Good morning, ladies and gentlemen and welcome to the Alaska Air Group 2023 Fourth 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 fourth quarter 2023 earnings call. This morning, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today’s call, you will hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported our fourth quarter GAAP net loss of $2 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $38 million. As a reminder, our comments today 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. Alaska Airlines closed out another great year in 2023. Before we get to those results, I want to address the recent grounding of our 737 MAX 9 fleet. I am deeply sorry to everyone on board Flight 1282 for what they experienced on January 5 and to all of those who have seen their travel plans disrupted by cancellations. We are looking forward to returning to the reliable service you know and expect from us. Our number one value and our absolute priority is and will always be safety. As you may know, following the accident, we proactively grounded our 65 MAX 9 aircraft, which was followed by a directive by the FAA to do so for all US-based operators of the fleet. This had a material, operational and financial impact on our business, with approximately one-third of our January capacity impacted by the grounding. Additionally, we believe it is likely that several aircraft deliveries could be delayed, which would further affect our full year capacity plans, which we initially anticipated would be between 3% and 5% over 2023 levels. Our primary focus right now is the safety of our guests, our people and our fleet. We remain committed to working diligently alongside the NTSB, FAA and Boeing to return our aircraft safely to service and ensure this never happens again. As a longtime valued partner, we remain fully committed to our relationship with Boeing, but we also intend to hold them accountable. There is work to be done but we have the utmost confidence with FAA oversight as well as our own that Boeing will emerge with improved quality processes as a better and safer manufacturer. I also want to take a moment to thank our employees for the response to this event and its aftermath. Safety and care are at the heart of everything we do, and our people continue to demonstrate the highest standards of professionalism and caring for our guests and each other. It has been a long and difficult few years since 2020, and I continue to be amazed at this resilient team of employees rallying to meet any challenges put in front of us. They demonstrate the Alaska Spirit each and every day. Now let's turn to our results. As I consider 2023 in its totality, I am proud of our company's accomplishments over the year. We competed for the industry's best margin, and we were close to achieving this goal in 2023, had it not been for surging international demand and a 1.5 point margin impact from higher West Coast fuel refining costs, both of which I believe are transitory impacts to our business, we would have once again posted the highest margin in the industry. Given our strong year of performance, I'm proud to announce that our people will receive another great bonus as we will pay out approximately $200 million or on average 6.4% of an employee salary. This is the 14th time in the past 15 years that we paid above target for our performance-based pay program. Our cost execution was unmatched as we delivered the best CASMex result in the industry, down 2.6% year-over-year. This result was at the better end of our originally guided range, first communicated in December of 2022. It's worth noting that throughout the course of the year, the majority of the industry revised cost guides higher while we did not. It proves to me our cost discipline DNA remains well embedded in the company's culture, and we will continue to, over the long-term, have a durable competitive advantage over peers in this critical area of the business. We ran an excellent operation as we prioritize reliability in 2023, hitting record completion rates throughout the summer. We ended the year with a 99.3% completion rate even as we finally surpassed pre-pandemic levels of flying and managed the successful transition out of our Airbus fleet. Our process-driven operational playbook works. We delivered the premium experience our guests have come to expect, and we have every expectation to continue to be a best-in-class operator in 2024 once our nine MAX fleet returns to service. Our balance sheet remains one of the strongest in the industry with net leverage below our long-term target of 1.5 times for the second year in a row. We restarted share repurchases in 2023, reaching $145 million or 3.5 million shares, which is nearly two times annual dilution. Our strong balance sheet has provided the foundation for our growth and expansion over the years, including pursuing our proposed acquisition of Hawaiian Airlines. And as a quick update, we initiated the process of obtaining anti-trust clearance by submitting our HSR filing this month. We've held initial conversations with the DOJ and the process will continue. We believe we have a stronger and differentiated case from JetBlue and Spirit and look forward to providing updates as they become available. Lastly, we generated a record $10.4 billion in revenue, 46% of which comes from our premium, loyalty and ancillary revenues. We brought in $1.7 billion in cash from our loyalty program and added five new global partners bringing our total partner portfolio to 30%. Much of the hard work we put into 2023 will carry into 2024. Our priorities remain focused on one, on yielding safety and investing in our people and culture; two, elevating our commercial initiatives to deliver a premium brand experience as the only domestic-oriented carrier with a comprehensive offering and hence maintaining a competitive cost structure. The combination of which we know provides the foundation to drive durable, financial performance. 2024 has begun under very difficult circumstances, but we are optimistic about what we can accomplish this year. Absent the grounding event, we were heading for a significantly improved first quarter result versus 2023. As I stated in April of last year, we are committed to returning to breakeven or better results in the first quarter, and I believe we've made tangible progress toward that goal. Last year, we lost $115 million in this period, and we were on track to drive a 30% improvement this year as the network changes we made began taking effect. As it has been for years, our goal is to concentrate our efforts on building preference for our airline through a premium experience and a fundamentally sound business model that endures over the long run, one that is resilient through cycles and creates durable financial returns for all our stakeholders. We made great progress in 2023, and we are well positioned to do much more in 2024. And with that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, my comments will focus on fourth quarter and full year results, along with Q1 revenue trends. Fourth quarter revenues reached $2.6 billion, up nearly 3% year-over-year, coming in slightly ahead of the midpoint of the revised guidance we put out in early December. Capacity finished the quarter up 13.6%. We saw a strong finish to the year in December with limited weather events and excellent operational performance to support holiday travel. This resulted in record traffic and coupon revenue up 7%. For the full year, we generated a record $10.4 billion in revenue, which was up 8.1% versus 2022 on capacity of 12.8%, resulting in full year unit revenue, down approximately 4%. The improvement we saw in unit revenue through year-end showed a marked strengthening in our core revenue. Unit revenues improved from down 13% in August to down 9% in December. Notwithstanding, we grew December capacity two points more than August year-over-year. This is a four-point improvement, underscoring a strengthening pricing environment from continued normalization of international demand and industry adaptation to post-COVID demand realities. On managed business travel, consistent with what we've shared before, our belief is that we're seeing a slow and steady recovery. For example, in the fourth quarter, our portfolio saw a strong 15% year-over-year revenue growth on higher volumes and yields. Overall, business revenues are within 5% of 2019 levels with most industries now fully recovered. The notable exceptions are tech and professional services, which still lag other industries but did see 26% and 14% year-over-year revenue growth, respectively, in Q4. Premium cabin revenues also continued their solid performance in 2023. First, on premium class revenues finished up 15% and 10%, respectively, for the year, continuing to substantially outpace main cabin revenue. At nearly 32% of total revenue, our premium product orientation provides a clear point of differentiation against our domestic focused peers, which will continue to be a core competitive advantage for us in years to come. Regarding loyalty, bank cash remuneration also hit a new record, bringing in $1.6 billion for the full year, up approximately 13% year-over-year. We also continue to thoughtfully build value in our loyalty programs through our extensive portfolio of domestic and international partnerships and alliances, which comprise approximately 7% of our total revenue. In 2023, we added five new partners, bringing our total airline partnerships to 30, 21 of which we now sell on alaskaair.com. Our pivot to selling partners on alaskaair.com, we believe, will be a big unlock for us. We expect to further build out our selling platform in 2024, including a significant add in British Airways, which we have never sold direct from our website other than for award redemptions. Selling our partners direct has three significant benefits. First, our website becomes increasingly valuable as a one-stop shop providing a step change in utility for guests through expanded booking options for both domestic and international trips. Second, it further rewards guest loyalty. When our guests book itineraries on our partners through alaskaair.com, they benefit from Alaska's generous policies, such as no change fees, and importantly, full mileage accrual for main cabin and above on all partners we sell directly, which is not available through other channels. And third, it drives incremental revenue to Alaska. In December, 38% of partner revenues sold on alaskaair.com was attributable to an Alaska operated segment. In 2024, we plan to sell approximately 5,000 tickets per day on partner flights, which is double what we sold in 2023. As we grow partner sales on alaskaair.com, we will also improve our own operated revenues. Now turning to our outlook and guidance. Assuming a gradual return of service of the MAX 9 fleet through the first week of February, we expect to have canceled over 3,000 flights during January, impacting our first quarter capacity by 7 points, which will result in capacity being down mid single-digits year-over-year for the quarter. However, given the time of year is seasonally low from a demand standpoint, we've been able to rebook over half of those guests impacted by cancellations back onto Alaska flights. Additionally, capacity flexibility at our regional carrier horizon due to lower pilot attrition has resulted in their operation of more than 150 unscheduled flights. This has allowed us to rebook over 10,000 impacted guests and get them to their destinations. As Ben mentioned, we were on an excellent revenue trajectory for the first quarter. Prior to the MAX 9 grounding, we had line of sight to unit revenues up 1% to 2% year-over-year on low single-digit growth, with held yields improving 1 to 2 points per week to start the year. This is a significant 11-point change in trajectory in unit revenue performance from Q4 of 2023. As we sit here today, held yield for February and March is marginally positive with daily sold yield up 8% this past week. Clearly, we are seeing the benefits from capacity adjustments to new post-COVID demand realities, strategically reshaping our network and applying our learnings to utilize our assets more optimally. We are seeing strong unit revenue performance from bookings in our highest frequency business markets and into California, where we reduced capacity double digits year-over-year. Several new leisure markets are also performing well right out of the gate. And then lastly, the general fare environment is improving along with the competitive capacity backdrop in our markets. For the past six months, competitive capacity was up high single digits, but trending towards flat in Q1, ahead of low single-digit growth in the second quarter. At this point in time, our held load factors for Q1 are near, and daily intakes remain positive on a yield basis year-over-year. Taken all together, absent the impact from the MAX 9 grounding, we feel very good about the outlook for our core business in Q1 and beyond. And in closing, we are now a $10 billion revenue franchise, and are not the same company we were a few years ago. We have a diversified product mix and all the elements in place to cater to evolving guest preferences, including lounges, first and premium class across 100% of our fleet, a global network through our partners and a robust loyalty program. Yet there is more to come, and we are excited to continue building on future opportunities, optimizing premium seating, up-sells, implementation of NDC and better merchandising and increasing the number of premium seats on both our Boeing 8s and 9s, all of which will help support strong financial performance and long-term profitable growth. And with that, I'll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. Before I discuss our fourth quarter and full year results and provide additional information on the impact of the MAX 9 grounding, I will reiterate that safety is and will remain the number one priority for Alaska. Our results are secondary to that concern and we will always place safety considerations for our people and our guests above financial performance. For the fourth quarter, our adjusted EPS was $0.30 on an adjusted pre-tax margin of 2.2% which was above both our initial and our most recent guide for the quarter. Unit costs ended down 6.7% versus 2023, while economic fuel cost per gallon was $3.42. Our fuel costs remained disproportionately impacted by elevated refining margins on the West Coast relative to the rest of the country. As a reminder, in the third quarter, our refining margin costs were $0.30 higher than US Gulf Coast margins. That spread held most of the fourth quarter, where West Coast refining margins were $0.34 higher. We did see improvement late in the fourth quarter and into the first, and today, we are back within $0.10 of US Gulf Coast. This phenomenon, although we believe temporary, has been material to our results. Our full-year pretax profitability would have been 1.5 points better had refining margins behaved more normally. Our adjusted EPS for the full year was $4.53 and our adjusted pre-tax margin was 7.5%. Unit costs were down 2.6%, and while economic fuel cost per gallon for the full year was $3.21. As Ben mentioned in his opening remarks, the strength of our balance sheet remains intact. Our leverage level closed the year with a long-term target range at 46% debt to cap and 1.4 times net debt to EBITDAR. During the quarter, we received an investment-grade credit rating from Moody's. We generated approximately $1.1 billion in cash flow from operations during the year, while total liquidity inclusive of our on-hand cash and undrawn lines of credit stood at a healthy $2.3 billion. Debt payments for the quarter were approximately $40 million and are expected to be $100 million in the first quarter. We more than offset dilution this year with $145 million in share repurchases, with over $300 million still existing under our current share repurchase program, which we intend to continue once again to at least offset dilution in 2024. Moving to costs, the teams have performed well during the year with continued improvement through the second half and December quarter. Fourth quarter CASMex ended well below our guide at down 6.7% and as we continue to execute and outperform against cost targets while milder winter weather helped strong completion rates and ASM production to finish the year. Even more notable, our full-year CASM ex ended down 2.6%, better than our latest guidance of down 1% to 2% and at the better end of our original guide of down 1% to 3%. Even adjusting for higher capacity, we were within $32 million of our original midpoint on a non-fuel cost base of $7 billion. We achieved this result amidst ramping our operation back to and beyond pre-pandemic flying levels, doing so at record completion rates and while absorbing significant wage increases. I believe our cost management was clearly differentiated versus the industry in 2023 and provides confidence that we will continue to maintain our relative costs versus our competitors in the years ahead, even as cost inflation has been a clear reality of the industry recently. The benefits from our upgauging strategy were also clear. We grew full-year capacity 12.8% on only 2.5% departure growth and improved fuel efficiency measured in ASMs per gallon, nearly 4%. Attention to cost at detail matters to us at Alaska, and we will continue to work on improving efficiencies within the context of lower growth and remaining cost headwinds in 2024. Given the impacts of the fleet grounding, we are opting to provide full-year EPS guidance only. We also like the idea of shifting focus to margins and cash flow versus unit metrics. We expect our full-year earnings per share to be $3 to $5, which assumes a $150 million negative impact from the fleet grounding. While we fully expect to be made whole for the profit impact of the grounding, we do not have details to share today on that process, nor have we incorporated this into our guidance. Excluding the approximate $150 million impact, at the midpoint, our EPS guide implies a flat to slightly improved result in 2024 versus 2023. We expect our full-year capacity to come in at or below the lower end of what had been our original expectation to grow 3% to 5% versus 2023. Our fleet plan called for 23 mainline deliveries this year, 16 MAX 9 and 7 MAX 8. We anticipate some of these deliveries may be delayed, hence, the inability to provide more precision on year-over-year growth. Lastly, on costs, this lower growth rate, coupled with strong 2023 cost performance results in a tougher comparison baseline for 2024. There are remaining cost headwinds the entire industry is facing in 2024 and we do not believe we will be disproportionately impacted by them. Wages are a large portion of this. We will be lapping the pilot wage step-up implemented in September, which is approximately $90 million for the full year and $60 million incrementally in 2024. We have an agreement in principle with our technicians and we're hopeful for a tentative agreement soon, and we have resumed negotiations with our flight attendants and are anxious to reach a TA with them as well. As we look forward, our outlook and priorities remain unchanged. We will prioritize a strong operation, continue to focus on managing costs, and recovering pre-pandemic productivity, ensure we are deploying our network in a way that is responsive to demand in the market, and will continue to drive our commercial roadmap and emphasize the competitiveness of our premium product offerings. We have a business model configured to compete with anyone in the industry and are optimistic about our ability to continue to deliver on our goal of delivering the industry's best margins. And with that, let's go to your questions.

And our first question today will come from Ravi Shanker with Morgan Stanley.

Thanks. Morning everyone. So, obviously, I know your start of the year than you expected, and I don't think anyone can really blame you for this. But can you share anything you've seen in terms of brand damage or NPS promoter scores that may be impacted by this? And also kind of what you're seeing in the forward booking curve in terms of any kind of max lingering issues there?

Ravi, good morning it's Ben. What I can say is, I've been overwhelmed with the support of our customers. And I think it's just a tribute to our employees who've been so well in gaining loyalty over the years. And they can't wait for us to get back to full service and our anticipation is when we will fill airplanes.

Great. Thank you. And just maybe as a quick follow-up. You said you're looking to hold Boeing accountable and don't have any info to share there. Any idea kind of when you might have something to share there?

Well, Ravi, as you know, my first priority is to get our MAX 9 fleet back into service and get our schedule back up to 100%. So, that's priority number one. We'll work on the accountability with Boeing. The accountability is essentially on raising the quality standards at the factory as well as making us whole. But that will be secondary. Right now, we're focused on safety and quality and getting our fleet back to a full schedule.

Very good. Good luck and good job everyone.

Thank you.

Your next question will come from Savi Syth with Raymond James Financial.

Good morning everyone. I want to follow up on Ravi's questions, particularly regarding your deliveries this year and possibly next year. What is your outlook for 2024 in terms of deliveries? Has there been any change? Also, what are your views on CapEx going forward? I know you provided guidance for 2024.

Hey Savi, it's Shane. Thanks for the question. I wish we had more detail, but we don't. It's still early to understand the impact. As Ben mentioned, our main focus is to get the grounded MAX 9 fleet back to flying safely according to schedule. We have started considering our fleet plan moving forward; we were scheduled to take 23 aircraft this year, which includes 16 MAX 9s and 7 MAX 8s. However, we suspect many of those will be delayed, although we don't know the duration of the delays. What I can assure you is that we have enough aircraft to meet the schedule we're currently selling, and we'll be careful to ensure we have the right fleet to support what we're offering. In December, we indicated a CapEx of $1.4 billion to $1.5 billion, which is a decrease from last year, and I believe it will not exceed that amount. My expectation is that it will be less. We'll provide updates on this as it becomes clearer, either during the next call or through an 8-K mid-quarter.

Makes sense. And just on the cost front. Just curious if you could kind of talk about it as we think through the year, if there are any kind of comp views or some headwinds that are greater kind of in any part of the quarters as we go through the year. And also just curious if you have any kind of labor contracts that you might be negotiating currently kind of considered in that guide?

Thank you, Savi. We did not provide a cost guide because predicting Q1 is challenging. We have unfortunately lost a significant number of ASMs that we intended to have in Q1, which impacts our projections for the full year, especially as we are uncertain about what the delivery stream will look like. I anticipate our growth rate will be much lower than we initially expected and we have not yet managed costs out of the system in relation to this. We still need to determine how to size the company based on our final growth decisions. For 2024, we face similar cost pressures that you have heard from others, including the annualization of pilot wage costs. As mentioned in the script, we are eager to finalize agreements with our technicians, which are close to being ratified, and I hope to finalize the TA with them soon. We have an agreement in principle with our flight attendants, and we need to complete both of those negotiations. Additionally, there will be pressures from airport and maintenance costs, which are comparable to those of our competitors, throughout the year. Ultimately, once everything is settled, I believe our cost structure will remain competitive relative to legacy peers and should be even more competitive compared to the rest of the industry by the end of this year. So, although unit costs may be pressured due to the growth rate, our core cost structure should be better positioned compared to others by the end of 2024.

Makes sense. Thank you.

And we'll move next to Scott Group with Wolfe Research.

Thanks. Regarding the $150 million you mentioned, is that figure inclusive of any book away impact? Are you experiencing that? Also, when you mention a mid-single digit capacity decrease in Q1, and considering you've rebooked half of the lost opportunities, does that mean RASMs will likely perform better than the 1% to 2% you initially anticipated? I just want to clarify the various components affecting the model for Q1.

Yes, thanks, Scott. The $150 million is really tickets that we've had to cancel and essentially refund; we couldn't rebook. There are certainly some costs of buying tickets on other airlines to reaccommodate. There are certainly some costs in that number over time and just the operational stress that we've had to go through. There's no like long-term core book away we think we're going to be; we're still able to have a very strong spring break and mid-winter break season. As Ben mentioned, we've been hearing from our guests, I can't wait to have the fleet flying again and come back and fly with us. There's certainly some close-in revenue loss that's in the next few weeks from business and even leisure just because it's so close to travel that we probably won't get to pick back up. So there's a small portion that you could call book away just over the next few weeks, but I don't think there's a brand-related, we don't expect a brand-related long-term impact; if we see it, obviously, we'll talk about that. But right now, I think we expect our guests to come back to us. Capacity down mid-single digits. Yes, I think, look, unit revenues, the point Andrew was making is we were on a really good trajectory. We felt great about the network reshaping that his team had done. We felt great about advances into the first quarter. The fact that we're losing a bunch of revenue in the first quarter, we're also losing a lot of ASM, so I think revenues could still be positive as we close the quarter out once that all nets out.

Okay. Helpful. And then I'm just curious, how does the JetBlue Spirit ruling change your views on success of approval with Hawaiian? And just any thoughts or color on just when you go through the Hawaiian proxy, some of the cash burn there, if that's all sort of incorporated in everything you laid out for us when we did the…

Yes, Scott, thank you. It's Ben. Our view is that these deals are completely different. The JetBlue Spirit was blocked by the judge essentially because it would limit a low-cost competitor. In our case, between Hawaiian and Alaska, these are two very similar business models. The networks are very, very complementary. In fact, when you combine the networks, there's only 12 overlap routes through the combination. So it's very pro-consumer, and it's also very pro-competitive customers in Hawaii will have an expansive network to fly to the United States and internationally; our customers on the West Coast will have more options to fly to Hawaii and internationally. So it's very different from the JetBlue Spirit. And look, after the deal would become a little bit larger airline to compete stronger against the network carriers and now we have a strong domestic network with a strong international network. So, we feel our case is differentiated, and we'll work through the DOJ on that process.

And Scott, I'll first mention very quick on Hawaiian cash burn since you also asked about that. It's in everything we've laid out, the cash burn is really principally tied to the delivery stream. And I just note that there's an asset behind that that has value that we want. So we're not funding significant or material operating cash losses. The negative cash flow is really about the CapEx right now. We think that, that business is going to recover over the next couple of years as Asia comes back and as they get Amazon up in the 787 up and Maui recovers.

Awesome. Thank you, guys. Appreciate it.

Thank you. Thanks, Scott.

Your next question comes from Duane Pfennigwerth with Evercore ISI.

Hey, thanks. I guess other than the lost ASMs from flight cancellations. Can you just talk a little bit more about maybe deliveries that you think could shift, or what other pieces there are that could influence where you ultimately end up for the year?

Yes, Duane, on capacity, I really think it's at this point, the deliveries. I think given the guidance we got yesterday, we have a good sense of when we can get the full MAX-9 fleet back operating and it really just comes down to the 23 deliveries. We did have some planned retirements. And we had some allocation for work to refurbish some interiors. So we've got some moving parts and pieces we can sort of, flex around to get to the right capacity number. But as we mentioned, as we look at it today, it's going to be below the range we had originally thought, which was 3% to 5%. It could very well be below 3% at the end of the day.

Thanks. And then just relatedly, have you made any changes with respect to hiring? Have you paused hiring? Have you paused training, resulting from this event?

Hey Duane, this is Ryan. We already came into the year, given the low growth profile with not much hiring required. I mean, some, of course, to backfill any attrition, but we've sort of left some optionality on the table. We've got a couple more months to make some decisions on that relative to our summer schedule. So we'll be talking about that in the next few months, obviously, if there's any delivery delays or anything, maybe we don't need some of those last training classes in the spring. But we've still got them available if we need them if we can find the capacity.

Okay. Thank you.

Thanks, Ryan.

And we'll move next to Conor Cunningham with Melius Research.

Hi everyone. Thank you. I apologize for bringing up the $150 million headwind again, but I'm a bit unclear about the distinction between lost revenue and cost impact. Any clarification on this would be appreciated.

Yeah. Hey Conor, this is Ryan again. So the majority of that $150 million is revenue. Costs, I would say, are kind of a wash because obviously, all the canceled flights, we saved on fuel and landing fees. But as you can imagine, we've incurred significant overtime as our operational employees are working around the clock to keep the new schedule going. A lot of passenger remuneration and things like that. So it's mostly been revenue. I mean, as Shane sort of mentioned, small assumption for maybe some booking challenges in February, as we get the fleet back operating. But we're sort of assuming by March, we're back on the original trend there. So that's kind of what it breaks down, as it's pretty much mostly revenue. And the point being that it's at least $150 million because obviously, any changes to delivery streams or capacity might further impact that. But it's pretty much cancels to date plus the small amount of booking impact in February.

I understand. That’s useful. You mentioned a 30% profit improvement from network changes in the first quarter. Could you provide some details on what that really means and what factors are driving this change? It appears to have a significant long-term impact for your company. Any insights you can share would be appreciated. Thank you.

Conor, it's Andrew. Essentially, it's the reshaping of the network. We have significant double-digit increases in some regions of our network that performed poorly last year due to a lack of business and changes in behavior. We also see very high double-digit growth in some of our sun destinations and other key routes. 2022 was an interesting year with a huge demand surge, and now we're back to a normal situation. As we assess it, our focus is really on revenue, reshaping and flying where the demand exists, optimizing for day of week seasonality, such as California compared to the Pacific Northwest. We are very pleased with the results.

And Conor, I'm going to add that, remember, our goal is to reduce losses in Q1 and get to breakeven or better. So that is the long-term objective.

Appreciate it. Thank you.

And our next question will come from Andrew Didora with BofA Global Research.

Hi, good morning, everyone. It's very early days since the instance, but comments today in the National Media this week. Just where does your relations along after this? And guess what needs to happen to make you rethink your single fleet type at this point?

Thanks for your question, Andrew. Well, look, where I stand is flight 1282 should never have happened. It should never have happened at all. So we have a long-standing deep relationship with Boeing. But like I said, it's not acceptable what happened. We're going to hold them accountable and we're going to raise the bar on quality on Boeing. So we have the relationship. We're having tough candid conversations. And my goal as CEO of this airline is for every airplane that comes out of that factory to come out with a higher degree of quality and reliability that has been in the past. So I think it's the virtue of our relationship that we can have these tough conversations, maintain the relationship and continue. We've got 231 737s that we've been happy with. Until the sensing, we were happy with the MAX. We have 185 on order that are coming to us. We believe with the network configuration we had, this is, of course, ex-Hawaiian. The network configuration we have, the Boeing airplane is 737 is well-suited for our network. So that is the long-term plan, but we're going to hold Boeing's feet to the fire to make sure that we get good airplanes out of that factory.

Thank you, Ben. And then my second question for Shane. You have to say like most of the calls last year, I think you were certainly a bit worried about industry domestic capacity growth over the course of 2023. As we sit here in January of 2024, you, most outside of getting the MAX 9 back up and running? Thanks.

Yes, Andrew, you were a bit difficult to hear towards the end. However, I agree with what you mentioned about the numerous predictions made by management teams, analysts, and observers regarding the new normal of demand post-COVID. It was quite uncertain, and we were all attempting to adapt based on the information we had last year. We also focused on restoring our companies to pre-COVID operational levels, which seemed logical. Much of this occurred following the significant demand surge that began in 2022 and continued through the summer of 2023. The positive news is that demand appears to be holding strong as we enter the first quarter of this year. Airlines are beginning to realize that while demand is changing compared to pre-COVID times, it's not as radically different as some had anticipated. There is still a recognizable seasonality in the business similar to what we experienced before COVID. I believe Andrew and his team have effectively adjusted to this change, which is reflected in the improved Q1 performance, excluding the grounding issues. We are optimistic about our capacity outlook. We certainly want to have these planes, and we feel we have a solid plan for them this year. If we don't receive them, we will need to ensure we optimize the results from our current fleet.

Thank you, everyone.

Thanks, Andrew.

And we'll move next to Jamie Baker with JPMorgan.

Hey, good morning everybody. Ben, I can only speak for myself, and I'm not under the illusion of my opinion really mattering that much to you. But I actually think you and the team have been handling the MAX situation very, very well. My first question actually relates to Silicon Valley Bank implosion last year. We're coming up on the anniversary in March. Can you remind us how California in particular, California demand behaved in the aftermath both in terms of magnitude and duration?

Hey, Jamie, you're challenging my memory a bit. What I remember is that the impact on our California network at the time was not very significant. There was already some high-tech softness. However, I want to emphasize that we've been very pleased with the performance in California. We're still 18% lower than pre-COVID levels, but the unit revenue performance from California this year has surpassed the system average. We've observed that this has been profitable, and it's actually continuing to close the margin gap compared to our overall system. Therefore, we're feeling quite positive about the ongoing refinement and strengthening of our California operations.

Okay. Thanks for that. And then just a quick question on guidance. Most of my earlier questions have been addressed. But assuming you do revise an ex-fuel CASM guide after this quarter, will you be accruing for the flight attendant contract? Thanks.

Thanks, Jamie. I think that we will guide when we're prepared to do so inclusive of all of the costs that we think are coming our way this year. I don't think we would start accruals. It hasn't been our practice in the past, and I don't foresee us changing that practice.

Okay. Helpful color. Thank you, everybody.

Thanks, Jamie.

Thanks, Jamie.

And our next question will come from Helane Becker with TD Cowen.

Thank you very much. Hello, everyone. I have a couple of questions. First, as you consider the MAX 9 returning to service, do you anticipate having customers for it? Additionally, do you think you will need to offer discounts to encourage them to fly the plane, or do you believe customers view all planes similarly, regardless of their level of expertise?

Good morning, it's Ben. As we mentioned earlier, our customers have a strong affection for our company and trust us to prioritize safety and reliability. The MAX 9 is receiving significant attention, and people are considering their flying options. Our current objective as we reintroduce the MAX 9 is to ensure that our employees, especially our crews, feel confident that Alaska has taken all necessary steps to ensure the MAX 9 is safe and ready for service. We aim to communicate with our guests, encouraging them to reach out to us or our crews with any concerns to reassure them about the safety of the aircraft. We will never return an unsafe aircraft to service. Initially, I expect there might be some questions and anxieties, similar to what we experienced two years ago after the thorough certification process the aircraft underwent. However, I believe that over time, confidence in this airplane will be restored.

And Helane, I just might add real quick that what we've been seeing is just really schedule reliability. And that's been the concern. But sort of in eight days from now, we'll have an fully back deployed and we fully expect our completion rates to go right back to 99%, our on-time back to our goals so that our guest can be assured that when they book on Alaska, they are going to get to where they need to go safety and on time.

Okay. So, can I push back just a tiny bit and say from what I've read, and if I'm wrong, if the reports are wrong, that's fine, just tell me. There was an indicator like that went off a few times that caused you guys to move the aircraft in question out of the Hawaiian market where it was flying and overland in case something happened, and of course, something did happen. Is it that the indicator didn't tell you where the problem was, or is it that maintenance thought it was faulty? I mean, how should people think about that because when your check engine light goes on in your car, you check it out.

Well, Helane, I'm glad you asked the question because I want to set the record straight on this. And I'll probably take a little bit of time and you're making me put on my old operations and maintenance and engineering hat back on, which I'm glad I love putting it back on. So, I'm going to say it right from the start, the issues were completely unrelated. What we had was a pressure controller issue. And the pressure controller has three modes of operation. It's got an automatic mode, it's got an alternate mode, and it's got a manual mode. What failed, but I liked that you're talking about that went on was the automatic mode switching to alternate mode. And that's perfectly in line with the pressure controller. It has one primary and two backups. So, the pressurization was never an issue on the airplane. The reason we restricted it from going over water, and this is stuff when I was back in maintenance, is we've taken an abundance of caution. We're saying, look, we have other airplanes that we can send over water. This one, the light went on. It's still working perfectly well. It's legal to send over water. We'll be a little more cautious. We'll keep it over land, so we can watch it and keep it between maintenance bases. So, I just want to be totally clear. These two issues were totally unit. This was an issue with the door plug. We got a faulty door plug from Boeing, totally unrelated to the light or to the pressurization issues.

Okay. Well, I appreciate that explanation because, as I said, I didn't know, and now I do. So, thanks Ben.

Okay. Thanks. All right, my pleasure.

And we'll move next to Catherine O'Brien with Goldman Sachs.

Hey everyone. Thanks for the time. Shane, maybe one for you first. So you guys called out that you expect to lose about 7 points of capacity from the MAX grounding now to be down mid-single digits. Can you just help us think about what you were targeting Primax for CASMex? Sounds like capacity is going to be up low single-digits between that math correctly. I'm guessing a lot of the fixed costs remain. Is it safe to say like there's about a seven-point headwind to CASMex versus what you were expecting on the old growth rate, or any color there would be super helpful. Thanks.

Sure. I previously mentioned that we haven't removed any costs from the system. I know it's somewhat confusing. The $150 million actually reflects revenue, as the costs balance out. We've taken on some extra costs, particularly with passenger compensation, re-accommodation expenses, and significant overtime. The savings we've seen are primarily from landing fees, food and beverage, and fuel. Consequently, there is a greater net cost challenge this quarter, and we didn't cut other costs since the situation arose on January 5, leaving us with little time to respond. The impact on this quarter is nearly one-for-one. However, we haven't provided guidance on what we anticipated for Q1. We believe we need more clarity on the situation before we can offer a full-year forecast if we decide to do so in the future.

Okay. Fair enough. And then, Andrew, maybe one for you as well. Can you help us size some of the drags to your unit revenue from tech corporate lagging, Maui, anything else you want to highlight in the fourth quarter and then how those items are trending into the first quarter? One of your competitors called out recently a boost in corporate at the start of the year and part driven by tech. So I would just love to kind of hear how maybe some of the drags in 4Q trending into 1Q. Thanks so much.

Yes. Thanks, Catie. Just to touch on Maui real quick. We had already adjusted our capacity down, I think, like 14%, 15% in the fourth quarter, it's down even more in the first quarter. So we feel like we've got our capacity somewhat aligned with demand in Maui. One of the unfortunate challenges as I shared in the Q4, we were seeing good momentum in corporate travel, of course, anything from zero to 14 days was severely impacted by the MAX 9 in January. So it's a little bit hard for us to comment on the business side. But again, we have continued to see good momentum in average phase for business travel and I don't see why that would not continue.

Great. Thanks.

Thanks, Catie.

And our next question will come from Mike Linenberg with Deutsche Bank.

Hey, good morning, everyone. Andrew, I appreciate all the color you gave around loyalty, ancillary, some of the premium data. I think calling out that 46% for premium and ancillary and other. I'm not sure I've seen that number before, and that was actually a bit higher than what I thought it would be or thought it was. From an aspirational perspective, where do you think you can get that and how also does that aspirational goal change in the event that you decide to do lie flat maybe in some of your domestic markets?

Thanks, Mike. We are still experiencing strong demand for our premium product in terms of revenue and management. There are also plenty of marketing opportunities and upselling potential ahead, so I expect continued strength in this area. We added a role for our additional premium class, and we will also be introducing more premium class in our 8s and 9s during our reconfiguration. The main challenge is ensuring we maintain a good balance without overwhelming our top-tier leads in the front cabin, and we believe we've achieved that balance. Overall, we are continually assessing our cabins and network, as well as determining the right seats and the densification of our premium cabins, particularly if the demand remains strong.

And Mike, I just want to shine a little more of a light on your question. Again, we had a 7.5% pre-tax margin close to United and Delta, again, without the international tailwinds with the fuel headwinds and yet our margin was as high as it was, simply because of your question, because of our premium offering. Our business model competes with the network carriers. We are differentiated domestically with our competitors. Our airplanes are 100% fully configured in premium, again, with our loyalty program, with the way the business miles stood up with lounges. So it is a reason why we see success even when there's a shift between domestic and international. Again, we'll have more success with the Hawaiian acquisition. So I just wanted to shine a bit more light on that.

Great. Thanks. And just sort of a follow-up and maybe it just leads to this next question, which Andrew, are you making that comment about part of the industry really starting to acknowledge what you refer to as these post-COVID demand realities. And I'm curious, at least from the low end, in any of your markets, what you're seeing on competitive capacity, maybe any notable markets that you want to call out where you've seen some meaningful shift that should be to your benefit? Any color there would be great. Thanks.

Yes. The only additional insight I would provide is that when we examine the weighted average capacity in our markets, we observe a declining trend. Some carriers that primarily operate on the East Coast are now moving to the West Coast, which has led to a reduction in their capacity. As the industry focuses on balancing revenues and costs to maintain strong and healthy margins, the current landscape for the industry appears to be positive.

Very good. Thanks.

Thanks Mike.

Thanks Mike.

And our next question comes from Stephen Trent with Citigroup.

Good afternoon everybody, and thanks for taking the time. Most of my questions have been answered. Just one really quick one. This might be for you, Shane. When do you think about that very good credit rating you guys have for Moody's? To what extent do one or two moves up or one or two moves down make a meaningful difference as you guys go in negotiate with your co-branded card and fuel hedge counterparties and other similar entities? Thank you.

Stephen, great question. It's Nat. One of the many hats I wear as Treasurer and getting a ratings agency question is just made up from heaven. So thank you. Really excited that Moody's gave us the investment-grade rating. We've got a really good story as Ben hit through his commentary, cost execution, terrific operation, balance sheet has been core for so long, and we look at that investment-grade rating just as affirmation from an external source that our story is very strong. It certainly helps us when we go into the capital markets, we go to negotiate whether it's for leases, fuel contracts, et cetera, as you say. It also gives us confidence as we move forward with the Hawaiian acquisition and really moving forward, seeing recognition from external parties that the Alaska story is strategically sound.

Really appreciate. Thanks for the color.

Thank you.

And we'll move next to Dan McKenzie with Seaport Global.

Hey, good morning. Thanks for squeezing me in here. So I guess my first question is for Andrew. Going back to the script and the more to come comment, of course, that's going to be my question here. So optimizing upsells, NDC, better merchandising, I guess, first, has Alaska cut over to NDC at this point? And then related to that, how many bookings and how much revenue is on third-party GDSs today? And I guess what I'm really trying to get at is just the percent of tickets Alaska is upselling today? And I guess what I'm really trying to get at is just the percent of tickets Alaska is upselling today on third-party GDSs and what that upsell take rate might look like on alaskaair.com.

Thanks, Dan. In short, this year is significant for us. We're developing around 12 APIs to fully capitalize on NDC. We already have several modules operational with platforms like Hopper. While our current percentages are small, we're noticing positive impacts, and we expect 2025 to be the breakthrough year for NDC.

Okay. Understood. And I guess another question on IT. Has Alaska begun the transition to the cloud? And if that's something you're looking at, could you help us size that level of cost savings from that shift and also elaborate a little bit on timing?

Thanks, Dan. We have been transitioning to modern platforms for a while starting six, seven years ago through the Virgin transition. We are starting to move more of our core IT and more of our sort of commercial e-commerce technology stack into the cloud. We're big fans of our partners up here in the Pacific Northwest, Microsoft, but we also use other focus as well as various other providers. I think the big thing is it's a cost increase; it's a CapEx increase initially and then you need to scale over many, many, many years. I think it's going to bode well ultimately for cost efficiency in the years to come. The other thing is we are going to benefit from artificial intelligence, AI. We've stood up a full team to focus on that. We're lucky to be in sort of one of the tech capitals of the world who are working on this stuff with a really great partner of Microsoft up the street. So I can't say anymore today, but I would have gone on for five minutes with you. Anyway, we're going to get an Investor Day together this year, and we want to talk about technology and AI and the benefits to the company when we get in front of all of you guys later this year. I appreciate everybody's questions, we'll have then wrap it up.

Thanks for joining us on our call. Thank you so much. We will keep you updated on our progress with the MAX 9 and thank you so much, and talk to you next time.

This concludes today's conference call. Thank you for attending.