Alaska Air Group, Inc. Q4 FY2020 Earnings Call

Good morning. My name is Sia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group 2020 Fourth Quarter Earnings Release Conference Call. Today's call is being recorded and will be accessible 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. At this time, I would like to turn the conference over to Alaska Air Group's Managing Director, Investor Relations, Emily Halverson. Please go ahead.

Thank you, Sia, and good morning. Thank you for joining us for our fourth quarter 2020 earnings call. This morning we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you'll hear updates from Brad, Ben, 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. Our business and outlook continue to be significantly impacted by the global health and economic crises that are underway. In the fourth quarter, Air Group reported an adjusted net loss excluding special items and mark-to-market adjustments of $316 million. Special items this quarter include $255 million of impairment and estimated return charges that were triggered as a result of certain aircraft being permanently parked. $22 million of benefit related to the first CARES Act payroll support program wage offset and $102 million benefit resulting from the expectation that certain employees will eventually be returning from long-term leave early. Our average daily cash burn for the quarter was approximately $3.8 million. This call marks the end of an unprecedented year, but also a few other important milestones as well. Brad has been with Alaska for 30 years serving as the CEO for the last eight, and this will be his final time speaking as CEO to our investor audience, as he will be retiring on March 31 and handing this license over to Ben. Today also happens to be Andrew Harrison’s birthday. Please join me in wishing both Andrew and Brad the best. Our comments today will include forward-looking statements about 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. We'll also 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.

Thanks, Emily. And I had actually forgotten that today is Andrew's birthday, so happy birthday from me as well, Andrew, and good morning to all of you. As everybody knows, we are roughly a year into this difficult COVID crisis, which has put virtually every airline around the world to the test. We've seen a lot of challenges over our 88 years at Alaska, but none has driven such a deep and prolonged disruption as this one. Our people rose to this challenge that they've done countless times before and the rest of the leadership team and I want to thank them for everything they've done and everything they’re doing to ensure that Alaska emerges from this crisis better and stronger. We'll talk about those things on this call. From the onset of the pandemic through this uneven recovery, we've remained focused on two priorities. First, the health and safety of our employees and our guests, and second, ensuring our airline comes out of this crisis strong and ideally in a better position competitively than when we entered it. These remain our priorities today. Our COVID work streams continue to align our actions around these two priorities. On the safety front, our next level of care program is providing guests with the confidence they need to fly. You know about the many measures we've implemented. We've received external recognition for these, but we also know that our guests who are flying with us are having a very positive experience. And in our fourth quarter Alaska listened survey, 87% of our guests gave us excellent or very good ratings on health and safety. More broadly, our customer satisfaction scores have reached all-time highs in the last few months. One of the great things about Alaska is that often our leaders figure out where we're going to head next and our people figure out how to get us there. That is certainly the case with our health and safety practices. If you haven't had a chance to view our safety dance video, we recommend it. For some time now, we've been analyzing our fleets and determining the best path forward. We were anxious to see if we could use this downturn to reconfigure ourselves and to come to market with a more simple and streamlined fleet. We were pleased in the last couple of months to bring two transactions to ahead. First, we sold our 10 owned A320s. And second, we reached terms on a restructured and enhanced order with Boeing for 68 new 737-9 aircraft. That will get us largely out of the Airbus fleet by the summer of 2023 and that will provide a host of other benefits. Shane will talk more about this. Our customers and employees care greatly about Alaska being a clear leader in the effort to reduce emissions and our carbon impact. This is especially true given our presence on the West Coast. We have long led the industry or been among the top couple of airlines in terms of carbon emissions per passenger. These fleet moves will do nothing but further our lead. From a financial perspective, there's so much we could talk about, but I really want to focus all of us on just two numbers. First, our revenues for 2020 were down a staggering $5.2 billion or 59% as a result of COVID. But second, our total debt factoring in lease obligations and backing out cash on hand is essentially unchanged from last year. I've watched the industry and our company for my entire career and I can't remember a time when two numbers stood in such stark contrast. Shane will describe this further, but from my part, I want to thank the extraordinary leadership team at Alaska and Horizon for aggressively reducing our spending both in variable and fixed areas and I also want to thank them for running our business profitably over the years such that our starting point was a strong balance sheet and robust cash flows from operations. I also want to thank the terrific employees of Alaska Air Group for standing behind their company during a period of significant change. I especially want to thank the 10,600 of them who took leaves of varying lengths to help us bring spending down or to save a job for someone else. Not burdening the company with a massive amount of new debt means that our balance sheet is unimpaired and strong, which means that we can all look forward to using it in the months and years ahead to find new opportunities for all of us. It's very clear the Congress's efforts to support the industry and its employees by providing vital funds to weather the downturn were essential to preserving our balance sheet. Of the $5 billion variance between our revenue loss and our $234 million cash outflow from operations, $753 million represents a grant, which we received as part of the CARES Act and we will receive another $400 million grant in the first quarter. All of us here want to thank leaders on both sides of the aisle and in both the Congress and the administration for their support of our industry and our employees. As Emily said, this will be my final earnings call as CEO of this great company. Before I sign off, I want to express my gratitude to all of you on the buy side and the sell side listening today, and to the folks who came before you. Over the years, I've had the opportunity to build relationships with many of you and you have most definitely pushed us to be better. The financial principles that underpin our management philosophy today, such as maintaining a fortress balance sheet, keeping our pension plans funded, and maintaining a low-cost structure, are principles that have been shaped by conversations with all of you. In the early 2000s, Alaska led the industry in establishing clearly articulated return on capital goals, and after that, return on invested capital goals, and then by aspiring to deliver results like other high-quality industrial companies, not just other airlines. All of these ideas were simple in concept, but they seemed ambitious and radical in an industry that for many of those years had done nothing but accumulate negative retained earnings. Some of the greatest learnings we had came from answering your questions and then walking away realizing that we didn't love the answer we've just given you. You've sharpened our thinking in so many areas. This is a long-winded way of saying thank you. You’ve made Alaska a much, much better business. I really enjoyed my time with all of you and I’ve learned so much. And perhaps most importantly, I want to thank our employees and the guests that we serve. This company has come so far in the last 30 years. I think all of us are humbled by the success that we’ve experience. And when we were challenged—and all airlines are regularly challenged—I was honored to be in the trenches with this fantastic team. Our people have a level of loyalty and dedication to their company that is uncommon in this day and age. If you had to put a point on it, that’s why we’ve done as well as we’ve done and that’s why I’m so optimistic about our future. So thanks to all of you serving this great company has been an honor. While I look forward to staying involved, my primary job in the future is going to be to step back and support Ben and this great team, as they take Alaska to the next level. Over to you, Ben.

Thanks, Brad, and good morning, everyone. I can’t pass on the opportunity to say a bit more about Brad’s impact here at Alaska over the last 30 years. During his time with the company, Alaska went from being one of the smaller airlines in the industry to the fifth largest airline in the country. As many of you know, Brad was CFO from February of 2000 and was instrumental, along with Bill Ayer, in creating a balanced business model providing value to employees, customers, owners, and communities. I want to highlight some of his accomplishments during his career and tenure as CEO. Over these 30 years, our fleet grew from 117 to 330 aircraft and our guests grew six-fold from 8 million to 46 million. Brad mentioned the return on capital goals from our 2010 plan, which were transformative in the industry. He was instrumental in conceptualizing and implementing that plan. This laid the groundwork for the financial discipline we’re proud to have today. In the last decade, he oversaw tremendous growth along the West Coast, including the acquisition of Virgin America. By 2019, revenues under Brad’s watch had grown eight times of 1991 levels. Brad’s focus was always on long-term sustainable growth and our company is stronger for it. Most of all, Brad has remained deeply connected to our culture, our values, and to the 22,000 people that make up this great company. At any Alaska event or station visit, he knows these employees by name and remarkably recalls our last conversation. You’ve probably experienced this yourself as part of our investor community. After 84 quarterly earnings calls, I hope you’ll join me in congratulating Brad on his incredible career. Brad, thank you for all that you’ve done to make our company what it is today. I speak for the whole team when I say Alaska's strong position would not have been possible without your leadership over the last 30 years. So turning to our fourth-quarter results, when we last spoke with you in October, both employment and bookings reached peaks for the pandemic period, and each month was improving from the last. That trend stalled in the fourth quarter, as employment and bookings deteriorated in November, as state and local closures and federal travel warnings came into effect in response to this third wave. In the fourth quarter, our revenue was $808 million, down 64% from the prior year on sellable capacity that was down 59% from the prior year. Sequentially, sellable capacity was up 10 points on Q3, while revenue results improved 7 points. Average daily bookings have increased since they stalled in November. From December to January, average daily bookings have increased by 20% from 49,000 to 58,000, and we’ve experienced several days at over 70,000. This is boosted by the fantastic work our commercial team has been doing to promote and stay connected with our guests. While customers are demonstrating interest in future travel, employment today remains stalled at around 35% of normal levels or about 40,000 passengers per day. Leisure travel continues to be the majority of our guests, both in carried passengers and in future bookings. Markets with the strongest load factors are warm weather destinations and places with outdoor activities. Our longest-haul routes, including Transcon, were the worst performers in the fourth quarter, similar to what you’ve heard across the industry. Demand continues to be severely depressed and came in at approximately 15% of normal levels. A bright spot, however, in our Q4 results was our operational performance. Alaska and Horizon were among the top of the industry in on-time performance for the quarter. It’s important that we carry this momentum forward into 2021. So while we had hoped the fourth-quarter results would be better, we’re cautiously optimistic there will be a step change in demand once the vaccine has been broadly distributed. For the past couple of calls, I’ve shared our thinking about the recovery and planning assumptions we’re using to plan for the future. First, I’d say the recovery has been slow thus far, but we expect there will be a point where it begins to accelerate in earnest. We’ve been treading water recently and believe sustained progressive improvement will begin when we have a widespread vaccine rollout and states are able to relax restrictions. We are confident leisure will lead the recovery, and we believe there is substantial pent-up demand for leisure travel. While we know many of our corporate guests want to get back traveling, we expect that business travel will return to only 50% of normal levels by the end of the year, and this is based on our surveys of corporate customers. So our focus right now is keeping the company ready for when demand does jump and making sure we have a business model that is strong post-pandemic. We remain confident that flying is safe. As I shared last quarter, several independent research studies have shown that consistent usage of masks, coupled with effective airflow and filtration systems on board, create a safe environment for our guests and crew. This is consistent with our own accumulated experience as well. This month, we moved forward with our plan to begin unblocking middle seats in our main cabin, but given the low passenger recovery, we don’t anticipate this to be highly impactful to results for a few months. We’ve left middle seats blocked in our premium cabin through May 31, not as a safety precaution, but as a benefit we can provide to guests who are looking for some extra elbow and legroom. Affordable and accessible testing and streamlined clearance programs also have the potential to reduce travel friction. Pre-clearance programs for destinations that require testing are maturing and may become more prevalent. In December, we were the first airline in the industry to offer Hawaii-bound guests pre-clearance on the West Coast to bypass the airport screening process upon arrival. The CDC has announced the new order requiring passengers entering the U.S. to have proof of either an antigen or a PCR test taken within three days. We’re currently working with our partners and health centers in the international locations we serve to prepare our guests and our teams for this requirement. Given all that I shared with you, we believe our customers are gearing up for traveling this spring and summer. This supports our plans to prepare to fly approximately 80% of 2019 levels by summer. We are poised for a business and our operation to scale to those levels in a measured way. As a result, we plan to fly Q1 capacity at 70% of 2019 levels and expect to carry a load factor between 40% to 45%. These load factor expectations reflect the current state of stalled employments, but we do expect health patterns to improve in the next two months and that restrictions will begin to relax. Additionally, the return of warmer weather in the spring is expected to drive continued interest in people getting out and doing things. As a result, we expect employments to improve in March and beyond. As we add back capacity, we will focus on our strongest hubs in the Pacific Northwest and Alaska. As California adapts to a more open posture, we will eventually begin to focus on adding capacity back there as well. These plans do not reflect any cancellations that we may utilize if conditions ultimately do not support the levels of flying that we have planned. While our capacity plans are consistent with what we shared previously, changes to our fleet that have been recently announced will impact our workforce planning and Shane will share more about that in a moment. The choppy recovery in 2021 will present us with challenges as we scale our business back, but we have a lot to look forward to. Our entry into oneworld is just two months away, and as we move forward with our partnership with American, this will bring incredible value to our guests and increased opportunities for our airlines. Our teams are also laser-focused on aggressive cost control, increases in productivity, and the operational and financial discipline that Alaska is known for. This will put us on the path back to profitability. 2020 has been a year like no other, but I am proud when I look at what we achieved, the ways we improved, and the strength we carried with us into the new year. I truly believe that our best days are ahead of us and our great people are ready for what it will take to climb out of this crisis. Now over to Shane.

Thanks, Ben, and good morning, everyone. My comments will cover similar areas as the past couple of calls, with a focus on liquidity and net debt, costs and cash burn during the quarter, and expectations going into 2021. I’ll also briefly discuss our recent order and fleet plans. We ended the year with $1.7 billion in adjusted net debt, which was essentially flat from year-end 2019. We believe we’ll be the only airline to achieve flat net debt without having issued equity. With no impairment to our balance sheet, we are well-positioned to capitalize on the recovery. We were able to achieve this result even in light of a $5.2 billion revenue decline from last year. That is because we were running a strong business before the pandemic and due to the speed with which we reduced cash spend throughout 2020. We removed $2.4 billion in expenses in 2020, shrunk capital spending, and moved to secure structural cost savings going forward. Those actions, coupled with $750 million in direct grant aid from Congress to maintain industry jobs, allowed us to fully offset our revenue loss and maintain flat net debt. Regarding liquidity, during 2020, we’ve created access to over $5 billion in incremental liquidity. Today we have $3.5 billion in cash on hand, inclusive of approximately $266 million that we received last week under the second round of the Payroll Support Program (PSP). We also have an additional $1.8 billion in available incremental financing through the CARES loan program, which we now have until May 28 to determine how much, if any, we will borrow. Our adjusted debt to capital is about 61% right now, with a low CapEx plan in 2021, we will be in a position to begin to reduce leverage by lowering our cash balance and repaying debt this year, assuming there is a stabilized recovery from here forward. In fact, if we were able to return to normal cash on hand levels and use the current excess cash towards debt repayment, our debt to capital would be below 50%, which as you know is within our long-term target range. Turning to costs, adjusted operating expenses were down 27% in the fourth quarter, two points better than Q3, while capacity in Q4 was up 13 points. This performance was aided by 3,300 employees remaining on leave or incentive leaves reducing costs driven by now 40 permanently parked Airbus aircraft and several favorable resolutions of vendor negotiations resulting in one-time savings. Additionally, we saw the ramping of several of the structural cost initiatives that we detailed for you on the last call, reaching run-rate levels, including permanent wage reductions, non-wage overhead spend reductions, and supplier rate reductions. Variable costs for the quarter were up with the added capacity and our COVID business recovery program, a goal-based bonus program designed to align our employees in managing this crisis, paid out as a target, as a result of our employees’ fantastic work around safety and our industry-leading cash burn reduction efforts. This drove incremental costs in the fourth quarter, so the program was an effective way to align our employees. Our GAAP operating expenses include several one-time charges that I’d like to touch on briefly, including approximately $255 million of impairment charges associated with the write-off of lease assets and recognition of lease return cost estimates for aircraft that we have permanently parked. We also recognize a credit of $102 million for the revision of our estimated pilot incentive leaves. As you know, we designed our leave programs early in the third quarter, but since then we have finalized a significant fleet decision that allowed us to refine our schedule, which now reflects a higher mix of Boeing flying. Cross-training and return-to-work schedules were impacted by these changes. We designed the program to have flexibility for just this reason. While we’ve done well this year managing spend and making our cost structure more variable, we have more work to do to return Alaska to pre-COVID unit costs. For 30 years now, our formula has been to have low fares enabled by low costs, which are best driven by a high productivity and low overhead mindset. Achieving those isn’t easy. It takes leadership focus, excellent execution of our operation, and buy-in from our people. In the post-pandemic period, we believe these same principles will ultimately be required to drive our business recovery. Our average cash outflows, as defined under the cash burn metric, were approximately $450 million per month in Q4, which is in line with the expectation we shared with you on our last call. Our cash burn in the fourth quarter of approximately $3.8 million per day was a sequential improvement from the third quarter driven primarily by improvements in demand, despite the choppiness that developed in November and December. Beginning today, we are sunsetting monthly cash burn guidance that we introduced in the initial phase of this crisis. Instead, we will provide quarterly operating cash flow expectations, which are a more direct measure of the health of our business as we believe the acute liquidity risks that mattered in 2020 have been mitigated by our available liquidity. With that, I will turn to 2021 cash and cost guidance. As Ben detailed, we anticipate operating capacity of approximately 70% of 2019 levels in Q1 and 80% by summer. This will naturally bring incremental flying costs back into the business. Last quarter, I detailed for you approximately $215 million in cost initiatives that had already been identified or secured. We have since identified an additional $50 million of savings including $10 million in fleet-related savings as we begin replacing the Airbus with MAX aircraft, $10 million in real estate-related reductions, and $30 million in productivity-related initiatives. Some initiatives are now at run-rate levels, while others will ramp through 2021. Our current expectation is for Q1 CASM excluding fuel to be up approximately 20%. We expect continued sequential improvement throughout the year on our way back to pre-COVID levels even if we are a smaller company. We expect our operating cash flow for the first quarter inclusive of PSP funds to be flat to minus $100 million. However, I believe cash flows from operations will be positive during the first half of the year if the vaccine rollout works, as we all expect it will, and allows demand to snap back. Given what I’ve shared about our liquidity and these cash flow expectations, we currently have no plans to draw any incremental financing in the first quarter. Having said that, our default will be to maintain conservatism until we have more confidence that the recovery is stable. We may extend or renew some existing debt that is currently slated for repayment in March and April. Before I turn the call over for questions, I would like to touch on the very exciting news that came out just before Christmas regarding the future of our fleet. The order we jointly announced with Boeing provides a clear path to transition into a higher gauge, more efficient aircraft as we return our leased Airbus fleet. The partnership between Alaska and Boeing is as strong as ever, and I’m very excited about what this order means for both of our companies. I think, you know, we are both located here in Seattle and we have employees with spouses, parents, sons, and daughters that are Boeing employees. The ties between our two companies are deep, and we’re excited about our futures together. With the order, over the next four years, we will take delivery of 68 new 737-9 aircraft, 13 of them leased, which will largely replace our Airbus fleet. We then have options for up to 52 additional aircraft through 2026 for when we find opportunities for growth. The agreement features significant flexibility in the deferral rates for the majority of the orders and full substitution rights to other MAX models. Each new generation 737-9 aircraft features superior economics relative to our existing older technology Airbus A320s, with better fuel efficiency, lower maintenance costs, and 20 incremental seats. Each replacement will improve unit costs and provide incremental revenue opportunity for our P&L. As noted above, the order allowed us to revise our 2021 cash outlays for CapEx as we will first consume existing progress payments with Boeing before beginning to pay into progress payments again in 2022. As a result, our 2021 capital expenditures will remain low at approximately $150 million to $250 million. And with that, we will go to your questions.

The first question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Hey, thanks. And Brad, congrats on the transition. I promise you that we learned a lot from you and your team as well over the years.

Thank you, Duane.

So big picture, your net debt is flat versus pre-pandemic. Your share count has not changed versus pre-pandemic, and relatively that appears to screen pretty well. So what would you say is the biggest driver of that strong relative performance? Is it simply that you had capital spending flexibility that others did not have? And was that a function of kind of where you were in the integration or how you structured your contracts? Appreciate just some detail on how exactly you were able to accomplish that?

Thanks, Duane. It’s a good question. I know more about us obviously than sort of where others are situated, but you’re right. We did have a lot of flexibility with respect to managing capital spending down very quickly this year. It was one of the important features of the revised deal with Boeing. We wanted to keep a low level of capital expenditure required into next year. We were happy to be able to restructure the agreement with them and maintain a low capital expenditure posture for 2021. I think the other thing was we rallied really early on, it’s hard to lose track of the week or the day, but it was sometime in late March where we decided this was a crisis. It was going to be a crisis for an indefinite period of time. We immediately went to the company and said that we needed to stop spending immediately. The company responded across the board; every single employee participated. As Brad mentioned, we had over 10,000 people take elective voluntary leaves, giving up their own income in order to help the company or save a job for somebody else. We worked with suppliers; we changed our payment terms. We ended up paying for what we were using, not necessarily exactly what our contracts called for in terms of minimums. It’s been a lot of work over the last several months, but the company did a phenomenal job pulling costs out, immediately getting cash burned down. I think we reached $4 million per day early in this and have hovered there, waiting for demand to come back. I think that's probably the biggest piece of it. What Brad said about starting off in a really good position is critical. We had a phenomenal balance sheet coming into it. We had just paid off $500 million or $600 million of debt and were in a position to borrow. Producing $1.5 billion or $1.6 billion in cash flow pre-pandemic gave us a lot of runway to not get into a bad position coming out.

So when you lost $5.2 billion, you only had to make up $3.5 billion or $3.7 billion to get back to flat?

Correct. Yes.

Appreciate those thoughts. And then just for my follow-up on the A320s that are leaving, can you just remind us, how do those impact cash flow? In other words, are there any cash gains? Are they all leases? How does debt go away? Can you just remind us how that impacts your balance sheet? Thank you.

Yes. I’ll have Emily or Chris talking about the balance sheet a bit, but we have maintenance requirements on all of these aircraft. They’re all leased. We have paid maintenance reserves along the way. It’s going to be a relatively manageable, full amount curtail as we return these, but there will be some cash expense to bring them back up to where they need to be before we return them to the lessor. From a balance perspective, Chris or Emily?

Yes. Hey Duane. We did. I mean, we paired with 40 of these Airbus aircraft this year. All of them were leased. I think there were the 10 that we did own that we sold to AirLease Corp, but in terms of these returns, we’ve been pairing those as well because they’re parked. The cash impact of those leases on the maintenance reserve side is really only going to be about—well, only; it’s a lot of money at $45 million to $50 million in 2021. So, the charge you see on the P&L is certainly not going to turn into cash imminently or nearly, not going to right now.

Okay. Appreciate the thoughts.

Thanks, Duane.

Thanks, Duane.

The next question will come from Catherine O'Brien with Goldman Sachs. Please go ahead.

Good morning, everyone. Thanks for your time. Also just want to echo I'm sure what will be everyone's comments congratulating you, Brad, on your career and what you've accomplished at Alaska.

Thank you so much, Catie.

So my first question is to be a follow-up on the fleet decision. I know sometimes moving deliveries around can create added costs with the OEMs, but given the MAX grounding, can we assume there was no net negative on pricing on existing orders and perhaps even some better pricing on the new orders, given your decision to go back to an all Boeing fleet versus keeping the dual fleet? Maybe that's for Shane or Nat.

Yes, thanks, Catie. I might, I probably won't get into the specifics of the deal. I can say though that we've worked a long time on getting to this decision. I think we were really clear along the way with our good friends and partners at Boeing on what we needed in order to place an order, especially right now and where we are in the pandemic cycle here that add significant volume and a lot of options. Our history with options is we take all of them. It could be quite a large order for us, and a significant amount of capital that we've got to go make work for us. We feel very good about the deal that we struck with them. We're really excited about the path we're on now. There are a lot of operational efficiencies and savings we can get by getting into a single fleet. But, I think I won't get into any more specifics than that on the deal.

Understood. Fair enough. And then a couple of related ones on the balance sheet. It sounds like we're waiting to see what happens with the recovery, but potentially no more cash burn or cash positive cash from ops in the first half of the year. So I guess in that scenario, how do you weigh taking more of the CARES loan at the end of May? And then whether you take that loan or not, how do you think about your balance sheet once we have seen more recovery? It sounded like from your comments you may be considering holding on to higher levels of liquidity for now, but do you permanently have a higher liquidity minimum you want to stick to before contemplating debt pay down? How do you think through a couple of those moving pieces there? And thanks for the time.

Catie, it’s Nat. Thanks for the question. Our current cash balance is $3.4 billion, which clearly is higher than historically Alaska has carried. Year-end 2019 we had $1.5 billion, so you're going to see us carry an excess amount until we see sustained revenue recovery. Over time, we'll be in a position to pay down debt. I do think certainly through 2021, we're going to carry an additional pad of liquidity just until we see sustained revenue recovery.

And I'll just add to that. In terms of long-term posture, we haven't decided on a higher rate than the $1.5 billion. We may end up there. We just haven't done a lot of that planning quite yet, but ultimately we'll make sure we have the ability to go out and get access to cash in a quick way if we need it. We do want to ultimately bring the cash balance down.

Understood. Thank you so much.

The next question is from Helane Becker with Cowen. Please go ahead.

Thanks very much, operator. And Brad, congratulations; it's been a long time that I've known you. I think I've been on all those 84 conference calls with you.

And then you might be—you and my—probably you guys go back. All right. I won’t say. Thanks a lot.

Because remember, I still think I'm 35. So here's a couple of questions for you. On the route network, how are you thinking about adjusting the route network? Given the fact that transcon is performing so poorly. Are you ready to—are you giving up on spring break traffic or are you thinking that we're going to get that back or we have a chance at it? So not sure who wants to answer that?

Helane, that's a great question for our CEO elect.

No, thanks. Brad still has some privileges; he's an exercise. The way we think of our route network and working closely with Andrew and his team is we are focusing on the Pacific Northwest, so where we're adding increasing capacity to 70% and 80%, you're going to see a lot of focus in the Pacific Northwest and the state of Alaska. California is going to come back as restrictions ease, and we'll have the capacity hopefully in the next 12 months to 18 months. In terms of transcon and spring break, Helane, I think, we'd have to see what happens with the vaccine rollout and how people are feeling and relaxation of restrictions. I'm optimistic with the Biden administration, he just announced 1.5 million vaccines a day in 100 days, which could mean 75—maybe we have 100 million people in the country vaccinated. I think you might start seeing people venturing out for spring break. We will be cautious and on our toes and react appropriately. Andrew, anything you want to add?

Just to put a couple of numbers to it, like on New York, transcon is still going to be down 90% in the first quarter, as was the fourth quarter. San Francisco is going to be down 68%, the same as it was in the fourth quarter. Where there’s no demand, but then places like Hawaii, we're going to be up 15 points in capacity. As Ben said, Pacific Northwest, and then we are moving things around like we've got 10 additional mainline flights; three of them are to Cancun, six of them are to Florida, and one to Hawaii. So as we progress, we're moving our airplanes around to go where the stronger demand is. That's where we're at on that.

Okay. That's very helpful. Thank you. And then just on Oneworld, I know the goal is what March 31, I think. But that's mostly international connecting opportunities. Is your thought on getting into Oneworld that it makes sense to do it now and then you get the benefits in the second half of 2021 or into 2022? Or is it the idea that you don't?

Helane, it's a great question. We've got Nat and Andrew here, but what I will say with Oneworld, it's a couple of things. It's the partnership with American, which we call the West Coast International Alliance along with the Oneworld partnership. We have four international flights starting here in the next couple of months, and I'm going to see if we have Qatar starting from Doha. We have Shanghai starting from Seattle. We've got Bangalore and we have London. To your point, I think Andrew and his team are working hard on getting corporate customers to see that with Alaska's broad domestic network in Seattle and now with the international alliances that we have, Alaska can provide a service to our business and leisure travel all around the world. So we are really excited about that. When you're coupled with the American Airlines partnership, this is the partnership we have with the West Coast Alliance on the domestic side; it's really a powerful network that we can offer—not only from Seattle but also for all our West Coast hubs.

Ben, I think one of the things you can talk a lot about is even though international is down, there are people that like to consolidate their international travel with their domestic, or they're thinking they're going to do international down the road. So that customer that travels internationally once or twice a year but six or eight times domestically, gives us a much better chance of getting that customer into the Alaska Airlines mileage plan.

That's great. Thank you very much, everybody.

Thanks, Helane.

Thanks, Helane.

The next question will come from Jamie Baker with JPMorgan. Please go ahead.

Hey, good morning. Brad, my heartfelt best to you and your family. I'm curious if this means you'll be doing more flying. Thank you for not lumping me with the old-timers club just now. For Andrew, happy birthday; I know many of us feel we've aged about three or four years in the last single year. So hopefully, you did better than that. A question on ticket pricing, and I'm going to try to ask it in a way that doesn't waste your time and that you're comfortable answering. So the common question is what level of discounting is going to be needed to coax people out of their homes? Personally, it's not clear to me that any discounting would be necessary, but I realize ticket pricing is a lot more complicated than that. So the reason I want to ask your perspective is that it seems that you've been running a fair number of promotions at a time when people are nervous about flying. So can you at least comment on the sort of response that's driven and whether we should assume that that's a blueprint for the future? Is that something you're comfortable commenting on?

Thanks, Jamie. We had very significant stimulation, and—I'm very proud of the marketing team. We had very heavy promotions in December. It got our brand out there. It got our employees engaged. We had the highest level of first-class bookings, highest level of Thursday, Friday, Saturday bookings that we've had all pandemic. To your point, I think that a lot of that was focused on future traffic. We have a lot of seats to sell into the future. Our coupon yield was down about 7.4% during this quarter. To your point, it's going to be a fine line, but we are after demand right now and volumes, and then with those volumes come pricing. That's sort of where we are right now.

Okay. That’s helpful. As a follow-up to that, and this relates to Oneworld and kind of piggybacks off what Helane was bringing up with connecting travel, presumably, that yield is going to be dilutive, which isn't to say it's not accretive; it's just dilutive. So is that something that we should be considering on our models? Because hopefully you're in an affirming core yield environment as the year progresses, but at the same time you're going to be carrying more connecting travel. Is that going to be impactful? Is it going to mean that your yield could lag that of the industry, just given the coincidence in timing of the Oneworld entry?

I mean I think in the fourth quarter, our international connectivity connections were down 93%. That's going to take some time to come back. I don't necessarily think it's going to be dilutive at all. It might be some yield give up, but I will tell you on the loyalty, the business, the connecting of our network, and the loyalty program with both American and Oneworld, I think this is all going to be good news for us.

Okay. That's helpful. And if I could just speak in a quick third, do you have the average pilot seniority today versus this time last year?

Wow. Jamie, this is Shane. We did retire 130 off the top at a 3000, but I don't think it's moved a ton just based on that. So we had 120, 130 that took early out. But that's it; attrition has been relatively modest besides that.

Got it. Thank you very much, everybody.

Thanks, Jamie.

Thanks, Jamie.

The next question is from Savi Syth with Raymond James. Please go ahead.

Hey, good morning. Brad, I like to care all the comments here on the call, and Andrew, happy birthday, and I'm sorry that you were spending it with us here today. Shane, if I might ask on the fleet, that you are able to provide maybe kind of by year at least for the next couple of years just what you expect in terms of deliveries and exits.

Yes, I can. Because there's a chart right here in front of me. Yes, Nat, why don't you take these numbers?

Happy to. Savi, we've spent a lot of time obviously with this chart. So we're going to take 13 737-9s in 2021, nine directly from Boeing and then four on lease from Air Lease Corp. We'll take 30 units in 2022, 13 in 2023, and then 12 in 2024. That gets us to our 68 from Boeing. We have 52 options that pull in a few in 2023 and then 2024, 2025, and 2026. This gives us some good flexibility and optionality. Shane mentioned this in his script as well. We've got a lot of deferral rights on this too, so that was one of our motivations with Boeing. We wanted to be flexible here and as the revenue recovery is still a bit murky.

That's helpful. Just on the Airbus side, when do you expect that kind of there's some of the remaining XP A321 to roll off?

This 320 for the most part is pretty consistent in 2022 and 2023; 10 to 15 leases are expired. As Chris mentioned earlier, we will work with lessors to accelerate some of those because most of those airplanes are parked. We've matched up our deliveries from Boeing pretty akin to those Airbus units going away.

I think those are the—Savi, you've talked about the 321s that span; I think the 321s, there are 10 of them, they're going to stay in our fleet for the foreseeable future. We are open to possibilities in what we can do for that, but for now they're in our fleet, and we tend to operate them.

That's helpful. And if I might ask just a clarifying question on the OpEx outlook for Q1, I'm just kind of wondering how much of that is impacted by PSP2 requirements. Of the $250 million to $300 million that you're targeting, how much has been reflected in that number?

Savi, so the PSP, we ended up having to bring back a few folks, mostly on the management side that we had unfortunately had to riff on October 1. They’re entitled to come back through the period that the PSP covers through March. On the frontline side, there wasn't a lot of additional recall that had to happen. We've already been in the middle of recalling folks to get ready for both the Q1 and Q2 capacity that we're going to deploy. The—I'm thinking you're speaking to this structural cost savings when you're talking about the $215 or $235. Yes, some of that like our management headcount reduction—it's a minor amount—but some of that is impacted, but that's really at full run rate today. A lot of the other things that we're tracking toward like non-wage overhead stuff—that's full run rate today, and I don't think we gave specific amounts on every one of these, but that's kind of where each one of those are at from a run rate perspective.

Helpful. Thank you.

The next question is from Darryl Genovesi with Vertical Research. Please go ahead.

Hey guys, thanks for your time. Congrats to everybody. I guess Andrew, there's this federal excise tax holiday on airline ticket purchases that expired at your end. So I guess this is somewhat of a follow-up to Jamie's, but I think that tax is now coming back, which equates to about 10% of the base fare. Do you anticipate any kind of yield pressure specifically related to that? I don't—I guess specifically recalling when raising fares when that tax went away, but I assume the revenue management system is probably seeing some kind of elastic response. Maybe it's early to tell, but just wondering how you think that plays out?

Yes. I don't want to comment too much about pricing. I haven't checked recently. When this first got reinstated, I think the industry kept that fairly well, and then I think in pockets it started to erode. I think for us the biggest opportunity is 30 or 40 point load back to gaps. The reality is we need to fill these airplanes. Volume is what's going to bring our revenues back for now, and then we're going to worry about yield later on. That’s why we think the lowest fare option is the best for our brand and the best to keep the blood flowing through our hubs.

Cool. Thank you. And then Ben, I think operational excellence has been a key tenet for you guys. It's very evident that that's been a focus. I just wondered if you're taking on more CEO responsibilities, remembering everyone's name and what have you. What needs to happen underneath you to backfill what you've been doing? I don't recall you announcing any specific personnel appointments, so if you don't want to mention any specific names, that's fine, but just generally speaking, what's the strategy for backfilling you?

We've worked hard on succession on the operations side, and with Gary Beck here, he's been with us for over 10 years right now. We have a strong succession plan, so the operations team is solid through and through. Our playbook is mature. I don't have worries on the operational side, Darryl. We will announce more of that in the near future, but I feel really confident.

Before we take the next question, if you all could keep it to one question from here on out, we've only got a couple of minutes left and several people to get through. Thank you.

The next question will come from Joseph DeNardi with Stifel. Please go ahead.

Thanks. This may be one and a half, but I want to ask the follow-up. Maybe for Andrew, can you just talk about the nature of your business traffic customer in terms of what industries they come from and whether you think that is more or less susceptible to the virtual meeting headwind? Potentially just thinking about it from a tech exposure perspective. And then whether you think you need to revisit cabin configuration in light of some of the uncertainties around business travel demand longer-term or whether you’re happy with what you have now or whether that’s being evaluated at the moment. Thank you.

Yes. Thanks, Joe. Our business is down, whether you measure it by bookings or revenues, just like everybody else. I think where we have a unique strength is especially in Alaska and the commercial slopes, the fishermen, the oil workers, those types of things. We have strengths. We just— the nature of our business, we still have a lot of small business travelers who do a fair bit of travel. The big ones that are challenged are obviously the Microsofts and the Amazons, who have very strict policies right now on no travel. What we’re excited about is that we believe we will take a step change up in our participation in business travel once it returns with Oneworld and the international and our partnership with American. Your second question was about cabin configuration, we feel great. We are very thankful that we maintained a non-flat position. We think our first class seats are spot on for the demand environment. As you heard Ben mention, premium class cabins have come a little bit under pressure, obviously, with the lack of business demand. That’s why we are booking the middle seat there and giving guests extra reason to buy up into that cabin as we come through this period of time.

Thank you.

The next question will come from Mike Linenberg with Deutsche Bank. Please go ahead.

Hey, good morning, everyone. And just Brad, what along the fun trip to spend? I learned a lot from you. In fact, I think back to when you sent me an email telling me that I was calculating really wrongly. So I thank you for that. Maybe you—you're calculating right.

I calculated wrong or you? Hopefully, we got it right.

Anyway, I guess that’s Andrew's super thing, just a quick one. Andrew, you noticed just lost the middle seat in the premium cabin? What does that actually mean? That a better product than your first class, at least for those who want the visual space, maybe you want to be as far from people as possible? Is there just the risk of cannibalization? I think it’s great; you’re doing it. It’s going to be great for your premium product—four seats and block, four and six seats. Based thoughts on that, that could have adverse consequences.

Yes. We haven’t seen that, and I think we’ve just recently opened up a first class cabin, obviously, since January 6. Our first class cabin is a nice product and we have full food service, but not hot, but we have good food service. It costs a lot for other benefits that come with a first class cabin. That will say of course, we can always adjust pricing along the way, as we go forward and see what happens there. I’m not overly concerned. I will say we have great premium seats, and I want guests sitting in those if we can make those available.

All right. Very good. Thanks to everyone.

Thanks, Mike.

The next question will come from Hunter Keay with Wolfe Research. Please go ahead.

Hey, Brad. Congratulations, man. Good stuff.

Thank you, Hunter. We’re going to miss—I miss you a lot.

I’m sure you will. Call me anytime if that’s actually true. So Andrew, you’ve talked about the importance of driving volume, right. I get it, to get those load factors up. But how confident are you that the new revenue management system that you implemented is going to be able to get you there, giving you a limited experience with it? Can you talk about how the forecast tool has performed during COVID and how you’re going to think about using it going forward to get your loads up? Thanks.

Thanks, Hunter. Our forecast was completely worthless; we’ll pay you that much. The reality is that obviously history was no predictor. But I know, and I can’t speak to the details, but our team who heads up our revenue management group has worked with Amadeus and they came up with some clever tools to help the analysts manage the demand environment we’re in. Yes. To your point, we want to see the revenue management system really tested until we get volumes running through the pipes, but we had a fantastic implementation. The team is fully trained and ready to go. I’m still confident that great things are coming as well as the automation that’s going to occur.

I might just add, having spent time in revenue management, that I think an unintended benefit of having demand go to zero is actually net good for our new revenue management tool. There are a lot of risks when you cut these over midstream at normal levels of volume, and we got to train the forecast perfectly now as it comes back as demand comes back. So I’m actually positive on this.

Thank you, Shane.

The next question will come from Brandon Oglenski with Barclays. Please go ahead.

Hey, good morning, everyone. Congrats, Brad and Ben, and happy birthday, Andrew. My one question is probably a longer-term one, Ben, but you have the Boeing deal with a pretty conservative balance sheet, the Oneworld agreement coming up. Is the future looking bright, and what are you re-imagining in a post-COVID world? Is this the time for you guys to be a bit more aggressive than in the past?

That’s a great question, Brandon. First and foremost, we’re looking both short-term and long-term. First and foremost, we’re going to get on solid financial footing, getting to positive cash flows, and getting back to profitability is just job one—rebuilding the network and really getting this Oneworld partnership to work. That’s really in our sights. I think if you look at our history—and this is thanks to Brad—we’ve always positioned the company to take advantage of opportunities out there. We don’t know exactly what they are, but being on our toes and looking at what’s going on with the environment and being opportunistic is what Alaska has done throughout its whole career. We do have a strategic plan, but we also look at opportunities out there and we’re going to take it as it comes. We’re in a fantastic position to do it.

The next question is from Ravi Shanker with Morgan Stanley. Please go ahead.

Thanks. Good afternoon, everyone. Brad, good luck for the future. Ben, congratulations. Maybe a couple of follow-ups, kind of what you discussed so far. One is your commentary on the ramp and traffic that you expect in the back half of the year and your focus on filling the planes first really stands out. I mean, is it fair to say that you expect to outgrow the rising tide through 2021 and 2022, given that you look like you are going to be a little bit more aggressive? Second, are you seeing any evidence of the booking curve extending or kind of picking up in the back half of the year for transcontinental routes specifically?

Hey, Ravi, this is Shane. I’ll let Andrew take the booking curve question. I think you may have been talking about our capacity ramp as we go forward. Yes, I mean, right now, like we’re—I think the thing that I would convey is we’re right on the initial plan we set, which was to be at 80% of our former size by this summer. The fleet order gives us the chance to get back to full capacity, full pre-COVID capacity in 2022 if demand is there and then the potential for growth beyond that. We want to get back to relatively high rates of growth. We’ll only do that if we’ve got the financial machine supporting it and justifying those investments. It’ll be interesting to see how demand comes back and what the shape of the economy is in this kind of new post-pandemic period. We’ll be good as a business in any economic situation, and if there are good opportunities to grow, we’ll be the first to pursue them, is the way we’re thinking about it.

And just on the booking, I think we've seen this in December; there was a strong demand to book into the spring and summer. COVID cases have been down on a steady downward trend for the past three weeks on a seven-day rolling average, and we've seen a steady increase in our bookings and our net bookings year-over-year steadily improving pretty much every day. In fact, yesterday was another very, very solid booking day. California is starting to open up a little bit here. So a lot to come, but we’re on an improved trajectory, and I’m not guaranteeing that’s going to continue, but we’re certainly headed in a good direction.

For several weeks now, we’ve had bookings that are 50% higher than our employments. So there’s definitely optimism about the future.

Yes. Let’s go ahead and take one more question, and then we’ll wrap the call up.

The final question will come from Dan McKenzie with Seaport Global. Please go ahead.

Hey, thanks for squeezing me in. Brad, of course, I have to echo huge congrats. Ben, it's just spot on with your accomplishments. And Andrew, happy birthday. It wouldn’t be a proper birthday, of course, if we didn’t celebrate with a question here. So I guess just on the expectation for business travel to return to 50% by year-end. To what extent does the American Airlines relationship and entry into oneworld accelerate that march back to 100%? Is the expectation that you could potentially get there in 2022?

I think that when I think about business travel, real quick, Dan, is just that number one, we need to get the vaccine out and get that going well. We still have a ways to go there. Number two, tell the managers to decide on their duty of care and how much friction they're going to put in for people to travel. Number three, corporate America has to open up and receive people for business, and that is yet to happen. And then the fourth one is the CFO factor; obviously, I think budgets are going to be reduced for a while. All that being said, there will be, I do believe, a strong step change in demand in the back half, and as we’ve shared working with American Airlines and Oneworld on a global partner, we’re seeing very solid and strong interest in new contracts and terms and network utility that we can provide at corporate contracts. So we’re very bullish on getting a better increase in share of business travel.

Thanks very much, Dan. This wraps it up. Thank you everybody. It's been fantastic. I know that Ben and team will look forward to talking with you all in 90 days. We appreciate your interest in the company, and this team will be talking to you down the road. Thanks very much.

Thank you for participating in today’s conference call. This call will be available for future playback at alaskaair.com. You may all disconnect at this time.