4) $(2) $(5) 
(a) As filed in our first quarter 10-Q, as amended.
(b) Cash burn for the prepayment of certain loans, offsetthree months ended June 30, 2020, can be calculated by new borrowings, undertakensubtracting cash flows for the three months ended March 31, 2020, as part of our broader plan of reducing balance sheet leverage and lowering interest expense. We also continued to return capital to our shareholders by paying dividends totaling $129 million and repurchasing $53 million of our common stock.previously filed with the SEC, from the six months ended June 30, 2020.

The table below presents the major indicators of financial condition and liquidity:
(in millions)June 30, 2020December 31, 2019Change
Cash and marketable securities$2,803  $1,521  84 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue42 %17 %25 pts
Total debt2,636  1,499  76 %
Shareholders’ equity$3,861  $4,331  (11)%

Debt-to-capitalization, adjusted for operating leases
(in millions)June 30, 2020December 31, 2019Change
Long-term debt, net of current portion$1,549  $1,264  23%
Capitalized operating leases1,649  1,708  (4)%
COVID-19 related borrowings(a)
818  —  NM
Adjusted debt$4,016  $2,972  35%
Shareholders' equity3,861  4,331  (11)%
Total invested capital$7,877  $7,303  8%
Debt-to-capitalization, including operating leases51 %41 %10 pts
(a)To best reflect our leverage at June 30, 2020, we included the short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.
38

(in millions)September 30, 2019 December 31, 2018 Change
Cash and marketable securities$1,619
 $1,236
 31 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue23% 20% 3 pts
Long-term debt, net of current portion$1,444
 $1,617
 (11)%
Shareholders’ equity$4,252
 $3,751
 13%

Debt-to-capitalization, adjusted for operating leases     
(in millions)September 30, 2019 December 31, 2018 Change
Long-term debt, net of current portion$1,444
 $1,617
 (11)%
Capitalized operating leases(a)
1,644
 1,768
 
(a) 
Adjusted debt$3,088
 $3,385
 (9)%
Shareholders' equity4,252
 3,751
 13%
Total invested capital$7,340
 $7,136
 3%
      
Debt-to-capitalization, including operating leases42% 47% (5) pts
Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)June 30, 2020
Adjusted debt$4,016 
Current portion of long-term debt, net of COVID-19 related borrowings269 
Total adjusted debt4,285 
Less: Cash and marketable securities(2,803)
Net adjusted debt$1,482 
(a)(in millions)Following the adoption of the new lease accounting standard on January 1, 2019, this represents the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no meaningful impact to the ratio.

We expect our debt-to-capitalization ratio to be approximately 41% by December.


Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)September 30, 2019
Adjusted debt$3,088
Current portion of long-term debt265
Total adjusted debt3,353
Less: Cash and marketable securities(1,619)
Net adjusted debt$1,734
  
(in millions)Last Twelve Months Ended September 30, 2019
GAAP Operating Income(a)
$857
Adjusted for:

Special items79
Mark-to-market fuel hedge adjustments51
Depreciation and amortization425
Aircraft rent329
EBITDAR$1,741
  
Net adjusted debt to EBITDAR1.0x
Last Twelve Months Ended June 30, 2020
GAAP Operating Income(a)
Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.$65 
Adjusted for:
Special items(119)
Mark-to-market fuel hedge adjustments(2)
Depreciation and amortization427 
Aircraft rent321 
EBITDAR$692 
Net adjusted debt to EBITDAR2.1x
(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.

ANALYSIS OF OUR CASH FLOWS
 
Cash Provided byUsed in Operating Activities
 
For the first ninesix months of 2019,2020, net cash provided by operating activities was $1.4 billion,$321 million, compared to $986 million$1 billion during the same period in 2018.2019. The $395$712 million increasedecrease in our operating cash flows is primarily attributable to a $174$712 million increasedecline in net income, as well as significant cash refund activity, and a greater increasedecline in our air traffic liability and higher depreciation and amortization expense in 2019advance bookings as compared to the same period in 2018. These increases werethe prior year, all as a result of the COVID-19 pandemic. The net loss was offset by a $65 million voluntary pension contribution made infunds received from the third quarterU.S. Treasury as part of 2019.the PSP.

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 used in investing activities was $708$124 million during the first ninesix months of 2019,2020, compared to $333$530 million during the same period of 2018. Our capital expenditures were $527 million2019. The decrease to cash used in the first nine months of 2019, a decrease of $27 million compared to the nine months ended September 30, 2018. Thisinvesting activities is primarily driven by lower cash outlays for deliveries of and advance deposits on aircraftdue to a reduction in 2019 as compared to the same period of 2018. Our net purchases of marketable securities, which were $218$34 million in the first ninesix months of 2019,2020, compared to net sales of $185$222 million in the ninesix months ended SeptemberJune 30, 2018.2019. The shift todecrease in net purchases is primarily driven by stronger operatingthe need to utilize previously invested cash flows as compared to 2018. Internally, we analyzefund operations and manage our cash and marketable securities balance inprovide customer refunds. The decrease is also due to the aggregate.



The table below reflects our full-year expectation forpostponement of capital expenditures based on our current intentions. It does not reflect our actual contractual obligations at this time, nor does it reflectin 2020 as a result of the capital expenditures that would be incurred if we exercised options or cancelable purchase commitments that are available to us. We have options to acquire 37 B737 aircraft with deliveries from 2021 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2021 to 2023. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.COVID-19 pandemic.
(in millions)2019 2020
Expected capital expenditures$700
 $775

Cash Used in Financing Activities
 
Cash used infrom financing activities was $538 million$1.1 billion during the first ninesix months of 20192020 compared to $666cash used for financing activities of $363 million during the same period in 2018.2019. During the first ninesix months of 2019,2020, we madehad proceeds from debt issuances of $1.3 billion, including the loan portion of the proceeds from the PSP. These proceeds were partially offset by debt payments of $752$125 million, including the prepayment of $532 million of debt, dividend payments totaling $129$45 million, and had $53$31 million in common stock repurchases. These payments were partially offset by the receipt of funds from new secured debt financing of $356 million in the first nine months of 2019.

39

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
Aircraft Commitments
 
As of SeptemberJune 30, 2019,2020, we have firm orders to purchase or lease 3635 aircraft. WeAlaska also havehas cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 20232024 through 2025.2026. We could incur a loss of pre-delivery payments and credits as a cancellation fee. WeAlaska also havehas options to acquire 37 B737 MAX aircraft with deliveries from 2021 through 2024, and Horizon has options to acquire 30 E175 aircraft with deliveries from 20212022 through 2023.2024. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, we haveAlaska has options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

The followingGiven the drastically reduced demand for air travel as a result of the COVID-19 pandemic, we are currently evaluating our overall fleet strategy and long-term plan. We are also in the process of negotiating with aircraft manufacturers and lessors to optimize timing of fleet activity. It is probable that the current outlook as stated below will change significantly. This table summarizes expectedrepresents anticipated fleet activity by year as of SeptemberJune 30, 2020:
Actual FleetAnticipated Fleet Activity
AircraftJune 30, 20202020 Additions2020 RemovalsDecember 31, 20202021 ChangesDecember 31, 2021
B737 Freighters3  —  —  3  —  3  
B737-70011  —  —  11  —  11  
B737-80061  —  —  61  —  61  
B737-90012  —  —  12  —  12  
B737-900ER79  —  —  79  —  79  
B737 MAX9(a)
—  3  —  3  15  18  
A320(b)
49  —  —  49  (7) 42  
A321neo10  —  —  10  —  10  
Total Mainline Fleet225  3  —  228  8  236  
Q400 operated by Horizon32  —  —  32  —  32  
E175 operated by Horizon30  —  —  30  —  30  
E175 operated by third party32  —  —  32  —  32  
Total Regional Fleet94  —  —  94  —  94  
Total319  3  —  322  8  330  
(a)The three B737 MAX9 aircraft reflected in 2020 were originally contracted for delivery in 2019 and are subjectdelayed due to change:the MAX grounding. Seven B737 MAX9 deliveries originally contracted for 2020 have been shifted to 2021 based on our current estimate of expected delivery dates.
(b)Actual fleet at June 30, 2020, excludes 12 Airbus aircraft permanently parked in response to COVID-19 capacity reductions.
 Actual Fleet Expected Fleet Activity
AircraftSeptember 30, 2019 2019 Additions 2019 Removals December 31, 2019 2020 Changes December 31, 2020
B737 Freighters3
 —
 —
 3
 —
 3
B737 Passenger Aircraft(a)
163
 1
 —
 164
 9
 173
Airbus Passenger Aircraft72
 1
 (2) 71
 (1) 70
Total Mainline Fleet238
 2
 (2) 238
 8
 246
Q400 operated by Horizon(b)
32
 2
 (1) 33
 (1) 32
E175 operated by Horizon30
 —
 —
 30
 —
 30
E175 operated by third party32
 —
 —
 32
 —
 32
Total Regional Fleet94
 2
 (1) 95
 (1) 94
Total332
 4
 (3) 333
 7
 340
(a)Two of the three B737 MAX9 aircraft that were originally scheduled for delivery in 2019 have been shifted to 2020 in light of the MAX grounding, based on our current estimate of the expected delivery dates.
(b)Two Q400 aircraft that were previously removed from our operating fleet will be returning to revenue service. We expect these additions to occur in late 2019.

For future firm orders and option exercises, we may finance the aircraft through cash flow from operations, long-term debt, or lease arrangements.


40

Fuel Hedge Positions

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. However, given the sharp decline in demand and our capacity resulting from the COVID-19 pandemic, we are currently overhedged relative to our target of 50% of consumption through the remainder of 2020. Our crude oil positions are as follows:
 Approximate Gallons Hedged (in millions)Weighted-Average Crude Oil Price per BarrelAverage Premium Cost per Barrel
Third Quarter 2020115$66$2
Fourth Quarter 202085$64$2
Full Year 2020200$65$2
First Quarter 202160$62$2
Second Quarter 202145$63$2
Third Quarter 202140$57$2
Fourth Quarter 202120$49$4
Total 2021165$60$2
 Approximate % of Expected Fuel Requirements Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
Remainder 201950% $74
 $2
First Quarter 202050% 70
 2
Second Quarter 202040% 68
 2
Third Quarter 202030% 68
 2
Fourth Quarter 202020% 66
 2
Full Year 202035% $68
 $2
First Quarter 202110% 63
 2
Full Year 20212% $63
 $2

Contractual Obligations
 
The following table provides a summary of our contractual obligations as of SeptemberJune 30, 2019.2020. For agreements with variable terms, amounts included reflect our minimum obligations.
(in millions)Remainder of 20202021202220232024Beyond 2024Total
Current and long-term debt obligations$529  $742  $281  $245  $153  $695  $2,645  
Aircraft lease commitments162  300  274  217  166  677  1,796  
Facility lease commitments5  9  8  7  7  84  120  
Aircraft maintenance deposits12  53  45  24  6  2  142  
Aircraft purchase commitments (a)
335  554  337  186  18  25  1,455  
Interest obligations (b)
32  42  30  23  17  61  205  
Other obligations (c)
41  179  185  190  197  910  1,702  
Total$1,116  $1,879  $1,160  $892  $564  $2,454  $8,065  
(a)Although the Company has contractual obligations for purchase commitments in 2020, informal agreements have been reached with aircraft manufacturers to defer payments beyond 2020.
(b)For variable-rate debt, future obligations are shown above using forecasted interest rates as of June 30, 2020.
(in millions)Remainder of 2019 2020 2021 2022 2023 Beyond 2023 Total
Current and long-term debt obligations$63
 $268
 $313
 $274
 $234
 $565
 $1,717
Aircraft lease commitments83
 313
 275
 250
 195
 738
 1,854
Facility lease commitments3
 10
 9
 6
 6
 89
 123
Aircraft maintenance deposits16
 73
 63
 54
 29
 10
 245
Aircraft purchase commitments111
 504
 475
 333
 194
 36
 1,653
Interest obligations (a)
14
 48
 39
 29
 23
 38
 191
Other obligations (b)
34
 152
 173
 181
 186
 1,079
 1,805
Total$324
 $1,368
 $1,347
 $1,127
 $867
 $2,555
 $7,588
(c)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements. In the second quarter, Alaska entered into an agreement with SkyWest to defer a portion of 2020 payments and eliminate contractual minimums through September 30, 2020.
(a)For variable-rate debt, future obligations are shown above using forecasted interest rates as of September 30, 2019.
(b)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.

In the second quarter, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations. The Company has also deferred 2020 aircraft payments, including those related to the B737 MAX9, to periods beyond 2020. Discussions remain ongoing with aircraft manufacturers and lessors to optimize the timing of aircraft deliveries and lease returns.

Credit Card Agreements
 
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million.$500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million.$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.
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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 will reverse, potentially resulting in an increase in income taxes paid.

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-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, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believeexpect that weour 2020 cash tax rate will havebe close to zero, given our current expectation of operating losses for the liquidity available to make our future tax payments.remainder of the year.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three months ended SeptemberJune 30, 2019.2020. For information on 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, 2018.2019 and Note 2, "COVID-19," for discussion about the estimates used in the Company's impairment analyses.

GLOSSARY OF AIRLINE TERMS

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 capitalized operating leases) divided by total equity plus adjusted debt

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

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

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of 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, Airbus 320 family and Airbus 321neo jets and all associated revenues and costs

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

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

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

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ 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. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchasepurchased 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

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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, 2018.2019.
 

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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

As of SeptemberJune 30, 2019,2020, 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 SeptemberJune 30, 2019.2020.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended SeptemberJune 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).

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PART II


ITEM 1. LEGAL PROCEEDINGS
 
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin 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.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles 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 and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.

The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. 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

ThereExcept for the additional risk factors below, there have been no material changes to the 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, 20182019.
.

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

In late 2019, an outbreak of novel coronavirus and its resulting disease (COVID-19) was detected in Wuhan, China. Since that time, COVID-19 has spread rapidly throughout the globe, including within the United States, where over one million cases have been positively diagnosed to date. In March 2020, the President of the United States declared a national emergency in response to the rapid spread, and all markets we serve have implemented some measure of travel restriction or stay-at-home order. These orders, combined with a wariness among the public of travel by aircraft due to perceived risk of infection, have resulted in an unprecedented decline in business and leisure travel. Cancellations of conventions and conferences, sporting events, concerts and other similar events, as well as the closure of popular tourist destinations, have contributed to this decline. This reduction in demand has materially negatively impacted our revenues and results of operations. As there is no indication of when these restrictions may be lifted or when demand may return, we expect to continue to see negative impacts from the COVID-19 pandemic on our business.

In response to the pandemic, we have implemented and continue to implement a comprehensive strategy to mitigate the impacts on our business. This strategy may itself have negative impacts on our business and operations. One such action is the waiver of change fees and the ability to rebook travel for an extended period beyond standard rebooking terms. The loss of change fee revenue, combined with ongoing significant ticket cancellation activity, has adversely impacted our revenues and liquidity, and we expect such impacts to continue if governmental authorities extend existing travel restriction or stay-at-home orders or
46

impose new orders or other restrictions intended to mitigate the spread of COVID-19, if businesses continue to restrict nonessential travel for their employees, or if the perceived risk of infection persists.

We have also implemented significant cash preservation and cost reduction strategies in response to the impacts of COVID-19. These strategies include, but are not limited to, capital expenditure reductions, hiring freezes, solicitation of voluntary leaves of absence and renegotiation of contractual terms and conditions. These measures, while helpful in slowing the rate at which we utilize our cash, are not expected to fully recover the loss of cash as a result of decreased ticket sales.

The Company may also experience significant supply chain disruptions as the COVID-19 pandemic may also adversely impact our suppliers. See “Item 1A., Risk Factors – We are dependent on a limited number of suppliers for aircraft and parts” of our Annual Report on Form 10-K for further discussion of risks related to the Company’s dependence on a limited number of suppliers. Should COVID-19 cause our limited vendors to have performance problems, reduced or ceased operations, or bankruptcies, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

At this time, we are unable to predict what impact the pandemic will have on future customer behavior. Future business travel may be impacted by widespread use of videoconferencing or the reduction of business travel budgets. Travelers may also become more reluctant in general to travel. In addition, the Company has incurred, and will continue to incur COVID-19 related costs for enhanced aircraft cleaning and additional procedures to limit transmission among employees and guests. Although these procedures are elective, the industry may in the future be subject to further cleaning and safety measures, which may be costly and take a significant amount of time to implement. These contingencies, individually and combined, could have a material adverse impact on our business. See “Item 1A., Risk Factors – Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.” of our Annual Report on Form 10-K for further discussion of the Company’s vulnerability to a general economic downturn or recession.

We have a significant amount of debt and fixed obligations and have incurred substantial incremental debt in response to the COVID-19 pandemic. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments, as well as non-cancelable commitments for airport and facility leases, maintenance and other obligations. In response to the COVID-19 pandemic, we have incurred and continue to seek new financing sources to fund our operations while demand remains at an unprecedented low level and for the unknown duration of any economic recovery period. Further, as we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, the impacts of COVID-19, or from other risks as described in “Item 1A., Risk Factors” of our Annual Report on Form 10-K, may prohibit us from doing so in the future and may adversely affect our overall liquidity.

We have accepted certain conditions by accepting funding under the payroll support program of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

On March 27, 2020, the CARES Act was signed into law and provides the Company with the ability to access liquidity in the form of grants, loans, loan guarantees and other investments by the U.S. government.

In the second quarter of 2020, the Company and its subsidiaries Alaska Airlines and Horizon Air, as well as McGee, entered agreements with the United States Department of the Treasury (the Treasury) to secure funding under the PSP of the CARES Act. Alaska, Horizon and McGee agreed to use PSP funds exclusively for employee payroll and benefits expenses through at least September 30, 2020. Our aggregate receipts from the PSP total approximately $1 billion, of which, a total of $281 million is in the form of an unsecured senior term loan payable over ten years.Additionally, the government received warrants to purchase 874,344 non-voting shares of the Company’s common stock. On April 23, 2020, Alaska and Horizon received full disbursement of the PSP funds. McGee received partial disbursement in June 2020, with the remainder expected in the third quarter of 2020. Additional warrants to purchase 14,327 shares of Air Group common stock will be issued to Treasury in connection with McGee's receipt of the second and third installments of PSP funds.

Our PSP funding is subject to the following conditions:

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•Alaska Airlines and Horizon Air must refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits for non-officer employees through September 30, 2020;

•Executive compensation for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through March 24, 2022;

•The Company is prohibited from repurchasing its common stock and from paying dividends on its common stock until September 30, 2021;

•Alaska Airlines and Horizon Air must maintain air service to markets they served as of March 1, 2020, unless exempted by the Department of Transportation, through March 1, 2022; and

•The Company must maintain certain internal controls and records, and provide any additional reporting required by the U.S. government, relating to PSP funding.

These conditions may affect the profitability of the Company, including through increased compliance costs, and affect retention of key personnel.

In April 2020, the Company and its airline subsidiaries applied for loans under a separate provision of the CARES Act.If we accept funds under the loan program, we will be required to provide additional compensation to the U.S. government and may be subject to conditions beyond those stated above.


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

This table provides certain information with respect to our purchases of shares of our common stock during the thirdsecond quarter of 2019.
2020.
 
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, 2019 - July 31, 201968,509
 $64.05
  
August 1, 2019 - August 31, 2019279,370
 58.99
  
September 1, 2019 - September 30, 2019117,475
 64.26
  
Total465,354
 $61.06
 $509
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)
April 1, 2020 - April 30, 2020— $— 
May 1, 2020 - May 31, 2020— — 
June 1, 2020 - June 30, 2020— — 
Total— $— $456 

TheHistorically, the Company purchased shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION
 
None.

48



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/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller
November 7, 2019August 4, 2020
 

49

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
*Indicates management contract or compensatory plan arrangement
Exhibit
Number
Exhibit
Description
FormDate of First FilingExhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-QAugust 3, 20173.1
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 - 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
*Indicates management contract or compensatory plan arrangement


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