The Alaska Air Group held their 2023 Second Quarter Earnings Call to discuss their GAAP net income of $240 million and adjusted net income of $387 million. The call was led by Vice President of Finance, Planning and Investor Relations, Ryan St. John, and included updates from Ben, Andrew and Shane. The results of the call reflected the strength of the leisure demand environment and the team's commitment to operational excellence and reliability.

Air Group had a successful travel season this year, with an 18.3% pre-tax margin and earnings per share of $3, beating the consensus by 11%. They had the most passengers in a single day in Air Group's history and a 99.5% completion rate. Over the 4th of July weekend, they had a 99.8% completion rate and an 85.1% on-time performance. Despite the current environment, Air Group remains confident in hitting their financial targets this year, including an adjusted pre-tax margin of 9-12% and earnings per share of $5.50 to $7.50.

Alaska Airlines has invested in training, aircraft, and staffing to enable them to meet a higher level of flying, with a higher completion rate performance than expected. This has allowed them to upgauge their fleet and increase capacity by 9.9% year-over-year. They have also partnered with Boeing to bring in their 53rd MAX aircraft, which has helped them de-risk their growth plan. Alaska has raised their full year capacity guide to 11% to 13% and are confident in their resources to meet this higher level of flying. They are working to restore all areas of their network to pre-pandemic levels and have doubled down on their core advantages to reinforce their foundation for profitable growth.

Air Group has returned to its historical strength as a single fleet operator, and has made progress on revenue initiatives. The balance sheet remains strong, and the company is expecting to have earnings per share on par with 2019. Despite higher labor and fuel costs, Air Group is focused on restoring and strengthening its competitive advantages and operational excellence. In the second quarter, revenue was up 6.8%, driven by strong leisure and close-in demand, and the company recorded its second highest revenue day in its history.

In the second quarter of 2023, Alaska Airlines saw a 9.9% increase in capacity and load factors increased from 85.5% in April to 89.1% in June, their second highest monthly load factor ever. Unit revenues were down 2.9% compared to 2022, but up 23% compared to 2019. Premium cabin revenues continued to be strong, increasing by 12%, and 31% of total revenues came from Premium Class products. Loyalty program performance was also strong, with bank cash remuneration up 15% year-over-year. Additionally, they are now selling 9 of their partners on alaskaair.com and will add a 10th partner in the fall.

This summer presents a unique situation with the unprecedented surge in international demand, which is likely to have an impact on the domestic leisure carrier. The company is expecting to add the ability to sell premium cabins on their website to provide a seamless ticketing capability. For the third quarter, the company expects revenues to be flat to up 3% on capacity that is up 10-13% versus 2022, resulting in a 6-point sequential deceleration in unit revenue performance. Of that 6 points, half is related to the pricing environment and the other half is a combination of domestic industry capacity growth, stage length growth, and holiday timing shifts.

In June, loyalty members were filling the equivalent of 18 787s on a daily basis, up 50% year-over-year from the same time in 2022. Close-in demand also surpassed 2022 and 2019 levels, with passengers booking further in advance and business volumes down 25%. Managed business travel remains at 75% recovered, with tech companies starting to return to office efforts. Revenue guidance for the year remains unchanged at up 8% to 10% with capacity growth at 11% to 13%.

Alaska Airlines is taking steps to increase its capacity in the third quarter and full year, primarily due to replacing its Airbus fleet with larger, more efficient MAX aircraft. June results show a 7% gauge growth year-over-year, but a 0.4 point drop in load factor. The West Coast is the least recovered geography across the industry, but Alaska is focused on restoring its pre-pandemic network. The company is also focused on pursuing and implementing its longer-term strategic drivers of profitable growth, such as its partnership in oneworld, premium products, and loyalty program.

Andrew and Ben shared that the company had a strong demand throughout the second quarter, carrying a record number of passengers. The teams have done a great job delivering a safe and reliable operation. The company has a strong balance sheet and liquidity position, with debt to cap at 48%, net debt-to-EBITDA below 1 turn, and total liquidity of $2.8 billion. The company also generated $600 million in cash flow from operations and have repurchased $60 million in shares. The operational excellence has allowed the company to deliver strong relative financial results.

In the second quarter, capacity was 9.9% higher than the previous year, resulting in higher capacity forecasts for the third quarter and full year. Costs were slightly higher than expected, mostly due to staffing levels and overtime, as well as training costs for transitioning from Airbus to Boeing. Unit cost guidance is also higher.

In the third quarter, CASMex is expected to be flat to down 2%, and unit costs are anticipated to be down 1% to 3% year-over-year. Fuel prices have improved, falling below the previously guided range and finishing at $2.76 for the second quarter, and they are expected to be $2.70 to $2.80 for the third quarter. Despite the challenges of the past three years, the company is tracking to deliver a 9% to 12% adjusted pretax margin this year, and they have the opportunity to further improve their margin performance in the years ahead.

Andrew Harrison and Shane Tackett answered a question from Jamie Baker from JPMorgan regarding the airline's RASM guide in the second half. They explained that California is the least recovered in terms of year-on-year RASM change, but is getting stronger. The Pacific Northwest is where most of the growth has gone and planes are still full. They also mentioned that the other big airlines had a deceleration from Q2 to Q3 of 4-5 points, whereas Alaska Airlines is only down 6 points. Lastly, they mentioned that in order to push down ex-fuel CASM measurably in 2024, a certain level of capacity growth is required.

In response to Andrew Didora's question about the strategy of exchanging trading yield for capacity, Andrew Harrison explained that the 3-point increase in guidance was already in the tapes, and the increase was due to a higher completion rate and the retirement of Airbus and Boeing deliveries. 80% of the capacity growth in the back half of the year is stage and gauge, and with high load factors and strong demand, they feel good about their position. Ben Minicucci added that they want to have line of sight to their long-term target range of 4-8%, and they intend to reduce capacity year-over-year in 2024.

Ben Minicucci and Andrew Harrison discuss the factors that impact capacity and revenue outlooks for the third and fourth quarters. They note that the deceleration of revenue is due to core pricing, increasing capacity, stage length, and a shift in holiday. Minicucci is optimistic about the outlook, but the stock is down 12%.

Ben Minicucci responds to Helane Becker's question about the disconnect between what the airline is seeing and saying and the stock price. He explains that the airline had a strong second quarter and is expecting a strong third quarter, with a pretax margin of 9-12%. He then explains that domestic demand is still strong, and international travel is surging similar to what happened domestically a year ago. He concludes by saying that the airline is executing well, and that he is optimistic about the business, and that the surge of international demand will normalize towards the end of the year.

Andrew Harrison explains that the airline is leaning into Latin American destinations, while also building out their California network, which is still 25% below 2019 levels. Shane Tackett adds that the airline is trying to get as close as possible to their 2019 productivity levels, but they are currently a bit short of the goal. He states that they are in control of these factors and will continue to work on them as the year comes to an end.

Shane Tackett discusses the success of the program to retain pilots on the Airbus and the need to execute aggressive cost targets going forward. He notes that the company will be better sequentially and year-over-year in the next few quarters and that they will lap their step-up in maintenance costs and transition costs in the coming year. In response to a follow-up question, Tackett confirms that the training costs will be a noticeable amount within the full year guide in 2023.

In Q2, Spirit Airlines had higher than anticipated revenue, leading to a high base to compare to in the future. They also had to train hundreds to thousands of pilots this year to accommodate the transition from Airbus to Boeing, resulting in costs and slower growth. Despite this, fares remain high relative to 2019 and planes are still being filled.

Shane Tackett and Andrew Harrison discussed the impacts of the sequential deterioration of RASM, with half of it attributed to pricing and the other third attributed to industry capacity, stage length growth, and the shift in the 4th of July. They also discussed Boeing's performance in delivering capacity this year and the headwinds and tailwinds they expect to face in terms of costs next year.

Boeing has done an excellent job this year in delivering planes on time and has recovered from quality and spirit issues. In December there may be one or two planes that come in January, but the company is not too concerned. In terms of tailwinds, there is a $100 million engine deal cost that will be fully lapped this year, contract costs are being lapped, and the Airbus transition costs will be fully behind them. The company is actively working on deals with flight attendants and mechanics and hopes to capture some of those costs this year.

Andrew Harrison and Ben Minicucci of Alaska Airlines discussed the company's focus on cost structure efficiency in order to maintain operational excellence. They also discussed the recent decline in fares, which they attribute to a balance between demand and supply. They believe that the decline in fares will stabilize as kids return to school and the market finds equilibrium.

Catherine O'Brien asked Shane Tackett and Andrew Harrison how Alaska Airlines would benefit from an international shift, to which Andrew Harrison responded that it was exciting to see that their global loyalty program was working and members were using the benefits. He also noted that as more partners were selling directly on alaskaair.com, it opened up the utility of their program, allowing members to fly globally with Alaska Airlines.

Shane Tackett explains that the company has not considered accruing for labor deals, as other airlines have done, as they prefer to keep the discussions between themselves and the union leaders at the property. Mike Linenberg then asks Andrew about route changes and running a more profitable airline during the winter season.

Andrew Harrison of Southwest Airlines discusses the changes in capacity for the first quarter, which includes 9 points of reallocation and the addition of new markets such as Mexico from Las Vegas and Nassau. He also mentions that the bigger impact on capacity is reallocating across the network, and getting more disciplined with the amount of flights to New York City during the winter. Duane Pfennigwerth from Evercore then asks if there is any travel credit breakage above trend that could be quantified for the third quarter.

Andrew Harrison and Duane Pfennigwerth are discussing the third quarter of the year and the shifts in bookings. The 4th of July falling on a Friday moved some of the bookings into June, which resulted in higher unit revenue for the month. The revenue management team has improved bookings for Hawaii, Mid-Con, and Transcon, resulting in higher load factors. Despite a decrease in business demand, there was more close-in booking within 2019.

Andrew Harrison and Nat Pieper of Southwest Airlines discussed their partnership with American Airlines, which was approved by the DOT in 2020. They noted that it is a traditional airline alliance, linking their complementary networks with codeshare and offering reciprocal loyalty benefits for customers. Harrison also mentioned that 10 of their top 20 corporate accounts have recovered revenues and are over 2019 levels. Lastly, he said that Southwest Airlines may break through the 75% ceiling as they move forward.

Andrew Harrison is discussing the variability of accounts in the high-tech sector, noting that some are recovering while others remain low. He believes this is a sign of hope for the rest of the year. Dan McKenzie then asked about the composition of revenue by advanced purchase bucket, to which Harrison replied that sale fares are lower than last year but close-in 0-13 day fares are up. He also stated that conversations with corporate travel managers lead him to believe that business travel could return later this year or next, though it is not baked into the forecast.

Executive Ben Minicucci explains that the West Coast is experiencing more difficulty due to the presence of large companies, but there is optimism that they will come out of it in the second half of the year. Shane Tackett adds that the company plans to grow 70% of its capacity through stage and gauge, with the remaining 30% prioritizing reliability.

In the second quarter, the company was able to outperform their assumptions on completion rate, leading to a good story. For 2024, they are expecting unit costs to go down in the mid-single-digit range, with the ability to grow RASM in excess of that. There is some concern that the domestic capacity will continue to grow, which could affect the duration of the international travelers being consumed by international.

Shane Tackett explains that it is too far in advance to predict what the economic environment will be like next year and what capacity will be. He points out that there are other factors besides pure growth that can drive the company's top line, such as reconcentrating the network and business travel recovering. He concludes that the company will talk more about these topics in the upcoming calls.

This summary was generated with AI and may contain some inaccuracies.