ALASKA AIR GROUP INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and basis of presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska, Horizon, and Hawaiian Airlines (starting September 18, 2024). Purchase accounting impacts resulting from the Hawaiian Airlines acquisition are included as of September 18, 2024. Prior periods do not include Hawaiian results. The unaudited 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, 2023. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2024 and the results of operations for the three and nine months ended September 30, 2024 and 2023. 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 nine months ended September 30, 2024 are not necessarily indicative of operating results for the entire year.

Goodwill and intangible assets, which were historically presented as one line item within the Condensed Consolidated Balance Sheets, are now presented as individual line items. This change was also made for the prior period in order to conform to the current period presentation.

Refer to the notes below for further discussion on the Hawaiian Airlines acquisition, including certain impacts on our Condensed Consolidated Financial Statements.

NOTE 2. ACQUISITION OF HAWAIIAN HOLDINGS, INC.

On September 18, 2024, the Company completed its acquisition of Hawaiian Holdings, Inc. The Company paid shareholders $18.00 per share, or approximately$936 million, in cash for 100% of the outstanding voting shares of Hawaiian. An additional$41 million was paid in cash for change in control payments and settlement of accelerated and vested awards, resulting in total consideration of $977 million. The combination brings together two highly complementary networks and expands consumer choice across Hawai'i, the West Coast, and international destinations. Along with enhanced network utility, the combined carriers' diversified product offerings and focus on high quality service and operational performance enhance Air Group's competitive position.

The results of Hawaiian are included in the Condensed Consolidated Financial Statements beginning September 18, 2024. For the period from the acquisition date to September 30, 2024, revenue and net loss from Hawaiian recognized in the Company's consolidated results of operations was$95 million and$52 million, respectively. This net loss figure includes merger-related costs that were classified as special items.

Purchase consideration

Total purchase consideration includes the value of the cash paid for outstanding shares of Hawaiian, accelerated and vested equity awards attributable to pre-acquisition service, and change in control payments. Alaska funded the full transaction with cash on hand. The total purchase price is calculated as follows:

Fair values of the assets acquired and the liabilities assumed

The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed were determined using a market basis, relief from royalty, or multi-period excess earnings approach. The purchase price allocation was prepared on a preliminary basis utilizing estimates and assumptions made by the Company at the time of acquisition. As additional information becomes available, the Company may revise the fair value of the assets acquired and liabilities assumed. The Company expects to continue obtaining information to assist with determining the fair values of the net assets acquired during the measurement period, which extends up to 12 months following the acquisition date.

Provisional fair values of the assets acquired and the liabilities assumed as of the acquisition date, September 18, 2024, are as follows:

Intangible assets

The Hawaiian Trademark represents the right to use the Hawaiian trade name. The Company has determined the trademark to be an indefinite-lived intangible asset, in part due to the established brand value of Hawaiian and management's intent to maintain and preserve the brand. An additional$2 million was allocated to airport slots at John F. Kennedy International Airport. These slots are expected to be renewed indefinitely in line with the Federal Aviation Administration's past practice, and thus were determined to be indefinite-lived intangible assets. These indefinite-lived intangibles will not be amortized, but rather tested for impairment annually, or more frequently when events or circumstances indicate that impairment may exist.

Goodwill

Goodwill of$761 million represents the excess of the purchase price over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition. Goodwill is not amortized, but instead is reviewed for impairment at least annually, or more frequently when events or circumstances indicate that impairment may exist. Neither goodwill recognized, nor any potential future impairment charges, are deductible for income tax purposes.

Merger-related costs

For the nine months ended September 30, 2024, the Company incurred costs directly attributable to the merger activities of$128 million. These costs are presented within Special items - operating within the Condensed Consolidated Statements of Operations. Refer to Note 12 for further information on special items. The Company expects to continue to incur merger-related costs in the future as the integration continues.

Pro forma impact of the acquisition

The unaudited pro forma financial information presented below represents a summary of the consolidated results of operations for the Company and Hawaiian as if the acquisition of Hawaiian had been consummated as of January 1, 2023. The pro forma results do not include any anticipated synergies, or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2023.

The pro forma information includes adjustments for merger-related costs of$146 million assumed to have been incurred on January 1, 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 Alaska's Mileage Plan program and Hawaiian's HawaiianMiles program. Loyalty program other revenue includes brand and marketing revenue from the Alaska Airlines Visa Signature and Hawaiian Airlines World Elite Mastercard co-branded credit cards and other partners, and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue comprises freight and mail revenue, including services provided to Amazon under the Air Transportation Services Agreement (the ATSA), and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The level of detail within the Company’s unaudited Condensed Consolidated Statements of Operations 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 Revenue

Passenger ticket and ancillary services revenue

Passenger revenue recognized in the unaudited Condensed Consolidated Statements of Operations:

Loyalty Program Revenue

Loyalty program revenue included in the unaudited Condensed Consolidated Statements of Operations:

Cargo and Other Revenue

Cargo and other revenue included in the unaudited Condensed Consolidated Statements of Operations:

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of$46 million and$33 million from the prior year-end air traffic liability balance for the three months ended September 30, 2024 and 2023, and$763 million and$621 million from the prior year-end air traffic liability balance for the nine months ended September 30, 2024 and 2023. The amounts recognized in 2024 from the prior year-end air traffic liability balance do not include Hawaiian passenger revenue as air traffic liability attributable to Hawaiian was not included within the Company's prior year-end balance.

Loyalty program assets and liabilities

The Company records a receivable for amounts due from affinity card partners and from other partners as mileage credits are sold until the payments are collected. The Company had $105 millionof such receivables as of September 30, 2024 and $102 million as of December 31, 2023.

The table below presents a roll forward of the total frequent flyer liability:

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 for identical instruments in active markets.

Level 2 refers to fair values estimated using significant other observable inputs such as similar instruments in active markets or quoted prices for identical or similar instrument in markets that are not active. Fair values for Level 2 instruments are determined using standard valuation models that incorporate inputs such as quoted prices for similar assets, interest rates, benchmark curves, credit ratings, and other observable inputs or market data.

Level 3 refers to fair values estimated using significant unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets. Fair values for Level 3 instruments are determined using future cash flows and discount rates, which include information obtained from third-party valuation sources and other market sources, including recent offers from potential buyers.

Fair value of financial instruments on a recurring basis

As of September 30, 2024, cost basis and fair value for marketable securities were $1.5 billion. Differences in cost basis and fair value of marketable securities are primarily a result of changes in interest rates and general market conditions. The Company does not believe any unrealized losses are the result of credit quality based on its evaluation of industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of September 30, 2024.

Fair values of financial instruments on the unaudited Condensed Consolidated Balance Sheets:

Activity and maturities for marketable securities

Maturities for marketable securities:

After completing the acquisition of Hawaiian, the Company began to liquidate the Hawaiian investment portfolio. At September 30, 2024, the value of Hawaiian's marketable securities was $442 million. Subsequent to quarter end, the Company sold approximately $330 million of these securities.

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.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs, or other contractual rights. The Company has both current and non-current restricted cash balances, which are presented in the Condensed Consolidated Balance Sheets within Restricted cash and Other noncurrent assets, respectively. They are carried at cost, which approximates fair value.

Debt: The estimated fair value of fixed-rate Enhanced Equipment Trust Certificate (EETC) debt and certain variable rate debt is Level 2, while the estimated fair value of $1.3 billion of certain variable-rate and fixed-rate debt, including PSP notes payable and Japanese Yen denominated debt, is classified as Level 3.

Fixed-rate debt on the unaudited Condensed Consolidated Balance Sheets and the estimated fair value of long-term fixed-rate debt:

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. No material impairments were recorded during the three and nine months ended September 30, 2024.

NOTE 5. DEBT

Debt obligations on the unaudited Condensed Consolidated Balance Sheets:

(a) Excludes finance lease liabilities of $57 million and $64 million as of September 30, 2024 and December 31 2023, respectively, on the condensed consolidated balance sheets. At September 30, 2024, amount includes one B787-9 aircraft financed under a Finance Lease Agreement but recorded as a financing liability under the applicable accounting framework.

Approximately $210 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2024, resulting in an effective weighted-average interest rate for the full debt portfolio of 6.2%.

During the nine months ended September 30, 2024, the Company incurred debt of $415 million from multiple lenders and sources. New debt includes proceeds of $347 million, secured by a combination of aircraft and flight simulators. Additionally, $68 million of debt was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement is reflected as a non-cash transaction within the supplemental disclosures in the unaudited Condensed Consolidated Statements of Cash Flows. During the nine months ended September 30, 2024, the Company made debt payments of $279 million, inclusive of $19 million paid by Hawaiian between September 18, 2024 and September 30, 2024.

Debt maturity

At September 30, 2024, debt principal payments for the next five years and thereafter are as follows:

Bank lines of credit

In September 2024, the Company entered into an agreement to consolidate and upsize its existing revolving credit facilities. The new facility is for $850 million, expires in September 2029, and is secured by a combination of aircraft, spare engines, flight simulators, slots, gates, routes, and other eligible assets. The facility has a variable interest rate based on SOFR plus a specified margin. As of September 30, 2024, the Company had no outstanding borrowing under this facility.

Alaska has a second credit facility for $76 million, expiring in June 2025, and is secured by aircraft. Alaska has secured letters of credit against this facility.

Both 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 September 30, 2024.

Subsequent Events

Redemption of Hawaiian 2026 and 2029 Senior Secured Notes

On October 1, 2024, the Company delivered to the holders of the 5.750% Senior Secured Notes due 2026, issued by Hawaiian Brand Intellectual Property, Ltd. and HawaiianMiles Loyalty, Ltd. a notice of redemption for all of the outstanding $6.3 million aggregate principal amount of the notes. The Company also delivered to the holders of the Hawaiian Issuers’ 11.000% Senior Secured Notes due 2029 a notice of redemption for all of the outstanding $984.8 million aggregate principal amount of the notes.

2029 and 2031 Senior Secured Notes

On October 15, 2024, the Company, through a wholly-owned subsidiary, issued and sold $625 million aggregate principal amount of 5.021% Senior Secured Notes due 2029 and $625 million aggregate principal amount of 5.308% Senior Secured Notes due 2031. The 2029 Notes will mature on October 20, 2029 and bear interest payable in quarterly installments beginning January 20, 2025. The 2031 Notes will mature on October 20, 2031 and bear interest payable in quarterly installments beginning January 20, 2025. The notes are collateralized by assets associated with the Company's Mileage Plan program.

Term loan facility

On October 15, 2024, the Company, through a wholly-owned subsidiary, entered into a new credit agreement for a $750 million senior secured term loan facility, the full amount of which was drawn. The loan facility is secured by substantially the same collateral as the senior secured notes described above. The loan under the facility will bear interest at a variable rate equal to Term SOFR (subject to a floor of zero), or another index rate, in each case plus a specified margin, with quarterly payments beginning in January 2025.

Subsequently, the Company executed $375 million in interest rate swaps to hedge the term loan's variable rate exposure.

Redemption of other Hawaiian debt

On October 15, 2024, the Company notified various lenders of its intent to prepay certain debt. Approximately $436 million in debt was prepaid pursuant to those notices, of which $110 million carried a floating interest rate, with the remainder of the prepayment covering fixed-rate indebtedness.

With the impact of the financing activity described above, Air Group's effective weighted-average interest rate for its debt portfolio is 5.1%.

NOTE 6. EMPLOYEE BENEFIT PLANS

The Company has five qualified defined-benefit pension plans. Four plans are the responsibility of Alaska Airlines, covering salaried employees, pilots, clerical, office, passenger service employees, mechanics, and related craft employees. One plan is the responsibility of Hawaiian Airlines, covering eligible pilots. All plans are closed to new entrants. Hawaiian also sponsors four defined benefit postretirement medical and life insurance plans and a separate plan to administer pilots disability benefits that is accounted for as a qualified plan.

Net periodic benefit costs for qualified plans include the following:

NOTE 7. COMMITMENTS AND CONTINGENCIES

Aircraft-related commitments

Alaska and Hawaiian have contractual commitments for aircraft with Boeing. Horizon has contractual commitments for aircraft with Embraer.The amounts disclosed below reflect commitments for firm aircraft and engine orders. Option deliveries are excluded until exercise.

Boeing has communicated that certain B737 and B787-9 aircraft are expected to be delivered later than the contracted delivery dates. For Alaska, this includes certain B737-8 and B737-9 aircraft contracted for delivery in 2024 that have been moved to 2025, as well as certain B737-10 aircraft contracted for delivery in 2025 that have been moved to 2026, pending certification of the aircraft type. For Hawaiian, this includes certain B787-9 aircraft contracted for delivery in 2024 that have been moved into 2025. These expected movements are reflected in the tables below. In addition, between September 2024 and November 2024, Boeing was impacted by an employee strike, which temporarily halted production of B737 aircraft . Management expects that other Boeing aircraft deliveries could be delayed beyond the contractual delivery dates.

Details for contractual aircraft delivery commitments as of September 30, 2024:

Capacity purchase agreement (CPA) commitments

Alaska has obligations associated with its CPA with SkyWest. The amounts disclosed below consider certain assumptions regarding the level of flying performed by the carrier on behalf of Alaska and exclude lease costs associated with the CPA.

A summary of aircraft-related and capacity purchase agreement commitmentsas of September 30, 2024.

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. While outcomes for litigation cannot be predicted with certainty, we do not expect current matters to have a material adverse impact to our results of operations or financial position.

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. 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 appealed the decision. On June 11, 2024, the appellate court issued a final decision affirming the lower court ruling in favor of the Virgin Group. 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. Alaska recorded an accrual in the second quarter of 2024 for $45 million, representing the expenses associated with the trademark license agreement, and management's current estimate of the amount due to the Virgin Group. The expense was classified within Special items – operating in the unaudited Condensed Consolidated Statements of Operations.

Credit card agreements

Air Group 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 of up to 100% of the credit card receivable balance associated with that processor, which would result in a restriction of cash. For example, certain agreements require Air Group to maintain a reserve if its credit rating is downgraded to or below a rating specified by the agreement or if its cash and marketable securities balance fell below $500 million. The Company is not currently required to maintain any reserve under these agreements. If Air Group were unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material impact on the Company's operations, business or financial condition.

NOTE 8. SHAREHOLDERS' EQUITY

Common stock repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. The Company repurchased 1.6 million shares for $63 million during the nine months ended September 30, 2024 and 1.5 million shares for $70 million during the nine months ended September 30, 2023. As of September 30, 2024, the Company has repurchased 12.7 million shares for $752 million, with $248 million remaining under this program.

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. The warrants were sold at auction in the second quarter of 2024 to a third party investor. The sale had no impact to the amount held on the Company's balance sheet.

As of September 30, 2024, 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.

NOTE 9. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding, including the dilutive effect of outstanding share-based instruments such as employee stock awards and warrants.

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS

A roll forward of the amounts included in accumulated other comprehensive loss is shown below for the three and nine months ended September 30, 2024 and 2023:

NOTE 11. OPERATING SEGMENT INFORMATION

Alaska Air Group has three operating airlines – Alaska, Hawaiian, 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. Air Group's network and schedules are centrally managed for all its operating airlines and CPA flying. By matching the appropriate fleet type and schedule timing, management seeks to optimize Air Group consolidated revenue and income.

Following the acquisition of Hawaiian, the Chief Operating Decision Maker (CODM) began to review financial results for Hawaiian to assess performance and make resource allocation decisions. As a result, the Company determined Hawaiian was an operating and reportable segment beginning in the third quarter of 2024. Air Group has plans to combine Alaska and Hawaiian under a single operating certificate in the near term. At that time, management anticipates the discrete information provided to the CODM specific to each carrier will similarly be combined, and resource allocation decisions and review will be executed at the combined level.

Management continues to evaluate and refine the reporting and information provided to the CODM utilized in their review of financial results and resource allocation decisions. Increasingly, the Company is managed as a single component that provides air transportation and loyalty benefits for passengers and cargo services. Managing the business in an integrated manner enables our team to leverage its comprehensive network, route scheduling system, and fleet as a single business to deliver optimized consolidated financial results. Management continues to evaluate changes to internal reporting that may impact the discrete information provided to the CODM to better align with the way the business is managed. These changes may have an impact on the Company's reportable segments once finalized.

The CODM reviews financial performance information as part of three reportable operating segments:

•Alaska Airlines - includes scheduled air transportation on Alaska's Boeing jet aircraft for passengers and cargo .

•Hawaiian Airlines- includes scheduled air transportation on Hawaiian's Boeing and Airbus jet aircraft for passengers and cargo.

•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation on E175 jet aircraft for passengers 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.

In addition to the reportable segments, the Company has a "Consolidating and Other" column which reflects Air Group parent company activity, Horizon CPA, 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. The "Special Items" column represents expenses classified as special items and mark-to-market fuel hedge accounting adjustments.

Operating segment information is as follows:

Total assets were as follows:

Total goodwill was as follows:

NOTE 12. SPECIAL ITEMS

The Company has classified certain operating and non-operating expenses as special items due to their unusual or infrequently occurring nature. The Company believes disclosing information about these items separately improves comparable year over year analysis and allows stakeholders to better understand its results of operations. Descriptions of the special items are provided below.

Fleet transition: Fleet transition costs (benefits) are associated with the retirement and disposition of Airbus acquired from Virgin America and Q400 aircraft.

Labor agreements: Labor agreement costs in 2024 are for retroactive pay for Alaska flight attendants pursuant to the tentative agreement reached in the second quarter of 2024. The agreement was not ratified and negotiations are ongoing. Costs in 2023 are for contractual changes to Alaska pilots' sick leave benefits.

Integration costs: Integration costs are associated with the acquisition of Hawaiian Airlines and primarily consist of legal and professional fees, and employee-related costs, which include severance and change in control payments.

Litigation: Litigation costs represent expenses associated with the Virgin trademark license agreement with the Virgin Group and were recorded following a negative ruling in an appeal case in the second quarter of 2024.

Net non-operating: These costs are primarily for interest expense recognized in 2023 associated with certain Virgin America A321neo lease agreements which were modified as part of Alaska's fleet transition.