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 ~~March 31,~~September 30, 2022

☐ 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.


Delaware						91-1292054
(State of Incorporation)						(I.R.S. Employer Identification No.)


19300 International Boulevard,			Seattle,			WA			98188

Telephone:

(206)

392-5040


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.

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 ~~126,091,824~~126,837,831 common shares, par value $0.01, outstanding at ~~April 30,~~October 31, 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 ~~MARCH 31,~~SEPTEMBER 30, 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, 2021. Please consider our forward-looking statements in light of those risks as you read this report.

PART I


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	(in millions)	March 31, 2022		December 31, 2021		(in millions)	September 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	628	$	470	Cash and cash equivalents	$	688	$	470
Marketable securities	Marketable securities	2,262		2,646		Marketable securities	2,462		2,646
Total cash and marketable securities	Total cash and marketable securities	2,890		3,116		Total cash and marketable securities	3,150		3,116
Receivables - net	Receivables - net	658		546		Receivables - net	345		546
Inventories and supplies - net	Inventories and supplies - net	78		62		Inventories and supplies - net	94		62
Prepaid expenses and other current assets	Prepaid expenses and other current assets	348		196		Prepaid expenses and other current assets	221		196
Total Current Assets	Total Current Assets	3,974		3,920		Total Current Assets	3,810		3,920

Property and Equipment	Property and Equipment					Property and Equipment
Aircraft and other flight equipment	Aircraft and other flight equipment	8,244		8,127		Aircraft and other flight equipment	8,811		8,127
Other property and equipment	Other property and equipment	1,529		1,489		Other property and equipment	1,589		1,489
Deposits for future flight equipment	Deposits for future flight equipment	283		384		Deposits for future flight equipment	300		384
		10,056		10,000			10,700		10,000
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	3,814		3,862		Less accumulated depreciation and amortization	4,046		3,862
Total Property and Equipment - Net	Total Property and Equipment - Net	6,242		6,138		Total Property and Equipment - Net	6,654		6,138

Other Assets	Other Assets					Other Assets
Operating lease assets	Operating lease assets	1,541		1,453		Operating lease assets	1,605		1,453
Goodwill and intangible assets	Goodwill and intangible assets	2,042		2,044		Goodwill and intangible assets	2,040		2,044
Other noncurrent assets	Other noncurrent assets	411		396		Other noncurrent assets	422		396
Total Other Assets	Total Other Assets	3,994		3,893		Total Other Assets	4,067		3,893

Total Assets	Total Assets	$	14,210	$	13,951	Total Assets	$	14,531	$	13,951

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	March 31, 2022		December 31, 2021		(in millions, except share amounts)	September 30, 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	$	299	$	200	Accounts payable	$	202	$	200
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	367		457		Accrued wages, vacation and payroll taxes	583		457
Air traffic liability	Air traffic liability	1,643		1,163		Air traffic liability	1,467		1,163
Other accrued liabilities	Other accrued liabilities	659		625		Other accrued liabilities	805		625
Deferred revenue	Deferred revenue	1,038		912		Deferred revenue	1,068		912
Current portion of operating lease liabilities	Current portion of operating lease liabilities	272		268		Current portion of operating lease liabilities	263		268
Current portion of long-term debt	Current portion of long-term debt	292		366		Current portion of long-term debt	321		366
Total Current Liabilities	Total Current Liabilities	4,570		3,991		Total Current Liabilities	4,709		3,991

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	2,078		2,173		Long-Term Debt, Net of Current Portion	1,889		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	1,357		1,279		Long-term operating lease liabilities, net of current portion	1,482		1,279
Deferred income taxes	Deferred income taxes	509		578		Deferred income taxes	571		578
Deferred revenue	Deferred revenue	1,394		1,446		Deferred revenue	1,413		1,446
Obligation for pension and post-retirement medical benefits	Obligation for pension and post-retirement medical benefits	302		305		Obligation for pension and post-retirement medical benefits	296		305
Other liabilities	Other liabilities	363		378		Other liabilities	345		378
Total Noncurrent Liabilities	Total Noncurrent Liabilities	3,925		3,986		Total Noncurrent Liabilities	4,107		3,986

Commitments and Contingencies (Note 7)	Commitments and Contingencies (Note 7)	0		0		Commitments and Contingencies (Note 7)

Shareholders' Equity	Shareholders' Equity					Shareholders' Equity
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	—		—		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		1		1
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares						Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares	1		1
Capital in excess of par value	Capital in excess of par value	503		494		Capital in excess of par value	549		494
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)		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	(292)		(262)		Accumulated other comprehensive loss	(328)		(262)
Retained earnings	Retained earnings	4,099		4,242		Retained earnings	4,278		4,242
		3,637		3,801			3,826		3,801
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	14,210	$	13,951	Total Liabilities and Shareholders' Equity	$	14,531	$	13,951

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	(in millions, except per share amounts)	2022		2021			(in millions, except per share amounts)	2022		2021		2022		2021
Operating Revenues	Operating Revenues						Operating Revenues
Passenger revenue	Passenger revenue	$	1,511	$	659		Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785
Mileage Plan other revenue	Mileage Plan other revenue	112		94			Mileage Plan other revenue	146		120		433		332
Cargo and other	Cargo and other	58		44			Cargo and other	67		59		190		160
Total Operating Revenues	Total Operating Revenues	1,681		797			Total Operating Revenues	2,828		1,953		7,167		4,277
Operating Expenses	Operating Expenses						Operating Expenses
Wages and benefits	Wages and benefits	606		493			Wages and benefits	686		578		1,931		1,581
Variable incentive pay	Variable incentive pay	36		33			Variable incentive pay	48		42		140		109
Payroll Support Program grant wage offset	Payroll Support Program grant wage offset	—		(411)			Payroll Support Program grant wage offset	—		—		—		(914)
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	347		203			Aircraft fuel, including hedging gains and losses	877		376		2,000		853
Aircraft maintenance	Aircraft maintenance	135		81			Aircraft maintenance	92		89		331		272
Aircraft rent	Aircraft rent	73		62			Aircraft rent	76		64		222		188
Landing fees and other rentals	Landing fees and other rentals	138		129			Landing fees and other rentals	161		141		435		414
Contracted services	Contracted services	78		51			Contracted services	83		62		243		167
Selling expenses	Selling expenses	58		33			Selling expenses	82		49		218		123
Depreciation and amortization	Depreciation and amortization	102		97			Depreciation and amortization	104		99		310		294
Food and beverage service	Food and beverage service	41		23			Food and beverage service	52		39		143		97
Third-party regional carrier expense	Third-party regional carrier expense	42		30			Third-party regional carrier expense	53		39		145		106
Other	Other	152		105			Other	207		126		536		348
Special items - fleet transition and related charges		75		18
Special items - restructuring charges		—		11
Special items - fleet transition							Special items - fleet transition	155		(9)		376		5
Special items - labor ratification bonus							Special items - labor ratification bonus	90		—		90		—
Special items - restructuring							Special items - restructuring	—		—		—		(12)

Total Operating Expenses	Total Operating Expenses	1,883		958			Total Operating Expenses	2,766		1,695		7,120		3,631
Operating Loss		(202)		(161)
Operating Income							Operating Income	62		258		47		646

Non-operating Income (Expense)	Non-operating Income (Expense)						Non-operating Income (Expense)
Interest income	Interest income	7		7			Interest income	17		6		35		19
Interest expense	Interest expense	(27)		(32)			Interest expense	(31)		(30)		(84)		(101)
Interest capitalized	Interest capitalized	2		3			Interest capitalized	3		3		8		9
Other - net	Other - net	14		10			Other - net	14		8		38		27
Total Non-operating Expense		(4)		(12)
Loss Before Income Tax		(206)		(173)
Income tax benefit		(63)		(42)
Net Loss		$	(143)	$	(131)
Total Non-operating Income (Expense)							Total Non-operating Income (Expense)	3		(13)		(3)		(46)
Income Before Income Tax							Income Before Income Tax	65		245		44		600
Income tax expense							Income tax expense	25		51		8		140
Net Income							Net Income	$	40	$	194	$	36	$	460

Basic Loss Per Share:		$	(1.14)	$	(1.05)
Diluted Loss Per Share:		$	(1.14)	$	(1.05)
Basic Earnings Per Share:							Basic Earnings Per Share:	$	0.32	$	1.55	$	0.28	$	3.69
Diluted Earnings Per Share:							Diluted Earnings Per Share:	$	0.31	$	1.53	$	0.28	$	3.64
Shares used for computation:	Shares used for computation:						Shares used for computation:
Basic	Basic	125.984		124.299			Basic	126.783		125.250		126.440		124.846
Diluted	Diluted	125.984		124.299			Diluted	128.370		127.188		128.087		126.325

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	(in millions)	2022		2021			(in millions)	2022		2021		2022		2021
Net Loss		$	(143)	$	(131)
Net Income							Net Income	$	40	$	194	$	36	$	460
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax
Marketable securities	Marketable securities	(40)		(12)			Marketable securities	(26)		(3)		(86)		(16)
Employee benefit plans	Employee benefit plans	1		6			Employee benefit plans	1		6		2		19
Interest rate derivative instruments	Interest rate derivative instruments	9		6			Interest rate derivative instruments	5		2		18		9
Total comprehensive loss, net		$	(173)	$	(131)
Total other comprehensive income (loss), net of tax							Total other comprehensive income (loss), net of tax	$	(20)	$	5	$	(66)	$	12

Total comprehensive income (loss), net							Total comprehensive income (loss), net	$	20	$	199	$	(30)	$	472

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(in millions)	(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total		(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, 2021	Balances at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801	Balances at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801
Net loss		—	—		—		—		—		(143)		(143)
Other comprehensive loss		—	—		—		—		(30)		—		(30)
Net income (loss)															Net income (loss)	—	—		—		—		—		(143)		(143)
Other comprehensive income (loss)															Other comprehensive income (loss)	—	—		—		—		(30)		—		(30)

Stock-based compensation	Stock-based compensation	—	—		13		—		—		—		13		Stock-based compensation	—	—		13		—		—		—		13

Stock issued under stock plans	Stock issued under stock plans	0.182	—		(4)		—		—		—		(4)		Stock issued under stock plans	0.182	—		(4)		—		—		—		(4)
Balances at March 31, 2022	Balances at March 31, 2022	126.088	$	1	$	503	$	(674)	$	(292)	$	4,099	$	3,637	Balances at March 31, 2022	126.088	$	1	$	503	$	(674)	$	(292)	$	4,099	$	3,637
Net income (loss)															Net income (loss)	—	—		—		—		—		139		139
Other comprehensive income (loss)															Other comprehensive income (loss)	—	—		—		—		(16)		—		(16)

Stock-based compensation															Stock-based compensation	0.017	—		9		—		—		—		9

Stock issued for employee stock purchase plan															Stock issued for employee stock purchase plan	0.643	—		30		—		—		—		30
Stock issued under stock plans															Stock issued under stock plans	0.012	—		—		—		—		—		—
Balances at June 30, 2022															Balances at June 30, 2022	126.760	$	1	$	542	$	(674)	$	(308)	$	4,238	$	3,799
Net income (loss)															Net income (loss)	—	—		—		—		—		40		40
Other comprehensive income (loss)															Other comprehensive income (loss)	—	—		—		—		(20)		—		(20)

Stock-based compensation															Stock-based compensation	—	—		8		—		—		—		8

Stock issued under stock plans															Stock issued under stock plans	0.074	—		(1)		—		—		—		(1)
Balances at September 30, 2022															Balances at September 30, 2022	126.834	$	1	$	549	$	(674)	$	(328)	$	4,278	$	3,826

(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, 2020 124.217 $ 1 $ 391 $ (674) $ (494) $ 3,764 $ 2,988
Net loss — — — — — (131) (131)
Other comprehensive loss — — — — — — —
Stock-based compensation — — 12 — — — 12
CARES Act warrant issuance — — 8 — — — 8
Stock issued under stock plans 0.225 — (2) — — — (2)
Balance at March 31, 2021 124.442 $ 1 $ 409 $ (674) $ (494) $ 3,633 $ 2,875


(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 income (loss)	—	—		—		—		—		(131)		(131)
Other comprehensive income (loss)	—	—		—		—		—		—		—

Stock-based compensation	—	—		12		—		—		—		12
CARES Act warrant issuance	—	—		8		—		—		—		8


Stock issued under stock plans	0.225	—		(2)		—		—		—		(2)
Balance at March 31, 2021	124.442	$	1	$	409	$	(674)	$	(494)	$	3,633	$	2,875
Net income (loss)	—	—		—		—		—		397		397
Other comprehensive income (loss)	—	—		—		—		7		—		7

Stock-based compensation	0.009	—		13		—		—		—		13
CARES Act warrant issuance	—	—		8		—		—		—		8

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
Net income (loss)	—	—		—		—		—		194		194
Other comprehensive income (loss)	—	—		—		—		5		—		5

Stock-based compensation	—	—		10		—		—		—		10
Stock issued under stock plans	0.076	—		(2)		—		—		—		(2)
Balances at September 30, 2021	125.305	$	1	$	462	$	(674)	$	(482)	$	4,224	$	3,531

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


		Three Months Ended March 31,					Nine Months Ended September 30,
(in millions)	(in millions)	2022		2021		(in millions)		2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net Loss		$	(143)	$	(131)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net Income						Net Income		$	36	$	460
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	102		97		Depreciation and amortization		310		294
Stock-based compensation and other	Stock-based compensation and other	5		12		Stock-based compensation and other		33		35
Special items - fleet transition and related charges		75		18
Special items - restructuring charges		—		11
Special items - fleet transition						Special items - fleet transition		376		5
Special items - restructuring						Special items - restructuring		—		(12)
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	(58)		(39)		Changes in deferred tax provision		—		95
Increase in accounts receivable	Increase in accounts receivable	(112)		(37)		Increase in accounts receivable		(59)		(56)
Increase in air traffic liability	Increase in air traffic liability	480		224		Increase in air traffic liability		304		152
Increase in deferred revenue	Increase in deferred revenue	74		48		Increase in deferred revenue		123		73

Pension contribution						Pension contribution		—		(100)
Federal income tax refund						Federal income tax refund		260		—
Other - net	Other - net	(136)		(36)		Other - net		26		(45)
Net cash provided by operating activities	Net cash provided by operating activities	287		167		Net cash provided by operating activities		1,409		901
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	(207)		(3)		Aircraft and aircraft purchase deposits		(688)		(52)
Other flight equipment	Other flight equipment	(24)		(11)		Other flight equipment		(156)		(78)
Other property and equipment	Other property and equipment	(57)		(13)		Other property and equipment		(103)		(60)
Total property and equipment additions, including capitalized interest	Total property and equipment additions, including capitalized interest	(288)		(27)		Total property and equipment additions, including capitalized interest		(947)		(190)
Purchases of marketable securities	Purchases of marketable securities	(552)		(1,243)		Purchases of marketable securities		(1,670)		(3,413)
Sales and maturities of marketable securities	Sales and maturities of marketable securities	880		732		Sales and maturities of marketable securities		1,731		2,669
Other investing activities	Other investing activities	(1)		(5)		Other investing activities		(2)		(9)
Net cash provided by (used in) investing activities		39		(543)
Net cash used in investing activities						Net cash used in investing activities		(888)		(943)
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	—		189		Proceeds from issuance of debt		—		363

Long-term debt payments	Long-term debt payments	(170)		(115)		Long-term debt payments		(333)		(1,222)
Other financing activities	Other financing activities	2		8		Other financing activities		37		34
Net cash provided by (used in) financing activities		(168)		82
Net cash used in financing activities						Net cash used in financing activities		(296)		(825)
Net increase (decrease) in cash, cash equivalents, and restricted cash	Net increase (decrease) in cash, cash equivalents, and restricted cash	158		(294)		Net increase (decrease) in cash, cash equivalents, and restricted cash		225		(867)
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period	494		1,386		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	$	652	$	1,092	Cash, cash equivalents, and restricted cash at end of the period		$	719	$	519


		Three Months Ended March 31,					Nine Months Ended September 30,
(in millions)	(in millions)	2022		2021		(in millions)		2022		2021

Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest (net of amount capitalized)	Interest (net of amount capitalized)	$	35	$	50	Interest (net of amount capitalized)		$	72	$	100
Income taxes	Income taxes	—		—		Income taxes		—		—

Non-cash transactions:	Non-cash transactions:					Non-cash transactions:
Right-of-use assets acquired through operating leases	Right-of-use assets acquired through operating leases	158		75		Right-of-use assets acquired through operating leases		419		126

Reconciliation of cash, cash equivalents, and restricted cash at end of the period	Reconciliation of cash, cash equivalents, and restricted cash at end of the period					Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	Cash and cash equivalents	628		1,076		Cash and cash equivalents		688		495
Restricted cash included in Prepaid expenses and other current assets	Restricted cash included in Prepaid expenses and other current assets	24		16		Restricted cash included in Prepaid expenses and other current assets		31		24
Total cash, cash equivalents, and restricted cash at end of the period	Total cash, cash equivalents, and restricted cash at end of the period	$	652	$	1,092	Total cash, cash equivalents, and restricted cash at end of the period		$	719	$	519

NOTES TO 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, 2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of ~~March 31,~~September 30, 2022 and the results of operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 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 nine months ended ~~March 31,~~September 30, 2022 are not necessarily indicative of operating results for the entire year.

NOTE 2. FLEET TRANSITION

In the first quarter of 2022, the Company announced plans to accelerate the transition of its 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~~is accelerating the retirement of its ~~30 operating~~ Airbus A320 aircraft, with all expected to exit the fleet by ~~early~~January 2023. Alaska also operates ~~ten~~Airbus A321neo aircraft, and ~~is evaluating options~~plans to remove them from its fleet by the end of 2023, subject to agreement with counterparties. ~~Also by the end~~The Company operated 23 A320 and ten A321neo aircraft as of ~~2023,~~September 30, 2022. Horizon ~~will exit~~plans to retire its Q400 fleet, which includes 2519 owned and 7three leased aircraft in operation ~~at March 31, 2022.~~as of September 30, 2022, in January 2023.

Valuation of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable. ~~The decisions made by~~During the ~~Company to accelerate the retirement~~first quarter of the A320 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 dates through 2029 to 2031, and are high-demand assets given their relative age and desirable technology.

For the purposes of recoverability testing, assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company performed recoverability tests for the A320 and Q400 fleets, comparing the sum of estimated undiscounted future cash flows expected to be directly generated by each asset group to the asset group's carrying value. Future cash flows were estimated utilizing a combination of historical data, forecasted results, and anticipated use of the aircraft as of March 31, 2022. The analysis indicated the A320 fleet was recoverable and no impairment measurement was required. However, the Company will adjust the useful lives of the A320 aircraft and related assets to correspond with the anticipated cease-use date. The analysis indicated the Q400 fleet was not recoverable, and impairment measurement was required.

The Company evaluated the fair market value for the Q400 fleet using available market price information with adjustments based on quantitative and qualitative considerations. Based on this fair market value,2022, the Company recorded an impairment charge of $70 million related to the Q400 fleet, reflecting the amount by which carrying value exceeded fair value of the owned Q400 ~~aircraft.~~aircraft as of March 31, 2022. This amount ~~is included~~was recorded within the "Special items - fleet ~~transition and related charges"~~transition" line ~~within~~in the consolidated statement of operations. Refer to Note 2 to our consolidated financial statements in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 for additional details.

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

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

A summary of special charges for fleet transition activities is included below for the three and nine months ended September 30, 2022. The impairment charges are one-time in nature, while the other special charges continue to be recorded consistent

~~operations. In conjunction~~ with the ~~impairment, the Company adjusted the useful lives~~schedules described above. The majority of ~~Q400 aircraft and related assets to correspond~~remaining charges will be recorded in 2022 with additional charges associated with the ~~anticipated cease-use date.~~

Airbus A321neo aircraft to be recorded in 2023. The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.

~~Other Special Items~~


	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
(in millions)	Airbus		Q400		Total		Airbus		Q400		Total
Lease return costs and other expenses	$	75	$	—	$	75	$	183	$	—	$	183
Accelerated aircraft ownership expenses	62		18		80		102		21		123
Impairment of long-lived assets	—		—		—		—		70		70
Total special items - fleet transition	$	137	$	18	$	155	$	285	$	91	$	376

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 operations. This includes adjustments related to the outstanding accrual for costs to return leased aircraft and a write-down of right of use assets for two A320 aircraft for which return to service work was initiated but was subsequently ceased.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue ~~are~~is passenger ancillary ~~revenues~~revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the co-branded credit card and other partners and certain interline frequent flyer revenue, net 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 March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
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 ticket revenue, including ticket breakage, net of taxes and fees	$	2,252	$	1,483	$	5,536	$	3,122
Passenger ancillary revenue	Passenger ancillary revenue	91		50			Passenger ancillary revenue	127		101		337		235
Mileage Plan passenger revenue	Mileage Plan passenger revenue	188		84			Mileage Plan passenger revenue	236		190		671		428
Total Passenger revenue	Total Passenger revenue	$	1,511	$	659		Total Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785

Mileage Plan Loyalty Program

Mileage Plan revenue included in the condensed consolidated statements of operations (in millions):


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
Passenger revenue	Passenger revenue	$	188	$	84		Passenger revenue	$	236	$	190	$	671	$	428
Mileage Plan other revenue	Mileage Plan other revenue	112		94			Mileage Plan other revenue	146		120		433		332
Total Mileage Plan revenue	Total Mileage Plan revenue	$	300	$	178		Total Mileage Plan revenue	$	382	$	310	$	1,104	$	760

Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
Cargo revenue	Cargo revenue	$	29	$	27		Cargo revenue	$	37	$	34	$	102	$	95
Other revenue	Other revenue	29		17			Other revenue	30		25		88		65
Total Cargo and other revenue	Total Cargo and other revenue	$	58	$	44		Total Cargo and other revenue	$	67	$	59	$	190	$	160

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of ~~$390~~$65 million and ~~$136~~$101 million from the prior year-end air traffic liability balance for the three months ended ~~March 31,~~September 30, 2022 and 2021, and $587 million and $276 million for the nine months ended September 30, 2022 and 2021.

Mileage Plan assets and liabilities

The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had ~~$108~~$80 million of such receivables as of ~~March 31,~~September 30, 2022 and $64 million as of December 31, 2021. ~~As demand for air travel remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.~~

The table below presents a roll forward of the total frequent flyer liability (in millions):


		Three Months Ended March 31,			Nine Months Ended September 30,
			2022			2021			2022		2021
Total Deferred revenue balance at January 1	Total Deferred revenue balance at January 1		$	2,358		$	2,277	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		(176)			(84)		Travel miles and companion certificate redemption - Passenger revenue	(632)		(428)
Miles redeemed on partner airlines - Other revenue	Miles redeemed on partner airlines - Other revenue		(9)			(4)		Miles redeemed on partner airlines - Other revenue	(45)		(30)
Increase in liability for mileage credits issued	Increase in liability for mileage credits issued		259			136		Increase in liability for mileage credits issued	800		531
Total Deferred revenue balance at March 31			$	2,432		$	2,325
Total Deferred revenue balance at September 30								Total Deferred revenue balance at September 30	$	2,481	$	2,350

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 ~~March 31,~~September 30, 2022, total cost basis for all marketable securities was ~~$2.3 billion. In the three months ended March 31, 2022,~~$2.6 billion, compared to a total fair value of ~~marketable securities declined by $57 million~~$2.5 billion. The decline in value is primarily due 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 ~~March 31,~~September 30, 2022.

Fair values of financial instruments on the condensed consolidated balance sheet (in millions):


		March 31, 2022						December 31, 2021							September 30, 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	$	416	$	—	$	416	$	331	$	—	$	331	U.S. government and agency securities	$	532	$	—	$	532	$	331	$	—	$	331
Equity mutual funds	Equity mutual funds	6		—		6		6		—		6		Equity mutual funds	5		—		5		6		—		6
Foreign government bonds	Foreign government bonds	—		29		29		—		38		38		Foreign government bonds	—		25		25		—		38		38
Asset-backed securities	Asset-backed securities	—		244		244		—		311		311		Asset-backed securities	—		260		260		—		311		311
Mortgage-backed securities	Mortgage-backed securities	—		190		190		—		232		232		Mortgage-backed securities	—		208		208		—		232		232
Corporate notes and bonds	Corporate notes and bonds	—		1,314		1,314		—		1,663		1,663		Corporate notes and bonds	—		1,384		1,384		—		1,663		1,663
Municipal securities	Municipal securities	—		63		63		—		65		65		Municipal securities	—		48		48		—		65		65
Total Marketable securities	Total Marketable securities	422		1,840		2,262		337		2,309		2,646		Total Marketable securities	537		1,925		2,462		337		2,309		2,646
Derivative instruments	Derivative instruments													Derivative instruments
Fuel hedge - call options	Fuel hedge - call options	—		203		203		—		81		81		Fuel hedge - call options	—		51		51		—		81		81
Interest rate swap agreements	Interest rate swap agreements	—		6		6		—		—		—		Interest rate swap agreements	—		15		15		—		—		—
Total Assets	Total Assets	$	422	$	2,049	$	2,471	$	337	$	2,390	$	2,727	Total Assets	$	537	$	1,991	$	2,528	$	337	$	2,390	$	2,727

Liabilities	Liabilities													Liabilities
Derivative instruments	Derivative instruments													Derivative instruments

Interest rate swap agreements	Interest rate swap agreements	—		(2)		(2)		—		(9)		(9)		Interest rate swap agreements	—		—		—		—		(9)		(9)
Total Liabilities	Total Liabilities	$	—	$	(2)	$	(2)	$	—	$	(9)	$	(9)	Total Liabilities	$	—	$	—	$	—	$	—	$	(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

Maturities for marketable securities (in millions):


March 31, 2022		Cost Basis		Fair Value
September 30, 2022						September 30, 2022	Cost Basis		Fair Value
Due in one year or less	Due in one year or less	$	628	$	626	Due in one year or less	$	738	$	729
Due after one year through five years	Due after one year through five years	1,651		1,597		Due after one year through five years	1,811		1,704
Due after five years	Due after five years	34		33		Due after five years	26		24

Total	Total	$	2,313	$	2,256	Total	$	2,575	$	2,457

As of ~~March 31,~~September 30, 2022, $6$5 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 ~~March 31,~~September 30, 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 (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of ~~$750~~$708 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):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021

Total fixed-rate debt	Total fixed-rate debt	$	1,752	$	1,821	Total fixed-rate debt	$	1,664	$	1,821

Estimated fair value	Estimated fair value	$	1,770	$	1,919	Estimated fair value	$	1,610	$	1,919

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

NOTE 5. LONG-TERM DEBT

Long-term debt obligations on the condensed consolidated balance sheet (in millions):


		March 31, 2022			December 31, 2021				September 30, 2022			December 31, 2021
Fixed-rate notes payable due through 2029	Fixed-rate notes payable due through 2029	$	150		$	163		Fixed-rate notes payable due through 2029	$	117		$	163
Fixed-rate PSP notes payable due through 2031	Fixed-rate PSP notes payable due through 2031	600			600			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	1,002			1,058			Fixed-rate EETC payable due through 2025 & 2027	947			1,058
Variable-rate notes payable due through 2029	Variable-rate notes payable due through 2029	636			738			Variable-rate notes payable due through 2029	562			738
Less debt issuance costs	Less debt issuance costs	(18)			(20)			Less debt issuance costs	(16)			(20)
Total debt	Total debt	2,370			2,539			Total debt	2,210			2,539
Less current portion	Less current portion	292			366			Less current portion	321			366
Long-term debt, less current portion	Long-term debt, less current portion	$	2,078		$	2,173		Long-term debt, less current portion	$	1,889		$	2,173

Weighted-average fixed-interest rate	Weighted-average fixed-interest rate	3.6		%	3.7		%	Weighted-average fixed-interest rate	3.5		%	3.7		%
Weighted-average variable-interest rate	Weighted-average variable-interest rate	1.7		%	1.3		%	Weighted-average variable-interest rate	4.2		%	1.3		%

Approximately ~~$396~~$353 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at ~~March 31,~~September 30, 2022, resulting in an effective weighted-average interest rate for the full debt portfolio of ~~3.3%~~3.5%.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the Company made scheduled debt payments of ~~$170 million.~~

$316 million and prepayments of $17 million for loans related to Q400 aircraft.

Debt Maturity

At ~~March 31,~~September 30, 2022, long-term debt principal payments for the next five years and thereafter are as follows (in millions):


		Total			Total
Remainder of 2022	Remainder of 2022	$	201	Remainder of 2022	$	52
2023	2023	334		2023	309
2024	2024	240		2024	238
2025	2025	261		2025	273
2026	2026	176		2026	176
Thereafter	Thereafter	1,176		Thereafter	1,178
Total	Total	$	2,388	Total	$	2,226

Bank Lines of Credit

Alaska has 3three credit facilities totaling $486 million as of ~~March 31,~~September 30, 2022. One of the credit facilities for $150 million expires in March 2025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. A second credit facility for $250 million expires in June 2024 and is secured by aircraft. Both facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June ~~2022~~2023 and is secured by aircraft.

Alaska 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. Alaska was in compliance with this covenant at ~~March 31,~~September 30, 2022.

NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021				2022		2021		2022		2021
Service cost	Service cost	$	11	$	13		Service cost	$	12	$	13	$	34	$	39
Pension expense included in Wages and benefits	Pension expense included in Wages and benefits	11		13			Pension expense included in Wages and benefits	12		13		34		39

Interest cost	Interest cost	16		14			Interest cost	17		14		49		42
Expected return on assets	Expected return on assets	(32)		(31)			Expected return on assets	(32)		(30)		(96)		(91)

Amortization of prior service cost (credit)							Amortization of prior service cost (credit)	(1)		(1)		(1)		(1)
Recognized actuarial loss	Recognized actuarial loss	2		9			Recognized actuarial loss	2		9		6		27
Pension expense included in Nonoperating Income (Expense)		$	(14)	$	(8)
Pension expense included in Non-operating Income (Expense)							Pension expense included in Non-operating Income (Expense)	$	(14)	$	(8)	$	(42)	$	(23)

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of ~~March 31,~~September 30, 2022 (in millions):


		Aircraft Commitments(a)		Capacity Purchase Agreements (b)			Aircraft Commitments(a)		Capacity Purchase Agreements (b)
Remainder of 2022	Remainder of 2022	$	1,159	$	133	Remainder of 2022	$	529	$	41
2023	2023	1,781		182		2023	2,124		172
2024	2024	414		188		2024	512		178
2025	2025	111		194		2025	254		186
2026	2026	47		195		2026	249		186
Thereafter	Thereafter	275		740		Thereafter	738		763
Total	Total	$	3,787	$	1,632	Total	$	4,406	$	1,526

(a)Includes ~~non-cancelable~~ contractual commitments for aircraft, engines, and ~~engines,~~ aircraft ~~maintenance and parts management. Contractual commitments do not reflect the impact of the impending fleet transition.~~maintenance. 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. In ~~March~~the second quarter of 2022, ~~Alaska~~Horizon amended its aircraft purchase agreement with ~~Boeing,~~Embraer, adding ~~the 737-8~~eight firm E175 deliveries between 2023 and ~~737-10 models to its existing order book of 737-9 aircraft. The amended agreement also includes~~2026 and 13 options to purchase additional aircraft with deliveries between 2024 and ~~2026.~~ 2025. The aircraft covered by the amendment may be assigned by Horizon to another entity. Horizon intends to take delivery of and operate all firm E175 aircraft.

Details for contractual aircraft commitments as of September 30, 2022 are outlined in the table below. ~~Horizon also~~


	Firm Orders	Options	Total
Aircraft Type	2022-2026	2024-2026	2022-2026
Boeing 737-8	10	—	10
Boeing 737-9	40	11	51
Boeing 737-10	6	41	47
Embraer E175	20	13	33
Total	76	65	141

The fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of September 30, 2022. Alaska has ~~commitments~~received information from Boeing indicating that certain 737 deliveries in 2022 and 2023 are expected to be delayed to 2023 and 2024. Alaska will continue to work with Boeing on delivery timelines that reflect Alaska's plans for growth.

Subsequent to quarter end, Alaska executed an agreement with Boeing to exercise options to purchase 1252 737 aircraft for delivery between 2024 and 2027. The agreement also secures rights for 105 additional aircraft through 2030. The incremental firm purchase commitments per the agreement are not contractually obligated at September 30, 2022, and are not reflected in the future minimum payments table above.

Aircraft Maintenance

Aircraft maintenance commitments include contractual commitments for engine maintenance agreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft. In turn, these maintenance agreements transfer certain risks to the third-party service provider. Alaska has a contract for maintenance on its Boeing 737-800 aircraft engines through 2033. In the third quarter of 2022, Alaska entered into a contract for maintenance on its Boeing 737-900ER aircraft engines with minimum payments effective 2023 through 2033. Horizon has a contract for maintenance on its Embraer E175 aircraft ~~with deliveries between 2022 and 2025. Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change.~~

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
engines through 2033.

Contingencies

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

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. 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~~pursued numerous appeal paths following 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~~federal district court order against Virgin America and Alaska Airlines ~~in the amount of~~awarding plaintiffs approximately $78 ~~million. It did not award injunctive relief against Alaska Airlines. In February 2021, an~~million, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the ~~judgment, again without awarding injunctive relief against Alaska. The determination of~~PAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.

The final total judgment amount has not been ~~completed~~determined by the lower court 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.

~~Alaska~~ The Company is ~~seeking~~analyzing a ~~conclusive U.S. Supreme Court ruling that the California laws on which the judgment is based are invalid as applied~~range of potential options to ~~airlines pursuant to the U.S. Constitution~~balance new compliance obligations with operational and ~~provisions~~labor considerations. Some or all of federal law that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case. If appeal efforts are unsuccessful, compliance with California and other states' lawsthese solutions may have an adverse impact on the ~~Company's~~Company’s operations and financial ~~position.~~position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.

~~Like other U.S. airlines,~~As part of the 2016 acquisition of Virgin America, Alaska ~~and Horizon are involved~~assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, the Virgin Group sued Alaska in ~~other litigation around the application of state and local employment laws. Our defenses are similar to those identified above, including~~England, alleging that the ~~state~~agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. The Virgin Group asserts that payments are required without regard to actual use of the mark. A trial was held in October 2022, and ~~local laws~~a decision is expected soon. Further legal proceedings are ~~preempted~~likely to take place before the matter is resolved. The Company believes the claims in the case are without factual and legal merit, a position supported by ~~federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.~~Virgin America’s representations during pre-merger due diligence.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. The Company 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. These restrictions ended on October 1, 2022.

CARES Act Warrant Issuances

As additional taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of ~~1,455,438~~1,455,437 warrants to purchase ALK common stock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.

The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, recorded in stockholders' equity at issuance.

Total warrants outstanding are as follows as of ~~March 31,~~September 30, 2022:


		Number of shares of ALK common stock	Strike Price		Number of warrants outstanding	Strike Price
PSP 1	PSP 1	928,127	31.61	PSP 1	928,126	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
Outstanding March 31, 2022		1,882,518
Outstanding September 30, 2022				Outstanding September 30, 2022	1,882,517

Accumulated other comprehensive loss

~~Components~~A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions):, is shown below for the three and nine months ended September 30, 2022:

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)


	Marketable Securities		Employee Benefit Plan		Interest Rate Derivatives		Total
Balance at June 30, 2022, net of tax effect of $98	$	(64)	$	(251)	$	7	$	(308)
Reclassifications into earnings, net of tax impact of $0	2		1		—		3
Change in value, net of tax impact of $6	(28)		—		5		(23)
Balance at September 30, 2022, net of tax effect of $104	$	(90)	$	(250)	$	12	$	(328)

Balance at December 31, 2021, net of tax effect of $83	$	(4)	$	(252)	$	(6)	$	(262)
Reclassifications into earnings, net of tax impact of $1	6		2		—		8
Change in value, net of tax impact of $20	(92)		—		18		(74)
Balance at September 30, 2022, net of tax effect of $104	$	(90)	$	(250)	$	12	$	(328)

Earnings ~~(Loss)~~ Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, restricted stock units, and warrants, using the treasury-stock method. ~~Loss per share is calculated by dividing net loss by the average number of basic shares outstanding.~~ For the three and nine months ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 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 and 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 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 March 31, 2022															Three Months Ended September 30, 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	$	1,243	$	268	$	—	$	—	$	1,511	$	—	$	1,511	Passenger revenues	$	2,217	$	398	$	—	$	—	$	2,615		$	—	$	2,615
CPA revenues	CPA revenues	—		—		94		(94)		—		—		—		CPA revenues	—		—		93		(93)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	100		12		—		—		112		—		112		Mileage Plan other revenue	133		13		—		—		146			—		146
Cargo and other	Cargo and other	57		—		—		1		58		—		58		Cargo and other	65		—		—		2		67			—		67
Total Operating Revenues	Total Operating Revenues	1,400		280		94		(93)		1,681		—		1,681		Total Operating Revenues	2,415		411		93		(91)		2,828			—		2,828
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,194		262		99		(94)		1,461		75		1,536		Operating expenses, excluding fuel	1,352		292		94		(94)		1,644			245		1,889
Fuel expense	Fuel expense	381		73		—		—		454		(107)		347		Fuel expense	625		121		—		—		746			131		877
Total Operating Expenses	Total Operating Expenses	1,575		335		99		(94)		1,915		(32)		1,883		Total Operating Expenses	1,977		413		94		(94)		2,390			376		2,766

Non-operating Income (Expense)	Non-operating Income (Expense)	1		—		(5)		—		(4)		—		(4)		Non-operating Income (Expense)	8		—		(5)		—		3			—		3
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(174)	$	(55)	$	(10)	$	1	$	(238)	$	32	$	(206)	Income (Loss) Before Income Tax	$	446	$	(2)	$	(6)	$	3	$	441		$	(376)	$	65
Pretax Margin																Pretax Margin									15.6		%			2.3		%

		Three Months Ended March 31, 2021															Three Months Ended September 30, 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	$	506	$	153	$	—	$	—	$	659	$	—	$	659	Passenger revenues	$	1,425	$	349	$	—	$	—	$	1,774		$	—	$	1,774
CPA revenues	CPA revenues	—		—		104		(104)		—		—		—		CPA revenues	—		—		107		(107)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	80		14		—		—		94		—		94		Mileage Plan other revenue	105		15		—		—		120			—		120
Cargo and other	Cargo and other	44		—		—		—		44		—		44		Cargo and other	58		—		—		1		59			—		59
Total Operating Revenues	Total Operating Revenues	630		167		104		(104)		797		—		797		Total Operating Revenues	1,588		364		107		(106)		1,953			—		1,953
Operating Expenses	Operating Expenses															Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	893		265		88		(109)		1,137		(382)		755		Operating expenses, excluding fuel	1,060		288		93		(113)		1,328			(9)		1,319
Fuel expense	Fuel expense	174		52		—		(1)		225		(22)		203		Fuel expense	299		77		—		—		376			—		376
Total Operating Expenses	Total Operating Expenses	1,067		317		88		(110)		1,362		(404)		958		Total Operating Expenses	1,359		365		93		(113)		1,704			(9)		1,695

Non-operating Income (Expense)	Non-operating Income (Expense)	(7)		—		(5)		—		(12)		—		(12)		Non-operating Income (Expense)	(8)		—		(6)		1		(13)			—		(13)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	(444)	$	(150)	$	11	$	6	$	(577)	$	404	$	(173)	Income (Loss) Before Income Tax	$	221	$	(1)	$	8	$	8	$	236		$	9	$	245
Pretax Margin																Pretax Margin									12.1		%			12.5		%


	Nine Months Ended September 30, 2022
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)			Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	5,488	$	1,056	$	—	$	—	$	6,544		$	—	$	6,544
CPA revenues	—		—		288		(288)		—			—		—
Mileage Plan other revenue	392		41		—		—		433			—		433
Cargo and other	186		—		—		4		190			—		190
Total Operating Revenues	6,066		1,097		288		(284)		7,167			—		7,167
Operating Expenses
Operating expenses, excluding fuel	3,808		843		291		(288)		4,654			466		5,120
Fuel expense	1,623		313		—		—		1,936			64		2,000
Total Operating Expenses	5,431		1,156		291		(288)		6,590			530		7,120





Non-operating Income (Expense)	12		—		(15)		—		(3)			—		(3)
Income (Loss) Before Income Tax	$	647	$	(59)	$	(18)	$	4	$	574		$	(530)	$	44
Pretax Margin									8.0		%			0.6		%

	Nine Months Ended September 30, 2021
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)			Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	3,003	$	782	$	—	$	—	$	3,785		$	—	$	3,785
CPA revenues	—		—		322		(322)		—			—		—
Mileage Plan other revenue	287		45		—		—		332			—		332
Cargo and other	157		—		—		3		160			—		160
Total Operating Revenues	3,447		827		322		(319)		4,277			—		4,277
Operating Expenses
Operating expenses, excluding fuel	2,937		839		272		(349)		3,699			(921)		2,778
Fuel expense	726		195		—		—		921			(68)		853
Total Operating Expenses	3,663		1,034		272		(349)		4,620			(989)		3,631





Non-operating Income (Expense)	(31)		—		(16)		1		(46)			—		(46)
Income (Loss) Before Income Tax	$	(247)	$	(207)	$	34	$	31	$	(389)		$	989	$	600
Pretax Margin									(9.1)		%			14.0		%

(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.

(c)Includes Payroll Support Program grant wage offsets, special items, and mark-to-market fuel hedge accounting adjustments.

Total assets were as follows (in millions):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Mainline	Mainline	$	19,684	$	19,258	Mainline	$	20,065	$	19,258
Horizon	Horizon	1,125		1,212		Horizon	1,115		1,212
Consolidating & Other	Consolidating & Other	(6,599)		(6,519)		Consolidating & Other	(6,649)		(6,519)
Consolidated	Consolidated	$	14,210	$	13,951	Consolidated	$	14,531	$	13,951

2021


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, 2021. This overview summarizes the MD&A, which includes the following sections:

•~~First~~Third Quarter Review—highlights from the ~~first~~third quarter of 2022 outlining some of the major events that occurred during the period and how they affected our financial performance.

•Results of Operations—an in-depth analysis of our ~~revenues~~revenue by segment and our expenses from a consolidated perspective for the three and nine months ended ~~March 31,~~September 30, 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 2022.

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

~~FIRST~~THIRD QUARTER REVIEW

~~Business Recovery and First~~Third Quarter Results

We recorded a consolidated pretax ~~loss~~income for the ~~first~~third quarter of 2022 under GAAP of ~~$206~~$65 million, compared to aconsolidated pretax ~~loss~~income of ~~$173~~$245 million in the ~~first~~third quarter of 2021. On an adjusted basis, we reported ~~a net loss~~consolidated pretax income for the quarter of ~~$167~~$441 million, compared to ~~an adjusted net loss~~consolidated pretax income of ~~$436~~$236 million in the same period of 2021. ~~We faced headwinds in January and February,~~Strong demand for passenger air travel combined 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 levelsexcellent operational performance enabled Air Group to deliver record breaking quarterly revenue in the ~~month of March, a first since the pandemic began.~~third quarter.

~~As we ramp our operation back to flying 2019 capacity levels, we have seen increases to our~~In the third quarter non-fuel ~~operating expenses. Non-fuel~~ operating expense, excluding special items, ~~rose 28%~~increased 24% over the prior year ~~period, primarily~~period. The increase was driven by ~~increased departure-related~~incremental departure related costs on ~~33%~~13% more flown capacity, ~~flown. Increased capacity, coupled~~as well as higher wages and training costs. Costs were also pressured by the impact of new labor agreements, elevated staff levels relative to our level of flying, and a one-time charge of $28 million associated with gifting each of our employees 90,000 Mileage Plan miles. Fuel costs remain elevated, resulting in a ~~24%~~133% increase over the prior year period. Although our hedging program provided a benefit of $29 million for the quarter, total fuel cost exceeded 2021 levels due primarily to a 79% increase in ~~fuel cost~~economic price per ~~gallon, drove additional fuel expense of $144 million as compared to 2021.~~gallon. We also incurred special charges of ~~$75~~$245 million, ~~in the first quarter of 2022~~including $155 million related to our Airbus and Q400 fleet ~~transition, compared to a special benefit of $382~~transitions and $90 million ~~recorded~~ in ~~2021 primarily~~ratification bonuses from ~~Payroll Support Program grant wage offsets.~~the new collective bargaining agreement with Alaska pilots.

See “Results of Operations” below for further discussion of changes in ~~revenues~~revenue 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.

Labor Update

During the third quarter, we reached three new labor agreements. In August 2022, Alaska's employees represented by the International Association of Machinists and Aerospace Workers ratified a two-year contract extension that includes increased pay with added steps to ensure wage rates remain competitive. In September 2022, Horizon pilots represented by the International Brotherhood of Teamsters ratified an agreement that includes increased pay and improved benefits designed to improve pilot retention. In September 2022, Alaska pilots represented by the Air Line Pilots Association reached a tentative agreement for a new contract with management. The agreement was ratified subsequent to quarter end in October 2022. The

new agreement includes increased pay and benefits as well as improvements to job security and scheduling. Also in October 2022, the Company opened negotiations with Alaska's flight attendants, whose contract becomes amendable in December 2022.

As a result of these new agreements, we recorded $35 million in additional costs in the third quarter due to increased wage rates and improvements to a slate of benefits. For the fourth quarter, we expect to record additional costs between $55 million and $60 million.

Environmental, Social and Governance Updates

In order to achieve our long-term target of zero carbon emissions by 2040, the use of sustainable aviation fuel (SAF) will play a crucial role. During the quarter, we signed an agreement with Gevo Inc. to purchase 185 million gallons of SAF to be delivered over the five year term of the agreement beginning in 2026. We also launched a new initiative in partnership with Microsoft, Boeing, and Washington State University to expand the use of SAF in business travel and increase education on sustainable travel topics.

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,~~our commitment to these goals, 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~~Performance Based Pay Plan, which is currently tracking to ~~target~~maximum achievement.

~~Labor Update~~Outlook

~~In April 2022, Alaska's dispatchers represented by the Transport Workers Union ratified an agreement that includes increased pay with added steps~~We remain committed 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,~~for both our mainline and ~~revealed new plans to transition our~~ regional operations, ~~to a single fleet by retiring~~which will best position our ~~Q400 fleet by~~airlines for long-term sustainable growth. In working toward this goal, our capacity for 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 first~~fourth quarter we announced a renewed co-brand credit card agreement with Bank of America extending to 2030. Throughout the pandemic, our loyalty program provided meaningful cash flow to our business, and has continued to grow in line with returning demand. The new agreement is expected to ~~generate incremental cash flows from improved economics, while providing our guests with expanded benefits.~~

To support our growth plans, we are focused on staffing our airlines and delivering the operational excellence for which 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 pilotsbe temporarily constrained as we ~~entered~~focus on pilot transition training. As a result, we anticipate capacity for the ~~second quarter. In response, management~~fourth quarter to be down 7% to 10% versus 2019, with full year capacity down 8% to 9%. Lower capacity, coupled with pressures from wages and training costs, has ~~moderated second~~shifted our expectation for fourth quarter ~~capacity plans~~CASMex to ~~maintain operational integrity, and now plans~~be up 20% to ~~fly capacity that is 6% to 9% below 2019 levels. Despite the drawdown in capacity, relative~~23% over 2019. Continued strength in the demand environment is expected to ~~lift second quarter revenues~~generate revenue 12% to 5%15% over 2019 levels. For the full year, we continue to ~~8% above 2019 levels.~~anticipate adjusted pretax margins will range between 6% to 9%.

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

RESULTS OF OPERATIONS

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

We believe disclosure of earnings excluding the impact of aircraft fuel, the Payroll Support Program grant wage ~~offsets~~offset and other special items is useful information to investors because:

•By excluding fuel expense and certain other items, ~~(including~~such as the Payroll Support Program grant wage offset and other special ~~items)~~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 other items, such as the Payroll Support Program grant wage offset and other special items, is one of the most important measures used by management and by our Board of Directors in assessing quarterly and annual cost performance.

•CASM excluding fuel and certain ~~special~~other 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.

2223

•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,~~revenue, we do not, ~~(nor~~nor are we able ~~to)~~to, evaluate unit ~~revenues~~revenue 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~~revenue 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,~~nonrecurring, infrequent, or unusual in nature.

2324

OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit ~~revenues~~revenue and adjusted unit costs, which are non-GAAP measures.


		Three Months Ended March 31,			Three Months Ended September 30,			Nine Months Ended September 30,
		2022	2021	Change			2022	2021	Change	2022	2021	Change
Consolidated Operating Statistics:(a)	Consolidated Operating Statistics:(a)					Consolidated Operating Statistics:(a)
Revenue passengers (000)	Revenue passengers (000)	8,694	4,666	86.3%		Revenue passengers (000)	11,437	9,832	16.3%	31,137	23,211	34.1%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	10,586	5,393	96.3%		RPMs (000,000) "traffic"	14,143	11,592	22.0%	38,475	27,319	40.8%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	13,783	10,397	32.6%		ASMs (000,000) "capacity"	16,349	14,429	13.3%	45,743	38,238	19.6%
Load factor	Load factor	76.8%	51.9%	24.9 pts		Load factor	86.5%	80.3%	6.2 pts	84.1%	71.4%	12.7 pts
Yield	Yield	14.27¢	12.22¢	16.8%		Yield	18.48¢	15.30¢	20.8%	17.01¢	13.85¢	22.8%
RASM	RASM	12.20¢	7.67¢	59.1%		RASM	17.30¢	13.54¢	27.8%	15.67¢	11.19¢	40.0%
CASM excluding fuel and special items(b)	CASM excluding fuel and special items(b)	10.61¢	10.93¢	(2.9)%		CASM excluding fuel and special items(b)	10.05¢	9.21¢	9.1%	10.17¢	9.67¢	5.2%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$2.62	$1.79	46.4%		Economic fuel cost per gallon(b)	$3.66	$2.05	78.5%	$3.38	$1.93	75.1%
Fuel gallons (000,000)	Fuel gallons (000,000)	173	126	37.3%		Fuel gallons (000,000)	204	183	11.5%	573	477	20.1%
ASMs per fuel gallon	ASMs per fuel gallon	79.9	82.4	(3.0)%		ASMs per fuel gallon	80.1	78.8	1.6%	79.8	80.2	(0.5)%
Average full-time equivalent employees (FTEs)	Average full-time equivalent employees (FTEs)	21,582	17,140	25.9%		Average full-time equivalent employees (FTEs)	22,878	20,315	12.6%	22,354	18,819	18.8%
Mainline Operating Statistics:	Mainline Operating Statistics:					Mainline Operating Statistics:
Revenue passengers (000)	Revenue passengers (000)	6,566	3,151	108.4%		Revenue passengers (000)	8,671	7,065	22.7%	23,557	16,367	43.9%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	9,512	4,589	107.3%		RPMs (000,000) "traffic"	12,846	10,122	26.9%	34,818	23,677	47.1%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	12,387	8,853	39.9%		ASMs (000,000) "capacity"	14,782	12,540	17.9%	41,221	33,004	24.9%
Load factor	Load factor	76.8%	51.8%	25.0 pts		Load factor	86.9%	80.7%	6.2 pts	84.5%	71.7%	12.8 pts
Yield	Yield	13.06¢	11.02¢	18.5%		Yield	17.26¢	14.08¢	22.6%	15.76¢	12.68¢	24.3%
RASM	RASM	11.30¢	7.11¢	58.9%		RASM	16.34¢	12.66¢	29.1%	14.72¢	10.44¢	41.0%
CASM excluding fuel and special items(b)	CASM excluding fuel and special items(b)	9.64¢	10.08¢	(4.4)%		CASM excluding fuel and special items(b)	9.15¢	8.45¢	8.3%	9.24¢	8.90¢	3.8%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$2.61	$1.77	47.5%		Economic fuel cost per gallon(b)	$3.61	$2.03	77.8%	$3.35	$1.91	75.4%
Fuel gallons (000,000)	Fuel gallons (000,000)	146	98	49.0%		Fuel gallons (000,000)	173	147	17.7%	484	380	27.4%
ASMs per fuel gallon	ASMs per fuel gallon	85.0	90.3	(5.9)%		ASMs per fuel gallon	85.4	85.3	0.1%	85.2	86.9	(2.0)%
Average FTEs	Average FTEs	16,336	12,473	31.0%		Average FTEs	17,453	15,116	15.5%	17,035	13,870	22.8%
Aircraft utilization	Aircraft utilization	9.5	8.5	11.8%		Aircraft utilization	10.5	10.2	2.9%	10.4	9.6	8.3%
Average aircraft stage length	Average aircraft stage length	1,334	1,303	2.4%		Average aircraft stage length	1,347	1,313	2.6%	1,348	1,313	2.7%
Operating fleet(d)	Operating fleet(d)	225	201	24 a/c		Operating fleet(d)	232	210	22 a/c	232	210	22 a/c
Regional Operating Statistics:(c)	Regional Operating Statistics:(c)					Regional Operating Statistics:(c)
Revenue passengers (000)	Revenue passengers (000)	2,128	1,515	40.5%		Revenue passengers (000)	2,767	2,767	—%	7,579	6,843	10.8%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	1,075	804	33.7%		RPMs (000,000) "traffic"	1,297	1,470	(11.8)%	3,657	3,642	0.4%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	1,396	1,544	(9.6)%		ASMs (000,000) "capacity"	1,567	1,889	(17.0)%	4,522	5,235	(13.6)%
Load factor	Load factor	77.0%	52.1%	24.9 pts		Load factor	82.8%	77.8%	5.0 pts	80.9%	69.6%	11.3 pts
Yield	Yield	24.96¢	19.04¢	31.1%		Yield	30.69¢	23.72¢	29.4%	28.88¢	21.47¢	34.5%
RASM	RASM	20.04¢	10.84¢	84.9%		RASM	26.23¢	19.26¢	36.2%	24.26¢	15.80¢	53.5%
Operating fleet(d)	Operating fleet(d)	98	94	4 a/c		Operating fleet(d)	94	94	— a/c	94	94	— 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~~Reflects all aircraft ~~removed from~~in operating service ~~as well as new aircraft which have not yet entered operating service.~~at September 30, 2022.

2425

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


FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited)	FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited)							FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared to 2019 (unaudited)
Alaska Air Group, Inc.	Alaska Air Group, Inc.									Alaska Air Group, Inc.

		Three Months Ended March 31,							Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2019		Change					2022		2019		Change	2022		2019		Change
Passenger revenue	Passenger revenue	$	1,511	$	1,716	(12)	%			Passenger revenue	$	2,615	$	2,211	18%	$	6,544	$	6,038	8%
Mileage plan other revenue	Mileage plan other revenue	112		110		2	%			Mileage plan other revenue	146		118		24%	433		346		25%
Cargo and other	Cargo and other	58		50		16	%			Cargo and other	67		60		12%	190		169		12%
Total operating revenues		$	1,681	$	1,876	(10)	%
Total operating revenue										Total operating revenue	$	2,828	$	2,389	18%	$	7,167	$	6,553	9%

Operating expense, excluding fuel and special items	Operating expense, excluding fuel and special items	$	1461	$	1,405	4	%			Operating expense, excluding fuel and special items	$	1,644	$	1,476	11%	$	4,654	$	4,295	8%
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	347		420		(17)	%			Aircraft fuel, including hedging gains and losses	877		486		80%	2,000		1,408		42%
Special items	Special items	75		26		NM				Special items	245		5		NM	466		39		NM
Total operating expenses	Total operating expenses	$	1,883	$	1,851	2	%			Total operating expenses	$	2,766	$	1,967	41%	$	7,120	$	5,742	24%

Total non-operating expense		(4)		(19)		(79)	%
Income (loss) before income tax		$	(206)	$	6	NM
Total non-operating income (expense)										Total non-operating income (expense)	3		(6)		(150)%	(3)		(38)		(92)%
Income before income tax										Income before income tax	$	65	$	416	(84)%	$	44	$	773	(94)%

Consolidated Operating Statistics:	Consolidated Operating Statistics:									Consolidated Operating Statistics:
Revenue passengers (000)	Revenue passengers (000)	8,694		10,417		(17)	%			Revenue passengers (000)	11,437		12,574		(9)%	31,137		35,018		(11)%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	10,586		12,449		(15)	%			RPMs (000,000) "traffic"	14,143		15,026		(6)%	38,475		42,113		(9)%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	13,783		15,508		(11)	%			ASMs (000,000) "capacity"	16,349		17,519		(7)%	45,743		50,006		(9)%
Load Factor	Load Factor	76.8%		80.3%		(3.5)	pts			Load Factor	86.5%		85.8%		0.7 pts	84.1%		84.2%		(0.1) pts
Yield	Yield	14.27¢		13.78¢		4	%			Yield	18.48¢		14.71¢		26%	17.01¢		14.34¢		19%
RASM	RASM	12.20¢		12.10¢		1	%			RASM	17.30¢		13.64¢		27%	15.67¢		13.10¢		20%
CASMex	CASMex	10.61¢		9.06¢		17	%			CASMex	10.05¢		8.43¢		19%	10.17¢		8.59¢		18%
FTEs	FTEs	21,582		21,832		(1)	%			FTEs	22,878		22,247		3%	22,354		22,000		2%

2526

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

Our consolidated net ~~loss~~income for the three months ended ~~March 31,~~September 30, 2022 was ~~$143~~$40 million, or ~~$1.14~~$0.31 per share, compared to a consolidated net ~~loss~~income of ~~$131~~$194 million, or ~~$1.05~~$1.53 per share, for the three months ended ~~March 31,~~September 30, 2021.

Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net ~~loss~~income for the ~~first~~third quarter of 2022 was ~~$167~~$325 million, or ~~$1.33~~$2.53 per share, compared to an adjusted net ~~loss~~income of ~~$436~~$187 million, or ~~$3.51~~$1.47 per share, in the ~~first~~third quarter of 2021. The following table reconciles our adjusted net ~~loss~~income per share (EPS) to amounts as reported in accordance with GAAP:

Three Months Ended March 31,
2022 2021
(in millions, except per share amounts) Dollars EPS Dollars EPS
GAAP net loss per share $ (143) $ (1.14) $ (131) $ (1.05)
Payroll Support Program grant wage offset — — (411) (3.31)
Mark-to-market fuel hedge adjustments (107) (0.85) (22) (0.18)
Special items - fleet transition and related charges 75 0.60 18 0.14
Special items - restructuring charges — — 11 0.09
Income tax effect of reconciling items above 8 0.06 99 0.80
Non-GAAP adjusted net loss per share $ (167) $ (1.33) $ (436) $ (3.51)


	Three Months Ended September 30,
	2022				2021
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income per share	$	40	$	0.31	$	194	$	1.53

Mark-to-market fuel hedge adjustments	131		1.02		—		—
Special items - fleet transition	155		1.21		(9)		(0.07)


Special items - labor ratification bonus	90		0.70		—		—
Income tax effect of reconciling items above	(91)		(0.71)		2		0.01
Non-GAAP adjusted net income per share	$	325	$	2.53	$	187	$	1.47

CASM excluding fuel and special items reconciliation is summarized below:


		Three Months Ended March 31,							Three Months Ended September 30,
(in cents)	(in cents)	2022		2021		% Change		(in cents)	2022		2021		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	13.66	¢	9.21	¢	48	%	CASM	16.91	¢	11.75	¢	44	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset		—		(3.95)		NM

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	2.51		1.95		29	%	Aircraft fuel, including hedging gains and losses	5.36		2.60		106	%
Special items - fleet transition and related charges		0.54		0.17		NM
Special items - restructuring charges		—		0.11		NM
Special items - fleet transition								Special items - fleet transition	0.95		(0.06)		NM
Special items - labor ratification bonus								Special items - labor ratification bonus	0.55		—		NM

CASM excluding fuel and special items	CASM excluding fuel and special items	10.61	¢	10.93	¢	(3)	%	CASM excluding fuel and special items	10.05	¢	9.21	¢	9	%

Mainline:	Mainline:							Mainline:
CASM	CASM	11.89	¢	8.07	¢	47	%	CASM	16.20	¢	10.77	¢	50	%
Less the following components:	Less the following components:							Less the following components:
Payroll Support Program grant wage offset		—		(4.06)		NM

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	2.21		1.72		29	%	Aircraft fuel, including hedging gains and losses	5.52		2.39		131	%

Special items - fleet transition and related charges		0.04		0.20		(80)	%
Special items - restructuring charges		—		0.13		NM
Special items - fleet transition								Special items - fleet transition	0.92		(0.07)		NM
Special items - labor ratification bonus								Special items - labor ratification bonus	0.61		—		NM

CASM excluding fuel and special items	CASM excluding fuel and special items	9.64	¢	10.08	¢	(4)	%	CASM excluding fuel and special items	9.15	¢	8.45	¢	8	%

OPERATING ~~REVENUES~~REVENUE

Total operating ~~revenues~~revenue increased ~~$884~~$875 million, or ~~111%~~45%, during the ~~first~~third quarter of 2022 compared to the same period in 2021. The changes are summarized in the following table:


		Three Months Ended March 31,							Three Months Ended September 30,
(in millions)	(in millions)	2022		2021		% Change		(in millions)	2022		2021		% Change
Passenger revenue	Passenger revenue	$	1,511	$	659	129	%	Passenger revenue	$	2,615	$	1,774	47	%
Mileage Plan other revenue	Mileage Plan other revenue	112		94		19	%	Mileage Plan other revenue	146		120		22	%
Cargo and other	Cargo and other	58		44		32	%	Cargo and other	67		59		14	%
Total operating revenues		$	1,681	$	797	111	%
Total operating revenue								Total operating revenue	$	2,828	$	1,953	45	%

Passenger ~~Revenue~~revenue

On a consolidated basis, Passenger revenue for the ~~first~~third quarter of 2022 increased by ~~$852~~$841 million, or ~~129%~~47%, ~~primarily~~ driven by a ~~significant~~22% increase in passenger traffic and ~~bolstered by~~ a ~~17%~~21% improvement in ticket yields. ~~January~~Increased demand for air travel and ~~February 2022 results were negatively impacted by~~constrained capacity industry wide enabled higher load factors in the ~~omicron variant; however, surging demand in March by both business~~third quarter of 2022. Higher revenue on improved Mileage Plan award redemptions and ~~leisure travelers drove meaningful improvements~~from our alliance partners following the relaxing of international travel restrictions also contributed meaningfully to ~~year-over-year results.~~

~~We expect~~revenue growth compared to ~~see continued growth to Passenger revenue as we progress through 2022 driven by high demand and increased capacity.~~2021.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue for the third quarter of 2022 increased by ~~$18~~$26 million, or ~~19%, as compared to the same prior-year period.~~22%. 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.~~

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

Cargo and other

On a consolidated basis, Cargo and other revenue for the ~~first~~third quarter of 2022 increased by ~~$14~~$8 million, or ~~32%, as compared to~~14%. Other ancillary revenue was the ~~same prior-year period as our dedicated freighters were running below full capacity in~~primary driver of the ~~first quarter of 2021. Additional departures also provided incremental belly cargo activity in the first quarter of 2022 compared~~year-over-year increase, consistent with the ~~prior year.~~

~~We expect~~return in demand for travel. Incremental freight revenue also contributed due to ~~see increases to cargo and other revenue for the remainder~~greater use of ~~2022, driven by increased~~ belly ~~cargo activity as we~~capacity, which grew on an increase in scheduled departures.

OPERATING EXPENSES

Total operating expenses increased ~~$925 million,~~$1.1 billion, or ~~97%~~63%, compared to the ~~first~~third quarter of 2021. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


		Three Months Ended March 31,							Three Months Ended September 30,
(in millions)	(in millions)	2022		2021		% Change		(in millions)	2022		2021		% Change
Fuel expense	Fuel expense	$	347	$	203	71	%	Fuel expense	$	877	$	376	133	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	1,461		1,137		28	%	Non-fuel operating expenses, excluding special items	1,644		1,328		24	%
Payroll Support Program grant wage offset		—		(411)		NM
Special items - fleet transition and related charges		75		18		NM
Special items - restructuring charges		—		11		NM

Special items - fleet transition								Special items - fleet transition	155		(9)		NM
Special items - labor ratification bonus								Special items - labor ratification bonus	90		—		NM

Total operating expenses	Total operating expenses	$	1,883	$	958	97	%	Total operating expenses	$	2,766	$	1,695	63	%

Fuel ~~Expense~~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 ~~$144~~$501 million, or ~~71%~~133%, compared to the ~~first~~third quarter of 2021. The elements of the change are illustrated in the following table:


		Three Months Ended March 31,									Three Months Ended September 30,
		2022				2021					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	$	504	$	2.91	$	222	$	1.77	Raw or "into-plane" fuel cost	$	775	$	3.80	$	397	$	2.16
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	(50)		(0.29)		3		0.02		(Gain)/loss on settled hedges	(29)		(0.14)		(21)		(0.11)
Consolidated economic fuel expense	Consolidated economic fuel expense	$	454	$	2.62	$	225	$	1.79	Consolidated economic fuel expense	$	746	$	3.66	$	376	$	2.05
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(107)		(0.62)		(22)		(0.18)		Mark-to-market fuel hedge adjustments	131		0.64		—		—
GAAP fuel expense	GAAP fuel expense	$	347	$	2.00	$	203	$	1.61	GAAP fuel expense	$	877	$	4.30	$	376	$	2.05
Fuel gallons	Fuel gallons			173				126		Fuel gallons			204				183

Raw fuel expense increased ~~127%~~95% in the ~~first~~third quarter of 2022 compared to the ~~first~~third quarter of 2021, due to ~~a combination of increased fuel consumption and~~significantly higher per gallon ~~costs. Fuel consumption~~costs and increased ~~by 47 million gallons, consistent with an increase in departures.~~fuel consumption. Raw fuel expense per gallon increased by approximately ~~64%~~76% 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 first quarter of 2022 was primarily driven by a 64% increase in crude~~Crude oil prices ~~when~~have risen 30% while refining margins have more than tripled compared to ~~the prior year.~~2021. Fuel gallons consumed increased 11%, consistent with rising capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from ~~or pay to,~~ hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. Economic fuel expense 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 ~~first~~third quarter were ~~$50~~$29 million in 2022, compared to ~~losses~~gains of $3$21 million in the same period in 2021. These amounts represent cash received from hedges at settlement, offset by cash paid in prior periods 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~~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 2021 are more fully described below.
Three Months Ended March 31,
(in millions) 2022 2021 % Change
Wages and benefits $ 606 $ 493 23 %
Variable incentive pay 36 33 9 %
Aircraft maintenance 135 81 67 %
Aircraft rent 73 62 18 %
Landing fees and other rentals 138 129 7 %
Contracted services 78 51 53 %
Selling expenses 58 33 76 %
Depreciation and amortization 102 97 5 %
Food and beverage service 41 23 78 %
Third-party regional carrier expense 42 30 40 %
Other 152 105 45 %
Total non-fuel operating expenses, excluding special items $ 1,461 $ 1,137 28 %

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


	Three Months Ended September 30,
(in millions)	2022		2021		% Change
Wages and benefits	$	686	$	578	19	%
Variable incentive pay	48		42		14	%
Aircraft maintenance	92		89		3	%
Aircraft rent	76		64		19	%
Landing fees and other rentals	161		141		14	%
Contracted services	83		62		34	%
Selling expenses	82		49		67	%
Depreciation and amortization	104		99		5	%
Food and beverage service	52		39		33	%
Third-party regional carrier expense	53		39		36	%
Other	207		126		64	%
Total non-fuel operating expenses, excluding special items	$	1,644	$	1,328	24	%

Wages and ~~Benefits~~benefits

Wages and benefits increased ~~during~~by $108 million, or 19%, in the ~~first~~third quarter of ~~2022 by $113 million, or 23%, compared to 2021.~~2022. The primary components of Wages and benefits are shown in the following table:
Three Months Ended March 31,
(in millions) 2022 2021 % Change
Wages $ 467 $ 357 31 %
Pension - Defined benefit plans service cost 11 13 (15) %
Defined contribution plans 38 32 19 %
Medical and other benefits 56 65 (14) %
Payroll taxes 34 26 31 %
Total wages and benefits $ 606 $ 493 23 %

Wages increased $110 million, or 31%, on a 26% increase in FTEs. Increased wages as compared to the prior period are primarily the result of the increase in FTEs as Alaska and Horizon continue their recovery from the pandemic and ramp up operations. Increased expense for defined contribution plans and payroll taxes are in line with the related increase to wages.

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

~~Aircraft Maintenance~~

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

~~Aircraft Rent~~

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


	Three Months Ended September 30,
(in millions)	2022		2021		% Change
Wages	$	514	$	433	19	%
Pension - Defined benefit plans service cost	11		13		(15)	%
Defined contribution plans	39		33		18	%
Medical and other benefits	85		68		25	%
Payroll taxes	37		31		19	%
Total wages and benefits	$	686	$	578	19	%

~~We expect aircraft rent~~Wages increased $81 million, or 19%, primarily driven by 13% growth in FTEs as Alaska and Horizon hire to support the ramp up in operations. The ratification of three new collective bargaining agreements during the third quarter resulted in significant wage increases for the represented groups. As a result of the new agreements, the Company recorded $35 million in incremental wage expense during the quarter, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates.

Increased expense for defined contribution plans and payroll taxes are consistent with the change in wages.

Medical and other benefits increased $17 million, or 25%, driven by growth in FTEs and premium costs, coupled with an increase in the obligation for our pilots long-term disability plan.

Variable incentive pay

Variable incentive pay expense increased by $6 million, or 14%, in the third quarter of 2022. The increase is due to the expectation that higher payouts will be achieved under the 2022 onPerformance Based Pay Plan.

Aircraft rent

Aircraft rent expense increased by $12 million, or 19%, in the ~~annualization~~third quarter of 2022. Increased expense ~~and additional deliveries~~is due to the delivery of eight leased Boeing 737-9 aircraft and ~~incremental~~ten leased Embraer E175 aircraft ~~flown~~operated by SkyWest ~~under our long-term capacity purchase agreement.~~since September 30, 2021.

Landing ~~Fees~~fees and ~~Other Rentals~~other rentals

Landing fees and other rentals increased by $9$20 million, or 7%14%, ~~during~~in the ~~first~~third quarter of 2022. The increase compared to the same period in 2021 is ~~due to an increase~~driven primarily by increases in departures as ~~demand returns, partially offset by decreases in rates~~well as rate increases for terminal rents. Rates for both fixed airport rent and landing fees rose significantly at ~~some~~Seattle-Tacoma International Airport, the Company's largest hub, which accounted for 75% of the ~~airports we service.~~increase compared to prior year.

Contracted ~~Services~~services

Contracted services increased by ~~$27~~$21 million, or ~~53%~~34%, ~~during~~in the ~~first~~third quarter of 2022, ~~compared to the same period in 2021~~ driven primarily by increased departures and passengers, ~~in line with increased demand,~~ coupled with ~~increased~~higher rates charged by vendor partners.

Selling ~~Expense~~expenses

Selling ~~expense~~expenses increased by ~~$25~~$33 million, or ~~76%~~67%, ~~during~~in the ~~first~~third quarter of 2022, ~~compared to the same period in 2021,~~driven primarily ~~driven~~ by an increase in distribution costs and credit card commissions incurred with the overall revenue recovery.

Food and ~~Beverage Service~~beverage service

Food and beverage service increased by ~~$18~~$13 million, or ~~78%~~33%, ~~during~~in the ~~first~~third quarter of 2022, ~~compared to the same period in 2021. This increase is in line~~consistent with ~~the 86%~~a 16% increase in revenue ~~passengers as compared~~passengers. Additional on-board offerings coupled with increased charges for transportation and food service supplies also contributed to the ~~prior-year period.~~overall increase.

Third-party ~~Regional Carrier Expense~~regional carrier expense

Third-party regional carrier expense, which represents expenses associated with SkyWest under our CPA, increased by ~~$12~~$14 million, or ~~40%~~36%, ~~during~~in the ~~first~~third quarter of ~~2022 compared to the same period in 2021.~~2022. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period. ~~In addition, a benefit was recorded in 2021 associated with the pass through of CARES Act PSP funding that reduced expense, which did not recur in 2022.~~

~~We expect third-party regional carrier~~Other expense ~~to grow in 2022 as compared to 2021 as we bring incremental E175 aircraft into the CPA with SkyWest through the year.~~

~~Other Expense~~

Other expense increased ~~$47~~$81 million, or ~~45%~~64%, ~~during~~in the ~~first~~third quarter of ~~2022~~2022. Increased expense as compared to the ~~same~~prior year period ~~in 2021. Increased~~is partially due to $28 million incurred for employee recognition related to the 90,000 mile gift granted to all employees. Other items that increased within Other expense ~~is primarily driven by incremental~~include training events and related travel costs, crew hotel stays, and crew per ~~diem,~~diem. Increases in crew-related costs are consistent with the ~~overall increase~~rise in ~~departures and capacity.~~departures.

Special ~~Items~~items - fleet transition ~~and related charges~~

We recorded ~~non-recurring expense~~expenses associated with fleet transition and related charges of ~~$75~~$155 million in the ~~first~~third quarter of 2022. Refer to Note 2 to the ~~condensed~~ consolidated financial statements for additional details.

Special items - labor ratification bonus

We recorded a nonrecurring expense of $90 million in the third quarter of 2022 representing a payment to Alaska pilots following the ratification of a new collective bargaining agreement.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 ofto 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~~reported an adjusted pretax ~~loss~~profit of ~~$174~~$446 million in the ~~first~~third quarter of 2022, compared to an adjusted pretax ~~loss~~profit of ~~$444~~$221 million in the ~~first~~third quarter of 2021. The ~~$270~~$225 million improvement was primarily driven by a ~~$737~~$792 million increase in Passenger ~~revenues as a result of increased demand for air travel,~~revenue, offset by a ~~$301~~$326 million increase in economic fuel cost and a $292 million increase in non-fuel operating ~~costs and a $207 million increase in economic fuel cost.~~costs.

As compared to the prior year, higher Mainline revenue is primarily attributable to a 27% increase in traffic and a 23% increase in yield, driven by a historically strong demand environment. Non-fuel operating expenses increased, ~~significantly,~~ driven by ~~increased~~higher variable costs, largely consistent with the overall ~~increase~~growth in capacity and departures. Higher ~~economic~~ fuel prices, combined with more gallons consumed, drove the increase in Mainline fuel expense.

Regional

Regional operations ~~recorded~~reported an adjusted pretax loss of ~~$55~~$2 million in the ~~first~~third quarter of 2022, compared to an adjusted pretax loss of ~~$150~~$1 million in the ~~first~~third quarter of 2021. ~~Improved results were attributable to a $113~~While operating revenue increased $47 million, ~~increase in operating revenues, partially~~the improvement was offset by a ~~$21~~$44 million increase in fuel ~~costs.~~costs and a $4 million increase in non-fuel operating expenses.

Regional passenger ~~revenues~~revenue increased significantly compared to the ~~first~~third quarter of 2021, primarily driven by ~~increased~~an improved load ~~factors~~factor and a ~~31%~~29% improvement in yield.

Higher ~~economic~~ fuel prices ~~combined with a significant increase in gallons consumed, drove~~contributed to the increase in Regional fuel expense.

Horizon

Horizon ~~recorded~~reported an adjusted pretax loss of ~~$10~~$6 million in the ~~first~~third quarter of 2022, compared to an adjusted pretax ~~income~~profit of ~~$11~~$8 million in the ~~first~~third quarter of 2021. The shift to adjusted pretax loss is driven by lower CPA revenue on decreased departures.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2022 TO NINE MONTHS ENDED SEPTEMBER 30, 2021

Our consolidated net income for the nine months ended September 30, 2022 was $36 million, or $0.28 per share, compared to consolidated net income of $460 million, or $3.64 per share, for the nine months ended September 30, 2021.

Our adjusted net income for the nine months ended September 30, 2022 was $438 million, or $3.42 per share, compared to an adjusted net loss of $287 million, or $2.27 per share, in the nine months ended September 30, 2021. The following table reconciles our adjusted net income and adjusted EPS to amounts as reported in accordance with GAAP:


	Nine Months Ended September 30,
	2022				2021
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income per share	$	36	$	0.28	$	460	$	3.64
Payroll Support Program grant wage offset	—		—		(914)		(7.24)
Mark-to-market fuel hedge adjustments	64		0.50		(68)		(0.54)

Special items - fleet transition	376		2.94		5		0.04
Special items - labor ratification bonus	90		0.70		—		—
Special items - restructuring	—		—		(12)		(0.09)
Income tax effect of reconciling items above	(128)		(1.00)		242		1.92
Non-GAAP adjusted net income (loss) per share	$	438	$	3.42	$	(287)	$	(2.27)

CASM excluding fuel and special items reconciliation is summarized below:


	Nine Months Ended September 30,
(in cents)	2022		2021		% Change
Consolidated:
CASM	15.56	¢	9.50	¢	64	%
Less the following components:
Payroll Support Program grant wage offset	—		(2.39)		NM
Aircraft fuel, including hedging gains and losses	4.37		2.24		95	%
Special items - fleet transition	0.82		0.01		NM
Special items - labor ratification bonus	0.20		—		NM
Special items - restructuring	—		(0.03)		NM

CASM excluding fuel and special items	10.17	¢	9.67	¢	5	%

Mainline:
CASM	14.59	¢	8.26	¢	77	%
Less the following components:
Payroll Support Program grant wage offset	—		(2.61)		NM
Aircraft fuel, including hedging gains and losses	4.44		1.99		123	%
Special items - fleet transition	0.69		0.02		NM
Special items - labor ratification bonus	0.22		—		NM
Special items - restructuring	—		(0.04)		NM

CASM excluding fuel and special items	9.24	¢	8.90	¢	4	%

OPERATING REVENUE

Total operating revenue increased $2.9 billion, or 68%, during the first nine months of 2022 compared to the same period in 2021. The changes are summarized in the following table:


	Nine Months Ended September 30,
(in millions)	2022		2021		% Change
Passenger revenue	$	6,544	$	3,785	73	%
Mileage Plan other revenue	433		332		30	%
Cargo and other	190		160		19	%
Total operating revenue	$	7,167	$	4,277	68	%

Passenger revenue

On a consolidated basis, Passenger revenue for the first nine months of 2022 increased by $2.8 billion, or 73%, on a 41% increase in passenger traffic and a 23% improvement in ticket yields. Although our airlines experienced operational disruptions in the first half of 2022 that have since been resolved, demand for both leisure and business travel continued to drive revenue results to historic levels.

For the fourth quarter, we anticipate Passenger revenue will continue to show meaningful improvements over the comparable prior year period on increased capacity offered. Strong demand for passenger air travel has persisted through summer and into the fall, with yields and load factors expected to exceed prior year results.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased $101 million, or 30%, in the first nine months of 2022. The change is largely due to an increase in commissions from our bank card partners driven by increased consumer spending and improved economics from our new co-branded credit card agreement.

We expect continued strength in Mileage Plan other revenue for the fourth quarter of 2022 compared to the prior year, driven by higher commissions resulting from the improved economics of our new co-branded credit card agreement and increased card spend.

Cargo and other

On a consolidated basis, Cargo and other revenue increased $30 million, or 19%, in the first nine months of 2022. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed due to greater use of belly capacity, which grew on an increase in scheduled departures.

We expect Cargo and other revenue to increase in the fourth quarter of 2022 compared to the prior year, driven by greater ancillary revenue and growth in our cargo business.

OPERATING EXPENSES

Total operating expenses increased $3.5 billion, or 96%, compared to the first nine months of 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:


	Nine Months Ended September 30,
(in millions)	2022		2021		% Change
Fuel expense	$	2,000	$	853	134	%
Non-fuel operating expenses, excluding special items	4,654		3,699		26	%
Payroll Support Program grant wage offset	—		(914)		NM
Special items - fleet transition	376		5		NM
Special items - labor ratification bonus	90		—		NM
Special items - restructuring	—		(12)		NM

Total operating expenses	$	7,120	$	3,631	96	%

Fuel expense

Aircraft fuel expense increased $1.1 billion, or 134%, compared to the nine months ended September 30, 2021. The elements of the change are illustrated in the table:


	Nine Months Ended September 30,
	2022				2021
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	2,103	$	3.67	$	949	$	1.99
(Gain)/loss on settled hedges	(167)		(0.29)		(28)		(0.06)
Consolidated economic fuel expense	$	1,936	$	3.38	$	921	$	1.93
Mark-to-market fuel hedge adjustments	64		0.11		(68)		(0.14)
GAAP fuel expense	$	2,000	$	3.49	$	853	$	1.79
Fuel gallons			573				477

Raw fuel expense increased 122% in the first nine months of 2022 compared to the first nine months of 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel expense per gallon increased by approximately 84% 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. Crude oil prices have risen 49% while refining margins have more than tripled compared to 2021. Fuel gallons consumed increased 20%, consistent with rising capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. Economic fuel expense 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 in the first nine months of 2022 were $167 million, compared to gains of $28 million in the same period in 2021. These amounts represent cash received from settled hedges, offset by cash paid in prior periods for premium expense.

We expect continued pressure in aircraft fuel expense in the fourth quarter of 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the fourth quarter to range between $3.50 to $3.70 per gallon. Based on expected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio in the fourth quarter. We expect the magnitude of the hedge benefit to be smaller compared to prior quarters in 2022 as the strike price of the portfolio approaches projected market cost per barrel.

Non-fuel expenses


	Nine Months Ended September 30,
(in millions)	2022		2021		% Change
Wages and benefits	$	1,931	$	1,581	22	%
Variable incentive pay	140		109		27	%
Aircraft maintenance	331		272		22	%
Aircraft rent	222		188		18	%
Landing fees and other rentals	435		414		5	%
Contracted services	243		167		45	%
Selling expenses	218		123		76	%
Depreciation and amortization	310		294		5	%
Food and beverage service	143		97		46	%
Third-party regional carrier expense	145		106		37	%
Other	536		348		54	%
Total non-fuel operating expenses, excluding special items	$	4,654	$	3,699	26	%

For the fourth quarter of 2022, we generally anticipate recognizing higher non-fuel operating costs compared to the prior year as we continue to increase our capacity and scheduled departures, and pay a larger employee base higher wage rates following the ratification of new labor agreements.

Wages and benefits

Wages and benefits increased by $350 million, or 22%, in the first nine months of 2022. The primary components of wages and benefits are shown in the following table:


	Nine Months Ended September 30,
(in millions)	2022		2021		% Change
Wages	$	1,467	$	1,176	25	%
Pension - Defined benefit plans service cost	34		39		(13)	%
Defined contribution plans	116		91		27	%
Medical and other benefits	207		192		8	%
Payroll taxes	107		83		29	%
Total wages and benefits	$	1,931	$	1,581	22	%

Wages increased $291 million, or 25%, in the first nine months of 2022, primarily driven by 19% growth in FTEs as Alaska and Horizon hire to support the ramp up in operations. The ratification of three new collective bargaining agreements during the third quarter resulted in significant wage increases for the represented groups. As a result of the new agreements, the Company recorded $35 million in incremental wage expense during the quarter, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates.

Increased expense for defined contribution plans and payroll taxes are consistent with the change in wages.

Variable incentive pay

Variable incentive pay expense increased $31 million, or 27%, in the first nine months of 2022. The increase is due to the expectation that higher payouts will be achieved under the 2022 Performance Based Pay Plan.

In the fourth quarter we anticipate variable incentive pay will increase as compared to the prior-year period on an expectation of improved payout under the plan.

Aircraft maintenance

Aircraft maintenance expense increased by $59 million, or 22%, in the first nine months of 2022. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft recorded in the first quarter of 2022 and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.

Aircraft rent

Aircraft rent expense increased by $34 million, or 18%, in the first nine months of 2022. Increased expense is due to the delivery of eight leased Boeing 737-9 aircraft and ten leased Embraer E175 aircraft operated by SkyWest since September 30, 2021.

Landing fees and other rentals

Landing fees and other rentals in the first nine months of 2022 were generally flat as compared to the same period in 2021. Increases in departures across the system were offset by favorable resolution for certain pandemic period airport accruals.

Contracted services

Contracted services increased by $76 million, or 46%, in the first nine months of 2022, driven primarily by increased departures and passengers in line with increased demand, coupled with increased rates charged by vendor partners.

Selling expenses

Selling expenses increased by $95 million, or 77%, in the first nine months of 2022, primarily driven by an increase in distribution costs and credit card commissions incurred with the overall revenue recovery.

Food and beverage service

Food and beverage service increased by $46 million, or 46%, in the first nine months of 2022. Incremental food and beverage charges are in line with the 34% increase in revenue passengers as well as additional offerings of on-board products as compared to the prior-year period.

Third-party regional carrier expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $39 million, or 37%, in the first nine months of 2022. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service as compared to the prior-year period.

We expect third-party regional carrier expense to grow in the fourth quarter of 2022 compared to the prior year as we continue operating the ten additional Embraer E175 aircraft under the CPA with SkyWest.

Other expense

Other expense increased $188 million, or 54%, in the first nine months of 2022. The most significant drivers of the increased cost were training events and related travel costs, crew hotel stays, and crew per diem. Increases in crew-related costs are consistent with the rise in departures. The increase within Other expense also includes $28 million incurred for employee recognition related to the 90,000 mile gift granted to all employees.

Special items - fleet transition

We recorded expenses associated with fleet transition and related charges of $376 million in the first nine months of 2022. We expect to record additional special charges associated with the fleet transition during 2022, primarily related to accelerated aircraft ownership and lease return expenses. At this time, these costs are estimated to be between $100 million and $125 million for the fourth quarter of 2022, and are subject to change as management continues to negotiate leased aircraft returns. Refer to Note 2 to the consolidated financial statements for additional details.

Special items - labor ratification bonus

We recorded a nonrecurring expense of $90 million in the third quarter of 2022 representing a payment to Alaska pilots following the ratification of a new collective bargaining agreement.

ADDITIONAL SEGMENT INFORMATION

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

Mainline

Mainline operations reported an adjusted pretax profit of $647 million in the first nine months of 2022, compared to an adjusted pretax loss of $247 million in the same period in 2021. The $894 million improvement was driven by a $2.6 billion increase in Mainline operating revenue partially offset by a $897 million increase in Mainline fuel expense and a $871 million increase in Mainline non-fuel operating expense.

As compared to the prior year, higher Mainline revenue are primarily attributable to a 47% increase in traffic and a 24% increase in yield, driven by the significant increase in demand. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Higher fuel prices, combined with additional gallons consumed, drove the increase in Mainline fuel expense.

Regional

Regional operations reported an adjusted pretax loss of $59 million in the first nine months of 2022, compared to an adjusted pretax loss of $207 million in the first nine months of 2021. Improved results were attributable to a $270 million increase in operating revenue which was the result of higher demand and yields, partially offset by a $118 million increase in fuel costs on higher fuel prices.

Horizon

Horizon reported an adjusted pretax loss of $18 million in the first nine months of 2022, compared to an adjusted pretax profit of $34 million in the same period in 2021. The shift to adjusted pretax loss is driven by lower CPA revenue on decreased departures, combined with ~~incremental maintenance expense on E175 aircraft and~~ higher wage and benefit costs on incremental ~~FTEs.~~FTEs and increased wage rates resulting from the new collective bargaining agreement with Horizon pilots.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

•Existing cash and marketable securities balance of ~~$2.9~~$3.2 billion, and cash flows from operations;

•5867 unencumbered aircraft that could be financed, if necessary;

•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we took free and clear delivery of ~~seven~~18 owned Boeing 737-9 aircraft. We also made debt payments totaling ~~$170~~$333 million, ending the quarter with a debt-to-capitalization ratio of ~~50%~~49%, within our ~~stated~~ target range of 40% to 50%. ~~Subsequent to quarter end, we received $184 million in federal tax refund as a result of carrying back losses from the 2020 tax year.~~

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

We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.

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

The table below presents the major indicators of financial condition and liquidity:


(in millions)	(in millions)	March 31, 2022			December 31, 2021			Change	(in millions)	September 30, 2022			December 31, 2021			Change
Cash and marketable securities	Cash and marketable securities	$	2,890		$	3,116		(7) %	Cash and marketable securities	$	3,150		$	3,116		1 %
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	47		%	57		%	(10) pts	Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	39		%	57		%	(18) pts
Long-term debt, net of current portion	Long-term debt, net of current portion	2,078			2,173			(4)%	Long-term debt, net of current portion	1,889			2,173			(13)%
Shareholders’ equity	Shareholders’ equity	$	3,637		$	3,801		(4)%	Shareholders’ equity	$	3,826		$	3,801		1%


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)	March 31, 2022			December 31, 2021			Change	(in millions)	September 30, 2022			December 31, 2021			Change
Long-term debt, net of current portion	Long-term debt, net of current portion	$	2,078		$	2,173		(4)%	Long-term debt, net of current portion	$	1,889		$	2,173		(13)%
Capitalized operating leases	Capitalized operating leases	1,629			1,547			5%	Capitalized operating leases	1,745			1,547			13%

Adjusted debt, net of current portion of long-term debt	Adjusted debt, net of current portion of long-term debt	$	3,707		$	3,720		—%	Adjusted debt, net of current portion of long-term debt	$	3,634		$	3,720		(2)%
Shareholders' equity	Shareholders' equity	3,637			3,801			(4)%	Shareholders' equity	3,826			3,801			1%
Total invested capital	Total invested capital	$	7,344		$	7,521		(2)%	Total invested capital	$	7,460		$	7,521		(1)%

Debt-to-capitalization, including operating leases	Debt-to-capitalization, including operating leases	50		%	49		%	1 pt	Debt-to-capitalization, including operating leases	49		%	49		%	— pt


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)	March 31, 2022		December 31, 2021		(in millions)	September 30, 2022		December 31, 2021
Current portion of long-term debt	Current portion of long-term debt	$	292	$	366	Current portion of long-term debt	$	321	$	366
Current portion of operating lease liabilities	Current portion of operating lease liabilities	272		268		Current portion of operating lease liabilities	263		268
Long-term debt	Long-term debt	2,078		2,173		Long-term debt	1,889		2,173
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,357		1,279		Long-term operating lease liabilities, net of current portion	1,482		1,279
Total adjusted debt	Total adjusted debt	3,999		4,086		Total adjusted debt	3,955		4,086
Less: Cash and marketable securities	Less: Cash and marketable securities	(2,890)		(3,116)		Less: Cash and marketable securities	(3,150)		(3,116)
Adjusted net debt	Adjusted net debt	$	1,109	$	970	Adjusted net debt	$	805	$	970

(in millions)	(in millions)	Twelve Months Ended March 31, 2022		Twelve Months Ended December 31, 2021		(in millions)	Twelve Months Ended September 30, 2022		Twelve Months Ended December 31, 2021
GAAP Operating Income(a)	GAAP Operating Income(a)	$	644	$	685	GAAP Operating Income(a)	$	86	$	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	(468)		(925)		Payroll Support Program grant wage offset and special items	462		(925)
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	(132)		(47)		Mark-to-market fuel hedge adjustments	85		(47)
Depreciation and amortization	Depreciation and amortization	399		394		Depreciation and amortization	410		394
Aircraft rent	Aircraft rent	265		254		Aircraft rent	288		254
EBITDAR	EBITDAR	$	708	$	361	EBITDAR	$	1,331	$	361
Adjusted net debt to EBITDAR	Adjusted net debt to EBITDAR	1.6x		2.7x		Adjusted net debt to EBITDAR	0.6x		2.7x

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

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

3238

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first ~~three~~nine months of 2022, net cash provided by operating activities was ~~$287 million,~~$1.4 billion, compared to ~~$167~~$901 million during the same period in 2021. The ~~$120~~$508 million net increase in our operating cash flows is ~~primarily attributable~~due to a combination of factors. Increased remuneration from our co-brand credit card provided nearly $300 million in incremental cash as compared to 2021 on improved economics and increased ~~build~~volumes. Additionally, in ~~our~~2022 we received $260 million in federal income tax refunds and the change in air traffic liability ~~as cash advance bookings in March 2022 reached the highest monthly total in company history. This increase was~~increased by $152 million due to strong passenger demand. The prior year also included a nonrecurring voluntary contribution of $100 million to Alaska pilots' defined benefit plan. These amounts were partially offset by uses of cash on increasing operating expenses ~~and greater payout on our performance based pay program~~ as ~~compared to 2021.~~the business returned flying capacity.

Cash Used in Investing Activities

Cash ~~provided by~~used in investing activities was ~~$39~~$888 million during the first ~~three~~nine months of 2022, compared to ~~$543~~$943 million ~~used in investing activities~~ during the same period of 2021. ~~The shift to cash provided by investing activities is primarily due to net sales of marketable securities, which were $328 million~~Cash used in ~~the first three months of 2022, compared to net purchases of $511 million in the three months ended March 31, 2021. This activity was partially offset by an increase in cash used for~~ capital expenditures ~~of $261 million~~ for aircraft purchase deposits and other property and ~~equipment.~~equipment was $947 million in the first nine months of 2022, compared to $190 million in the first nine months of 2021. This increase in cash used in capital expenditures was offset by purchases and sales of marketable securities, which were $61 million of net sales during the first nine months of 2022, compared to $744 million of net purchases during the first nine months of 2021.

Cash ~~Provided by (Used in)~~Used in Financing Activities

Cash used in financing activities was ~~$168~~$296 million during the first ~~three~~nine months of 2022, compared to ~~cash provided by financing activities of $82~~$825 million during the same period in 2021. During the first ~~three~~nine months of 2022, we had no new proceeds from issuance of debt and utilized cash on hand to repay ~~$170~~$333 million of outstanding long-term debt, compared to debt proceeds of ~~$189~~$363 million and payments of ~~$115 million~~$1.2 billion during the same period in 2021.

MATERIAL CASH COMMITMENTS

Aircraft Commitments

As of ~~March 31,~~September 30, 2022, Alaska has firm orders to purchase 6756 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease ~~seven~~five Boeing 737-9 aircraft with deliveries in ~~2022. Alaska also has an agreement with SkyWest Airlines to expand their long-term capacity purchase agreement by six Embraer E175 aircraft in~~ 2022 and ~~one in~~ 2023. ~~Horizon has commitments to purchase 12 Embraer E175 aircraft with deliveries between 2022 and 2025.~~ Alaska has options to acquire up to 11 additional Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries between 2024 and 2026. Subsequent to quarter end, Alaska executed an agreement with Boeing to exercise options to purchase 52 737 aircraft for delivery between 2024 and 2027. The agreement also secures rights for 105 additional 737 aircraft through 2030.

Alaska has received information from Boeing indicating that certain 737 deliveries in 2022 and 2023 are expected to be delayed to 2023 and 2024. Alaska will continue to work with Boeing on delivery timelines that reflect Alaska's plans for growth.

Horizon has commitments to purchase 20 Embraer E175 aircraft with deliveries between 2022 and 2026. Horizon has options to acquire 13 Embraer E175 aircraft between 2024 and 2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

3339

~~The~~To best reflect our expectations of future fleet activity, we have incorporated anticipated delivery delays related to 2022 and the October 2022 Boeing agreement described above into the following table, which summarizes our ~~anticipated~~expected fleet count by year, as of ~~March 31,~~November 3, 2022:


		Actual Fleet	Anticipated Fleet Activity(a)								Actual Fleet	Anticipated Fleet Activity(a)
Aircraft	Aircraft	March 31, 2022	2022 Additions	2022 Removals	Dec 31, 2022	2023 Changes	Dec 31, 2023	2024 Changes	Dec 31, 2024	Aircraft	September 30, 2022	2022 Additions	2022 Removals	Dec 31, 2022	2023 Changes	Dec 31, 2023	2024 Changes	Dec 31, 2024
737 Freighters(b)		3	—	—	3	—	3	—	3
B737-700 Freighters										B737-700 Freighters	3	—	—	3	—	3	—	3
B737-800 Freighters										B737-800 Freighters	—	—	—	—	2	2	—	2
B737-700	B737-700	11	—	—	11	—	11	—	11	B737-700	11	—	—	11	—	11	—	11
B737-800(b)		61	—	—	61	—	61	—	61
B737-800										B737-800	61	—	—	61	(2)	59	—	59
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
B737-8	B737-8	—	—	—	—	5	5	5	10	B737-8	—	—	—	—	5	5	5	10
B737-9	B737-9	19	23	—	42	28	70	7	77	B737-9	33	5	—	38	35	73	10	83
B737-10	B737-10	—	—	—	—	—	—	6	6	B737-10	—	—	—	—	—	—	6	6
A320(d)		30	—	(14)	16	(16)	—	—	—
A320										A320	23	—	(10)	13	(13)	—	—	—
A321neo	A321neo	10	—	—	10	(10)	—	—	—	A321neo	10	—	—	10	(10)	—	—	—
Total Mainline Fleet	Total Mainline Fleet	225	23	(14)	234	7	241	18	259	Total Mainline Fleet	232	5	(10)	227	17	244	21	265
Q400 operated by Horizon(d)		32	—	(8)	24	(24)	—	—	—
Q400 operated by Horizon										Q400 operated by Horizon	22	—	(11)	11	(11)	—	—	—
E175 operated by Horizon	E175 operated by Horizon	30	3	—	33	6	39	—	39	E175 operated by Horizon	30	3	—	33	8	41	3	44
E175 operated by third party	E175 operated by third party	36	6	—	42	1	43	—	43	E175 operated by third party	42	—	—	42	—	42	—	42
Total Regional Fleet(c)		98	9	(8)	99	(17)	82	—	82
Total Regional Fleet(b)										Total Regional Fleet(b)	94	3	(11)	86	(3)	83	3	86
Total	Total	323	32	(22)	333	(10)	323	18	341	Total	326	8	(21)	313	14	327	24	351

(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)~~Excludes the planned addition of two 737-800 freighters following conversion from passenger aircraft, as well as the subsequent replacement of passenger aircraft.~~

~~(c)~~Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third ~~party, which are not yet contracted.~~

~~(d)~~In March 2022, management announced its intention to accelerate the removal of the A320 and Q400 aircraft from the operating fleet. Management continues to refine anticipated removal dates for individual aircraft, and as such, timing of removals may shift between 2022 and 2023.party.

~~For~~We intend to finance future ~~firm orders~~aircraft deliveries and option exercises ~~we intend to finance the aircraft through~~using 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 % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel		Approximate % of Expected Fuel Requirements(a)		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel

Second Quarter 2022		50	%	$71	$3
Third Quarter 2022		50	%	$80	$3

Fourth Quarter 2022	Fourth Quarter 2022	40	%	$83	$5	Fourth Quarter 2022	60	%	$88	$5
Full Year 2022		47	%	$78	$4
Remainder of 2022						Remainder of 2022	60	%	$88	$5
First Quarter of 2023	First Quarter of 2023	30	%	$84	$6	First Quarter of 2023	50	%	$93	$6
Second Quarter of 2023	Second Quarter of 2023	20	%	$92	$7	Second Quarter of 2023	40	%	$98	$7
Third Quarter of 2023	Third Quarter of 2023	10	%	$100	$8	Third Quarter of 2023	30	%	$103	$8
Fourth Quarter of 2023						Fourth Quarter of 2023	20	%	$102	$8
Full Year 2023	Full Year 2023	15	%	$90	$7	Full Year 2023	35	%	$98	$7
First Quarter of 2024						First Quarter of 2024	10	%	$88	$8

Full Year 2024						Full Year 2024	2	%	$88	$8

(a)We are hedged at approximately 60% of expected fuel consumption for the remainder of 2022 due to schedule reductions that occurred subsequent to the Company entering these positions.

3440

Contractual Obligations

The following table ~~provides a summary of~~reflects our contractual obligations as of ~~March 31,~~September 30, 2022, and the agreement executed with Boeing in October 2022. For agreements with variable terms, amounts included reflect our minimum obligations.


(in millions)	(in millions)	Remainder of 2022		2023		2024		2025		2026		Beyond 2026		Total		(in millions)	Remainder of 2022		2023		2024		2025		2026		Beyond 2026		Total
Debt obligations	Debt obligations	$	201	$	334	$	240	$	261	$	176	$	1,176	$	2,388	Debt obligations	$	52	$	309	$	238	$	273	$	176	$	1,178	$	2,226
Aircraft lease commitments(a)	Aircraft lease commitments(a)	235		255		198		193		188		710		1,779		Aircraft lease commitments(a)	84		282		227		221		219		929		1,962
Facility lease commitments	Facility lease commitments	13		16		9		8		8		86		140		Facility lease commitments	5		17		9		8		8		86		133
Aircraft-related commitments(b)	Aircraft-related commitments(b)	1,159		1,781		414		111		47		275		3,787		Aircraft-related commitments(b)	629		2,024		1,394		1,262		689		941		6,939

Interest obligations (c)	Interest obligations (c)	50		95		71		53		53		132		454		Interest obligations(c)	9		102		70		55		60		164		460
Other obligations (d)	Other obligations (d)	144		193		199		203		199		757		1,695		Other obligations(d)	43		183		190		195		190		780		1,581
Total	Total	$	1,802	$	2,674	$	1,131	$	829	$	671	$	3,136	$	10,243	Total	$	822	$	2,917	$	2,128	$	2,014	$	1,342	$	4,078	$	13,301

(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, engines, and ~~engines, buyer furnished equipment, and contractual~~ aircraft ~~maintenance obligations. Contractual~~maintenance. Option deliveries are excluded from minimum commitments ~~do not reflect the impact of the impending fleet transition.~~until exercise.

(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of ~~March 31,~~September 30, 2022.

(d)Comprised of non-aircraft lease costs associated with capacity purchase agreements and other miscellaneous obligations.

Following the October 2022 agreement with Boeing, we now anticipate capital expenditures for 2022 to range between $1.5 billion and $1.6 billion, which we plan to fund with cash generated by operating activities and cash on hand.

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.

35In August 2022, the Inflation Reduction Act ("IRA") bill was signed into law, effective for tax years beginning after December 31, 2022. The IRA includes a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted income during the most recently-completed three-year period exceeds $1 billion. We will continue to evaluate the provisions within the IRA, but at this time we do not believe it will have a material impact on our financial statements.

CRITICAL ACCOUNTING ESTIMATES

Except as described below, for information regarding 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, 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,~~September 30, 2022, the deferred revenue balance associated with the Mileage Plan program was ~~$2.4~~$2.5 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~~revenue 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 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

3743


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, 2021.

3844


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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).

3945

PART II


ITEM 1. LEGAL PROCEEDINGS

~~In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as~~pursued numerous appeal paths following 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~~federal district court order against Virgin America and Alaska Airlines ~~in the amount of~~awarding plaintiffs approximately $78 ~~million. It did not award injunctive relief against Alaska Airlines. In February 2021, an~~million, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the ~~judgment.~~PAGA penalties and total judgment value. In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The ~~determination of~~decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines.


ITEM 1A. RISK FACTORS

See Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for a detailed discussion of risk factors affecting Alaska Air Group.


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~~indefinitely; these restrictions ~~are effective until~~ended on October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.

As of ~~March 31,~~September 30, 2022, a total of ~~1,455,438~~1,882,517 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $31.61 ~~(928,127~~(928,126 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~~stock. An additional 427,080 warrants were issued in conjunction with a draw on the ~~fifth anniversary~~CARES Act Loan in 2020 at a strike price of $31.61. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the ~~issue date of the warrant.~~Company's option, and have a five-year term. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS

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.


ALASKA AIR GROUP, INC.

/s/ EMILY HALVERSON
Emily Halverson
Vice President Finance and Controller

~~May 5,~~November 3, 2022

4147

EXHIBIT INDEX
Exhibit
Number Exhibit
Description Form Date of First Filing Exhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-Q August 3, 2017 3.1
10.1†*
Supplemental Agreement No. 19 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.
10-Q
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
101.INS† XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
101.SCH† XBRL Taxonomy Extension Schema Document
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document
101.LAB† XBRL Taxonomy Extension Label Linkbase Document
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document
† Filed herewith
* 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.

Exhibit
Number

Exhibit
Description

Form

Date of First Filing

Exhibit Number

3.1

Amended and Restated Certificate of Incorporation of Registrant

10-Q

August 3, 2017

3.1

10.1#

Purchase Agreement No. 3866 between T he Boeing Company and Alaska Airlines, Inc.

10-K

February 14, 2013

10.8

31.1†

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

31.2†

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

32.1†

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

32.2†

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

101.INS†

XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

Filed herewith

Indicates management contract or compensatory plan or arrangement.

Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10).

4248


PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2122
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	3844
ITEM 4.	CONTROLS AND PROCEDURES	3945
PART II.	OTHER INFORMATION	4046
ITEM 1.	LEGAL PROCEEDINGS	4046
ITEM 1A.	RISK FACTORS	4046
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4046
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4046
ITEM 4.	MINE SAFETY DISCLOSURES	4047
ITEM 5.	OTHER INFORMATION	4147
ITEM 6.	EXHIBITS	4147
	SIGNATURES	4147