Earnings Call Transcript - ALK Q4 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 Fourth Quarter Earnings Call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers' remarks, we will conduct a question-and-answer session for analysts. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Emily Halverson.

Emily Halverson, Vice President of Finance

Thank you, operator, and good morning. Thank you for joining us for our fourth quarter 2022 earnings call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others from our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported fourth quarter GAAP net income of $22 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $118 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.

Benito Minicucci, CEO

Thanks, Emily, and good morning, everyone. Despite another volatile year, we closed out 2022 with solid results. With our continued focus and the incredible dedication of our employees, we are well-positioned to build on this success as we move into 2023 and beyond. This year, we generated full-year revenue 10% above 2019 levels, doing so on 9% less capacity. Our 7.6% full-year adjusted pretax margin led the industry, proving that our business model is resilient. Air Group's pretax margins have now ranked number one in the industry for 11 of the last 13 years. Additionally, our employees earned the largest performance bonus payout in our company's history on average, adding 10.5% on top of our employee salaries or nearly six weeks' worth of pay. Our people did a fantastic job delivering care. I want to thank all of them for the work they do to ensure Air Group outperforms even during turbulent times. Earlier this year, we identified three key priorities to strengthen our competitive advantage and prepare for future growth. Our teams delivered on each of these priorities, including: one, completing our labor deals. We signed five labor contracts in 2022, all of which include significant improvements for our people and create stability and clarity for our company and employees. With these in place, we are well-positioned to fully focus on our future; two, fortifying our operational reliability. Despite challenges throughout the year, we finished 2022 with one of the industry's best completion and on-time performance rates. Operational integrity is the foundation of a healthy airline, and we remain focused on balancing our growth aspirations with consistent delivery of the operational excellence Alaska is known for; and three, executing our single fleet transitions at both Alaska and Horizon. On January 8th, we flew our last A320 revenue service flight, and today marks the final Q400 flight leaving only 10 A321s in the fleet through year-end. We have retired over 60 aircraft in the last few months, paving the way for more cost-efficient and productive operations in both our regional and mainline business. As we take off 2023, we're taking with us many lessons learned. We closed out a solid year, and we are committed to making 2023 even better. Our leadership team has a clear set of strategic initiatives that will support our growth aspirations, expand margins and improve operational excellence. For the full year, we expect to achieve adjusted pretax margins of between 9% and 12%. This morning, we introduced an earnings guide of $5.50 per share to $7.50 per share, which implies a restoration to 2019 EPS levels at the midpoint. Delivering on these targets will be challenging and will require us to leverage our competitive strengths. Undoubtedly, there have been structural shifts within the industry, but history has proven time and again that cost discipline and a strong balance sheet are required to win in the airline business. This is the heart of Air Group's DNA, and we continue to believe low cost and high productivity matter, and that pursuing both benefits all stakeholders. Productivity is not where it used to be in this post-pandemic era, and it can be debated what is structural and what is temporary, but our leadership team is dedicated to driving down unit costs in 2023 as we restore flying and begin to close the productivity gap. This strategy is largely enabled by our single fleet transition and the upgauge benefits that come with our new MAX fleet. Two critical factors to successful capacity growth in 2023 will continue to be staffing and aircraft availability. We had success in hiring nearly 8,000 people in 2022, and are confident in our plans to hire 3,500 more in 2023. And as it relates to aircraft, we remain in close communication with Boeing and have a high degree of confidence in our fleet planning assumptions as well. Having factored in the appropriate buffer in both these areas, we are confident in our 2023 plans to grow 8% to 10% compared to the prior year, so long as demand and the economic environment continue to support it. Lastly, the revenue roadmap we outlined at our March Investor Day will provide valuable contributions in 2023 and continue to build towards our $400 million target. Through focus on cost discipline and growing revenue opportunities, we have a tangible path to expand margins, and our team is excited to deliver on these in 2023. To wrap up, our goal throughout the pandemic has been to emerge a stronger, more competitive airline, and the steps we've taken to date ensure we're on that path. We have the people, the resources, the knowledge, and the discipline to drive performance. I am proud of the results we achieved in 2022, but even more so, I'm looking forward to the opportunities ahead of us as we deliver on our financial and strategic initiatives in 2023 and beyond. And with that, I'll turn it over to Andrew.

Andrew Harrison, CRO

Thanks, Ben, and good morning, everyone. My comments today will focus on our fourth quarter and full-year results, along with first quarter guidance. Fourth quarter revenues totaled $2.5 billion. That's up 11.3% compared to the fourth quarter of 2019, notwithstanding that our capacity was down nearly 10%. These strong results included the impact of severe winter conditions that we experienced over the peak holiday travel period in December. The storm reduced revenue by approximately $45 million. Notwithstanding this, we achieved unit revenue increases of 23% for the quarter with robust load factors, which exceeded 2019 levels and came in at 85.5%. More impressively, as Ben mentioned, our full-year revenues came in at $9.6 billion, and that's up 10% versus 2019 on 9% less capacity. This resulted in industry-leading full-year unit revenues, which were up 21% versus 2019, capping off a strong year of outperformance and demonstrating the leverage of our commercial initiatives, the power of our network, and a constructive pricing environment. Turning to product and loyalty. As has been the case all year, we continued to benefit from strong demand in our premium products. First class was up 19% and premium class up 14% versus the fourth quarter of 2019, with paid load factors up six points and two points, respectively. As we reflect on the full year of 2022, we were able to drive an increase in premium revenues of nearly $0.5 billion, or 20% above 2019. Our loyalty program has also been a significant revenue driver, given our renewed credit card deal with Bank of America. Cash remuneration from the bank was up 42% versus the fourth quarter of 2019 and 39% for the full year. As a reminder, product and loyalty represented roughly half of our $400 million commercial initiatives, and we expect to achieve product and loyalty's full run rate in 2023. Regarding network and alliances, we are encouraged by the results we've seen through our partnerships in oneworld. Through increased opportunities that we simply did not have before the pandemic, including joint contracting with American and working with MX GBT, we have meaningfully improved our corporate share gap and continue to experience higher traffic volumes facilitated by our alliance partnerships. We are stepping up our airline partners' selling capability in 2023, which will help us offer full partner inventory for 10 global carriers on alaskaair.com by year-end. These partners include American Airlines, IAG, Japan Airlines, Qatar, and Qantas; an expanded global network that we can sell and market as our own is compelling for our guests, and we expect our airline partner revenue to reach 8% to 10% of total Air Group revenues by 2025. Turning to corporate travel. We experienced a softening in bookings during the fourth quarter from those in the late summer peaks, exiting 2022 at approximately 75% recovered on a volume basis and 85% recovered on a revenue basis. West Coast business remains less recovered, which is not surprising given the significant workforce reductions happening across large technology companies located up and down the coast, where we primarily operate. Despite the choppiness we've seen in this segment, business travel has trended in a positive direction in the last few weeks. While we don't expect continued recovery to be linear, over time, we do still expect to fully restore our business revenue based on our improved opportunity set. Looking ahead to guidance for the first quarter, we expect total revenue to be up 29% to 32% year-over-year on capacity that is up 11% to 14% as we lap weak comparisons when Omicron reached its peak in the first quarter of 2022. Q1 is always our weakest quarter of the year, but leisure travel remains healthy, and yields are holding steady. For the full year, we expect revenue to be up 8% to 10% on flat unit revenue. Our 8% to 10% growth in 2023 will continue to focus on deepening the connections of our network while growing in the Pacific Northwest and restoring California. Approximately two-thirds of our growth will be focused in the Pacific Northwest and one-third in California and will not be overly dilutive to our yields, as much of it will be added to our strongest markets where demand exceeded supply in 2022. Importantly, 85% of growth comes from increased gauge and stage. This is the most efficient capacity growth of any year that I can recall at Alaska Airlines. In closing, my team and I are squarely focused on 2022 as our baseline year, which represented industry-leading unit revenue and profitability. From that base, we look forward to building an even stronger result for 2023. The economics of our renewed credit card will continue to build this year. Our alliances and partnerships are set to gain further momentum as we improve our corporate share, and international travel continues to unlock. Our premium seat mix and upgauging opportunities will also grow as we take 37 MAX deliveries where 22% of seats are premium. This combination drives further unit revenue momentum that we believe will be a differentiator for us going forward. I'm excited for what our commercial team is set to deliver in 2023. And with that, I'll pass it over to Shane.

Shane Tackett, COO

Thanks, Andrew, and good morning, everyone. As you heard from Ben, our full year 7.6% adjusted pretax margin led the industry and is a great result for us, given how the year started and the challenges we experienced rescaling our company in the face of incredible demand for travel. We are especially proud that all of our people will receive significant performance-based bonuses in February, given their achievements this year. We are looking forward to further building towards our long-term financial goals in 2023 by remaining focused on running a reliable operation, driving unit cost and productivity improvements, and delivering on our commercial roadmap. Turning to Q4 results and an update on our balance sheet. We ended the year with debt to capitalization of 49%, within our target range of 40% to 50%, and still among the strongest in the industry. Debt payments during the fourth quarter were approximately $50 million. For full year 2023, debt repayments are modest, totaling approximately $280 million, with $100 million in the first quarter. Cash flow from operations totaled $1.4 billion for full year 2022, and total liquidity, inclusive of on-hand cash and undrawn lines of credit, ended the year at $2.8 billion; a great result, given that we continue to pay cash for our CapEx in 2022, which was one of the highest CapEx years in our history. In addition to top-of-industry margins and our balance sheet strength, our trailing 12-month return on invested capital reached 9% in 2022, above our cost of capital and approaching our long-term target range. Our balance sheet strength, our cash position, and our margin and return on capital results allowed us to take two other important steps towards the end of 2022. First, we announced in December our plan to restart share repurchases in the first quarter of 2023, initially focused on offsetting dilution. Second, we secured an expanded order book with Boeing, now having firm and option aircraft positions through the rest of this decade. Given overall aircraft and engine demand and ongoing supply chain challenges, having access to positions for the next seven-plus years will, we believe, prove to be beneficial strategically, as it provides maximum fleet flexibility on great terms. Turning to costs. In Q4, CASMex increased 24% versus 2019, approximately one point above our guide driven entirely by lost capacity and incremental costs as a result of the severe winter weather in November and December. Absent this impact, our Q4 CASMex would have slightly beaten our guide. Our full-year CASMex in capacity ended the year within our guided ranges at up 20% and down 9%, respectively, versus 2019. As a reminder, we do continue to include the cost of our performance-based bonus and incentive pay programs in our unit costs. For the full year, this represented approximately two points of unit cost pressure versus 2019 and was materially more impactful on our unit costs than other airlines. Our beliefs about what will drive long-term success and value in the airline industry remain largely intact and consistent with what we believed pre-pandemic. We firmly believe a strong balance sheet and low relative costs will be the ultimate drivers of business stability and success. We remain focused on and confident in both of these areas. Our balance sheet is strong, and based on 2023 guides, Alaska is positioned to achieve the best unit cost result within the industry this year, helping us maintain or improve our pre-pandemic relative cost position. Looking ahead to 2023, our current schedule has us returning to pre-pandemic levels of capacity during the first half of the year. Maintaining operational safety and reliability remains our top priority, and we will have continued modest cost headwinds as we complete the transition training related to our fleet transitions. However, we are planning for solid improvements to our overall fleet utilization and levels of productivity during 2023, and are focused on reducing unit costs on a year-over-year basis. For the first quarter, we expect capacity to be up 11% to 14% with CASMex down zero to 2% year-over-year. For the full year, we continue to expect capacity to be up 8% to 10% with CASMex down 1% to 3% on a year-over-year basis. Touching on fuel, oil prices have moderated from 2022 levels but remain elevated. Refining spreads also remain volatile. We currently expect fuel price per gallon to be $3.15 to $3.35 for the first quarter and $3.10 to $3.30 for the full year. Our significant 2022 benefit from hedging, which was approximately $170 million, will likely turn to a net cost in 2023. As a reminder, our hedging program uses 20% out of the money call options only, and our strike prices are above what we anticipate oil prices will be during the year. Taken all together, as Ben mentioned, we expect margins to improve this year with our full-year adjusted pretax margin guide of 9% to 12%. This incorporates the full structural impact of our ratified labor contracts, contributing approximately three points to our full-year CASMex. While we are optimistic about demand for travel this year, we are also cognizant of the uncertain economic backdrop we are operating in, and we'll adjust capacity accordingly this year if we need to. One of our primary strengths over the years has been to execute our plans. In 2022, we certainly experienced volatility and some setbacks, but overall, we executed on the major components of our recovery plan and have a strong foundation to work from in 2023. We have most of our labor deals completed. We are through the majority of our fleet transition. We were one of the most reliable airlines in the industry. We've got a solid balance sheet and a great aircraft order book. We are now focused on improving utilization, productivity, and delivering on more of our commercial roadmap as we attempt to lead the industry again in financial performance in 2023. And with that, let's go to your questions.

Operator, Operator

And our first question today will come from Andrew Didora with Bank of America Global Research.

Andrew Didora, Analyst

Hi. Good morning, everyone. Andrew just you got the RASM premium last year even with kind of the West Coast corporate tech travel not showing as much growth as other areas. Based on guys out of other airlines and your guidance this morning, doesn't seem like you're assuming much of a further RASM growth premium here. Just curious, what are you baking into your guide in terms of corporate travel recovery here in 2023? And do you think there's the opportunity for that RASM premium to maintain throughout this year?

Andrew Harrison, CRO

Yes. Good morning. Thank you, Andrew. There are a few points to consider. Firstly, regarding the higher benchmark from last year, the industry's guidance for this year suggests that unit revenue will remain about flat, and we align with that expectation. As I mentioned in my prepared remarks, I believe we may see more growth in the corporate sector compared to others on a relative basis, which presents an opportunity. Additionally, as you know, our peak seasons are in the second and third quarters. It’s important to note that industry capacity has not returned to 2019 levels, which could lead to further potential growth. Overall, we are currently in a strong position.

Andrew Didora, Analyst

Got it. And then a question for Shane, just in regards to that kind of peaking in 2Q and 3Q. When we think about capacity in CASM for the rest of the year, do you expect these to be fairly consistent across the quarters going forward here? Or is there like any lumpiness that we should build into our models? Thanks.

Shane Tackett, COO

Hey, good morning, Andrew, thanks. From a capacity perspective, it's pretty sequentially modest Q4 to Q1, Q1 to Q2, Q2 to Q3. There is a step-up in the second half of the year, but it's very reasonable, I think. In terms of unit cost, I think flattish for the first half of the year, consistent with our Q1 guide, obviously, and then a little bit of momentum in the back half of the year. It's not exaggerated. It's sort of flattish first half of the year and then single-digit-ish in the second half of the year. So I don't think there's a big swing quarter-to-quarter that you guys need to expect from us this year.

Andrew Didora, Analyst

That's helpful. Thank you.

Shane Tackett, COO

Thanks, Andrew.

Jamie Baker, Analyst

Hey, good morning, everybody. I know your pilot contract has a snap-up or a me-too clause. But as I recall, it's a little complex. Can you remind us of the mechanics of that mechanism? When do look-backs occur? What's the group of airlines that you compare against? And I can obviously do my own analysis, but if you have Alaska's estimate based on Delta becoming the market, I'm all ears, but we can do that work on our end.

Andrew Harrison, CRO

Yes, Jamie, I'll provide you with the complicated formula so you can do the math. It's the simple average of the four airlines larger than us and JetBlue, and we analyze it as of September 1st. You can make estimates about what you think the industry would have approved by that date and then easily deduce what you think the impact might be in relation to the planned 4% pay raise. We are pleased to have this included in the contract, as we don't want our pilots to fall behind. We recognized that going first required us to implement a mechanism to ensure we stayed aligned with the market if it diverged from our expectations.

Jamie Baker, Analyst

Okay. Perfect. I appreciate the color. And then on oneworld, you said reaching 10% of group revenue by 2025. That's the goal you gave, right?

Shane Tackett, COO

8% to 10%. Okay.

Jamie Baker, Analyst

I've always assumed that connecting revenue or alliance revenue is less profitable than local revenue. Obviously, if the connecting revenue is entirely incremental, it's highly accretive. I know you've been really bullish on your one-world membership. But on a margin basis, how does that 8% to 10% compare to your core flying?

Andrew Harrison, CRO

I believe there are a few key points to highlight. This year, especially with American Airlines, we've seen strong participation not only in international markets but also domestically through their hubs and local market codeshares. We have taken part in American's robust revenue environment, benefiting both corporate and leisure travelers who utilize our network for more efficient travel. Overall, I am quite pleased with the yields being generated. As we progress into this year, the continuation of international travel and the strong international fares we experienced last year contribute positively to our momentum.

Jamie Baker, Analyst

Okay. That's helpful. I appreciate it. Take care, everyone.

Andrew Harrison, CRO

Thanks, Jamie.

Catherine O'Brien, Analyst

Hey, good morning, everyone. Hope you are doing well. So in December, you guys had some really unusual weather that drove the operational issues you saw. Not being that preparing for an ice storm on Christmas should be the operational base case, but some of your peers are talking about the need to have permanently higher buffers to protect the operation. Do you believe that you already had the appropriate buffers in place for an 8% to 10% capacity guide for 2023 and December didn't really change anything? Some color there would be great. Thanks.

Shane Tackett, COO

I will discuss 2023 while you handle the December event. Welcome back, Catie; it’s nice to have you here. I believe we have adequate buffers in our capacity and staffing plans to avoid overloading the network. In the second half of the year, after addressing our April issues with pilot training, we achieved some of the best on-time performance and completion rates in the industry. While this unique weather event lasted several days and affected our aircraft in Seattle, Portland, and other areas of the Pacific Northwest, it has become somewhat of a norm, as we faced similar conditions last year. Although we don’t expect such events to recur every year, we need to build more resilient operations in response to irregular situations.

Benito Minicucci, CEO

Yes, Catie, it's Ben. Having done operations my whole career, you can look at it a couple of ways. You can create a massive amount of buffer for an event that might not happen, or you can go in with the appropriate level of staffing with some additional cushion to deal with winter events. But things like ice storms are massive events that cripple a city, and there's not a lot you can do no matter how much buffer you put in; there's nothing you can do to operate in an ice storm. So what our mindset is to create a robust schedule that we can operate in the peak periods or peak periods where we're susceptible to weather, create additional buffers but it's got to be managed appropriately. So we were good. This was just a big event, and I'm pretty proud of the team and how we dug out of it and got back on track.

Catherine O'Brien, Analyst

Totally understandable. I mean just seeing some of the scenes in Seattle, it definitely seems like a unique event. So maybe just one then. Great to have most of the fleet transition behind you. Can you just help us think about some of the moving pieces on the P&L for this year, underlying your full year CASMex guidance? I know you mentioned some elevated training in your prepared remarks, but anything else we should be thinking about that as go-forward might roll off, that's unique to the fleet transition for Alaska?

Shane Tackett, COO

Yes. I don't think there's anything major to discuss. Many of the expenses related to returning the lease aircraft were accounted for last year through special items. Therefore, we don't anticipate significant fluctuations this year in the profit and loss statement concerning the fleet transition. The primary cost will be completing the pilot training transition, which will largely occur in the first quarter, with a small overlap into the second quarter. Other than that, there aren't any notable fleet transition-related costs affecting the profit and loss statement. I don't see anything that deviates from industry norms. We are experiencing growth in airport costs, which is consistent with the overall industry. Additionally, labor costs have increased structurally, and as we expand, these costs will continue to rise as we hire more personnel to support that growth. Overall, everything else appears to be normal in terms of trends, with nothing particularly noteworthy to highlight.

Catherine O'Brien, Analyst

Okay. Thank you.

Shane Tackett, COO

Thanks, Catie.

Benito Minicucci, CEO

Thanks, Catie.

Helane Becker, Analyst

Thanks very much, operator. Hi, everybody, and thank you very much for the time. Just one quick clarification on that last point, Shane. The $120 million in the fourth quarter, then is that the end of the transition costs? Is that the way we think about that?

Emily Halverson, Vice President of Finance

Helane, this is Emily. So the $120 million that you saw in special charges in Q4 should be most of the remainder because we've put all of our estimates in for returning all the A320s. We've done all the accelerated depreciation and other charges that we're going to take on both Q4 and the A320s. Those aircraft actually leave our property over the next 12 to 18 months. So there could be some minor true-ups that come through there. The last remaining thing that you're going to see coming through special charges in 2023 is going to be whatever we end up doing with the A321s, which are still on our books. So there will be some dollars there, but there should not be much more for A320.

Helane Becker, Analyst

Okay. That's very helpful. Thanks for clarifying that. And then just on the mileage plan. I think there was an announcement that there are new benefits that are accruing to your members beginning, like I want to say around now. Maybe, Andrew, can you talk about that and how that should benefit your revenue line?

Andrew Harrison, CRO

Yes. Thanks, Helane. So two things: Certainly, for our loyalty guest members, there are some really cool incremental benefits as it relates to bonus miles for subscriptions, boarding priorities. Even if you hold Bank of America accounts, you'll get bonuses there. So there's a lot of good things there. I think specifically for Air Group, a couple of things for new cardholders, there's going to be some minimum spend thresholds, which we've never had before. I think that will add to some of the quality. The other thing we did have is a fee increase this year, which we haven't done forever, and we're still one of, if not the lowest card membership fee. But again, that went from $75 to $95. So we will participate in that goodness.

Helane Becker, Analyst

Okay. That's very helpful. Just to clarify on the minimum spend, I understand your points about attracting better quality customers, but do you believe that this might lead to fewer applications? Do you think potential applicants might be discouraged by this?

Andrew Harrison, CRO

No. I think, again, this is just on the forward book, Helane, not the back book. Again, obviously, this is something that we'll watch. But at the end of the day, knowing what our average card spend is and all the rest of it, our guests get a lot of value from our card, and the spend on the card is very, very healthy. We think this is well within the industry. In fact, it's probably low versus the industry, but we don't have any concerns about it.

Benito Minicucci, CEO

And Andrew, since we've launched it, you've seen a lot of credit card sign-ups, right?

Andrew Harrison, CRO

Yes, exactly, and a lot of positive comments.

Helane Becker, Analyst

Okay. That's helpful. Thanks, Team.

Andrew Harrison, CRO

Thanks, Helane.

Benito Minicucci, CEO

Thanks, Helane.

Duane Pfennigwerth, Analyst

In terms of the pacing benefits, the pacing of benefits of moving to a single fleet, what are we seeing in the first quarter here, if any, and can you just remind us what are the hurdles you need to clear to realize further benefits?

Shane Tackett, COO

Hey, good morning, Duane. Really, it's just getting through the pilot training and getting the Dash 9s that replace the A320s here on property. We are at low 40s of Dash 9s relative to the 60-ish A319s and A320s we had. So the planes are coming. We've got a bunch more coming this year. We'll have full restoration of the fleet size as we get through the year. We'll be through all of the transition training on Horizon here in the first half of the year, mostly in the first quarter. Similar on mainline, although we'll have these 10 A321s, I think we can pretty easily get those into one hub, one base and manage that. So I think the way the unlock is basically going to start in the second quarter and ramp through the rest of the year, and we should be at close to full run rate as we get through the fourth quarter, dependent upon what we do with the A321 transition because we still have 150 pilots you've got to transition off of that equipment ultimately.

Duane Pfennigwerth, Analyst

Thank you for your answer. Ben, you have historically been known for your focus on process improvement. Alaska has been effective at recognizing variability, measuring it, and eliminating it from your operations. Given the current challenging operating conditions, do you believe there are still opportunities to reduce variability? What specific productivity initiatives do you plan to pursue this year? Or do you think that approach is no longer relevant? Thank you for addressing my questions.

Benito Minicucci, CEO

Thank you for your question, Duane. It's an important one, and we discuss it frequently. I want to emphasize that this type of thinking is deeply ingrained in our culture; I have been here for 20 years, and it's how we naturally approach things. Regarding whether there have been structural changes, that's open to interpretation. However, I believe that the airline industry has not yet returned to the capacity levels of 2019. If we consider the aerospace sector, we still need proper air traffic control staffing. We are not operating at the same levels as we did in 2019. Analyzing block times and departures, we are still below where we were back then. Essentially, aerospace remains unchanged, and it must work effectively from an FAA standpoint. Internally, we see potential for improvements in asset utilization and workforce productivity. We have the processes and mechanisms already established to enhance our performance. Has there been some change? Yes. Will we return to our previous efficiency? Absolutely.

Duane Pfennigwerth, Analyst

Thank you very much.

Benito Minicucci, CEO

Thanks, Duane.

Michael Linenberg, Analyst

Hey, good morning, everyone. Shane, congrats on getting the ROIC. I guess, congrats to you and the whole team for getting your return on invested capital trailing 12 months on better than your cost. You're one of the few out there who can actually have achieved that objective. You did highlight the return of share repurchase program. Again, this is to offset just the dilution. And then the amping up the part of the deliveries of some MAXs. Where is your thinking on bringing back the dividend? Is that something that we see in 2023? Is that later this year? Is that a next year phenomenon? Thanks.

Shane Tackett, COO

Mike, thanks for picking up the ROIC comment in the script. That's nice that you did. That question on dividend is the 2023 conversation item with the Board. We decided last year to prioritize offsetting dilution first. As you know, I mean, I think a dividend is something that you do when you have a lot of confidence in the outlook for a multi-year period. We're really optimistic, but we want to see how this year shapes up, especially with the economic backdrop. So we're actively discussing it with the Board, still in our long-term sort of thought process in terms of capital allocation and shareholder returns, but nothing to say right now on it.

Michael Linenberg, Analyst

Okay, great. Fair enough. My second question is about loyalty to Andrew regarding the $1.5 billion in remuneration. A few years ago, it was around $1 billion to $1.1 billion, and I recall you mentioned something about 39% back in 2019. Are we looking at a 10% or 12% compound annual growth rate going forward? Is that the correct outlook? Have you discussed any potential increase in rates, or will there be milestones in the next year or two that might lead to a jump to 2? How should we understand the growth of that program?

Andrew Harrison, CRO

Yes, I think there are a couple of things to note. You've seen a significant improvement from the new contract. As mentioned earlier, there will be more positive developments. There are changes that will occur over time, but what we are really excited about right now is moving past this phase and focusing on expanding the program, increasing the portfolio, and enhancing spending. My team is fully committed to these goals. I personally anticipate continued momentum, and it will be a major priority for us as we progress.

Michael Linenberg, Analyst

Okay, very good. Thanks, everyone.

Benito Minicucci, CEO

Thanks, Mike. I wanted to add that it was a great answer, Andrew, especially since it's Andrew's birthday today, which I forgot to mention earlier. I just want to remind the analysts to go easy on Andrew, although feel free to be as tough as you want. Happy Birthday, Andrew.

Andrew Harrison, CRO

Thank you, Ben.

Operator, Operator

And our next question today will come from Savi Syth with Raymond James Financial.

Savi Syth, Analyst

Good morning. I wanted to follow up on Andrew Didora's question, and I have a similar inquiry for Andrew. Could you provide more insight into the business recovery? You mentioned the potential to return to 2019 levels, but with various initiatives in place, do you expect to reach that this year? I'm particularly interested in whether the recent headlines about job cuts in West Coast tech companies are affecting tech business demand, or if you're simply not seeing the recovery yet.

Andrew Harrison, CRO

Yes. Savi, thanks for that. I think it's a great question because the first thing I will say is that even though the headlines are recent on these job cuts, we've been experiencing especially some really large tech companies; their corporate travel has already been severely depressed for some time now. So the corporate numbers that you see from us already include a lot of high-tech companies with that already, in some cases, nearly turned off their travel, but have severely depressed. So as we move forward, I don't think these cuts personally impact the technology side because I think we've already seen them. The question is, will they come back? I'm more bullish and confident certainly on the non-tech side of corporate travel and continue to share there. I will say the jury is a little bit out on where tech does go. But I think overall, portfolio-wise, business is somewhat stable that the 85%, 75%, 85% range. But again, I hope with our share movement and continued strength over time that we do get back there.

Shane Tackett, COO

And Savi, I might just add, one thing not to lose sight of is these tech companies, while they haven't been traveling for quite a while, these are like the most valuable companies on earth. At some point, they are going to expand again, and they're going to get traveling again. So it's probably future goodness for us. We just don't know when it's going to really come back. It could be a year away or more.

Savi Syth, Analyst

Makes sense. I just wanted to bring up the topic of utilization and productivity again. Ben, you've mentioned that the aerospace sector is what it is, and we're still underperforming while everyone seems to be struggling. I’m curious about the factors we can control on the Alaska side and the timing of those improvements compared to the things that are beyond your influence.

Benito Minicucci, CEO

No, Savi. Just let me start with a couple of things. I think for us, coming back from a pandemic and getting the inertia up for the operation, I think that's where not just Alaska, but the entire industry struggled getting back up to a certain level of capacity. So there was a lot of issues there. As I look forward now into 2023, when I look at the benefits of a single fleet and having the majority of your fleet consisting of Boeing and the majority of your fleet being Embraer 175, that just drives massive efficiency in terms of crews, in terms of swapping airplanes and getting reserve crews. Just there alone for us is a major improvement. Secondly, getting through a little bit of the volatility with staffing and training, that goes away. So that volatility goes out. Our folks are pure in every part of the operation where we see volatility in staffing, where we see volatility in performance, is to go and zero in on those issues and snuff them out. I mean, that's what good airlines do, and operational reliability is just critical in doing that right. Now there will be things that will never go back to the way they were in 2019, but I think a lot of this is in our control. We just don't give up on those type of things. It's savings that you can go after, and we're going to go after them.

Savi Syth, Analyst

Just to clarify, but just on the staffing side, staffing and training. The training is related to the fleet transition, right? Are you fairly caught up in just being able to source the pilots for the capacity?

Benito Minicucci, CEO

Right. Yes. We're going through a lot of the A320 Airbus pilot transition right now. So we'll be through it by the end of the first quarter. And so that's going through all our schoolhouse right now. Same thing with the Q400s and the Embraer 175. So we'll be largely done that big by wave.

Savi Syth, Analyst

Thank you.

Benito Minicucci, CEO

Thanks, Savi.

Operator, Operator

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

Scott Group, Analyst

Hey, thanks. I just want to go back to the revenue guide. So it looks like RASM decelerating from when I look versus '19, decelerating from fourth quarter to first quarter, and then reaccelerating the rest of the year. Just help us understand that. Is that a market view? Is that something specific to you guys? Just any color there?

Andrew Harrison, CRO

Yes, good morning, Scott. We've discussed this before, but our first quarter is typically the weakest. Business travel in January has been quite unpredictable and did not rebound as much as we anticipated. However, if we take a moment to look at our revenue overall, particularly in comparison to 2019, our unit revenue projections for the first quarter align well with industry standards. The resurgence of significant international travel will likely benefit them greatly. For the year, our performance is on par with the industry, but we still need to improve in January and February regarding our network. It’s essential to build our network to accommodate these fluctuations in demand. However, looking ahead to March and beyond, we are very optimistic.

Scott Group, Analyst

Okay, Shane, you mentioned that there is a fuel hedging loss included in the guidance for this year. How much is that? Looking at the bigger picture, the main issue has been with crack spreads rather than crude prices. Do you have any thoughts on reevaluating your hedging strategies? I understand it’s more complex, but it seems like a more effective approach if you choose to hedge.

Nathaniel Pieper, VP of Fuel and Supply Chain

Hey Scott, it's Nat Pieper. Thanks for your question about fuel. To start, regarding our hedging program, we initiated it in 2015 with 20% out of the money calls, which was quite straightforward and formulaic. From 2015 to 2021, we broke even. As you mentioned, 2022 was a profitable year for us. However, our goal with hedging is not to generate profit but to reduce volatility. We believe it's a beneficial way to utilize our strong balance sheet and helps us gain better insights for our future planning. We've also invested significant time with investment banking contacts on the East Coast to explore potential strategies for hedging the crack spread, which has indeed been a primary source of frustration and volatility. We're currently considering this but will only proceed if it aligns with our core values as a company, leverages our robust financial foundation, and can be managed efficiently.

Scott Group, Analyst

And what is the hedge loss that you've got factored in?

Nathaniel Pieper, VP of Fuel and Supply Chain

We're looking at about $10 million in the first quarter. And then as you can imagine, it snaps to something different every day as the forward curve moves.

Scott Group, Analyst

Okay. All right. Thank you, guys.

Andrew Harrison, CRO

Thanks, Scott.

Operator, Operator

And our next question will come from Dan McKenzie with Seaport Global.

Daniel McKenzie, Analyst

Hey, good morning, guys. Thanks. Andrew of course, we want to help you celebrate your birthday with a couple of questions here. Happy Birthday.

Andrew Harrison, CRO

Thank you.

Daniel McKenzie, Analyst

So I guess the question is the State of California was pretty slow to come out of the pandemic, and I guess my question is, what percent of the revenue growth this year is just simply getting markets back to 2019 levels of revenue? And then related to this, what percent of Alaska's revenue touches the State of California?

Andrew Harrison, CRO

Yes. So just on the big picture, Dan, our growth, two-thirds of it is going to be Pacific Northwest and one-third of it is going to be California. Just as it relates to recovery, if you look at our growth in 2023, the Pacific Northwest is now in the double-digit territory higher than 2019. But California was still down 23% last year, and it will be close; it will be about 10 points better than that. So our California network will still be down about 10% to 12% this year versus 2019, but recovering. I would say, again, very high level, one-third of our revenues is somewhat tied to California.

Daniel McKenzie, Analyst

That's significant. Referring to the previous comment about Alaska having more potential for corporate revenue compared to peers, I understand that there was a statistic indicating a 62% increase in premium seats this year compared to 2019. I wonder if that information is still accurate and whether you can provide details on the current mix or expectations for the end of the year. Additionally, regarding corporate travel budgets, are they expected to be significantly higher, somewhat higher, or lower than last year, especially considering the tech sector's influence?

Andrew Harrison, CRO

Yes. So I think a couple of things. And maybe you saw in my prepared remarks that we were able to increase our premium revenues by nearly $0.5 billion. And as Shane has shared, we're sort of trading out 12 first-class seat 320s for 16 first-class seat MAXs. So there's real upside there. I think overall, I think first-class revenues were up about 21%. So there is a significant opportunity there. The other opportunity we're working on is our regional fleet, and we actually we're all 175 now, which have first and premium, and we're really happy with the progress we've made on filling those seats at good fares, and we continue to work that. And then on the last question you had was on corporate. Could you repeat that one again, sorry?

Daniel McKenzie, Analyst

Yes, the corporate budget is a little higher, a little lower or given the tech exposure.

Andrew Harrison, CRO

Yes. Some of the budgets were still being finalized for this year when I last spoke to my team. Regardless of budgets, what we're noticing in some cases is the on-off switch. People need to seek approval from their Vice President to travel, which is why travel is limited. We are seeing either significant cuts in travel or more average levels. The real question is whether high-tech companies will start allowing their employees to travel again. It's not just about hotels; it also involves cars and airfares. That's the current situation. And with that, let's go to your questions.

Savi Syth, Analyst

Hi, everyone. Thanks for the time. Happy Birthday, Andrew. Just on the capacity outlook, this would be an easy one. Just can you provide some context on what's new versus core utilization stage gauge? It just feels like a lot of the growth is going to be utilization and gauge base this year within your core markets, but if you could just clarify that, that would be great.

Andrew Harrison, CRO

Yes, I mean, you're exactly right. At the end of the day, very, very few new cities. This is essentially all core restoration and 85% of all of our growth is stage-gauged. So it's very efficient growth.

Savi Syth, Analyst

Is that mostly on the Pacific Northwest in California? I mean, I feel like you mentioned that during the prior.

Andrew Harrison, CRO

Yes, yes, that's correct.

Conor Cunningham, Analyst

Shane Tackett, COO

Benito Minicucci, CEO

Thank you, everyone, for being here, and we will catch you again next quarter. Have a great day.

Operator, Operator

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