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" within this document. 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 unaudited condensed 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, 2024. This overview summarizes the MD&A, which includes the following sections:

Previous wording

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

Current wording

•First Quarter Review - highlights from the first quarter of 2025 outlining some of the major events that occurred during the period, as well as forward-looking statements.

Previous 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.

Current wording

•Results of Operations - an in-depth analysis of our financial and operational results for the three months ended March 31, 2025.

Previous wording

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not consider them a substitute for GAAP figures. Amounts in the tables below are rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to the Company's actual figures presented in the tables below.

Current wording

Dollar amounts in the MD&A are generally rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to our actual figures presented in the tables below.

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 the Aircraft Mechanics Fraternal Association.

Current wording

In the first quarter, Alaska flight attendants, represented by the Association of Flight Attendants (AFA), ratified a new three-year Collective Bargaining Agreement (CBA) that includes wage increases and other improvements to benefits. Horizon is in negotiations with its pilots, represented by International Brotherhood of Teamsters (IBT), and its flight attendants, represented by AFA, for updated CBAs.

Previous 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:

Current wording

On a pro forma basis, total operating expenses increased $132 million, or 4%. The changes, including the reconciliation of the impact of Hawaiian on the combined results, are summarized below. 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 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 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

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.

Current wording

Alaska's fuel hedge program was suspended in 2023 and all remaining positions were settled as of March 31, 2025. Hawaiian's fuel hedge program, which uses crude oil call options, was suspended in the first quarter of 2025, and has open positions, based in Brent crude oil, that will settle through the third quarter of 2025. The call options 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

A summary of Alaska's WTI positions and Hawaiian's Brent crude positions is provided below:

Current wording

A summary of Hawaiian's Brent crude positions is provided below:

Previous 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.

Current wording

On a pro forma basis, aircraft fuel expense decreased $78 million, or 10%. Raw fuel expense decreased by 10%, primarily driven by lower refining margins associated with the conversion of crude oil to jet fuel, as well as lower per gallon costs on crude oil. Decreases were partially offset by higher fuel consumption consistent with increased capacity.

Previous 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.

Current wording

Losses recognized for hedges that settled during the first quarter were $3 million in 2025, compared to losses of $15 million in 2024. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Previous wording

The table below summarizes our operating expense line items, excluding fuel and other special items. Generally, increases to these expenses are driven by capacity increases and growth of the Company's operations, including the incorporation of Hawaiian into our consolidated results. Other significant or unusual changes compared to 2023 in addition to the acquisition impact are discussed in more detail below.

Current wording

The table below summarizes our operating expense line items, excluding fuel and other special items, on a pro forma basis. Generally, increases to these expenses are driven by capacity increases and growth of the Company's operations. Significant or unusual changes compared to 2024 on a pro forma basis are more fully described below.

Previous wording

Variable incentive pay in the third quarter of 2024 increased by $59 million, or 131%. 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.

Current wording

On a pro forma basis, variable incentive pay increased $13 million, or 27%, due to the inclusion of Hawaiian employees in the Company's Performance-Based Pay program in 2025, as well as an increased wage base.

Previous wording

Aircraft maintenance in the third quarter of 2024 increased by $22 million, or 19%, of which $9 million was attributable to Hawaiian. The remaining $13 million increase was driven by higher rates for outside maintenance work and additional maintenance projects.

Current wording

On a pro forma basis, aircraft maintenance increased $22 million, or 11%, driven by higher rates for outside maintenance work, additional maintenance projects, and the addition of certain E175 engines to Horizon's power-by-the-hour contract since the first quarter of 2024.

Previous 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.

Current wording

On a pro forma basis, depreciation and amortization increased $15 million, or 8%, primarily due to the addition of 20 owned aircraft to our airlines' fleets since the first quarter of 2024. Incremental depreciation on ground service and other equipment also contributed to the increase.

Previous 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.

Current wording

Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $10 million, or 19%, driven by incremental departures and block hours operated by SkyWest.

Previous wording

Refer to Note 11 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's results.

Current wording

Refer to Note 11 to the unaudited condensed consolidated financial statements for a detailed description of each segment and a reconciliation of segment results to consolidated Air Group results. Below is a summary of each segment's results for the first quarter of 2025.

Previous wording

Alaska Airlines reported a pretax profit, excluding special items, of $336 million in the third quarter of 2024, compared to a profit of $302 million in the same period in 2023. The $34 million improvement was due to a decrease in economic fuel cost and an increase in operating revenue, driven by growth in departures and revenue passengers, as well as the introduction of two B737-800 freighters to the Company's cargo operations. The improvement was partially offset by an increase in non-fuel operating expenses, driven largely by higher wages and variable incentive pay.

Current wording

Alaska Airlines reported a pretax loss, excluding special items and other adjustments, of $55 million in the first quarter of 2025, compared to a loss of $162 million in the same period in 2024. The $107 million improvement was primarily due to lost revenue and additional operational costs resulting from the B737-9 grounding in the first quarter of 2024. Growth in departures and revenue passengers also contributed to the increase. The improvement was partially offset by an increase in non-fuel operating expenses, driven largely by higher wages and variable costs associated with increased capacity.

Previous 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.

Current wording

Regional reported a pretax loss of $10 million, excluding special items and other adjustments, in the first quarter of 2025, compared to a loss of $2 million in the same period in 2024. Higher operating expenses associated with increased capacity were partially offset by higher passenger revenue consistent with the increase in traffic.

Previous wording

As of September 30, 2024, we had cash and marketable securities of $2.5 billion. We also have 93 unencumbered aircraft, which can be financed if necessary, and an $850 million bank line-of-credit facility with no outstanding borrowings. We expect our current cash and marketable securities balance, combined with our available sources of liquidity, are sufficient to fund our liquidity needs for the next 12 months. We expect to meet our liquidity needs for the foreseeable future using cash flows from our operations, our available sources of liquidity, and future financing arrangements. We discuss our sources and uses of cash in more detail below.

Current wording

As of March 31, 2025, we had cash and marketable securities of $2.5 billion. Our airlines have 113 unencumbered aircraft, which can be financed if necessary, and an $850 million bank line-of-credit facility with no outstanding borrowings. We expect our current cash and marketable securities balance, combined with our available sources of liquidity, are sufficient to fund our liquidity needs for the next 12 months. We expect to meet our liquidity needs for the foreseeable future using cash flows from our operations, our available sources of liquidity, and future financing arrangements. We discuss our sources and uses of cash in more detail below.

Previous wording

Cash provided by ticket sales and from our co-branded credit card agreement are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, aircraft fuel, payments to suppliers for goods and services, payments to lessors and airport authorities for leased aircraft, rents, and landing fees, and interest expense for our debt obligations. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.

Current wording

Cash provided by operating activities was $459 million during the first three months of 2025. Advance ticket sales and our co-branded credit card agreements are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, aircraft fuel, payments to suppliers for goods and services, payments to lessors and airport authorities for leased aircraft, rents, and landing fees, and interest expense for our debt obligations. Additionally, we paid more than $300 million to employees in recognition of their 2024 Performance-Based Pay program achievements.

Previous wording

Capital expenditures to acquire aircraft, flight equipment, and other property and equipment is the primary use of investing cash flow. We continue to plan to incur approximately $1.2 to $1.3 billion in capital expenditures for 2024. This amount assumes we pay for 18 B737 aircraft this year, subject to Boeing delivery ability.We discuss our aircraft-related commitments in more detail below.

Current wording

Capital expenditures to acquire aircraft, flight equipment, and other property and equipment are the primary purpose of our investing cash flow. We plan to incur approximately $1.4 billion to $1.6 billion in capital expenditures for 2025. We discuss our aircraft-related commitments in more detail below.

Previous wording

Cash provided by new financing arrangements is the primary source of our financing cash flow. Our primary uses of financing cash flow are payments of our debt service and finance lease obligations, as well as share repurchases. Refer to Note 5 to the condensed consolidated financial statements for a detailed discussion of our debt balances, including a schedule outlining the time period of future payments.

Current wording

Cash provided by new financing arrangements is the primary source of our financing cash flow. Our primary uses of financing cash flow are payments of our debt and finance lease obligations, as well as share repurchases. Refer to Note 5 to the unaudited condensed consolidated financial statements for a detailed discussion of our debt balances, including a schedule outlining the time period of future payments.

Previous wording

(a)Excludes restricted cash balance of $27 million as of September 30, 2024.

Current wording

(a) Excludes restricted cash of $28 million as of March 31, 2025 and $29 million as of December 31, 2024.

Previous wording

The Company has various contractual obligations that require material future cash commitments. These obligations include the purchase of aircraft and other flight equipment, payments for our CPA with SkyWest, debt service payments, lease payments for aircraft and other property and equipment, costs for aircraft and engine maintenance, sponsorship and license agreements, and other miscellaneous agreements for services associated with operating and marketing our airlines. The Company also anticipates it may have material cash outlays related to its sustainability-focused efforts to reach net-zero carbon emissions by 2040. Currently, Alaska and Hawaiian have agreements to purchase SAF to be delivered in the coming years. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF.

Current wording

We have various contractual obligations that require material future outlays of cash. These obligations include the purchase of aircraft and other flight equipment, payments for Alaska's CPA with SkyWest, debt service payments, lease payments for aircraft and other property and equipment, costs for aircraft and engine maintenance, sponsorship and license agreements, and other miscellaneous agreements for services associated with operating and marketing our airlines. We also anticipate we may have material cash outlays associated with new technologies for the future of the business. Currently, Alaska and Hawaiian have agreements to purchase sustainable aviation fuel (SAF) to be delivered in the coming years. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF.

Previous wording

We expect to satisfy these obligations using cash flows from our operations, our available sources of liquidity, and future financing arrangements. Refer to Note 5 and Note 7 to the condensed consolidated financial statements for additional discussion of these commitments.

Current wording

We expect to satisfy these obligations using cash flows from our operations, our available sources of liquidity, and future financing arrangements. Within the notes accompanying our unaudited condensed consolidated financial statements, refer to Note 5 for discussion of scheduled debt obligations and Note 7 for discussion of aircraft-related purchase commitments and CPA obligations.

Previous wording

As of September 30, 2024, Alaska had firm orders to purchase 69 B737 aircraft with deliveries between 2024 and 2027. Alaska also had rights for 105 additional B737 aircraft through 2030. Hawaiian had firm orders to purchase ten B787-9 aircraft with deliveries between 2025 and 2027. Horizon had firm orders to purchase six E175 aircraft with deliveries between 2025 and 2026. Horizon also had options to acquire two E175 aircraft in 2026, one of which expired subsequent to quarter end. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

Current wording

As of March 31, 2025, Alaska had firm orders to purchase 70 B737 aircraft with deliveries expected between 2025 and 2029. Alaska also had rights for 100 additional B737 aircraft through 2030. Hawaiian had firm orders to purchase 9 B787-9 aircraft with deliveries expected between 2025 and 2028. Horizon had firm orders to purchase 5 E175 aircraft with deliveries between 2025 and 2026.

Previous wording

Alaska and Hawaiian have contractual commitments for aircraft with Boeing. Horizon has contractual commitments for aircraft with Embraer. 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 and 2025 that have been moved into 2025 and 2026, respectively. 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.

Current wording

Boeing has communicated that certain B737 and B787-9 aircraft are expected to be delivered later than the contracted delivery timing. For Alaska, this includes certain B737-9 aircraft contracted for delivery in 2024 that have moved to 2025, certain B737-8 aircraft contracted for delivery in 2024 and 2025 that have moved later in the contracted year or into the year following the contracted delivery, and certain B737-10 aircraft contracted for delivery in 2025 and 2026 that have moved to 2026 or 2027, pending certification of the aircraft type. For Hawaiian, this includes certain B787-9 aircraft contracted for delivery between 2024 and 2026 that have been moved later into the contracted year or into the year following the contracted delivery. Management expects that other Boeing aircraft deliveries could be delayed beyond the contractual delivery. The table below summarizes our fleet plan, reflecting Boeing's communications and management's internal expectations.

Previous wording

•By excluding certain costs from our unit metrics, we believe that we have better visibility into the results of operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. We believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management and investors to understand the impact of company-specific cost drivers which are more controllable by management. We adjust for expenses related directly to our freighter aircraft operations to allow for better comparability to other domestic carriers that do not operate freighter aircraft. We also exclude certain special charges as they are unusual or nonrecurring in nature and adjusting for these expenses allows management and investors to better understand our cost performance.

Current wording

•By excluding certain costs from our unit metrics, we believe that we have better visibility into the results of operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. We believe that all U.S. carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management and investors to understand the impact of company-specific cost drivers which are more controllable by management. We adjust for expenses related directly to our freighter aircraft operations, including those costs incurred under the ATSA with Amazon, to allow for better comparability to other carriers that do not operate freighter aircraft. We also exclude certain special charges as they are unusual or nonrecurring in nature and adjusting for these expenses allows management and investors to better understand our cost performance.

Previous wording

•CASMex is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance. CASMex is also a measure commonly used by industry analysts, and we believe it is the basis by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

Current wording

•CASMex is one of the most important measures used by management and by the Air Group Board of Directors in assessing cost performance. CASMex is also a measure commonly used by industry analysts, and we believe it is the basis by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

Previous wording

(b)See a reconciliation of this non-GAAP measure and Note A for a discussion of the importance of this measure to investors in the accompanying pages.

Current wording

(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

Previous wording

Management has historically identified Alaska's loyalty program as a critical accounting estimate. There were no material changes to this estimate during the three and nine months ended September 30, 2024. For additional discussion, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

There have been no material changes to our critical accounting estimates during the three months ended March 31, 2025. For information regarding our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2024.

Previous wording

Economic Fuel - best estimate of the cash cost of fuel, excluding operations under the Air Transportation Service Agreement (ATSA) with Amazon, net of the impact of our fuel-hedging program

Current wording

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program and excluding operations under the Air Transportation Service Agreement (ATSA) with Amazon

Previous wording

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Current wording

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with revenue passengers

Previous wording

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, loyalty program and other ancillary revenue; represents the average total revenue for flying one seat one mile

Current wording

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, loyalty program revenue, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Previous wording

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Current wording

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with revenue passengers; one passenger traveling one mile is one RPM

Previous wording

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

Current wording

Yield - passenger revenue per RPM; represents the average passenger revenue for flying one passenger one mile