Alaska Air Group, Inc. Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2023 Second Quarter Earnings Call. At this time all participants have been placed on mute to prevent background noise. 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 like to now 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 second quarter 2023 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 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 second quarter GAAP net income of $240 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $387 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.

Thanks, Ryan, and good morning, everyone. Our solid second quarter results reflect the strength of the leisure demand environment to date, as well as our team’s unwavering commitment to operational excellence and reliability. I am thankful for their focus, which has helped us capitalize on this busy travel season to produce these great results. Our 18.3% pre-tax margin will likely lead the industry, coming in above 2019 margins, despite higher fuel and structurally higher costs. Our earnings per share of $3 was $0.83 higher than 2019 levels, bringing us above 2019 on a year-to-date basis and beating consensus by 11%. The strength of demand this quarter was evident on June 30th when we flew the most passengers in a single day in Air Group’s history. And at a 99.5% completion rate, we ran one of the best operations in the country as we continued to prioritize completing flights and serving our guests with care. This was 1.7 points better than 2022 and 0.3 points better than 2019. Heading into the busy summer period, we have planned and prepared our airline for peak flying and our teams are executing. Over the 4th of July weekend, we led the industry in completion rate at 99.8% and on-time performance at 85.1% while flying a 90% load factor. As we approach the rest of the year and beyond, it is clear our environment is evolving as domestic leisure fares have recently started to come down from their peaks. Delivering on our targets will not be without challenges, but we remain focused on restoring the tenets of our resilient business model, driving improvements in efficiency and productivity, and controlling unit costs to continue to deliver strong financial performance. We remain confident in hitting our financial targets this year, including our adjusted pre-tax margin of 9% to 12% and earnings per share of $5.50 to $7.50. Now turning to an update on our business priorities and progress. We have chosen to prioritize reliability and are running a strong operation like we have historically done. Not only do our guests deserve this level of commitment and excellence, but it is imperative to restoring stability, improving predictability, capturing revenue, and building a foundation to drive further improvement to the business. Our investments in training, aircraft, and staffing have enabled us to meet a higher level of flying. Higher completion rate performance has surpassed our initial expectations, driving approximately half of the 3-point increase of capacity in our full year guide. Productivity is also improving as we adjust to new work behaviors amidst a more stable operating environment and work to close the gap to 2019 levels. Boeing has also continued to be a great partner, delivering according to expectations despite continued disruptions within their supply chain. Earlier this month, we welcomed our 53rd MAX into the fleet. The upgauging benefits of these aircraft are significant. While departures were down 1.3% year-over-year this quarter, higher gauge coupled with mainline utilization exceeded 2019 levels by 4% at 11.5 hours per day and drove capacity up 9.9% year-over-year as we continue to leverage our fixed cost assets as much as possible. As we transition to a fully Boeing fleet at Alaska, the sufficient growth has helped us de-risk our growth plan within a constrained industry operating environment. Given our expectation of continued strong operational execution, adequate staffing, and efficient growth, we have raised our full year capacity guide to 11% to 13% versus 2022. As we work to restore all areas of our network to pre-pandemic levels, we are confident in our resources to meet this higher level of flying and balance our growth aspirations with a consistent commitment to excellence. Our business is configured to compete, and we’ve doubled down on these core advantages to reinforce our foundation for profitable growth. We are returning to our historical strength as a single fleet operator and have rebuilt our foundation of operational excellence. We continued to push incrementally more on productivity and costs and still expect to be one of the only in the industry to drive unit costs lower year-over-year even when factoring in our industry-leading performance-based pay, which several of our peers exclude. We are executing on our commercial roadmap and making progress on revenue initiatives. Our balance sheet remains unimpaired coming out of the crisis with leverage well within our long-term target range, and we have line of sight to full year earnings per share on par with 2019, despite structurally higher labor costs and at least 30% higher fuel costs. For decades, Air Group has adapted and will continue to do so to produce consistent profitable growth. As you well know, this industry is challenging, yet we remain focused on the drivers of our long-term success, restoring and strengthening our competitive advantages, operational excellence, cost discipline, and high productivity in a consistent and measured way will continue to position us well now and far into the future. And with that, I’ll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. My comments today will focus on second quarter results, as well as our revenue outlook for the rest of the year. We produced very solid second quarter results. Our record high revenues of $2.8 billion were up 6.8% versus the second quarter of 2022 and above the high end of our guide, driven by strong leisure and close-in demand. To close out the quarter, on June 30th, we recorded our second best revenue day in our history, only to be outperformed by the Sunday of Thanksgiving last year. Capacity for the quarter was up 9.9% versus the second quarter of 2022, and our planes continued to fly full with load factors increasing from 85.5% in April to 86.4% in May, and 89.1% in June, the second highest monthly load factor in our history. Turning to unit revenues. Changes are noisy on a year-over-year basis at down 2.9% given both volatile pricing and capacity in 2022. However, when compared to a more stable 2019, we saw improvement in unit revenues of 23% for the quarter, with June up 25%. We still expect July to produce the highest total revenue of any month in 2023, which is consistent with pre-COVID trends, but for the second straight year, June has supplanted July as the peak yield month for us. Regarding product, strength in premium cabin revenues continued to support our revenue momentum. We launched the sale of exit row seats in mid-March, and I’m pleased to report sales have been strong right out of the gate. Including exit rows, First and Premium Class revenues were both up approximately 12% year-over-year, outpacing Main Cabin by 8 points. In the second quarter, 31% of total revenues came from Premium Class products, up from 2022 and up 7 points from 2019. On the loyalty side, performance remains strong with bank cash remuneration up 15% versus the second quarter of 2022, outpacing our system revenue growth rate by 2x. As always, we continue to prioritize delivering value to our guests through our loyalty program, and we are proud to have been named the number one best airline reward program for 2023, 2024 from U.S. News earlier today. Lastly, we are now selling 9 of our partners on alaskaair.com and anticipate bringing on our 10th partner this fall. Phase 1 is to sell and service main cabin tickets. But later this year, we will add the ability to sell premium cabins on our website, helping us to achieve our vision of providing our guests a seamless ticketing capability on our portfolio of global partners with access to any major region of the world. Now, I’ll turn to our outlook and forward-looking guidance. Demand remains very strong, even as we’ve come off the peak of historically high fares, a trend we knew would happen at some point. Notwithstanding this evolution, yield is still meaningfully above 2019 levels on industry capacity that has now surpassed 2019 levels by an estimated 6% for the second half of 2023. For the third quarter, we expect revenues to be flat to up 3% on capacity that is up 10% to 13% versus 2022. This implies unit revenues down approximately 9% at the midpoint. Our revenue guide is based on the environment we see today with 67% of third quarter revenues on the books. When comparing our Q3 revenue guide to our Q2 results, this implies a 6-point sequential deceleration in unit revenue performance. Of that 6 points, roughly half is directly related to the pricing environment, while the other half is a combination of domestic industry capacity growth tracking to be up 10% year-over-year, our stage length growth, and holiday timing shifts. As a primarily domestic leisure carrier, this summer presents a unique situation with the unprecedented surge in international demand, not dissimilar to the domestic surge last year. We believe pent-up international demand has had the effect of a larger pool of would-be domestic travelers than has historically been the case. Long-haul international seats off the West Coast are up 31% year-over-year this June. Our loyalty members alone in June, as evidenced by accrual and redemption activity, were filling the equivalent of 18 787s on a daily basis across our international partner network, up over 50% year-over-year, while our lounges experienced a 68% increase in visits from guests traveling internationally. While we believe this will ultimately normalize, there is a disproportionate impact on our realized domestic fares in the third quarter, which we estimate could impact our Q3 revenue performance by approximately 0.5% to 1%, which is reflected in our guide. Close-in demand is another important dynamic to address. Having improved recently, the percentage of passengers booked and flown within months during Q2 surpassed both 2022 and 2019 levels. This is particularly significant when compared to 2019, given our stage length has increased 7%, where passengers skew more towards advanced booking patterns and business volumes remain down 25%. Although currently not in our forecast, if this trend persists, this represents an additional 100 basis points of revenue upside to our current third quarter guide. Lastly, as it pertains to managed business travel, we have not seen any meaningful change, remaining around 75% recovered by volume, with both California and the technology sector still accounting for the largest gap to full recovery. However, we have seen more return-to-office efforts at major tech companies and are incrementally more optimistic that we might finally break through the 75% recovered ceiling. Although we have not baked any of this into our guidance, we will continue to watch this closely as we move into the fall. For the full year, our revenue guide remains unchanged at up 8% to 10% versus 2022, but on higher capacity growth of 11% to 13%. While our capacity is taking a step up in the third quarter and full year, in part due to strong operational performance, it is primarily driven by Alaska’s gauge and stage growth as we benefit from the replacement of the Airbus fleet with larger, more efficient MAX aircraft. As a reminder, by September 30th, we will have replaced all 72 Airbus aircraft at an average gauge of 150 seats with brand-new MAX 9s that have 28 more seats. The benefits of upgauging are clear in our June results as gauge has grown 7% year-over-year, yet our load factor was only down 0.4 points year-over-year from what was the highest load factor ever flown in our history. At a system level, we have restored ASMs in the second half of the year to approximately 103% of 2019, but there are still areas within our network, including Portland and California, that are not fully restored. The West Coast is still the least recovered geography across the industry, and we are focused on restoring our pre-pandemic network, especially where we have opportunities to provide feed for international partners. In a period of historically high demand and yields, the right economic decision has been to fly and maximize ASMs within our fleet and crew capabilities. That said, if we identify pockets of relative softening, we will adjust as needed to deploy our capacity thoughtfully. While the industry continues to normalize and work towards a new, more predictable environment, we have confidence in our commercial plan. With business travel still below historical levels and the West Coast least recovered, we believe there is more upside to come as we head towards 2024. We are focused on pursuing and implementing our longer-term strategic drivers of profitable growth, specifically, our partnership in oneworld and the West Coast International Alliance, our premium products, and our loyalty program. Our value proposition is significant, our initiatives tangible, and our product well-suited to traveler needs post-pandemic, positioning us well to continue to serve guests and build on our strong results going forward. And with that, I’ll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. As both Ben and Andrew shared, we saw continued strong demand throughout the second quarter, carrying a record number of passengers, both to end the period and into the 4th of July holiday. Our teams have done an excellent job this summer delivering a safe, reliable operation in the midst of full flights and very busy airports. Now that we’ve restored operational excellence, which we viewed as our first priority, we now look forward to added focus on driving consistent improvement to our unit cost profile. Ultimately, operational excellence leads to cost-efficient operations, and coupled together, they will allow us to continue to deliver strong relative financial results within the industry. Turning to results. Our balance sheet and liquidity positions remain healthy and a core strength of ours. Debt to cap finished the quarter at 48%, while our net debt-to-EBITDA remains below 1 turn and better than where it stood in the second quarter of 2019 at 0.9 times. Debt payments were approximately $50 million for the quarter and are expected to be $100 million in the third quarter. With a strong demand backdrop and the start of summer travel, we generated approximately $600 million in cash flow from operations during the quarter. Total liquidity, inclusive of on-hand cash and undrawn lines of credit remains very healthy and within our target liquidity range at $2.8 billion. Also, our share repurchases for the year have reached approximately $60 million year-to-date and our trailing 12-month return on invested capital reached nearly 12% this quarter. Turning to costs and capacity results. As I noted, our operation has been running extremely well. For the second quarter, capacity was up 9.9% versus Q2 2022, above the high end of our guided range, which was primarily driven by a higher completion rate than we had originally planned. Our completion rate has been 99.7% over the last few months. And given this, we’ve assumed higher completion for the balance of the year, resulting in slightly higher capacity forecasts for the third quarter, which we expect to be up 10% to 13%, and for the full year, which we expect to now be up 11% to 13% versus 2022. Moving to costs. Our second quarter CASMex was up 2.4% year-over-year, within our guided range, albeit on higher incremental capacity. While we did not miss our range, we, of course, expect to be at midpoint or better when we outperform on capacity. The drivers away from midpoint or better are predominantly not structural. They are relatively small misses against what we know were aggressive cost and productivity targets. To be clear, our cost profile continues to improve, both sequentially and year-on-year. And in comparison to the rest of the industry, we believe we have the best cost trends, especially given we are growing at a somewhat slower rate than many of our primary competitors. Areas where we saw elevated costs relative to expectation remain related to running a solid operation, including staffing levels modestly higher than planned and elevated overtime and premium pay. Ben and our leadership team have been clear with the company that operational excellence and consistency are the first priority, and having now established that, we will incrementally focus on working these cost areas down appropriately. We also have slightly higher than forecasted crew costs associated with our transition out of the Airbus fleet. We assume higher levels of attrition from the fleet and are, as expected, incurring significant training costs related to transitioning Airbus pilots to Boeing. Turning to unit cost guidance. We expect third quarter CASMex to be flat to down 2%. For the full year, we still expect to see unit costs down 1% to 3% year-over-year. As a reminder, our CASMex guide includes profit sharing, and we anticipate that we may be the only airline that will achieve unit cost reductions year-over-year. We will do this on less incremental capacity versus our peers. Finally, fuel trended positively, falling below our previously guided range and finishing at $2.76 for the second quarter. Based on current trends, we expect fuel price per gallon to be $2.70 to $2.80 for the third quarter. While this offers a benefit compared to last year, fuel prices are still up approximately 30% above 2019. To wrap up, it feels like we are finally getting back to normalized operations after over three years of unprecedented challenges. We have work to do and the opportunity to improve further, but we are delivering results within our guided ranges. As Ben mentioned, we are still tracking to deliver our 9% to 12% adjusted pretax margin this year with visibility towards an EPS restored to 2019 levels at the midpoint of both higher fuel and structurally higher labor costs. As I look forward, I think we have a very solid setup. We’ve got arguably the best absolute cost trends with further opportunity to drive unit costs down next year. We believe the West Coast is the least recovered region in the U.S. but also believe it will continue to recover, including business travel, which will provide future revenue tailwinds. We believe that once pent-up international demand is run through, there will be a normalization in the international versus domestic demand mix, further providing pricing support in our network, and we have further opportunity to drive our commercial initiatives. So, even as we expect to compete for the industry’s best margin again in Q3 and for the full year 2023, we know we also have the opportunity to further improve our margin performance in the years ahead. And with that, let’s go to your questions.

And our first question comes from Jamie Baker from JPMorgan.

So, the RASM guide in the second half is clearly disappointing. You mentioned that Seattle South or West Coast was the least recovered. If we parse your network into four buckets, Hawaii, Seattle North, Seattle South, and then Seattle East, could you rank order them in terms of year-on-year RASM change, looking forward, not the second quarter, related to the guide?

Hey Jamie, Andrew. That’s maybe a little complicated off the top. I think what I would say is there is a lot going on in our network, but essentially, we continue to see California improving, both our margins versus 2022 and 2019, but it’s the least recovered, but it’s getting stronger. As far as the Pacific Northwest, that’s where most of our growth has gone. And again, we’ve seen really good unit revenue strength there. But I would say at the end of the day, as we’ve said in our prepared remarks, overall, we’re coming off the high across the network, across the system from historically peak unit revenues. That said, our planes across the board are still extremely full. And again, as we talked about, a lot of the things that we’ve got there in our guide haven’t been fully baked in. And importantly, if you look at the recent results from the other big guys, essentially, they had a deceleration from Q2 to Q3 of 4 to 5 points, which they’re anywhere up to half international, which is extremely strong, and we’re only down decelerating 6 points. So, on a relative basis, we feel really good about our performance.

Okay. You mentioned that ex-fuel CASM might decline in 2024. What level of capacity growth is necessary to significantly reduce ex-fuel CASM next year?

Yes. Hey Jamie, it’s Shane. Thanks. Good morning, by the way. I think we’d want to be in our long-term target range of 4% to 8% to have visibility on that. It’s really early in terms of considering capacity for next year. But our intention is to continue to drive it down and achieve a year-over-year reduction in 2024.

And our next question comes from Andrew Didora from Bank of America Global Research.

Ben, Andrew, I wanted to ask about what appears to be a shift in strategy, specifically exchanging trading yield for additional capacity. You've mentioned it relates to a higher completion factor, but why is now the appropriate time for this considering the shift in domestic and international share? Would you consider reducing capacity in the latter half of the year if fares continue to be low?

Thanks, Andrew. I want to clarify the capacity aspect and the three-point increase in guidance. This isn’t due to any new flights; it has been part of our plans for a while. Half of that increase has already been realized in the first half of the year, and we might be slightly outdated on our guidance. However, we did exceed our completion rate, and we've taken a conservative approach. Thus, half of the increased capacity is intended for the remainder of the year. Additionally, this is reflected in our completion rate, which has been exceptionally strong, along with our Boeing and Airbus deliveries. We have solidified those plans and are more confident about the upcoming months. On the capacity front, 80% of our growth in the latter half of the year is focused on stage and gauge, which is very efficient. With high load factors and strong demand, we are optimistic about our situation.

Yes. Andrew, it’s Ben. I think another factor is when you compare where our capacity is compared to 2019, we’re just getting back to 2019 levels of capacity. And then just to put another point on what Andrew just said, our departures are actually down 1.3%. So, we feel like we’re in the right place for capacity.

Got it. For my second question, if I consider the midpoints of your capacity and revenue outlooks for the third quarter and the full year, it seems that the third quarter RASM will be the lowest this year, with the fourth quarter being a couple of points better. What is influencing your thought process on this? Is it due to the shift in domestic versus international share or any other trends you are observing in your booking curves? Thanks.

Yes. Thanks for that. As we shared in the prepared remarks, there is the deceleration, about half of that is indeed to the core pricing, but there’s also increasing capacity and our stage length growth and a little bit of a shift in the 4th of July, but those made up the balance of the difference.

Brandon, this is Shane. I’ll just unpack that for you because I think I know what you might be asking. We have a normal capacity growth to RASM reduction model that we sort of assume; it’s pretty consistent over the years. What we’re saying is the pricing reductions is slightly higher than that model would suggest. And that’s what Andrew’s attributing to coming off the peak pricing impact.

And our next question comes from Savi Syth from Raymond James.

I’m curious about what you’re seeing from Boeing regarding costs and your confidence in meeting capacity expectations as we transition from this year to next. At a high level, what are the main headwinds and tailwinds you anticipate for next year in terms of costs?

Boeing has performed exceptionally well for us this year. If there were any criticism, it would be that they have consistently delivered all their planes on time. As a result, we have slightly increased our schedule capacity, which is raising some questions today, but their on-time performance has been impressive. We haven’t experienced any delays with aircraft deliveries. We have several deliveries scheduled for December, which is always a time when a few might slip into January, but we are not worried about that. Boeing has made a strong recovery from previous quality issues and is now in a great position. We are optimistic about our fleet plans for next year and are eager for them to obtain certification for the MAX 10. While we don't know the exact timing for that, we are excited to operate that aircraft in the future. Overall, Boeing has done an excellent job this year in getting back on track with deliveries.

Just on the major buckets there on next day?

I appreciated the first question; I overlooked the second. Regarding the positive factors, I mentioned a few earlier. We have a $100 million increase in costs from the 900 ER engine deal this year that will be fully accounted for. Most of our contract costs are currently being accounted for as well. We do have negotiations to finalize with our flight attendants and mechanics, which we are eager to complete and are actively working on. I expect, and hope, that some of those costs will be recognized this year, but we will need to continue accounting for those deals next year. I won't discuss specific amounts. Additionally, the costs from the Airbus transition will no longer be a factor, which will be another significant advantage. Our focus now is to ensure that we are efficiently maintaining a strong operational performance. There are many small opportunities across the company, but we will concentrate on streamlining our cost structure next year due to our commitment to operational excellence.

Helpful. And can I clarify just quickly on those kind of fare softness. When did you start to see that? I think the other kind of question that investors are going to have is, obviously, is this the start of further declines, or is there something a new level that you’ve seen stabilize? Just a little bit more on that when you saw that fare and then what you’re seeing today?

Yes. Hi, Savi. As you know, our quarters are influenced by the previous ones. I think as we approached the summer a while back, we began to notice in the third quarter a couple of months ago that there might have been a peak followed by a slight decline. I’m hesitant to call it softness, but it seems to be a matter of finding the right balance between demand and supply. Additionally, as has been reported in the last 6 to 8 weeks, there has been a decrease from the highs we observed a couple of months ago.

And Savi, remember, demand is still very strong on the domestic side. Our load factors were some of the highest we’ve seen. And it’s really due to the surge in international. And I think if you really look at it, international is going to be strong from maybe June through September, October. But as kids get back to school and things start to normalize, like I do think this thing is going to find its equilibrium. So, I just wanted to give just a little more context on how we’re seeing it.

And our next question comes from Catherine O’Brien from Goldman Sachs.

I know we spoke a little bit about this last quarter, and you touched on the prepared remarks, Shane, but unit costs coming in at the midpoint on higher than planned capacity is not traditional Alaska performance, I guess. Do you expect to be able to squeeze some of those labor costs tied to shoring up operations as we exit the year, or is that really more of a 2024 opportunity?

Yes. Thanks, Catie. It’s probably more of a 2024, you sort of need the volumes to be there. And even though Q4 capacity is growing year-over-year, it’s still down sequentially from Q2 and Q3. Not that we won’t be focused on it, but the other thing, we have to get through this full Airbus transition and all of the pilot training. One other potential tailwind for us next year, I didn’t speak too much about, but we will be bringing on a preferential bidding system with our pilots sort of earlyish in the year, maybe April; it will take us a few months to get our feet under ourselves there, but that should also be marginally helpful on the cost efficiency and productivity front.

That’s great. Andrew, you mentioned some statistics about loyalty members flying with partners and an increase in international travelers visiting your clubs. How does Alaska gain from this? Does it impact your profit and loss? What should we consider regarding this? I understand that you are primarily a domestic carrier, but I'm curious if there's any segment of the business that benefits from this shift towards international travel. Thank you.

Yes. Thanks, Catie. Actually, it’s extremely exciting for us. It shows that we have our members that our global loyalty program really works. They’re using the benefits and more importantly, as we move more and more partners to sell directly on alaskaair.com, it just really opens up the utility that we can provide for our members that you really can fly globally with Alaska Airlines. So, it’s actually proving out the thesis, and I’m very excited as we move through the rest of the year.

And our next question comes from Mike Linenberg from Deutsche Bank.

Shane, I want to get back to your point on the flight attendants mechanics deals yet to be done. Have you considered accruing for those agreements? And the reason I ask is, there was a time where actually all the airlines used to accrue for labor deals. And then I think we got to the point where it was just Southwest. And now we’re seeing United accrue for their pilot deals. What’s your thinking about that philosophy, does that make sense? And why not start it now? And then I have one more.

Yes, thank you, Mike. We haven't considered accruing for those agreements. We're aware that some others have done so. The levels those contracts reached made sense, but it's not something we've done since I've been here. It really relates to the uncertainty surrounding timing, and we prefer to keep those discussions between ourselves and the union leaders at the property. We don't want to discuss the potential economic impacts openly, as other companies have. We believe it's better to keep those discussions private and then inform everyone of our decisions once they are finalized.

Okay, that makes sense. My second question is for Andrew. I understand this pertains more to later this year or early next year, but there are some significant route and seasonal changes ahead. I recall that a couple of quarters ago, you mentioned the need to operate a more efficient airline during the winter, which is typically our weakest season. As I consider the latter part of this year and the beginning of next year, it appears that a substantial portion of your available seat miles will be dedicated to new routes. It feels like it’s been quite some time since the Virgin acquisition that you've had this much capacity in new markets. If I'm mistaken, please let me know, but is there anything you can share about your plans that might address my question regarding the balance of new flights versus historical routes? I realize I have posed several questions there, so I’ll pause.

Yes. Don’t worry, Mike. Well, I’m glad you asked because it’s actually a really important question and point. Our schedules will start to reflect and are being reflected, but we’ve moved about 9 points of our capacity around in the first quarter. We’ve also got extremely laser-focused on the makeup of the first quarter, which is really three distinct seasons for us coming off of the Christmas and the holidays. Then a very difficult period and then, of course, you move into March and the spring. You’ve seen a number of new markets from us. Those are obviously reallocations. You see us leaning hard into Latin. We’re trying some things like Mexico from Las Vegas is unserved, Nassau, and all of those things. But honestly, the bigger impact on our capacity is just reallocating across our network, and that’s sort of the 9 points of which some of these new markets are part of, but we’re getting more disciplined, how much we’re flying to New York City during the depths of winter, those types of things.

And our next question comes from Duane Pfennigwerth from Evercore.

Just firstly, anything in the 3Q comp from last year, you could call out? For example, was there any travel credit breakage above trend that you could quantify?

Hey Duane, it’s Shane. Good morning. I don’t think there’s anything significant to highlight regarding the 3Q comparisons, especially not concerning the breakage issues. I believe we have already addressed most of that beforehand.

Yes. The only thing in the third quarter last year, obviously, coming off the back of some operational challenges in the pilot pipeline, we had some closer in pull downs that impacted summer and specifically California in a large way, but other than that.

And you mentioned some holiday shifts. Could you just elaborate on that?

The 4th of July this year was on a Friday, which caused some movement into June compared to last year when it was in July. Interestingly, for the past two years, our unit revenue in June has been the highest of the year, and this trend appears to be ongoing.

Yes. Thanks. I found your comment about the quarter's bookings interesting. Could you provide more detail regarding the booking curve? Are these bookings made within a week or within 30 days? I understand you don’t anticipate this trend continuing, but does this suggest that you are starting a quarter with less visibility than you have had in the past?

Yes. I want to commend the revenue management team. When considering the bookings we receive each month, especially looking at last year's sold-too-soons, we have witnessed significant improvements this year for Hawaii, Mid-Con routes to California, and even the Transcon Southeast. We have the availability to meet demand, and we are successfully filling our airplanes, as reflected in the higher load factor. Interestingly, despite a decrease in business demand, particularly in June, we observed an increase in close-in bookings compared to 2019.

And our next question comes from Stephen Trent from Citi.

Just one, and I know it does not directly pertain to you. But considering that your partner, American Airlines, is going to do the unwind of the Northeast alliance? Did that in any way kind of lead you guys to pivot on your eastbound strategy?

Thank you for the question, Stephen. This is Nat Pieper. I want to clarify our partnership with American. First, we are very satisfied with it, and second, it was reviewed and approved by the DOT in 2020. What’s beneficial about this partnership is that it operates like a traditional airline alliance. We connect our complementary networks through codeshare and provide reciprocal loyalty benefits that have been well received by our customers. We see many opportunities to continue linking our networks in areas where we each have weaknesses, which will enhance the experience for our joint customers moving forward.

I appreciate the information. I have a quick follow-up that isn't directly related to your area, but you mentioned a potential improvement in tech industry travel. Are there any specific indicators you can share? I think I heard about Microsoft resuming corporate travel or any return-to-office initiatives from your tech customers.

Hi, Stephen. We did make the comment that we might break through the 75% ceiling as we move forward. Just a couple of interesting data points. But 10 of our top 20 corporate accounts are actually recovered revenues and over 2019 levels right now. But we are seeing high variability within those accounts. We are still seeing some high-tech companies very low, not recovered, but we’re also seeing some high-tech covered companies that actually are fully recovered. So I think what I would say to you is that we’re starting to see a thawing. It’s not all the techs are down now. We’re seeing some really start to perk up. And I think this gives us a little bit of hope that there might be some green shoots here as we move through the rest of the year.

And our next question comes from Dan McKenzie from Seaport Global.

I guess, a couple of questions here. Andrew, I’m wondering if there’s been a change in the composition of revenue by advanced purchase bucket. So more discounting further out, firmer pricing closer in and, at least, in kind of what you referenced to your close-in strength today. And I’m just wondering if the current forecast for the third quarter is predicated on strong close-in demand throughout the quarter.

Yes. Thanks, Dan. You’re spot on, like the structured fares are what they are. But what we are seeing in the sale fares, they’re sort of a little down from what they were this time last year as in lower. But the close-in 0 to 13-day fares are actually up from what they were last year. So overall, you’re seeing that softness on the sale fare side. And we did not bake into our forecast continued close-in booking strength.

And that concludes today’s conference call. Thank you for attending.