UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2023

☐ 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 ~~127,224,437~~128,053,077 common shares, par value $0.01, outstanding at ~~July~~October 31, 2023.

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

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~JUNE~~SEPTEMBER 30, 2023

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, 2022. Some of these risks include competition, labor costs, relations and availability, general economic conditions including those associated with pandemic recovery, increases in operating costs including fuel, inability to meet cost reduction, ESG and other strategic goals, seasonal fluctuations in demand and financial results, supply chain risks, events that negatively impact aviation safety and security, and changes in laws and regulations that impact our business. 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)	June 30, 2023		December 31, 2022		(in millions)	September 30, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	536	$	338	Cash and cash equivalents	$	647	$	338
Marketable securities	Marketable securities	1,906		2,079		Marketable securities	1,804		2,079
Total cash and marketable securities	Total cash and marketable securities	2,442		2,417		Total cash and marketable securities	2,451		2,417
Receivables - net	Receivables - net	351		296		Receivables - net	341		296
Inventories and supplies - net	Inventories and supplies - net	107		104		Inventories and supplies - net	122		104
Prepaid expenses	Prepaid expenses	187		163		Prepaid expenses	187		163
Assets held for sale						Assets held for sale	385		3
Other current assets	Other current assets	157		60		Other current assets	158		57
Total Current Assets	Total Current Assets	3,244		3,040		Total Current Assets	3,644		3,040

Property and Equipment	Property and Equipment					Property and Equipment
Aircraft and other flight equipment	Aircraft and other flight equipment	9,918		9,053		Aircraft and other flight equipment	10,015		9,053
Other property and equipment	Other property and equipment	1,714		1,661		Other property and equipment	1,756		1,661
Deposits for future flight equipment	Deposits for future flight equipment	550		670		Deposits for future flight equipment	538		670
		12,182		11,384			12,309		11,384
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	4,219		4,127		Less accumulated depreciation and amortization	4,283		4,127
Total Property and Equipment - Net	Total Property and Equipment - Net	7,963		7,257		Total Property and Equipment - Net	8,026		7,257

Other Assets	Other Assets					Other Assets
Operating lease assets	Operating lease assets	1,318		1,471		Operating lease assets	1,171		1,471
Goodwill and intangible assets	Goodwill and intangible assets	2,036		2,038		Goodwill and intangible assets	2,034		2,038
Other noncurrent assets	Other noncurrent assets	268		380		Other noncurrent assets	290		380
Total Other Assets	Total Other Assets	3,622		3,889		Total Other Assets	3,495		3,889

Total Assets	Total Assets	$	14,829	$	14,186	Total Assets	$	15,165	$	14,186

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	(in millions, except share amounts)	June 30, 2023		December 31, 2022		(in millions, except share amounts)	September 30, 2023		December 31, 2022
LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY					LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	212	$	221	Accounts payable	$	229	$	221
Accrued wages, vacation and payroll taxes	Accrued wages, vacation and payroll taxes	463		619		Accrued wages, vacation and payroll taxes	561		619
Air traffic liability	Air traffic liability	1,574		1,180		Air traffic liability	1,359		1,180
Other accrued liabilities	Other accrued liabilities	871		846		Other accrued liabilities	806		846
Deferred revenue	Deferred revenue	1,207		1,123		Deferred revenue	1,233		1,123
Current portion of operating lease liabilities	Current portion of operating lease liabilities	277		228		Current portion of operating lease liabilities	150		228
Current portion of long-term debt and finance leases	Current portion of long-term debt and finance leases	572		276		Current portion of long-term debt and finance leases	736		276
Total Current Liabilities	Total Current Liabilities	5,176		4,493		Total Current Liabilities	5,074		4,493

Long-Term Debt, Net of Current Portion	Long-Term Debt, Net of Current Portion	1,889		1,883		Long-Term Debt, Net of Current Portion	2,128		1,883

Noncurrent Liabilities	Noncurrent Liabilities					Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,148		1,393		Long-term operating lease liabilities, net of current portion	1,113		1,393
Deferred income taxes	Deferred income taxes	606		574		Deferred income taxes	662		574
Deferred revenue	Deferred revenue	1,370		1,374		Deferred revenue	1,366		1,374
Obligation for pension and post-retirement medical benefits	Obligation for pension and post-retirement medical benefits	362		348		Obligation for pension and post-retirement medical benefits	368		348
Other liabilities	Other liabilities	327		305		Other liabilities	361		305
Total Noncurrent Liabilities	Total Noncurrent Liabilities	3,813		3,994		Total Noncurrent Liabilities	3,870		3,994

Commitments and Contingencies (Note 7)	Commitments and Contingencies (Note 7)					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: 2023 - 137,983,828 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,348,343 shares; 2022 - 127,533,916 shares		1		1
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares						Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares	1		1
Capital in excess of par value	Capital in excess of par value	648		577		Capital in excess of par value	659		577
Treasury stock (common), at cost: 2023 - 10,635,485 shares; 2022 - 9,349,944 shares		(731)		(674)
Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares						Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares	(744)		(674)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(365)		(388)		Accumulated other comprehensive loss	(360)		(388)
Retained earnings	Retained earnings	4,398		4,300		Retained earnings	4,537		4,300
		3,951		3,816			4,093		3,816
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	14,829	$	14,186	Total Liabilities and Shareholders' Equity	$	15,165	$	14,186

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	(in millions, except per share amounts)	2023		2022		2023		2022		(in millions, except per share amounts)	2023		2022		2023		2022
Operating Revenue	Operating Revenue									Operating Revenue
Passenger revenue	Passenger revenue	$	2,598	$	2,418	$	4,582	$	3,929	Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544
Mileage Plan other revenue	Mileage Plan other revenue	170		175		324		287		Mileage Plan other revenue	159		146		483		433
Cargo and other revenue	Cargo and other revenue	70		65		128		123		Cargo and other revenue	62		67		190		190
Total Operating Revenue	Total Operating Revenue	2,838		2,658		5,034		4,339		Total Operating Revenue	2,839		2,828		7,873		7,167

Operating Expenses	Operating Expenses									Operating Expenses
Wages and benefits	Wages and benefits	754		639		1,477		1,245		Wages and benefits	782		686		2,259		1,931
Variable incentive pay	Variable incentive pay	57		56		104		92		Variable incentive pay	45		48		149		140
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	573		776		1,238		1,123		Aircraft fuel, including hedging gains and losses	694		877		1,932		2,000
Aircraft maintenance	Aircraft maintenance	125		104		249		239		Aircraft maintenance	118		92		367		331
Aircraft rent	Aircraft rent	54		73		113		146		Aircraft rent	48		76		161		222
Landing fees and other rentals	Landing fees and other rentals	167		136		319		274		Landing fees and other rentals	183		161		502		435
Contracted services	Contracted services	95		82		190		160		Contracted services	100		83		290		243
Selling expenses	Selling expenses	81		78		147		136		Selling expenses	84		82		231		218
Depreciation and amortization	Depreciation and amortization	113		104		217		206		Depreciation and amortization	113		104		330		310
Food and beverage service	Food and beverage service	60		50		114		91		Food and beverage service	62		52		176		143
Third-party regional carrier expense	Third-party regional carrier expense	54		50		106		92		Third-party regional carrier expense	58		53		164		145
Other	Other	182		177		359		329		Other	185		207		544		536
Special items - fleet transition and other	Special items - fleet transition and other	186		146		199		221		Special items - fleet transition and other	156		155		355		376
Special items - labor and related	Special items - labor and related	—		—		51		—		Special items - labor and related	—		90		51		90
Total Operating Expenses	Total Operating Expenses	2,501		2,471		4,883		4,354		Total Operating Expenses	2,628		2,766		7,511		7,120
Operating Income (Loss)		337		187		151		(15)
Operating Income										Operating Income	211		62		362		47

Non-operating Income (Expense)	Non-operating Income (Expense)									Non-operating Income (Expense)
Interest income	Interest income	22		11		39		18		Interest income	23		17		62		35
Interest expense	Interest expense	(28)		(26)		(56)		(53)		Interest expense	(34)		(31)		(90)		(84)
Interest capitalized	Interest capitalized	7		3		14		5		Interest capitalized	7		3		21		8
Special items - net non-operating	Special items - net non-operating	(6)		—		(6)		—		Special items - net non-operating	(8)		—		(14)		—
Other - net	Other - net	(7)		10		(16)		24		Other - net	(6)		14		(22)		38
Total Non-operating Expense		(12)		(2)		(25)		(6)
Income (Loss) Before Income Tax		325		185		126		(21)
Income tax expense (benefit)		85		46		28		(17)
Net Income (Loss)		$	240	$	139	$	98	$	(4)
Total Non-operating Income (Expense)										Total Non-operating Income (Expense)	(18)		3		(43)		(3)
Income Before Income Tax										Income Before Income Tax	193		65		319		44
Income tax expense										Income tax expense	54		25		82		8
Net Income										Net Income	$	139	$	40	$	237	$	36

Basic Earnings (Loss) Per Share:		$	1.88	$	1.10	$	0.77	$	(0.03)
Diluted Earnings (Loss) Per Share:		$	1.86	$	1.09	$	0.76	$	(0.03)
Basic Earnings Per Share:										Basic Earnings Per Share:	$	1.09	$	0.32	$	1.86	$	0.28
Diluted Earnings Per Share:										Diluted Earnings Per Share:	$	1.08	$	0.31	$	1.84	$	0.28
Shares used for computation:	Shares used for computation:									Shares used for computation:
Basic	Basic	127.440		126.543		127.470		126.265		Basic	127.187		126.783		127.375		126.440
Diluted	Diluted	128.919		127.795		128.860		126.265		Diluted	129.188		128.370		129.085		128.087

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		2023		2022		(in millions)	2023		2022		2023		2022
Net Income (Loss)		$	240	$	139	$	98	$	(4)
Net Income										Net Income	$	139	$	40	$	237	$	36
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	(5)		(20)		16		(60)		Marketable securities	2		(26)		18		(86)
Employee benefit plans	Employee benefit plans	4		—		8		1		Employee benefit plans	3		1		11		2
Interest rate derivative instruments	Interest rate derivative instruments	1		4		(1)		13		Interest rate derivative instruments	—		5		(1)		18
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	$	—	$	(16)	$	23	$	(46)	Total other comprehensive income (loss), net of tax	$	5	$	(20)	$	28	$	(66)

Total Comprehensive Income (Loss), Net of Tax	Total Comprehensive Income (Loss), Net of Tax	$	240	$	123	$	121	$	(50)	Total Comprehensive Income (Loss), Net of Tax	$	144	$	20	$	265	$	(30)

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 Loss		Retained Earnings		Total
Balance at December 31, 2022	Balance at December 31, 2022	127.534	$	1	$	577	$	(674)	$	(388)	$	4,300	$	3,816	Balance at December 31, 2022	127.534	$	1	$	577	$	(674)	$	(388)	$	4,300	$	3,816
Net loss	Net loss	—	—		—		—		—		(142)		(142)		Net loss	—	—		—		—		—		(142)		(142)
Other comprehensive income	Other comprehensive income	—	—		—		—		23		—		23		Other comprehensive income	—	—		—		—		23		—		23
Common stock repurchase	Common stock repurchase	(0.414)	—		—		(18)		—		—		(18)		Common stock repurchase	(0.414)	—		—		(18)		—		—		(18)
Stock-based compensation	Stock-based compensation	—	—		12		—		—		—		12		Stock-based compensation	—	—		12		—		—		—		12

Stock issued under stock plans	Stock issued under stock plans	0.123	—		(2)		—		—		—		(2)		Stock issued under stock plans	0.123	—		(2)		—		—		—		(2)
Balance at March 31, 2023	Balance at March 31, 2023	127.243	$	1	$	587	$	(692)	$	(365)	$	4,158	$	3,689	Balance at March 31, 2023	127.243	$	1	$	587	$	(692)	$	(365)	$	4,158	$	3,689
Net income	Net income	—	—		—		—		—		240		240		Net income	—	—		—		—		—		240		240
Other comprehensive income	Other comprehensive income	—	—		—		—		—		—		—		Other comprehensive income	—	—		—		—		—		—		—
Common stock repurchase	Common stock repurchase	(0.872)	—		—		(39)		—		—		(39)		Common stock repurchase	(0.872)	—		—		(39)		—		—		(39)
Stock-based compensation	Stock-based compensation	0.017	—		26		—		—		—		26		Stock-based compensation	0.017	—		26		—		—		—		26

Stock issued for employee stock purchase plan	Stock issued for employee stock purchase plan	0.924	—		34		—		—		—		34		Stock issued for employee stock purchase plan	0.924	—		34		—		—		—		34
Stock issued under stock plans	Stock issued under stock plans	0.036	—		1		—		—		—		1		Stock issued under stock plans	0.036	—		1		—		—		—		1
Balance at June 30, 2023	Balance at June 30, 2023	127.348	$	1	$	648	$	(731)	$	(365)	$	4,398	$	3,951	Balance at June 30, 2023	127.348	$	1	$	648	$	(731)	$	(365)	$	4,398	$	3,951
Net income															Net income	—	—		—		—		—		139		139
Other comprehensive income															Other comprehensive income	—	—		—		—		5		—		5
Common stock repurchase															Common stock repurchase	(0.249)	—		—		(13)		—		—		(13)
Stock-based compensation															Stock-based compensation	—	—		11		—		—		—		11

Stock issued under stock plans															Stock issued under stock plans	0.021	—		—		—		—		—		—
Balance at September 30, 2023															Balance at September 30, 2023	127.120	$	1	$	659	$	(744)	$	(360)	$	4,537	$	4,093

(in millions) Common Stock Outstanding Common Stock Capital in Excess of Par Value Treasury Stock Accumulated Other Comprehensive Loss Retained Earnings Total
Balance at December 31, 2021 125.906 $ 1 $ 494 $ (674) $ (262) $ 4,242 $ 3,801
Net loss — — — — — (143) (143)
Other comprehensive loss — — — — (30) — (30)
Stock-based compensation — — 13 — — — 13
Stock issued under stock plans 0.182 — (4) — — — (4)
Balance at March 31, 2022 126.088 $ 1 $ 503 $ (674) $ (292) $ 4,099 $ 3,637
Net income — — — — — 139 139
Other comprehensive loss — — — — (16) — (16)
Stock-based compensation 0.017 — 9 — — — 9
Stock issued for employee stock purchase plan 0.643 — 30 — — — 30
Stock issued under stock plans 0.012 — — — — — —
Balance at June 30, 2022 126.760 $ 1 $ 542 $ (674) $ (308) $ 4,238 $ 3,799


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801

Net loss	—	—		—		—		—		(143)		(143)
Other comprehensive loss	—	—		—		—		(30)		—		(30)

Stock-based compensation	—	—		13		—		—		—		13



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

Stock-based compensation	0.017	—		9		—		—		—		9


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

Stock-based compensation	—	—		8		—		—		—		8
Stock issued under stock plans	0.074	—		(1)		—		—		—		(1)
Balance at September 30, 2022	126.834	$	1	$	549	$	(674)	$	(328)	$	4,278	$	3,826

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


		Six Months Ended June 30,						Nine Months Ended September 30,
(in millions)	(in millions)		2023		2022		(in millions)		2023		2022
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:						Cash Flows from Operating Activities:
Net Income (Loss)			$	98	$	(4)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net Income							Net Income		$	237	$	36
Adjustments to reconcile net income to net cash provided by (used in) operating activities:							Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization		217		206		Depreciation and amortization		330		310
Stock-based compensation and other	Stock-based compensation and other		56		20		Stock-based compensation and other		73		33
Special items - fleet transition and other	Special items - fleet transition and other		187		221		Special items - fleet transition and other		344		376
Special items - labor and related	Special items - labor and related		51		—		Special items - labor and related		51		—

Changes in certain assets and liabilities:	Changes in certain assets and liabilities:						Changes in certain assets and liabilities:
Changes in deferred income taxes	Changes in deferred income taxes		27		(14)		Changes in deferred income taxes		90		—
Increase in accounts receivable	Increase in accounts receivable		(55)		(115)		Increase in accounts receivable		(45)		(59)
Increase in air traffic liability	Increase in air traffic liability		394		615		Increase in air traffic liability		179		304
Increase in deferred revenue	Increase in deferred revenue		80		83		Increase in deferred revenue		102		123

Federal income tax refund	Federal income tax refund		—		260		Federal income tax refund		—		260
Other - net	Other - net		(223)		(37)		Other - net		(258)		26
Net cash provided by operating activities	Net cash provided by operating activities		832		1,235		Net cash provided by operating activities		1,103		1,409
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		(414)		(509)		Aircraft and aircraft purchase deposits		(669)		(688)
Other flight equipment	Other flight equipment		(113)		(69)		Other flight equipment		(153)		(156)
Other property and equipment	Other property and equipment		(107)		(54)		Other property and equipment		(169)		(103)
Total property and equipment additions	Total property and equipment additions		(634)		(632)		Total property and equipment additions		(991)		(947)
Purchases of marketable securities	Purchases of marketable securities		(389)		(1,410)		Purchases of marketable securities		(519)		(1,670)
Sales and maturities of marketable securities	Sales and maturities of marketable securities		574		1,323		Sales and maturities of marketable securities		806		1,731

Other investing activities	Other investing activities		(30)		(2)		Other investing activities		(106)		(2)
Net cash used in investing activities	Net cash used in investing activities		(479)		(721)		Net cash used in investing activities		(810)		(888)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:						Cash Flows from Financing Activities:

Proceeds from issuance of long-term debt, net of issuance costs							Proceeds from issuance of long-term debt, net of issuance costs		313		—
Long-term debt payments	Long-term debt payments		(149)		(239)		Long-term debt payments		(242)		(333)
Common stock repurchases	Common stock repurchases		(57)		—		Common stock repurchases		(70)		—

Other financing activities	Other financing activities		41		33		Other financing activities		11		37
Net cash used in financing activities			(165)		(206)
Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities		12		(296)
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents		188		308		Net increase in cash and cash equivalents		305		225
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period		369		494		Cash, cash equivalents, and restricted cash at beginning of period		369		494
Cash, cash equivalents, and restricted cash at end of the period	Cash, cash equivalents, and restricted cash at end of the period		$	557	$	802	Cash, cash equivalents, and restricted cash at end of the period		$	674	$	719

910


		Six Months Ended June 30,						Nine Months Ended September 30,
(in millions)	(in millions)		2023		2022		(in millions)		2023		2022
Supplemental disclosure:	Supplemental disclosure:						Supplemental disclosure:
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		$	42	$	35	Interest, net of amount capitalized		$	85	$	72

Income taxes, net of refunds received	Income taxes, net of refunds received		14		—		Income taxes, net of refunds received		14		—

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		120		378		Right-of-use assets acquired through operating leases		120		419
Operating leases converted to finance leases	Operating leases converted to finance leases		310		—		Operating leases converted to finance leases		505		—
Property and equipment acquired through the issuance of debt	Property and equipment acquired through the issuance of debt		134		—		Property and equipment acquired through the issuance of debt		179		—

Reconciliation of cash, cash equivalents, and restricted cash:	Reconciliation of cash, cash equivalents, and restricted cash:						Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	Cash and cash equivalents		536		778		Cash and cash equivalents		647		688
Restricted cash included in Prepaid expenses and Other noncurrent assets			21		24
Restricted cash included in Other noncurrent assets							Restricted cash included in Other noncurrent assets		27		31
Total cash, cash equivalents, and restricted cash at end of the period	Total cash, cash equivalents, and restricted cash at end of the period		$	557	$	802	Total cash, cash equivalents, and restricted cash at end of the period		$	674	$	719

1011

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, and other immaterial business units. All 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, 2022. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of ~~June~~September 30, 2023 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. Such adjustments were of a normal recurring nature. Certain rows, columns, figures, or percentages may not recalculate due to rounding.

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 revenue and expenses, including impairment charges. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2023 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 plans to transition its regional operations to an all-Embraer ~~fleet, retiring the Q400~~ fleet. The removal of all A320 and Q400 aircraft from operating service was completed in January 2023. ~~Alaska continues to operate ten~~The removal of all A321neo aircraft ~~and plans to remove them~~ from ~~its~~ operating ~~fleet by the end of the third quarter of~~service was completed in September 2023. ~~Management plans to exit the leases by purchasing the aircraft, and subsequently sell them to a third-party. During the quarter,~~At September 30, 2023, Alaska had reached agreements with ~~two~~multiple lessors to exit ~~six of the~~its ten A321neo operating leases and purchase the aircraft. ~~One of the~~Three aircraft purchases closed by September 30, 2023. Subsequent to quarter end, Alaska finalized an agreement to sell the ten aircraft to American Airlines. The remaining seven purchases and all sales to American Airlines are expected to occur in the ~~second quarter; the other five transactions are expected in the third~~fourth quarter of 2023 and ~~fourth quarters~~first quarter of ~~2023.~~2024. As a result of the new agreements, the operating leases associated with the ~~five~~seven aircraft that ~~have~~were not ~~yet been~~ purchased by September 30, 2023 were considered modified, and upon evaluation were reclassified as finance leases.

Valuation of ~~long-lived assets~~Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the total carrying value of an asset or asset group may not be recoverable. ~~Management identified indicators of~~In the second quarter, the Company performed an impairment analysis for the A321neo fleet and ~~performed~~recorded an impairment ~~analysis in the second quarter.~~charge of $156 million.

~~For~~In the purposes of recoverability testing, three asset groups were identified: owned A321neo aircraft, A321neo aircraft operated under finance leases, and A321neo aircraft operated under operating leases. Thethird quarter, the Company ~~performed recoverability tests for the aircraft, comparing each asset group's carrying value~~determined there was additional impairment related to the ~~sum of its estimated undiscounted future cash flows. Future cash flows were estimated utilizing a combination of historical data, forecasted results, and anticipated use of~~A321neo fleet due to new purchase activity in the ~~aircraft as of June 30, 2023. The analysis indicated the carrying value for all three asset groups was not recoverable, and an impairment measurement was required.~~

period. The Company estimated the fair market value for the A321neo aircraft using available market price information with adjustments based on quantitative and qualitative considerations. Based on this fair market value, the Company recorded an impairment charge of ~~$156~~$123 million, reflecting the amount by which carrying value exceeded fair value of ~~these asset groups.~~the aircraft. This charge is included within ~~"Special~~Special items - fleet transition and ~~other"~~other in the condensed consolidated statements of operations.

Other Fleet Related Disclosure

The ~~five~~ten A321neo aircraft ~~operated under~~that have been removed from operating service are classified as Assets held for sale in the condensed consolidated balance sheets as of September 30, 2023. Seven of these aircraft are classified as finance leases, ~~are reflected within "Aircraft and other flight equipment." As of June 30, 2023, and subsequent to recognizing the related impairment charges, the assets total $175 million. The finance~~whose lease

liabilities are reflected within ~~"Current~~Current portion of long-term debt and finance ~~leases"~~leases and total ~~$316~~$452 million as of ~~June~~September 30, 2023. Interest expense ~~of $6 million~~ associated with the finance leases of $8 million for the third quarter of 2023 was recognized within ~~"Special~~Special items - net ~~non-operating"~~non-operating in the condensed consolidated statements of operations.

Special charges were also recognized during the ~~quarter reflecting~~three and nine months ended September 30, 2023 for other fleet transition costs, including accelerated aircraft ownership expenses, certain aircraft maintenance work performed as a result of the fleet retirements, adjustments to estimated costs to return the A320 fleet, ~~as well as~~and penalty rent for Airbus aircraft which have not yet been returned to the lessor as of the lease expiration date.

The following table summarizes our special charges for fleet transition costs for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		2023		2022		(in millions)	2023		2022		2023		2022
Impairment of long-lived assets(a)	Impairment of long-lived assets(a)	$	151	$	—	$	151	$	70	Impairment of long-lived assets(a)	$	120	$	—	$	271	$	70
Accelerated aircraft ownership expenses		19		43		25		43
Lease return costs and other expenses		16		103		23		108

Other fleet transition costs										Other fleet transition costs	36		155		84		306
Special items - fleet transition and other	Special items - fleet transition and other	$	186	$	146	$	199	$	221	Special items - fleet transition and other	$	156	$	155	$	355	$	376

(a) Net of other immaterial activity recognized in the three and nine months ended ~~June 30, 2023.~~

Subsequent to quarter end, Alaska executed an agreement with one lessor to exit two additional operating leases and purchase the A321neo aircraft. The transactions are expected to occur in the first quarter of 2024 and will result in cash outflows of approximately $130 million. The agreements were not contractually obligated as of June 30, 2023 and are not reflected within the consolidated financial statements or accompanying notes as of JuneSeptember 30, 2023.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue is passenger ancillary revenue such as bag fees, on-board food and beverage, 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.

The Company disaggregates revenue by segment in Note 10. The level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing, and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022			2023		2022		2023		2022
Passenger ticket revenue, net of taxes and fees	Passenger ticket revenue, net of taxes and fees	$	2,207	$	2,052	$	3,855	$	3,284	Passenger ticket revenue, net of taxes and fees	$	2,226	$	2,252	$	6,081	$	5,536
Passenger ancillary revenue	Passenger ancillary revenue	123		119		227		210		Passenger ancillary revenue	135		127		362		337
Mileage Plan passenger revenue	Mileage Plan passenger revenue	268		247		500		435		Mileage Plan passenger revenue	257		236		757		671
Total Passenger revenue	Total Passenger revenue	$	2,598	$	2,418	$	4,582	$	3,929	Total Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544

Mileage Plan Loyalty Program

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022			2023		2022		2023		2022
Passenger revenue	Passenger revenue	$	268	$	247	$	500	$	435	Passenger revenue	$	257	$	236	$	757	$	671
Mileage Plan other revenue	Mileage Plan other revenue	170		175		324		287		Mileage Plan other revenue	159		146		483		433
Total Mileage Plan revenue	Total Mileage Plan revenue	$	438	$	422	$	824	$	722	Total Mileage Plan revenue	$	416	$	382	$	1,240	$	1,104

1213

Cargo and Other Revenue

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022			2023		2022		2023		2022
Cargo revenue	Cargo revenue	$	39	$	36	$	68	$	65	Cargo revenue	$	29	$	37	$	97	$	102
Other revenue	Other revenue	31		29		60		58		Other revenue	33		30		93		88
Total Cargo and other revenue	Total Cargo and other revenue	$	70	$	65	$	128	$	123	Total Cargo and other revenue	$	62	$	67	$	190	$	190

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $~~103~~33 million and $~~132~~65 million from the prior year-end air traffic liability balance for the three months ended ~~June~~September 30, 2023 and 2022, and $~~588~~621 million and $~~522~~587 million from the prior year-end air traffic liability balance for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

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 ~~$96~~$91 million of such receivables as of ~~June~~September 30, 2023 and $83 million as of December 31, 2022.

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


		Six Months Ended June 30,					Nine Months Ended September 30,
		2023		2022			2023		2022
Total Deferred Revenue balance at January 1	Total Deferred Revenue balance at January 1	$	2,497	$	2,358	Total Deferred Revenue balance at January 1	$	2,497	$	2,358
Travel miles and companion certificate redemption - Passenger revenue	Travel miles and companion certificate redemption - Passenger revenue	(470)		(409)		Travel miles and companion certificate redemption - Passenger revenue	(712)		(632)
Miles redeemed on partner airlines - Other revenue	Miles redeemed on partner airlines - Other revenue	(52)		(26)		Miles redeemed on partner airlines - Other revenue	(86)		(45)
Increase in liability for mileage credits issued	Increase in liability for mileage credits issued	602		518		Increase in liability for mileage credits issued	900		800
Total Deferred Revenue balance at June 30		$	2,577	$	2,441
Total Deferred Revenue balance at September 30						Total Deferred Revenue balance at September 30	$	2,599	$	2,481

NOTE 4. FAIR VALUE MEASUREMENTS

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

Fair Value of Financial Instruments on a Recurring Basis

As of ~~June~~September 30, 2023, total cost basis for all marketable securities was ~~$2.0~~$1.9 billion, compared to a total fair value of ~~$1.9~~$1.8 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 industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of ~~June~~September 30, 2023.

1314

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


		June 30, 2023						December 31, 2022							September 30, 2023						December 31, 2022
		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	$	532	$	—	$	532	$	505	$	—	$	505	U.S. government and agency securities	$	508	$	—	$	508	$	505	$	—	$	505
Equity mutual funds	Equity mutual funds	5		—		5		5		—		5		Equity mutual funds	5		—		5		5		—		5
Foreign government bonds	Foreign government bonds	—		10		10		—		25		25		Foreign government bonds	—		10		10		—		25		25
Asset-backed securities	Asset-backed securities	—		217		217		—		261		261		Asset-backed securities	—		216		216		—		261		261
Mortgage-backed securities	Mortgage-backed securities	—		138		138		—		196		196		Mortgage-backed securities	—		123		123		—		196		196
Corporate notes and bonds	Corporate notes and bonds	—		945		945		—		1,025		1,025		Corporate notes and bonds	—		889		889		—		1,025		1,025
Municipal securities	Municipal securities	—		59		59		—		62		62		Municipal securities	—		53		53		—		62		62
Total Marketable securities	Total Marketable securities	537		1,369		1,906		510		1,569		2,079		Total Marketable securities	513		1,291		1,804		510		1,569		2,079
Derivative instruments	Derivative instruments													Derivative instruments
Fuel hedge contracts - call options	Fuel hedge contracts - call options	—		15		15		—		44		44		Fuel hedge contracts - call options	—		40		40		—		44		44
Interest rate swap agreements	Interest rate swap agreements	—		13		13		—		15		15		Interest rate swap agreements	—		13		13		—		15		15
Total Assets	Total Assets	$	537	$	1,397	$	1,934	$	510	$	1,628	$	2,138	Total Assets	$	513	$	1,344	$	1,857	$	510	$	1,628	$	2,138

The Company uses 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 interest ~~LIBOR-based and~~ SOFR-based forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Maturities for marketable securities (in millions):


June 30, 2023		Cost Basis		Fair Value
September 30, 2023						September 30, 2023	Cost Basis		Fair Value
Due in one year or less	Due in one year or less	$	386	$	379	Due in one year or less	$	403	$	395
Due after one year through five years	Due after one year through five years	1,512		1,442		Due after one year through five years	1,386		1,320
Due after five years	Due after five years	71		65		Due after five years	73		68
Due after 10 years	Due after 10 years	15		14		Due after 10 years	18		16
No maturity date	No maturity date	4		6		No maturity date	4		5
Total	Total	$	1,988	$	1,906	Total	$	1,884	$	1,804

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.

1415

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

Debt: To estimate the fair value of all fixed-rate debt as of ~~June~~September 30, 2023, 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 ~~$567~~$566 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 sheets and the estimated fair value of long-term fixed-rate debt (in millions):


		June 30, 2023		December 31, 2022			September 30, 2023		December 31, 2022

Fixed-rate debt	Fixed-rate debt	$	1,586	$	1,660	Fixed-rate debt	$	1,520	$	1,660

Estimated fair value	Estimated fair value	$	1,428	$	1,473	Estimated fair value	$	1,372	$	1,473

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 and finance lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for details regarding impairment charges recorded in the three and ~~six~~nine months ended ~~June~~September 30, 2023.

NOTE 5. LONG-TERM DEBT

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


		June 30, 2023			December 31, 2022				September 30, 2023			December 31, 2022
Fixed-rate notes payable due through 2029	Fixed-rate notes payable due through 2029	$	95		$	113		Fixed-rate notes payable due through 2029	$	85		$	113
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	891			947			Fixed-rate EETC payable due through 2025 & 2027	835			947
Variable-rate notes payable due through 2035	Variable-rate notes payable due through 2035	573			514			Variable-rate notes payable due through 2035	907			514
Less debt issuance costs	Less debt issuance costs	(13)			(15)			Less debt issuance costs	(15)			(15)
Total debt	Total debt	2,146			2,159			Total debt	2,412			2,159
Less current portion(a)	Less current portion(a)	257			276			Less current portion(a)	284			276
Long-term debt, less current portion	Long-term debt, less current portion	$	1,889		$	1,883		Long-term debt, less current portion	$	2,128		$	1,883

Weighted-average fixed-interest rate	Weighted-average fixed-interest rate	3.5		%	3.5		%	Weighted-average fixed-interest rate	3.4		%	3.5		%
Weighted-average variable-interest rate	Weighted-average variable-interest rate	6.5		%	5.8		%	Weighted-average variable-interest rate	6.8		%	5.8		%

(a) Excludes finance lease liabilities recognized within ~~"Current~~Current portion of long-term debt and finance ~~leases"~~leases in the condensed consolidated balance sheets as of ~~June~~September 30, 2023.

Approximately ~~$265~~$216 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at ~~June~~September 30, 2023, resulting in an effective weighted-average interest rate for the full debt portfolio of ~~3.8%~~4.3%.

In the second quarter, Horizon executed an agreement to finance E175 aircraft scheduled to be delivered in 2023 and 2024. The financing, which covers a portion of the total aircraft cost and is secured by the related aircraft, is funded upon each delivery and will total $247 million over the duration of the agreement. During the ~~six~~nine months ended ~~June~~September 30, 2023, the Company incurred ~~new~~ debt ~~associated with~~of $495 million from multiple lenders and sources. New debt includes proceeds of $316 million which is secured by aircraft. Additionally, $179 million was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement ~~of $134 million, covering six E175 aircraft. This financing activity~~ is reflected as a non-cash transaction within the supplemental disclosures in the condensed consolidated statements of cash flows.

Also during the ~~six~~nine months ended ~~June~~September 30, 2023, the Company made scheduled debt payments of ~~$147~~$240 million and prepayments of $2 million.

1516

~~Subsequent to quarter end, Alaska completed a refinancing of an existing 2018 variable-rate loan facility with a total commitment amount of $117 million. The facility is secured by B737 aircraft.~~

Debt Maturity

At ~~June~~September 30, 2023, long-term debt principal payments for the next five years and thereafter are as follows (in millions):


		Total			Total
Remainder of 2023	Remainder of 2023	$	135	Remainder of 2023	$	45
2024	2024	251		2024	286
2025	2025	304		2025	343
2026	2026	184		2026	292
2027	2027	544		2027	597
Thereafter	Thereafter	741		Thereafter	864
Total Principal Payments	Total Principal Payments	$	2,159	Total Principal Payments	$	2,427

Bank Lines of Credit

Alaska has three credit facilities totaling ~~$476~~$626 million as of ~~June~~September 30, 2023. 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~~which is secured by ~~aircraft.~~aircraft, was amended by the Company in the third quarter to increase its size to $400 million and extend its term to June 2026. Both facilities have variable interest rates based on SOFR plus a specified margin. A third credit facility for $76 million expires in June 2024 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 ~~June~~September 30, 2023.

Subsequent to quarter end, the Company executed an amendment to one of its aircraft-backed credit facilities, extending the term of the agreement from June 2024 to June 2026 and increasing the size of the facility from $250 million to $400 million. There were no changes to the minimum unrestricted cash and marketable securities requirement.

NOTE 6. EMPLOYEE BENEFIT PLANS

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022			2023		2022		2023		2022
Service cost	Service cost	$	7	$	11	$	14	$	22	Service cost	$	8	$	12	$	22	$	34
Pension expense included in Wages and benefits	Pension expense included in Wages and benefits	7		11		14		22		Pension expense included in Wages and benefits	8		12		22		34

Interest cost	Interest cost	27		16		54		32		Interest cost	27		17		81		49
Expected return on assets	Expected return on assets	(29)		(32)		(57)		(64)		Expected return on assets	(28)		(32)		(85)		(96)

Amortization of prior service cost (credit)										Amortization of prior service cost (credit)	—		(1)		—		(1)
Recognized actuarial loss	Recognized actuarial loss	6		2		12		4		Recognized actuarial loss	5		2		17		6
Pension expense included in Non-operating Income (Expense)	Pension expense included in Non-operating Income (Expense)	$	4	$	(14)	$	9	$	(28)	Pension expense included in Non-operating Income (Expense)	$	4	$	(14)	$	13	$	(42)

1617

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of ~~June~~September 30, 2023 (in millions):


		Aircraft-Related Commitments(a)		Capacity Purchase Agreements and Other Obligations (b)			Aircraft-Related Commitments(a)		Capacity Purchase Agreements and Other Obligations (b)
Remainder of 2023	Remainder of 2023	$	1,177	$	109	Remainder of 2023	$	460	$	56
2024	2024	1,390		224		2024	1,754		224
2025	2025	1,440		227		2025	1,438		227
2026	2026	689		218		2026	688		219
2027	2027	335		220		2027	334		220
Thereafter	Thereafter	598		739		Thereafter	591		739
Total	Total	$	5,629	$	1,737	Total	$	5,265	$	1,685

(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.

(b)Primarily comprised of non-lease costs associated with capacity purchase agreements, as well as other various sponsorship agreements and investment commitments.

Aircraft Commitments

Aircraft purchase commitments include contractual commitments for aircraft and engines. Details for contractual aircraft commitments as of ~~June~~September 30, 2023 are outlined ~~in the table~~ below.


		Firm Orders	Options and Other Rights	Total		Firm Orders	Options and Other Rights	Total
Aircraft Type	Aircraft Type	2023-2027	2025-2030	2023-2030	Aircraft Type	2023-2027	2025-2030	2023-2030
B737	B737	94	105	199	B737	89	105	194
E175	E175	11	13	24	E175	9	13	22
Total	Total	105	118	223	Total	98	118	216

The B737 fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of ~~June~~September 30, 2023. ~~Alaska~~Boeing has ~~received information from Boeing~~communicated to Alaska that certain B737 deliveries contracted in 2023 are expected to be delayed into 2024.

Alaska has contractual agreements as of ~~June~~September 30, 2023 to purchase ~~five~~seven of its leased A321neo aircraft. These transactions are expected to occur in the ~~third~~fourth quarter of 2023 and ~~fourth quarters~~first quarter of ~~2023.~~2024. The obligations for these aircraft, including both the remaining lease payments and subsequent purchase, are reflected within ~~"Current~~Current portion of long-term debt and finance ~~leases"~~leases in the condensed consolidated balance sheets as of ~~June~~September 30, 2023 and are not reflected in the tables above. ~~Subsequent to quarter end, Alaska signed agreements to purchase two additional leased A321neo aircraft, with transactions expected to occur in the first quarter of 2024.~~ Refer to Note 2 to the condensed consolidated financial statements for additional details.

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 contracts for maintenance on its B737-800 and B737-900ER aircraft engines through 2026 and 2032, respectively. Horizon has a contract for maintenance on certain E175 aircraft 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.

1718

~~The Company has paid the final total judgment amount of approximately $31 million in the~~ ~~Bernstein v. Virgin America, Inc.~~ ~~class action lawsuit, and expects to pay $6 million in additional settlement fees, disbursements, and costs to close the matter.~~

As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company has appealed the decision and believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence, and applied for permission to appeal the decision. On July 31, 2023, the UK appellate court granted the Company's application for appeal. A date for the appellate court proceedings has not been set.diligence. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. In March 2020, the Company suspended the share repurchase program as required by the CARES Act. These restrictions ended on October 1, 2022. The Company restarted the share repurchase program in February 2023 pursuant to the existing repurchase program. As of ~~June~~September 30, 2023, the Company has repurchased ~~8.9~~9.1 million shares for ~~$601~~$613 million under this program. No shares were repurchased in 2022.

Share purchase activity (in millions, except share amounts):
Three Months Ended
June 30, 2023 Six Months Ended
June 30, 2023
Shares Amount Shares Amount
2015 Repurchase Program—$1 billion 871,987 $ 39 1,285,541 $ 57


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	248,988	$	13	1,534,529	$	70

CARES Act Warrant Issuances

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

As of ~~June~~September 30, 2023, there are 1,882,517 total warrants outstanding, with a weighted average strike price of $39.06. 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.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, restricted stock units, and warrants, using the treasury-stock method. ~~For the three and six months ended June 30, 2023 and June 30, 2022, anti-dilutive shares~~Anti-dilutive common stock equivalents excluded from the calculation of ~~EPS~~diluted earnings per share were ~~not material.~~1.2 million and 1.9 million for the three and nine months ended September 30, 2023, and 1.4 million and 1.7 million for the three and nine months ended September 30, 2022.

1819

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), is shown below for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022:


		Marketable Securities		Employee Benefit Plan		Interest Rate Derivatives		Total			Marketable Securities		Employee Benefit Plan		Interest Rate Derivatives		Total

Balance at March 31, 2023, net of tax effect of $117		$	(59)	$	(315)	$	9	$	(365)
Reclassifications into earnings, net of tax effect of $(2)		2		4		—		6
Change in value, net of tax effect of $1		(7)		—		1		(6)
Balance at June 30, 2023, net of tax effect of $116		$	(64)	$	(311)	$	10	$	(365)

Balance at June 30, 2023, net of tax effect of $116										Balance at June 30, 2023, net of tax effect of $116	$	(64)	$	(311)	$	10	$	(365)
Reclassifications into earnings, net of tax impact of $(1)										Reclassifications into earnings, net of tax impact of $(1)	2		3		—		5
Change in value, net of tax impact of $0										Change in value, net of tax impact of $0	—		—		—		—
Balance at September 30, 2023, net of tax effect of $115										Balance at September 30, 2023, net of tax effect of $115	$	(62)	$	(308)	$	10	$	(360)

Balance at December 31, 2022, net of tax effect of $122	Balance at December 31, 2022, net of tax effect of $122	$	(80)	$	(319)	$	11	$	(388)	Balance at December 31, 2022, net of tax effect of $122	$	(80)	$	(319)	$	11	$	(388)
Reclassifications into earnings, net of tax effect of $~~(4)~~(5)	Reclassifications into earnings, net of tax effect of $~~(4)~~(5)	7		8		—		15		Reclassifications into earnings, net of tax effect of $~~(4)~~(5)	9		11		—		20
Change in value, net of tax effect of $(2)	Change in value, net of tax effect of $(2)	9		—		(1)		8		Change in value, net of tax effect of $(2)	9		—		(1)		8
Balance at June 30, 2023, net of tax effect of $116		$	(64)	$	(311)	$	10	$	(365)
Balance at September 30, 2023, net of tax effect of $115										Balance at September 30, 2023, net of tax effect of $115	$	(62)	$	(308)	$	10	$	(360)

Marketable Securities Employee Benefit Plan Interest Rate Derivatives Total
Balance at March 31, 2022, net of tax effect of $93 $ (44) $ (251) $ 3 $ (292)
Reclassifications into earnings, net of tax effect of $1 2 — — 2
Change in value, net of tax effect of $4 (22) — 4 (18)
Balance at June 30, 2022, net of tax effect of $98 $ (64) $ (251) $ 7 $ (308)
Balance at December 31, 2021, net of tax effect of $83 $ (4) $ (252) $ (6) $ (262)
Reclassifications into earnings, net of tax effect of $1 4 1 — 5
Change in value, net of tax effect of $14 (64) — 13 (51)
Balance at June 30, 2022, net of tax effect of $98 $ (64) $ (251) $ 7 $ (308)


	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 effect of $1	6		2		—		8
Change in value, net of tax effect of $20	(92)		—		18		(74)
Balance at September 30, 2022, net of tax effect of $104	$	(90)	$	(250)	$	12	$	(328)

NOTE 10. 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 revenue.

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 revenue and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.

•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

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

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is

used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

Operating segment information is as follows (in millions):


		Three Months Ended June 30, 2023																	Three Months Ended September 30, 2023
		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 Revenue	Operating Revenue																	Operating Revenue
Passenger revenue	Passenger revenue	$	2,228	$	370	$	—	$	—	$	2,598		$	—	$	2,598		Passenger revenue	$	2,225	$	393	$	—	$	—	$	2,618		$	—	$	2,618
CPA revenue	CPA revenue	—		—		92		(92)		—			—		—			CPA revenue	—		—		104		(104)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	158		12		—		—		170			—		170			Mileage Plan other revenue	146		13		—		—		159			—		159
Cargo and other revenue	Cargo and other revenue	67		—		—		3		70			—		70			Cargo and other revenue	60		—		—		2		62			—		62
Total Operating Revenue	Total Operating Revenue	2,453		382		92		(89)		2,838			—		2,838			Total Operating Revenue	2,431		406		104		(102)		2,839			—		2,839
Operating Expenses	Operating Expenses																	Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,468		279		87		(92)		1,742			186		1,928			Operating expenses, excluding fuel	1,484		297		89		(92)		1,778			156		1,934
Fuel expense	Fuel expense	490		81		—		1		572			1		573			Fuel expense	621		108		—		—		729			(35)		694
Total Operating Expenses	Total Operating Expenses	1,958		360		87		(91)		2,314			187		2,501			Total Operating Expenses	2,105		405		89		(92)		2,507			121		2,628

Non-operating Income (Expense)	Non-operating Income (Expense)	3		—		(10)		1		(6)			(6)		(12)			Non-operating Income (Expense)	—		—		(11)		1		(10)			(8)		(18)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	498	$	22	$	(5)	$	3	$	518		$	(193)	$	325		Income (Loss) Before Income Tax	$	326	$	1	$	4	$	(9)	$	322		$	(129)	$	193
Pretax Margin	Pretax Margin									18.3		%			11.5		%	Pretax Margin									11.4		%			6.8		%

		Three Months Ended June 30, 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 Revenue	Operating Revenue																	Operating Revenue
Passenger revenue	Passenger revenue	$	2,028	$	390	$	—	$	—	$	2,418		$	—	$	2,418		Passenger revenue	$	2,217	$	398	$	—	$	—	$	2,615		$	—	$	2,615
CPA revenue	CPA revenue	—		—		101		(101)		—			—		—			CPA revenue	—		—		93		(93)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	159		16		—		—		175			—		175			Mileage Plan other revenue	133		13		—		—		146			—		146
Cargo and other revenue	Cargo and other revenue	64		—		—		1		65			—		65			Cargo and other revenue	65		—		—		2		67			—		67
Total Operating Revenue	Total Operating Revenue	2,251		406		101		(100)		2,658			—		2,658			Total Operating Revenue	2,415		411		93		(91)		2,828			—		2,828
Operating Expenses	Operating Expenses																	Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	1,262		289		98		(100)		1,549			146		1,695			Operating expenses, excluding fuel	1,352		292		94		(94)		1,644			245		1,889
Fuel expense	Fuel expense	617		119		—		—		736			40		776			Fuel expense	625		121		—		—		746			131		877
Total Operating Expenses	Total Operating Expenses	1,879		408		98		(100)		2,285			186		2,471			Total Operating Expenses	1,977		413		94		(94)		2,390			376		2,766

Non-operating Income (Expense)	Non-operating Income (Expense)	3		—		(5)		—		(2)			—		(2)			Non-operating Income (Expense)	8		—		(5)		—		3			—		3
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	375	$	(2)	$	(2)	$	—	$	371		$	(186)	$	185		Income (Loss) Before Income Tax	$	446	$	(2)	$	(6)	$	3	$	441		$	(376)	$	65
Pretax Margin	Pretax Margin									14.0		%			7.0		%	Pretax Margin									15.6		%			2.3		%

2021


		Six Months Ended June 30, 2023																	Nine Months Ended September 30, 2023
		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 Revenue	Operating Revenue																	Operating Revenue
Passenger revenue	Passenger revenue	$	3,918	$	664	$	—	$	—	$	4,582		$	—	$	4,582		Passenger revenue	$	6,143	$	1,057	$	—	$	—	$	7,200		$	—	$	7,200
CPA revenue	CPA revenue	—		—		170		(170)		—			—		—			CPA revenue	—		—		274		(274)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	301		23		—		—		324			—		324			Mileage Plan other revenue	447		36		—		—		483			—		483
Cargo and other revenue	Cargo and other revenue	124		—		—		4		128			—		128			Cargo and other revenue	184		—		—		6		190			—		190
Total Operating Revenue	Total Operating Revenue	4,343		687		170		(166)		5,034			—		5,034			Total Operating Revenue	6,774		1,093		274		(268)		7,873			—		7,873
Operating Expenses	Operating Expenses																	Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	2,858		535		171		(169)		3,395			250		3,645			Operating expenses, excluding fuel	4,342		832		260		(261)		5,173			406		5,579
Fuel expense	Fuel expense	1,051		166		—		—		1,217			21		1,238			Fuel expense	1,672		274		—		—		1,946			(14)		1,932
Total Operating Expenses	Total Operating Expenses	3,909		701		171		(169)		4,612			271		4,883			Total Operating Expenses	6,014		1,106		260		(261)		7,119			392		7,511

Non-operating Income (Expense)	Non-operating Income (Expense)	(3)		—		(18)		2		(19)			(6)		(25)			Non-operating Income (Expense)	(3)		—		(29)		3		(29)			(14)		(43)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	431	$	(14)	$	(19)	$	5	$	403		$	(277)	$	126		Income (Loss) Before Income Tax	$	757	$	(13)	$	(15)	$	(4)	$	725		$	(406)	$	319
Pretax Margin	Pretax Margin									8.0		%			2.5		%	Pretax Margin									9.2		%			4.1		%

		Six Months Ended June 30, 2022																	Nine 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 Revenue	Operating Revenue																	Operating Revenue
Passenger revenue	Passenger revenue	$	3,271	$	658	$	—	$	—	$	3,929		$	—	$	3,929		Passenger revenue	$	5,488	$	1,056	$	—	$	—	$	6,544		$	—	$	6,544
CPA revenue	CPA revenue	—		—		195		(195)		—			—		—			CPA revenue	—		—		288		(288)		—			—		—
Mileage Plan other revenue	Mileage Plan other revenue	259		28		—		—		287			—		287			Mileage Plan other revenue	392		41		—		—		433			—		433
Cargo and other revenue	Cargo and other revenue	121		—		—		2		123			—		123			Cargo and other revenue	186		—		—		4		190			—		190
Total Operating Revenue	Total Operating Revenue	3,651		686		195		(193)		4,339			—		4,339			Total Operating Revenue	6,066		1,097		288		(284)		7,167			—		7,167
Operating Expenses	Operating Expenses																	Operating Expenses
Operating expenses, excluding fuel	Operating expenses, excluding fuel	2,456		551		197		(194)		3,010			221		3,231			Operating expenses, excluding fuel	3,808		843		291		(288)		4,654			466		5,120
Fuel expense	Fuel expense	998		192		—		—		1,190			(67)		1,123			Fuel expense	1,623		313		—		—		1,936			64		2,000
Total Operating Expenses	Total Operating Expenses	3,454		743		197		(194)		4,200			154		4,354			Total Operating Expenses	5,431		1,156		291		(288)		6,590			530		7,120

Non-operating Income (Expense)	Non-operating Income (Expense)	4		—		(10)		—		(6)			—		(6)			Non-operating Income (Expense)	12		—		(15)		—		(3)			—		(3)
Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	$	201	$	(57)	$	(12)	$	1	$	133		$	(154)	$	(21)		Income (Loss) Before Income Tax	$	647	$	(59)	$	(18)	$	4	$	574		$	(530)	$	44
Pretax Margin	Pretax Margin									3.1		%			(0.5)		%	Pretax Margin									8.0		%			0.6		%

(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges.

(c)Includes special items and mark-to-market fuel hedge accounting adjustments.

Total assets were as follows (in millions):


		June 30, 2023		December 31, 2022			September 30, 2023		December 31, 2022
Mainline	Mainline	$	20,311	$	19,733	Mainline	$	20,468	$	19,733
Horizon	Horizon	1,285		1,157		Horizon	1,320		1,157
Consolidating & Other	Consolidating & Other	(6,767)		(6,704)		Consolidating & Other	(6,623)		(6,704)
Consolidated	Consolidated	$	14,829	$	14,186	Consolidated	$	15,165	$	14,186

2122


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, 2022. This overview summarizes the MD&A, which includes the following sections:

•~~Second~~Third Quarter Review—highlights from the ~~second~~third quarter of 2023 outlining some of the major events that occurred during the ~~period and how they affected our financial performance.~~period.

•Results of Operations—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the three and ~~six~~nine months ended ~~June~~September 30, 2023. 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 2023.

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

~~SECOND~~THIRD QUARTER REVIEW

~~Second~~Third Quarter Results

We recorded consolidated pretax income for the ~~second~~third quarter of 2023 under GAAP of ~~$325~~$193 million, compared to consolidated pretax income of ~~$185~~$65 million in the ~~second~~third quarter of 2022. ~~On an adjusted basis, we reported consolidated~~Increased pretax income ~~for~~is primarily the ~~quarter~~result of ~~$518~~a $183 million ~~compared to consolidated pretax income of $371~~decrease in aircraft fuel costs, and an $81 million decrease in ~~2022. Strength in the demand environment on 10% incremental capacity over 2022 lifted second quarter revenue to the highest total in company history.~~

~~During the second quarter we continued to experience cost pressures, with the most acute impact stemming from~~special operating and non-operating charges. These decreases were partially offset by a ~~18% year-over-year~~$134 million increase in wages and benefits, driven by new labor contracts and elevated staffing levels to support operational integrity. Fuel costs moderated in the second quarter, with economic price per gallon decreasing 27% as compared to the prior year. As further progress was made in our transition towards an all-Boeing single fleet at Alaska, we also recorded $186 million inother operating ~~special charges representing impairment charges and other exit costs for the Airbus fleet.~~expense categories.

See “Results of Operations” below for further discussion of changes in revenue and operating expenses as compared to 2022, 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.

Operational Milestones

In the third quarter, our airlines leveraged our foundational strength of operational excellence, leading the industry in completion rate and finishing with an on-time performance higher than 80%. Additionally, Alaska completed its transition back to a single-fleet operator following the retirement of its A321neo aircraft in September. Subsequent to quarter end, Alaska reached an agreement with American Airlines to sell all ten A321neos, with sales expected to be completed by the first quarter of 2024.

Labor ~~Updates~~Update

Under the terms of the existing collective bargaining agreement with the Air Line Pilots Association (ALPA), Alaska's pilots' wages underwent a market review in the third quarter. Following this review, Alaska executed a Letter of Agreement with ALPA for a one-time market rate adjustment to increase pay rates effective September 1, 2023.

Alaska is actively negotiating for new contracts with its mainline flight attendants represented by the Association of Flight Attendants, whose contract became amendable in December 2022, and its mainline mechanics represented by the Aircraft Mechanics Fraternal Association, whose contract ~~becomes~~became amendable in October 2023. Horizon is actively negotiating for a new

contract with its pilots, represented by the International Brotherhood of Teamsters, whose contract becomes amendable in December 2024.

~~Environmental, Social and Governance Updates~~

In order to achieve our long-term target of net-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 Shell Aviation to advance SAF technology and

~~infrastructure throughout the West Coast. Shell Aviation will also supply Alaska with up to 10 million gallons of SAF in Los Angeles.~~

Additionally, we contributed a retired Q400 aircraft to ZeroAvia, a hydrogen-electric aircraft engine developer, to support its research and development of zero emissions technology for the aviation industry.

Outlook

~~Looking to~~For the ~~second half~~fourth quarter of 2023, we anticipate our cost discipline and operational excellence will continue to ~~prioritize running an excellent operation~~benefit unit costs, with an emphasis on improving productivity as we work through pilot transition training and adjust to post-pandemic employee behavior. Demand remains strong, even as we have come off the peak of historically high fares. As a primarily domestic leisure carrier, we expect the recent surge in international demand could impact our third quarter revenue performance, which we have reflected in our guidance. Yields remain well above 2019 levels. We expect third quarter revenueCASMex expected to be ~~flat~~down 3% to ~~up 3%~~5% on capacity up ~~10%~~11% to ~~13% versus~~14% as compared to the prior year. Although we have seen some slowing in the demand environment, we expect our diversified product offerings and Mileage Plan revenue streams will lift total revenue up 1% to 4% over 2022. ~~We anticipate third quarter CASMex will be flat~~For the full year, headwinds from fuel prices which were not previously contemplated, coupled with decreased revenue expectations, have led us to ~~down 2%, as both periods include the impacts of labor deals with various workgroups.~~reduce our expected full year adjusted pretax margin to 7% to 8%.

We ~~will~~ continue to ~~respond~~remain focused on setting intentional targets and taking the appropriate steps to ~~emerging information~~deliver on those targets. Changes to the operating environment and industry trends ~~which~~ could lead to ~~changes in~~adjustments to the guidance ~~we have~~ provided ~~above.~~as management aligns our business to be appropriately responsive. As we leverage our network ~~Mileage Plan program,~~ and ~~fleet~~diversified revenue offerings for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years that will continue to serve us in the remainder of 2023 and beyond.

RESULTS OF OPERATIONS

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

We believe disclosure of earnings excluding the impact of aircraft fuel and special items is useful information to investors because:

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

•Cost per ASM (CASM) excluding fuel expense and 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 expense and special items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

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

OPERATING STATISTICS SUMMARY (unaudited)

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


		Three Months Ended June 30,			Six Months Ended June 30,				Three Months Ended September 30,			Nine Months Ended September 30,
		2023	2022	Change	2023	2022	Change		2023	2022	Change	2023	2022	Change
Consolidated Operating Statistics:(a)	Consolidated Operating Statistics:(a)							Consolidated Operating Statistics:(a)
Revenue passengers (000)	Revenue passengers (000)	11,592	11,005	5%	21,444	19,700	9%	Revenue passengers (000)	12,210	11,437	7%	33,654	31,137	8%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	14,936	13,746	9%	27,491	24,332	13%	RPMs (000,000) "traffic"	15,718	14,143	11%	43,208	38,475	12%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	17,160	15,611	10%	32,865	29,394	12%	ASMs (000,000) "capacity"	18,582	16,349	14%	51,447	45,743	12%
Load factor	Load factor	87.0%	88.1%	(1.1) pts	83.6%	82.8%	0.8 pts	Load factor	84.6%	86.5%	(1.9) pts	84.0%	84.1%	(0.1) pts
Yield	Yield	17.40¢	17.59¢	(1)%	16.67¢	16.15¢	3%	Yield	16.66¢	18.48¢	(10)%	16.66¢	17.01¢	(2)%
RASM	RASM	16.54¢	17.03¢	(3)%	15.32¢	14.76¢	4%	RASM	15.28¢	17.30¢	(12)%	15.30¢	15.67¢	(2)%
CASMex(b)	CASMex(b)	10.15¢	9.92¢	2%	10.33¢	10.24¢	1%	CASMex(b)	9.57¢	10.05¢	(5)%	10.05¢	10.17¢	(1)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$2.76	$3.76	(27)%	$3.07	$3.23	(5)%	Economic fuel cost per gallon(b)	$3.26	$3.66	(11)%	$3.14	$3.38	(7)%
Fuel gallons (000,000)	Fuel gallons (000,000)	207	196	6%	396	368	8%	Fuel gallons (000,000)	224	204	10%	620	573	8%
ASMs per fuel gallon	ASMs per fuel gallon	82.9	79.6	4%	83.0	79.9	4%	ASMs per fuel gallon	83.0	80.1	4%	83.0	79.8	4%
Departures (000)	Departures (000)	104.4	105.7	(1)%	199.8	198.9	—%	Departures (000)	111.8	110.4	1%	311.6	309.3	1%
Average full-time equivalent employees (FTEs)	Average full-time equivalent employees (FTEs)	23,301	22,603	3%	23,140	22,092	5%	Average full-time equivalent employees (FTEs)	23,879	22,878	4%	23,386	22,354	5%
Mainline Operating Statistics:	Mainline Operating Statistics:							Mainline Operating Statistics:
Revenue passengers (000)	Revenue passengers (000)	9,221	8,321	11%	17,054	14,887	15%	Revenue passengers (000)	9,681	8,671	12%	26,735	23,557	13%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	13,827	12,460	11%	25,496	21,972	16%	RPMs (000,000) "traffic"	14,471	12,846	13%	39,967	34,818	15%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	15,851	14,052	13%	30,462	26,439	15%	ASMs (000,000) "capacity"	17,123	14,782	16%	47,584	41,221	15%
Load factor	Load factor	87.2%	88.7%	(1.5) pts	83.7%	83.1%	0.6 pts	Load factor	84.5%	86.9%	(2.4) pts	84.0%	84.5%	(0.5) pts
Yield	Yield	16.12¢	16.28¢	(1)%	15.37¢	14.89¢	3%	Yield	15.37¢	17.26¢	(11)%	15.37¢	15.76¢	(2)%
RASM	RASM	15.48¢	16.02¢	(3)%	14.26¢	13.81¢	3%	RASM	14.20¢	16.34¢	(13)%	14.24¢	14.72¢	(3)%
CASMex(b)	CASMex(b)	9.26¢	8.98¢	3%	9.38¢	9.29¢	1%	CASMex(b)	8.67¢	9.15¢	(5)%	9.12¢	9.24¢	(1)%
Economic fuel cost per gallon(b)	Economic fuel cost per gallon(b)	$2.74	$3.74	(27)%	$3.05	$3.21	(5)%	Economic fuel cost per gallon(b)	$3.22	$3.61	(11)%	$3.11	$3.35	(7)%
Fuel gallons (000,000)	Fuel gallons (000,000)	179	165	8%	345	311	11%	Fuel gallons (000,000)	193	173	12%	538	484	11%
ASMs per fuel gallon	ASMs per fuel gallon	88.6	85.2	4%	88.3	85.0	4%	ASMs per fuel gallon	88.7	85.4	4%	88.4	85.2	4%
Departures (000)	Departures (000)	67.2	61.6	9%	129.8	117.4	11%	Departures (000)	72.3	65.3	11%	202.1	182.7	11%
Average full-time equivalent employees (FTEs)	Average full-time equivalent employees (FTEs)	18,147	17,315	5%	17,966	16,825	7%	Average full-time equivalent employees (FTEs)	18,619	17,453	7%	18,184	17,035	7%
Aircraft utilization	Aircraft utilization	11.5	10.1	14%	11.3	9.8	15%	Aircraft utilization	11.9	10.5	13%	11.5	10.4	11%
Average aircraft stage length	Average aircraft stage length	1,384	1,363	2%	1,375	1,349	2%	Average aircraft stage length	1,386	1,347	3%	1,379	1,348	2%
Operating fleet(d)	Operating fleet(d)	226	233	(7) a/c	226	233	(7) a/c	Operating fleet(d)	220	232	(12) a/c	220	232	(12) a/c
Regional Operating Statistics:(c)	Regional Operating Statistics:(c)							Regional Operating Statistics:(c)
Revenue passengers (000)	Revenue passengers (000)	2,372	2,685	(12)%	4,390	4,813	(9)%	Revenue passengers (000)	2,529	2,767	(9)%	6,919	7,579	(9)%
RPMs (000,000) "traffic"	RPMs (000,000) "traffic"	1,109	1,285	(14)%	1,994	2,360	(16)%	RPMs (000,000) "traffic"	1,247	1,297	(4)%	3,241	3,657	(11)%
ASMs (000,000) "capacity"	ASMs (000,000) "capacity"	1,309	1,559	(16)%	2,403	2,955	(19)%	ASMs (000,000) "capacity"	1,459	1,567	(7)%	3,862	4,522	(15)%
Load factor	Load factor	84.7%	82.4%	2.3 pts	83.0%	79.9%	3.1 pts	Load factor	85.5%	82.8%	2.7 pts	83.9%	80.9%	3.0 pts
Yield	Yield	33.37¢	30.35¢	10%	33.30¢	27.88¢	19%	Yield	31.57¢	30.69¢	3%	32.61¢	28.88¢	13%
RASM	RASM	29.26¢	26.04¢	12%	28.59¢	23.21¢	23%	RASM	27.85¢	26.23¢	6%	28.30¢	24.26¢	17%
Departures (000)	Departures (000)	37.2	44.1	(16)%	70.0	81.5	(14)%	Departures (000)	39.5	45.2	(13)%	109.5	126.6	(14)%
Operating fleet(d)	Operating fleet(d)	81	104	(23) a/c	81	104	(23) a/c	Operating fleet(d)	83	94	(11) a/c	83	94	(11) a/c

(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

(c)Data presented includes information related to flights operated by Horizon and third-party carriers.

(d)Excludes all aircraft removed from operating service.

COMPARISON OF THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2023 TO THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2022

Our consolidated net income for the three months ended ~~June~~September 30, 2023 was ~~$240~~$139 million, or ~~$1.86~~$1.08 per share, compared to a consolidated net income of ~~$139~~$40 million, or ~~$1.09~~$0.31 per share, for the three months ended ~~June~~September 30, 2022.

Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net income for the ~~second~~third quarter of 2023 was ~~$387~~$237 million, or ~~$3.00~~$1.83 per share, compared to an adjusted net income of ~~$280~~$325 million, or ~~$2.19~~$2.53 per share, for the ~~second~~third quarter of 2022. The following table reconciles our adjusted net income per share (EPS) to amounts as reported in accordance with GAAP:


		Three Months Ended June 30,									Three Months Ended September 30,
		2023				2022					2023				2022
(in millions, except per share amounts)	(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS		(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income per share	GAAP net income per share	$	240	$	1.86	$	139	$	1.09	GAAP net income per share	$	139	$	1.08	$	40	$	0.31
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	1		0.01		40		0.31		Mark-to-market fuel hedge adjustments	(35)		(0.27)		131		1.02
Special items - fleet transition and other	Special items - fleet transition and other	186		1.44		146		1.14		Special items - fleet transition and other	156		1.20		155		1.21
Special items - labor and related										Special items - labor and related	—		—		90		0.70
Special items - net non-operating	Special items - net non-operating	6		0.05		—		—		Special items - net non-operating	8		0.06		—		—
Income tax effect of reconciling items above	Income tax effect of reconciling items above	(46)		(0.36)		(45)		(0.35)		Income tax effect of reconciling items above	(31)		(0.24)		(91)		(0.71)
Non-GAAP adjusted net income per share	Non-GAAP adjusted net income per share	$	387	$	3.00	$	280	$	2.19	Non-GAAP adjusted net income per share	$	237	$	1.83	$	325	$	2.53

CASM excluding fuel and special items reconciliation is summarized below:


		Three Months Ended June 30,							Three Months Ended September 30,
(in cents)	(in cents)	2023		2022		% Change		(in cents)	2023		2022		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	14.57	¢	15.84	¢	(8)	%	CASM	14.14	¢	16.91	¢	(16)	%
Less the following components:	Less the following components:							Less the following components:
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	3.34		4.98		(33)	%	Aircraft fuel, including hedging gains and losses	3.73		5.36		(30)	%
Special items - fleet transition and other	Special items - fleet transition and other	1.08		0.94		15	%	Special items - fleet transition and other	0.84		0.95		(12)	%

Special items - labor and related								Special items - labor and related	—		0.55		(100)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	10.15	¢	9.92	¢	2	%	CASM excluding fuel and special items	9.57	¢	10.05	¢	(5)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	13.56	¢	15.06	¢	(10)	%	CASM	13.01	¢	16.20	¢	(20)	%
Less the following components:	Less the following components:							Less the following components:
Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	3.10		5.06		(39)	%	Aircraft fuel, including hedging gains and losses	3.42		5.52		(38)	%

Special items - fleet transition and other	Special items - fleet transition and other	1.20		1.02		18	%	Special items - fleet transition and other	0.92		0.92		—	%

Special items - labor and related								Special items - labor and related	—		0.61		(100)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	9.26	¢	8.98	¢	3	%	CASM excluding fuel and special items	8.67	¢	9.15	¢	(5)	%

OPERATING REVENUE

Total operating revenue ~~increased $180 million, or 7%, during~~was approximately flat in the ~~second~~third quarter of 2023 compared to the same period in 2022. The changes are summarized in the following table:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Passenger revenue	Passenger revenue	$	2,598	$	2,418	7	%	Passenger revenue	$	2,618	$	2,615	—	%
Mileage Plan other revenue	Mileage Plan other revenue	170		175		(3)	%	Mileage Plan other revenue	159		146		9	%
Cargo and other revenue	Cargo and other revenue	70		65		8	%	Cargo and other revenue	62		67		(7)	%
Total Operating Revenue	Total Operating Revenue	$	2,838	$	2,658	7	%	Total Operating Revenue	$	2,839	$	2,828	—	%

Passenger revenue

On a consolidated basis, Passenger revenue for the ~~second~~third quarter of 2023 ~~increased by $180 million, or 7%, on a 9% increase~~was approximately flat compared to the same period in 2022. While passenger traffic ~~partially offset~~rose 11% due to increased departures flown by larger aircraft in our Mainline fleet, softening of the demand environment led to a ~~slight~~10% decrease in ~~yield. Passenger traffic growth as~~yield following record highs in the prior year. Additionally, cancellations for travel to Maui following wildfires in August resulted in approximately $20 million in decreased passenger revenue for the third quarter compared to the prior year was driven primarily on increased gauge and departures from our Mainline fleet. Although yields softened from prior year historic highs, improvements in premium class revenues and award redemption by Mileage Plan members lessened the negative impact.year.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue for the ~~second~~third quarter of 2023 ~~decreased~~increased by $5$13 million, or 3%9%. The ~~decrease~~increase was primarily due to a one-time $20 million favorable adjustment recorded in the second quarter of 2022 as a result of finalizing accounting conclusions for the contract with Bank of America. The decrease was partially offsetdriven by higher commissions from our bank card partners due to increased spend levels and annual membership ~~fees, and credit card acquisitions.~~

~~Cargo and other revenue~~

On a consolidated basis, Cargo and other revenue for the second quarter of 2023 increased by $5 million, or 8%. The increase was driven by a combination of factors, including higher lounge revenue and increased freight volumes during the quarter.fees.

OPERATING EXPENSES

Total operating expenses ~~increased $30~~decreased $138 million, or 1%5%, compared to the ~~second~~third quarter of 2022. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Fuel expense	Fuel expense	$	573	$	776	(26)	%	Fuel expense	$	694	$	877	(21)	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	1,742		1,549		12	%	Non-fuel operating expenses, excluding special items	1,778		1,644		8	%

Special items - fleet transition and other	Special items - fleet transition and other	186		146		27	%	Special items - fleet transition and other	156		155		1	%

Special items - labor and related								Special items - labor and related	—		90		(100)	%

Total Operating Expenses	Total Operating Expenses	$	2,501	$	2,471	1	%	Total Operating Expenses	$	2,628	$	2,766	(5)	%

Fuel expense

Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense decreased ~~$203~~$183 million, or ~~26%~~21%, compared to the ~~second~~third quarter of 2022. The elements of the change are illustrated in the following table:


		Three Months Ended June 30,									Three Months Ended September 30,
		2023				2022					2023				2022
(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	$	555	$	2.68	$	824	$	4.20	Raw or "into-plane" fuel cost	$	711	$	3.18	$	775	$	3.80
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	17		0.08		(88)		(0.44)		(Gain)/loss on settled hedges	18		0.08		(29)		(0.14)
Consolidated economic fuel expense	Consolidated economic fuel expense	$	572	$	2.76	$	736	$	3.76	Consolidated economic fuel expense	$	729	$	3.26	$	746	$	3.66
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	1		—		40		0.20		Mark-to-market fuel hedge adjustments	(35)		(0.16)		131		0.64
GAAP fuel expense	GAAP fuel expense	$	573	$	2.76	$	776	$	3.96	GAAP fuel expense	$	694	$	3.10	$	877	$	4.30
Fuel gallons	Fuel gallons			207				196		Fuel gallons			224				204

Raw fuel expense decreased ~~33%~~8% in the ~~second~~third quarter of 2023 compared to the ~~second~~third quarter of 2022, due to ~~significantly~~ lower per gallon costs, partially offset by increased fuel consumption. Raw fuel expense per gallon decreased by ~~36%~~16% due to

lower all-in jet fuel prices. Jet fuel prices are impacted by the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel, both of which have decreased in the ~~second~~third quarter of 2023 compared to the prior year. Fuel gallons consumed increased 6%10%, ~~consistent with rising~~driven by increased 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.

Losses recognized for hedges that settled during the ~~second~~third quarter were ~~$17~~$18 million in 2023, compared to gains of ~~$88~~$29 million in the same period in 2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Non-fuel expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel and other special items. Significant operating expense variances from 2022 are more fully described below.


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Wages and benefits	Wages and benefits	$	754	$	639	18	%	Wages and benefits	$	782	$	686	14	%
Variable incentive pay	Variable incentive pay	57		56		2	%	Variable incentive pay	45		48		(6)	%
Aircraft maintenance	Aircraft maintenance	125		104		20	%	Aircraft maintenance	118		92		28	%
Aircraft rent	Aircraft rent	54		73		(26)	%	Aircraft rent	48		76		(37)	%
Landing fees and other rentals	Landing fees and other rentals	167		136		23	%	Landing fees and other rentals	183		161		14	%
Contracted services	Contracted services	95		82		16	%	Contracted services	100		83		20	%
Selling expenses	Selling expenses	81		78		4	%	Selling expenses	84		82		2	%
Depreciation and amortization	Depreciation and amortization	113		104		9	%	Depreciation and amortization	113		104		9	%
Food and beverage service	Food and beverage service	60		50		20	%	Food and beverage service	62		52		19	%
Third-party regional carrier expense	Third-party regional carrier expense	54		50		8	%	Third-party regional carrier expense	58		53		9	%
Other	Other	182		177		3	%	Other	185		207		(11)	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	1,742	$	1,549	12	%	Total non-fuel operating expenses, excluding special items	$	1,778	$	1,644	8	%

Wages and benefits

Wages and benefits increased by ~~$115~~$96 million, or ~~18%~~14%, in the ~~second~~third quarter of 2023. The primary components of Wages and benefits are shown in the following table:


		Three Months Ended June 30,							Three Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Wages	Wages	$	576	$	486	19	%	Wages	$	602	$	514	17	%
Pension—Defined benefit plans		8		12		(33)	%
Pension - Defined benefit plans								Pension - Defined benefit plans	7		11		(36)	%
Defined contribution plans	Defined contribution plans	49		39		26	%	Defined contribution plans	51		39		31	%
Medical and other benefits	Medical and other benefits	77		66		17	%	Medical and other benefits	85		85		—	%
Payroll taxes	Payroll taxes	44		36		22	%	Payroll taxes	37		37		—	%
Total Wages and benefits	Total Wages and benefits	$	754	$	639	18	%	Total Wages and benefits	$	782	$	686	14	%

Wages increased ~~$90~~$88 million, or ~~19%~~17%, on 3%4% growth in FTEs. When combined with FTE increases, higher wage rates stemming from ~~labor agreements executed in 2022~~market adjustments and annual step increases were the primary driver for incremental year-over-year expense for ~~wages and related taxes. Higher stock-based compensation also contributed to the increase in wages, driven by additional stock award grants within the period.~~

wages.

Incremental expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for ~~many~~several labor groups. ~~Increased~~Decreased defined benefit expense ~~for medical and other benefits~~ was driven by ~~an increase~~changes in ~~claims compared to the prior year and the increase in FTEs, including high value claims which were not experienced in 2022.~~actuarial assumptions.

Aircraft maintenance

Aircraft maintenance expense increased by ~~$21~~$26 million, or ~~20%~~28%, in the ~~second~~third quarter of 2023. The increase was primarily driven by the new B737-900ER power-by-the-hour contract in 2023, as well as increased aircraft utilization.

Aircraft rent

Aircraft rent expense decreased by ~~$19~~$28 million, or ~~26%~~37%, in the ~~second~~third quarter of 2023. The decrease was primarily driven by the retirement of 2923 leased A320 ~~and~~aircraft. The A321neo fleet retirement also contributed to the ~~reclassification of five A321neo~~decrease, as seven aircraft were reclassified from operating leases to finance ~~leases.~~leases and three aircraft were purchased during 2023. These decreases were partially offset by delivery of ~~five~~four leased B737-9 aircraft since the ~~second~~third quarter of 2022.

Landing fees and other rentals

Landing fees and other rentals increased by ~~$31~~$22 million, or ~~23%~~14%, in the ~~second~~third quarter of 2023. The increase was driven primarily by higher terminal rent costs resulting from both rate and volume ~~increases.~~increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due to a shift in the mix of flying from Regional to ~~Mainline. Additionally, there was less favorability from settlements in 2023 as compared to 2022.~~Mainline and upgauging our fleet.

Contracted services

Contracted services increased by ~~$13~~$17 million, or ~~16%~~20%, in the ~~second~~third quarter of 2023. The increase was driven primarily by ~~incremental passengers throughout our network, coupled with~~ higher rates charged by ~~vendors.~~vendors for services as well as an increase in passengers.

Food and beverage service

Food and beverage service increased by $10 million, or ~~20%~~19%, in the ~~second~~third quarter of 2023. The increase was driven by a combination of 5%7% growth in revenue passengers ~~additional onboard offerings,~~ and higher costs for food, food service supplies, and transportation.

~~Third-party regional carrier~~Other expense

~~Third-party regional carrier~~Other expense ~~which represents expenses associated with SkyWest under the CPA with Alaska, increased~~decreased by $4$22 million, or 8%11%, in the ~~second~~third quarter of 2023. ~~Although total regional capacity and departures have decreased year-over-year, the increase in third-party regional carrier expense is~~The decrease was primarily driven by ~~incremental SkyWest-operated departures. SkyWest departures have risen due to the annualization~~one-time employee recognition costs of ~~six E175 aircraft operating under the CPA which were delivered~~$28 million recorded in the ~~second~~third quarter of ~~2022. Higher wage rates for flight crews have also contributed~~2022, partially offset by increases to ~~the increase.~~miscellaneous variable costs in 2023 consistent with increased capacity.

Special items - fleet transition and other

We recorded expenses associated with the Company's fleet transition ~~and related charges~~ of ~~$186~~$156 million in the ~~second~~third quarter of 2023. Refer to Note 2 to the consolidated financial statements for additional details.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 10 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's ~~profitability.~~results.

Mainline

Mainline operations reported an adjusted pretax profit of ~~$498~~$326 million in the ~~second~~third quarter of 2023, compared to ~~$375~~a profit of $446 million in the same period in 2022. The ~~$123~~$120 million ~~improvement~~decrease was driven primarily by a ~~$200 million increase in Passenger revenue and a $127 million decrease in economic fuel, partially offset by a $206~~$132 million increase in non-fuel operating expenses.

Compared to the prior year, higher Mainline revenue is primarily attributable to a 11% increase in traffic, driven by continued strength in the demand environment. Lower all-in fuel prices relative to 2022, partially offset by more gallons consumed, drove the decrease in Mainline fuel expense. Non-fuelnon-fuel operating expenses increased ~~driven by~~primarily due to higher wage rates ~~and higher~~across various labor groups. Higher variable costs, largely consistent with the overall growth in capacity and ~~departures.~~departures, also contributed to the increase.

Regional

Regional operations reported an adjusted pretax profit of ~~$22~~$1 million in the ~~second~~third quarter of 2023, compared to ~~an adjusted pretax~~a loss of $2 million in the same period in 2022. The ~~$24~~$3 million improvement was driven by ~~a $38 million decrease in~~decreased fuel ~~costs~~expense on less capacity and a ~~a $10 million decrease in non-fuel operating expenses,~~lower price per gallon, partially offset by ~~a $24 million decrease in Operating revenue. These decreases are primarily the result of reduced flying activity, with a 16% decrease in capacity. Lower price per gallon~~decreased revenue on ~~decreased consumption drove the decrease in Regional fuel expense.~~less capacity and higher wage rates.

Horizon

Horizon reported an adjusted pretax ~~loss~~profit of $5$4 million in the ~~second~~third quarter of 2023, compared to $2a loss of $6 million in the same period in 2022. The ~~loss is~~$10 million improvement was driven by ~~lower~~updates to internal rates under Horizon's CPA ~~revenue on decreased departures~~with Alaska and ~~block hours, as well as~~cost savings following Horizon’s transition to a single fleet. These improvements were partially offset by higher ~~wage and benefit costs due to increased wage rates.~~interest expense associated with debt financing of new E175 deliveries in 2023.

COMPARISON OF ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2023 TO ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2022

Our consolidated net income for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$98~~$237 million, or ~~$0.76~~$1.84 per share, compared to consolidated net ~~loss~~income of $4$36 million, or ~~$0.03~~$0.28 per share, for the ~~six~~nine months ended ~~June~~September 30, 2022.

Our adjusted net income for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$308~~$545 million, or ~~$2.39~~$4.22 per share, compared to an adjusted net income of ~~$113~~$438 million, or ~~$0.89~~$3.42 per share, for the ~~six~~nine months ended ~~June~~September 30, 2022. The following table reconciles our adjusted net income and adjusted EPS to amounts as reported in accordance with GAAP:


		Six Months Ended June 30,									Nine Months Ended September 30,
		2023				2022					2023				2022
(in millions, except per share amounts)	(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS		(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income (loss) per share		$	98	$	0.76	$	(4)	$	(0.03)
GAAP net income per share										GAAP net income per share	$	237	$	1.84	$	36	$	0.28
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	21		0.16		(67)		(0.53)		Mark-to-market fuel hedge adjustments	(14)		(0.11)		64		0.50
Special items - fleet transition and other	Special items - fleet transition and other	199		1.54		221		1.75		Special items - fleet transition and other	355		2.75		376		2.94
Special items - labor and related	Special items - labor and related	51		0.40		—		—		Special items - labor and related	51		0.39		90		0.70
Special items - net non-operating	Special items - net non-operating	6		0.05		—		—		Special items - net non-operating	14		0.11		—		—
Income tax effect of reconciling items above	Income tax effect of reconciling items above	(67)		(0.52)		(37)		(0.30)		Income tax effect of reconciling items above	(98)		(0.76)		(128)		(1.00)
Non-GAAP adjusted net income per share	Non-GAAP adjusted net income per share	$	308	$	2.39	$	113	$	0.89	Non-GAAP adjusted net income per share	$	545	$	4.22	$	438	$	3.42

CASM excluding fuel and special items reconciliation is summarized below:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in cents)	(in cents)	2023		2022		% Change		(in cents)	2023		2022		% Change
Consolidated:	Consolidated:							Consolidated:
CASM	CASM	14.86	¢	14.81	¢	—	%	CASM	14.60	¢	15.56	¢	(6)	%
Less the following components:	Less the following components:							Less the following components:

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	3.77		3.82		(1)	%	Aircraft fuel, including hedging gains and losses	3.76		4.37		(14)	%
Special items - fleet transition and other	Special items - fleet transition and other	0.61		0.75		(19)	%	Special items - fleet transition and other	0.69		0.82		(16)	%
Special items - labor and related	Special items - labor and related	0.15		—		NM		Special items - labor and related	0.10		0.20		(50)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	10.33	¢	10.24	¢	1	%	CASM excluding fuel and special items	10.05	¢	10.17	¢	(1)	%

Mainline:	Mainline:							Mainline:
CASM	CASM	13.73	¢	13.69	¢	—	%	CASM	13.47	¢	14.59	¢	(8)	%
Less the following components:	Less the following components:							Less the following components:

Aircraft fuel, including hedging gains and losses	Aircraft fuel, including hedging gains and losses	3.52		3.84		(8)	%	Aircraft fuel, including hedging gains and losses	3.49		4.44		(21)	%
Special items - fleet transition and other	Special items - fleet transition and other	0.67		0.56		20	%	Special items - fleet transition and other	0.75		0.69		9	%
Special items - labor and related	Special items - labor and related	0.16		—		NM		Special items - labor and related	0.11		0.22		(50)	%

CASM excluding fuel and special items	CASM excluding fuel and special items	9.38	¢	9.29	¢	1	%	CASM excluding fuel and special items	9.12	¢	9.24	¢	(1)	%

OPERATING REVENUE

Total operating revenue increased ~~$695~~$706 million, or ~~16%~~10%, during the first ~~six~~nine months of 2023 compared to the same period in 2022. The changes are summarized in the following table:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Passenger revenue	Passenger revenue	$	4,582	$	3,929	17	%	Passenger revenue	$	7,200	$	6,544	10	%
Mileage Plan other revenue	Mileage Plan other revenue	324		287		13	%	Mileage Plan other revenue	483		433		12	%
Cargo and other revenue	Cargo and other revenue	128		123		4	%	Cargo and other revenue	190		190		—	%
Total operating revenue		$	5,034	$	4,339	16	%
Total Operating Revenue								Total Operating Revenue	$	7,873	$	7,167	10	%

Passenger revenue

On a consolidated basis, Passenger revenue for the first ~~six~~nine months of 2023 increased by ~~$653~~$656 million, or ~~17%~~10%, on a ~~13%~~12% increase in passenger traffic, ~~and~~partially offset by a ~~3% improvement~~2% decrease in ~~ticket~~ yield. ~~Demand for air travel remained strong through the second quarter, which we were able to capture through~~The increase was primarily driven by increased departures flown by larger aircraft in our Mainline fleet. Redemptions by Mileage Plan members also provided a benefit over the prior year, with greater redemption on both Alaska and partner airlines.

We expect to see ~~growth to~~fourth quarter Passenger revenue ~~for~~consistent with the ~~remainder of the~~prior year ~~compared~~due to ~~2022 driven~~increases in passenger traffic being offset by ~~increased capacity and continued strength in flown redemptions by our Mileage Plan members.~~decreased yields.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased ~~$37~~$50 million, or ~~13%~~12%, in the first ~~six~~nine months of 2023. The increase was driven by higher commissions from our bank card partners due to increased spend levels, annual membership fees, and credit card acquisitions.

We expect to see continued strength in Mileage Plan other revenue for the remainder of 2023, enabled by higher commissions from increased card spend.

~~Cargo and other revenue~~

On a consolidated basis, Cargo and other revenue for the first six months of 2023 increased by $5 million, or 4%. The increase was driven by a combination of factors, including higher lounge revenue and increased freight volumes.

~~We expect Cargo and other revenue to continue to increase compared to 2022 due to the factors described above as well as the addition of one 737-800 freighter to our fleet in the fourth quarter.~~

OPERATING EXPENSES

Total operating expenses increased ~~$529~~$391 million, or ~~12%~~5%, compared to the first ~~six~~nine months of 2022. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Fuel expense	Fuel expense	$	1,238	$	1,123	10	%	Fuel expense	$	1,932	$	2,000	(3)	%
Non-fuel operating expenses, excluding special items	Non-fuel operating expenses, excluding special items	3,395		3,010		13	%	Non-fuel operating expenses, excluding special items	5,173		4,654		11	%

Special items - fleet transition and other	Special items - fleet transition and other	199		221		(10)	%	Special items - fleet transition and other	355		376		(6)	%
Special items - labor and related	Special items - labor and related	51		—		NM		Special items - labor and related	51		90		(43)	%

Total operating expenses		$	4,883	$	4,354	12	%
Total Operating Expenses								Total Operating Expenses	$	7,511	$	7,120	5	%

Fuel expense

Aircraft fuel expense ~~increased $115~~decreased $68 million, or ~~10%~~3%, compared to the ~~six~~nine months ended ~~June~~September 30, 2022. The elements of the change are illustrated in the table:


		Six Months Ended June 30,									Nine Months Ended September 30,
		2023				2022					2023				2022
(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	$	1,188	$	3.00	$	1,328	$	3.61	Raw or "into-plane" fuel cost	$	1,899	$	3.06	$	2,103	$	3.67
(Gain)/loss on settled hedges	(Gain)/loss on settled hedges	29		0.07		(138)		(0.38)		(Gain)/loss on settled hedges	47		0.08		(167)		(0.29)
Consolidated economic fuel expense	Consolidated economic fuel expense	$	1,217	$	3.07	$	1,190	$	3.23	Consolidated economic fuel expense	$	1,946	$	3.14	$	1,936	$	3.38
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	21		0.05		(67)		(0.18)		Mark-to-market fuel hedge adjustments	(14)		(0.02)		64		0.11
GAAP fuel expense	GAAP fuel expense	$	1,238	$	3.12	$	1,123	$	3.05	GAAP fuel expense	$	1,932	$	3.12	$	2,000	$	3.49
Fuel gallons	Fuel gallons			396				368		Fuel gallons			620				573

Raw fuel expense decreased ~~11%~~10% in the first ~~six~~nine months of 2023 compared to the first ~~six~~nine months of 2022, due to lower per gallon costs, partially offset by increased fuel consumption. Raw fuel expense per gallon decreased by approximately 17% due to lower all-in jet fuel prices. Jet fuel prices are impacted by the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel, both of which have decreased in the first ~~six~~nine months of 2023 compared to the prior year. Fuel gallons consumed increased 8%, ~~consistent with rising~~driven by increased 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.

~~Losses~~ recognized for hedges that settled in the first ~~six~~nine months of 2023 ~~were $29~~of $47 million, compared to gains of ~~$138~~$167 million in the same period in 2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

We expect our economic fuel cost per gallon in the ~~third~~fourth quarter to range between ~~$2.70~~$3.30 to ~~$2.80~~$3.40 per gallon.

Non-fuel expenses


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Wages and benefits	Wages and benefits	$	1,477	$	1,245	19	%	Wages and benefits	$	2,259	$	1,931	17	%
Variable incentive pay	Variable incentive pay	104		92		13	%	Variable incentive pay	149		140		6	%
Aircraft maintenance	Aircraft maintenance	249		239		4	%	Aircraft maintenance	367		331		11	%
Aircraft rent	Aircraft rent	113		146		(23)	%	Aircraft rent	161		222		(27)	%
Landing fees and other rentals	Landing fees and other rentals	319		274		16	%	Landing fees and other rentals	502		435		15	%
Contracted services	Contracted services	190		160		19	%	Contracted services	290		243		19	%
Selling expenses	Selling expenses	147		136		8	%	Selling expenses	231		218		6	%
Depreciation and amortization	Depreciation and amortization	217		206		5	%	Depreciation and amortization	330		310		6	%
Food and beverage service	Food and beverage service	114		91		25	%	Food and beverage service	176		143		23	%
Third-party regional carrier expense	Third-party regional carrier expense	106		92		15	%	Third-party regional carrier expense	164		145		13	%
Other	Other	359		329		9	%	Other	544		536		1	%
Total non-fuel operating expenses, excluding special items	Total non-fuel operating expenses, excluding special items	$	3,395	$	3,010	13	%	Total non-fuel operating expenses, excluding special items	$	5,173	$	4,654	11	%

Wages and benefits

Wages and benefits increased by ~~$232~~$328 million, or ~~19%~~17%, in the first ~~six~~nine months of 2023. The primary components of wages and benefits are shown in the following table:


		Six Months Ended June 30,							Nine Months Ended September 30,
(in millions)	(in millions)	2023		2022		% Change		(in millions)	2023		2022		% Change
Wages	Wages	$	1,134	$	953	19	%	Wages	$	1,736	$	1,467	18	%
Pension - Defined benefit plans service cost		15		23		(35)	%
Pension - Defined benefit plans								Pension - Defined benefit plans	22		34		(35)	%
Defined contribution plans	Defined contribution plans	100		77		30	%	Defined contribution plans	151		116		30	%
Medical and other benefits	Medical and other benefits	143		122		17	%	Medical and other benefits	228		207		10	%
Payroll taxes	Payroll taxes	85		70		21	%	Payroll taxes	122		107		14	%
Total wages and benefits		$	1,477	$	1,245	19	%
Total Wages and benefits								Total Wages and benefits	$	2,259	$	1,931	17	%

Wages increased ~~$181~~$269 million, or ~~19%~~18%, on 5% growth in FTEs. When combined with FTE increases, higher wage rates stemming from ~~labor agreements executed in 2022~~market adjustments and annual step increases were the primary driver for incremental year-over-year expense for wages and related taxes. Higher stock-based compensation also contributed to the increase in wages, driven by additional stock award grants within the period.

Incremental expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for ~~many~~several labor groups. Increased expense for medical and other benefits was primarily driven by an increase in claims compared to the prior year and incremental FTEs. Decreased defined benefit expense was driven by changes in actuarial assumptions.

We expect to see higher wages and benefits for the remainder of 2023 due to the increase in wage ~~rates and new labor agreements.~~rates. Wages and benefits could also increase further in 2023 due to agreements we may reach ~~during~~in the ~~year~~fourth quarter with represented labor groups.

~~Variable incentive pay~~

Variable incentive pay expense increased $12 million, or 13%, in the first six months of 2023. The increase was driven by growth in the variable incentive pay wage base due to incremental FTEs and increased wage rates compared to 2022.

Aircraft maintenance

Aircraft maintenance expense increased by ~~$10~~$36 million, or 4%11%, in the first ~~six~~nine months of 2023. The increase was primarily driven by the new B737-900ER power-by-the-hour contract and increased aircraft utilization, partially offset by $35 million of lease return costs in the first quarter of 2022 that did not recur in 2023 as all lease return costs associated with the Company's fleet transition have been recorded to Special items - fleet transition and other since the announcement of our fleet transition plan in the second quarter of 2022.

We expect aircraft maintenance to increase for the remainder of 2023 as compared to 2022 due primarily to the B737-900ER power-by-the-hour contract, which will total approximately $100 million for the ~~year, as well as increased~~year. Higher aircraft ~~utilization.~~utilization will also contribute to an increase in aircraft maintenance.

Aircraft rent

Aircraft rent expense decreased by ~~$33~~$61 million, or ~~23%~~27%, in the first ~~six~~nine months of 2023. The decrease was driven by the retirement of 2923 leased A320 ~~and~~aircraft. The A321neo fleet retirement also contributed to the ~~reclassification of five A321neo~~decrease, as seven aircraft were reclassified from operating leases to finance ~~leases.~~leases and three aircraft were purchased during 2023. These decreases were partially offset by delivery of ~~five~~four leased B737-9 aircraft since the ~~second~~third quarter of 2022.

We expect aircraft rent will remain below 2022 levels for the remainder of 2023, due to the net reduction in overall leased aircraft described ~~above as well as the purchase of currently leased A321neo aircraft.~~above.

Landing fees and other rentals

Landing fees and other rentals increased by ~~$45~~$67 million, or ~~16%~~15%, in the first ~~six~~nine months of 2023. The increase was driven primarily by higher terminal rent costs resulting from both rate and volume ~~increases.~~increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due a shift in the mix of flying from Regional to ~~Mainline.~~Mainline and upgauging our fleet.

We expect landing fees and other rentals to increase for the remainder of 2023 as compared to 2022 due to increased capacity and higher rates at airports.

Contracted services

Contracted services increased by ~~$30~~$47 million, or 19%, in the first ~~six~~nine months of 2023. The increase was primarily driven by ~~incremental passengers throughout our network, coupled with~~ higher rates charged by ~~vendors.~~vendors for services as well as an increase in passengers.

We expect contracted services to increase for the remainder of 2023 as compared to 2022 ~~as we continue to increase capacity and departures throughout our network.~~

~~Selling expenses~~

Selling expenses increased by $11 million, or 8%, in the first six months of 2023. The increase was driven by incremental credit card commissions and distribution costs incurred from increased bookings. Commissions and fees associated with alliances and business travel also contributeddue to the ~~increase.~~

~~We expect selling expenses to increase for the remainder of 2023 as compared to 2022 due primarily to higher sales.~~reasons described above.

Food and beverage service

Food and beverage service increased by ~~$23~~$33 million, or ~~25%~~23%, in the first ~~six~~nine months of 2023. The increase was driven by a combination of 9%8% growth in revenue passengers ~~additional onboard offerings,~~ and higher costs for food, food service supplies, and transportation.

We expect the factors described above will continue to have a similar impact on food and beverage service for the remainder of 2023 as compared to 2022.

Third-party regional carrier expense

Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased ~~$14~~$19 million, or ~~15%~~13%, in the first ~~six~~nine months of 2023. ~~Although total regional capacity and departures have decreased year-over-year, the~~The increase in third-party regional carrier expense is driven by incremental SkyWest-operated departures. SkyWest departures

have risen due to the annualization of ten E175 aircraft operating under the CPA which were delivered during the first ~~six months~~half of 2022. Higher wage rates for flight crews have also contributed to the increase.

We expect third-party regional carrier expense will continue to be higher for the remainder of 2023 as compared to 2022 due to incremental departures and block hours, as well as higher wage rates for flight crews.

Other expense

Other expense increased ~~$30~~$8 million, or 9%1%, in the first ~~six~~nine months of 2023. ~~The increase was driven by higher professional services and software costs,~~Costs increased as ~~well as increases for crew hotel stays and crew per diem. Increases in~~a result of crew-related ~~costs are~~expenses due to contract improvements for Alaska ~~pilots.~~pilots, coupled with additional professional services and software expenses. These increases were partially offset by one-time employee recognition costs of $28 million recorded in the third quarter of 2022.

We expect other expense will continue to be higher for the remainder of 2023 as compared to 2022 due to overall growth throughout our network.

Special items - fleet transition

We recorded expenses associated with the Company's fleet transition ~~and related charges~~ of ~~$199~~$355 million in the first ~~six~~nine months of 2023.

We expect to record additional special charges associated with the retirement of the A321neo aircraft. At this time, these costs are estimated to range between $100 million and $150 million for the remainder of 2023. We also anticipate recording gains upon the sale of certain Q400 aircraft. Refer to Note 2 to the consolidated financial statements for additional details.

Special items - labor and other

We recorded a nonrecurring expense of $51 million in the first quarter of 2023 due to a Letter of Agreement with Alaska pilots, represented by ALPA. The charge is a one-time adjustment of accrued benefits related to expected future cash payments of pilots' unused sick leave upon retirement.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 10 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's ~~profitability.~~results.

Mainline

Mainline operations reported an adjusted pretax profit of ~~$431~~$757 million in the first ~~six~~nine months of 2023, compared to ~~$201~~a profit of $647 million in the same period in 2022. The ~~$230~~$110 million improvement was driven by a ~~$692~~$708 million increase in ~~Mainline~~ operating revenue, partially offset by a ~~$402~~$534 million increase in ~~Mainline~~ non-fuel operating expense and a ~~$53~~$49 million increase in ~~Mainline~~ fuel expense.

As compared to the prior year, higher ~~Mainline~~ revenue is primarily attributable to a ~~16%~~15% increase in traffic ~~and a 3% increase in yield,~~ driven by the increase in ~~capacity and demand.~~capacity. Non-fuel operating expenses increased, driven by higher wage rates and higher variable costs, largely consistent with the overall growth in capacity and departures. Additional gallons consumed and prior year gains from settled hedges drove the increase in ~~Mainline~~ fuel expense.

Regional

Regional operations reported an adjusted pretax loss of ~~$14~~$13 million in the first ~~six~~nine months of 2023, compared to ~~$57~~a loss of $59 million in the same period in 2022. ~~Improved results were attributable~~The $46 million improvement was primarily driven by decreased fuel expense due to ~~higher yields~~a lower price per gallon and ~~decreased operating expenses on reduced traffic and departures.~~fewer gallons consumed.

Horizon

Horizon reported an adjusted pretax loss of ~~$19~~$15 million in the first ~~six~~nine months of 2023, compared to ~~$12~~a loss of $18 million in the same period in 2022. The ~~loss is~~$3 million improvement was driven by decreased operating expenses consistent with less flying and other cost savings following Horizon’s transition to a single fleet, as well as updates to internal rates under Horizon’s CPA with Alaska. These improvements were partially offset by lower overall CPA revenue ~~on decreased departures and block hours, combined~~consistent with less flying, as well as higher ~~wage and benefit costs due to increased wage rates resulting from the annualization~~interest expense associated with debt financing of new ~~collective bargaining agreements with Horizon employees.~~E175 deliveries in 2023.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

•Existing cash and marketable securities of ~~$2.4~~$2.5 billion;

•Cash flows from operations of ~~$832 million;~~$1.1 billion;

•8262 unencumbered aircraft that could be financed, if necessary;

•Combined bank line-of-credit facilities, with no outstanding borrowings, of ~~$400~~$550 million.

During the three months ended ~~June~~September 30, 2023, we took free and clear delivery of ~~eight~~five owned Boeing 737-9 aircraft. We incurred new of debt of ~~$134~~$361 million and made debt payments totaling ~~$53~~$93 million. We ended the quarter with a debt-to-capitalization ratio of 48%, within our target range of 40% to 50%. We continued share repurchases, spending ~~$39~~$13 million in the ~~second~~third quarter, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.

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)	June 30, 2023			December 31, 2022			Change	(in millions)	September 30, 2023			December 31, 2022			Change
Cash and marketable securities	Cash and marketable securities	$	2,442		$	2,417		1 %	Cash and marketable securities	$	2,451		$	2,417		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	27		%	29		%	(2) pts	Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	29		%	29		%	—
Long-term debt, net of current portion	Long-term debt, net of current portion	1,889			1,883			—%	Long-term debt, net of current portion	2,128			1,883			13%
Shareholders’ equity	Shareholders’ equity	$	3,951		$	3,816		4%	Shareholders’ equity	$	4,093		$	3,816		7%


Debt-to-capitalization, adjusted for operating and finance leases
Debt-to-capitalization, including operating and finance leases									Debt-to-capitalization, including operating and finance leases
(in millions)	(in millions)	June 30, 2023			December 31, 2022			Change	(in millions)	September 30, 2023			December 31, 2022			Change
Long-term debt, net of current portion	Long-term debt, net of current portion	$	1,889		$	1,883		—%	Long-term debt, net of current portion	$	2,128		$	1,883		13%
Capitalized operating leases	Capitalized operating leases	1,425			1,621			(12)%	Capitalized operating leases	1,263			1,621			(22)%
Capitalized finance leases(a)	Capitalized finance leases(a)	316			—			NM	Capitalized finance leases(a)	452			—			NM
Adjusted debt		$	3,630		$	3,504		4%
Adjusted debt, net of current portion of long-term debt									Adjusted debt, net of current portion of long-term debt	$	3,843		$	3,504		10%
Shareholders' equity	Shareholders' equity	3,951			3,816			4%	Shareholders' equity	4,093			3,816			7%
Total invested capital	Total invested capital	$	7,581		$	7,320		4%	Total invested capital	$	7,936		$	7,320		8%

Debt-to-capitalization, including operating and finance leases	Debt-to-capitalization, including operating and finance leases	48		%	48		%	—	Debt-to-capitalization, including operating and finance leases	48		%	48		%	—

(a)To best reflect our leverage at ~~June~~September 30, 2023, we included our capitalized finance lease balances, which are recognized within the ~~'Current~~Current portion of long-term debt and finance ~~leases'~~leases line in the condensed consolidated balance sheets.


Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items, and rent						Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items, and rent
(in millions)	(in millions)	June 30, 2023		December 31, 2022		(in millions)	September 30, 2023		December 31, 2022
Current portion of long-term debt and finance leases	Current portion of long-term debt and finance leases	$	572	$	276	Current portion of long-term debt and finance leases	$	736	$	276
Current portion of operating lease liabilities	Current portion of operating lease liabilities	277		228		Current portion of operating lease liabilities	150		228
Long-term debt	Long-term debt	1,889		1,883		Long-term debt	2,128		1,883
Long-term operating lease liabilities, net of current portion	Long-term operating lease liabilities, net of current portion	1,148		1,393		Long-term operating lease liabilities, net of current portion	1,113		1,393
Total adjusted debt	Total adjusted debt	3,886		3,780		Total adjusted debt	4,127		3,780
Less: Cash and marketable securities	Less: Cash and marketable securities	2,442		2,417		Less: Cash and marketable securities	2,451		2,417
Adjusted net debt	Adjusted net debt	$	1,444	$	1,363	Adjusted net debt	$	1,676	$	1,363

(in millions)	(in millions)	Twelve Months Ended June 30, 2023		Twelve Months Ended December 31, 2022		(in millions)	Twelve Months Ended September 30, 2023		Twelve Months Ended December 31, 2022
GAAP Operating Income(a)	GAAP Operating Income(a)	$	236	$	70	GAAP Operating Income(a)	$	385	$	70
Adjusted for:	Adjusted for:					Adjusted for:
Special items	Special items	609		580		Special items	520		580
Mark-to-market fuel hedge adjustments	Mark-to-market fuel hedge adjustments	164		76		Mark-to-market fuel hedge adjustments	(2)		76
Depreciation and amortization	Depreciation and amortization	426		415		Depreciation and amortization	435		415
Aircraft rent	Aircraft rent	258		291		Aircraft rent	230		291
EBITDAR	EBITDAR	$	1,693	$	1,432	EBITDAR	$	1,568	$	1,432
Adjusted net debt to EBITDAR	Adjusted net debt to EBITDAR	0.9x		1.0x		Adjusted net debt to EBITDAR	1.1x		1.0x

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

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

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first ~~six~~nine months of 2023, net cash provided by operating activities was ~~$832 million,~~$1.1 billion, compared to ~~$1.2~~$1.4 billion ~~during the same period~~ in 2022. Cash provided by ticket sales and from our co-branded credit card agreement are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.

The ~~$403~~$306 million net decrease in our operating cash flows iswas due to a combination of factors. ~~First, there were non-recurring~~2022 operating cash flows included federal income tax refunds of $260 million. Additionally, growth in our air traffic liability decreased $125 million ~~in 2022. Additionally,~~and payments made in 2023 for our 2022 performance-based pay program were approximately $110 million higher than payments in ~~the prior year~~2022 for our 2021 program. ~~Less significant growth in our air traffic liability and an increase in cash used for operating expenses was~~These amounts were partially offset by an improved net income compared to the prior year.

Cash Used in Investing Activities

Cash used in investing activities was ~~$479~~$810 million during the first ~~six~~nine months of 2023, compared to ~~$721~~$888 million in 2022. The change ~~in cash used in investing~~ was ~~largely driven by marketable~~due to a combination of factors. Marketable securities activity ~~which~~ was ~~$185~~$287 million of net sales during the first ~~six~~nine months of 2023, compared to ~~$87~~$61 million ~~of net purchases~~ in 2022. This amount was partially offset by an increase in capital expenditures, which were $44 million higher compared to 2022. Cash used ~~for capital expenditures~~in investing during the first nine months of 2023 was ~~flat as compared~~also impacted by the purchase of three previously leased A321neo aircraft, included in Other investing activities, which are expected to be sold to American Airlines in the ~~prior year period.~~fourth quarter of 2023 and first quarter of 2024.

Cash Provided by (Used in) Financing Activities

Cash ~~Used in Financing Activities~~

~~Cash used in~~provided by financing activities was ~~$165~~$12 million during the first ~~six~~nine months of 2023, compared to ~~$206~~cash used in financing activities of $296 million in 2022. ~~During the first six months of 2023, we utilized cash on hand to repay $149~~The change was largely driven by $313 million ofin new debt proceeds and $91 million less in payments for outstanding long-term debt compared to ~~payments of $239 million during the same period in~~ 2022. ~~We also repurchased $57 million of our~~These amounts were partially offset by common stock ~~during the first six months~~repurchases of ~~2023.~~$70 million in 2023 and a decrease of cash flows from other financing activities of $26 million.

MATERIAL CASH COMMITMENTS

Material cash requirements include the following contractual and other obligations:

Aircraft Commitments

As of ~~June~~September 30, 2023, Alaska has firm orders to purchase 9489 B737 aircraft with deliveries between 2023 and 2027 and a firm commitment to lease one B737-9 aircraft with delivery in 2023. Alaska has rights for 105 additional B737-10 aircraft ~~through~~between 2026 and 2030. Alaska also has commitments to lease two B737-800 freighters with deliveries in 2023 and 2024.

~~Alaska~~Boeing has ~~received information from Boeing~~communicated to Alaska that certain B737 deliveries contracted in 2023 are expected to be delayed into 2024. The anticipated fleet ~~count~~delivery schedule outlined below reflects the expected impact of these delays. Alaska ~~will continue~~continues to work with Boeing onto structure delivery timelines in a manner that ~~support~~supports Alaska's ~~plans for growth.~~capacity growth plans.

As of September 30, 2023, Horizon has commitments to purchase 11nine E175 aircraft with deliveries between ~~2023~~2024 and 2026. Horizon has options to acquire 13 E175 aircraft between 2025 and 2026. The E175 deliveries expected ~~for~~through the ~~remainder~~end of ~~2023 and~~ 2024 are covered under a financing agreement executed in the second ~~quarter.~~quarter of 2023. Capital expenditures for these deliveries, which are included within aircraft-related commitments in the contractual obligations table below, will be reflected as a non-cash transaction in the condensed consolidated statements of cash flows. Subsequent to quarter end, two of Horizon's 13 E175 options expired.

Options will be exercised only if we believe return on invested capital targets can be met over the long term. We intend to finance future aircraft deliveries and option exercises using cash flow from operations or long-term debt.

To best reflect our expectations of future fleet activity, we have incorporated anticipated delivery delays ~~related~~and other modifications of our order book as agreed to ~~2023 described above~~in principle with Boeing into the following table, which summarizes our expected fleet count by year, as of ~~August~~November 2, 2023:


		Actual Fleet	Anticipated Fleet Activity(a)								Actual Fleet	Anticipated Fleet Activity
Aircraft	Aircraft	June 30, 2023	2023 Additions	2023 Removals	Dec 31, 2023	2024 Changes	Dec 31, 2024	2025 Changes	Dec 31, 2025	Aircraft	September 30, 2023	2023 Changes	Dec 31, 2023	2024 Changes	Dec 31, 2024	2025 Changes	Dec 31, 2025
B737-700 Freighters	B737-700 Freighters	3	—	—	3	—	3	—	3	B737-700 Freighters	3	—	3	—	3	—	3
B737-800 Freighters	B737-800 Freighters	—	1	—	1	1	2	—	2	B737-800 Freighters	—	1	1	1	2	—	2
B737-700	B737-700	11	—	—	11	—	11	—	11	B737-700	11	—	11	—	11	—	11
B737-800	B737-800	60	—	(1)	59	—	59	—	59	B737-800	59	—	59	—	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	—	1	—	1	4	5	4	9	B737-8	—	1	1	7	8	12	20
B737-9	B737-9	51	17	—	68	16	84	5	89	B737-9	56	8	64	17	81	—	81
B737-10	B737-10	—	—	—	—	6	6	21	27	B737-10	—	—	—	—	—	11	11

A321neo		10	—	(10)	—	—	—	—	—

Total Mainline Fleet	Total Mainline Fleet	226	19	(11)	234	27	261	30	291	Total Mainline Fleet	220	10	230	25	255	23	278

E175 operated by Horizon	E175 operated by Horizon	39	2	—	41	3	44	3	47	E175 operated by Horizon	41	—	41	3	44	3	47
E175 operated by third party	E175 operated by third party	42	—	—	42	—	42	1	43	E175 operated by third party	42	—	42	—	42	1	43
Total Regional Fleet	Total Regional Fleet	81	2	—	83	3	86	4	90	Total Regional Fleet	83	—	83	3	86	4	90
Total	Total	307	21	(11)	317	30	347	34	381	Total	303	10	313	28	341	27	368

~~(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.~~

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 and, during a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. Our crude oil positions are as follows:


		Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel		Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel

Third Quarter of 2023		50	%	$100	$7

Fourth Quarter of 2023	Fourth Quarter of 2023	50	%	$96	$7	Fourth Quarter of 2023	50	%	$96	$7
Full Year 2023	Full Year 2023	50	%	$98	$7	Full Year 2023	50	%	$96	$7
First Quarter of 2024	First Quarter of 2024	40	%	$87	$6	First Quarter of 2024	50	%	$90	$5
Second Quarter of 2024	Second Quarter of 2024	30	%	$86	$6	Second Quarter of 2024	40	%	$90	$5
Third Quarter of 2024	Third Quarter of 2024	20	%	$82	$6	Third Quarter of 2024	30	%	$88	$5
Fourth Quarter of 2024	Fourth Quarter of 2024	10	%	$79	$6	Fourth Quarter of 2024	20	%	$87	$5
Full Year 2024	Full Year 2024	25	%	$85	$6	Full Year 2024	35	%	$89	$5
First Quarter of 2025						First Quarter of 2025	10	%	$92	$5
Full Year 2025						Full Year 2025	2	%	$92	$5

Contractual Obligations

The following table provides a summary of our obligations as of ~~August~~November 2, 2023 and reflects anticipated delivery delays ~~described above.~~and other modifications of our order book as agreed to in principle with Boeing. For agreements with variable terms, amounts included reflect our minimum obligations. ~~Discussion of these obligations follow the table below.~~


(in millions)	(in millions)	Remainder of 2023		2024		2025		2026		2027		Beyond 2027		Total		(in millions)	Remainder of 2023		2024		2025		2026		2027		Beyond 2027		Total
Debt obligations	Debt obligations	$	135	$	251	$	304	$	184	$	544	$	741	$	2,159	Debt obligations	$	45	$	286	$	343	$	292	$	597	$	864	$	2,427
Lease commitments(a)	Lease commitments(a)	518		268		196		194		188		840		2,204		Lease commitments(a)	454		265		195		194		188		841		2,137

Aircraft-related commitments(b)	Aircraft-related commitments(b)	948		1,619		1,440		689		335		598		5,629		Aircraft-related commitments(b)	460		1,211		1,337		1,093		587		591		5,279

Interest obligations(c)	Interest obligations(c)	65		95		89		74		69		114		506		Interest obligations(c)	23		120		104		102		92		150		591
CPA and other obligations~~(d)~~	CPA and other obligations~~(d)~~	109		224		227		218		220		739		1,737		CPA and other obligations~~(d)~~	56		224		227		219		220		739		1,685
Total	Total	$	1,775	$	2,457	$	2,256	$	1,359	$	1,356	$	3,032	$	12,235	Total	$	1,038	$	2,106	$	2,206	$	1,900	$	1,684	$	3,185	$	12,119

(a)Lease commitments include minimum payments for aircraft operated under operating leases and aircraft removed from operating service which remain under operating and finance leases, as ~~well as for aircraft which have been removed from operating service, as~~ we have remaining ~~obligation~~cash obligations under existing terms. It also includes minimum lease payments for facilities.

(b)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.

(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of ~~June~~September 30, 2023.

~~(d)Primarily comprised of non-lease costs associated with capacity purchase agreements.~~

Debt Obligations and Interest Obligations

The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. During the ~~six~~nine months ended ~~June~~September 30, 2023, the Company incurred new debt of ~~$134~~$495 million and repaid ~~$149~~$242 million in existing debt. At ~~June~~September 30, 2023, our debt portfolio carries a weighted average interest rate of ~~3.8%~~4.3%. Interest is paid with regular debt service. ~~Debt service obligations remaining in 2023 are expected to be approximately $200 million, inclusive of interest and principal.~~ Refer to Note 5 to the consolidated financial ~~statement~~statements for further discussion of our debt and interest balances.

CPA and Other Obligations

We have obligations primarily associated with the non-lease components of our capacity purchase agreement between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.

Leased Aircraft Return Costs

For many of our leased aircraft, ~~we are required under the~~ contractual terms require us 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~~to return 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~~to remove the leased asset ~~is removed~~ from operation. If the leased aircraft is removed from the operating fleet, the estimated cost ofto return is accrued at the time of removal. If a leased aircraft has a known early retirement date in the future, the estimated cost to return is accrued through the retirement date. 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. ~~Additional charges to be recorded in 2023 will reflect adjustments to estimated costs to return the A320 fleet.~~ A total of ~~$200~~$165 million is accrued for upcoming lease returns at ~~June~~September 30, 2023, including costs recorded in prior year ~~periods.We anticipate recording material cash outflows to return aircraft in 2023 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.~~periods.

Credit Card Agreements

Alaska has 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.

Sustainability Commitments

As part of our efforts to reach net-zero carbon emissions by 2040, we have outlined a five-part path that we expect to include operational efficiency, fleet renewal, ~~SAF,~~sustainable aviation fuel (SAF), enabling new technologies including zero emission aircraft in the future, and using credible offsetting and removal technologies to close the gaps to ~~the~~our emissions target in future years. We anticipate these efforts will require cash outlays, not all of which are reflected in our contractual commitments. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of neat SAF to be delivered ~~between 2025 and~~through 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within the CPA and other obligations row in the above ~~table, as appropriate.~~table.

Income Taxes

For federal income tax purposes, the majority of our property and equipment 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 property and equipment difference will reverse into taxable income, potentially resulting in an increase in income taxes payable.

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices, among other factors out of our control), whether ~~“bonus depreciation”~~bonus depreciation provisions are available, as well as other legislative changes beyond our control. We believe we have the liquidity to make our future tax payments.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three and ~~six~~nine months ended ~~June~~September 30, 2023. 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, 2022.

GLOSSARY OF AIRLINE TERMS

Adjusted net debt - long-term debt, including current portion, plus capitalized operating and finance 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";~~ASM; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ~~ASM;~~ASM, or "unit cost"; 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 and finance 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 A320, and Airbus A321neo jets and all associated 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


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, 2022.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of ~~June~~September 30, 2023, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of ~~June~~September 30, 2023.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended ~~June~~September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

PART II


ITEM 1. LEGAL PROCEEDINGS


ITEM 1A. RISK FACTORS

See Part I, Item 1A. "Risk Factors," in our 2022 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

This table provides certain information with respect to our purchases of shares of our common stock during the ~~second~~third quarter of 2023.
Total Number of
Shares Purchased Average Price
Paid per Share Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)
April 1, 2023 - April 30, 2023 259,224 42.71
May 1, 2023 - May 31, 2023 399,204 43.82
June 1, 2023 - June 30, 2023 213,559 48.71
Total 871,987 $ 44.69 $ 399


	Total Number of Shares Purchased	Average Price Paid per Share		Maximum remaining dollar value of shares that can be purchased under the plan (in millions)






July 1, 2023 - July 31, 2023	141,538	$	51.08
August 1, 2023 - August 31, 2023	107,450	$	46.99
September 1, 2023 - September 30, 2023	—	$	—
Total	248,988	$	49.32	$	387

The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.

As of ~~June~~September 30, 2023, a total of 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 (928,126 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. An additional 427,080 warrants were issued in conjunction with a draw on the 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 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

~~Securities Trading Plans~~During the three months ended September 30, 2023, no director or officer of ~~Directors and Executive Officers~~

~~On June 5, 2023,~~ Alaska Air Group ~~President and CEO Ben Minicucci entered into~~adopted, modified, or terminated a Rule 10b5-1 trading ~~plan (“Plan”) having conditions that, if satisfied, could lead to his sale~~arrangement or a non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of up to 20,000 shares of Alaska Air Group common stock through May 20, 2024. Mr. Minicucci’s Plan will commence on September 5, 2023 and will cease upon the earlier of May 20, 2024 or the date of sale of 20,000 shares of common stock included in the Plan. The Plan is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)(1)Regulation S-K promulgated under the Securities Exchange Act of ~~1934, as amended. Mr. Minicucci entered the Plan in accordance with the Alaska Air Group Insider Trading Policy.~~1934.


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

~~August~~November 2, 2023

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
3.2
Amended and Re st ated Bylaws of Registrant
8-K December 15, 2015 3.2
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q
101.INS† XBRL Instance Document - 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
104† Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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).

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

3.2

Amended and Restated Bylaws of Registrant

8-K

December 15, 2015

3.2

10.1#†

Amendment No. 22 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, Inc.

10-Q

10.2#†

Amendment No. 23 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, 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

104†

Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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).


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	2223
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	42
ITEM 4.	CONTROLS AND PROCEDURES	43
PART II.	OTHER INFORMATION	44
ITEM 1.	LEGAL PROCEEDINGS	44
ITEM 1A.	RISK FACTORS	44
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	4544
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45
	SIGNATURES	45


	Three Months Ended June 30, 2023			Six Months Ended June 30, 2023
	Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	871,987	$	39	1,285,541	$	57