Good morning. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group Second Quarter Earnings Release Conference Call. Today's call is being recorded and will be available for future playback at alaskaair.com. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for analysts. Thank you. I would now like to turn the call over to Alaska Air Group's Director, Investor Relations Emily Halverson.

Thank you, Erica. Good morning, and thank you for joining us for our second quarter 2020 earnings call. On today's call, you'll hear updates from Brad, Ben, and Shane. Several other members of our management team are also on the line to answer your questions during the Q&A portion of the call. The global health and economic crises continue to significantly impact our business and outlook. This morning Alaska Air Group reported a second quarter GAAP net loss of $214 million. Excluding special items and mark-to-market adjustments, Air Group reported an adjusted net loss of $439 million. Special items this quarter include approximately $69 million of lease return charges that were triggered as a result of certain aircraft being permanently parked and a $362 million benefit related to the CARES Act payroll support program wage offset. As a reminder, our comments today will include forward-looking statements regarding future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found in our SEC filings. On today's call, we'll refer to certain non-GAAP financial measures such as adjusted earnings and unit costs excluding fuel. And as usual, we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. And now, I'll turn it over to Brad for his opening remarks.

Thanks, Emily, and good morning, everybody. As you all know, we're now nearly five months into the deepest and most uncertain downturn in aviation history. While we've weathered many crises before, this global health pandemic and economic devastation are unlike any the industry has faced before. Here at Alaska, we're focused on two priorities: first, keeping our employees and guests healthy and safe; and second, ensuring our airline is here to support and serve them in the future. I'm very confident that we're taking the right steps to get us through the crisis and to ensure our long-term success. In the second quarter, our leaders and frontline employees took dramatic action to reduce our capacity to significantly lower our cost trajectory, fortify our liquidity, and moderate our cash burn rate. The men and women of Alaska and Horizon have always been at their best in the face of adversity, and this could not be more true today. Here are a few examples of their efforts: Our health and safety team, led by Max Tidwell, have led the charge in ensuring the health and safety of our guests. They've partnered with infectious disease experts from the University of Washington and other medical advisers to add layers of safety throughout the travel journey that build our guest confidence in flying. Ben will touch on these measures in a moment, and many of these are also highlighted in our press release. Our crews and frontline workers have continued to provide our guests with remarkable care. Scaling down our operation, revising schedules, and changing policies have introduced a great deal of change and complexity to our operation. Our people have handled this complexity with poise and grace, educating our guests about the in-airport and onboard policy changes, and providing them the best and safest experience possible. In the back office, our alliance teams and many others have continued to lay important groundwork for our future by moving our partnerships with American and oneworld forward. We're pleased to announce that we've received our formal invitation to join the oneworld alliance. We challenge our teams to accelerate their behind-the-scenes efforts to push for our entrance by the end of the year. This is admittedly an aggressive goal. And our finance and legal teams have worked with dedication to preserve and enhance our financial strength. In July, the team secured new EETC debt financing of nearly $1.2 billion, increasing our already strong liquidity position to $3.7 billion today. We entered this crisis with a strong balance sheet, and this liquidity infusion gives us even more staying power. As Emily mentioned, we reported a second quarter adjusted net loss of $439 million, which excludes the benefit of the CARES Act payroll support program. These results came while flying at capacity levels that were 75% below the prior year. This is a sobering loss. It's the largest quarterly loss in our history, and it's obviously not a sustainable result. Our total revenues were down 82% for the quarter. And as bad as this number is, we believe it will be significantly better than the industry, which is a testament to our route structure and our low fares. Our adjusted operating expenses were down 47% for the quarter, and excluding PSP wage offsets, our wages and related costs were down 20%. In the second quarter, we were among the fastest in the industry to bring our cash burn rate down. During the month of June, our absolute cash burn rate of $4 million per day was the best in the industry on a size-adjusted basis. We expect our July cash burn rate to be up in part due to slowing ticket sales. We're fully focused on getting our cash burn rate to zero. As you know, it's our goal to reach this objective by year-end, and achieving this goal will require two things: one, it will require us to do everything possible to manage costs and to help our customers know that they are safe flying with us; and two, it will require a more positive national backdrop with respect to the virus. The news of late has been negative with cases up, return-to-office schedules delayed, quarantines extended, and schools announcing remote learning for the fall. We take great pride in controlling everything that is within our control. We will continue to do this, and I am very confident that Alaska will reach cash breakeven at or near the front of the pack with respect to our airline competitors. Once we get beyond cash breakeven, we have confidence that our low-fare, low-cost structure and our strong network footprint will continue to be a source of strength, but the reality we likely face is that a recovery to 2019 levels will take at least two years. Flexibility is essential in this environment. But given what we know today, we are planning for our business to be smaller for the foreseeable future. Ben will share more details in a moment, but our current plans are to be 35% smaller than last year in October, and then building gradually to 20% smaller than 2019 levels by the summer of 2021. We've made some difficult changes to reduce management positions, and we're working on programs now for our frontline employees. We've made significant progress already, and I'm optimistic that we'll continue to reduce the number of furloughs required through early-out programs, leaves of absence, and incentive lines. To be clear, our employees did nothing to cause or contribute to the economic environment that has led us to make these challenging decisions, and they've given everything they've got to push Alaska and Horizon forward. These two facts make these decisions incredibly difficult. We look forward to a day when we return to growing our airline. For today, we're focused on structuring our organization for our current reality, and this means adjusting our fleet size and our employee base. While this is a necessary step, I know that everyone here has the resolve to set a strong new foundation from which we can and will build our airline back to the size and growth trajectory we had prior to the crisis. Before I pass this over to Ben, I want to recognize the heavy weight that many people in our country, including many of our employees, are carrying in these trying times. On top of the tragedy of the coronavirus, our nation is grappling with long-standing and deeply rooted racial injustice. We all have a responsibility to do better, and I want the black employees at Alaska and Horizon to know that this is a responsibility that those of us in leadership embrace. We stand for helping one another, and we stand for being good to one another. We are committed to listen, to learn, and to do everything we can to effect positive and lasting changes in our company, in our communities, and in our country. And with that, I'll turn this over to Ben.

Thanks, Brad, and good morning, everyone. Since this crisis began, our leadership team has been focused on creating plans for whatever scenario we may encounter to candidly communicate those plans with our people and then to execute to the best of our abilities. Before updating you on how we're doing that, I'd like to provide some context for what we're seeing in the current environment. By several measures, it is clear that the low point in this down cycle was in April. And we have now begun the slow, likely uneven climb to recovery. April load factors were 16%, as passenger counts had bottomed early in the month at only 4% of normal levels. Flight searches and new bookings hit a low point the following week, demonstrating confidence in future travel was also eroding. Load factors improved to 52% for June due to both returning passenger demand and actions we took to right-size our capacity. Passenger counts increased to an average of 30,000 per day, or 20% of normal, and flight searches at alaskaair.com rebounded to better than 50% of normal. These developments came as markets along the West Coast and the Southwest, including Texas, Phoenix, and Las Vegas, moved to reopen, and people's confidence in flying grew, driving leisure demand back to approximately 50% of normal levels. We expect July load factors to show further improvement to approximately 55%, on a sequential five-point increase in capacity from June. But, as Brad mentioned, we've seen some of these upward trends stall more recently as many of the geographies where we fly have experienced an increase in case levels, which paused many of the local reopening plans. Demand is not something we can fully control, but we are doing our best to earn guest confidence and create the right environment for an eventual strong return in demand. Today, we recognize that customers fall into one of three buckets: those who will travel, those who might travel, and those who won't travel. By delivering best-in-class health and safety policies and clear communications, we're connecting with those who will and those who might, providing them confidence that flying is safe. Even those who won't travel today have the potential to say they might travel tomorrow, and we believe we must be earning their trust as well. Sangita Woerner's team has done a fantastic job implementing the program we call Next-Level Care, offering layers of safety through every single stage of travel and helping our guests build confidence for flying. Our safety measures include: making the preflight experience as contactless as possible and adding a health agreement during check-in; requiring masks for both guests and employees and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so; using the latest air filtration technology and hospital-grade filters to remove particulates and fully recycle air in the cabin every two to three minutes; exceeding CDC cleaning guidelines and using high-grade disinfectants to reduce the risk of transmissions on board; and keeping middle seats open through September 30, preserving our guests' ability to create personal distance while flying. In our Alaska Listens survey, we've surveyed thousands of guests, and what they care most about are consistent mask policies, the blocking of middle seats, and clean airplanes. 80% of those surveyed also reported that our Next-Level Care measures are working, and they feel strongly that we've created a healthy and safe environment for flying. Alaska is also a strong advocate for temperature screening, and we are actively lobbying for screening to be implemented at airports by TSA. Collectively, we believe these actions we're taking will lay the groundwork for guests to confidently return to flying when they are ready. Shifting now to our longer-term plans. We are committed to doing whatever is necessary to improve our competitive position and set the stage for future growth. Our top financial priority remains improving our cash burn rate and progressing towards our goal to achieve cash breakeven by year-end. To put this in context, I'll share some of our planning assumptions. When we spoke with you last quarter, we knew very little about the crisis we are in today. The future is still largely uncertain and volatile, but the second quarter provided some key insights that help refine our thinking. Today, we are planning for Q3 capacity to be down by approximately 50%, and Q4 will be down by approximately 35%. At these capacity levels, we are also making a planning assumption that cash bookings will recover to 40% to 60% of normal by December. This is not guidance, but demonstrates the parameters that we are operating within as we work to restructure our company. We believe these are reasonable planning assumptions for a few reasons. First, in June, we saw that traveler confidence and psychological safety are strongly connected. As destinations moved to reopen and health concerns began to subside, leisure demand returned quickly. This tells us that the desire to travel is there just below the surface. Unlocking this potential requires ongoing societal progress and cooperation through behaviors like mask-wearing, better, faster, and more reliable testing methods, and improved treatments like a vaccine. We believe this progress will be made, even if slowly. Together, these factors would support continued leisure recovery. Second, we're in the midst of the biggest demand contraction in the history of our industry. As we all know, there are far too many seats flying today for the demand that currently exists. Adding capacity back in a disciplined manner is important for the health of the industry and is critical to our company's cash breakeven goals. Planning for a business that will be 35% smaller in the fourth quarter has implications for our operation and for our people. We have been clear with our employees that no one has a crystal ball to the post-COVID environment, and we will adjust course on capacity if our assumptions don't materialize. Whatever demand and revenue scenario we face, maintaining the strong liquidity position we have built is paramount, and our goal to achieve cash burn breakeven is a primary factor in the scenario plans we're putting together. The strong showing from teams across the organization in the second quarter gives me confidence that we are prepared to manage the change and challenges we're facing. I am so grateful for our dedicated and talented people, and I know we will emerge from this crisis stronger than we came in. With that, I will pass it to Shane.

Thanks, Ben, and hi everyone. Last quarter, we spoke to you about the factors we were focused on as we were beginning to manage Alaska through the initial shock of the COVID-19 crisis, including building our liquidity and aggressively managing our cost profile to preserve cash. Today, I'll provide an update on both areas, as well as share initial thoughts on restructuring Alaska for the future. On the liquidity front, we began 2020 with $1.5 billion in cash and marketable securities. Since March, we have added over $3 billion to that liquidity from a $400 million draw on existing credit lines, $425 million from a one-year loan in March, $163 million in new financing secured by aircraft, approximately $1 billion in payroll support via the CARES Act, and in July, we added $1.2 billion of cash through an EETC transaction. Accumulating this level of liquidity in about 90 days is a superb achievement, with credit due to our teams in treasury, finance, and legal. The EETC is a new addition to our capital structure and the team was exceptional in telling Alaska's story, attracting new investors, and closing the $1.2 billion raise at reasonable rates. I would add that while we moved quickly, we also had clear objectives we applied to guide our thinking about how to initially add liquidity during this crisis, which were: one, retaining strategic and financial flexibility; two, achieving a low cost of financing; three, maximizing cash yield from our collateral; and four, avoiding dilution of our equity base. Our current financing mix nicely balances these objectives and leaves room for us to take further action if we need to. Today, we have $3.7 billion of cash on hand. We have $1.1 billion of unencumbered aircraft and non-aircraft collateral, and we also have our Mileage Plan assets available to use as collateral for future financing. In the immediate term, given the uncertainty going forward, we do intend to continue to evaluate and pursue smart ways to add liquidity. We are in ongoing discussions with the United States Treasury for participation in the CARES Act loan program, which could provide an additional $1.1 billion in financing, utilizing our Mileage Plan assets as collateral. In July, we signed a non-binding LOI with Treasury and anticipate final terms would be reached over the next eight weeks. In parallel to the ongoing discussions with Treasury, we are evaluating other avenues of collateralizing Mileage Plan and other assets as well. In addition to raising capital, the most important goal we have is to aggressively manage our cash burn rate. As mentioned, we do believe we were successful this past quarter in managing cash burn down at the quickest rate in the industry. This progress is a testament to Alaska's low-cost culture and the commitment of employees throughout our organization. In fact, in the second quarter, our adjusted operating expenses reduced by 47% on 75% less capacity. We typically view our cost as 40% variable in the near term, so to achieve a 47% reduction is a good result. Regarding the cash burn rate, ours declined from over $400 million per month run rate exiting March to $120 million in June. As a reminder, we define cash burn as all operating cash receipts or cash that will turn into revenue, plus investment earnings offset by all cash expenditures including debt service and CapEx. We exclude financing raises or payroll support funding from this metric. The improvement between March and June was driven by improved bookings with stabilized cancellations, payroll savings of $45 million through the use of voluntary leaves, reducing management schedules, and flexing crews down to contractual minimums, variable cost removal on reduced capacity, and the immediate suspension of discretionary and reduction of overhead spend. July's cash burn, however, will be higher than June's driven by the slowing of forward ticket sales and the variable cost of incremental flying in the month. As Ben mentioned, our planning assumption today is for capacity to be down 35% in Q4, and we are planning for cash booking scenarios of down 40% to down 60%. I want to expand on what that will mean for our cash burn goals, our people, and our cost structure. To achieve cash breakeven by year-end while operating at levels 35% below 2019, we must reduce the size of our workforce. Today we have approximately 23,000 employees, and we would likely need as many as 7,000 fewer active in the fourth quarter. Our goal is to mitigate to the greatest degree possible involuntary furloughs. As of today, over 30% of our employees are on voluntary leaves of absence, and we will continue to offer that program for the remainder of the year. In July, we initiated early-out programs for all our frontline workers and offered incentive leaves to pilots. While we will need to send out WARN notices on August 1st to potentially impacted employees, these mitigation efforts will reduce the number of involuntary furloughs that we expect to face in the future. Also, we have made the decision to reduce our management positions by 300 or 15% effective October 1. These are in addition to prior reductions of about 200 over the past couple of years. It goes without saying these decisions have regrettable and meaningful impacts on employees who invested their careers here. While extraordinarily difficult, these actions are necessary given the realities of our business going forward. Beyond these immediate decisions impacting our payroll, we are also finalizing our plans to repair our cost structure and to ensure our ability to reach cash breakeven even in a severely depressed revenue environment. It is our intent to ultimately return Alaska to pre-COVID CASMex levels even if we are a smaller company on a sustained basis. To begin that effort, we are targeting to achieve structural cost reductions that would hit a $250 million savings run rate exiting the year. We'll have more to say on future calls on specifics of our restructuring plan. As we turn to questions, I would close by saying that while all of this is easy to read off of my script, the truth is these things are very hard to do because they impact people. We are truly drawing lessons from our past, where tough, but balanced decisions were made by those management teams, which then put Alaska on a course to achieve all it has the past 15 years. And that mindset hasn't changed. We have to run a good business in order to have the future we want for our people. And with that, let's go to your questions.

Your first question comes from Joseph DeNardi with Stifel.

Hey, good morning. Maybe Shane or Ben, can you just talk about maybe some of the conversations you're having with your corporate customers? You talked about maybe the kind of the three buckets of your customers. And can you maybe speak to kind of the confidence you have at maybe the pace at which corporate returns and maybe how much does not return? And I know it's a difficult question, but maybe just kind of the framework you're using to approach that. Thank you.

Thanks, Joe. I'm going to let Andrew. Andrew's been doing some work on that, so Andrew can provide some color.

Joe, thanks for your question. Yes, we're obviously talking about corporate customers weekly. We're seeing what I believe the whole industry is seeing is that corporate travel is massively down over 90%. A big part of what the corporate accounts are dealing with is this concept of duty of care. And so with the extension of closing office spaces right now we're not really seeing any thawing in the business demand. And so as Shane has been discussing, we are just going to be structuring our business in a way for a more prolonged comeback of business. That said, we've always excelled on the leisure side and that we continue to expect to occur.

And then Shane, just on the loyalty program, if you use it as collateral for the loan package from Treasury, how much additional financing capacity do you think exists against it? Thank you.

Yes. Thanks, Joe. I appreciate the question. So as you know, and I think this is one issue we are running into with the CARES loan program with Treasury. They're capped in how much they can actually allow us to finance with that program. And we believe that they're capped at a rate that's well below the total value of Mileage Plan. And so, it was our intent to pursue getting additional financing out in the public markets. Recently, we've been presented with terms that would limit our ability to do that and that wasn't something we expected to be part of the terms with Treasury 45 days ago. So we are still processing that, working with Treasury and making sure that they understand that we think our ability to get full value for Mileage Plan from multiple sources partly from them and partly from public markets is in fact in everybody's best interest. So we're working through that. I think what we showed last time, we kind of gave you guys the roadmap that suggests that the Mileage Plan value was a little over $5 billion. And you can sort of apply your best guess on LTVs or how much we could get from it. But the government is capped at $1.1 billion, and we think we can raise much more on the $5 billion or more base of value that we have.

Got it. It's helpful. Thank you.

Thanks, Joe.

Your next question is from Savi Syth with Raymond James.

Hi, good morning. Appreciate all the color on the cash burn and everything. I was kind of curious, so does this $250 million structural program, I realize it's a stretched goal, but does that get you to cash breakeven today, if things do not improve the way you're thinking about it?

Thank you, Savi. I want to clarify that there's a connection here. What we’re looking at is a run rate, or an exit rate, that would annualize to $250 million. This doesn't mean there will be a structural reduction of $250 million by the end of the year. It will be part of our approach to achieve cash breakeven. Even under the scenario of 40% to 60% revenue, we will need to implement this to reach that goal. Additionally, reaching cash breakeven is just one step on our journey back to profitability, debt repayment, and growth. We are committed to aggressively restructuring the company to return to a growth path and address the debt we’ve taken on.

That's helpful. And then if I might follow up on the revenue answer and commentary. So I'm just trying to understand as you think through kind of the projection here. The September average is it kind of fair to assume that September doesn't do as well as August on a year-over-year revenue basis because it historically relies more on business passengers, or are you kind of based on the build you're seeing in leisure, etcetera, is that not a fair assumption?

Yes. I believe September will likely be worse than August based on current observations. While I wouldn’t attribute that solely to specific factors, as Andrew mentioned, we don’t anticipate a return to business travel anytime soon, certainly not by September. We had hoped for some incremental growth throughout the quarter had the country not experienced renewed shutdowns. However, that doesn't seem likely at this moment, which aligns with what Brad and Ben discussed earlier.

Savi, it's Brad. Typically, there is some seasonal business effect that helps September. The weather is still nice, and kids are returning to school. However, what we're experiencing aligns with trends seen across other airlines. The recent news about rising coronavirus cases has shifted perceptions, and quarantines are being extended from July into August and potentially September. Employers are indicating they prefer their staff not to travel, and plans for returning to the office are being postponed. In many areas, schools are a significant factor in this situation. We witnessed strong demand leading up to the July 4th weekend, with daily customer numbers steadily increasing. However, as the narrative shifted and headlines changed, all airlines have faced a decline in future travel bookings, creating concerns for August and September. I want to emphasize our commitment to managing our schedule wisely and working towards reducing cash burn significantly. We are managing what we can control to the best of our ability. It’s important to recognize that the current environment is quite different from what it was just a month ago.

Make sense. Appreciate that. Thank you.

Yeah.

Thanks, Savi.

Your next question is from Hunter Keay with Wolfe Research.

Hey, good morning.

Hi, Hunter.

So I think you're secure enough for me to ask you this question. Obviously COVID is an opportunity to make a lot of changes that can't be made when times are good. So, what are two or three things that you think Southwest Airlines does really well that you think you can mimic for yourselves?

Well, Hunter, it's Ben. Right from the start, I want to express our admiration for Southwest. They are an excellent company with outstanding leadership. When you examine Southwest, their success is largely due to their low-cost structure, which has been a focus throughout my career and Brad's as well. Maintaining low costs is crucial in both good and challenging times. One aspect we both respect about Southwest is their strong balance sheet. As Shane mentioned, the less cash we consume, the less we have to settle when we emerge from this situation. Our priority is to navigate through this crisis, reach cash breakeven, start addressing our debt, and return to a growth trajectory, while ensuring we have enough resources to seize new opportunities. It's clear why Southwest is experiencing remarkable growth, and we share a similar mindset. There are many admirable qualities about them that we will continue to appreciate. Brad, do you have anything to add?

It's good.

Yeah.

Okay. And then maybe you said this, I'm sorry Shane if not. You said it will take two years to restore the schedule of 2019 capacity. Does that mean that it should take about two years to get to that CASMex of 2019 or better too? Is that fair?

Hey, Hunter. Yeah. In the script, that's what Brad mentioned; while we don't have a crystal ball, we're looking out and thinking it's going to be a two-year process. I would say we would want to be left of that. And we're not in a position to give you specific dates at this time. But I think what I said in my script was our intent is to get to pre-COVID CASMex even if we're a smaller company on a sustained basis. And so we're working through that. We'll have more to talk about on the next call I'm sure on this topic. But no, I don't think that we're waiting to get back to pre-COVID capacity to reach our pre-COVID CASMex.

Okay Shane. Thanks a lot.

Thanks, Hunter.

Your next question is from Jamie Baker with JPMorgan.

Good morning. I just wanted to quickly follow up. My line was cutting in and out while you were discussing a cap at Treasury. Perhaps I misunderstood, but which specific cap were you referring to?

Yes. Hi Jamie, this is Shane. So, they are limited in how much they can loan to each of the airlines, right? It's a $25 billion package, and it's apportioned based off of capacity pre-COVID. And so they can only loan us up to $1.128 billion. And what we were saying is we think our Mileage Plan assets could fetch more than that in total. We don't want to be limited on how much we can go do with other parties.

All right. We're good then because I thought maybe you were referring to some arbitrary cap on what they can accept in total from the industry on loyalty as collateral. I apologize for that. To return to a pre-COVID ex-fuel CASM level on a smaller footprint, do you believe you can achieve that without changes in wages and work rules?

It's a good question, Jamie. I'm not going to totally speculate on that at this point. I will tell you that it will require us to reach pre-sort of peak levels of utilization and productivity, which we've got to do. We were I think one of the best in the industry in terms of the productivity of all of our Air Group assets, airport assets, airplanes. Because of growth congestion integration dual fleet, we've stepped off of those peaks recently, and one way to get back to where we need to get back there is to reclaim those peaks. So, I totally appreciate the question. I get where you're coming from. I think it's a little premature to know exactly how we're going to go do this, but we're going to be willing to talk about this stuff as we move forward.

Got it. And if I can sneak in a final one. I assume you're in possibly daily contact with officials in Hawaii. Do you care to hazard a guess as to whether the modified September 1st date holds and how forward bookings are looking beyond that date?

Hey Jamie, it's Andrew. We've obviously seen it extended a couple of times now. We're staying in close contact. I don't know where it's going to be, but I certainly think there's a high risk that that may slip again. But again, we just monitor that, and we take each day as it comes.

Fair enough. Thank you, everybody.

Thanks, Jamie.

Your next question is from Catherine O'Brien with Goldman Sachs.

Hey, good morning everyone. Thanks for the time.

Hi Kate.

Hey guys. So, on the month of June cash burn improvement we saw through the quarter from your initial guide back at 1Q earnings. I know you gave some color on what drove that better performance. But can you just help us think about proportionately how that better performance was driven between cost and better demand? And then as a team, it seems you have quite the history of finding incremental cost savings. So, any ongoing projects that drive cash burn down from that $200 million figure you've gotten July out there even excluding a better demand backdrop? Thanks.

Kate, I will start and then Shane will discuss the cost aspect. A significant factor is our network and our low-fare offering. If we examine our revenue figures, we saw an 82% decline, which I mentioned earlier. That's a disappointing figure for any business and industry, but it may be among the best in the industry or very close to it. The combination of our route network, our flying strategies, fare structures, and loyalty programs contributed positively in the second quarter and will continue to benefit us moving forward. Shane, the cost aspect you mentioned is something Alaska has historically excelled at, and we will be focusing on enhancing that area further. Perhaps you can elaborate on that.

Yes. Kate, it's a great question. I would go back to it was really important that we got all of the variable cost out that we thought we should, and we did. And I talked about this last quarter, a one-to-one relationship on the variable costs which is good to prove. We always think we know what the variable costs are, but we were able to prove that out. There were a lot of things that we did in the immediate term that were probably more temporary, and that's why we're starting to shift the conversation to structural cost reductions. A lot of the stuff in this quarter was just suspension of all discretionary spending, really aggressive offering of voluntary leaves, which as I said in the script, 30% of our folks took, which was a huge help on the payroll line. There wasn't a lot of structural stuff that we had done in the quarter though, and that's what we've got to go start to work on. The first thing that we've done is reduce the management team size, which I mentioned in the script as well. And we're working on that list of ideas that we've got to go execute on to get the rest of this goal that we've got out in front of us.

Okay. Great. Maybe one, I don't know how this would factor into your thought process on driving those structural costs out. But any updates for us on the fleet decision to remain a two-aircraft-type carrier or go back to a single fleet? And then how should we be thinking about lease return expenses for the rest of this year and next? Obviously not as big of a factor as it was pre-COVID, but still one to think about? Thanks.

Catie, it's Nat Pieper. I think no question the fleet is a healthy proportion of the structural savings that Shane is talking about. And academically you kind of can think of it this way: if you're going to keep a mixed fleet going forward, you better leverage that to get advantages in ownership cost, better lease pricing, and using competition, and also on the revenue side having different airplanes to match the different markets. The counter to it is on a single fleet you better get operating efficiencies. And so as part of the structural savings, we've got to figure that out. And as we start to narrow down the Airbus aircraft that we have, we parked all 10 of our A319 last quarter and two of our A320s. We've got 39 leased Airbus A320s left that have expirations over the next three to five years. And we're starting to creatively look at ways to phase some of those airplanes out. So, a lot of leverage in that question and a big piece of achieving the structural savings goal we want to.

Great. Thank you so much.

Your next question is from Helane Becker with Cowen.

Thanks very much, Operator. Hi, gentlemen and Emily, thank you for your time.

Hi, Helane.

So, can you guys codeshare with JetBlue through the American codeshare or just on your own?

Helane, it's Andrew here. Number one, I think we don't have a relationship with obviously JetBlue. And number two, we're not in a position to go into the privity of contract details with our West Coast international alliance. I will say that, we are very excited and very committed in discussions. And you've seen the recent oneworld invitation. But both American and Alaska, I think are really well positioned to grow our presence and strength off the West Coast, both on the corporate side and the leisure side. And we've spent a lot of months putting together a very compelling alliance on the West Coast, and we're very excited to start to get that into motion.

Yeah. International isn't top of mind for people today understandably, but competitively being able to go into the marketplace when corporate travel is back and have a robust solution that covers an extraordinary domestic network but also international is important. So we're going to push this thing hard so that when we have international travel again, which we will, we're really well positioned. We're super excited. American has announced service from Seattle to Bangalore, and Shanghai and London. And the oneworld offering out of Seattle and other West Coast cities is just going to be really, really strong. So we're excited about this, and we're going to push it hard.

Thank you. I appreciate that. For my follow-up question, as you consider emerging from the current situation with COVID and look toward recovery as a smaller airline, do you think this provides an opportunity to exit markets that may not have been viable before, markets you were serving simply because of longstanding practices or because Virgin America was present? Does this situation allow you to be more strategic about your flight locations and schedules?

Helane, I believe the answer is yes. Ben and Andrew might want to add their thoughts, but if we look closely, many changes have already been made. This situation allows us to reorganize our route network. For instance, we are utilizing Anchorage for flights as much as possible. We have reinforced our position in Seattle and see potential for growth in Portland. We hold strong positions in the northwest with cities like Spokane, Boise, Redmond, Oregon, Missoula, and Bozeman. We see opportunities to connect these northwest cities, which have significant mileage for our members, to destinations like San Jose, San Francisco, LAX, and San Diego. We're already working on this. Andrew has also made recent developments out of LAX, which supports the idea. There is definitely an opportunity to reconfigure and enhance the network based on our strengths. As for expecting further changes, I wouldn’t hold my breath; many adjustments have already been implemented. However, Andrew might have a different perspective on that. What do you think?

No. I think Brad's spot on. And I think if you look at our pull downs in our network in general and even in California, we are still in the majority in the utility of the California network just at a significantly reduced frequency. And as Brad mentioned, really some of the L.A. moves are really just a general reshaping of our network. But I will agree with one thing in respect of all of this is that there is a rebaselining of the nation's networks. And you are seeing all carriers having to make deliberate choices about where they're going to serve and where they're going to make adjustments. And I think that's going to play out over time, and we'll make sure that we are focusing on that as we move forward.

That’s really helpful, Brad and Andrew. Thank you very much for your help there.

Thanks, Helane.

Thanks, Helane.

Your next question is from Duane Pfennigwerth with Evercore ISI.

Thank you. I have a philosophical question considering many inquiries about leverage limits at the board level. There are numerous intriguing questions at the moment regarding collateral and the various assets you could potentially leverage, such as your Mileage Plan, brand, office furniture, and even office supplies. Why are there limits in place? Does it make sense to borrow against every last piece of collateral you possess right now? If not, what is the rationale based on the organization's history?

Thanks, Duane. What’s crucial for us is to navigate whatever form the downturn and the inconsistent recovery take. Even with all the capital raises we’ve completed, our debt-to-cap ratio remains below 60%. If we pursue an additional liquidity of $1 billion to $2 billion, we would still be under a 70% or 75% debt-to-cap ratio. Therefore, we have room on our balance sheet. The question is valid, but I believe it's a bit early to discuss limits on using non-traditional assets like our brand and other resources to bolster our liquidity further. Our viewpoint is that we will raise the necessary cash to endure this period and will manage costs very aggressively. Once we reach cash breakeven, it becomes a non-issue; we can sustain ourselves for as long as needed. Both aspects are critical in our perspective.

Shane, so we want to borrow, we just don't want to use the money. So like one mental model we have is have the finance team, hard at work borrowing, I don't know if it's as much as we can, but borrowing really shoring up our liquidity. And then hopefully things get better and we start paying that money off. That's kind of the mental model that I see for the finance team. It's do everything we have to do to ensure our staying power. But then at some point, we'll have a vaccine; things will be better. And as soon as we get there, we start reducing those debt balances.

Okay. Appreciate the thoughts.

Thanks, Duane.

Thanks, Duane.

Your next question is from Mike Linenberg with Deutsche Bank.

Good morning, everyone. Brad, your initial comment about your cash burn being among the best in the industry is notable and reflects your route structure and low fares. Andrew, in response to Helane's question, you briefly mentioned the adjustments being made to the network. It seems that the modifications you've made in the last three to six months exceed those of the competition. I'm curious about the extent to which these changes were a response to COVID-19, possibly shifting aircraft from business markets to leisure-focused markets, versus the impact of the American agreement from February, which aimed to enhance connectivity across networks. Is it a mix of both factors? I'd like to understand the thought process and motivations behind these network changes.

Hey, Mike, I mean, just at the highest-level summary, I think the most significant changes I think you're referring to are really boiled down into serving secondary Pacific Northwest markets from California. I mean, if you look at the vast majority of the changes in numbers at the high level, that's what they would be. And I think these are markets where we are strong. We've got good regional aircraft right now to do this makes sense for us, and that was part of our strategy shift. And as we got into this, it still made sense to do those. I think some of the other changes you've seen are just retweaking and looking at, for instance, L.A. and making sure that we're positioned on the leisure side, which we're solid at. So I think overall, but I think at the end of the day if you look at the network, it's essentially utility-wise the same except that frequencies are significantly down right now in these massively depressed transcon market in California. And we've pretty much maintained everything in Seattle from a destination perspective.

Okay. Okay. That's helpful. And then maybe to Ben on the airport side. We've heard airlines as an industry talk about ways to improve peace of mind with customers finding ways to get them to want to travel again. And the concept of temperature screening by the TSA, it's been kicked around for some time now. It feels like several months. And yet I'm not sure if it's gone anywhere. What are some of the gating issues in trying to move that along?

This is on temperature screening. Diana, you've done some work there. Yes.

Yes. So we are strongly advocating for the TSA to take up temperature screening. We're doing a proof of concept with the Port of Seattle here in the Sea-Tac Airport. Honestly, I think there's some just varied science on whether or not it actually does sufficiently screen people, whether there's enough people that are caught with temperatures high enough to actually screen them out. And so there's ongoing debate about whether or not it's worth putting it in place across airports. But we are continuing to ask for it. It's another layer of safety in addition to all of our steps in Next-Level Care. And it could increase guest confidence.

Like we have them here in the building honestly everywhere we go in. I'll tell you, it's slick technology. I don't know if you have it. You just put your face and literally two seconds it takes your temperature. And we're just saying look, it's just another level of confidence for customers that come in to say, look, your temperature is normal. It's just another step in making sure that people are getting on board airplanes that are safe. So we're going to continue advocating for it. Likely not go as fast as we would like, but we're going to continue pushing on it because I think it's just part of the confidence of society and people flying.

Okay. Very good. Thank you.

Okay.

Your next question is from Brandon Oglenski with Barclays.

Hey, good morning everyone. Thanks for taking my question. I guess Brad at a high level, should investors expect that you guys not only want to manage to like a cash breakeven level or backing up before full recovery or should we even expect that like if this drags on longer that you guys could move towards earnings? And is that I guess from the outside looking in is that even a prudent decision because if you expect demand to come back maybe you don't want to cut costs that far. Can you just help us out on that?

I believe it's important to maintain the right mindset. Businesses need to find a balance between sustainability and liquidity while effectively managing cash flow, profitability, and fundraising to retain control of their future, all while also seizing strategic opportunities. If you have tracked Alaska over the past few decades through various challenges, you may have noticed our contrarian strategies. We've made some of our most significant moves during downturns. Currently, however, demand across all airlines, including Alaska, is significantly low. Therefore, we feel that our focus should be on adjusting our schedule to align with the current demand and continuing our efforts on the liquidity front. Regarding our cost structure, we aim to make improvements that will strengthen us for the future. Essentially, we want to be positioned to take advantage of opportunities as they arise. At this moment, our primary concern is resizing due to the exceptionally weak demand faced by all airlines.

Brandon, I'll add on that. I think when you look at our Q4 capacity down 35%; I think we're in a good place. I don't think that's overly aggressive, overly conservative. It allows us to flex up or down and allows us to manage costs and also take advantage of an uptick in demand. So I think we're threading the needle pretty well on that.

Thank you. Sorry about the cell phone.

No worries.

Your next question is from Darryl Genovesi with Vertical Research.

Hi guys. Thanks for time. Andrew or if Nat's on the line, I think at the time you closed the Virgin America deal you had to scale back the American Airlines relationship. Would you just remind us what you're not allowed to do with American and whether you're waiting on any regulatory approvals to reramp that relationship or the relationship with the oneworld carriers more broadly?

Yes. Darryl I think there was a couple of components, about 50-plus markets in all. But essentially, we weren't allowed to cooperate on all the Virgin America overlap markets, which were essentially California. And then secondly, at a high level on our hubs, so Seattle, Portland, San Francisco, etcetera, we were not allowed to put our code on American's flight out of our hubs and vice versa. So the best way to think about it is that the historical Virgin America network was sort of off limits. And then secondarily, really getting connections beyond American's network and beyond our network was still fine. So we continue to operate within those parameters obviously and look at what options on what we may need to do going forward. But I will say as it stands today, we still given those have a lot of opportunity to work with American.

And Darryl, this is Kyle. On your second question, we're totally clear of regulatory requirements. We cleared those hurdles I think in early May or so.

Okay. Shane mentioned a $250 million target for reducing structural costs. Is there a similarly significant figure related to the oneworld membership, even if you're not prepared to share that number yet?

Oh, yes. So Darryl, yes, we haven't really put any sort of information out in terms of what the value of that might be. I don't think we're going to do that this morning either. But suffice it to say, Brad, I think and Andrew both did a really good summary. The opening up of the globe through our major West Coast hubs and focus cities is going to create a lot of value for customers that we think we're excited about.

And the other thing I would just add is it puts us on an international platform as it relates to our loyalty members. And something that we've always been missing in the Pacific Northwest is a good seamless global connectivity story with elite reciprocity across the globe and this is going to bring us that.

Perfect. Thanks a lot, guys.

Thanks, Darryl.

Your final question comes from Myles Walton with UBS.

Hey, good morning. Just a couple of cleanup questions if I could. The first on cost reduction in the third quarter, 47% in the second quarter. What's the bogey that you're putting there for the third quarter?

Yes. We did not provide guidance on that, so I can't give you a specific number. Additional capacity will incur some costs. As mentioned, we have reduced a lot of expenses, with examples like cutting 70%, 80%, or 90% on maintenance spending. This is not a long-term strategy. We need to start bringing aircraft out of storage and will have to invest in maintenance for those. Therefore, there will be some costs that we'll add back, which is why it's crucial to see improvements in national public health to stimulate demand and regain the trends we observed in late June and early July. I anticipate that the cost reductions will be somewhat less in the next quarter compared to this one, but we have not provided specific guidance.

Okay. And then one other cleanup. On the yield in the second quarter obviously, up 30% year-on-year. Can you just give any nuance to what was going on there? And I guess the outlook for the rest of the year looks more normalizing to prior trends?

Myles, this is Chris Berry. The yields for the second quarter were a bit odd, simply because we still have some residual stuff from the Mileage Plan program on flown miles that really related to the Virgin America acquisition years ago. So that sort of stayed about level, and that's why you see the yields pop in Q2. If you look at the real like raw passenger yields, they really were not up nearly that much. Raw passenger yields were up probably about 9% for the quarter. So you'll see that fall off as we move into third and fourth quarter, and it will be more relative to year-over-year it will look a little bit more realistic.

Thank you, guys.

Okay. I think that's our final question. Thanks, everybody for tuning in. We look forward to chatting with you next quarter.

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