ALASKA AIR GROUP, INC. Q1 2025 earnings call

Thank you, Operator, and good morning. Thank you for joining us for our Q1 2025 earnings call. Yesterday, 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'll 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. Air Group reported a Q1 GAAP net loss of $166 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $95 million. Our comments today will include discussion of Air Group's reported results and forward-looking guidance compared to prior year pro forma results, as if Alaska and Hawaiian were a combined company for the full periods referenced. Lastly, as a reminder, forward-looking statements about future performance may differ materially from 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 cost excluding fuel. 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.

Thanks, Ryan, and good morning, everyone. The challenging start to this year was not what we expected as air travel demand diverged from the strength we saw just a few months ago. However, what remains certain at Air Group is our unwavering confidence in our strategy, Alaska Accelerate. We are executing with discipline, focusing on long-term value creation, and taking the right steps to strengthen our business through any cycle. Regardless of what's happening today, we believe firmly in our ability to deliver performance and grow profitably both now and in the years ahead. Air Group has a proven track record, not just of weathering downturns, but of emerging stronger every time.

We're operating from a position of real strength, one of the industry's healthiest balance sheets, a diversified revenue base with nearly 50% generated outside the Main Cabin, market share leadership in our key hubs, and a substantial 15% cost advantage over our largest competitors. These advantages aren't just meaningful; they're decisive, and they position us to outperform in any environment. That said, the current landscape has been challenging to predict. While we're not updating our full-year guidance today, we remain confident in our outlook. Even in the event of a recession, we expect to remain solidly profitable in 2025 and are fully committed to our share buyback plan of $1 billion over the next four years. In fact, given where our stock price has trended, the current environment has provided a unique opportunity to accelerate our share repurchase program that is already underway.

As we outlined at our investor day last December, winning in this industry requires scale, relevance, and loyalty. That fundamental belief is as relevant today as it was four months ago. We have conviction in our ability to deliver $10 of earnings per share by 2027 and do not believe what's happening today jeopardizes that target in any way. Our energy is fully committed to driving Alaska Accelerate and unlocking $1 billion in incremental profit as we continue to strengthen various aspects of our business. Importantly, what's in our control is going according to plan. This is evidenced by our year-over-year industry-leading unit revenue performance that is several points ahead of peers, even those peers who have greater exposure to international markets that are clearly outperforming domestic trends. Integration synergies are tracking slightly ahead of plan through the Q1, and our Hawaiian assets are performing well.

We delivered a seven-point margin improvement in our combined Q1 results year-over-year, including a double-digit margin improvement from our Hawaiian assets. Demand to, from, and within Hawaii remains strong, especially in premium cabins, supported by continued loyalty growth and the value we're unlocking through a larger, more efficient network. Huaka'i by Hawaiian memberships are up 90% since year-end, and Hawaiian card acquisitions have more than doubled year-over-year. We are well on our way to building the scale, relevance, and loyalty needed to lead as Hawaii's trusted airline in this premium leisure market. As we continue advancing our vision to connect guests to the world, we're just 18 days away from launching our first intercontinental flight from Seattle to Tokyo Narita. This marks a major step forward in the evolution of our largest hub as we chart a path to serving at least 12 intercontinental destinations by 2030.

It's a bold move that positions Air Group to capture high-value international demand while deepening our relevance and loyalty across our network. We know that delivering a seamless end-to-end premium travel experience is a key differentiator, and we're fully committed to investing in every aspect of it, from our lobbies and lounges to premium cabins, food and beverage, and onboard service. Even in the current environment, our premium revenues continue to outperform, and our premium cabin retrofits are on track to increase our premium seat exposure to 29% by next summer. We're excited to expand our loyalty offerings and will be launching our uniquely branded single loyalty platform and our premium credit card later this summer, another exciting step in enhancing our guest experience. As we continue to diversify our revenue streams, our cargo operations are ramping to full capacity.

We took delivery of two more Amazon A330 freighters for a total of eight, and our cargo revenue is up 36% year-over-year. In terms of execution, our integration milestones remain on schedule. Our teams are working through the process to achieve a single operating certificate by the Q4 of this year. Work is underway to bring both passenger service systems together by early 2026, and we're starting joint bargaining negotiations across our union groups. We know we have a good playbook in place, and we're focused on executing every step of the way. I also want to take a moment to thank our incredible employees. Their hard work and dedication are what make the Alaska Accelerate vision possible.

We're currently wrapping up our annual employee engagement survey, and I'm thrilled to share that engagement scores are at record levels, higher than at any point since we began the survey 14 years ago. That speaks volumes about the alignment and energy across our company. Our employees believe in our vision, and they're already helping us bring it to life. We are all energized by the opportunities ahead. Air Group is on a clear path to build scale, relevance, and loyalty, laying the foundation for strong long-term returns. I'll say this with complete confidence: our company is significantly undervalued relative to where we're headed and the strength we're already showing in the areas fully within our control. With that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. My comments today will focus on Q1 performance, but more importantly, the successful trends we're seeing that underpin our Alaska Accelerate strategy. In the Q1, total revenues reached $3.1 billion, up 9% year-over-year, and capacity growth of 3.9%. Unit revenues finished strong, up 5%. First Class, Premium Class, and importantly, Main Cabin all delivered positive unit revenues year-over-year. Loyalty continues to show strength. We generated $550 million in cash remuneration in Q1 from our co-brand cards, up 12% year-over-year. Importantly, new cards across the Alaska and Hawaiian networks increased 26%, with flown segments by our elites up 34%. These statistics demonstrate the power of our combined network and incredible value that accrues to guests enrolled in our loyalty programs. Turning to premium, our revenues grew 10% and represent approximately 34% of our total revenues.

Our continued investment in premium cabins is coming to life. By July of this year, 84 of our 900s and -9s will have been retrofitted with six more Premium Class seats, with all 159 aircraft completed by year-end. In the next several weeks, we will receive our 1st 3 max 8s configured with 161 seats, including four more First Class seats. The conversion of our existing 59 800s into the same configuration begins this summer as we look to improve guest comfort while reducing costs and increasing revenues. Taking a step back, more than 200 of our Boeing 737 aircraft will have additional premium seats by the summer of 2026, and that's without removing any seats from these aircraft.

This will add 1.3 million first and Premium Class seats per year and bring our premium seat mix to 29%, further strengthening our position in what we believe is a long-term driver of guest satisfaction and revenue and well-suited to our network's long stage length. Our synergy and revenue initiatives are on track despite near-term macroeconomic volatility. I want to share with you three leveraged commercial initiatives that illustrate Alaska Accelerate is working and why this deepens our conviction in our positioning over the next several years to deliver results. In Seattle and Portland, where we have leading market shares and the number one brand preference, our scheduled banking strategy is yielding significant positive results. We are increasingly more relevant to more guests and driving more connecting traffic through these two hubs.

In the Q1, connecting passengers were up 15% in Seattle compared to last year, and we see similar trends as we look forward. Our banking schedule in Portland rolled out this month, and connecting bookings for May and June are up more than 200%. In Hawaii, our recently acquired Hawaiian Airlines operations are producing strong results, including West Coast to Hawaii and Neighbor Island flying as we unlock the power behind a combined network, better utilization, and more connections. Unit revenues of our Hawaiian Airlines assets were up 9% year-over-year, nearly twice that of system average. Not surprisingly, as a premium leisure market, we saw strength in premium revenues that were up 17%. Furthermore, we're continuing to grow our loyalty with State of Hawaii card acquisitions, up nearly 40%, making it one of our highest percentage growth markets.

As Ben mentioned, Huaka'i by Hawaiian memberships for our exclusive Hawaii resident travel program are up 90% since December, and we now have well over 200,000 members in just five months since launch. In San Diego, a key focus market for us, we just announced a 30% increase in flights starting this fall, including new non-stop service to Chicago, Denver, and Phoenix. With these investments, we will have the highest network utility in San Diego by a wide margin and offer non-stop service to 44 destinations, 26% more than any other carrier. Credit card growth has surpassed our San Diego capacity growth, which is evidence that our network investments are driving outsized loyalty. In fact, San Diego now has the highest average card spend of any city we serve within the state of California.

Our product and offerings are well-suited for San Diego, and we are excited to see San Diegans respond positively to our continued expansion and differentiated premium service. Now, turning to our outlook, we expect our capacity to be up approximately 2-3% in the Q2. Importantly, this growth is all driven by our Hawaiian Airlines assets, which are performing exceptionally well. Hawaiian asset growth is slated to be up double digits as we implement network changes and increase utilization, while our Alaska assets are not expected to grow at all this quarter. We still expect our full-year capacity growth to be approximately 2-3%. That said, we are currently evaluating certain off-peak capacity adjustments this fall as we continue to monitor the demand environment. Unit revenues are expected to be flat to down, low single digits in the Q2.

Overall, bookings have stabilized as we look forward, albeit at lower yields than originally planned. Hawaii continues to book well, with flat to positive loads and yields despite double-digit increases in capacity. Managed corporate revenue, after posting a record January, ended the quarter up 3% and has also stabilized. We've seen material improvements from two of our largest accounts in the last several weeks after a meaningful step back in February and March, and total forward bookings are up low single digits, improved from where they seem to have bottomed out in March. Although the year has not started off as we had envisioned, we remain focused on building scale, relevance, and loyalty through our commercial initiatives for long-term success. Our revenues are more diversified than ever, and this will only continue to grow as we execute our plan over the coming years, adding strength and resiliency to Air Group.

Our yields, loyalty, traffic, and revenue growth all point to a strong foundation that will bring additional revenue upside as the environment further stabilizes and ultimately recovers. With that, I'll pass it over to Shane.

Thanks, Andrew. For the Q1, we reported an adjusted loss per share of $0.77, which was $0.07, or just $10 million of profit below our guide. This was a strong result given our more than 90% domestic exposure and the rapidly changed demand backdrop the entire industry experienced in the quarter. More importantly, execution of the very early stages of our 2027 Alaska Accelerate vision we shared at Investor Day last year is going extremely well. The only disappointment in the Q1 was the softening macro environment. Our synergy ramp, our commercial initiatives, and our cost performance were right on or better than our plan, and our domestic unit revenue led the industry. These are strong initial steps on our path to achieve at least $10 in earnings per share.

Moving to our balance sheet and liquidity, our total liquidity, inclusive of on-hand cash and undrawn lines of credit, stood at $3.3 billion at quarter end. Scheduled debt repayments for the quarter were $155 million and are expected to be approximately $100 million in the Q2. Our debt to cap stood at 58%, with our net leverage at 2.1 times. Share repurchases have totaled $149 million year-to-date and nearly $400 million in the last six months, or approximately 5% of our market capitalization. We plan to continue to execute repurchases aggressively at our current low market valuation, given our conviction and our ability to drive future earnings, and we'll do so while maintaining our commitment to a healthy balance sheet. Q1 unit costs were up 2.1% year-over-year, coming in better than expected and reflecting the new contract we ratified with our Alaska flight attendants in February.

Our cost expectations remain unchanged and on track for the year, with the largest areas of year-over-year increases in wages and real estate costs, as we've discussed before. Also, as indicated last call, the Q2 will be the most pressured this year, with improving unit cost trends in the second half of the year. For the Q2, unit costs are expected to be up mid to high single digits, consistent with our original plan and on capacity growth of just 2-3%. Our fuel price averaged $2.61 per gallon, consistent with our original expectation. While crude prices came down recently, West Coast refining margins spiked in the last three weeks of the quarter to well above 70 cents due to unplanned refinery maintenance events. Margins have since come back down over the past two weeks.

For the Q2, we expect EPS of $1.15-$1.65, reflecting approximately 6% of revenue impact from the demand backdrop. Absent this softer outlook, the areas of our business within our control are performing well and remain in line with our prior expectations. While we've started to see stabilization, the environment remains challenging to predict, and for now, we will pause on providing an update to our full-year expectations. To provide some context to the rest of the year, however, we have seen a five-point deterioration of revenue for the first half, and if this continued throughout the rest of the year, we still expect to be solidly profitable and expect to continue to outperform on a domestic unit revenue basis. Demand fluctuations and uncertainty are not new for our industry or our team.

We are well-versed in navigating these environments, and we will again continue to focus on building strength into Alaska so when demand returns to more robust levels, we are poised to capitalize on it and outperform our peers. We have an exciting future ahead of us with many unique drivers of value and are pleased with the initial stages of delivering on both integration and our Alaska Accelerate commercial and synergy initiatives this quarter. We believe we have a business model that can outperform in any industry backdrop and have the best domestic setup for the long term. Let's go to your questions.