ALASKA AIR GROUP INC

Previous wording

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 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, 2023. This overview summarizes the MD&A, which includes the following sections:

Current wording

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 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" within this document. This overview summarizes the MD&A, which includes the following sections:

Previous wording

•Second Quarter Review -highlights from the second quarter of 2024 outlining some of the major events that occurred during the period.

Current wording

•Third Quarter Review -highlights from the third quarter of 2024 outlining some of the major events that occurred during the period.

Previous wording

•Results of Operations -an in-depth analysis of our consolidated revenue and expenses for the three and six months ended June 30, 2024. This section includes forward-looking statements regarding our view of the remainder of 2024.

Current wording

•Results of Operations -an in-depth analysis of our consolidated revenue and expenses for the three and nine months ended September 30, 2024. This section includes forward-looking statements regarding our view of the remainder of 2024.

Previous wording

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

Current wording

•Liquidity and Capital Resources -an overview of our financial position, analysis of cash flows, and relevant material cash commitments.

Previous wording

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

Current wording

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.

Previous wording

(b)Includes aircraft owned and leased by Alaska and Horizon as well as aircraft operated by third-party regional carriers under capacity purchase agreements. Excludes non-operating aircraft.

Current wording

(d)Includes aircraft owned and leased by Alaska, Hawaiian, and Horizon as well as aircraft operated by third-party regional carriers under capacity purchase agreements. Excludes all aircraft removed from operating service.

Previous wording

Horizon is in negotiations with certain labor groups for updated CBAs, including its pilots, represented by the International Brotherhood of Teamsters; its flight attendants, represented by AFA; and its technicians, represented by AMFA.

Current wording

Horizon is in negotiations with certain labor groups for updated CBAs, including its pilots, represented by the International Brotherhood of Teamsters; its flight attendants, represented by AFA; and its technicians, represented by the Aircraft Mechanics Fraternal Association.

Previous wording

Total operating revenue increased $59 million, or 2%, in the second quarter of 2024 compared to the same period in 2023. The changes are summarized in the following table:

Current wording

Total operating revenue in the third quarter of 2024 increased $233 million, or 8%, of which $95 million was attributable to Hawaiian. The changes are summarized in the following table:

Previous wording

Total operating expenses increased $74 million, or 3%, compared to the second quarter of 2023. 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:

Current wording

Total operating expenses in the third quarter of 2024 increased $103 million, or 4%. 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:

Previous wording

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.

Current wording

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 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.

Previous wording

In 2023, we suspended our crude oil hedge program. Existing positions entered into before suspension of the program will settle through the first quarter of 2025. All 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. Prior to suspension, our program was designed to hedge on up to 50% of our expected consumption. Our crude oil positions are as follows:

Current wording

Alaska and Hawaiian each have a fuel hedge program. Alaska's program was suspended in 2023, and has open positions, based in West Texas Intermediate (WTI) crude oil, that will settle through the first quarter of 2025. Hawaiian's program was temporarily paused as of September 30, 2024, and has open positions, based in Brent crude oil, that will settle through the third quarter of 2025. All future 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.

Previous wording

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.

Current wording

We 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.

Previous wording

Aircraft fuel expense increased $42 million, or 7%, compared to the second quarter of 2023. The elements of the change are illustrated in the following table:

Current wording

Aircraft fuel expense in the third quarter of 2024 decreased $70 million, or 10%. The elements of the change are illustrated in the following table:

Previous wording

Raw fuel expense increased 10% in the second quarter of 2024 compared to the second quarter of 2023 due to higher fuel consumption and per gallon costs of crude oil, partially offset by a decrease in refining margins associated with the conversion of crude oil to jet fuel.

Current wording

Raw fuel expense decreased 13% in the third quarter of 2024 compared to the third quarter of 2023. The decrease was driven primarily by lower refining margins associated with the conversion of crude oil to jet fuel, as well as lower per gallon costs on crude oil. It was partially offset by higher fuel consumption consistent with increased capacity and the inclusion of $23 million of raw fuel expense attributable to Hawaiian.

Previous wording

Losses recognized for hedges that settled during the second quarter were $10 million in 2024, compared to losses of $17 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement. In 2023, we suspended our crude oil hedge program. Our final option position will settle in the first quarter of 2025.

Current wording

Losses recognized for hedges that settled during the third quarter were $9 million in 2024, compared to losses of $18 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Previous wording

Wages and benefits increased by $28 million, or 4%, in the second quarter of 2024. The primary components of Wages and benefits are shown in the following table:

Current wording

Wages and benefits in the third quarter of 2024 increased by $101 million, or 13%, of which $37 million was attributable to Hawaiian. The primary components of Wages and benefits are shown in the following table:

Previous wording

The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for Alaska technicians.

Current wording

Increased expense for medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for Alaska technicians.

Previous wording

Depreciation and amortization increased by $15 million, or 13%, in the second quarter of 2024. The increase was primarily due to the addition of 22 owned B737 aircraft and five owned E175 aircraft to our fleet since the second quarter of 2023, as well as incremental depreciation on ground service and other equipment additions.

Current wording

Depreciation and amortization in the third quarter of 2024 increased by $26 million, or 23%, of which $8 million was attributable to Hawaiian. The remaining $18 million increase was driven by the addition of 20 owned B737 aircraft and three owned E175 aircraft to the Alaska and Horizon fleets, respectively, since the third quarter of 2023. Incremental depreciation on ground service and other equipment also contributed to the increase.

Previous wording

Food and beverage service increased by $7 million, or 12%, in the second quarter of 2024. The increase was driven by a combination of growth in revenue passengers, additional onboard offerings, and higher costs for food, food service supplies, and transportation.

Current wording

Food and beverage service in the third quarter of 2024 increased by $7 million, or 11%, of which $4 million was attributable to Hawaiian. The remaining $3 million increase was driven by growth in revenue passengers and higher rates for food and beverage products.

Previous wording

We recorded $146 million of operating special items in the second quarter of 2024, compared to $186 million in the same period in 2023. Refer to Note 12 to the consolidated financial statements for details.

Current wording

In the third quarter of 2024, we recorded $74 million of operating special items compared to $156 million in the same period in 2023. Refer to Note 12 to the consolidated financial statements for details.

Previous wording

Regional reported a pretax profit of $55 million in the second quarter of 2024, compared to a pretax profit of $41 million in the same period in 2023. The $14 million improvement was driven by higher passenger revenue consistent with the increase in traffic, partially offset by higher operating expenses associated with increased capacity.

Current wording

Regional reported a pretax profit of $71 million, excluding special items, in the third quarter of 2024, compared to a profit of $25 million in the same period in 2023. The $46 million improvement was driven by higher passenger revenue consistent with the increase in traffic, partially offset by higher operating expenses associated with increased capacity.

Previous wording

Total operating revenue increased $95 million, or 2%, during the first six months of 2024 compared to the same period in 2023. The changes are summarized in the following table:

Current wording

Total operating revenue in the first nine months of 2024 increased $328 million, or 4%, of which $95 million was attributable to Hawaiian. The changes are summarized in the following table.

Previous wording

Passenger revenue for the first six months of 2024 increased by $73 million, or 2%, driven by increased passenger traffic. Traffic growth was due to increased gauge and departures throughout the network. Strength in premium class products and increased redemptions by Mileage Plan members on both Alaska and partner airlines also contributed to this increase. These improvements were offset by lost revenue from the B737-9 grounding as well as a moderating domestic revenue environment in the second quarter.

Current wording

On a consolidated basis, Passenger revenue for the first nine months of 2024 increased by $276 million, or 4%, of which $84 million was attributable to Hawaiian. The remaining $192 million increase was driven by increased traffic. Traffic growth was due to increased gauge and departures throughout the network. Strength in premium class products and increased redemptions by Mileage Plan members on both Alaska and partner airlines also contributed to this increase. These improvements were partially offset by lost revenue from the B737-9 grounding.

Previous wording

Mileage Plan other revenue increased $14 million, or 4%, in the first six months of 2024. The increase was driven by higher commissions from bank card and third party partners.

Current wording

On a consolidated basis, Loyalty program other revenue for the first nine months of 2024 increased $26 million, or 5%, of which $5 million was attributable to Hawaiian.. The remaining $21 million increase was primarily driven by higher commissions from bank card and third party partners.

Previous wording

We expect to see continued strength in Mileage Plan other revenue for the remainder of 2024, driven by higher commissions from increased card spend and acquisition bonuses, offset by incremental redemption on other air partners as compared to the prior year.

Current wording

We expect to see continued strength in Loyalty program other revenue for the fourth quarter compared to 2023 due to higher commissions from partners and the Hawaiian acquisition.

Previous wording

Total operating expenses increased $90 million, or 2%, compared to the first six months of 2023. 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:

Current wording

Total operating expenses in the first nine months of 2024 increased $193 million, or 3%. 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:

Previous wording

Aircraft fuel expense decreased $58 million, or 5%, compared to the six months ended June 30, 2023. The elements of the change are illustrated in the table:

Current wording

Aircraft fuel expense in the first nine months of 2024 decreased $128 million, or 7%. The elements of the change are illustrated in the table:

Previous wording

Economic fuel expense includes losses recognized for hedges that settled in the first six months of 2024 of $23 million, compared to losses of $29 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Current wording

Economic fuel expense includes losses recognized for hedges that settled in the first nine months of 2024 of $31 million, compared to losses of $47 million in the same period in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Previous wording

We expect our economic fuel cost per gallon in the third quarter to range between $2.85 to $2.95.

Current wording

We expect our economic fuel cost per gallon in the fourth quarter to range between $2.55 to $2.65 per gallon.

Previous wording

Wages and benefits increased by $109 million, or 7%, in the first six months of 2024. The primary components of wages and benefits are shown in the following table:

Current wording

Wages and benefits in the first nine months of 2024 increased by $210 million, or 9%, of which $37 million was attributable to Hawaiian. The primary components of wages and benefits are shown in the following table:

Previous wording

Wages increased $67 million, or 6%, driven by increased wage rates across multiple labor groups since the prior year, as well as additional impact from irregular operations following the B737-9 grounding in the first quarter of 2024. The increase was partially offset by nonrecurring stock awards granted in the second quarter of 2023. Increased expense for payroll taxes is consistent with the change in wages.

Current wording

Wages in the first nine months of 2024 increased $128 million, or 7%, of which $30 million was attributable to Hawaiian. The remaining $98 million increase was driven by increased wage rates across multiple labor groups since the prior year, as well as additional impact from irregular operations following the B737-9 grounding in the first quarter of 2024. The increase was partially offset by nonrecurring stock awards granted in the second quarter of 2023. Increased expense for payroll taxes is consistent with the change in wages.

Previous wording

The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for Alaska technicians.

Current wording

The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year. Increased expense for defined contribution plans was driven by higher wages as well as higher matching contributions for Alaska technicians.

Previous wording

We expect to see higher wages and benefits for the remainder of 2024 due to the impact of the new contract for Alaska flight attendants as well as increases in wage rates for other labor groups.

Current wording

We expect to see higher wages and benefits for the remainder of 2024 due to increases in wage rates for labor groups.

Previous wording

Variable incentive pay expense decreased by $11 million, or 11%, in the first six months of 2024. The decrease was driven by a lower assumed payout percentage compared to the prior year, partially offset by an increased wage base.

Current wording

Variable incentive pay expense increased by $48 million, or 32%, in the first nine months of 2024. The increase was driven by a higher assumed payout percentage for the Company's Performance-Based Pay program compared to the prior year, as well as an increased wage base.

Previous wording

Aircraft rent expense decreased by $20 million, or 18%, in the first six months of 2024. The decrease was primarily driven by the retirement of ten leased A321neo aircraft from operations.

Current wording

Aircraft rent expense in the first nine months of 2024 decreased by $19 million, or 12%. The decrease was primarily driven by the retirement of ten leased A321neo aircraft from operations.

Previous wording

We expect aircraft rent will remain below 2023 levels for the remainder of 2024, due to the reduction in leased aircraft described above.

Current wording

We expect aircraft rent will increase for the remainder of 2024 compared to the prior year due to the addition of leased aircraft in Hawaiian's fleet.

Previous wording

Depreciation and amortization increased by $37 million, or 17%, in the first six months of 2024. The increase was primarily due to the addition of 22 owned B737 aircraft and five owned E175 aircraft to our fleet since the second quarter of 2023, as well as incremental depreciation on ground service and other equipment additions.

Current wording

Depreciation and amortization in the first nine months of 2024 increased by $63 million, or 19%, of which $8 million was attributable to Hawaiian. The remaining $55 million increase was primarily due to the addition of 20 owned B737 aircraft and three owned E175 aircraft to the Alaska and Horizon fleets, respectively, since the third quarter of 2023. Incremental depreciation on ground service and other equipment also contributed to the increase.

Previous wording

We expect depreciation and amortization to increase for the remainder of 2024 as compared to 2023 due to incremental owned aircraft added to our fleet.

Current wording

We expect depreciation and amortization to increase for the remainder of 2024 as compared to 2023, due to incremental owned aircraft added to our airlines' fleets, as well as the amortization of certain intangible assets associated with the Hawaiian acquisition.

Previous wording

Food and beverage service increased by $11 million, or 10%, in the first six months of 2024. The increase was driven by a combination of additional onboard offerings and higher costs for food, food service supplies, and transportation.

Current wording

Food and beverage service in the first nine months of 2024 increased by $18 million, or 10%, of which $4 million was attributable to Hawaiian. The remaining $14 million increase was driven by a combination of 4% growth in revenue passengers, additional onboard offerings, and higher costs for food, food service supplies, and transportation.

Previous wording

Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $12 million, or 11%, in the first six months of 2024. The increase was driven by incremental departures and block hours operated by SkyWest.

Current wording

Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $17 million, or 10%, in the first nine months of 2024. The increase was driven by incremental departures and block hours operated by SkyWest.