Alaska Air Group, Inc. (NYSE:ALK) Q4 2023 Earnings Call Transcript

Alaska Air Group, Inc. (NYSE:ALK) Q4 2023 Earnings Call Transcript January 25, 2024

Alaska Air Group, Inc. beats earnings expectations. Reported EPS is $0.3, expectations were $0.18. Alaska Air Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen and welcome to the Alaska Air Group 2023 Fourth Quarter Earnings Call. [Operator Instructions] Today’s call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers’ remarks, we will conduct a question-and-answer session for analysts. I would now like to turn the call over to Alaska Air Group’s Vice President of Finance, Planning and Investor Relations, Ryan St. John.

Ryan St. John: Thank you, operator and good morning. Thank you for joining us for our fourth quarter 2023 earnings call. This morning, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today’s call, you will hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported our fourth quarter GAAP net loss of $2 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $38 million. As a reminder, our comments today include forward-looking statements about future performance, which may differ materially from our actual results.

Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today’s earnings release. Over to you, Ben.

Ben Minicucci: Thanks, Ryan, and good morning, everyone. Alaska Airlines closed out another great year in 2023. Before we get to those results, I want to address the recent grounding of our 737 MAX 9 fleet. I am deeply sorry to everyone on board Flight 1282 for what they experienced on January 5 and to all of those who have seen their travel plans disrupted by cancellations. We are looking forward to returning to the reliable service you know and expect from us. Our number one value and our absolute priority is and will always be safety. As you may know, following the accident, we proactively grounded our 65 MAX 9 aircraft, which was followed by a directive by the FAA to do so for all US-based operators of the fleet. This had a material, operational and financial impact on our business, with approximately one-third of our January capacity impacted by the grounding.

Additionally, we believe it is likely that several aircraft deliveries could be delayed, which would further affect our full year capacity plans, which we initially anticipated would be between 3% and 5% over 2023 levels. Our primary focus right now is the safety of our guests, our people and our fleet. We remain committed to working diligently alongside the NTSB, FAA and Boeing to return our aircraft safely to service and ensure this never happens again. As a longtime valued partner, we remain fully committed to our relationship with Boeing, but we also intend to hold them accountable. There is work to be done but we have the utmost confidence with FAA oversight as well as our own that Boeing will emerge with improved quality processes as a better and safer manufacturer.

I also want to take a moment to thank our employees for the response to this event and its aftermath. Safety and care are at the heart of everything we do, and our people continue to demonstrate the highest standards of professionalism and caring for our guests and each other. It has been a long and difficult few years since 2020, and I continue to be amazed at this resilient team of employees rallying to meet any challenges put in front of us. They demonstrate the Alaska Spirit each and every day. Now let’s turn to our results. As I consider 2023 in its totality, I am proud of our company’s accomplishments over the year. We competed for the industry’s best margin, and we’re close to achieving this goal in 2023, had it not been for surging international demand and a 1.5 point margin impact from higher West Coast fuel refining costs, both of which I believe are transitory impacts to our business, we would have once again posted the highest margin in the industry.

Given our strong year of performance, I’m proud to announce that our people will receive another great bonus as we will pay out approximately $200 million or on average 6.4% of an employee salary. This is the 14th time in the past 15 years that we paid above target for our performance-based pay program. Our cost execution was unmatched as we delivered the best CASMex result in the industry, down 2.6% year-over-year. This result was at the better end of our originally guided range, first communicated in December of 2022. It’s worth noting that throughout the course of the year, the majority of the industry revised cost guides higher while we did not. It proves to me our cost discipline DNA remains well embedded in the company’s culture, and we will continue to, over the long-term, have a durable competitive advantage over peers in this critical area of the business.

We ran an excellent operation as we prioritize reliability in 2023, hitting record completion rates throughout the summer. We ended the year with a 99.3% completion rate even as we finally surpassed pre-pandemic levels of flying and manage the successful transition out of our Airbus fleet. Our process-driven operational playbook works. We delivered the premium experience our guests have come to expect, and we have every expectation to continue to be a best-in-class operator in 2024 once our nine MAX fleet returns to service. Our balance sheet remains one of the strongest in the industry with net leverage below our long-term target of 1.5 times for the second year in a row. We restarted share repurchases in 2023, reaching $145 million or 3.5 million shares, which is nearly two times annual dilution.

Our strong balance sheet has provided the foundation for our growth and expansion over the years, including pursuing our proposed acquisition of Hawaiian Airlines. And as a quick update, we initiated the process of obtaining anti-trust clearance by submitting our HSR filing this month. We’ve held initial conversations with the DOJ and the process will continue. We believe we have a stronger and differentiated case from JetBlue and Spirit and look forward to providing updates as they become available. Lastly, we generated a record $10.4 billion in revenue, 46% of which comes from our premium, loyalty and ancillary revenues. We brought in $1.7 billion in cash from our loyalty program and added five new global partners bringing our total partner portfolio to 30%.

Much of the hard work we put into 2023 will carry into 2024. Our priorities remain focused on one, on yielding safety and investing in our people and culture; two, elevating our commercial initiatives to deliver a premium brand experience as the only domestic-oriented carrier with a comprehensive offering and hence maintaining a competitive cost structure. The combination of which we know provides the foundation to drive durable, financial performance. 2024 has begun under very difficult circumstances, but we are optimistic about what we can accomplish this year. Absent the grounding event, we were heading for a significantly improved first quarter result versus 2023. As I stated in April of last year, we are committed to returning to breakeven or better results in the first quarter, and I believe we’ve made tangible progress toward that goal.

Last year, we lost $115 million in this period, and we were on track to drive a 30% improvement this year as the network changes we made began taking effect. As it has been for years, our goal is to concentrate our efforts on building preference for our airline through a premium experience and a fundamentally sound business model that endures over the long run, one that is resilient through cycles and creates durable financial returns for all our stakeholders. We made great progress in 2023, and we are well positioned to do much more in 2024. And with that, I’ll turn it over to Andrew.

Andrew Harrison: Thanks, Ben, and good morning, everyone. Today, my comments will focus on fourth quarter and full year results, along with Q1 revenue trends. Fourth quarter revenues reached $2.6 billion, up nearly 3% year-over-year, coming in slightly ahead of the midpoint of the revised guidance we put out in early December. Capacity finished the quarter up 13.6%. We saw a strong finish to the year in December with limited weather events and excellent operational performance to support holiday travel. This resulted in record traffic and coupon revenue up 7%. For the full year, we generated a record $10.4 billion in revenue this was up 8.1% versus 2022 on capacity of 12.8%, resulting in full year unit revenue, down approximately 4%.

The improvement we saw in unit revenue through year-end showed a marked strengthening in our core revenue. Unit revenues improved from down 13% in August to down 9% in December. Notwithstanding, we grew December capacity two points more than August year-over-year. This is a four-point improvement, underscoring a strengthening pricing environment from continued normalization of international demand and industry adaptation to post-COVID demand realities. On managed business travel, consistent with what we’ve shared before, our belief is that we’re seeing a slow and steady recovery. For example, in the fourth quarter, our portfolio saw a strong 15% year-over-year revenue growth on higher volumes and yields. Overall, business revenues are within 5% of 2019 levels with most industries now fully recovered.

The notable exceptions are tech and professional services, which still lag other industries but did see 26% and 14% year-over-year revenue growth, respectively, in Q4. Premium cabin revenues also continued their solid performance in 2023. First, on premium class revenues finished up 15% and 10%, respectively, for the year, continuing to substantially outpace main cabin revenue. At nearly 32% of total revenue, our premium product orientation provides a clear point of differentiation against our domestic focused peers, which will continue to be a core competitive advantage for us in years to come. Regarding loyalty, bank cash remuneration also hit a new record, bringing in $1.6 billion for the full year, up approximately 13% year-over-year. We also continue to thoughtfully build value in our loyalty programs through our extensive portfolio of domestic and international partnerships and alliances, which approximately 7% of our total revenue.

In 2023, we added five new partners, bringing our total airline partnerships to 30, 21 of which we now sell on alaskaair.com. Our pivot to selling partners on alaskaair.com, we believe, will be a big unlock for us. We expect to further build out our selling platform in 2024, including a significant add in British Airways who we have never sold direct from our website other than for award redemptions. Selling our partners direct has three significant benefits. First, our website becomes increasingly valuable as a one-stop shop providing a step change in utility for guests through expanded booking options for both domestic and international trips. Second, it further rewards guest loyalty. When our guests book itineraries on our partners through alaskaair.com, they benefit from Alaska’s generous policies, such as no change fees, and importantly, full mileage accrual for main cabin and above on all partners we sell directly, which is not available through other channels.

And third, it drives incremental revenue to Alaska. In December, 38% of partner revenues sold on alaskaair.com was attributable to an Alaska operated segment. In 2024, we plan to sell approximately 5,000 tickets per day on partner flights, which is double what we sold in 2023. As we grow partner sales on alaskaair.com, we will also improve our own operated revenues. Now turning to our outlook and guidance. Assuming a gradual return of service of the MAX 9 fleet through the first week of February, we expect to have canceled over 3,000 flights during January, impacting our first quarter capacity by 7 points which will result in capacity being down mid single-digits year-over-year for the quarter. However, given the time of year is seasonally low from a demand standpoint, we’ve been able to rebook over half of those guests impacted by cancellations back onto Alaska flights.

Additionally, capacity flexibility at our regional carrier horizon due to lower pilot attrition has resulted in their operation of more than 150 unscheduled flights. This has allowed us to rebook over 10,000 impacted guests and get them to their destinations. As Ben mentioned, we were on an excellent revenue trajectory for the first quarter. Prior to the MAX 9 grounding, we had line of sight to unit revenues up 1% to 2% year-over-year on low single-digit growth with held yields improving 1 to 2 points per week to start the year. This is a significant 11-point change in trajectory in unit revenue performance from Q4 of 2023. As we sit here today, held yield for February and March is marginally positive with daily sold yield up 8% this past week.

Clearly, we are seeing the benefits from capacity adjustments to new post-COVID demand realities, strategically reshaping our network and applying our learnings to utilize our assets more optimally. We are seeing strong unit revenue performance from bookings in our highest frequency business markets and into California, where we reduced capacity double digits year-over-year. Several new leisure markets are also performing well right out of the gate. And then lastly, the general fare environment is improving along with the competitive capacity backdrop in our markets. For the past six months, competitive capacity was up high single digits, but trending towards flat in Q1, ahead of low single-digit growth in the second quarter. At this point in time, our held load factors for Q1 are near fat daily intakes remain positive on a yield basis year-over-year.

Taken all together, absent the impact from the MAX 9 grounding, we feel very good about the outlook for our core business in Q1 and beyond. And in closing, we are now a $10 billion revenue franchise, and are not the same company we were a few years ago. We have a diversified product mix and all the elements in place to cater to evolving guest preferences, including lounges, first and premium class across 100% of our fleet, a global network through our partners and a robust loyalty program. Yet there is more to come, and we are excited to continue building on future opportunities, optimizing premium seeding up-sells, implementation of NDC and better merchandising and increasing the number of premium seats on both our Boeing 8s and 9s, all of which will help support strong financial performance and long-term profitable growth.

And with that, I’ll pass it over to Shane.

Shane Tackett: Thanks, Andrew, and good morning, everyone. Before I discuss our fourth quarter and full year results and provide additional information on the impact of the MAX 9 grounding I will reiterate that safety is and will remain the number one priority for Alaska. Our results are secondary to that concern and we will always place safety considerations for our people and our guests above financial performance. For the fourth quarter, our adjusted EPS was $0.30 on an adjusted pre-tax margin of 2.2% which was above both our initial and our most recent guide for the quarter. Unit costs ended down 6.7% versus 2023, while economic fuel cost per gallon was $3.42. Our fuel costs remained disproportionately impacted by elevated refining margins on the West Coast relative to the rest of the country.

As a reminder, in the third quarter our refining margin costs were $0.30 higher than US Gulf Coast margins. That spread held most of the fourth quarter, where West Coast refining margins were $0.34 higher. We did see improvement late in the fourth quarter and into the first and today, we are back within $0.10 of US Gulf Coast. This phenomenon, although we believe temporary has been material to our results. Our full year pretax profitability would have been 1.5 points better had refining margins behaved more normally. Our adjusted EPS for the full year was $4.53 and our adjusted pre-tax margin was 7.5%. Unit costs were down 2.6%, and while economic fuel cost per gallon for the full year was $3.21. As Ben mentioned in his opening remarks, the strength of our balance sheet remains intact.

Our leverage level closed the year with a long-term target ranges at 46% debt to cap and 1.4 times net debt to EBITDAR. And during the quarter, we received an investment-grade credit rating from Moody’s. We generated approximately $1.1 billion in cash flow from operations during the year, while total liquidity inclusive of our on-hand cash and undrawn lines of credit stood at a healthy $2.3 billion. Debt payments for the quarter were approximately $40 million and are expected to be $100 million in the first quarter. We more than offset dilution this year with $145 million in share repurchases with over $300 million still existing under our current share repurchase program, we intend to continue once again to at least offset dilution in 2024.

Moving to costs, the teams have performed well during the year with continued improvement through the second half and December quarter. Fourth quarter CASMex ended well below our guide at down 6.7% and as we continue to execute and outperform against cost targets while milder winter weather helped strong completion rates and ASM production to finish the year. Even more notable, our full year CASM ex ended down 2.6%, better than our latest guide of down 1% to 2% and at the better end of our original guide of down 1% to 3%. Even adjusting for higher capacity, we were within $32 million of our original midpoint on a nonfuel cost base of $7 billion. We achieved this result amidst ramping our operation back to and beyond pre-pandemic flying levels, doing so at a record completion rates and while absorbing significant wage increases.

I believe our cost management was clearly differentiated versus the industry in 2023 and provides confidence that we will continue to maintain our relative costs versus our competitors in the years ahead, even as cost inflation has been a clear reality of the industry recently. The benefits from our upgauging strategy were also clear. We grew full year capacity 12.8% on only 2.5% departure growth and improved fuel efficiency measured in ASMs per gallon, nearly 4%. Attention to cost at detail matters to us at Alaska, and we will continue to work on improving efficiencies within the context of lower growth and remaining cost headwinds in 2024. Given the impacts of the fleet grounding, we are opting to provide full year EPS guidance only. We also like the idea of shifting focus to margins and cash flow versus unit metrics.

We expect our full year earnings per share to be $3 to $5, which assumes a $150 million negative impact from the fleet grounding. While we fully expect to be made whole for the profit impact of the grounding, we do not have details to share today on that process, nor have we incorporated this into our guidance. Excluding the approximate $150 million impact, at the midpoint, our EPS guide implies a flat to slightly improved result in 2024 versus 2023. We expect our full year capacity to come in at or below the lower end of what had been our original expectation to grow 3% to 5% versus 2023. Our fleet plan called for 23 mainline deliveries this year, 16 MAX 9 and 7 MAX 8. We anticipate some of these deliveries may be delayed, hence, the inability to provide more precision on year-over-year growth.

Lastly, on costs, this lower growth rate, coupled with strong 2023 cost performance results in a tougher comparison baseline for 2024. There are remaining cost headwinds the entire industry is facing in 2024 and we do not believe we will be disproportionately impacted by them. Wages are a large portion of this. We will be lapping the pilot wage step-up implemented in September, which is approximately $90 million for the full year and $60 million incrementality in 2024. We have an agreement in principle with our technicians and we’re hopeful for a tentative agreement soon, and we have resumed negotiations with our flight attendants and are anxious to reach a TA with them as well. As we look forward, our outlook and priorities remain unchanged.

We will prioritize a strong operation, continue to focus on managing costs, and recovering pre-pandemic productivity, ensure we are deploying our network in a way that is responsive to demand in the market, and will continue to drive our commercial roadmap and emphasize the competitiveness of our premium product offerings. We have business model configured to compete with anyone in the industry and are optimistic about our ability to continue to deliver on our goal of delivering the industry’s best margins. And with that, let’s go to your questions.

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Q&A Session

Operator: [Operator Instructions] And our first question today will come from Ravi Shanker with Morgan Stanley.

Ravi Shanker: Thanks. Morning everyone. So, obviously, I know your start of the year than you expected, and I don’t think anyone can really blame you for this. But can you share anything you’ve seen in terms of brand damage or NPS promoter scores that may be impacted by this? And also kind of what you’re seeing in the forward booking curve in terms of any kind of max lingering issues there?

Ben Minicucci: Ravi, good morning it’s Ben. What I can say is, I’ve been overwhelmed with the support of our customers. And I think it’s just a tribute to our employees who’ve been so well in gaining loyalty over the years. And they can’t wait for us to get back to full service and our anticipation is when we will fill airplanes.

Ravi Shanker: Great. Thank you. And just maybe as a quick follow-up. You said you’re looking to hold Boeing accountable and don’t have any info to share there. Any idea kind of when you might have something to share there?

Ben Minicucci: Well, Ravi, as you know, my first priority is to get our MAX 9 fleet back into service and get our schedule back up to 100%. So, that’s priority number one. We’ll work on the accountability with Boeing. The accountability is essentially on raising the quality standards at the factory as well as making us whole. But that will be secondary. Right now, we’re focused on safety and quality and getting our fleet back to a full schedule.

Ravi Shanker: Very good. Good luck and good job everyone.

Ben Minicucci: Thank you.

Operator: Your next question will come from Savi Syth with Raymond James Financial.

Savi Syth: Hey, good morning everyone. Just to kind of follow up on Ravi’s kind of questioning especially as you kind of think of your deliveries this year and maybe kind of next year as well. Just any thoughts on — or maybe what is your kind of 2024 outlook kind of based on in terms of deliveries? Has that changed at all? And just any kind of views on CapEx here going forward? I know you gave a guide for 2024?

Shane Tackett: Hey Savi, it’s Shane. Thanks for the question. I wish we had more detail. We don’t. It’s just so early in understanding the impact. As Ben mentioned, the real focus is getting the MAX 9 fleet that’s grounded back flying the schedule safely. We have started to think about the fleet plan going forward, we were meant to take 23 aircraft this year, 16 MAX 9s, and 7 MAX 8s. And our suspicion is many of those will get delayed, but we don’t know for how long. What I can tell you is we have enough aircraft to fly the schedule we’re selling today, and we’ll be very careful to make sure that we’ve got enough fleet to fly what we’re out there selling. I think we — in December, mentioned $1.4 billion to $1.5 billion of CapEx down from last year. I think it’s not going to be more than that. My suspicion is it will be less. And as that becomes more clear, we’ll provide updates either at the next call or by an 8-K mid-quarter?

Savi Syth: Makes sense. And just on the cost front. Just curious if you could kind of talk about it as we think through the year, if there are any kind of comp views or some headwinds that are greater kind of in any part of the quarters as we go through the year. And also just curious if you have any kind of labor contracts that you might be negotiating currently kind of considered in that guide?

Shane Tackett: Thanks, Savi. We like — we didn’t put a cost guide out. I think it’s hard to predict Q1. We obviously have lost a significant number of the ASMs we wanted to carry in Q1 and less material to the full year, but not knowing what the delivery stream is going to look like. I think we’re going to have a much lower growth rate than we had initially thought. We haven’t managed costs out of the system for that today. And we still need to decide sort of how to size the company given what we ultimately decide to grow. I think for 2024, what we’re facing are similar cost pressures that you’ve heard from others, there’s certainly annualization of pilot wage costs. And as I said in the script, we are very anxious to get ratified agreements with both our technicians which were close, I hope to getting the TA with them.

We have an agreement in principle and with our flight attendants. We need to get both of those done and then airport costs and maintenance costs, which are very similar to competitors, there’s pressure throughout the year on those. I think what I would also just mention is when it all washes out, our cost structure is going to be as competitive relative to legacy peers and I think more competitive relative to the rest of the industry, as we go through this year and close out this year. So even though the unit cost might be pressured because of the growth rate, I think our core cost structure is going to be in a better position relative to everybody else once we close 2024 out.

Savi Syth: Makes sense. Thank you.

Operator: And we’ll move next to Scott Group with Wolfe Research.

Scott Group: Thanks. So I was — the $150 million that you guys cited, is there any — is that inclusive of any book away impact? Are you seeing that? And then I just want to be sure. So when you talk about capacity down mid single digits now in Q1, but you’ve sort of rebooked half of the loss stuff like. Does that imply that RASMs actually going to be better than the 1% to 2% than you were initially planning for. I just want to understand just the moving pieces for the model for Q1?

Shane Tackett: Yes, thanks, Scott. The $150 million is really tickets that we’ve had to cancel and essentially refund, we couldn’t rebook there’s some costs of buying tickets on other airlines to reaccommodate. Are there certainly some costs in that number over time and just the operational stress that we’ve had to go through. There’s no like long-term core book away we think we’re going to be still able to have a very strong spring break and mid-winter break season. As Ben mentioned, we’ve been hearing from our guests, I can’t wait to have the fleet flying again and come back and fly with us. There’s certainly some close-in revenue loss that’s in the next few weeks from business and even leisure just because it’s so close to travel that we probably won’t get to pick back up.

And so there’s a small portion that you could call book away just over the next few weeks, but I don’t think there’s a brand related, we don’t expect a brand-related long-term impact, if we see when, obviously, we’ll talk about that. But right now, I think we expect our guests to come back to us. Capacity down mid-single digits. Yes, I think, look, unit revenues, the point Andrew was making is we were on a really good trajectory. We felt great about the network reshaping that his team had done. We felt great about advances into the first quarter. The fact that we’re losing a bunch of revenue in the first quarter, we’re also losing a lot of ASM. So I think revenues could still be positive as we close the quarter out once that all nets out.