Good morning, ladies and gentlemen. And welcome to the Alaska Air Group 2024 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 speaker’s 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 second quarter 2024 earnings call. Yesterday, 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’ll 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 second quarter GAAP net income of $220 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $327 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. As we closed out another strong quarter, we remain steadfast in executing on the key pillars that are paramount to our success: safety and operational excellence, financial strength, and taking care of our guests and employees. A few highlights for the quarter include achieving $2.9 billion in revenue, the highest quarterly result in our history, with nearly $1 billion generated from our premium segments. Our 15.8% adjusted pre-tax margin will likely lead the entire industry, differentiating us from other domestic-focused peers in terms of profitability. We continue to prove that our ability to achieve industry-leading profits during the second quarter and the summer peak is unmatched, and at the same time, we are actively working to improve margins in the seasonally weaker Q1 and Q4. We’re happy to announce a record tentative agreement with our flight attendants, underscoring our deep appreciation for their vital role in our business. This includes a 32% increase in compensation, aligning with industry standards and reflecting our commitment to their futures. This would mark the completion of our last major labor contract, and pending ratification in August, it will conclude this labor cycle for us. Making investments in our people remains a focus, and we look forward to the stability and alignment that our labor contracts bring as we focus on being best-in-class operators. Our resolute focus on cost management and productivity across the business remains strong, driving a unit cost result that is among the best in the industry, down nearly 2% year-over-year. This was even better than our expectations, reflecting the dedication of our teams in carrying out our aggressive internal plans. We ran a safe, reliable operation with a completion rate of 99.5% or better each month this quarter, as our teams were focused on delivering for our guests. And lastly, an update on our planned acquisition of Hawaiian Airlines. In the quarter, we submitted the DOJ’s second request for information. We are maintaining close and transparent communication with the DOJ as they finalize their review process, expected to be completed by August 5th, when we anticipate learning more about potential next steps. Now turning to our business outlook. As we move into the second half of the year, we are adjusting the midpoint of our full year EPS guide by $0.25 to reflect the economics of our flight attendant deal, as well as the current domestic environment. That said, the fundamental drivers that have consistently placed us among the top margin producers in the industry remain unchanged. In terms of growth and aircraft deliveries, we have acquired 10 MAX aircraft from Boeing while maintaining vigilant oversight of the production process to guarantee nothing but the highest quality aircraft are delivered to us. With line of sight and increased confidence to 2024 Boeing deliveries, we now expect full year capacity growth to be less than 2.5%. Although lower than the level of growth we originally configured the business for this year, our teams are doing a great job managing costs and productivity. Operational excellence is core to our DNA and we are committed to being best-in-class operators and delivering for our guests. We’re off to a great start as we fly our largest ever summer schedule and posted a 99.5% completion rate over the 4th of July holiday period, despite some challenging weather and airport construction projects. As a further testament to the care our employees provide for our guests and our commitment to run a safe, reliable, on-time airline with exceptional service, recently released DOT data for 2023 shows Alaska generated the lowest number of customer complaints per 100,000 guests of any U.S. airline. This result is an improvement versus 2020, 75% better than the industry average and 35% better than the second-ranked airline. Still, we’re not sitting idle, we have more to do and continue to elevate our brand and travel experience. We’re making the online process easier with 23 of our oneworld and Global Partners now available to book through alaskaair.com. We’re enhancing the in-person guest experience with new technology and a beautiful new terminal and lounge at San Francisco, where we are the second-largest carrier, and a stunning new lobby in Portland. We’re also stepping up our premium exposure, given the strength in demand and shift in guest preference towards this segment. With the first modification set to begin this September, this was a decision made some time ago. We’ll be adding six Premium Class seats to our 737-900ER and MAX9 fleets and four First Class seats to our 737-800 fleet, driving our total premium seat mix up 3 points to 28% when completed. I’m excited that we are making this investment as we continue to respond to guest preference and diversify our revenue base. This is a dynamic industry that requires constant adaptation and course corrections. Had it not been for the full $223 million impact from Flight 1282 and the fleet grounding to start the year, we’d be on track for improving full year margins versus last year, even amidst a softer domestic demand environment and continued material step-ups in industry labor costs. And still, we expect to be a top three margin producer and far and away, the strongest domestic-focused carrier. I am grateful for the talented and dedicated team of employees here at Air Group and building a business model designed to excel and achieve long-term success. The underlying fundamentals are embedded in our DNA: a strong balance sheet, operational excellence, guest care, and a relentless focus on areas within our control. I am confident that our investments going forward build on our unique competitive advantages, including the potential acquisition of Hawaiian Airlines, which if approved, we believe will enhance our strength as we broaden our presence in both domestic and international markets. At Alaska, we meet challenges head-on, and we are committed to maintaining a track record of consistent success, day in and day out, just as we have done for years. And with that, I’ll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, my comments will highlight our second quarter results, as well as provide color on our third quarter outlook and capacity guidance. We achieved a record $2.9 billion in revenue this quarter, up 2% year-over-year. This was on a capacity increase of 6%, resulting in unit revenues down 3.7%. Notably, this unit revenue result reflects the impact of $60 million in lost revenue attributed to the fleet grounding or 2 points of lost RASM. Throughout the quarter, unit revenues moderated as our industry capacity reached peak growth in the month of June. Load factors also increased sequentially, reaching 87% in June. Our 84% load factor for the quarter, below the records of the past two years, saw outsized impacts from regions with double-digit capacity additions that pressurized both yields and loads more than originally anticipated. As you know, the past few years have demonstrated significant volatility in passenger demand, but I believe trends are stabilizing and should continue to allow us to optimize further. For the most part, booking patterns are similar to what they were pre-pandemic and business travel has largely returned. For Alaska, I still see opportunity in Front Cabins given guest preferences, as well as network refinement to match when and where guests want to fly. Our Premium Cabins continue to be the bright spot in our performance. First Class and Premium Class revenues were up 8% and 6% year-over-year, respectively, and continue to outpace Main Cabin revenue growth. Paid First Class load factor was 71% for the quarter, up four points on flat yields. As Ben mentioned, we are continuing to invest in premium seating. Late last year, we added a row of Premium Class to our Regional Embraer 175 fleet, and starting this fall, approximately 220 of our Mainline aircraft on property, including all our 800s, 900ERs and MAX8s and 9s, will start being fitted with additional premium seats, with technical difficulties resulting in slight losses in total ship seats, with program completion by mid-2026. Similarly, our loyalty program remains strong, with bank cash remuneration totaling $430 million for the quarter. We are constantly strengthening the value of the program with new and varied offerings that allow our guests to build value in different ways. We found unique ways to attract younger, next-generation mileage plan members to build lifetime loyalty. Our recent partnership with Bilt, where customers can pay rent with Alaska’s credit card and earn triple miles, for example, has had great initial results. Our partner selling platform now covers 23 global airlines, including the recent addition of our longtime partner, British Airways. To date, guests have purchased tickets to more than 80 countries and ticket sales are up 53% year-to-date. We’re also continuing to invest in our global loyalty proposition. Since we relaunched partner redemptions on April 1, with more content, new promotions, and refreshed pricing, we’ve seen activity increase 61%, helping drive overall revenue contribution from our partners to 7% of our total revenue. And we continue to enhance our customer experience. We’re excited to move to a stunning new terminal in San Francisco this month, which co-locates us with many of our oneworld partners. We will also open our new 11,000-square-foot lounge next week. In addition to offering a world-class experience and amenities, our lobby in the Harvey Milk Terminal 1 is the first to offer next-generation automated bag drop technology. This innovative and seamless self-service technology introduced in the heart of Silicon Valley will get guests through the check-in process within minutes. Our bag tag technology, which has been implemented system-wide, has resulted in a 30% increase in guests checking in digitally before they arrive at the airport and guests using self-service check-in for bags has doubled to over 70%. We’ve also reintroduced hot meals for pre-purchase on board our aircraft in our Premium and Main Cabins. At Alaska, we’re focused on the quality experience for all our guests. We are excited to continue investing in the products and amenities that create this premium experience for them. Turning to our Managed Corporate business, travel remains solid throughout the quarter following the significant step up we experienced at the beginning of the year. Corporate revenues were up 24% year-over-year in the second quarter and continue to be driven by technology companies that were up 40% year-over-year. On a revenue basis, we have now eclipsed 2019, although overall volumes are about 85% recovered. Specific to the Bay Area, we see further upside potential given the market has only recovered 80% of revenue to date. Encouragingly, as we sit here today, held Managed Corporate revenue on the books is up over 15%. Now, turning to our outlook and guidance, we expect capacity to moderate sequentially to up 2% to 3% year-over-year in the third quarter. Similarly, domestic industry capacity is set to increase approximately 3% year-over-year in the third quarter. That’s down from the 6% increase we saw in the second quarter. Following an exceptionally strong Q1 result, we stretched to capture more yield in the second quarter before rebalancing towards load. While we saw good results versus competitors in this peak flying period, we’ve made network and capacity adjustments for Q3 and beyond to better match supply and demand in off-peak periods. Also factoring into our expectations is what we believe to be a shift in school calendars to slightly earlier summer breaks, leading to a strengthening in June versus July and August. As more leisure trips take place earlier, this has pushed June to become a stronger peak month. Given this shift, along with the yield environment we observed last year during these months, we are planning for nearly flat capacity in August and September versus 2023. Lastly, the international versus domestic traffic mix has not yet normalized, although we still believe it will over time. With over one point of demand having shifted out of domestic travel since 2019, we expect these phenomena is still detracting from high-value domestic demand that would otherwise be present. Looking ahead, we’ve been encouraged by our advance bookings which are coming in above capacity growth with load factors for August and September building ahead of last year. We currently have 65% of forecasted coupon revenue in the books as of today’s call. Given our lower growth as we go into the shoulder periods of August and September, we are seeing the benefit of stronger loads relative to last year. These trends give us confidence that we can achieve flat to positive unit revenues in the third quarter versus last year. This assumes negative unit revenues in July, modestly positive in August, and solidly positive unit revenue in September. September may have more upside potential as corporate travel traditionally picks up versus the summer months. We have a strong commercial plan that offers great value for our guests, is producing results, and has room to grow. Our upcoming fleet modifications will expand our premium offering, adding 1.3 million lifted seats annually. I am excited to drive more revenue from this side of the business from the 25% premium seat mix today to 28% of seats when completed. Layering on a comprehensive network, both our own and through our partners internationally, guests can go anywhere in the world and they can do so while accruing currency in the most valuable loyalty program out there. While Alaska doesn’t offer long-haul international services on our own metal, our guests consistently choose to fly our partner airlines when taking these trips, choosing one of the attractive options within the global Alaska ecosystem. This is among the many reasons our multifaceted approach to creating a premium experience across our product segmentation drives value for our guests, differentiates us from domestic peers, and supports long-term sustainable financial results. And with that, I’ll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. We delivered a strong second quarter, which is now by a large distance our strongest quarter of the year. June has become our strongest margin month of the year, and while margins were down slightly year-over-year, the gap to 2023 narrowed in each month of the quarter sequentially. Absent the impacts of the fleet grounding during the first quarter, our results in the first half of this year would have improved nicely versus 2023, an indication of the strong underlying business model we have created. And while we are seeing similar trends demand-wise as others and will experience a significant step up in labor costs, should our tentative agreement with our flight attendants ratify, our expectation is that our full year pre-tax results, again adjusted for the impact of the fleet grounding, would be similar to or better than 2023’s full year result of 7.5%. Turning to our second quarter, our adjusted earnings per share was $2.55, with what we believe will be an industry-leading adjusted pre-tax margin of 15.8%. Fuel price per gallon was $2.84, down from $3.08 in the first quarter. In particular, we were encouraged to see West Coast refining margins return to being on par with Gulf Coast during the quarter. Our total liquidity, inclusive of on-hand cash and undrawn lines of credit, stood at $3.1 billion at quarter-end. Debt repayments for the quarter were approximately $50 million and are expected to be approximately $110 million in the third quarter. We continue to have one of the healthiest balance sheets in the industry, with debt-to-cap at 45% and net debt-to-EBITDAR at 1 turn. Share repurchases totaled $28 million this quarter, for a year-to-date total of $49 million, and we are tracking to at least fully offset dilution for the year. Second quarter unit costs were down 1.9% year-over-year, coming in better than our original expectation, as our teams continue to do a great job managing costs with incrementally better results across the organization. Productivity improved again this quarter, with passengers per FTE up 2.3%. This was the sixth consecutive quarter of productivity improvements adjusted for the impact of the fleet grounding, a trend we expect to continue going forward. Turning to third quarter guidance, we expect more pressure on unit costs than we saw in the first and second quarters, which we anticipate will be in the high single digits for the back half of the year. I will provide detail on what is driving this, but would note that we have the toughest comp in the industry, given that we led in cost performance in the second half of last year, with unit costs down 5% versus an industry average up 3% year-over-year in the third quarter, creating a natural headwind as we lap those results. For the third quarter this year, we are seeing a 5-point to 6-point drag on CASMex from the following areas. First, 2 points of headwind is from having configured our business for a higher level of growth than we will realize this year, primarily driven by fewer and later deliveries from Boeing. While we have done an excellent job managing costs down in the face of lower growth, we are still not at an optimal level. While this will be a future opportunity in tailwind, as we continue to right-size our cost structure at these new growth levels, it’s driving a headwind in Q3. Second, we are seeing 1 point of pressure from the timing of costs shifting to later in the year. This includes modestly higher maintenance spend in the second half and airport real estate costs that reset on July 1st. Third, labor costs continue to step up materially and we will see 2 points of pressure from our agreement with our flight attendants, assuming it ratifies. Also in the labor costs category, there is a little more than a 1-point headwind from the annualization of our pilot wage snap-up to industry standards from last September and the new agreement with our technicians from late last year. We are excited about the investments we’ve been able to make in our people, and with line of sight to closing our last labor deal of this round of bargaining, we now have more visibility into our future cost structure which we now need to fully adapt our business model to. Importantly, our long-term strategy and commitment is to maintain our unit cost advantage versus our competitors and we remain confident this continues to be the case. On a stage length-adjusted CASMex basis, we still expect to finish the year with one of the best results in the industry compared to 2019. While unit metrics may be pressured in the near term, as I noted on the last few calls, we will continue to be responsible with capacity given the current demand context and we’ll focus on prioritizing margin and profitability over other metrics. Fuel remains somewhat unpredictable, but trends in the last quarter have been a welcome change, with crude around $80 a barrel and West Coast refining margins averaging only a $0.03 premium over Gulf Coast for the quarter. Although these spreads have recovered more in line with historical levels, we are still focused on neutralizing the West Coast fuel disadvantage we’ve seen through other initiatives over time. For the third quarter, we expect our economic fuel cost per gallon to be between $2.85 and $2.95. Taken altogether, we expect third quarter EPS to be $1.40 to $1.60, and we’ve adjusted our full year EPS lower by $0.25 at the midpoint. These are both principally driven by an outlook that now incorporates a historic new labor contract, more moderate growth in the second half of the year, and the moderated domestic fare environment we’ve experienced recently compared to a few months earlier in the year. That said, we still expect to be in the top group of margin producers in the industry, both this year and in years to come. Absent the grounding, we’re on track to achieve at least flat margins versus last year, validating our differentiated business model and the strong fundamentals that underpin it. And in a more premium-leaning environment, we’re excited to not only add premium seats, but to do so without removing any total seats from our planes, a positive for revenue and our unit cost. By any metric, Alaska has a long track record of success. As we continue to build on our competitive advantages and apply learnings to adjust parts of our business within our control, we are strengthening our already successful business model that’s helping us win in today’s environment. And as the industry continues to evolve, we will adapt and position ourselves to continue delivering margins among the best in the industry. And with that, let’s go to your questions.

And our first question today will come from Jamie Baker with JPMorgan. Please ask your question.

Oh! It’s two in a row. I should be paranoid. So a deal-related question, folks. So with Virgin, you disclosed you were speaking with justice and remedies were being bantered about. I’m trying to square that against what you said in the prepared remarks regarding the August 5th date. It sounds as if you’re not yet having constructive discussions; rather, you’re in a wait-and-see mode, just as the market is, to hear back from justice by then. Is that how I should incorporate Ben’s opening remarks?

Yeah. Jamie, look, we went through the entire process with the DOJ and all the documents and discussions have occurred. We’re in the homestretch here in two weeks and we’re waiting to see what DOJ comes back to us with. So we’ve made our case and we feel pretty strong about our case on being pro-consumer and pro-competitive. So we’ll wait for the DOJ’s decision and go from there.

Perfect. And then second, on a yield basis, what’s your paid Premium Class, not First Class, but Premium Class paid premium to traditional or average economy yields? I know it’s a metric you don’t usually disclose. I’m estimating it’s in the 15% to 20% range, just trying to find out if I’m close with that forecast.

I believe the entire cabin is around 40%, with about half of those being paid. So that’s where we stand. It’s a solid 40% for the cabin compared to the Main Cabin, and it has been quite encouraging.

Sure. But, and again, your 40% includes elite upgrades, right?

Correct. Which is about…

Okay.

There’s about half of them. Yeah.

Okay. Perfect. Just wanted to make sure I understood. Okay. Thank you both. Appreciate it. Take care.

Thanks, Jamie.

And we’ll move next to Duane Pfennigwerth with Evercore ISI.

Hey. Thanks. I don’t know if you have this metric, but overall competitive capacity in your markets, what was that growth in 2Q and how do you see that evolving in 3Q and perhaps 4Q?

Yeah. Duane, it was elevated, as you’re aware, and even in my prepared remarks, an area like Alaska long-haul, industry capacity was up over 20%, which is 12% of our network. But as you look through all of our hubs, looking forward in certainly September, October, seats are sort of flat to very low-single digits up. So, very much a significant reduction in the overall trajectory of growth that we see today.

Great. And sorry to stay with you, but you piqued my interest with the 65% book comment. Can you put that in context for us, revenue pacing of 65% at this point? How would that compare to, say, last year or maybe 2019?

In 2019, I might need to follow up on that, but this is consistent with what we usually see. It's typically in the mid-60s moving towards the higher 60s. So, it aligns well with what we've observed over the past year or two.

Okay. Thank you.

Thank you, Duane.

Thanks, Ben.

And our next question will come from Scott Group with Wolfe Research.

Hey. Thanks. So, Shane, I want to focus on the cost side a little bit. I understand that year-over-year comparisons are tougher on CASM, and capacity growth is less than unit cost. I’d like to concentrate on absolute costs for a moment. Comparing Q2 to Q3, you’re projecting about a 10% to 11% increase in absolute costs excluding fuel, while capacity is only increasing by 5%. That's almost $200 million. Can you help us break that down? Specifically, how much is attributed to pilots and flight attendants, and what about other factors? Will this new level of cost remain the same or will it decrease as we approach the fourth quarter of next year? Any insights would be appreciated.

Thanks, Scott, and good morning. In terms of proportionality, I believe labor will account for about a third of the increase, primarily due to the flight attendant contract. We also have a smaller increase for pilots coming in September, although it’s much less significant than last year's adjustments, marking the last rate change in our current contract. The remainder of the changes are due to timing shifts. We had a notable credit on airport costs in the first half of the year that was recorded in June. As I mentioned earlier, we have a slightly lower base in Q2 that carries over to Q3. Maintenance costs are similar, with some adjustments moving from Q2 to Q3. I don’t believe our costs are structurally different from our competitors, and we will continue to address this. Our goal is to maintain a cost advantage over the legacy carriers and reduce the cost difference with low-cost carriers. Currently, our costs are lower than JetBlue's, we're competitive with Southwest, and we’re not allowing Delta, United, or American to close in on us. This is what we expect for the rest of the year and moving forward. I also want to highlight that we’ve had six consecutive quarters of productivity improvements, which will persist even as we adjust growth downwards. This will serve as a positive factor for the remainder of this year and into next year. We do not anticipate a high single-digit cost increase becoming the norm; rather, it’s related to timing and some significant increases in costs and labor rates. I believe this will likely be the last significant adjustment as we finalize this negotiation cycle, assuming our flight attendants approve their agreement.

Okay. That's helpful. All the airlines have mentioned that in August and September, capacity seems to flatten out, which looks promising. However, when I examine the current schedules, it appears that you may be reaccelerating in Q4. Is that just a temporary estimate, and do you anticipate it will be adjusted closer to flat in Q4, considering you are in September? Also, do you have any preliminary thoughts on capacity for 2025?

Just on the Scott on the capacity, as you heard in our prepared remarks, the year will be sort of sub 2.5%. What I’m expecting is that Q4 on a year-over-year basis will actually be a little lower than Q3 is what I’m seeing.

In 2025, I'm not ready to discuss one specific aspect. However, I can share that we expect to take fewer aircraft deliveries next year and anticipate retiring more aircraft than we did this year. Therefore, we will be cautious about our capacity and will carefully consider our network, making sure to focus on expanding margins for the company as we move forward.

Okay. Thank you, guys.

Thanks, Scott.

And we’ll take our next question from Andrew Didora with BofA Global Research.

Hey. Good morning, everyone. Shane I was actually going to ask the 2025 capacity question as well, but I guess, kind of big picture given the delivery delays. Is it fair to say that next year will continue to remain below sort of your medium to longer-term targets of kind of mid-single-digit growth?

Yeah. Good morning, Andrew. I think that's a reasonable perspective. We are really focused on the MAX10 certification, which is where most of our forward order book is currently positioned. There is significant potential for us to continue optimizing the network, so it's appropriate to expect that we may fall short of our long-term growth targets for 2025 as we consider the current outlook.

Yeah. Got it. Make sense. And just thinking about it, in that type of growth environment, what we see unit costs kind of at that similar high single-digit level into the first half of 2025, because it doesn’t seem like much of these headwinds will ease by then or do you expect some sort of relief earlier than that? Thanks.

Yeah. Thanks. It’s really early for us to be thinking about or talking about 2025. What I would say is philosophically, no, we wouldn’t expect to see this level of elevated unit costs. It’s not been a part of our thinking about the business or the business model. It’s not going to become a part of our thinking about the business model to have high single-digit unit costs. And I think for the full year we’re going to be in a fair place and if you look at us against 2022 or against 2019, we’re no different holding our own on a unit cost basis against all of the industry and we’ll be very mindful about continuing to work on the productivity and other efficiency levers in the business, and some of these things do begin to actually lap and they’re part of the base next year. And the last thing I just reminder, we had a lot of capacity out of Q1 of last year, so there’s going to be some noise in the comps even as we go forward in 2025.

Right. That’s fair. Thanks so much.

Thank you.

And we will move next to Dan McKenzie with Seaport Global.

Oh! Hey. Thanks. Good morning, guys. Going back to the premium on Economy Plus is the 40% Premium over Mainline Cabin across all stage lengths, or is it reasonable to assume it’s a little bit higher in the longer haul and a little bit less on the shorter all flights?

Hi, Dan. Yeah. That’s absolutely correct, and just as a reminder, we have Premium Class across our entire Regional fleet as well, and our stage length is one of the longest domestically in the industry, and so this is why Premium Class is such a huge asset for us and I think our Regional aircraft probably fly longer than most other Regional aircraft as well. So that’s why the PC product is a really good fit for us.

Sure. Regarding San Francisco being 80% recovered, can you share how much revenue this represents and whether it is mainly corporate or leisure that hasn't bounced back? Additionally, what are your thoughts on the recovery timeline moving forward?

Yeah. Hi, Dan. My comments were specifically to business travel.

Okay.

And I think we have the network post-COVID positioned very well in California and as you look at our growth, certainly in the Bay Area has been very moderate just because we’re not going to get ahead of the demand curve there. And again, in Los Angeles, we’ve been focusing more on some of these Latin and high leisure markets, which have generated revenue done quite well for us. But again, we are on a low growth cadence here for the next little bit and what we will be doing is spending a lot of time. There’s sort of no autopilot here on network. We will be managing this dynamically through this year and into next year to ensure that we’ve got the airplanes in the right markets to maximize our revenues and to accommodate where our guests actually want to fly.

Yeah. Thanks for the time you guys.

Thanks, Dan.

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

Thanks. Good afternoon, everyone, and kudos for sneaking in that autopilot pun in there. Just on the Premium Cabin, kind of just given the new initiatives and the target to kind of raise the mix there, where is that incremental customer coming from? Is that converting from Main Cabin? Is that coming from oneworld partner airlines? Is that coming from other legacy carriers, who’s that incremental customer?

Yeah. Thanks, Ravi. I think it’s sort of all of the above, and I think we are going to tell a lot more of a story around our premium product in general, both First Class and Premium Class. Our international partners can sell into that. And we’ve just seen, as I shared earlier, just a real appetite and demand for that Premium Class Cabin. I think as you look at the industry and you look at the lower end of fares, we meet those very well with our Saver Fare, but we are doing a much better job at actually selling the product we have. For instance, not too long ago, the only way you could buy Premium Class on us directly was to go into the seat map while you were choosing your seat and we would upsell you there. Now we have it fully on our front page matrix and then it will be coming to mobile here soon. So I think we have real merchandising opportunity to catch demand out there that perhaps folks haven’t seen as much as we could have put it in front of them.

Ravi, it’s Ben. At a broader level, we’re discussing not just a premium seat, but an overall premium experience. This is what truly sets us apart from our domestic competitors. From the moment you check in, we’re enhancing lobbies with automated backgrounds. We offer lounges and have a partnership with oneworld. Our loyalty program is excellent, featuring valuable rewards. On board, we provide a premium product along with high-quality local food and beverages. If you consider the entire experience, we are delivering a premium experience, and I believe this is where the value comes from with the premium seats.

Understood. That’s a great color and look forward to experiencing that. Maybe as a follow up, I just wanted to confirm that, when you check your Net Promoter Scores and customer-like booking behavior and everything, is everything back to normal after the January incident or is there still some lingering impact?

I think, as we mentioned last quarter, we haven’t observed any lingering effects from the grounding in the first quarter.

Yeah. And I’ll just add, I’m so proud of how our company got through the first quarter. If you think about how immense that incident was on January 5th and the grounding, how our company came out of it with losses in Q1 to this fantastic quarter where we’re posting industry-leading margins, it’s really a tribute to all the people here. And I’m so proud of them and Ravi, and no, I think everything is behind us, and we feel pretty good going forward in the future. And I mentioned in my script, in 2023 DOT data, we had the lowest customer complaints of any airline in the industry, and I think that’s just a tribute to what our people are doing out there in our operation.

Wonderful. Thank you.

Thanks, Ravi.

We’ll move next to Conor Cunningham with Melius Research.

Hi, everyone. Thank you. I want to ask about the premium topic regarding the expansion of First Class. How much CapEx is involved in that? I’m not sure if you’ve shared that information before. Additionally, it looks like the turnaround for the overhaul is quite rapid. Did you encounter any challenges in finding MRO capacity to carry out this retrofit? Thank you.

Well, let me start. I think I said in my script, Conor, we just didn’t come up with this a month ago and put it in here. This is something we’ve been thinking about a lot. We’ve invested in our premium experience now for many, many years and this just doesn’t happen overnight. So, on the 800s, on the First Class seats, we have 12 in there. It’s a smaller airplane. But over time, we feel that we need to match with the rest of our fleet. So that’s where we’re going to 16. In terms of CapEx.

It's going to be roughly $1 million per airplane, and it will be spread out over a couple of years. We're introducing a new seat in the 800. The 900ER is easier as it just requires re-pitching, which will be completed relatively quickly. We've had good allocation from our MRO partners available to us over the last few years and we anticipate good capacity moving forward.

Okay. That’s helpful. And then when I think about your historical seasonality of your business, you guys make the vast majority of your money in 2Q, 3Q. Ben, you mandated significant change in 1Q. As you think about the opportunity in the fourth quarter, what are your learnings that you saw in 1Q that you could apply to the fall? Is it more of just an off-peak versus peak, changing of capacity? Just curious on how you’re thinking about evolving seasonality in general of your earning stream? Thank you.

Thank you for the question, Connor. I’ll let Andrew give more details. As you know, we perform very strongly in Q2 and Q3, often outperforming our competitors. However, Q1 and Q4 have a few weeks that are weaker than the rest of the year, and those are the areas we are focusing on. As I mentioned in my earlier comments, we aim to manage what we can control and will direct our resources where we can be most profitable. With that said, we have made some significant announcements. Andrew, could you provide a bit more insight on that?

Yeah, Ben is absolutely correct. We are being more careful than ever before regarding the fourth quarter, capacity, and scheduling. However, I want to emphasize that this is not solely about the network. We are nearly finished with a three-year modernization of our digital platform, which will enhance our conversion rates and sales methods. We believe there are additional merchandising opportunities available. You may have noticed that we have overhauled our loyalty program and analyzed redemptions both domestically and globally. We are now monetizing more cabins and seats, including those in front of and within the exit rows and Premium Class. Our approach is to be precise and disciplined regarding our network, while also implementing various revenue initiatives that provide guests with better products, services, and more options. I anticipate that these improvements will continue.

Appreciate it. Thank you.

Thanks, Conor.

Our next question comes from Mike Linenberg with Deutsche Bank.

Good morning, everyone. I want to revisit the point you made about the moderating domestic revenue environment. Andrew, you mentioned it, and I felt like it was brought up a few times. Can you clarify how much of the current situation is purely macroeconomic versus a misalignment of supply and demand? I also want to ask, considering domestic volumes are currently up 6% to 7%, is it fair to say that a significant part of that is driven by stimulated demand? When you analyze your forecasts, what do you consider to be the organic demand, without any stimulation? Are we beginning to notice some macroeconomic softness? I have a follow-up question as well.

Yeah. Hey. Great question. What I would say is this. Firstly, there’s just the general population and then there’s flyers and people who travel, and I do think there’s a little bit of a difference there. I do think on the lower end of fares, just even the last 28 days, we’ve seen more of a shift out of OTA mix into direct, which sometimes they’re the lower fares, so that would seem that there’s softness there. But I think mostly for us, it’s just really a capacity story. As I said, we grew seats 8% in First Class, and our revenues went up 8% in the second quarter.

Yeah.

The Main Cabin situation is somewhat different. Overall, I believe the adjustments we are making to our capacity will greatly help us achieve balance there.

And Mike just…

Okay. Yeah.

If you examine our margin and exclude the impact of 1282, our full year margin for 2024 will be the same or better than it was in 2023, despite the additional costs we are facing. This is a significant accomplishment and reflects our strong business model and the investments we've made in premium offerings. We believe there is considerable resilience in our approach, attracting the right customers with a well-segmented product lineup. Overall, we feel optimistic about our current position and future prospects.

Great. And then just a quick one on now that you’re well established as a oneworld partner, although maybe you’re still saying you would probably tell me that you’re still maybe in the third or fifth inning, not the seventh. What are you seeing like the contribution? And it may even be what is driving you to go from 25% to 28%, because someone who comes off a BA flight and maybe is connecting to, I don’t know, Portland or Medford or wherever, maybe even the State of Alaska, they want that front seat product. So if we think about it, I don’t know if it’s load factor points or whatever that you’re getting now that you’ve synced up very nicely. I mean, you gave some numbers on how much more you’re selling in the oneworld ecosystem. What is that driving on your own…

Yeah.

…metal? Thanks for taking my question.

Yes. Yeah. That’s a great question. And I would just say in the scheme of size, if you will, that the number of international connections onto our network, given our domestic size and what we do carry is not a huge component of it. I think the oneworld is really our loyalty members being able to carry their elite benefits globally and staying within the oneworld system and Alaska’s loyalty system is the real upside. But nonetheless, to your point, as we continue to put more First Class seats on our aircraft, as well as Premium, that opens up more opportunity for all the long-haul connections we do to provide them and many of them also choosing premium seats up their long trip.

Very good.

Andrew, does it account for 7%? What percentage of revenues?

Total revenues from the partners is about 7% of the mix.

Does that include…

…again.

Andrew, is that your Regionals as well or is that Non-Regional connections?

Sorry, I think Mike is just saying that 7% of our revenue is generated by our partnerships. We weren't discussing Mainline versus Regional. This revenue comes from our oneworld and other partners.

That’s perfect. Perfect.

Yeah. And I think it’s going to grow from there. And to your point, it’s a high-value traveler, generally speaking.

Yes. Yes. Very good. Thank you, everyone.

Thanks, Mike.

We’ll hear next from Savi Syth with Raymond James.

Hey. Good morning. If I might, the 3Q cost bridge chart was very helpful. I’m just curious what in there might have been incremental versus what you were thinking before and just along that the line of questions that you’ve gotten so far on the cost side. I think, historically, I think the thinking was, if you grew about 5% or a little bit higher than that, you can keep unit costs flat. Is that relationship still holding?

Thank you for the question, Savi. Regarding the second half forecast, there have been some changes since earlier in the year. The growth rate has decreased, and we are holding resources and adjusting our operations, which is different from our original expectations. The final negotiated compensation for our labor deal turned out to be higher than we anticipated, though not excessively so. Additionally, there have been some timing shifts related to airport credits and maintenance that are impacting expenses this year, which tends to happen annually but has been more significant this time. Our approach to leveraging growth remains unchanged. If we grow by 4% or 5%, we expect unit costs to remain largely flat, and ideally, we aim to perform even better than that in the long run. This philosophy is still very much in place at Alaska.

That’s helpful. Thanks, Shane. And finally, regarding the new product launch, you're not reducing seats; in fact, you might actually be adding a few. Should we consider this in terms of unit cost and unit revenue as we look ahead to the next 18 months?

Absolutely. And I think I mentioned that, I think, it was the last couple of words in my prepared remarks that, yeah, we’re not losing seats one fleet. We’re adding two seats to the other. We’re going to get premium revenue into all of those seats and we’ll have slightly more seats to spread costs over.

Appreciate it. Thanks.

Thanks, Savi.

And our next question will come from Tom Fitzgerald with Cowen & Company.

Hi, everyone. Thank you for your time. I think most questions have already been addressed, but I’m curious about the new routes to Mexico. Are they primarily focused on U.S. point-of-sale leisure, or do you also engage in any of the VFR traffic between the two countries? Thank you.

Hi, Tom. Most of our expansion involves the core U.S. leisure point-of-sale, which has performed well. The positive aspect is that these represent entirely new sources of revenue. While we are reducing capacity in other sectors, you’ll notice the 18 routes, many of which won't begin until December or January and are aimed at the peak of winter in the first quarter. We are very optimistic about these changes.

And Tom, welcome to the earnings call. Thanks for being on. And we won’t do this again, but please send our best to the new, I guess, managing director and mentor, Helane, who will be missed on these calls for sure.

You got it. Thanks very much, everyone.

Thanks, Tom.

Our next question will come from Stephen Trent with Citigroup.

Yes, hello, everybody, and thanks for taking my question. Just a follow-up, if I may. Appreciate the color on the premium increase, and forgive me if I miss this, but do you see any parallel adjustments that you might make to your app, or for example, any pivots in your thinking on changes in the distribution channel as you increase that premium? Thank you.

Yeah. Steve, that’s a great question. And as I shared earlier, we now have on our website full category of premium. And our app, excuse me, will be updated here in the next month or so, as well as some other significant changes to our app. So we have upside in distributing our products through our app, which is increasingly where bookings are going.

Oh! Okay. I appreciate that, Andrew. And just one other quick question. I appreciate what you have mentioned on the Boeing deliveries and what have you. Over the long-term, do you see any possibility that perhaps the Embraer E2 could potentially play a bigger role in your fleet, depending on what happens with supply from the larger OEMs?

Hey, Steve. We’re not considering that aircraft at the moment. We’re really excited about our current order book with Boeing. Our focus is on integrating the ten aircraft into our fleet. We have a strong partnership and agreement with them, and we are dedicated to fulfilling that fleet order over the next few years.

Okay. I appreciate that and thanks for the time.

Thanks, Steve.

Thanks, Steve.

And our next question comes from Chris Stathoulopoulos with Susquehanna Financial Group.

Good morning, everyone. Thanks for taking my question. I want to go back to, I think, it was Duane’s question on competitive capacity. You did give, I think, a number for 2Q and 3Q. I think you said that you would expect, I’m not sure for 3Q whether you were referencing that competitive capacity drop versus your network or sort of domestic as a whole. I’m just trying to kind of localize as we think about potential opportunities for yield acceleration, whether it’s broad-based or we look at your network map and see potential opportunities around hubs and things like that? Thank you.

Hey, Chris. It obviously varies by carrier, by hub, I will say, at the higher level. The amount of competitive increase in seats in our core hubs at the highest level is extremely low single-digit on average as we go into September and October, and we continue to see adjustments to the further out. So, I would just say, they’re somewhat flat to marginally up.

Okay. And the second question, I realize you don’t want to speak to or explicitly give any color on capacity here for next year, but as we think about the goal of expanding margins here and you have fewer deliveries, so should we think about the pieces of capacity, departure stage and gauge as sort of more stage-engaged, dependent or positive or accretive for next year? I just want to understand sort of at a high level how you’re thinking about that because each of those pieces do come with different margin profiles? Thank you.

I believe the growth next year will likely align closely with the number of units we take on. Our stage lengths in the domestic market are among the longest, particularly from the West Coast, with most destinations being three to six hours away. This is also a key reason why our segmentation and premium configuration are effective for us. The real next opportunity for gauge growth will come when we incorporate the MAX10, which isn’t happening next year, but perhaps we’ll start to see benefits from that in 2026. We're looking forward to an increase in gauge as we begin to take on the MAX10, likely in 2026.

Okay. Thank you.

Thanks.

Well, thanks, Chris, and thank you, everyone, for joining us. We’ll talk to you next quarter.

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