Alaska Air Group, Inc. Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 First Quarter Earnings Call. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers' remarks, we will conduct a question-and-answer session for analysts. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Planning and Investor Relations, Ryan St. John.

Thank you, operator, and good morning. Thank you for joining us for our first quarter 2023 Earnings Call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. Today, you'll hear updates from Ben, Andrew, and Shane. Several others from our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported a first quarter GAAP net loss of $142 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $79 million. As a reminder, 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 within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben.

Hello, and good morning, everyone. Before I begin, I want to welcome Ryan St. John as our new Head of Investor Relations. Ryan is a 15-year veteran of Alaska and also leads our financial and resource planning groups. I'm excited to see Ryan step into this role and know he will do a great job. I also must acknowledge Emily Halverson, who Ryan is replacing. Emily stepped into the IR role at the onset of the pandemic, not the easiest time to learn how to do this important and challenging work. Emily has been fantastic as our Head of IR, but this change will allow her to fully focus on leading our accounting and financial reporting functions as our controller. So now turning to our results. Despite our first quarter loss, I am pleased to report that our operational and financial performance trended positively as we progressed throughout the quarter. We are actively driving improvements in our business, and I believe we are well positioned to capitalize in the second and third quarters. It's important to note that Alaska, along with the entire industry, historically experienced weaker results in the first quarter, and our loss is primarily a reflection of our current network seasonality. In the past, Alaska has found ways to breakeven or earn a small profit in the first quarter. Therefore, we are setting a target to reduce our first quarter profit seasonality over the next few years. That's the right goal for us to have in the future, and it will have a meaningful impact on our full year results. The start of this year has presented more challenging weather conditions than we've seen historically. Persistent storms, regular snow, and elevated icing conditions throughout January and February across all our geographies, including California, led to higher cancellation rates than normal. Additionally, volcanic ash in Alaska and the Pacific Northwest recently disrupted our operations for several days. Despite these challenges, we still operated with one of the best rates year-to-date. We will continue to prioritize operational performance, and we remain committed to delivering a reliable experience for our people and our guests, especially as we move into peak demand periods. Although we can't control what Mother Nature throws at us, I have set a goal for our teams to significantly harden our operational resiliency before next winter and to reduce cancels and customer impacts from weather to the greatest extent possible. The total impact of storms in Q1 was in the order of $13 million. But most importantly, this quarter, we delivered on metrics that were squarely within our control. First quarter capacity, revenue, and unit costs, excluding fuel, all landed within our originally guided ranges. I am particularly encouraged to see less close in variability and greater stability when forecasting company performance than we've seen in the past three years as stability returns, and our ability to execute on our cost and commercial initiatives improves. Looking ahead, our outlook and priorities remain unchanged as we continue to execute on our strategic initiatives. Our teams remain focused on returning us to the foundational strengths that have served Air Group well for decades. These strengths, including operational excellence, disciplined cost management, high productivity, and low overhead, will continue to be the primary drivers of consistent, profitable growth, and we are making good progress on several fronts. Our productivity trends are improving. Total passengers per FTE are up 6% compared to last year, and we have increased total aircraft utilization by 14%. In fact, our mainline utilization has exceeded 2019 levels. Absentee and attrition rates have declined across all workgroups, including pilot attrition rates after the ratification of our new contract back in October. With several labor contracts signed last year, we are looking forward to reaching a deal with our flight attendants and aircraft technicians soon to complete the cycle. Our move to a single mainline fleet is driving better economics. We have improved fuel efficiency by 4% year-over-year this quarter or the equivalent of $25 million and 7 million fuel gallons saved as a direct result of the superior MAX aircraft in our fleet. This is equivalent to taking 15,000 cars off the road each year. Additionally, our upgauging strategy, which adds 28 more seats per aircraft than the A320s we replaced, allows us to unlock growth efficiencies without adding departures within an already constrained operating environment. As a result, we are now producing 20% more ASMs per aircraft than we did at this time last year. Finally, our balance sheet continues to be a pillar of strength. Our trailing 12-month return on invested capital has continued to improve, reaching double digits for the first time since the pandemic began. Our financial strength has also allowed us to support a long history of shareholder returns, and during the first quarter, we officially restarted our share repurchase program to offset dilution and remain on target to spend at least $100 million this year. As we approach our busy Q2 and Q3, we are well prepared for peak summer flying. We have taken proactive steps to prepare our airline, including doubling our pilot training throughput compared to the same period last year and providing a one-day immersive care retreat to 14,000 guest-facing employees. This retreat emphasized our core values of being kind-hearted and doing the right thing, as well as focusing on self-care, team care, and guest care, which are essential to our culture. This has become even more important and necessary in leadership's view post-pandemic. Our people are integral to our success, and I am proud of the work they do preparing our airline to meet demand while performing at a high level of operational excellence. We have taken deliberate steps to build momentum coming out of this recovery and to fortify our ability to deliver on our targets. As we look forward, we have line of sight to returning to strong double-digit adjusted pretax margins this quarter. And assuming a stable economy, we remain confident that we will deliver our full year adjusted pretax margin of 9% to 12% and earnings per share of $5.50 to $7.50, which we believe will be at or near the top of the industry. Despite the potential for a recession and softening in some sectors of the economy, travel demand remains strong. And while our industry and business may face continued economic volatility in 2023, it remains to be seen if there will be any negative impact on revenue. At Alaska, we have a proven track record of adapting and navigating challenging environments. As we progress on our road map to profitable growth, we are already seeing the benefits of restoring our historical strength as a single fleet operator and unlocking new commercial initiatives. This positions us well in any environment to continue to deliver on our financial commitments and drive our long-term success. And with that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. My comments today will focus on our first quarter results and in particular, on March, which I believe is more indicative of what we see going forward. I will also share our thoughts on second quarter trends and guidance. First quarter revenues totaled $2.2 billion, and that's up 31% versus the first quarter of 2022 with capacity up 14% over the same period. This marked a significant milestone for us as we finally restored capacity to pre-pandemic levels, a 3-year journey. Load factor came in at 80%, exceeding last year's load by 3 points as we lap the effects of Omicron in early 2022. Even when comparing our results to 2019, we delivered strong revenue progression throughout the quarter with January unit revenues up 13%; February up 15%; and March up 19%. The strong results in March are a good indication of where we're headed as we look to the second quarter. Total March revenue came in above our record-breaking March last year on both higher capacity and higher yields, while our pretax margin was nearly 2 points better despite higher fuel prices. Throughout my tenure at Air Group, this airline has been solidly profitable 10 months of the year, with January and February always being the most difficult due to our network configuration and predominantly leisure consumer base. Layer and business travel that hasn't fully recovered, plus exceptionally high fuel prices, made for a tough quarter. As Ben mentioned, we are committed to driving improvements in these months to accommodate seasonally low demand with an aim to return to breakeven or better in the first quarter in future years. Moving to business travel, nearly all of our core hubs are in geographies where business has not returned as quickly as in other major economic centers throughout the country, corporate layoffs and a heavy concentration in the tech sector being major contributors. Yet despite the lagging tech sector, which is roughly 50% to 60% restored to pre-pandemic travel levels, overall, business travel remains around 75% recovered by volume and 85% to 90% by revenue when compared to 2019 levels. I believe the lag in West Coast business travel is upside for us, which we have not factored into our revenue forecast. There may be opportunity ahead as corporate travel budgets increase given some companies beginning to return to the office and move into new fiscal periods later this year. We see continuing strength this year in premium and loyalty performance. First and Premium Class revenues were up 35% and 33% year-over-year, respectively, on higher payload factors and fares. This front cabin preference has persisted, and I expect this trend to continue. Bank cash remuneration also remains strong as we lap the anniversary of our renewed credit card deal with Bank of America. For the quarter, it was up 17% year-over-year, and with the launch of our new card benefits, acquisitions have exceeded our expectations with the highest quarterly sign-ups in our history, surpassing 100,000 new cards during the quarter. Regarding network and alliances, we are progressing nicely on our plan to unlock selling capabilities for 10 airline partners on our website this year, with the goal of making alaskaair.com a gateway to the world for our guests. Since our last call, we've turned on selling capabilities for Iberia as partner #5, and work is currently underway to launch three more airlines by summer. While we know partner-enabled selling drives positive yield contributions to our network, direct sales also offer a low-cost distribution channel that not only supports our partners but reinforces to our guests that Alaska Airlines can deliver on their global travel needs, which in turn keeps our guests within our network and loyalty program. I am excited to see this area of our commercial initiatives continue to grow and drive incremental benefit in line with our goals to enable 8% to 10% of our total revenues through Alliance Partners. Turning to second quarter guidance, we have line of sight to delivering strong results above and beyond the record quarter we produced last year during a time of high demand for our industry. For Q2, we expect total revenue to be up 2.5% to 5.5% year-over-year on capacity that is up 6% to 9%. While we experienced softness in close-in bookings in January and February, which is understandable given the lack of business travel that usually materializes during this period, we exited March seeing improved performance across the booking curve. Near term, we continue to see strength in demand with held yields sitting above both 2019 and 2022 levels as we move into the second quarter. My team is doing a great job optimizing the load and yield equation as capacity and demand remain more stable this year compared to last. I'm very excited to have Kirsten Amrine step into a new VP role overseeing both revenue management and network planning. Kirsten has spent her 16 years at Air Group in various roles in revenue management. Her deep knowledge and expertise have been an asset as we constantly learn how to manage our inventory to account for new shifts in booking patterns and make network adjustments going forward. Brett Catlin has done a fantastic job at managing our network for the last four years, and he will be taking on direct responsibility for our loyalty and credit card programs, corporate sales, and continuing his alliance responsibilities. These leadership changes will ensure that the commercial organization stays laser-focused and coordinated on these critical revenue-generating levers. As Ben mentioned, our growth this year is primarily being driven by gauge and stage, a highly efficient form of expansion. Having returned to pre-pandemic levels of capacity at a system level, we are focused on building network depth in Portland and working to fully restore our network in many California markets. Looking to the remainder of the year, we are poised to produce strong results as we rebuild our network, upgauge efficiently, and refine our revenue capabilities within this evolving demand environment. Importantly, we are performing in line with our internal targets and remain confident in delivering on our full-year goals. We have proven product initiatives in place, and they will continue to drive value for our business as we move forward. And with that, I'll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. As Ben mentioned, we experienced improved stability in the business this quarter, which was good to see. In my experience, the biggest challenge to operational and cost management historically has been volatility. And as that volatility subsides, our ability to drive consistent operational and cost improvements is enhanced. I'm encouraged that we were able to start the year with financial performance, absent fuel price impacts within our original guidance ranges. Alaska has a long history of delivering on our commitments and guidance, and we are focused on doing so again in the second quarter and for the full year. Turning to our balance sheet and liquidity, we remain well positioned with both. Our debt to cap finished the quarter at 48%, and our net debt-to-EBITDAR stood below 1 turn at 0.8x, both of these metrics are within our long-term target ranges. Debt payments were approximately $100 million for the quarter and are expected to be $50 million and $100 million in the second and third quarters, respectively. We generated $222 million in cash flow from operations during the quarter, while total liquidity inclusive of on-hand cash and undrawn lines of credit was a healthy $2.8 billion at quarter-end. As our business normalizes and we continue to pay for aircraft deliveries, we will anchor toward the higher end of our target liquidity range of 15% to 25% of revenue or around $2 billion to $2.4 billion, inclusive of lines of credit. Our trailing 12-month return on invested capital surpassed double digits and closed the quarter at 10.6%. The last time we achieved double-digit trailing 12-month ROIC was, not surprisingly, February of 2020. It's nice for this metric to, once again, be well above our cost of capital, and our goal is to now remain above 10% and grow from there. We also restarted our share repurchase program this quarter and have spent approximately $23 million year-to-date, marking our way to returning to our long-term capital allocation goals. Turning to the performance of the business, we executed to our plan in the quarter, again, absent fuel price. First quarter CASMex was down 1% year-over-year on capacity up 14%, both within our guided ranges. Our teams did an excellent job delivering on their internal targets with the only source of significant variance being the cost of challenging winter weather that Ben mentioned, which was approximately $8 million of the $13 million total impact. Our completion rate exceeded our goal, while daily aircraft utilization increased 14% year-over-year, helping us return to pre-pandemic capacity. With the retirement of our A320s and Q400s in January, our total aircraft count was down by 29 aircraft, while the ASMs were up 14% versus Q1 2022, demonstrating the impact of both utilization and the benefits of our upgauging strategy. It's worth acknowledging that our capacity was at the high end of our guide, and our CASMex fuel was just below our midpoint. I would like to see us return to our historical pattern of matching capacity outperformance with commensurate cost outperformance, and I'm confident we will ultimately see this. We are wholly focused on continuing to rebuild this muscle over the next several quarters. Fuel was a clear headwind in the first quarter. While crude prices were between $70 and $80 per barrel during the quarter, refining margins continued to be particularly volatile. Although they have been more stable in the past few weeks at what I would view as reasonable levels. Our first quarter fuel price was $3.41 per gallon versus our original guidance midpoint of $3.25 and versus $2.62 last year. This added more than $30 million of cost versus our guide, which equated to approximately 150 basis points in margin impact. For the second quarter, we estimate our price per gallon will be between $2.95 and $3.15. We hope this is a conservative guide as month-to-date, our all-in per gallon price is close to the $2.95 low end of our guide. At any fuel price within our range, we have line of sight to solid double-digit pretax margins for the quarter, with any additional price favorability contributing direct upside opportunity to our results. Turning to capacity and cost guidance, we expect capacity to be up 6% to 9% versus Q2 2022, and CASMex to be up 1% to 3%. While lower than the 14% year-over-year capacity increase in the first quarter, when comparing to 2019, our Q2 and first half capacity is roughly flat, while we expect to step up to low single-digit growth in the back half of the year. From a cost standpoint, the first quarter year-over-year comparison benefited from $35 million of lease return costs rolling off, while this is not the case for the second quarter. Along with lower sequential year-over-year growth, we have a slightly tougher cost comparison setup this quarter. For the full year, we still expect to reduce unit costs 1% to 3% as we drive productivity improvements, leverage the restoration of our full network, and lap labor deals in the back half of the year. Regarding our fleet transition, September 2023 will be the final month we operate the Airbus fleet, at which point we will retire the last 10 A321s from what was at one point a 72 aircraft fleet. This cements our future as a single fleet operator by 2024. As a result of this acceleration, we expect to incur approximately $300 million to $350 million in special fleet transition charges through the end of the year. By fully retiring the Airbus fleet at the end of the third quarter, we expect all of our pilot training and associated transition costs to be completed by year-end with very little spillover into 2024. We will plan to transition the remaining Airbus pilots in the fourth quarter of this year, which will set us up for a clean 2024 from a pilot training and dual fleet cost headwind standpoint. We still expect to deliver 8% to 10% capacity growth this year. As we've mentioned before, following the setbacks we experienced last year, we derisked our 2023 capacity plan considerably and will remain conservative in our capacity commitments as we protect stability and prioritize reliability in our operation, which essentially means that we may continue to perform at the higher end of our guided capacity range if our completion rate continues to be strong. In closing, our management team has been very intentional in setting targets and ensuring we execute the steps necessary to deliver on them. We know we still have work to do but are encouraged by our recent results and are optimistic about the second and third quarters, which are our peak performance period. We remain at the belief that we have core competitive advantages, the right business model, and the right strategic initiatives to continue to drive outperformance versus our peers in whatever economic backdrop we encounter. And with that, let's go to your questions.

And our first question today comes from Savi Syth with Raymond James.

Could you discuss what you're observing regarding changes in travel patterns compared to pre-pandemic times, specifically related to the booking curve, seasonality, day of the week, or destinations? I'm interested in how this is evolving and its impact on your forecasts.

So we're still working and observing as we build back. But a couple of things I will share is that number one, I think the booking curve is back sort of to 2019 levels. So we're sort of seeing leisure book further out again. So that's the first thing. I think second thing on the big day of week changes, Friday and Sunday are still CASM Kings. They generate the highest unit revenues of the week, but we've seen Saturday take a step change up, and that's been one of the strongest increases in unit revenue days of the week. And so there's more flying on Saturdays. I think Wednesdays and Tuesdays are the weakest, and then sort of Thursdays come along with Mondays. Another big change that's occurred is sort of the advanced booking window. I think in my career, I've never seen 30-day advance purchase barriers that have gone up. And we're seeing that across our network, which sort of leads me to believe that essentially business travelers are actually booking further out than they have historically. And then the last thing I would mention is Ben has also articulated is we need to do a much better job at matching supply and demand and what's seems to be a weaker January and February with business traffic essentially down 25% at this time.

That's helpful color. And then if I might, on the fleet transition, the special charge that you talked about, is any of that cash this year? And just if you could talk a little bit more about how that transition went in kind of the first part with the A320s and how that's informing how you do the A321 transition?

Savi, this is Emily. I will start on the cash, and then I'll hand it over to Nat to talk more about the fleet transition itself. Some of the cash will hit this year. I expect most of what Shane mentioned, the $300 million to $350 million, to hit over the next 12 months. We also have some cash that will be incurred this year related to the accruals that were taken last year. So as we work through the remainder of the A320 transition, it's all through the P&L already, but the cash is still going to be incurred in 2023.

And Savi, on the A321s, it's Nat. We're really excited, as you gather from Shane, from Ben, from Andrew, really everybody at Air Group to get this fleet transition done and get to a single fleet as fast as we can. The plan is in motion. And now the last hurdle we've got to get over is to come up with an A321 exit plan, and we're getting close. Late-stage discussions with a bunch of parties, lessors, financial firms, and other airlines, and our objective is to paper the transaction for the 10 aircraft by the end of the second quarter. And we're confident with the way we've structured it that we will come out on an NPV and cash flow positive basis versus parking the aircraft to maturity and just making lease payments until then.

Your next question comes from Conor Cunningham with Melius Research.

The implied exit rate on cost looks very positive, but could you clarify how you arrive at the high and low ends of the full-year guidance? I’m asking because the improvement seems quite significant, indicating a decrease of about 6% in the fourth quarter. I would like to understand the factors involved and how you reach that conclusion.

It's Shane. Yes, I think the biggest driver of the second half performance trend is going to be the lapping of labor deals. I think we talked about this the last couple of quarters. We've got about $75 million to $80 million of structural cost increase due to the six labor deals we signed last year; they start to lap in August. But the biggest one, of course, is our pilot deal that really starts to lap in Q4. So we'll be fully through the comp headwinds by the fourth quarter. That's the biggest one. I think the other thing just to realize is as we grew the first quarter of this year on an absolute basis over the fourth quarter of last year. We held extra resources to do that. We typically downsize in capacity from Q4 to Q1. We stressed the operation a bit, and we made sure we had ample additional resources to ensure that we didn't take a hit on completion rate or operational performance, which we did a really good job on the operations. So I think as we go forward, we'll get a little more productive with our resources, and then we'll start to lap these large labor deals.

Okay. That's helpful. Last quarter, there was extensive discussion about the connection between fuel costs and revenue. Currently, fuel prices are significantly lower than they were in January. You are reaffirming your unit revenue projections for the full year, so I am trying to understand why we wouldn't be at the lower end of the range given the current fuel situation. I know there are many factors at play, but could you please explain some of the revenue drivers that might help offset this?

Conor, I'll start on the fuel. We have always believed that unit revenue is primarily influenced by capacity, which in turn is impacted by the economic environment, and that environment likely affects fuel costs. Our full-year expectation for fuel is in the $3.15 to $3.20 range, and we haven't determined that it will be significantly lower than that. Our Q2 guidance is slightly below that, but still above our current costs. If we were confident that fuel would consistently trend below $2.90, we might consider adjusting our outlook on unit revenues. However, we believe it's too soon to make that call as fuel prices have been very unstable, and refining margins have fluctuated significantly in the first quarter. Our baseline expectation remains aligned with what we initially guided for earlier in the year, which is fuel in the $3.10 range and flat unit revenues for the entire year.

Our next question will come from Brandon Oglenski with Barclays.

Andrew, I was wondering if you could come back to your comments about sequential RASM here and looking at it year-over-year as well. Looks like you're going to be up sequentially, but maybe down from where you were in Q2 '22. Can you talk to that dynamic?

Yes, I think from Q1 to Q2, we see a unit revenue increase of about 1.5% considering our seasonality. Our growth is obviously more than 9% as we move forward. Our goal is to align traffic with our capacity growth at revenue levels we achieved last year. You might notice a slight decrease in revenue as we have tough comparisons, but overall, the volumes are coming in as we look at Q2, and we're maintaining our unit revenue increases from last year. This is reflected in our guidance, and we're feeling positive about the second quarter.

Okay. I appreciate that. And then can you give us any detail on business travel trends in your network, especially given Silicon Valley Bank in March?

Yes. I think on a macro level, and again, I just went back and looked at the ARC data as well as our own data around the weeks of all of that. And essentially, the booking levels, there are blips here and there, but they've sort of really been stuck at this back in our network at least 75% with revenues closer to 85% and 90%. And I think as we look forward, we're not forecasting it, but we're hoping to see as we move past some of these little shocks to the system that business travel comes back a little bit better than the 75% it's been at, but we're not expecting it.

And we'll hear next from Ravi Shanker with Morgan Stanley.

The last response, you said in your prepared remarks that West Coast corporate travel is an opportunity for you and I completely agree. But at what point do you kind of say that, hey, that's taking too long? Or maybe that's just structurally not coming back as much as you think, given the job cuts there. I was wondering, do you envision a point where you're structurally thinking of moving away from West Coast corporate in terms of exposure as you had and moving more towards leisure travel?

That's actually a really good question, Ravi. I think where we are, for now, is that the close-in volumes aren't there. And so we're going to be biasing toward building the volumes outside of the typical business window. Actually, right now, leisure revenues are up about 130% versus 2019, very strong. And so we're going to continue to capitalize on that and watch that. And I think on the network side, some of the hub-to-hub heavy traditional business traffic markets, we're going to sort of trim back and maybe put that capacity elsewhere. So again, we're watching it. But I think that's going to be a big question as we move forward through this year.

Got it. That's helpful. And maybe as a follow-up. Given your West Coast alliance as a part of oneworld, how do we think about China reopening as a potential tailwind for you guys over the next 12 months? How do you size the multiplier effect of domestic travel once you have people coming in through the West Coast hubs?

Ravi, it's Nat Pieper. Great question on China. And I can't speak specifically to that as we're kind of watching that with all of our alliance partners. What I can say is that we're really optimistic and bullish with the oneworld feed and linking our West Coast network to our partners, whether it's nonstop flights into Seattle, Japan Airlines to Tokyo, Finnair to Helsinki, and then Los Angeles with Iberia. We're really seeing a lot of pickup and a lot of incremental revenue that's getting there. So as China opens over time, we'd expect to participate in that through our partners.

We'll move next to Andrew Didora with Bank of America.

Andrew, could you share your thoughts on the current recovery of the California market? What is your perspective on the build-up there? We have also heard from a few sources recently that transcontinental fares seem to be quite weak. What do you think is causing that situation from your viewpoint?

Yes. I think we talk in macro levels about our growth and getting back flat with '19. The reality is Seattle is actually healthily above 2019. And the rest of the network and specifically California is still below 2019. And so in some respects, I think that's the right place to be. I think on a year-over-year basis, we've actually, in our network, at least being very happy with our unit revenue performance in the California market because we are building ourselves back to a stronger place. And so at the highest level, your comments are actually absolutely true. I think for us internally, we feel good that our California network is actually improving.

Got it. And then thoughts on transcon?

Yes. Again, I think especially with our partnership with American and part of oneworld, we've got code on these flights, especially out of the Bay Area that's really helping. And I think we'll see what happens this summer, although it's not specifically West Coast, but I think the general New York areas, some of the slots are being pulled down a little bit. But again, I think we're in a better position than we were certainly last year as it relates to the transcon markets.

Andrew, I might just add one thing. I think your sort of implication of the question is California is somewhat weaker in terms of recovery than a lot of the rest of the country. And I think that's generally true. We've done a good job putting the right supply in there, but it's all upside for us. And I think we're feeling good because we've got a chance to still be the industry's top margin producer and further upside when California does recover. It's the sixth largest economy in the world. It's going to come back.

I wasn't saying that it was unexpectedly weak. I was just curious where it was in the recovery?

Got you. No, I appreciate that. Yes, I think if we continue to trade at prices that we believe are a really good value, which is what we believe about our stock price today, we'll have a bias to do more than just dilution throughout the year. So we'll continue to talk about that internally and with our Board. But I think if prices are where they are today, we'll probably be more aggressive in the second quarter.

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

So maybe just one more on the revenue. Your guidance is implying a reacceleration in RASM in Q2 from Q1 on a versus '19 basis that helps us for seasonality there. Can you just walk us through what drove the deceleration from year-end into Q1 and what you're seeing today that gives you confidence in a better Q2? Is that just higher leisure mix? Or is there anything else driving that improvement?

Catie, to address Q2 first, we currently have 63% of the second quarter's revenues recorded. Looking ahead, based on our recent bookings in both yield and traffic, we are performing well within our guidance. From Q4 to Q1, we experienced significant growth of 14%. In January and February, typically our slowest months, I believe we could have structured our network differently if we had anticipated events more accurately. Additionally, challenging weather conditions contributed to our deceleration. However, as shown in the graphs, we are seeing positive momentum again, accelerating through March, April, May, and June, and I believe we are on a strong path forward.

Great. And then maybe one for Shane. Based on your commentary on two half capacity growth and then your comments on being considerate on completion, it sounds like there's a decent chance you're going to come in at the higher end of capacity guide. Should that inform our view on how CASM ultimately comes in? Or are there offsets that higher capacity where we shouldn't assume coming in at the higher end of the capacity moves us towards the better end of the down 1 to 3 similar to what we just saw in the first quarter?

And I tried to address this a bit in my script. We were at the high end in Q1 of capacity. We have built conservatism into the capacity guide. We certainly have more planes and more resources that we could fly harder if we wanted to put more capacity into the system. We're going to continue to prioritize operational reliability and stability, and we're going to watch the economy closely. So I think I said in the script that if we continue to complete flights at a high level, we could easily be at the high end of that range. And I think that's an absolute true statement, and that's kind of where we would expect to be at this point. I don't think we should infer too much in terms of a change in our posture on unit costs. Our goal long term would be to be on the high end of the capacity range and the low end of the CASMex range. That's where we want to get back to. We didn't do that in Q1. I think we'll get there. It's just a matter of rebuilding this muscle over the next several quarters.

Your next question comes from Duane Pfennigwerth with Evercore ISI.

Just on the technology corporate recovery status, one we've been looking for for a while. I think you said 50% to 60%. Is that revenue or a volume comment? And maybe you could just put it in context, was it at a higher level than that at any point last year? In other words, are you seeing any incremental weakness in tech business travel? Or is it kind of bouncing along the bottom where it has been for some time?

It's Andrew. I provided a volume metric, and there are some technology companies that are performing much worse than that, while others are doing significantly better. If I recall correctly, in the third quarter of '22, we observed a slight recovery in tech, but by the end of the year, we started to see it decline again. Nothing has really changed since then. In my opinion, this situation is mainly influenced by CFOs and restrictions on travel and budgets. Until those constraints are lifted, I don't expect to see any improvement.

It's Ben. Just on that, just being here on the West Coast and watching some of these big tech companies mandate return to office, new fiscal budgets coming. It's not in our forecast, but I think we just see a lot of upside going forward in the future. I think we're out of the trough to answer your question, and we're hopeful that it gets better as these tech companies recover and get stable and then move forward with their business.

Your next question comes from Stephen Trent with Citigroup.

I am interested in your perspective on U.S. infrastructure. I know your company and your competitors have worked hard to ensure a smoother summer travel experience. What are you observing from the government regarding the staffing and investment in TSA traffic control infrastructure? It appears that the House of Representatives and the White House have reached a consensus on the budget. I'm curious about your overall views on this situation.

Stephen, thanks for your question. So maybe the best way I can contrast it is back to 2019. So when I look at the capacity of the airline industry vis-a-vis today, it's roughly the same. So we have roughly the same amount of capacity than we did in 2019. I think the pinch point is air traffic controllers. As you see some of the actions that need to be taken in New York, I think in Florida, I think we've seen some in California and our L.A. market. So I think staffing on the federal side is the key pinch point. And again, we're talking with our government counterparties and making sure that they hire and train appropriately. Infrastructure is another one. I think that airlines and government have to work on together to make sure the airspace is efficient. There's a lot of things that we can do in terms of technology to facilitate that. And I think that going forward, like I said, we're back to 2019 levels where we were already constrained. But going forward, I think we really need a solid plan to really facilitate this next generation of aerospace management.

And we'll move next to Mike Linenberg with Deutsche Bank.

Andrew, you aim to reduce the seasonality of the company in the March quarter or at least find a way to achieve profitability. It appears that no management team at Alaska has managed to solve this issue effectively. There may have been a few years of profitability here and there, usually during peak times. I'm curious if you see a solution in building a hub or if it's more about the network and possibly scaling back frequency in certain corporate markets while increasing maintenance on more airplanes. This might decrease your utilization, but it could be beneficial. Alternatively, could focusing on costs, such as transitioning to a single fleet type, provide a favorable boost? I'm just trying to understand your perspective on this. It's intriguing.

Mike, it's Ben. It's a great question. So for us, March was very profitable. We almost hit a double-digit pretax margin. It was January and February that were the issues. So for us, like I got to be honest, I just set the mandate for my team and say, look, leaders change outcomes. We don't like the outcome in January and February, and we don't know the exact answer, Mike, to be honest. But the mandate has been given to the commercial team to say, look, there are things that we know if we dissect the data, airplanes can be moved. We can do things with our network, manage capacity. But you have to do that not only right before the quarter; you got to start thinking about it nine months before, which is why we're setting the goal now. So Andrew needs to think about what he does in the second and third quarters as he builds capacity so you can manage the first quarter of next year. And so a lot of work to do, Mike. And hopefully, we can show that at least we've closed the gap to next year as we work on this thing. And to your point, it's not been consistently done, but at Alaska, we just like taking big audacious challenges. Let's change the narrative.

I know, very good. Now just one more. Watching American sort of shift on their distribution and I'm sure you've been following the reports closely where it does look like they're now focusing on their larger corporate accounts. And given that you guys have gotten closer and as part of the partnership, you obviously want to grow and build on that and then obviously bring in more corporate travel. Does that have an impact on you? Specifically, where American has said that they're going to sort of back away from some of the smaller accounts, corporate accounts that maybe do less than $1.5 million or $2 million of sales? I know that may be an area that you play in. Obviously, you have big corporates that you do business with, but when I think about Alaska historically, given your network size prior to oneworld and the American partnership, you probably had a disproportionate amount of your corporates as maybe small, medium enterprises. I'm just curious if there's any sort of impact there. You're probably watching that closely. Any comments that you can make about that shift on American on the distribution and sales side?

Yes. I think obviously, it's well documented, some of the significant changes that American is doing specifically around NDC and the impact with GDS and all the rest of it. I think for us, we obviously have good and a lot of joint contracting with American and our larger corporates, and they've been working extremely well. One of Brett Catlin's priorities is I think we under-index where we should in the small and medium enterprises. So I think it's not something we've focused on as much as we should. So again, if anything, given our West Coast footprint, we're going to be focusing a lot more on that. As it relates to NDC, we are well into our journey as well and more to come on that will be sort of fully up and running next year with OTAs and all that connected. I think there's a good cost story there, and there's a good product story there, and more to come.

We'll hear next from Scott Group with Wolfe Research.

I want to just go back to the chart on the monthly RASM. So I think you said 63% of revenue is booked for the quarter. How much of June is booked at this point because there's obviously a big further step-up assumed in June? And how do I think about that further acceleration in June relative to some of your comments about RASM following fuel prices?

Yes, I believe in June we still have over 45 points to go regarding our load factor. While this month has the lowest bookings, I can also say it has one of the strongest demands as we approach summer. The team is currently focused on this. As I mentioned earlier, we need to find the right balance between bookings further out and those closer in.

Scott, it's Nat. Consistent with Alaska, you know, we play it for the long run. And hedging costs in the quarter was about $12 million. Long term, it was $170 million to the good last year. So we didn't get a lot of questions last year about changing the hedge program as you might expect. Since we've had this program specifically in place since 2015, buying calls 20% out of the money, 18 months in advance. The program has been positive for us. It's all about putting a box around it. So one quarter doesn't cause this necessarily to change a multiyear process. But I think we're going to be intelligent about it and look at it over the long run. And if there are smart changes to be made, we'll make them.

And then the 8% to 10% revenue, is that still the right number?

Yes, sorry, Scott, I didn't mean to not answer that question. Yes, that is still the right number for us for sure.

And our next question comes from Helane Becker with TD Cowen.

I have two questions. My first question is in February this year, I think you lost a lawsuit in the Virgin America case. Number one, have you taken accruals for that? And b, will you appeal that decision? Or is it not appealable?

Helane, it's Kyle. This litigation is a long road. We've been fighting this for about seven years. It's the Virgin Group Royalty license matter pending in London. And the very first stage of that was a ruling by the judge in London, adopting Virgin Group's interpretation of our contract. There are additional proceedings coming, so continue to watch, and we'll keep you posted. On the accrual side, we have accrued $10 million at this point, and you'll see additional disclosures in our 10-Q in a couple of weeks.

Okay. That's very helpful. And then my follow-up question or another question, you guys announced recently, I think, within the last week or so that you're eliminating kiosks at the airport. And I'm just wondering how you're thinking about that? I know most people come to the airport with their boarding pass in hand, but how are you thinking about the acceptance rate of that among your clients?

Thanks for bringing that up, Helane. Actually, this is very exciting. And the reality is our lobbies are hugely congested. And we've actually started rolling these out. We've had about seven or eight stations done, including Portland. And what we're finding is at least a 10-point increase in people coming prepared to the lobby, checked in already, even paid for their bag. And so what it's going to do is there's a little bit of change in management, of course, but we've seen hugely positive results both from our guests and our agents. And I think what you're going to see in the future is people only needing to check bags that are going to be milling around in the lobby. Only half of all passengers check bags. The rest need to go straight to security. We've had about a quarter of those being the lobby, using kiosks, to do all sorts of things. And now we're fully mobile, and we can do that outside. So I think you're going to see good productivity, efficiency, and a much more pleasant lobby experience as we roll this out over '23 and '24.

It's Ben. Like our long-term vision is to have people come in, just get their bag tag or have an electronic bag tag, which we've already introduced, go to a self-backdrop, drop your bag, and get to security within under five minutes is the goal. So really, make it a wonderful, easy customer experience. So these are the things that we're rolling out in the next 12 to 18 months. It's really exciting for us on the innovation front.

Our next question will come from Chris with Susquehanna International.

Ben, could you comment on the procedures in place to navigate, let's say, less than ideal operating conditions versus periods of strong demand, meaning how confident are you in Alaska's ability - operational resiliency and ability to keep your completion factors north of 95% when conditions are tough?

Chris, that's a great question. As we approach summer, I'm very confident. There are two key elements that need to be in place: First, proper staffing, and we have strong numbers across all labor groups. Second, as we regain our footing—given our history of excellent performance—we have an operational playbook that we are implementing. We have a clear timeline and a definite plan of action, and I can see that it's starting to come together across all areas and hubs. I'm quite confident in our operations team, and I believe we are set for a successful summer.

Okay. And then my follow-up on the stage engage focus this year as we think about the cadence of second half CASMex, should we expect this benefit to flow through evenly throughout the second half? Or is this something that would be more fully realized as we exit Q4? And I realize there's also implicitly some type of macro assumption around stage and certainly as it relates to gauge and any order book risk that you've contemplated there?

Chris, yes, regarding the CASMex cadence, we issued some slides that could be helpful for you to review. The exit rate in Q4 is the strongest of the year, but the benefits are actually more gradual as we move from Q2 to Q3 compared to Q4. We will have an opportunity to assess our performance in the next one and a half quarters. Also, since we are mainly comparing against labor deals in the fourth quarter, that's where we see the most significant benefit from CASM-ex. Thank you all for joining us, and we look forward to speaking with you next quarter.

And this concludes today's conference call. Thank you for attending.