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 June 30, 2021March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
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Delaware | | 91-1292054 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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19300 International Boulevard, | Seattle, | WA | 98188 |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Ticker Symbol | Name of each exchange on which registered |
Common stock, $0.01 par value | ALK | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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.
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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 125,232,721126,091,824 common shares, par value $0.01, outstanding at July 31, 2021.April 30, 2022.
This document is also available on our website at http://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021MARCH 31, 2022
TABLE OF CONTENTS
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. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”
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. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking 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. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2020.2021. Please consider our forward-looking statements in light of those risks as you read this report.
PART I
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | (in millions) | (in millions) | June 30, 2021 | | December 31, 2020 | (in millions) | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 1,025 | | | $ | 1,370 | | Cash and cash equivalents | $ | 628 | | | $ | 470 | |
Marketable securities | Marketable securities | 2,926 | | | 1,976 | | Marketable securities | 2,262 | | | 2,646 | |
Total cash and marketable securities | Total cash and marketable securities | 3,951 | | | 3,346 | | Total cash and marketable securities | 2,890 | | | 3,116 | |
Receivables - net | Receivables - net | 567 | | | 480 | | Receivables - net | 658 | | | 546 | |
Inventories and supplies - net | Inventories and supplies - net | 52 | | | 57 | | Inventories and supplies - net | 78 | | | 62 | |
Prepaid expenses, assets held-for-sale, and other current assets | 201 | | | 123 | | |
Prepaid expenses and other current assets | | Prepaid expenses and other current assets | 348 | | | 196 | |
Total Current Assets | Total Current Assets | 4,771 | | | 4,006 | | Total Current Assets | 3,974 | | | 3,920 | |
| Property and Equipment | Property and Equipment | | | | Property and Equipment | | | |
Aircraft and other flight equipment | Aircraft and other flight equipment | 7,996 | | | 7,761 | | Aircraft and other flight equipment | 8,244 | | | 8,127 | |
Other property and equipment | Other property and equipment | 1,433 | | | 1,398 | | Other property and equipment | 1,529 | | | 1,489 | |
Deposits for future flight equipment | Deposits for future flight equipment | 402 | | | 583 | | Deposits for future flight equipment | 283 | | | 384 | |
| | 9,831 | | | 9,742 | | | 10,056 | | | 10,000 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | 3,703 | | | 3,531 | | Less accumulated depreciation and amortization | 3,814 | | | 3,862 | |
Total Property and Equipment - Net | Total Property and Equipment - Net | 6,128 | | | 6,211 | | Total Property and Equipment - Net | 6,242 | | | 6,138 | |
| Other Assets | | Other Assets | |
Operating lease assets | Operating lease assets | 1,375 | | | 1,400 | | Operating lease assets | 1,541 | | | 1,453 | |
Goodwill | 1,943 | | | 1,943 | | |
Intangible assets - net | 103 | | | 107 | | |
Goodwill and intangible assets | | Goodwill and intangible assets | 2,042 | | | 2,044 | |
Other noncurrent assets | Other noncurrent assets | 336 | | | 379 | | Other noncurrent assets | 411 | | | 396 | |
Other Assets | 3,757 | | | 3,829 | | |
Total Other Assets | | Total Other Assets | 3,994 | | | 3,893 | |
| Total Assets | Total Assets | $ | 14,656 | | | $ | 14,046 | | Total Assets | $ | 14,210 | | | $ | 13,951 | |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | (in millions, except share amounts) | (in millions, except share amounts) | June 30, 2021 | | December 31, 2020 | (in millions, except share amounts) | March 31, 2022 | | December 31, 2021 |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | Current Liabilities | | | | Current Liabilities | | | |
Accounts payable | Accounts payable | $ | 159 | | | $ | 108 | | Accounts payable | $ | 299 | | | $ | 200 | |
Accrued wages, vacation and payroll taxes | Accrued wages, vacation and payroll taxes | 439 | | | 527 | | Accrued wages, vacation and payroll taxes | 367 | | | 457 | |
Air traffic liability | Air traffic liability | 1,533 | | | 1,073 | | Air traffic liability | 1,643 | | | 1,163 | |
| Other accrued liabilities | Other accrued liabilities | 661 | | | 424 | | Other accrued liabilities | 659 | | | 625 | |
Deferred revenue | Deferred revenue | 922 | | | 733 | | Deferred revenue | 1,038 | | | 912 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 263 | | | 290 | | Current portion of operating lease liabilities | 272 | | | 268 | |
Current portion of long-term debt | Current portion of long-term debt | 869 | | | 1,138 | | Current portion of long-term debt | 292 | | | 366 | |
Total Current Liabilities | Total Current Liabilities | 4,846 | | | 4,293 | | Total Current Liabilities | 4,570 | | | 3,991 | |
| Long-Term Debt, Net of Current Portion | Long-Term Debt, Net of Current Portion | 2,319 | | | 2,357 | | Long-Term Debt, Net of Current Portion | 2,078 | | | 2,173 | |
| Noncurrent Liabilities | Noncurrent Liabilities | | | | Noncurrent Liabilities | | | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,222 | | | 1,268 | | Long-term operating lease liabilities, net of current portion | 1,357 | | | 1,279 | |
Deferred income taxes | Deferred income taxes | 439 | | | 407 | | Deferred income taxes | 509 | | | 578 | |
Deferred revenue | Deferred revenue | 1,424 | | | 1,544 | | Deferred revenue | 1,394 | | | 1,446 | |
Obligation for pension and postretirement medical benefits | 660 | | | 665 | | |
Obligation for pension and post-retirement medical benefits | | Obligation for pension and post-retirement medical benefits | 302 | | | 305 | |
Other liabilities | Other liabilities | 422 | | | 524 | | Other liabilities | 363 | | | 378 | |
Total Noncurrent Liabilities | | Total Noncurrent Liabilities | 3,925 | | | 3,986 | |
| | 4,167 | | | 4,408 | | | | | |
Commitments and Contingencies | 0 | | 0 | |
Commitments and Contingencies (Note 7) | | Commitments and Contingencies (Note 7) | 0 | | 0 |
| Shareholders' Equity | Shareholders' Equity | | | | Shareholders' Equity | | | |
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding | 0 | | | 0 | | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares | 1 | | | 1 | | |
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding | | Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding | — | | | — | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 135,437,808 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,087,864 shares; 2021 - 125,905,864 shares | | Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 135,437,808 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,087,864 shares; 2021 - 125,905,864 shares | 1 | | | 1 | |
Capital in excess of par value | Capital in excess of par value | 454 | | | 391 | | Capital in excess of par value | 503 | | | 494 | |
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares | (674) | | | (674) | | |
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares | | Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares | (674) | | | (674) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (487) | | | (494) | | Accumulated other comprehensive loss | (292) | | | (262) | |
Retained earnings | Retained earnings | 4,030 | | | 3,764 | | Retained earnings | 4,099 | | | 4,242 | |
| | 3,324 | | | 2,988 | | | 3,637 | | | 3,801 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 14,656 | | | $ | 14,046 | | Total Liabilities and Shareholders' Equity | $ | 14,210 | | | $ | 13,951 | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
(in millions, except per share amounts) | (in millions, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 | (in millions, except per share amounts) | 2022 | | 2021 | |
Operating Revenues | Operating Revenues | | | | | | | | Operating Revenues | | | | |
Passenger revenue | Passenger revenue | $ | 1,352 | | | $ | 309 | | | $ | 2,011 | | | $ | 1,790 | | Passenger revenue | $ | 1,511 | | | $ | 659 | | |
Mileage Plan other revenue | Mileage Plan other revenue | 118 | | | 73 | | | 212 | | | 182 | | Mileage Plan other revenue | 112 | | | 94 | | |
Cargo and other | Cargo and other | 57 | | | 39 | | | 101 | | | 85 | | Cargo and other | 58 | | | 44 | | |
Total Operating Revenues | Total Operating Revenues | 1,527 | | | 421 | | | 2,324 | | | 2,057 | | Total Operating Revenues | 1,681 | | | 797 | | |
Operating Expenses | Operating Expenses | | | | | | | | Operating Expenses | | | | |
Wages and benefits | Wages and benefits | 510 | | | 472 | | | 1,003 | | | 1,084 | | Wages and benefits | 606 | | | 493 | | |
Variable incentive pay | Variable incentive pay | 34 | | | 16 | | | 67 | | | 23 | | Variable incentive pay | 36 | | | 33 | | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (503) | | | (362) | | | (914) | | | (362) | | Payroll Support Program grant wage offset | — | | | (411) | | |
Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 274 | | | 59 | | | 477 | | | 443 | | Aircraft fuel, including hedging gains and losses | 347 | | | 203 | | |
Aircraft maintenance | Aircraft maintenance | 102 | | | 45 | | | 183 | | | 160 | | Aircraft maintenance | 135 | | | 81 | | |
Aircraft rent | Aircraft rent | 62 | | | 74 | | | 124 | | | 155 | | Aircraft rent | 73 | | | 62 | | |
Landing fees and other rentals | Landing fees and other rentals | 144 | | | 83 | | | 273 | | | 214 | | Landing fees and other rentals | 138 | | | 129 | | |
Contracted services | Contracted services | 54 | | | 30 | | | 105 | | | 102 | | Contracted services | 78 | | | 51 | | |
Selling expenses | Selling expenses | 41 | | | 4 | | | 74 | | | 59 | | Selling expenses | 58 | | | 33 | | |
Depreciation and amortization | Depreciation and amortization | 98 | | | 107 | | | 195 | | | 215 | | Depreciation and amortization | 102 | | | 97 | | |
Food and beverage service | Food and beverage service | 35 | | | 7 | | | 58 | | | 56 | | Food and beverage service | 41 | | | 23 | | |
Third-party regional carrier expense | Third-party regional carrier expense | 37 | | | 26 | | | 67 | | | 63 | | Third-party regional carrier expense | 42 | | | 30 | | |
Other | Other | 117 | | | 78 | | | 222 | | | 221 | | Other | 152 | | | 105 | | |
Special items - impairment charges and other | (4) | | | 69 | | | 14 | | | 229 | | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 75 | | | 18 | | |
Special items - restructuring charges | Special items - restructuring charges | (23) | | | 0 | | | (12) | | | 0 | | Special items - restructuring charges | — | | | 11 | | |
Special items - merger-related costs | 0 | | | 1 | | | 0 | | | 4 | | |
| Total Operating Expenses | Total Operating Expenses | 978 | | | 709 | | | 1,936 | | | 2,666 | | Total Operating Expenses | 1,883 | | | 958 | | |
Operating Income (Loss) | 549 | | | (288) | | | 388 | | | (609) | | |
Nonoperating Income (Expense) | | | | | |
Operating Loss | | Operating Loss | (202) | | | (161) | | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | | |
Interest income | Interest income | 6 | | | 7 | | | 13 | | | 16 | | Interest income | 7 | | | 7 | | |
Interest expense | Interest expense | (39) | | | (17) | | | (71) | | | (30) | | Interest expense | (27) | | | (32) | | |
Interest capitalized | Interest capitalized | 3 | | | 1 | | | 6 | | | 4 | | Interest capitalized | 2 | | | 3 | | |
Other - net | Other - net | 9 | | | 6 | | | 19 | | | 11 | | Other - net | 14 | | | 10 | | |
Total Nonoperating Income (Expense) | (21) | | | (3) | | | (33) | | | 1 | | |
Income (Loss) Before Income Tax | 528 | | | (291) | | | 355 | | | (608) | | |
Income tax expense (benefit) | 131 | | | (77) | | | 89 | | | (162) | | |
Net Income (Loss) | $ | 397 | | | $ | (214) | | | $ | 266 | | | $ | (446) | | |
Total Non-operating Expense | | Total Non-operating Expense | (4) | | | (12) | | |
Loss Before Income Tax | | Loss Before Income Tax | (206) | | | (173) | | |
Income tax benefit | | Income tax benefit | (63) | | | (42) | | |
Net Loss | | Net Loss | $ | (143) | | | $ | (131) | | |
| Basic Income (Loss) Per Share: | $ | 3.18 | | | $ | (1.74) | | | $ | 2.13 | | | $ | (3.62) | | |
Diluted Income (Loss) Per Share: | $ | 3.13 | | | $ | (1.74) | | | $ | 2.10 | | | $ | (3.62) | | |
Basic Loss Per Share: | | Basic Loss Per Share: | $ | (1.14) | | | $ | (1.05) | | |
Diluted Loss Per Share: | | Diluted Loss Per Share: | $ | (1.14) | | | $ | (1.05) | | |
Shares used for computation: | Shares used for computation: | | | Shares used for computation: | | |
Basic | Basic | 124.977 | | | 123.296 | | | 124.640 | | | 123.058 | | Basic | 125.984 | | | 124.299 | | |
Diluted | Diluted | 126.825 | | | 123.296 | | | 126.388 | | | 123.058 | | Diluted | 125.984 | | | 124.299 | | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Net Income (Loss) | $ | 397 | | | $ | (214) | | | $ | 266 | | | $ | (446) | |
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Other Comprehensive Income (Loss): | | | | | | | |
Related to marketable securities: | | | | | | | |
Unrealized holding gain (loss) arising during the period | 0 | | | 31 | | | (11) | | | 30 | |
Reclassification of gain into Other - net nonoperating income | (2) | | | (6) | | | (6) | | | (9) | |
Income tax effect | 1 | | | (6) | | | 4 | | | (5) | |
Total | (1) | | | 19 | | | (13) | | | 16 | |
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Related to employee benefit plans: | | | | | | | |
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income | 9 | | | 8 | | | 17 | | | 15 | |
Income tax effect | (2) | | | (2) | | | (4) | | | (4) | |
Total | 7 | | | 6 | | | 13 | | | 11 | |
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Related to interest rate derivative instruments: | | | | | | | |
Unrealized holding gain (loss) arising during the period | 1 | | | (2) | | | 9 | | | (27) | |
Reclassification of loss into Aircraft rent | 0 | | | 0 | | | 0 | | | 1 | |
Income tax effect | 0 | | | 1 | | | (2) | | | 6 | |
Total | 1 | | | (1) | | | 7 | | | (20) | |
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Other Comprehensive Income | 7 | | | 24 | | | 7 | | | 7 | |
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Comprehensive Income (Loss) | $ | 404 | | | $ | (190) | | | $ | 273 | | | $ | (439) | |
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| Three Months Ended March 31, | | |
(in millions) | 2022 | | 2021 | | | | |
Net Loss | $ | (143) | | | $ | (131) | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | |
Marketable securities | (40) | | | (12) | | | | | |
Employee benefit plans | 1 | | | 6 | | | | | |
Interest rate derivative instruments | 9 | | | 6 | | | | | |
Total comprehensive loss, net | $ | (173) | | | $ | (131) | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
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(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, 2020 | 124.217 | | | $ | 1 | | | $ | 391 | | | $ | (674) | | | $ | (494) | | | $ | 3,764 | | | $ | 2,988 | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 0 | | | — | | | 0 | | | | | |
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Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | | | |
CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
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Stock issued under stock plans | 0.225 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
Balances at March 31, 2021 | 124.442 | | | $ | 1 | | | $ | 409 | | | $ | (674) | | | $ | (494) | | | $ | 3,633 | | | $ | 2,875 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 397 | | | 397 | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | | | | | |
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Stock-based compensation | 0.009 | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
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Stock issued for employee stock purchase plan | 0.716 | | | — | | | 23 | | | — | | | — | | | — | | | 23 | | | | | |
Stock issued under stock plans | 0.062 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | | | |
Balances at June 30, 2021 | 125.229 | | 1 | | 454 | | (674) | | | (487) | | | 4,030 | | | 3,324 | | | | | |
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(in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | | | | |
Balances at December 31, 2021 | 125.906 | | | $ | 1 | | | $ | 494 | | | $ | (674) | | | $ | (262) | | | $ | 4,242 | | | $ | 3,801 | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (143) | | | (143) | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (30) | | | — | | | (30) | | | | | |
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Stock-based compensation | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
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Stock issued under stock plans | 0.182 | | | — | | | (4) | | | — | | | — | | | — | | | (4) | | | | | |
Balances at March 31, 2022 | 126.088 | | | $ | 1 | | | $ | 503 | | | $ | (674) | | | $ | (292) | | | $ | 4,099 | | | $ | 3,637 | | | | | |
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| (in millions) | (in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total | | (in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | |
Balances at December 31, 2019 | 123.000 | | | $ | 1 | | | $ | 305 | | | $ | (643) | | | $ | (465) | | | $ | 5,133 | | | $ | 4,331 | | | |
Balances at December 31, 2020 | | Balances at December 31, 2020 | 124.217 | | | $ | 1 | | | $ | 391 | | | $ | (674) | | | $ | (494) | | | $ | 3,764 | | | $ | 2,988 | | |
| Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (232) | | | (232) | | | Net loss | — | | | — | | | — | | | — | | | — | | | (131) | | | (131) | | |
Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (17) | | | — | | | (17) | | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
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 plans | 0.123 | | | — | | | — | | | — | | | — | | | — | | | 0 | | | |
Balance at March 31, 2020 | 122.585 | | | $ | 1 | | | $ | 314 | | | $ | (674) | | | $ | (482) | | | $ | 4,856 | | | $ | 4,015 | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (214) | | | (214) | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 24 | | | — | | | 24 | | | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | 2 | | | — | | | — | | | — | | | 2 | | | Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | |
CARES Act warrant issuance | CARES Act warrant issuance | — | | | — | | | 7 | | | — | | | — | | | — | | | 7 | | | CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | |
| Stock issued for employee stock purchase plan | 1.000 | | | — | | | 27 | | | — | | | — | | | — | | | 27 | | | |
| Stock issued under stock plans | Stock issued under stock plans | 0.054 | | | — | | | 0 | | | — | | | — | | | — | | | 0 | | | Stock issued under stock plans | 0.225 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | |
Balances at June 30, 2020 | 123.639 | | | $ | 1 | | | $ | 350 | | | $ | (674) | | | $ | (458) | | | $ | 4,642 | | | $ | 3,861 | | | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | 124.442 | | | $ | 1 | | | $ | 409 | | | $ | (674) | | | $ | (494) | | | $ | 3,633 | | | $ | 2,875 | | |
| | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | | | Six Months Ended June 30, | | Three Months Ended March 31, |
(in millions) | (in millions) | 2021 | | 2020 | (in millions) | 2022 | | 2021 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net Income (Loss) | $ | 266 | | | $ | (446) | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net Loss | | Net Loss | $ | (143) | | | $ | (131) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 195 | | | 215 | | Depreciation and amortization | 102 | | | 97 | |
Stock-based compensation and other | Stock-based compensation and other | 24 | | | 7 | | Stock-based compensation and other | 5 | | | 12 | |
Special items - impairment charges and other | 14 | | | 229 | | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 75 | | | 18 | |
Special items - restructuring charges | Special items - restructuring charges | (12) | | | 0 | | Special items - restructuring charges | — | | | 11 | |
Changes in certain assets and liabilities: | Changes in certain assets and liabilities: | | Changes in certain assets and liabilities: | |
Changes in deferred tax provision | Changes in deferred tax provision | 33 | | | (98) | | Changes in deferred tax provision | (58) | | | (39) | |
Increase in accounts receivable | | Increase in accounts receivable | (112) | | | (37) | |
Increase in air traffic liability | Increase in air traffic liability | 460 | | | 231 | | Increase in air traffic liability | 480 | | | 224 | |
Increase in deferred revenue | Increase in deferred revenue | 69 | | | 84 | | Increase in deferred revenue | 74 | | | 48 | |
| Other - net | Other - net | (42) | | | 99 | | Other - net | (136) | | | (36) | |
Net cash provided by operating activities | Net cash provided by operating activities | 1,007 | | | 321 | | Net cash provided by operating activities | 287 | | | 167 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Property and equipment additions: | Property and equipment additions: | | | | Property and equipment additions: | | | |
Aircraft and aircraft purchase deposits | Aircraft and aircraft purchase deposits | (30) | | | (58) | | Aircraft and aircraft purchase deposits | (207) | | | (3) | |
Other flight equipment | Other flight equipment | (38) | | | (43) | | Other flight equipment | (24) | | | (11) | |
Other property and equipment | Other property and equipment | (34) | | | (67) | | Other property and equipment | (57) | | | (13) | |
Total property and equipment additions, including capitalized interest | Total property and equipment additions, including capitalized interest | (102) | | | (168) | | Total property and equipment additions, including capitalized interest | (288) | | | (27) | |
Purchases of marketable securities | Purchases of marketable securities | (2,524) | | | (1,004) | | Purchases of marketable securities | (552) | | | (1,243) | |
Sales and maturities of marketable securities | Sales and maturities of marketable securities | 1,561 | | | 1,038 | | Sales and maturities of marketable securities | 880 | | | 732 | |
Other investing activities | Other investing activities | (5) | | | 10 | | Other investing activities | (1) | | | (5) | |
Net cash used in investing activities | (1,070) | | | (124) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 39 | | | (543) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Proceeds from issuance of debt | Proceeds from issuance of debt | 363 | | | 1,265 | | Proceeds from issuance of debt | — | | | 189 | |
Common stock repurchases | 0 | | | (31) | | |
Dividends paid | 0 | | | (45) | | |
| Long-term debt payments | Long-term debt payments | (681) | | | (125) | | Long-term debt payments | (170) | | | (115) | |
Other financing activities | Other financing activities | 37 | | | 27 | | Other financing activities | 2 | | | 8 | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (281) | | | 1,091 | | Net cash provided by (used in) financing activities | (168) | | | 82 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | Net increase (decrease) in cash, cash equivalents, and restricted cash | (344) | | | 1,288 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | 158 | | | (294) | |
Cash, cash equivalents, and restricted cash at beginning of period | Cash, cash equivalents, and restricted cash at beginning of period | 1,386 | | | 232 | | Cash, cash equivalents, and restricted cash at beginning of period | 494 | | | 1,386 | |
Cash, cash equivalents, and restricted cash at end of the period | Cash, cash equivalents, and restricted cash at end of the period | $ | 1,042 | | | $ | 1,520 | | Cash, cash equivalents, and restricted cash at end of the period | $ | 652 | | | $ | 1,092 | |
| Cash paid during the period for: | | |
Interest (net of amount capitalized) | $ | 61 | | | $ | 25 | | |
Income taxes | 0 | | | 0 | | |
| Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | |
Cash and cash equivalents | $ | 1,025 | | | $ | 1,509 | | |
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets | 17 | | | 11 | | |
Total cash, cash equivalents, and restricted cash at end of the period | $ | 1,042 | | | $ | 1,520 | | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2022 | | 2021 |
| | | |
Cash paid during the period for: | | | |
Interest (net of amount capitalized) | $ | 35 | | | $ | 50 | |
Income taxes | — | | | — | |
| | | |
Non-cash transactions: | | | |
Right-of-use assets acquired through operating leases | 158 | | | 75 | |
| | | |
Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | | |
Cash and cash equivalents | 628 | | | 1,076 | |
Restricted cash included in Prepaid expenses and other current assets | 24 | | | 16 | |
Total cash, cash equivalents, and restricted cash at end of the period | $ | 652 | | | $ | 1,092 | |
| | | |
| | | |
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 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, 2020.2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of June 30, 2021March 31, 2022 and the results of operations for the three and six months ended June 30, 2021March 31, 2022 and 2020.2021. Such adjustments were of a normal recurring nature.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and six months ended June 30, 2021March 31, 2022 are not necessarily indicative of operating results for the entire year.
NOTE 2. COVID-19 PANDEMICFLEET TRANSITION
The public health and economic crisis resulting from the outbreak of COVID-19 inIn the first quarter of 2020 continues to have a significant impact on the Company. Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result,2022, the Company continuesannounced plans to fly less capacity than it had pre-pandemic.accelerate the transition of mainline operations to an all-Boeing 737 fleet. It also announced new plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska will accelerate the retirement of its 30 operating Airbus A320 aircraft, with all expected to exit the fleet by early 2023. Alaska also operates ten A321neo aircraft, and is evaluating options to remove them from its fleet by the end of 2023, subject to agreement with counterparties. Also by the end of 2023, Horizon will exit its Q400 fleet, which includes 25 owned and 7 leased aircraft in operation at March 31, 2022.
Beginning in 2020, the Company implemented various cost-saving initiatives, including permanently parking aircraft, restructuring the workforce through early-out and incentive leave programs, and obtaining funding available under programs offered by the U.S. DepartmentValuation of the Treasury (the Treasury). As demand has improved and the business has grown back towards pre-pandemic flying levels, these programs have been adjusted to meet the needs of the airline. The impacts of these programs for the three and six months ended June 30, 2021 are described below.
Lease Return Costslong-lived assets
The Company removed 40 leased Aircraft from operating service in 2020, and recordedreviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an estimateasset or asset group may not be recoverable. The decisions made by the Company to accelerate the retirement of the expected futureA320 and Q400 aircraft represented a significant adverse change in the extent in which those long-lived asset group would be used and an expectation that each asset group would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. Indicators of impairment were not present for the A321neo aircraft as the majority of these aircraft have contractual lease return costsdates through 2029 to 2031, and are high-demand assets given their relative age and desirable technology.
For the purposes of recoverability testing, assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company performed recoverability tests for the aircraft. Lease return costs includeA320 and Q400 fleets, comparing the write offsum of associated maintenance deposits, as the Company no longer expectsestimated undiscounted future cash flows expected to perform maintenance events coveredbe directly generated by those deposits. The total net charge recorded in 2020 for aircraft that were parked amounted to $209 million. In the first quarter of 2021, the Company recorded an additional $18 million in incremental costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returnedeach asset group to the lessor, which was classified as Special items - impairment chargesasset group's carrying value. Future cash flows were estimated utilizing a combination of historical data, forecasted results, and other onanticipated use of the condensed consolidated statements of operations. In the second quarter, expected costs to return leased aircraft was reduced by $4 million. The lease return cost estimates are based on the Company's best estimate of costs to return aircraft as of March 31, 2022. The analysis indicated the date of this filing.
In the second quarter of 2021,A320 fleet was recoverable and no impairment measurement was required. However, the Company initiated a planwill adjust the useful lives of the A320 aircraft and related assets to reactivate up to twelve previously parked Airbus aircraft to supportcorrespond with the Company's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. These reactivations create flexibility as management seeks to return capacity, mitigating against both staffinganticipated cease-use date. The analysis indicated the Q400 fleet was not recoverable, and supply chain risks that could constrain Alaska or Horizon's available capacity. Management's plans to return to 100% of pre-pandemic levels by no later than summer 2022 are consistent with previous plans, but some recovery has been accelerated into the second half of 2021 in response to the strong demand recovery that took place in the second quarter.The first of these reactivated aircraft are expected to reenter revenue service beginning in the third quarter of 2021, with all reactivated by the second quarter of 2022. The Company currently anticipates these aircraft will be removed from operating service beginning in late 2022 through the end
of 2023. At this time, the Company does not anticipate material changes to estimated lease return costs previously recorded, as leases for aircraft returning to service generally expire within a near term window.
Workforce restructuringimpairment measurement was required.
The Company continues to expect that demand will be below pre-pandemic levels throughevaluated the end of 2021, but management will continue rebuilding capacity to 2019 levels. The Company reduced its workforce in 2020 to better alignfair market value for the Q400 fleet using available market price information with the expected size of the business. To mitigate the need for involuntary furloughs, various early-outadjustments based on quantitative and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs, over 600 employees took permanent early-outs and over 3,300 employees took voluntary or incentive leaves. As of June 30, 2021, approximately 1,800 employees remainqualitative considerations. Based on a voluntary leave program. The Company expects all employees on leave to return to work by October 2021.
In 2020, as a result of these programs,this fair market value, the Company recorded $220an impairment charge of $70 million, in wage expense for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. Inreflecting the first quarteramount by which carrying value exceeded fair value of 2021, the Company refined capacity expectations and training schedules, and delayed certain recalls to a future period beyond what was anticipated inowned Q400 aircraft. This amount is included within the accrual at December 31, 2020, resulting in additional expense of $11 million. In the second quarter, demand improved at an accelerated pace, and the Company issued recall notices to all pilots on incentive leave for return-to-work by October 2021. As a result, $23 million of incentive leave accrual was reversed and recognized as a benefit within Special"Special items - restructuring charges infleet transition and related charges" line within the condensed consolidated statementsstatement of operations during the three months ended June 30, 2021. In total, the Company has recorded a net benefit from these adjustments of $12 million during the six months ended June 30, 2021.
The table below presents a roll forward of the outstanding voluntary leave liability (in millions): | | | | | | | | |
| | Six Months Ended June 30, 2021 |
Total voluntary leave liability balance at January 1 | | $ | 127 | |
Cash payments | | (79) | |
Charges and adjustments | | (12) | |
Total voluntary leave liability balance at June 30 | | $ | 36 | |
The outstanding accrual is based on the Company's best estimate of capacity expectations and training schedules for 2021, as of the date of this filing. The Company will make the majority of the remaining cash payments associated with this liability in 2021. The balance is reflected in accrued wages, benefits and payroll taxes on the condensed consolidated balance sheet.
CARES Act Funding
During the first quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the Treasury through an extension of the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the supporting agreements, Alaska and Horizon received total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska and Horizon received an additional $80 million in funds made available under PSP 2.
Also in April 2021, Alaska, Horizon and McGee finalized additional agreements with the Treasury under a third round of the PSP, made available under the American Rescue Plan Act of 2021 (PSP 3). Under PSP 3 and the supporting agreements, Alaska, Horizon, and McGee received total funds of $585 million in the second quarter of 2021.
Of the amounts received during the six months ended June 30, 2021, $311 million represented unsecured debt and was recorded at par, and $16 million represented warrants recorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance sheet. The remaining $892 million was recorded as grant proceeds. These amounts are inclusive of additional funding of $8 million made available to McGee under the first installment of the PSP program (PSP 1). The grant is recorded as an offset to wages, salaries and benefits as eligible expenses are incurred. During the six months ended June 30, 2021, the Company recognized $914 million of the PSP grant proceeds as a wage offset. Included within this $914 million is approximately $21 million for employee retention credits as provided for in the CARES Act. The Company does not expect to record any additional wage offset in 2021.
Total funds contracted fromoperations. In conjunction with the Treasury underimpairment, the three Payroll Support Programs are allocated as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Grants | | Loans | | Warrants | | Total Proceeds |
PSP 1 | $ | 757 | | | $ | 293 | | | $ | 9 | | | $ | 1,059 | |
PSP 2 | 457 | | | 160 | | | 9 | | | 626 | |
PSP 3 | 431 | | | 147 | | | 7 | | | 585 | |
Total | $ | 1,645 | | | $ | 600 | | | $ | 25 | | | $ | 2,270 | |
Company adjusted the useful lives of Q400 aircraft and related assets to correspond with the anticipated cease-use date.
Funds are exclusively usedThe Company will continue to evaluate the need for paymentfurther impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.
Other Special Items
In addition to the impairment described above, the Company recorded $5 million incremental expense to "Special items - fleet transition and related charges" within the condensed consolidated statement of employee salaries, wagesoperations. This includes adjustments related to the outstanding accrual for costs to return leased aircraft and benefits. Upon receipta write-down of the funds issued under PSP 3, certain conditions and restrictions were extended. These conditions include,right of use assets for two A320 aircraft for which return to service work was initiated but are not limited to, refraining from conducting involuntary furloughs or reducing employee pay rates through September 30, 2021 and placing limits on executive compensation and severance through April 1, 2023. Alaska Air Group also agreed to continue the suspension of dividends and share repurchases until September 30, 2022.was subsequently ceased.
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. In 2020, the Company eliminated ticket change fees indefinitely from its main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from ourthe co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
In the first quarter of 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The amendment extended the term of the agreement into 2030 and resulted in modifications to the separately identifiable performance obligations.
The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
Passenger revenue recognized in the condensed consolidated statements of operations (in millions): | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Passenger ticket revenue, including ticket breakage and net of taxes and fees | $ | 1,114 | | | $ | 222 | | | $ | 1,639 | | | $ | 1,435 | | |
Passenger ticket revenue, including ticket breakage, net of taxes and fees | | Passenger ticket revenue, including ticket breakage, net of taxes and fees | $ | 1,232 | | | $ | 525 | | |
Passenger ancillary revenue | Passenger ancillary revenue | 84 | | | 31 | | | 134 | | | 147 | | Passenger ancillary revenue | 91 | | | 50 | | |
Mileage Plan passenger revenue | Mileage Plan passenger revenue | 154 | | | 56 | | | 238 | | | 208 | | Mileage Plan passenger revenue | 188 | | | 84 | | |
Total Passenger revenue | Total Passenger revenue | $ | 1,352 | | | $ | 309 | | | $ | 2,011 | | | $ | 1,790 | | Total Passenger revenue | $ | 1,511 | | | $ | 659 | | |
Mileage Plan™Plan Loyalty Program
Mileage Plan™Plan revenue included in the condensed consolidated statements of operations (in millions): | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Passenger revenue | Passenger revenue | $ | 154 | | | $ | 56 | | | $ | 238 | | | $ | 208 | | Passenger revenue | $ | 188 | | | $ | 84 | | |
Mileage Plan other revenue | Mileage Plan other revenue | 118 | | | 73 | | | 212 | | | 182 | | Mileage Plan other revenue | 112 | | | 94 | | |
Total Mileage Plan revenue | Total Mileage Plan revenue | $ | 272 | | | $ | 129 | | | $ | 450 | | | $ | 390 | | Total Mileage Plan revenue | $ | 300 | | | $ | 178 | | |
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, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Cargo revenue | Cargo revenue | $ | 34 | | | $ | 28 | | | $ | 61 | | | $ | 52 | | Cargo revenue | $ | 29 | | | $ | 27 | | |
Other revenue | Other revenue | 23 | | | 11 | | | 40 | | | 33 | | Other revenue | 29 | | | 17 | | |
Total Cargo and other revenue | Total Cargo and other revenue | $ | 57 | | | $ | 39 | | | $ | 101 | | | $ | 85 | | Total Cargo and other revenue | $ | 58 | | | $ | 44 | | |
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $36 $390 million and net refunds$136 million from the prior year-end air traffic liability balance for the three months ended June 30, 2021March 31, 2022 and 2020, and $175 million and $484 million for the six months ended June 30, 2021 and 2020.2021.
Given the increase in demand for air travel from the recovery from the COVID-19 pandemic, advance bookings and associated cash receipts have significantly increased in relation to prior year. The Company also experienced increased revenue recognition from credits redeemed for travel, for which the remaining balance is included in the air traffic liability balance, and total $387 million, net of breakage. In April 2021, the Company announced updated expiration terms for these credits, extending to December 31, 2021 for possible travel through November 30, 2022.
Mileage PlanTM assets and liabilities
The Company records a receivable for amounts due from the bankaffinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $61$108 million of such receivables as of June 30, 2021March 31, 2022 and $48$64 million as of December 31, 2020.2021. As demand for air travel continues to increase unpredictably,remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.
The table below presents a roll forward of the total frequent flyer liability (in millions): | | | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Total Deferred Revenue balance at January 1 | | $ | 2,277 | | | $ | 1,990 | | |
Total Deferred revenue balance at January 1 | | Total Deferred revenue balance at January 1 | | $ | 2,358 | | | $ | 2,277 | |
Travel miles and companion certificate redemption - Passenger revenue | Travel miles and companion certificate redemption - Passenger revenue | | (238) | | | (208) | | Travel miles and companion certificate redemption - Passenger revenue | | (176) | | | (84) | |
Miles redeemed on partner airlines - Other revenue | Miles redeemed on partner airlines - Other revenue | | (17) | | | (21) | | Miles redeemed on partner airlines - Other revenue | | (9) | | | (4) | |
Increase in liability for mileage credits issued | Increase in liability for mileage credits issued | | 324 | | | 313 | | Increase in liability for mileage credits issued | | 259 | | | 136 | |
Total Deferred Revenue balance at June 30 | | $ | 2,346 | | | $ | 2,074 | | |
Total Deferred revenue balance at March 31 | | Total Deferred revenue balance at March 31 | | $ | 2,432 | | | $ | 2,325 | |
NOTE 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 June 30, 2021,March 31, 2022, total cost basis for all marketable securities was $2.9$2.3 billion. There were no significant differences betweenIn the cost basis andthree months ended March 31, 2022, fair value of marketable securities declined by $57 million primarily due to changes in interest rates. Management does not believe any individual classunrealized losses are the result of marketable securities.expected credit losses based on its evaluation of available information as of March 31, 2022.
Fair values of financial instruments on the condensed consolidated balance sheet (in millions): | | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Assets | Assets | | | | | | | | | | | | Assets | | | | | | | | | | | |
Marketable securities | Marketable securities | | Marketable securities | |
U.S. government and agency securities | U.S. government and agency securities | $ | 298 | | | $ | 0 | | | $ | 298 | | | $ | 407 | | | $ | 0 | | | $ | 407 | | U.S. government and agency securities | $ | 416 | | | $ | — | | | $ | 416 | | | $ | 331 | | | $ | — | | | $ | 331 | |
Equity mutual funds | Equity mutual funds | 5 | | | 0 | | | 5 | | | 7 | | | 0 | | | 7 | | Equity mutual funds | 6 | | | — | | | 6 | | | 6 | | | — | | | 6 | |
Foreign government bonds | Foreign government bonds | 0 | | | 31 | | | 31 | | | 0 | | | 20 | | | 20 | | Foreign government bonds | — | | | 29 | | | 29 | | | — | | | 38 | | | 38 | |
Asset-backed securities | Asset-backed securities | 0 | | | 330 | | | 330 | | | 0 | | | 224 | | | 224 | | Asset-backed securities | — | | | 244 | | | 244 | | | — | | | 311 | | | 311 | |
Mortgage-backed securities | Mortgage-backed securities | 0 | | | 253 | | | 253 | | | 0 | | | 290 | | | 290 | | Mortgage-backed securities | — | | | 190 | | | 190 | | | — | | | 232 | | | 232 | |
Corporate notes and bonds | Corporate notes and bonds | 0 | | | 1,943 | | | 1,943 | | | 0 | | | 978 | | | 978 | | Corporate notes and bonds | — | | | 1,314 | | | 1,314 | | | — | | | 1,663 | | | 1,663 | |
Municipal securities | Municipal securities | 0 | | | 66 | | | 66 | | | 0 | | | 50 | | | 50 | | Municipal securities | — | | | 63 | | | 63 | | | — | | | 65 | | | 65 | |
Total Marketable securities | Total Marketable securities | 303 | | | 2,623 | | | 2,926 | | | 414 | | | 1,562 | | | 1,976 | | Total Marketable securities | 422 | | | 1,840 | | | 2,262 | | | 337 | | | 2,309 | | | 2,646 | |
Derivative instruments | Derivative instruments | | Derivative instruments | |
Fuel hedge - call options | Fuel hedge - call options | 0 | | | 92 | | | 92 | | | 0 | | | 15 | | | 15 | | Fuel hedge - call options | — | | | 203 | | | 203 | | | — | | | 81 | | | 81 | |
| Interest rate swap agreements | | Interest rate swap agreements | — | | | 6 | | | 6 | | | — | | | — | | | — | |
Total Assets | Total Assets | $ | 303 | | | $ | 2,715 | | | $ | 3,018 | | | $ | 414 | | | $ | 1,577 | | | $ | 1,991 | | Total Assets | $ | 422 | | | $ | 2,049 | | | $ | 2,471 | | | $ | 337 | | | $ | 2,390 | | | $ | 2,727 | |
| Liabilities | Liabilities | | Liabilities | |
Derivative instruments | Derivative instruments | | Derivative instruments | |
| Interest rate swap agreements | Interest rate swap agreements | 0 | | | (16) | | | (16) | | | 0 | | | (25) | | | (25) | | Interest rate swap agreements | — | | | (2) | | | (2) | | | — | | | (9) | | | (9) | |
Total Liabilities | Total Liabilities | $ | 0 | | | $ | (16) | | | $ | (16) | | | $ | 0 | | | $ | (25) | | | $ | (25) | | Total Liabilities | $ | — | | | $ | (2) | | | $ | (2) | | | $ | — | | | $ | (9) | | | $ | (9) | |
The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts are 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 are the result of expected credit losses based on its evaluation of available information as of June 30, 2021.
Maturities for marketable securities (in millions): | June 30, 2021 | Cost Basis | | Fair Value | |
March 31, 2022 | | March 31, 2022 | Cost Basis | | Fair Value |
Due in one year or less | Due in one year or less | $ | 1,538 | | | $ | 1,539 | | Due in one year or less | $ | 628 | | | $ | 626 | |
Due after one year through five years | Due after one year through five years | 1,280 | | | 1,294 | | Due after one year through five years | 1,651 | | | 1,597 | |
Due after five years through 10 years | 88 | | | 88 | | |
Due after five years | | Due after five years | 34 | | | 33 | |
| Total | Total | $ | 2,906 | | | $ | 2,921 | | Total | $ | 2,313 | | | $ | 2,256 | |
As of March 31, 2022, $6 million of total marketable securities do not have a maturity date and are therefore excluded from the total fair value of maturities for marketable securities above.
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: To estimate the fair value of all fixed-rate debt as of June 30, 2021,March 31, 2022, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $780$750 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.
Fixed-rate debt on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions): | | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| Total fixed-rate debt | Total fixed-rate debt | $ | 1,896 | | | $ | 1,662 | | Total fixed-rate debt | $ | 1,752 | | | $ | 1,821 | |
| Estimated fair value | Estimated fair value | $ | 2,019 | | | $ | 1,778 | | Estimated fair value | $ | 1,770 | | | $ | 1,919 | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairments wereRefer to Note 2 for discussion regarding impairment charges recorded during the three and six months ended June 30, 2021.March 31, 2022.
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheet (in millions): | | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Fixed-rate notes payable due through 2029 | Fixed-rate notes payable due through 2029 | $ | 180 | | | $ | 198 | | Fixed-rate notes payable due through 2029 | $ | 150 | | | $ | 163 | |
Fixed-rate PSP notes payable due through 2031 | Fixed-rate PSP notes payable due through 2031 | 600 | | | 290 | | Fixed-rate PSP notes payable due through 2031 | 600 | | | 600 | |
Fixed-rate EETC payable due through 2025 & 2027 | Fixed-rate EETC payable due through 2025 & 2027 | 1,116 | | | 1,174 | | Fixed-rate EETC payable due through 2025 & 2027 | 1,002 | | | 1,058 | |
Variable-rate notes payable due through 2029 | Variable-rate notes payable due through 2029 | 1,315 | | | 1,866 | | Variable-rate notes payable due through 2029 | 636 | | | 738 | |
Less debt issuance costs and unamortized debt discount | (23) | | | (33) | | |
Less debt issuance costs | | Less debt issuance costs | (18) | | | (20) | |
Total debt | Total debt | 3,188 | | | 3,495 | | Total debt | 2,370 | | | 2,539 | |
Less current portion | Less current portion | 869 | | | 1,138 | | Less current portion | 292 | | | 366 | |
Long-term debt, less current portion | Long-term debt, less current portion | $ | 2,319 | | | $ | 2,357 | | Long-term debt, less current portion | $ | 2,078 | | | $ | 2,173 | |
| Weighted-average fixed-interest rate | Weighted-average fixed-interest rate | 3.7 | % | | 4.3 | % | Weighted-average fixed-interest rate | 3.6 | % | | 3.7 | % |
Weighted-average variable-interest rate | Weighted-average variable-interest rate | 1.6 | % | | 1.9 | % | Weighted-average variable-interest rate | 1.7 | % | | 1.3 | % |
Approximately $562$396 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, 2021,March 31, 2022, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.1%3.3%.
During the sixthree months ended June 30, 2021,March 31, 2022, the Company issued $363 millionmade scheduled debt payments of debt, comprised of $311 million of unsecured loans from the PSP and $54 million in proceeds from issuance of debt. Debt proceeds were offset by $681 million in debt$170 million.
payments. Included within total debt payments is the full repayment of the $135 million loan from the U.S. Treasury made available under the CARES Act and the $363 million outstanding balance on two credit facilities.
The $600 million PSP notes are unsecured senior term loans 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 PSP notes are prepayable at par without penalty.
CARES Act
In 2020, the Company finalized an agreement with the Treasury to obtain up to $1.9 billion via a secured term loan facility. Obligations under the loan agreement were secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 30 aircraft and 15 spare engines. In 2020, the Company drew $135 million under the agreement, which was used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act. The full balance was repaid in the second quarter of 2021. In accordance with the related agreement, the facility terminated at the time of payment.
Debt Maturity
At June 30, 2021March 31, 2022, long-term debt principal payments for the next five years and thereafter are as follows (in millions): | | | Total | | Total |
Remainder of 2021 | $ | 227 | | |
2022 | 796 | | |
Remainder of 2022 | | Remainder of 2022 | $ | 201 | |
2023 | 2023 | 334 | | 2023 | 334 | |
2024 | 2024 | 240 | | 2024 | 240 | |
2025 | 2025 | 261 | | 2025 | 261 | |
2026 | | 2026 | 176 | |
Thereafter | Thereafter | 1,353 | | Thereafter | 1,176 | |
Total | Total | $ | 3,211 | | Total | $ | 2,388 | |
Bank Lines of Credit
The CompanyAlaska has 3 credit facilities with availability totaling $486 million as of June 30, 2021, resulting from the second quarter 2021 repayment of $363 million.March 31, 2022. One of the credit facilities for $150 million expires in March 20222025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. TheA second credit facility for $250 million expires in June 2024 and is secured by aircraft. These twoBoth facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June 2022 and is secured by aircraft.
The CompanyAlaska has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The CompanyAlaska was in compliance with this covenant at June 30, 2021.March 31, 2022.
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, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Service cost | Service cost | $ | 13 | | | $ | 13 | | | $ | 26 | | | $ | 26 | | Service cost | $ | 11 | | | $ | 13 | | |
Pension expense included in Wages and benefits | Pension expense included in Wages and benefits | 13 | | | 13 | | | 26 | | | 26 | | Pension expense included in Wages and benefits | 11 | | | 13 | | |
| Interest cost | Interest cost | 14 | | | 19 | | | 28 | | | 38 | | Interest cost | 16 | | | 14 | | |
Expected return on assets | Expected return on assets | (30) | | | (27) | | | (61) | | | (55) | | Expected return on assets | (32) | | | (31) | | |
| Recognized actuarial loss | Recognized actuarial loss | 9 | | | 8 | | | 18 | | | 17 | | Recognized actuarial loss | 2 | | | 9 | | |
Pension expense included in Nonoperating Income (Expense) | Pension expense included in Nonoperating Income (Expense) | $ | (7) | | | $ | 0 | | | $ | (15) | | | $ | 0 | | Pension expense included in Nonoperating Income (Expense) | $ | (14) | | | $ | (8) | | |
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of June 30, 2021March 31, 2022 (in millions): | | | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | |
Remainder of 2021 | | | $ | 107 | | | $ | 82 | | | |
2022 | | | 1,458 | | | 173 | | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 1,159 | | | $ | 133 | | |
2023 | 2023 | | | 1,207 | | | 178 | | | 2023 | | 1,781 | | | 182 | | |
2024 | 2024 | | | 291 | | | 183 | | | 2024 | | 414 | | | 188 | | |
2025 | 2025 | | | 76 | | | 188 | | | 2025 | | 111 | | | 194 | | |
2026 | | 2026 | | 47 | | | 195 | | |
Thereafter | Thereafter | | | 12 | | | 877 | | | Thereafter | | 275 | | | 740 | | |
Total | Total | | | $ | 3,151 | | | $ | 1,681 | | | Total | | $ | 3,787 | | | $ | 1,632 | | |
(a)Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management. Contractual commitments do not reflect the impact of the impending fleet transition. Option deliveries are excluded from minimum commitments until exercise.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. AsIn March 2022, Alaska amended its aircraft purchase agreement with Boeing, adding the 737-8 and 737-10 models to its existing order book of June 30, 2021, Alaska had737-9 aircraft. The amended agreement also includes options to purchase additional aircraft with deliveries between 2024 and 2026. Details are outlined in the table below. Horizon also has commitments to purchase 63 B737-9 MAX12 Embraer E175 aircraft with contracted deliveries between 20212022 and 2024.2025. Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change. Horizon also has commitments to purchase 12 E175 aircraft with deliveries between 2022 and 2025. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2027. In addition, Alaska has options to purchase 39 B737-9 MAX aircraft, and Horizon has options to purchase 21 E175 aircraft. The cancelable purchase commitments and option payments are not reflected in the table above.
| | | | | | | | | | | | | | | | | |
| Firm Orders | | Options | | Total |
Aircraft Type | 2022-2025 | | 2024-2026 | | 2022 - 2026 |
Boeing 737-8 | 10 | | — | | 10 |
Boeing 737-9 | 51 | | 11 | | 62 |
Boeing 737-10 | 6 | | 41 | | 47 |
Embraer E175 | 12 | | — | | 12 |
Total | 79 | | 52 | | 131 |
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. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment.judgment, again without awarding injunctive relief against Alaska. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.
Alaska is seeking an appellate courta conclusive U.S. Supreme 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 provisions of 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 casecase. If appeal efforts are unsuccessful, compliance with California and agree withother states' laws may have an adverse impact on the Company's other bases for appeal.operations and financial position.
The Company isLike other U.S. airlines, Alaska and Horizon are involved in other litigation around the application of state and local employment laws, like many air carriers.laws. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of June 30, 2021, theThe Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, subject to restrictions under the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Company suspended the share repurchase program indefinitely.
CARES Act Warrant Issuances
As additional taxpayer protection required under PSP programs, during the six months ended June 30, 2021Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of 539,5081,455,438 warrants to purchase Alaska Air Group (ALK)ALK common stock. Thestock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska'sthe Company's option, and have a five-year term.
Additionally, in conjunction with the October 2020 draw on the CARES Act Loan, the Company granted the Treasury 427,080 warrants to purchase ALK common stock. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relativemodel. The total fair value of theall outstanding warrants of $6was $30 million, was recorded in stockholders' equity.equity at issuance.
Total warrants outstanding are as follows as of June 30, 2021:March 31, 2022: | | | Number of shares of ALK common stock | | Strike Price | | Number of shares of ALK common stock | | Strike Price |
PSP 1 | PSP 1 | 928,127 | | | 31.61 | PSP 1 | 928,127 | | | 31.61 |
CARES Act loan warrants | CARES Act loan warrants | 427,080 | | | 31.61 | CARES Act loan warrants | 427,080 | | | 31.61 |
PSP 2 | PSP 2 | 305,499 | | | 52.25 | PSP 2 | 305,499 | | | 52.25 |
PSP 3 | PSP 3 | 221,812 | | | 66.39 | PSP 3 | 221,812 | | | 66.39 |
Total | 1,882,518 | | | |
Outstanding March 31, 2022 | | Outstanding March 31, 2022 | 1,882,518 | | |
Accumulated other comprehensive loss
Components of accumulated other comprehensive loss, net of tax (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
Balance at December 31, 2021, net of tax effect of $83 | $ | (4) | | | $ | (252) | | | $ | (6) | | | $ | (262) | |
Reclassifications into earnings, net of tax impact of $0 | 2 | | | 1 | | | — | | | 3 | |
Change in value, net of tax impact of $10 | (42) | | | — | | | 9 | | | (33) | |
Balance at March 31, 2022, net of tax effect of $93 | $ | (44) | | | $ | (251) | | | $ | 3 | | | $ | (292) | |
| | | | | | | |
Balance at December 31, 2020, net of tax effect of $160 | $ | 23 | | | $ | (498) | | | $ | (19) | | | $ | (494) | |
Reclassifications into earnings, net of tax impact of $2 | (4) | | | 6 | | | — | | | (2) | |
Change in value, net of tax impact of $(2) | (8) | | | — | | | 6 | | | 2 | |
Balance at March 31, 2021, net of tax effect of $160 | $ | 11 | | | $ | (492) | | | $ | (13) | | | $ | (494) | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Related to marketable securities | $ | 10 | | | $ | 23 | |
Related to employee benefit plans | (485) | | | (498) | |
Related to interest rate derivatives | (12) | | | (19) | |
Total | $ | (487) | | | $ | (494) | |
Earnings (Loss) Per Share (EPS)
EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, and restricted stock units, and warrants, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and six months ended June 30,March 31, 2022 and March 31, 2021, 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 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 withand SkyWest, 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 three 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, Costa Rica, and Costa Rica.Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Operating segment information is as follows (in millions): | | | Three Months Ended June 30, 2021 | | Three Months Ended March 31, 2022 |
| | Mainline | | Regional | | Horizon | | 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 Revenues | | | | | | | | | | | | | | Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | Passenger revenues | $ | 1,072 | | | $ | 280 | | | $ | 0 | | | $ | 0 | | | $ | 1,352 | | | $ | 0 | | | $ | 1,352 | | Passenger revenues | $ | 1,243 | | | $ | 268 | | | $ | — | | | $ | — | | | $ | 1,511 | | | $ | — | | | $ | 1,511 | |
CPA revenues | CPA revenues | 0 | | | 0 | | | 111 | | | (111) | | | 0 | | | 0 | | | 0 | | CPA revenues | — | | | — | | | 94 | | | (94) | | | — | | | — | | | — | |
Mileage Plan other revenue | Mileage Plan other revenue | 102 | | | 16 | | | 0 | | | 0 | | | 118 | | | 0 | | | 118 | | Mileage Plan other revenue | 100 | | | 12 | | | — | | | — | | | 112 | | | — | | | 112 | |
Cargo and other | Cargo and other | 55 | | | 0 | | | 0 | | | 2 | | | 57 | | | 0 | | | 57 | | Cargo and other | 57 | | | — | | | — | | | 1 | | | 58 | | | — | | | 58 | |
Total Operating Revenues | Total Operating Revenues | 1,229 | | | 296 | | | 111 | | | (109) | | | 1,527 | | | 0 | | | 1,527 | | Total Operating Revenues | 1,400 | | | 280 | | | 94 | | | (93) | | | 1,681 | | | — | | | 1,681 | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | Operating expenses, excluding fuel | 984 | | | 286 | | | 91 | | | (127) | | | 1,234 | | | (530) | | | 704 | | Operating expenses, excluding fuel | 1,194 | | | 262 | | | 99 | | | (94) | | | 1,461 | | | 75 | | | 1,536 | |
Economic fuel | 253 | | | 66 | | | 0 | | | 1 | | | 320 | | | (46) | | | 274 | | |
Fuel expense | | Fuel expense | 381 | | | 73 | | | — | | | — | | | 454 | | | (107) | | | 347 | |
Total Operating Expenses | Total Operating Expenses | 1,237 | | | 352 | | | 91 | | | (126) | | | 1,554 | | | (576) | | | 978 | | Total Operating Expenses | 1,575 | | | 335 | | | 99 | | | (94) | | | 1,915 | | | (32) | | | 1,883 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | | |
Interest income | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | | |
Interest expense | (34) | | | 0 | | | (5) | | | 0 | | | (39) | | | 0 | | | (39) | | |
Interest capitalized | 3 | | | 0 | | | 0 | | | 0 | | | 3 | | | 0 | | | 3 | | |
Other - net | 9 | | | 0 | | | 0 | | | 0 | | | 9 | | | 0 | | | 9 | | |
Total Nonoperating Income (Expense) | (16) | | | 0 | | | (5) | | | 0 | | | (21) | | | 0 | | | (21) | | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | 1 | | | — | | | (5) | | | — | | | (4) | | | — | | | (4) | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | (24) | | | $ | (56) | | | $ | 15 | | | $ | 17 | | | $ | (48) | | | $ | 576 | | | $ | 528 | | Income (Loss) Before Income Tax | $ | (174) | | | $ | (55) | | | $ | (10) | | | $ | 1 | | | $ | (238) | | | $ | 32 | | | $ | (206) | |
| | | Three Months Ended June 30, 2020 | | Three Months Ended March 31, 2021 |
| | Mainline | | Regional | | Horizon | | 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 Revenues | | | | | | | | | | | | | | Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | Passenger revenues | $ | 225 | | | $ | 84 | | | $ | 0 | | | $ | 0 | | | $ | 309 | | | $ | 0 | | | $ | 309 | | Passenger revenues | $ | 506 | | | $ | 153 | | | $ | — | | | $ | — | | | $ | 659 | | | $ | — | | | $ | 659 | |
CPA revenues | CPA revenues | 0 | | | 0 | | | 81 | | | (81) | | | 0 | | | 0 | | | 0 | | CPA revenues | — | | | — | | | 104 | | | (104) | | | — | | | — | | | — | |
Mileage Plan other revenue | Mileage Plan other revenue | 56 | | | 17 | | | 0 | | | 0 | | | 73 | | | 0 | | | 73 | | Mileage Plan other revenue | 80 | | | 14 | | | — | | | — | | | 94 | | | — | | | 94 | |
Cargo and other | Cargo and other | 39 | | | 0 | | | 0 | | | 0 | | | 39 | | | 0 | | | 39 | | Cargo and other | 44 | | | — | | | — | | | — | | | 44 | | | — | | | 44 | |
Total Operating Revenues | Total Operating Revenues | 320 | | | 101 | | | 81 | | | (81) | | | 421 | | | 0 | | | 421 | | Total Operating Revenues | 630 | | | 167 | | | 104 | | | (104) | | | 797 | | | — | | | 797 | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | Operating expenses, excluding fuel | 746 | | | 210 | | | 68 | | | (82) | | | 942 | | | (292) | | | 650 | | Operating expenses, excluding fuel | 893 | | | 265 | | | 88 | | | (109) | | | 1,137 | | | (382) | | | 755 | |
Economic fuel | 45 | | | 20 | | | 0 | | | 0 | | | 65 | | | (6) | | | 59 | | |
Fuel expense | | Fuel expense | 174 | | | 52 | | | — | | | (1) | | | 225 | | | (22) | | | 203 | |
Total Operating Expenses | Total Operating Expenses | 791 | | | 230 | | | 68 | | | (82) | | | 1,007 | | | (298) | | | 709 | | Total Operating Expenses | 1,067 | | | 317 | | | 88 | | | (110) | | | 1,362 | | | (404) | | | 958 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | | |
Interest income | 11 | | | 0 | | | 0 | | | (4) | | | 7 | | | 0 | | | 7 | | |
Interest expense | (18) | | | 0 | | | (5) | | | 6 | | | (17) | | | 0 | | | (17) | | |
Interest capitalized | 1 | | | 0 | | | 0 | | | 0 | | | 1 | | | 0 | | | 1 | | |
Other - net | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | | |
Total Nonoperating Income (Expense) | 0 | | | 0 | | | (5) | | | 2 | | | (3) | | | 0 | | | (3) | | |
| Non-operating Income (Expense) | | Non-operating Income (Expense) | (7) | | | — | | | (5) | | | — | | | (12) | | | — | | | (12) | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | (471) | | | $ | (129) | | | $ | 8 | | | $ | 3 | | | $ | (589) | | | $ | 298 | | | $ | (291) | | Income (Loss) Before Income Tax | $ | (444) | | | $ | (150) | | | $ | 11 | | | $ | 6 | | | $ | (577) | | | $ | 404 | | | $ | (173) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 1,578 | | | $ | 433 | | | $ | 0 | | | $ | 0 | | | $ | 2,011 | | | $ | 0 | | | $ | 2,011 | |
CPA revenues | 0 | | | 0 | | | 215 | | | (215) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 182 | | | 30 | | | 0 | | | 0 | | | 212 | | | 0 | | | 212 | |
Cargo and other | 99 | | | 0 | | | 0 | | | 2 | | | 101 | | | 0 | | | 101 | |
Total Operating Revenues | 1,859 | | | 463 | | | 215 | | | (213) | | | 2,324 | | | 0 | | | 2,324 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,877 | | | 551 | | | 179 | | | (236) | | | 2,371 | | | (912) | | | 1,459 | |
Economic fuel | 427 | | | 118 | | | 0 | | | 0 | | | 545 | | | (68) | | | 477 | |
Total Operating Expenses | 2,304 | | | 669 | | | 179 | | | (236) | | | 2,916 | | | (980) | | | 1,936 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 13 | | | 0 | | | 0 | | | 0 | | | 13 | | | 0 | | | 13 | |
Interest expense | (61) | | | 0 | | | (10) | | | 0 | | | (71) | | | 0 | | | (71) | |
Interest capitalized | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | |
Other - net | 19 | | | 0 | | | 0 | | | 0 | | | 19 | | | 0 | | | 19 | |
Total Nonoperating Income (Expense) | (23) | | | 0 | | | (10) | | | 0 | | | (33) | | | 0 | | | (33) | |
Income (Loss) Before Income Tax | $ | (468) | | | $ | (206) | | | $ | 26 | | | $ | 23 | | | $ | (625) | | | $ | 980 | | | $ | 355 | |
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 1,459 | | | $ | 331 | | | $ | 0 | | | $ | 0 | | | $ | 1,790 | | | $ | 0 | | | $ | 1,790 | |
CPA revenues | 0 | | | 0 | | | 186 | | | (186) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 154 | | | 28 | | | 0 | | | 0 | | | 182 | | | 0 | | | 182 | |
Cargo and other | 83 | | | 0 | | | 0 | | | 2 | | | 85 | | | 0 | | | 85 | |
Total Operating Revenues | 1,696 | | | 359 | | | 186 | | | (184) | | | 2,057 | | | 0 | | | 2,057 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,905 | | | 479 | | | 160 | | | (192) | | | 2,352 | | | (129) | | | 2,223 | |
Economic fuel | 358 | | | 82 | | | 0 | | | 0 | | | 440 | | | 3 | | | 443 | |
Total Operating Expenses | 2,263 | | | 561 | | | 160 | | | (192) | | | 2,792 | | | (126) | | | 2,666 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 25 | | | 0 | | | 0 | | | (9) | | | 16 | | | 0 | | | 16 | |
Interest expense | (30) | | | 0 | | | (10) | | | 10 | | | (30) | | | 0 | | | (30) | |
Interest capitalized | 4 | | | 0 | | | 0 | | | 0 | | | 4 | | | 0 | | | 4 | |
Other - net | 12 | | | 0 | | | 0 | | | (1) | | | 11 | | | 0 | | | 11 | |
Total Nonoperating Income (Expense) | 11 | | | 0 | | | (10) | | | 0 | | | 1 | | | 0 | | | 1 | |
Income (Loss) Before Income Tax | $ | (556) | | | $ | (202) | | | $ | 16 | | | $ | 8 | | | $ | (734) | | | $ | 126 | | | $ | (608) | |
(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 allocation and excludes certain charges. See Note A in the accompanying pages for further information.
(c)Includes Payroll Support Program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.
Total assets were as follows (in millions): | | | June 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Mainline | Mainline | $ | 19,920 | | | $ | 19,754 | | Mainline | $ | 19,684 | | | $ | 19,258 | |
Horizon | Horizon | 1,251 | | | 1,170 | | Horizon | 1,125 | | | 1,212 | |
Consolidating & Other | Consolidating & Other | (6,515) | | | (6,878) | | Consolidating & Other | (6,599) | | | (6,519) | |
Consolidated | Consolidated | $ | 14,656 | | | $ | 14,046 | | Consolidated | $ | 14,210 | | | $ | 13,951 | |
| | |
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, 2020.2021. This overview summarizes the MD&A, which includes the following sections:
•SecondFirst Quarter Review—highlights from the secondfirst quarter of 20212022 outlining some of the major events that happenedoccurred during the period and how they affected our financial performance.
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and six months ended June 30, 2021.March 31, 2022. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2021.2022.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
SECONDFIRST QUARTER REVIEW
Business Recovery and Financial OutlookFirst Quarter Results
SecondWe recorded a consolidated pretax loss for the first quarter 2021 results indicate we have reachedof 2022 of $206 million, compared to a turning point in our recovery from the significant impactspretax loss of the COVID-19 pandemic. Early$173 million in the pandemicfirst quarter of 2021. On an adjusted basis, we shared plansreported a net loss for the quarter of $167 million, compared to return capacity in a prudent manner, only when demand supported doing so. We also established structural cost removal targets that have positioned the airline well for returning to profitability in recovery. With the strong return of demand in the second quarter, we reported an adjusted net loss that was significantly better than previous quarterly losses, and we currently expect double-digit adjusted pre-tax profit marginsof $436 million in the third quarter.same period of 2021. We faced headwinds in January and February, with weaker demand and staffing challenges as a result of an outbreak of the omicron variant of COVID-19. As cases subsided and business and leisure demand rebounded, monthly operating revenues surpassed 2019 levels in the month of March, a first since the pandemic began.
As we ramp our operation back to flying 2019 capacity levels, we have seen increases to our non-fuel operating expenses. Non-fuel operating expense, excluding special items, rose 28% over the prior year period, primarily driven by increased departure-related costs on 33% more capacity flown. Increased capacity, coupled with a 24% increase in fuel cost per gallon, drove additional fuel expense of $144 million as compared to 2021. We also incurred special charges of $75 million in the first quarter of 2022 related to our fleet transition, compared to a special benefit of $382 million recorded in 2021 primarily from Payroll Support Program grant wage offsets.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses as compared to 2021, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
Environmental, Social and Governance Updates
Delivering on our diversity, equity and inclusion goals is critical to our long-term success. In the first quarter of 2022, we launched the Ascend Pilot Academy, in partnership with the Hillsboro Aero Academy, which will provide aspiring pilots a simpler and more financially accessible path to become a pilot at Horizon. This academy will help make careers in aviation possible for a broader and more diverse population of future pilots.
As a reflection of the importance of the commitments made, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emissions target into our company-wide Performance-Based Pay Plan, which is currently tracking to target achievement.
Labor Update
In April 2022, Alaska's dispatchers represented by the Transport Workers Union ratified an agreement that includes increased pay with added steps to ensure wage rates remain competitive, enhanced benefits, and streamlined training.
Outlook and Strategic Updates
As we look to the second quarter and remainder of the year, we have turned focus to our strategy for long-term sustainable growth. In the first quarter, we announced plans to accelerate our transition to a single fleet at Alaska, and revealed new plans to transition our regional operations to a single fleet by retiring our Q400 fleet by the end of 2023. Moving to single fleet at Alaska and Horizon strengthens our low cost, high productivity competitive advantage, and contributes to greater operational excellence. As part of the transition, we are also strategically upgauging our fleet as we backfill retired aircraft, supporting efficient growth and bringing with it more premium revenue opportunity.
In the second half of 2021,first quarter, we remain committed to returning capacity inannounced a deliberate manner to match the return of leisure and business demand in the markets we serve. We also continue to return to 2019 capacity levels no later than the summer of 2022, though we have increased our near-term flying expectations as we ramp towards that target. To support this plan and prepare for growth beyond 2022, in the second quarter of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and 2024, and nine E175 to be operated by Horizon Air with deliveries in 2022 and 2023. In addition, we expanded our long-term capacityrenewed co-brand credit card agreement with SkyWest by eight aircraft beginningBank of America extending to 2030. Throughout the pandemic, our loyalty program provided meaningful cash flow to our business, and has continued to grow in 2022.line with returning demand. The new agreement is expected to generate incremental cash flows from improved economics, while providing our guests with expanded benefits.
Our guidanceTo support our growth plans, we are focused on staffing our airlines and delivering the operational excellence for 2021 compares against 2019which we are known. We faced challenges in the first quarter as the omicron variant caused disruptions in our pilot training throughput, which led to a shortage of pilots as we believe it provides a more meaningful indication ofentered the pacesecond quarter. In response, management has moderated second quarter capacity plans to maintain operational integrity, and quality of recoverynow plans to pre-pandemicfly capacity that is 6% to 9% below 2019 levels. ForDespite the thirddrawdown in capacity, relative strength in the demand environment is expected to lift second quarter we are planning for capacityrevenues to be approximately 17%5% to 20% below the same period in8% above 2019 coupled with increased passenger counts as leisure travel continues through the summer months and business travel rebuilds as workplaces reopen. As we continue to be disciplined with returning capacity and optimizing the aircraft gauge for flown routes, we anticipate third quarter load factors to range between 82% and 85%.levels.
The guidance we have provided and our outlook more broadly are sensitive to health trends, exposure to variants of the COVID-19 virus, andas well as regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. OurAs we leverage our network, Mileage Plan program, and fleet for growth, our people continue to focus on keeping costs low, running a greatstrong operation, and welcoming guests back to travel with Next-Level Care to ensure theybuilding brand love as we go. These are safe and comfortable when they fly. These competitive advantages we have cultivated over many years that will continue to serve us well in 20212022 and beyond, and we are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.
Sustainability Updates
As we move beyond the impacts of the COVID-19 pandemic, we have shifted our focus back to our 2025 strategic plan, which was announced in 2019. During the second quarter, we continued to make strides towards our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. As part of these commitments, we announced a partnership with Boeing on the 737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies to enhance the safety and sustainability of air travel. In the second quarter we also announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and machine learning to optimize air traffic and enable more fuel-efficient flight paths for aggregate savings of fuel, carbon emissions and time.
As a reflection of the importance of the commitments made, we continue to tie a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emission target into our company-wide performance-based pay program, for which we currently expect to meet the targeted goal.
Financial Overview
Our consolidated pre-tax income for the second quarter of 2021 was $528 million, compared to a pre-tax loss of $291 million in the second quarter of 2020. The $819 million improvement is primarily driven by an increase of $1.1 billion in operating revenue and $141 million of increased wage offsets provided by extensions of the PSP of the CARES Act. These improvements were offset by a $292 million increase in non-fuel operating costs, excluding special items, and a $215 million increase in fuel expense as the operation ramps up to meet increased demand.
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. A glossary of financial terms can be found at the end of this Item 2.beyond.
RESULTS OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of theaircraft fuel, Payroll Support Program grant wage offset,offsets and other special items 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 specialother items (including the Payroll Support Program grant wage offset impairment and restructuring charges and merger-related costs)other special items) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as productivity, airport costs, maintenance costs, etc., which are more controllable by management.
•Cost per ASM (CASM) excluding fuel and certain specialother items, such as the Payroll Support Program grant wage offset impairment and restructuring charges and merger-related costs,other special items, is one of the most important measures used by management and by the Air Groupour Board of Directors in assessing quarterly and annual cost performance.
•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual cash incentive plan, which covers the majority of employees within the 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 have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.
•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual cash incentive plan, which covers the majority of employees within the Alaska Air Group organization.
•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
•Although we disclose our 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.
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, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | | 2022 | | 2021 | | Change | |
Consolidated Operating Statistics:(a) | Consolidated Operating Statistics:(a) | | | | | | | | | | | | Consolidated Operating Statistics:(a) | | | | | | |
Revenue passengers (000) | Revenue passengers (000) | 8,712 | | 1,485 | | 486.7% | | 13,379 | | 10,417 | | 28.4% | Revenue passengers (000) | 8,694 | | 4,666 | | 86.3% | |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 10,334 | | 1,654 | | 524.8% | | 15,727 | | 12,310 | | 27.8% | RPMs (000,000) "traffic" | 10,586 | | 5,393 | | 96.3% | |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 13,413 | | 4,307 | | 211.4% | | 23,810 | | 19,612 | | 21.4% | ASMs (000,000) "capacity" | 13,783 | | 10,397 | | 32.6% | |
Load factor | Load factor | 77.0% | | 38.4% | | 38.6 pts | | 66.1% | | 62.8% | | 3.3 pts | Load factor | 76.8% | | 51.9% | | 24.9 pts | |
Yield | Yield | 13.09¢ | | 18.68¢ | | (29.9)% | | 12.79¢ | | 14.54¢ | | (12.0)% | Yield | 14.27¢ | | 12.22¢ | | 16.8% | |
RASM | RASM | 11.38¢ | | 9.77¢ | | 16.5% | | 9.76¢ | | 10.49¢ | | (7.0)% | RASM | 12.20¢ | | 7.67¢ | | 59.1% | |
CASM excluding fuel and special items(b) | CASM excluding fuel and special items(b) | 9.20¢ | | 21.87¢ | | (57.9)% | | 9.95¢ | | 12.00¢ | | (17.1)% | CASM excluding fuel and special items(b) | 10.61¢ | | 10.93¢ | | (2.9)% | |
Economic fuel cost per gallon(b) | Economic fuel cost per gallon(b) | $1.90 | | $1.20 | | 58.3% | | $1.85 | | $1.77 | | 4.5% | Economic fuel cost per gallon(b) | $2.62 | | $1.79 | | 46.4% | |
Fuel gallons (000,000) | Fuel gallons (000,000) | 168 | | 54 | | 211.1% | | 294 | | 248 | | 18.5% | Fuel gallons (000,000) | 173 | | 126 | | 37.3% | |
ASMs per fuel gallon | ASMs per fuel gallon | 79.8 | | 79.8 | | —% | | 81.0 | | 79.1 | | 2.4% | ASMs per fuel gallon | 79.9 | | 82.4 | | (3.0)% | |
Average full-time equivalent employees (FTEs) | Average full-time equivalent employees (FTEs) | 19,001 | | 15,836 | | 20.0% | | 18,071 | | 19,115 | | (5.5)% | Average full-time equivalent employees (FTEs) | 21,582 | | 17,140 | | 25.9% | |
Mainline Operating Statistics: | Mainline Operating Statistics: | | Mainline Operating Statistics: | | |
Revenue passengers (000) | Revenue passengers (000) | 6,151 | | 905 | | 579.7% | | 9,302 | | 7,580 | | 22.7% | Revenue passengers (000) | 6,566 | | 3,151 | | 108.4% | |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 8,966 | | 1,276 | | 602.7% | | 13,555 | | 10,858 | | 24.8% | RPMs (000,000) "traffic" | 9,512 | | 4,589 | | 107.3% | |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 11,611 | | 3,363 | | 245.3% | | 20,464 | | 17,060 | | 20.0% | ASMs (000,000) "capacity" | 12,387 | | 8,853 | | 39.9% | |
Load factor | Load factor | 77.2% | | 37.9% | | 39.3 pts | | 66.2% | | 63.6% | | 2.6 pts | Load factor | 76.8% | | 51.8% | | 25.0 pts | |
Yield | Yield | 11.96¢ | | 17.63¢ | | (32.2)% | | 11.64¢ | | 13.44¢ | | (13.4)% | Yield | 13.06¢ | | 11.02¢ | | 18.5% | |
RASM | RASM | 10.59¢ | | 9.52¢ | | 11.2% | | 9.09¢ | | 9.94¢ | | (8.6)% | RASM | 11.30¢ | | 7.11¢ | | 58.9% | |
CASM excluding fuel and special items(b) | CASM excluding fuel and special items(b) | 8.48¢ | | 22.19¢ | | (61.8)% | | 9.17¢ | | 11.17¢ | | (17.9)% | CASM excluding fuel and special items(b) | 9.64¢ | | 10.08¢ | | (4.4)% | |
Economic fuel cost per gallon(b) | Economic fuel cost per gallon(b) | $1.88 | | $1.20 | | 56.7% | | $1.84 | | $1.78 | | 3.4% | Economic fuel cost per gallon(b) | $2.61 | | $1.77 | | 47.5% | |
Fuel gallons (000,000) | Fuel gallons (000,000) | 135 | | 38 | | 255.3% | | 233 | | 201 | | 15.9% | Fuel gallons (000,000) | 146 | | 98 | | 49.0% | |
ASMs per fuel gallon | ASMs per fuel gallon | 86.0 | | 88.5 | | (2.8)% | | 87.8 | | 84.9 | | 3.4% | ASMs per fuel gallon | 85.0 | | 90.3 | | (5.9)% | |
Average FTEs | Average FTEs | 14,021 | | 12,340 | | 13.6% | | 13,247 | | 14,579 | | (9.1)% | Average FTEs | 16,336 | | 12,473 | | 31.0% | |
Aircraft utilization | Aircraft utilization | 9.9 | | 5.6 | | 76.8% | | 9.2 | | 8.8 | | 4.5% | Aircraft utilization | 9.5 | | 8.5 | | 11.8% | |
Average aircraft stage length | Average aircraft stage length | 1,320 | | 1,144 | | 15.4% | | 1,313 | | 1,270 | | 3.4% | Average aircraft stage length | 1,334 | | 1,303 | | 2.4% | |
Operating fleet(d) | Operating fleet(d) | 202 | | 225 | | (23) a/c | | 202 | | 225 | | (23) a/c | Operating fleet(d) | 225 | | 201 | | 24 a/c | |
Regional Operating Statistics:(c) | Regional Operating Statistics:(c) | | Regional Operating Statistics:(c) | | |
Revenue passengers (000) | Revenue passengers (000) | 2,562 | | 580 | | 341.7% | | 4,077 | | 2,837 | | 43.7% | Revenue passengers (000) | 2,128 | | 1,515 | | 40.5% | |
RPMs (000,000) "traffic" | RPMs (000,000) "traffic" | 1,367 | | 378 | | 261.6% | | 2,172 | | 1,452 | | 49.6% | RPMs (000,000) "traffic" | 1,075 | | 804 | | 33.7% | |
ASMs (000,000) "capacity" | ASMs (000,000) "capacity" | 1,802 | | 945 | | 90.7% | | 3,346 | | 2,552 | | 31.1% | ASMs (000,000) "capacity" | 1,396 | | 1,544 | | (9.6)% | |
Load factor | Load factor | 75.9% | | 40.0% | | 35.9 pts | | 64.9% | | 56.9% | | 8.0 pts | Load factor | 77.0% | | 52.1% | | 24.9 pts | |
Yield | Yield | 20.48¢ | | 22.12¢ | | (7.4)% | | 19.95¢ | | 22.80¢ | | (12.5)% | Yield | 24.96¢ | | 19.04¢ | | 31.1% | |
RASM | RASM | 16.41¢ | | 10.63¢ | | 54.4% | | 13.84¢ | | 14.07¢ | | (1.6)% | RASM | 20.04¢ | | 10.84¢ | | 84.9% | |
Operating fleet | 94 | | 94 | | — a/c | | 94 | | 94 | | — a/c | |
Operating fleet(d) | | Operating fleet(d) | 98 | | 94 | | 4 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 all aircraft removed from operating service, as well as new aircraft which have not yet entered operating service.
Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 20212022 to 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited) |
Alaska Air Group, Inc. | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2019 | | Change | | 2021 | | 2019 | | Change |
Passenger revenue | $ | 1,352 | | | $ | 2,111 | | | (36) | % | | $ | 2,011 | | | $ | 3,827 | | | (47) | % |
Mileage plan other revenue | 118 | | | 118 | | | — | % | | 212 | | | 228 | | | (7) | % |
Cargo and other | 57 | | | 59 | | | (3) | % | | 101 | | | 109 | | | (7) | % |
Total operating revenues | $ | 1,527 | | | $ | 2,288 | | | (33) | % | | $ | 2,324 | | | $ | 4,164 | | | (44) | % |
| | | | | | | | | | | |
Operating expense, excluding fuel and special items | $ | 1,234 | | | $ | 1,414 | | | (13) | % | | $ | 2,371 | | | $ | 2,819 | | | (16) | % |
Economic fuel | 274 | | | 502 | | | (45) | % | | 477 | | | 922 | | | (48) | % |
Special items | (530) | | | 8 | | NM | | (912) | | | 34 | | NM |
Total operating expenses | $ | 978 | | | $ | 1,924 | | | (49) | % | | $ | 1,936 | | | $ | 3,775 | | | (49) | % |
| | | | | | | | | | | |
Total nonoperating expense | (21) | | | (13) | | | 62 | % | | (33) | | | (32) | | | 3 | % |
Income (loss) before income tax | $ | 528 | | | $ | 351 | | | 50 | % | | $ | 355 | | | $ | 357 | | | (1) | % |
| | | | | | | | | | | |
Consolidated Operating Statistics(a): | | | | | | | | | | | |
Revenue passengers (000) | 8,712 | | 12,026 | | (28) | % | | 13,379 | | 22,442 | | (40) | % |
RPMs (000,000) "traffic" | 10,334 | | 14,638 | | (29) | % | | 15,727 | | 27,087 | | (42) | % |
ASMs (000,000) "capacity" | 13,413 | | 16,980 | | (21) | % | | 23,810 | | 32,487 | | (27) | % |
Load Factor | 77.0% | | 86.2% | | (9.2) | pts | | 66.1% | | 83.4% | | (17.3) | pts |
Yield | 13.09¢ | | 14.43¢ | | (9) | % | | 12.79¢ | | 14.13¢ | | (9) | % |
RASM | 11.38¢ | | 13.48¢ | | (16) | % | | 9.76¢ | | 12.82¢ | | (24) | % |
CASMex | 9.20¢ | | 8.33¢ | | 10 | % | | 9.95¢ | | 8.68¢ | | 15 | % |
FTEs | 19,001 | | 21,921 | | (13) | % | | 18,071 | | 21,876 | | (17) | % |
(a)2019 comparative operating statistics have been recalculated using the information presented above, and as filed in our second quarter 2019 Form 10-Q. | | | | | | | | | | | | | | | | | | | | | | | |
FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited) |
Alaska Air Group, Inc. | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2019 | | Change | | | | | | |
Passenger revenue | $ | 1,511 | | | $ | 1,716 | | | (12) | % | | | | | | |
Mileage plan other revenue | 112 | | | 110 | | | 2 | % | | | | | | |
Cargo and other | 58 | | | 50 | | | 16 | % | | | | | | |
Total operating revenues | $ | 1,681 | | | $ | 1,876 | | | (10) | % | | | | | | |
| | | | | | | | | | | |
Operating expense, excluding fuel and special items | $ | 1461 | | | $ | 1,405 | | | 4 | % | | | | | | |
Aircraft fuel, including hedging gains and losses | 347 | | | 420 | | | (17) | % | | | | | | |
Special items | 75 | | | 26 | | NM | | | | | | |
Total operating expenses | $ | 1,883 | | | $ | 1,851 | | | 2 | % | | | | | | |
| | | | | | | | | | | |
Total non-operating expense | (4) | | | (19) | | | (79) | % | | | | | | |
Income (loss) before income tax | $ | (206) | | | $ | 6 | | | NM | | | | | | |
| | | | | | | | | | | |
Consolidated Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 8,694 | | 10,417 | | (17) | % | | | | | | |
RPMs (000,000) "traffic" | 10,586 | | 12,449 | | (15) | % | | | | | | |
ASMs (000,000) "capacity" | 13,783 | | 15,508 | | (11) | % | | | | | | |
Load Factor | 76.8% | | 80.3% | | (3.5) | pts | | | | | | |
Yield | 14.27¢ | | 13.78¢ | | 4 | % | | | | | | |
RASM | 12.20¢ | | 12.10¢ | | 1 | % | | | | | | |
CASMex | 10.61¢ | | 9.06¢ | | 17 | % | | | | | | |
FTEs | 21,582 | | 21,832 | | (1) | % | | | | | | |
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 TO THREE MONTHS ENDED JUNE 30, 2020MARCH 31, 2021
Our consolidated net incomeloss for the three months ended June 30, 2021March 31, 2022 was $397$143 million, or $3.13$1.14 per share, compared to a net loss of $214$131 million, or $1.74$1.05 per share, for the three months ended June 30, 2020.March 31, 2021.
Excluding the impact of the Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the secondfirst quarter of 20212022 was $38$167 million, or $0.30$1.33 per share, compared to an adjusted net loss of $439$436 million, or $3.57$3.51 per share, in the secondfirst quarter of 2020.2021. The following tables reconciletable reconciles our adjusted net loss per share (EPS) to amounts as reported in accordance with GAAP:
| | | Three Months Ended June 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
(in millions, except per share amounts) | (in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS | (in millions, except per share amounts) | Dollars | | EPS | | Dollars | | EPS |
GAAP net income (loss) per share | $ | 397 | | | $ | 3.13 | | | $ | (214) | | | $ | (1.74) | | |
GAAP net loss per share | | GAAP net loss per share | $ | (143) | | | $ | (1.14) | | | $ | (131) | | | $ | (1.05) | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (503) | | | (3.97) | | | (362) | | | (2.94) | | Payroll Support Program grant wage offset | — | | | — | | | (411) | | | (3.31) | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (46) | | | (0.36) | | | (6) | | | (0.05) | | Mark-to-market fuel hedge adjustments | (107) | | | (0.85) | | | (22) | | | (0.18) | |
Special items - impairment charges and other | (4) | | | (0.03) | | | 69 | | | 0.56 | | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 75 | | | 0.60 | | | 18 | | | 0.14 | |
Special items - restructuring charges | Special items - restructuring charges | (23) | | | (0.18) | | | — | | | — | | Special items - restructuring charges | — | | | — | | | 11 | | | 0.09 | |
Special items - merger-related costs | — | | | — | | | 1 | | | 0.01 | | |
| Income tax effect of reconciling items above | Income tax effect of reconciling items above | 141 | | | 1.11 | | | 73 | | | 0.59 | | Income tax effect of reconciling items above | 8 | | | 0.06 | | | 99 | | | 0.80 | |
Non-GAAP adjusted net loss per share | Non-GAAP adjusted net loss per share | $ | (38) | | | $ | (0.30) | | | $ | (439) | | | $ | (3.57) | | Non-GAAP adjusted net loss per share | $ | (167) | | | $ | (1.33) | | | $ | (436) | | | $ | (3.51) | |
CASM excluding fuel and special items reconciliation is summarized below: | | | Three Months Ended June 30, | | Three Months Ended March 31, |
(in cents) | (in cents) | 2021 | | 2020 | | % Change | (in cents) | 2022 | | 2021 | | % Change |
Consolidated: | Consolidated: | | | | | | Consolidated: | | | | | |
CASM | CASM | 7.29 | ¢ | | 16.46 | ¢ | | (56) | % | CASM | 13.66 | ¢ | | 9.21 | ¢ | | 48 | % |
Less the following components: | Less the following components: | | Less the following components: | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (3.75) | | | (8.40) | | | (55) | % | Payroll Support Program grant wage offset | — | | | (3.95) | | | NM |
Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 2.04 | | | 1.37 | | | 49 | % | Aircraft fuel, including hedging gains and losses | 2.51 | | | 1.95 | | | 29 | % |
Special items - impairment charges and other | (0.03) | | | 1.60 | | | (102) | % | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 0.54 | | | 0.17 | | | NM |
Special items - restructuring charges | Special items - restructuring charges | (0.17) | | | — | | | NM | Special items - restructuring charges | — | | | 0.11 | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % | |
| CASM excluding fuel and special items | CASM excluding fuel and special items | 9.20 | ¢ | | 21.87 | ¢ | | (58) | % | CASM excluding fuel and special items | 10.61 | ¢ | | 10.93 | ¢ | | (3) | % |
| Mainline: | Mainline: | | Mainline: | |
CASM | CASM | 6.24 | ¢ | | 15.79 | ¢ | | (60) | % | CASM | 11.89 | ¢ | | 8.07 | ¢ | | 47 | % |
Less the following components: | Less the following components: | | Less the following components: | |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (3.79) | | | (9.69) | | | (61) | % | Payroll Support Program grant wage offset | — | | | (4.06) | | | NM |
Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 1.78 | | | 1.16 | | | 53 | % | Aircraft fuel, including hedging gains and losses | 2.21 | | | 1.72 | | | 29 | % |
| Special items - impairment charges and other | (0.03) | | | 2.11 | | | (101) | % | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 0.04 | | | 0.20 | | | (80) | % |
Special items - restructuring charges | Special items - restructuring charges | (0.20) | | | — | | | NM | Special items - restructuring charges | — | | | 0.13 | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % | |
| CASM excluding fuel and special items | CASM excluding fuel and special items | 8.48 | ¢ | | 22.19 | ¢ | | (62) | % | CASM excluding fuel and special items | 9.64 | ¢ | | 10.08 | ¢ | | (4) | % |
OPERATING REVENUES
Total operating revenues increased $1.1 billion$884 million, or 111%, during the secondfirst quarter of 20212022 compared to the same period in 2020.2021. The changes are summarized in the following table: | | | Three Months Ended June 30, | | Three Months Ended March 31, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Passenger revenue | Passenger revenue | $ | 1,352 | | | $ | 309 | | | 338 | % | Passenger revenue | $ | 1,511 | | | $ | 659 | | | 129 | % |
Mileage Plan other revenue | Mileage Plan other revenue | 118 | | | 73 | | | 62 | % | Mileage Plan other revenue | 112 | | | 94 | | | 19 | % |
Cargo and other | Cargo and other | 57 | | | 39 | | | 46 | % | Cargo and other | 58 | | | 44 | | | 32 | % |
Total operating revenues | Total operating revenues | $ | 1,527 | | | $ | 421 | | | 263 | % | Total operating revenues | $ | 1,681 | | | $ | 797 | | | 111 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the secondfirst quarter of 20212022 increased by $1.0 billion,$852 million, or 129%, primarily driven by a significant increase in passenger traffic. Intraffic and bolstered by a 17% improvement in ticket yields. January and February 2022 results were negatively impacted by the second quarter of 2020,omicron variant; however, surging demand in March by both business and leisure travelers drove meaningful improvements to year-over-year results.
We expect to see continued growth to Passenger revenue as we experienced a near complete loss of demandprogress through 2022 driven by the COVID-19 pandemic. As recovery has taken hold, including wide availability of the vaccinehigh demand and removal of restrictions throughout the markets we serve, demand for air travel has increased exponentially driven primarily by leisure travelers.capacity.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased by $45$18 million, or 62%19%, as compared to the same prior-year period,period. The change is largely due to an increase in commissions from our bank card partners driven by our new co-branded credit card agreement and increased consumer spending and new card acquisitions. Performance of
We expect to see increases to Mileage Plan other revenues outpaced all other revenue sources, and resulted infor the best performanceremainder of 2022, driven by higher commissions from the program ever in the second quarter of 2021.new co-branded credit card agreement.
Cargo and other
On a consolidated basis, Cargo and other revenue for the secondfirst quarter of 20212022 increased by $18$14 million, or 46%32%, as compared to the same prior-year period. The increase is primarily due to the return of all threeperiod as our dedicated freighters back towere running below full capacity in the secondfirst quarter of 2021, coupled2021. Additional departures also provided incremental belly cargo activity in the first quarter of 2022 compared with the prior year.
We expect to see increases to cargo and other revenue for the remainder of 2022, driven by increased belly cargo activity as we increase scheduled departures.
OPERATING EXPENSES
Total operating expenses increased $269$925 million, or 38%97%, compared to the secondfirst quarter of 2020.2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management: | | | Three Months Ended June 30, | | Three Months Ended March 31, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Fuel expense | Fuel expense | $ | 274 | | | $ | 59 | | | 364 | % | Fuel expense | $ | 347 | | | $ | 203 | | | 71 | % |
Non-fuel operating expenses, excluding special items | Non-fuel operating expenses, excluding special items | 1,234 | | | 942 | | | 31 | % | Non-fuel operating expenses, excluding special items | 1,461 | | | 1,137 | | | 28 | % |
Payroll Support Program grant wage offset | Payroll Support Program grant wage offset | (503) | | | (362) | | | 39 | % | Payroll Support Program grant wage offset | — | | | (411) | | | NM |
Special items - impairment charges and other | (4) | | | 69 | | | (106) | % | |
Special items - fleet transition and related charges | | Special items - fleet transition and related charges | 75 | | | 18 | | | NM |
Special items - restructuring charges | Special items - restructuring charges | (23) | | | — | | | NM | Special items - restructuring charges | — | | | 11 | | | NM |
Special items - merger-related costs | — | | | 1 | | | (100) | % | |
| Total operating expenses | Total operating expenses | $ | 978 | | | $ | 709 | | | 38 | % | Total operating expenses | $ | 1,883 | | | $ | 958 | | | 97 | % |
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.
Aircraft fuel expense increased $215$144 million, or 71%, compared to the secondfirst quarter of 2020.2021. The elements of the change are illustrated in the following table: | | | Three Months Ended June 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2022 | | 2021 | |
(in millions, except for per gallon amounts) | (in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | (in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | |
Raw or "into-plane" fuel cost | Raw or "into-plane" fuel cost | $ | 330 | | | $ | 1.96 | | | $ | 60 | | | $ | 1.11 | | Raw or "into-plane" fuel cost | $ | 504 | | | $ | 2.91 | | | $ | 222 | | | $ | 1.77 | | |
(Gain)/loss on settled hedges | (Gain)/loss on settled hedges | (10) | | | (0.06) | | | 5 | | | 0.09 | | (Gain)/loss on settled hedges | (50) | | | (0.29) | | | 3 | | | 0.02 | | |
Consolidated economic fuel expense | Consolidated economic fuel expense | 320 | | | 1.90 | | | $ | 65 | | | $ | 1.20 | | Consolidated economic fuel expense | $ | 454 | | | $ | 2.62 | | | $ | 225 | | | $ | 1.79 | | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (46) | | | (0.27) | | | (6) | | | (0.11) | | Mark-to-market fuel hedge adjustments | (107) | | | (0.62) | | | (22) | | | (0.18) | | |
GAAP fuel expense | GAAP fuel expense | $ | 274 | | | $ | 1.63 | | | $ | 59 | | | $ | 1.09 | | GAAP fuel expense | $ | 347 | | | $ | 2.00 | | | $ | 203 | | | $ | 1.61 | | |
Fuel gallons | Fuel gallons | 168 | | | | | 54 | | | | Fuel gallons | | | 173 | | | | | 126 | | |
Raw fuel expense increased 127% in the first quarter of 2022 compared to the first quarter of 2021 due to a combination of increased fuel consumption and higher per gallon for the three months ended June 30, 2021costs. Fuel consumption increased by 47 million gallons, consistent with an increase in departures. Raw fuel expense per gallon increased by approximately 77%64% due to higher 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 increase in raw fuel price per gallon during the secondfirst quarter of 20212022 was primarily driven by a 24%64% increase in crude oil prices. This is coupled with an increase in consumption of 114 million gallons, on an increase in scheduled departures.prices when compared to the prior year.
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economicEconomic fuel expense, we include includes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business 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.
Gains recognized for hedges that settled during the secondfirst quarter were $10$50 million in 2021,2022, compared to losses of $5$3 million in the same period in 2020.2021. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.
We expect to see continued pressure in aircraft fuel expense as we progress through 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the second quarter to range between $3.20 and $3.25 per gallon. Based on expected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio during 2022. We expect the magnitude of the hedge benefit to be lesser in the second half of the year as the strike price of the portfolio approaches projected market cost per barrel.
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 other special items. Significant operating expense variances from 20202021 are more fully described below. | | | Three Months Ended June 30, | | Three Months Ended March 31, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Wages and benefits | Wages and benefits | $ | 510 | | | $ | 472 | | | 8 | % | Wages and benefits | $ | 606 | | | $ | 493 | | | 23 | % |
Variable incentive pay | Variable incentive pay | 34 | | | 16 | | | 113 | % | Variable incentive pay | 36 | | | 33 | | | 9 | % |
Aircraft maintenance | Aircraft maintenance | 102 | | | 45 | | | 127 | % | Aircraft maintenance | 135 | | | 81 | | | 67 | % |
Aircraft rent | Aircraft rent | 62 | | | 74 | | | (16) | % | Aircraft rent | 73 | | | 62 | | | 18 | % |
Landing fees and other rentals | Landing fees and other rentals | 144 | | | 83 | | | 73 | % | Landing fees and other rentals | 138 | | | 129 | | | 7 | % |
Contracted services | Contracted services | 54 | | | 30 | | | 80 | % | Contracted services | 78 | | | 51 | | | 53 | % |
Selling expenses | Selling expenses | 41 | | | 4 | | | 925 | % | Selling expenses | 58 | | | 33 | | | 76 | % |
Depreciation and amortization | Depreciation and amortization | 98 | | | 107 | | | (8) | % | Depreciation and amortization | 102 | | | 97 | | | 5 | % |
Food and beverage service | Food and beverage service | 35 | | | 7 | | | 400 | % | Food and beverage service | 41 | | | 23 | | | 78 | % |
Third-party regional carrier expense | Third-party regional carrier expense | 37 | | | 26 | | | 42 | % | Third-party regional carrier expense | 42 | | | 30 | | | 40 | % |
Other | Other | 117 | | | 78 | | | 50 | % | Other | 152 | | | 105 | | | 45 | % |
Total non-fuel operating expenses, excluding special items | Total non-fuel operating expenses, excluding special items | $ | 1,234 | | | $ | 942 | | | 31 | % | Total non-fuel operating expenses, excluding special items | $ | 1,461 | | | $ | 1,137 | | | 28 | % |
29For the remainder of the year, we generally anticipate recognizing incremental costs as compared to 2021 as we continue to increase our capacity and scheduled departures, and hire additional employees at higher wage rates to staff our operation.
Wages and Benefits
Wages and benefits increased during the secondfirst quarter of 20212022 by $38$113 million, or 8%23%, compared to 2020.2021. The primary components of Wages and benefits are shown in the following table: | | | Three Months Ended June 30, | | Three Months Ended March 31, |
(in millions) | (in millions) | 2021 | | 2020 | | % Change | (in millions) | 2022 | | 2021 | | % Change |
Wages | Wages | $ | 386 | | | $ | 350 | | | 10 | % | Wages | $ | 467 | | | $ | 357 | | | 31 | % |
Pension - Defined benefit plans service cost | Pension - Defined benefit plans service cost | 13 | | | 13 | | | — | % | Pension - Defined benefit plans service cost | 11 | | | 13 | | | (15) | % |
Defined contribution plans | Defined contribution plans | 26 | | | 30 | | | (13) | % | Defined contribution plans | 38 | | | 32 | | | 19 | % |
Medical and other benefits | Medical and other benefits | 59 | | | 54 | | | 9 | % | Medical and other benefits | 56 | | | 65 | | | (14) | % |
Payroll taxes | Payroll taxes | 26 | | | 25 | | | 4 | % | Payroll taxes | 34 | | | 26 | | | 31 | % |
Total wages and benefits | Total wages and benefits | $ | 510 | | | $ | 472 | | | 8 | % | Total wages and benefits | $ | 606 | | | $ | 493 | | | 23 | % |
Wages increased $36$110 million, or 10%31%, on a 20%26% increase in FTEs. Increased wages as compared to the prior period are primarily the result of leaves of absence takenthe increase in FTEs as Alaska and reductionHorizon continue their recovery from the pandemic and ramp up operations. Increased expense for defined contribution plans and payroll taxes are in executive pay and hours for management employees in 2020 which were not repeated in 2021.line with the related increase to wages.
Defined contribution plan expenseMedical and other benefits decreased 13% as compared to 20202021 as a result of a one-timean adjustment recorded in the second quarter of 2021 for employer contributions to those participating in incentive leaveprior-period reserves and structural changes to benefit programs.
Variable Incentive Pay
Variable incentive pay expense increased $18 million during the second quarter of 2021 compared to the same period in 2020 on increased expectation of achievement of key financial and operational metrics.
Aircraft Maintenance
Aircraft maintenance expense increased by $57$54 million, during the second quarter of 2021or 67%, compared to the same period in 2020. Thisfirst quarter of 2021. Higher maintenance expense is primarily duethe result of charges recorded for maintenance work to return leased aircraft and increased power-by-the-hour charges on covered aircraft, including a significant increase in utilization of aircraft as we return to capacity, resulting in increased engine events, heavy checks and power-by-the-hour expense.new contract for our regional fleet.
Aircraft Rent
Aircraft rent expense decreasedincreased by $12$11 million, or 16%18%, during the secondfirst quarter of 20212022 compared to the same period in 20202021 primarily theas a result of leased Boeing 737-9 deliveries in the full impairment takensecond half of 2021 and first quarter of 2022.
We expect aircraft rent to increase in 2022 on certainthe annualization of expense and additional deliveries of leased Airbus737-9 aircraft in 2020.and incremental aircraft flown by SkyWest under our long-term capacity purchase agreement.
Landing feesFees and other rentalsOther Rentals
Landing fees and other rentals increased by $61$9 million, or 73%7%, during the secondfirst quarter of 20212022. The increase compared to the same period in 2020 primarily2021 is due to a significantan increase in departures. Increased departure-related costs were coupleddepartures as demand returns, partially offset by rate increasesdecreases in rates at manysome of our hubthe airports including the renegotiated lease at our largest airport hub Seattle-Tacoma International Airport.we service.
Contracted Services
Contracted services increased by $24$27 million, or 80%53%, during the secondfirst quarter of 20212022 compared to the same period in 20202021 driven primarily by increased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.in line with increased demand, coupled with increased rates charged by vendor partners.
Selling Expense
Selling expense increased by $37$25 million, or 76%, during the secondfirst quarter of 20212022 compared to the same period in 2020,2021, primarily driven by a significantan increase in distribution costs and credit card commissions incurred with the increase of overall travel.revenue recovery.
Food and Beverage Service
Food and beverage service increased by $28$18 million, or 78%, during the secondfirst quarter of 20212022 compared to the same period in 2020.2021. This increase is consistentin line with the overall86% increase in revenue passengers as compared to the prior-year period, as well as the return of many of our on-board products in the second quarter of 2021.period.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made toexpenses associated with SkyWest under our CPA, increased by $11$12 million, or 42%40%, during the secondfirst quarter of 20212022 compared to the same period in 2020.2021. The increase in expense is primarily due to increases inincremental departures flown by SkyWest as compared to the prior-year period. Increased expenseIn addition, a benefit was partially offset by arecorded in 2021 associated with the pass through of CARES Act PSP funding of $5 million receivedthat reduced expense, which did not recur in 2022.
We expect third-party regional carrier expense to grow in 2022 as compared to 2021 as we bring incremental E175 aircraft into the second quarter to offsetCPA with SkyWest pilot and flight attendant wages and benefits.through the year.
Other expenseExpense
Other expense increased $39$47 million, or 50%45%, during the secondfirst quarter of 20212022 compared to the same period in 2020.2021. Increased expense is primarily driven by incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity, as well as additional expense for professional services.capacity.
Special Items - Impairmentfleet transition and otherrelated charges
We recorded a benefitnon-recurring expense associated with impairmentfleet transition and otherrelated charges of $4$75 million in the secondfirst quarter of 2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned2022. Refer to Note 2 to the lessor.condensed consolidated financial statements for additional details.
Special Items - Restructuring charges
We recorded a benefit for workforce restructuring of $23 million in the second quarter of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline operations recorded an adjusted pretax loss of $24$174 million in the secondfirst quarter of 2021,2022, compared to aan adjusted pretax loss of $471$444 million in the secondfirst quarter of 2020.2021. The $447$270 million improvement was primarily driven by an $847a $737 million increase in Passenger revenues as a result of increased demand for air travel, offset by a $238$301 million increase in non-fuel operating costs and a $208$207 million increase in economic fuel cost.
The increase in Mainline passenger revenue for the second quarter of 2021 was primarily driven by a significant increase in traffic and capacity due to increased demand for air travel.
Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher raweconomic fuel prices, combined with a significant increase inmore gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations generatedrecorded an adjusted pretax loss of $56$55 million in the secondfirst quarter of 2021,2022, compared to aan adjusted pretax loss of $129$150 million in the secondfirst quarter of 2020. The improved pretax loss was2021. Improved results were attributable to a $195$113 million increase in operating revenues, partially offset by a $76 million increase in non-fuel operating expenses and a $46$21 million increase in fuel costs.
Regional passenger revenuerevenues increased significantly compared to the secondfirst quarter of 2020,2021, primarily driven by increased trafficload factors and capacity driven by the resurgencea 31% improvement in demand for air travel.yield.
TheHigher economic fuel prices, combined with a significant increase in non-fuel operating expenses is primarily due to increased variable costs and higher CPA rates on angallons consumed, drove the increase in capacity, offset by the pass through of CARES Act PSP funds recorded in the second quarter of 2021.Regional fuel expense.
Horizon
Horizon achievedrecorded an adjusted pretax profit of $15 million in the second quarter of 2021 compared to $8 million in the second quarter of 2020. Increased profit is primarily the result of increased capacity flown, coupled with substantial progress in cost reduction efforts.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2021 TO SIX MONTHS ENDED JUNE 30, 2020
Our consolidated net income for the six months ended June 30, 2021 was $266 million, or $2.10 per diluted share, compared to a net loss of $446 million, or $3.62 per diluted share, for the six months ended June 30, 2020.
Our adjusted net loss for the six months ended June 30, 2021 was $474 million, or $3.75 per diluted share, compared to an adjusted net loss of $541 million, or $4.40 per diluted share, in the six months ended June 30, 2020. The following tables reconcile our adjusted net loss and adjusted diluted EPS to amounts as reported in accordance with GAAP: | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Reported GAAP net income (loss) and diluted EPS | $ | 266 | | | $ | 2.10 | | | $ | (446) | | | $ | (3.62) | |
Payroll Support Program grant wage offset | (914) | | | (7.23) | | | (362) | | | (2.94) | |
Mark-to-market fuel hedge adjustments | (68) | | | (0.54) | | | 3 | | | 0.02 | |
Special items - merger-related costs | — | | | — | | | 4 | | | 0.03 | |
Special items - impairment charges and other | 14 | | | 0.11 | | | 229 | | | 1.86 | |
Special items - restructuring charges | (12) | | | (0.09) | | | — | | | — | |
Income tax effect of reconciling items above | 240 | | | 1.90 | | | 31 | | | 0.25 | |
Non-GAAP adjusted net loss per share | $ | (474) | | | $ | (3.75) | | | $ | (541) | | | $ | (4.40) | |
Our operating costs per ASM are summarized below: | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in cents) | 2021 | | 2020 | | % Change |
Consolidated: | | | | | |
CASM | 8.13 | ¢ | | 13.59 | ¢ | | (40) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (3.84) | | | (1.85) | | | 108 | % |
Aircraft fuel, including hedging gains and losses | 2.00 | | | 2.26 | | | (12) | % |
Special items - impairment charges and other | 0.07 | | | 1.17 | | | (94) | % |
Special items - restructuring charges | (0.05) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.01 | | | (100) | % |
CASM excluding fuel and special items | 9.95 | ¢ | | 12.00 | ¢ | | (17) | % |
| | | | | |
Mainline: | | | | | |
CASM | 6.72 | ¢ | | 12.39 | ¢ | | (46) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (4.21) | | | (1.91) | | | 120 | % |
Aircraft fuel, including hedging gains and losses | 1.75 | | | 2.12 | | | (17) | % |
Special items - impairment charges and other | 0.07 | | | 0.99 | | | (93) | % |
Special items - restructuring charges and other | (0.06) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 9.17 | ¢ | | 11.17 | ¢ | | (18) | % |
OPERATING REVENUES
Total operating revenues increased $267 million, or 13%, during the first six months of 2021 compared to the same period in 2020. The changes are summarized in the following table: | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Passenger revenue | $ | 2,011 | | | $ | 1,790 | | | 12 | % |
Mileage Plan other revenue | 212 | | | 182 | | | 16 | % |
Cargo and other | 101 | | | 85 | | | 19 | % |
Total operating revenues | $ | 2,324 | | | $ | 2,057 | | | 13 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the first six months of 2021 increased by $221 million, or 12%, on a 28% increase in passenger traffic, driven primarily by rebounding demand for leisure travel experienced in the second quarter of 2021. As travel restrictions were removed, including the full removal of restrictions in the state of California in June of 2021, passenger counts increased dramatically as compared to the prior year. These improvements were offset by a decrease of 12% in yield, stemming from promotional activities undertaken to stimulate demand and increase bookings during what is typically a low booking period.
We expect to see continued improvement to Passenger revenue as we progress through 2021, driven by continued growth in demand and capacity, as well as improvements to business travel as employees return to work.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased $30 million, or 16%, in the first six months of 2021 compared to the first six months of 2020, due largely to an increase in commission received from our affinity card partner stemming from growing consumer spend and incremental new card acquisitions.
Cargo and other
On a consolidated basis, Cargo and other revenue increased $16 million, or 19%, in the first six months of 2021 compared to the first six months of 2020. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.
We expect that our cargo and other revenues will be positively impacted as compared to 2020 due to the elimination of freighter limitations.
OPERATING EXPENSES
Total operating expenses decreased $730 million, or 27%, compared to the first six months of 2020. 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) | 2021 | | 2020 | | % Change |
Fuel expense | $ | 477 | | | $ | 443 | | | 8 | % |
Non-fuel operating expenses, excluding special items | 2,371 | | | 2,352 | | | 1 | % |
Payroll Support Program grant wage offset | (914) | | | (362) | | | 152 | % |
Special items - impairment charges and other | 14 | | | 229 | | | (94) | % |
Special items - restructuring charges | (12) | | | — | | | NM |
Special items - merger-related costs | — | | | 4 | | | (100) | % |
Total operating expenses | $ | 1,936 | | | $ | 2,666 | | | (27) | % |
Fuel Expense
Aircraft fuel expense increased $34 million, or 8%, compared to the six months ended June 30, 2020. The elements of the change are illustrated in the table:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 552 | | | $ | 1.87 | | | $ | 430 | | | $ | 1.73 | |
(Gain)/loss on settled hedges | (7) | | | (0.02) | | | 10 | | | 0.04 | |
Consolidated economic fuel expense | 545 | | | 1.85 | | | $ | 440 | | | $ | 1.77 | |
Mark-to-market fuel hedge adjustments | (68) | | | (0.23) | | | 3 | | | 0.01 | |
GAAP fuel expense | $ | 477 | | | $ | 1.62 | | | $ | 443 | | | $ | 1.78 | |
Fuel gallons | 294 | | | | | 248 | | | |
The raw fuel price per gallon increased 8% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the first six months of 2021 was driven by a 10% increase in crude oil prices, offset by a 65% decrease in refining margins.
Gains recognized for hedges that settled in the first six months of 2021 were $7 million, compared to losses of $10 million in the same period in 2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.
We expect our economic fuel cost per gallon in the thirdfirst quarter to range between $1.95 and $2.00 per gallon based on current market West Coast jet fuel prices.
Non-fuel Expense and Non- special items
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages and benefits | $ | 1,003 | | | $ | 1,084 | | | (7) | % |
Variable incentive pay | 67 | | | 23 | | | 191 | % |
Aircraft maintenance | 183 | | | 160 | | | 14 | % |
Aircraft rent | 124 | | | 155 | | | (20) | % |
Landing fees and other rentals | 273 | | | 214 | | | 28 | % |
Contracted services | 105 | | | 102 | | | 3 | % |
Selling expenses | 74 | | | 59 | | | 25 | % |
Depreciation and amortization | 195 | | | 215 | | | (9) | % |
Food and beverage service | 58 | | | 56 | | | 4 | % |
Third-party regional carrier expense | 67 | | | 63 | | | 6 | % |
Other | 222 | | | 221 | | | — | % |
Total non-fuel operating expenses, excluding special items | $ | 2,371 | | | $ | 2,352 | | | 1 | % |
Wages and Benefits
Wages and benefits decreased during the first six months of 2021 by $81 million, or 7%. The primary components of wages and benefits are shown in the following table: | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages | $ | 743 | | | $ | 803 | | | (7) | % |
Pension—Defined benefit plans service cost | 26 | | | 26 | | | — | % |
Defined contribution plans | 58 | | | 68 | | | (15) | % |
Medical and other benefits | 124 | | | 130 | | | (5) | % |
Payroll taxes | 52 | | | 57 | | | (9) | % |
Total wages and benefits | $ | 1,003 | | | $ | 1,084 | | | (7) | % |
Wages decreased $60 million, or 7%, on a 5% decrease in FTEs. Decreased wages as compared to the prior period are primarily the result of voluntary early-outs, as well as leaves of absence and incentive lines accepted in 2020 which carried into 2021. These reductions were offset by increased wages in the second quarter as we began to rebuild staffing and provide incentives to employees in response to increasing demand. Reductions to defined-contribution plan expense, medical and other benefits, and payroll taxes are a direct result of the decline in wages.
For the full year, we expect wages and benefits will increase compared to 2020 as we increase scheduled flying and return workers from incentive leaves or other absences to align with our expectation of increased demand. Additionally, as labor shortages continue to impact many of our markets, we expect to see continued wage pressure as we offer premium and bonus pay to attract and retain employees.
Variable Incentive Pay
Variable incentive pay expense increased $44 million, or 191%, during the first six months of 2021 as compared to the same period in 2020. The increase is primarily due to the expectation that incremental key targets will be achieved under the performance based pay program.
Aircraft Maintenance
Aircraft maintenance expense increased by $23 million, or 14%, during the first six months of 2021 compared to the same period in 2020. The increase is primarily due to increased component repairs which were delayed from 2020 as a result of increased flight hours, as well as increased power-by-the-hour combined with increased utilization of covered aircraft.
We expect full year aircraft maintenance expense to be higher than 2020 on increased aircraft utilization.
Landing fees and other rentals
Landing fees and other rentals increased by $59 million, or 28%, during the first six months of 2021 compared to the same period in 2020, primarily due to a significant increase in departures, combined with increased rates at certain of our airports.
For the full year we expect landing fees and other rentals to increase as compared to 2020 as we continue to increase capacity and departures on increased rates at many of our hub airports.
Selling Expense
Selling expense increased by $15 million, or 25%, during the first six months of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions. Increased marketing spend and sponsorship costs given the return of professional sports and events also contributed to the year-over-year increase.
We expect full year selling expense will increase in-line with the increase to revenue as a result of increased distribution costs on higher bookings, as well as increased sponsorship and marketing costs.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $4 million, or 6%, during the first six months of 2021 compared to the same period in 2020. The increase is primarily due to a 26% increase in SkyWest departures as compared to the prior year. Increased SkyWest activity was offset by the receipt and recognition of $14 million in pass-through of CARES Act PSP funding for pilot and flight attendant wages and benefits.
For the full year, we expect third-party regional carrier expense to be higher than 2020 driven by increased departures.
Special Items - Impairment and other charges
We recorded impairment and other charges of $14 million in the first six months of 2021, consisting of costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor. We continue to evaluate total estimated costs to return these permanently parked aircraft, and make updates to total expense where necessary.
Special Items - Restructuring charges
We recorded a restructuring benefit of $12 million in the first six months of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.
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 reported an adjusted pretax loss was $468 million in the first six months of 2021,2022, compared to an adjusted pretax lossincome of $556 million in the same period in 2020. The $88 million improvement to pretax loss was driven by a $163 million increase in Mainline operating revenues coupled with a $28 million decrease in Mainline non-fuel operating expense. These improvements were offset by a $69 million increase in Mainline fuel expense.
As compared to the prior year, higher Mainline revenues are primarily attributable to a 25% increase in traffic on a 20 point increase in capacity, driven by the significant increase in demand recovering from the COVID-19 pandemic. Non-fuel operating expenses increased from higher variable costs on increased capacity, as well as rising wages and benefits expense as we expand our workforce to meet growing demand and leisure travel seasonality. Higher raw fuel prices, combined with increased consumption drove the growth in Mainline fuel expense.
Regional
Regional operations incurred an adjusted pretax loss of $206$11 million in the first six monthsquarter of 2021, compared2021. The shift to an adjusted pretax loss of $202 million in the first six months of 2020. The increased loss was attributable to a $72 million increase in non-fuel operating expenses and a $36 million increase in fuel costs, offset by a $104 million increase in operating revenues.
The increase to regional revenues is driven by a 50% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses.
Horizon
Horizon achieved an adjusted pretax profit of $26 million in the first six months of 2021, compared to an adjusted pretax profit of $16 million in the same period in 2020, primarily due to improved operational performancelower CPA revenue on decreased departures, combined with incremental maintenance expense on E175 aircraft and cost management.
higher wage and benefit costs on incremental FTEs.
LIQUIDITY AND CAPITAL RESOURCES
As a resultOur primary sources of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, manage liquidity and preserve the relative strength of our balance sheet. In 2020, we took significant actions to enhance and preserve our liquidity, withstand depressed demand, and prepare for the recovery ahead. In 2021, we have achieved the following, which we believe positions us well for recovery:are:
•Generated positive operatingExisting cash flowand marketable securities balance of $1.0$2.9 billion, bolstered by improved advance bookings for increased demand for air travel, and the receipt of $1.2 billion in payroll support fundingcash flows from the U.S. Treasury under extensions of CARES Act programs, $892 million of which is included in operating cash flow;operations;
•Repaid $681 million in debt, including the termination of the CARES Act loan, and the full repayment of two outstanding lines of credit;58 unencumbered aircraft that could be financed, if necessary;
•Decreased debt-to-capitalization ratio to 56% at June 30, 2021 from 61% at December 31, 2020;Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.
•FinalizedDuring the three months ended March 31, 2022, we took free and clear delivery of seven Boeing 737-9 aircraft. We also made debt payments totaling $170 million, ending the quarter with a previously announced amendmentdebt-to-capitalization ratio of 50%, within our stated target range of 40% to the existing aircraft purchase agreement with Boeing, which significantly reduced our 2021 capital commitments and provides slide rights50%. Subsequent to defer commitments from 2022 to later years, and;
•Maintained low capital expenditures, which are expected to be approximately $225quarter end, we received $184 million in 2021, including renegotiated timingfederal tax refund as a result of pre-delivery payments and deferral of non-essential capital projects.
Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors.carrying back losses from the 2020 tax year.
As the business continuesreturns to recover and returns tosustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and strengtheningreinforcing our balance sheet is aremain high priority. Basedpriorities. Our capital expenditures for 2022 are expected to be approximately $1.6 billion to $1.7 billion, which we plan to fund with cash generated by operating activities and cash on our expectations about the recovery ahead, we expect to generate cash flow from operations of zero to $100 million in the third quarter. This is lower than in the second quarter due to the expectation of no further government support and seasonal booking patterns that result in less cash bookings for future travel.hand.
We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, and meet our debt payment obligations, and to remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.
The table below presents the major indicators of financial condition and liquidity: | (in millions) | (in millions) | June 30, 2021 | | December 31, 2020 | | Change | (in millions) | March 31, 2022 | | December 31, 2021 | | Change |
Cash and marketable securities | Cash and marketable securities | $ | 3,951 | | | $ | 3,346 | | | 18 % | Cash and marketable securities | $ | 2,890 | | | $ | 3,116 | | | (7) % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 103 | % | | 94 | % | | 9 pts | Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 47 | % | | 57 | % | | (10) pts |
Total debt | 3,188 | | | 3,495 | | | (9) % | |
Long-term debt, net of current portion | | Long-term debt, net of current portion | 2,078 | | | 2,173 | | | (4)% |
Shareholders’ equity | Shareholders’ equity | $ | 3,324 | | | $ | 2,988 | | | 11% | Shareholders’ equity | $ | 3,637 | | | $ | 3,801 | | | (4)% |
| Debt-to-capitalization, adjusted for operating leases | Debt-to-capitalization, adjusted for operating leases | | Debt-to-capitalization, adjusted for operating leases | |
(in millions) | (in millions) | June 30, 2021 | | December 31, 2020 | | Change | (in millions) | March 31, 2022 | | December 31, 2021 | | Change |
Long-term debt, net of current portion | Long-term debt, net of current portion | $ | 2,319 | | | $ | 2,357 | | | (2)% | Long-term debt, net of current portion | $ | 2,078 | | | $ | 2,173 | | | (4)% |
Capitalized operating leases | Capitalized operating leases | 1,485 | | | 1,558 | | | (5)% | Capitalized operating leases | 1,629 | | | 1,547 | | | 5% |
COVID-19 related borrowings(a) | 425 | | | 734 | | | (42)% | |
| Adjusted debt, net of current portion of long-term debt | Adjusted debt, net of current portion of long-term debt | $ | 4,229 | | | $ | 4,649 | | | (9)% | Adjusted debt, net of current portion of long-term debt | $ | 3,707 | | | $ | 3,720 | | | —% |
Shareholders' equity | Shareholders' equity | 3,324 | | | 2,988 | | | 11% | Shareholders' equity | 3,637 | | | 3,801 | | | (4)% |
Total invested capital | Total invested capital | $ | 7,553 | | | $ | 7,637 | | | (1)% | Total invested capital | $ | 7,344 | | | $ | 7,521 | | | (2)% |
| Debt-to-capitalization, including operating leases | Debt-to-capitalization, including operating leases | 56 | % | | 61 | % | | (5) pts | Debt-to-capitalization, including operating leases | 50 | % | | 49 | % | | 1 pt |
(a)To best reflect our leverage, we included the remaining 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.
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | |
(in millions) | (in millions) | June 30, 2021 | | December 31, 2020 | (in millions) | March 31, 2022 | | December 31, 2021 |
Current portion of long-term debt | Current portion of long-term debt | $ | 869 | | | $ | 1,138 | | Current portion of long-term debt | $ | 292 | | | $ | 366 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 263 | | | 290 | | Current portion of operating lease liabilities | 272 | | | 268 | |
Long-term debt, net of current portion | 2,319 | | | 2,357 | | |
Long-term debt | | Long-term debt | 2,078 | | | 2,173 | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,222 | | | 1,268 | | Long-term operating lease liabilities, net of current portion | 1,357 | | | 1,279 | |
Total adjusted debt | Total adjusted debt | 4,673 | | | 5,053 | | Total adjusted debt | 3,999 | | | 4,086 | |
Less: Cash and marketable securities | Less: Cash and marketable securities | (3,951) | | | (3,346) | | Less: Cash and marketable securities | (2,890) | | | (3,116) | |
Adjusted net debt | Adjusted net debt | $ | 722 | | | $ | 1,707 | | Adjusted net debt | $ | 1,109 | | | $ | 970 | |
| (in millions) | (in millions) | Twelve Months Ended June 30, 2021 | | Twelve Months Ended December 31, 2020 | (in millions) | Twelve Months Ended March 31, 2022 | | Twelve Months Ended December 31, 2021 |
GAAP Operating Loss(a) | $ | (778) | | | $ | (1,775) | | |
GAAP Operating Income(a) | | GAAP Operating Income(a) | $ | 644 | | | $ | 685 | |
Adjusted for: | Adjusted for: | | Adjusted for: | |
Payroll Support Program grant wage offset and special items | Payroll Support Program grant wage offset and special items | (712) | | | 71 | | Payroll Support Program grant wage offset and special items | (468) | | | (925) | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (79) | | | (8) | | Mark-to-market fuel hedge adjustments | (132) | | | (47) | |
Depreciation and amortization | Depreciation and amortization | 400 | | | 420 | | Depreciation and amortization | 399 | | | 394 | |
Aircraft rent | Aircraft rent | 268 | | | 299 | | Aircraft rent | 265 | | | 254 | |
EBITDAR | EBITDAR | $ | (901) | | | $ | (993) | | EBITDAR | $ | 708 | | | $ | 361 | |
Adjusted net debt to EBITDAR | Adjusted net debt to EBITDAR | (0.8x) | | (1.7x) | Adjusted net debt to EBITDAR | 1.6x | | 2.7x |
(a)Operating lossIncome 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 by Operating Activities
For the first sixthree months of 2021,2022, net cash provided by operating activities was $1.0 billion,$287 million, compared to $321$167 million during the same period in 2020.2021. The $686$120 million increase in our operating cash flows is primarily attributable to a $712 million improvement to net income, aided by the receipt and recognition of $892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvementincreased build in our air traffic liability, as cash advance bookings in March 2022 reached the highest monthly total in company history. This increase was partially offset by uses of cash on increasing operating cash flows is due to continued increases in advanced bookingsexpenses and a significant reduction in refund activity whengreater payout on our performance based pay program as compared to the first six months of 2020.2021.
Cash Used in Investing Activities
Cash provided by investing activities was $39 million during the first three months of 2022, compared to $543 million used in investing activities was $1.1 billion during the first six months of 2021, compared to $124 million during the same period of 2020.2021. The increaseshift to cash used inprovided by investing activities is primarily due to net purchasessales of marketable securities, which were $963$328 million in the first sixthree months of 2021,2022, compared to net salespurchases of $34$511 million in the sixthree months ended June 30, 2020. The shift to net purchases is primarily drivenMarch 31, 2021. This activity was partially offset by additionalan increase in cash on hand from increased operating cash flowused for capital expenditures of $261 million for aircraft purchase deposits and the PSP program, which allowed the Company to invest additional funds.other property and equipment.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $281$168 million during the first sixthree months of 20212022, compared to cash provided by financing activities of $1.1 billion$82 million during the same period in 2020.2021. During the first sixthree months of 2021,2022, we had no new proceeds from issuance of debt and utilized cash on hand to repay $681$170 million of outstanding long-term debt, compared to debt proceeds of $189 million and payments of $125$115 million during the same period in 2020. These payments were offset by proceeds from debt issuances of $363 million, primarily a result of the loan portion of the proceeds from the CARES Act PSP, compared to $1.3 billion issued in 2020 in response to the COVID-19 pandemic.2021.
CONTRACTUAL OBLIGATIONS ANDMATERIAL CASH COMMITMENTS
Aircraft Commitments
As of June 30, 2021, we haveMarch 31, 2022, Alaska has firm orders to purchase 7567 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease 13 aircraft.seven Boeing 737-9 aircraft with deliveries in 2022. Alaska also has an agreement with SkyWest Airlines to expand ourtheir long-term capacity purchase agreement by eightsix Embraer E175 aircraft in 2022. Alaska also2022 and one in 2023. Horizon has cancellablecommitments to purchase commitments for 30 Airbus A320neo12 Embraer E175 aircraft with deliveries from 2024 through 2027. At this time, we do not expect to take delivery of these 30 Airbus aircraft.between 2022 and 2025. Alaska also has options to acquire 39 B737-9 MAXup to 11 additional Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries frombetween 2024 through 2026, and Horizon has options to acquire 21 E175 aircraft with deliveries from 2023 through 2024.2026. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
The following table summarizes our anticipated fleet count by year, as of June 30, 2021:March 31, 2022: | | | Actual Fleet | | Anticipated Fleet Activity(a) | | Actual Fleet | | Anticipated Fleet Activity(a) |
Aircraft | Aircraft | June 30, 2021 | | 2021 Additions | | 2021 Removals | | Dec 31, 2021 | | 2022 Changes | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 | Aircraft | March 31, 2022 | | 2022 Additions | | 2022 Removals | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 | | 2024 Changes | | Dec 31, 2024 |
B737 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | | |
737 Freighters(b) | | 737 Freighters(b) | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | |
B737-700 | B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | | | — | | | 11 | | B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | | | — | | | 11 | |
B737-800(b) | B737-800(b) | 61 | | | — | | | — | | | 61 | | | — | | | 61 | | | — | | | 61 | | B737-800(b) | 61 | | | — | | | — | | | 61 | | | — | | | 61 | | | — | | | 61 | |
B737-900 | B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | | | — | | | 12 | | B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | | | — | | | 12 | |
B737-900ER | B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | | | — | | | 79 | | B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | | | — | | | 79 | |
B737-9 MAX | 5 | | | 7 | | | — | | | 12 | | | 31 | | | 43 | | | 22 | | | 65 | | |
A320(b) | 21 | | | 7 | | | (1) | | | 27 | | | (3) | | | 24 | | | (24) | | | — | | |
B737-8 | | B737-8 | — | | | — | | | — | | | — | | | 5 | | | 5 | | | 5 | | | 10 | |
B737-9 | | B737-9 | 19 | | | 23 | | | — | | | 42 | | | 28 | | | 70 | | | 7 | | | 77 | |
B737-10 | | B737-10 | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
A320(d) | | A320(d) | 30 | | | — | | | (14) | | | 16 | | | (16) | | | — | | | — | | | — | |
A321neo | A321neo | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | | — | | | 10 | | A321neo | 10 | | | — | | | — | | | 10 | | | (10) | | | — | | | — | | | — | |
Total Mainline Fleet | Total Mainline Fleet | 202 | | | 14 | | | (1) | | | 215 | | | 28 | | | 243 | | | (2) | | | 241 | | Total Mainline Fleet | 225 | | | 23 | | | (14) | | | 234 | | | 7 | | | 241 | | | 18 | | | 259 | |
Q400 operated by Horizon(c) | 32 | | | — | | | — | | | 32 | | | — | | | 32 | | | — | | | 32 | | |
E175 operated by Horizon(c) | 30 | | | — | | | — | | | 30 | | | 5 | | | 35 | | | 4 | | | 39 | | |
E175 operated by third party(c) | 32 | | | — | | | — | | | 32 | | | 8 | | | 40 | | | — | | | 40 | | |
Total Regional Fleet | 94 | | | — | | | — | | | 94 | | | 13 | | | 107 | | | 4 | | | 111 | | |
Q400 operated by Horizon(d) | | Q400 operated by Horizon(d) | 32 | | | — | | | (8) | | | 24 | | | (24) | | | — | | | — | | | — | |
E175 operated by Horizon | | E175 operated by Horizon | 30 | | | 3 | | | — | | | 33 | | | 6 | | | 39 | | | — | | | 39 | |
E175 operated by third party | | E175 operated by third party | 36 | | | 6 | | | — | | | 42 | | | 1 | | | 43 | | | — | | | 43 | |
Total Regional Fleet(c) | | Total Regional Fleet(c) | 98 | | | 9 | | | (8) | | | 99 | | | (17) | | | 82 | | | — | | | 82 | |
Total | Total | 296 | | | 14 | | | (1) | | | 309 | | | 41 | | | 350 | | | 2 | | | 352 | | Total | 323 | | | 32 | | | (22) | | | 333 | | | (10) | | | 323 | | | 18 | | | 341 | |
(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted or agreed to by counterparties yet.
(b)Actual fleet at June 30, 2021, excluding AirbusExcludes the planned addition of two 737-800 freighters following conversion from passenger aircraft, permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12as well as the subsequent replacement of these aircraft to operating service, seven of which are planned for 2021 and five for 2022.passenger aircraft.
(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. Underparty, which are not yet contracted.
(d)In March 2022, management announced its intention to accelerate the terms of our capacity purchase agreement with a third party, in 2023 an additional spare aircraft will be leased to support the operational integrityremoval of the network.A320 and Q400 aircraft from the operating fleet. Management continues to refine anticipated removal dates for individual aircraft, and as such, timing of removals may shift between 2022 and 2023.
For future firm orders and option exercises, we mayintend to finance the aircraft through cash flow from operations or long-term debt.
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. Our crude oil positions are as follows: | | | Approximate Gallons Hedged (in millions) | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel | | Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| Third Quarter 2021 | 100 | | $60 | | $2 | |
Fourth Quarter 2021 | 90 | | $61 | | $3 | |
Remainder of 2021 | 190 | | $60 | | $2 | |
First Quarter 2022 | 80 | | $67 | | $3 | |
| Second Quarter 2022 | Second Quarter 2022 | 60 | | $66 | | $3 | Second Quarter 2022 | 50 | % | | $71 | | $3 |
Third Quarter 2022 | Third Quarter 2022 | 40 | | $70 | | $3 | Third Quarter 2022 | 50 | % | | $80 | | $3 |
Fourth Quarter 2022 | Fourth Quarter 2022 | 20 | | $71 | | $3 | Fourth Quarter 2022 | 40 | % | | $83 | | $5 |
Full Year 2022 | Full Year 2022 | 200 | | $68 | | $3 | Full Year 2022 | 47 | % | | $78 | | $4 |
First Quarter of 2023 | | First Quarter of 2023 | 30 | % | | $84 | | $6 |
Second Quarter of 2023 | | Second Quarter of 2023 | 20 | % | | $92 | | $7 |
Third Quarter of 2023 | | Third Quarter of 2023 | 10 | % | | $100 | | $8 |
Full Year 2023 | | Full Year 2023 | 15 | % | | $90 | | $7 |
Contractual Obligations
The following table provides a summary of our contractual obligations as of June 30, 2021.March 31, 2022. For agreements with variable terms, amounts included reflect our minimum obligations. | (in millions) | (in millions) | Remainder of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Beyond 2025 | | Total | (in millions) | Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Beyond 2026 | | Total |
Current and long-term debt obligations | $ | 227 | | | $ | 796 | | | $ | 334 | | | $ | 240 | | | $ | 261 | | | $ | 1,353 | | | $ | 3,211 | | |
Debt obligations | | Debt obligations | $ | 201 | | | $ | 334 | | | $ | 240 | | | $ | 261 | | | $ | 176 | | | $ | 1,176 | | | $ | 2,388 | |
Aircraft lease commitments(a) | Aircraft lease commitments(a) | 162 | | | 280 | | | 219 | | | 167 | | | 159 | | | 633 | | | 1,620 | | Aircraft lease commitments(a) | 235 | | | 255 | | | 198 | | | 193 | | | 188 | | | 710 | | | 1,779 | |
Facility lease commitments | Facility lease commitments | 6 | | | 10 | | | 9 | | | 8 | | | 6 | | | 88 | | | 127 | | Facility lease commitments | 13 | | | 16 | | | 9 | | | 8 | | | 8 | | | 86 | | | 140 | |
Aircraft-related commitments(b) | Aircraft-related commitments(b) | 107 | | | 1,458 | | | 1,207 | | | 291 | | | 76 | | | 12 | | | 3,151 | | Aircraft-related commitments(b) | 1,159 | | | 1,781 | | | 414 | | | 111 | | | 47 | | | 275 | | | 3,787 | |
| Interest obligations (c) | Interest obligations (c) | 55 | | | 98 | | | 72 | | | 57 | | | 51 | | | 175 | | | 508 | | Interest obligations (c) | 50 | | | 95 | | | 71 | | | 53 | | | 53 | | | 132 | | | 454 | |
Other obligations (d) | Other obligations (d) | 89 | | | 184 | | | 189 | | | 196 | | | 197 | | | 898 | | | 1,753 | | Other obligations (d) | 144 | | | 193 | | | 199 | | | 203 | | | 199 | | | 757 | | | 1,695 | |
Total | Total | $ | 646 | | | $ | 2,826 | | | $ | 2,030 | | | $ | 959 | | | $ | 750 | | | $ | 3,159 | | | $ | 10,370 | | Total | $ | 1,802 | | | $ | 2,674 | | | $ | 1,131 | | | $ | 829 | | | $ | 671 | | | $ | 3,136 | | | $ | 10,243 | |
(a)Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.
(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations. Contractual commitments do not reflect the impact of the impending fleet transition.
(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of June 30, 2021.March 31, 2022.
(d)Primarily comprisedComprised of non-aircraft lease costs associated with capacity purchase agreements.agreements and other miscellaneous obligations.
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
Leased Aircraft Return Costs
For many of our leased aircraft, we are required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. We anticipate recording material expenses and cash outflows to return aircraft in 2022 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.
While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-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.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three months ended June 30, 2021. ForExcept as described below, for information onregarding our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
FREQUENT FLYER PROGRAMS
The rate at which we defer sales proceeds related to services sold:
Following the amendment of our agreement with our co-brand bank card partner in the first quarter, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.
The number of miles that will not be redeemed for travel (breakage):
Following its review of significant Mileage Plan assumptions, the Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. At March 31, 2022, the deferred revenue balance associated with the Mileage Plan program was $2.4 billion. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $7 million impact on annual revenue recognized.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Adjusted net debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit
Aircraft Stage Length - represents the average miles flown per aircraft departure
ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items
CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control
Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus 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
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
Productivity - number of revenue passengers per full-time equivalent employee
RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile
Regional - represents capacity purchased by Alaska from Horizon and SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and SkyWest under the respective capacity purchased arrangement (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, 2020.2021.
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ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of June 30, 2021,March 31, 2022, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of June 30, 2021.March 31, 2022.
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 June 30, 2021,March 31, 2022, 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).
PART II
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ITEM 1. LEGAL PROCEEDINGS |
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. In February 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.
The CompanyAlaska is seeking an appellate courta conclusive U.S. Supreme 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 provisions of 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 casecase. If appeal efforts are unsuccessful, compliance with California and agree withother states' laws may have an adverse impact on the Company's other bases for appeal.operations and financial position.
The Company isLike other U.S. airlines, Alaska and Horizon are involved in other litigation around the application of state and local employment laws, like many air carriers.laws. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
There have been no material changes to theSee Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for a detailed discussion of risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.Alaska Air Group.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely. These restrictions are effective until October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.
In the second quarterAs of 2021, the Company issued 271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchaseMarch 31, 2022, a total of 1,455,4361,455,438 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program.Payroll Support Program. Each warrant is exercisable at a strike price of $52.25 (49,625$31.61 (928,127 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. MINE SAFETY DISCLOSURES |
None.
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ITEM 5. OTHER INFORMATION |
None.
The following documents are filed as part of this report:
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.
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ALASKA AIR GROUP, INC. | |
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/s/ CHRISTOPHER M. BERRYEMILY HALVERSON | |
Christopher M. BerryEmily Halverson | |
Vice President Finance and Controller | |
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August 3, 2021May 5, 2022 | |
EXHIBIT INDEX | | | | | | | | | | | | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
4.1† | | | | |
4.2† | | | | |
4.3† | | | | |
4.4† | | | | |
4.5† | | | | |
4.6† | | | | |
10.1† | | | | |
10.2† | | | | |
10.3† | | | | |
10.4† | | | | |
10.5†* | | | | |
10.6† | | | | |
10.7† | | | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| | | | |
† | Filed herewith |
* | Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended. |
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Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
10.1†* | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| | | | |
† | Filed herewith |
* | Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended. |