ALASKA-AIR-GROUP Earningcall Transcript Of Q2 of 2024

Shane R. Tackett -- Executive Vice President, Finance and Chief Financial Officer

Thanks, Andrew, and good morning, everyone. We delivered a strong second quarter, which is
now by a large distance our strongest quarter of the year. June has become our strongest
margin month of the year and while margins were down slightly year over year, the gap to 2023
narrowed in each month of the quarter sequentially. Absent the impacts of the fleet grounding
during the first quarter, our results in the first half of this year would have improved nicely versus
2023, an indication of the strong underlying business model we have created.

And while we are seeing similar trends demand-wise as others and will experience a significant
step up in labor costs, should our tentative agreement with our flight attendants ratify, our
expectation is that our full-year pre-tax results, again, adjusted for the impact of the fleet
grounding, would be similar or better than 2023's full-year result of 7.5%. Turning to our second
quarter, our adjusted earnings per share was $2.55, with what we believe will be an
industry-leading adjusted pre-tax margin of 15.8%. Fuel price per gallon was $2.84, down from
$3.08 in the first quarter. In particular, we were encouraged to see West Coast refining margins
return to being on par with Gulf Coast during the quarter.

Our total liquidity, inclusive of on-hand cash and undrawn lines of credits, stood at $3.1 billion at
quarter end. Debt repayments for the quarter were approximately $50 million and are expected

to be approximately $110 million in the third quarter. We continue to have one of the healthiest
balance sheets in the industry, with debt-to-cap at 45% and net debt-to-EBITDAR at one turn.
Share repurchases totaled $28 million this quarter, for a year-to-date total of $49 million and we
are tracking to at least fully offset dilution for the year.

Second-quarter unit costs were down 1.9% year over year, coming in better than our original
expectation, as our teams continue to do a great job managing costs with incrementally better
results across the organization. Productivity improved again this quarter, with passengers per
FTE up 2.3%. This was the sixth consecutive quarter of productivity improvements adjusted for
the impact of the fleet grounding, a trend we expect to continue going forward. Turning to
third-quarter guidance, we expect more pressure on unit costs than we saw in the first and
second quarters, which we anticipate will be in the high single digits for the back half of the
year.

I will provide detail on what is driving this, but would note that we have the toughest comp in the
industry, given that we led in cost performance in the second half of last year, with unit costs
down 5% versus an industry average up 3% year over year in the third quarter, creating a natural
headwind as we lapped those results. For the third quarter this year, we are seeing a 5-point to
6-point drag on CASMex from the following areas. First, 2 points of headwind is from having
configured our business for a higher level of growth than we will realize this year, primarily
driven by fewer and later deliveries from Boeing. While we have done an excellent job managing
costs down in the face of lower growth, we are still not at an optimal level.

While this will be a future opportunity in tailwind, as we continue to right-size our cost structure
at these new growth levels, it's driving a headwind in Q3. Second, we are seeing 1 point of
pressure from the timing of costs shifting to later in the year. This includes modestly higher
maintenance spend in the second half and airport real estate costs that reset July 1st. Third,
labor costs continue to step up materially and we will see 2 points of pressure from our
agreement with our flight attendants, assuming it ratifies.

And also in the labor costs category, there is a little more than a 1-point headwind from the
annualization of our pilot wage snap up to industry from last September and the new agreement
with our technicians from late last year. We are excited about the investments we've been able
to make in our people and with line of sight to closing our last labor deal of this round of
bargaining, we now have more visibility into our future cost structure which we now need to fully
adapt our business model to. Importantly, our long-term strategy and commitment is to
maintain our unit cost advantage versus our competitors and we remain confident this
continues to be the case. On a stage length-adjusted CASMex basis, we still expect to finish the
year with one of the best results in the industry versus 2019.

While unit metrics may be pressured in the near term, as I noted on the last few calls, we will
continue to be responsible with capacity given the current demand context and we'll focus on
prioritizing margin and profitability over other metrics. Fuel remains somewhat unpredictable,
but trends in the last quarter have been a welcome change with crude around $80 a barrel and
West Coast refining margins averaging only a $0.03 premium over Gulf Coast for the quarter.
Although these spreads have recovered more in line with historical levels, we are still focused on
neutralizing the West Coast fuel disadvantage we've seen through other initiatives over time. For
the third quarter, we expect our economic fuel cost per gallon to be between $2.85 and $2.95.

Taken all together, we expect third-quarter EPS to be $1.40 to $1.60 and we've adjusted our
full-year EPS lower by $0.25 at the midpoint. These are both principally driven by an outlook that
now incorporates a historic new labor contract, more moderate growth in the second half of the
year, and the moderated domestic fare environment we've experienced recently compared to a
few months earlier in the year. That said, we still expect to be in the top group of margin
producers in the industry, both this year and in years to come. Absent the grounding, we're on
track to achieve at least flat margins versus last year, validating our differentiated business
model and the strong fundamentals that underpin it.

And in a more premium-leaning environment, we're excited to not only add premium seats, but
to do so without removing any total seats from our planes, a positive for revenue and our unit
cost. By any metric, Alaska has a long track record of success. As we continue to build on our
competitive advantages and apply learnings to adjust parts of our business within our control,
we are strengthening our already successful business model that's helping us win in today's
environment. And as the industry continues to evolve, we will adapt and position ourselves to
continue delivering margins among the best in the industry.

And with that, let's go to your questions.

Questions & Answers: