Earnings Call Transcript - ALK Q3 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 Third Quarter Earnings Call. Today's call is being recorded and will be accessible for future playback at alaskaair.com. 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 third 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 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 third quarter GAAP net income of $40 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $325 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 in our SEC filings. We'll 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. Today, we released our third quarter results, closing out the busiest travel period since the pandemic began. Demand was resilient, planes were full, our people were busy, and our results were strong. Our 15.6% pretax margin is likely to top the industry and came despite multiple new labor contracts. We ran the best operation this summer, leading the industry with the #1 DOT on-time performance from June through September. Our $2.8 billion in revenue marked the highest quarterly revenue ever recorded in our history. Our unit revenue was up 27% versus 2019, which we also believe is the best in the industry and underscores that our commercial initiatives are delivering. We ratified three major labor contracts, becoming the first major airline to reach a deal with our mainline pilot group. Our leadership team has been very deliberate about our priorities this year and setting ourselves up for continued success. We are seeing results as we focus on moving rapidly to a single fleet, delivering operational excellence, securing labor contracts, and configuring our business for profitable growth. Our financial results are strong, and our underlying business model is resilient. To put it simply, we are poised to continue to outperform and are excited about what the future holds. Now let me give you a quick update on our top priorities. Our fleet transition is progressing well, and we are closing in on getting back to a single fleet. All A320 and Q400 aircraft will be out of the fleet by January of 2023, and the 10 A320s will follow by the end of 2023. Today, we have 35 MAX aircraft that are 25% more fuel-efficient per seat than the smaller A320s they are replacing. We expect to have 78 MAX aircraft by the end of next year, representing over 30% of our mainline fleet. As we focus on reconfiguring our business back to a single fleet, transition training for nearly 500 of our pilots will continue through May of next year, after which we expect to begin to ramp toward a $75 million single fleet savings we outlined at Investor Day. Our operation is also back on track. This summer, we returned to delivering a reliable operation with a completion rate over 99% each month of the quarter despite flying record high load factors throughout the summer. Horizon has also posted fantastic operating results with the #1 completion rate in the industry at 99.5%. Importantly, our guests have noticed with our guest satisfaction score improving and exceeding our target for the quarter. We locked in three major labor deals, a huge milestone for us that has been a primary focus for several months. Following the ratification of a contract extension with IM, we secured deals with Horizon pilots and are attracting a robust pilot pipeline. Also Monday of this week, our Alaska mainline pilots represented by ALPA ratified a new 3-year agreement that recognizes their contributions to our success and the market for pilots in the industry. We are excited for the stability and alignment this brings our organization and will prioritize getting our upcoming labor agreements done as well. We have a lot to be positive about here at Air Group. We are delivering on our goals and demand remains strong. We also realize there are challenges our industry is facing, including an uncertain economic backdrop and a structural step-up in wages. Going forward, we are uniquely positioned to offset this pressure by leveraging initiatives we already have in place. One of the most impactful will be harnessing the structural efficiencies that come with our return to a single fleet, a tailwind that will be unique to Alaska. This includes increasing productivity as we eliminate cross-training events, more efficient scheduling by moving line pilots, and cost-effective growth through upgauging. We are not immune to the challenges of the industry but remain committed to keeping our cost advantage relative to our competitors as we move forward. We are fortunate to be on solid footing as we look to finish out the year and build on our performance into 2023. Our priorities not only this year but throughout the pandemic have centered on preparing our airline for profitable growth, and we have taken strategic steps to bolster our competitive advantages. As these initiatives continue to fully ramp up, they will support our results both in the near and long term. Near term, this is already evident in our unit revenue outperformance and the fact that we are still tracking to deliver a 6% to 9% full year adjusted pretax margin unchanged despite now including the impact from our new labor deal. The foundational strength of our balance sheet, coupled with our commercial roadmap and commitment to operational excellence will continue to support strong financial performance. To close, I am excited to see all of our hard work begin to come to fruition and for the opportunity that we have ahead of us over the coming quarters and years. Lastly, before I hand things over to Andrew, I want to thank all of our Air Group employees for a great summer and everything that they do. Running a safe, reliable operation is critical to our success on all fronts and serving our guests, connecting our communities, and delivering on our financial performance. Our success would not be possible without their tremendous effort and the care they continue to show day in and day out. And with that, I'll turn it over to Andrew.

Andrew Harrison, CFO

Well, thanks, Ben, and good morning, everyone. My comments today will focus primarily on our third quarter results, along with fourth quarter guidance. In the third quarter, we achieved our highest recorded revenue in our history at $2.8 billion. This revenue performance, which is up 18% versus 2019 on 7% less capacity, resulted in very strong unit revenue performance. Unit revenues were up 27% versus 2019, a sequential improvement versus an already exceptional second quarter despite yields having peaked from the levels seen back in June and July. Load factors also remained strong, exceeding 2019 levels every month of the quarter and coming in at 86.5% for the full quarter. Our network and revenue teams did a fantastic job partnering together to maximize revenue performance, which was also fueled by revenues generated from the commercial teams' initiatives. These factors, coupled with capacity constraints across the industry during a period of elevated demand, have translated into a strong pricing environment. Moving to product categories, our premium products continue to show strength as they have all year. First Class and Premium Class revenue were both up approximately 28% versus 2019. Paid load factors continue to exceed 2019 levels with first-class up 4 points and premium class up 9 points, both on higher average fares. The strong cash flow generation from our loyalty program has also continued throughout the year. Cash remuneration from the bank was up 37% versus the third quarter of 2019, and total loyalty revenues finished the quarter up 34% year over year, recently voted the #1 Best Airline Rewards Program by U.S. News & World Report. We believe our credit card and loyalty program offer exceptional value to our guests and provide a continued source of growth for our business. These strong results were included in our product and loyalty initiatives this year. We are tracking ahead of plan and are set to recognize approximately $135 million in incremental revenue on our long-term goal of $195 million. This initiative is one of the key reasons for our unit revenue outperformance. Turning to corporate travel trends. After taking a step up earlier this year, business travel volumes have remained around 75% to 80% recovered from 2019 levels, while revenue was approximately 10 points better than this given the yield environment. Notwithstanding a slower recovery of corporate demand across the West Coast, we believe our business recovery is in line with the majors, underscoring the improved business offering we have versus pre-COVID. Additionally, while some of our corporate partners have been slower to return to travel, we believe we are benefiting from employees at these companies taking more personal and hybrid travel as they move around and work remotely. I fully expect that we can restore 100% of business revenue. Year-to-date, we've improved our share gap from 2019 levels through our corporate distribution channels because of the increased opportunities we have from working with Amex, GBT, and joint contracting with American. Finally, our One World and international partnerships have continued their positive momentum from what we shared last quarter, sustaining a high single-digit contribution to our total coupon revenue for the quarter. As we sit today, international and business travel have not fully recovered, which we believe only offers more revenue upside from these partnerships. It will take a few more quarters to get a more complete sense of the impact, but there is no doubt that the strength of these partnerships is real and that this is an accretive revenue source for our business going forward. Looking ahead to guidance for the fourth quarter, we expect total revenue to be up 12% to 15% on capacity that is down 7% to 10% versus 2019. By a wide margin, our go-forward capacity will be most constrained in the fourth quarter as we retire 45 aircraft across our mainline and regional fleet by the end of January and execute training events in preparation for 2023 growth starting in the first quarter. This guidance implies fourth quarter unit revenue performance of approximately 24% versus 2019. Bookings remain healthy as guests continue to book holiday travel. As has been the case throughout the summer, we are booking solidly ahead of 2019 load factors through the end of the year, and we are on track to fly a record load factor for the fourth quarter. We are currently holding yields at approximately 20% higher versus Q4 of 2019. On the network side, we will continue to focus on deepening the spokes of our system as we fully restore our capacity to 2019 levels by spring and grow from there. Looking at our network, the competitive backdrop is still favorable as the West Coast remains the least recovered, with competitive capacity down over 20% versus 2019. As we move into 2023, we are looking forward to taking more MAX deliveries to upgauge and grow efficiently in some of our strongest and capacity-constrained markets such as Seattle. To wrap up, we remain in a remarkable demand environment, and we look forward to closing out a strong year of revenue performance. We've configured our business for incremental improvement and are already seeing the benefits from joining One World, our partnership with American, and our new credit card deal. More importantly, the commercial drivers we have in place are poised to unlock in an even greater way as we move into 2023. I look forward to sharing more details during our year-end call. Our $400 million of commercial initiatives is proven and tangible, and we will continue to support our revenue performance over the coming quarters and years. And with that, I'll pass it over to Shane.

Shane Tackett, CFO

Thanks, Andrew, and good morning, everyone. Our $325 million adjusted net profit this quarter reflects both the strong demand backdrop we are experiencing and the strength of Alaska's business model. We are encouraged by the return to operational stability and reliability this quarter, and we are also encouraged by the absence of the extreme COVID-related volatility that had challenged us for more than two years. Our results largely landed within previously guided ranges with no major disruptions causing significant and unanticipated revisions, which seems like a small thing, but it's actually quite refreshing. Not only did we deliver a very strong quarter operationally and financially, but as Ben mentioned, we ratified three key labor deals as well. Completing these deals is an important step in ensuring we have contracts that recognize the contributions of our people and allow us to fully focus on running a great operation, taking care of guests, and pursuing our growth and financial performance road maps. I'll briefly walk through highlights of our third quarter performance before discussing costs and labor contracts that are incorporated into our results and our fourth quarter guidance. On the back of the continued strong demand environment, we generated $174 million in cash flow from operations during the third quarter, bringing our year-to-date operating cash flow to $1.4 billion. Total liquidity, inclusive of on-hand cash and undrawn lines of credit, remains at a healthy $3.6 billion, providing us twice the cash we need to run our business and ample funds to pay for our Boeing aircraft deliveries over the next year. Our balance sheet remains strong with debt to capitalization at 49%. Debt payments during the quarter were approximately $100 million, and remaining payments for the year are $50 million. As you know, shareholder restrictions associated with our CARES funding officially rolled off at the end of September. With our strong operational and financial performance and solid balance sheet, we look forward to discussing potential shareholder returns with our Board next month. Turning to costs, they increased 19.3% in the third quarter versus 2019, 30 basis points above our guidance range. As a reminder, our practice is not to include new contract impacts in our guidance until ratified. Our new labor agreements added $35 million in costs that were not in our original guidance. Excluding these, our CASM-ex would have been up 16.8%, which would have been below the midpoint of our guidance range. Other transient cost drivers in the quarter include $30 million associated with issuing each of our employees 90,000 mileage plan miles in recognition of all of their extraordinary work during the pandemic and our 90th anniversary as an airline, and approximately $15 million in costs associated with carrying higher staffing complements relative to our flying that we believe we will need in the future. These two items represent a 3-point impact to CASM-ex in the quarter. Turning to fourth quarter guidance and our longer-term thinking into 2023, let me begin by saying that our Q4 capacity remains artificially constrained as we focus on transition training our pilots to meet our deadline for retiring Q400s and A320s in January. We will have both the added cost of these training events and fewer pilots available to fly in revenue service during the quarter and into the first quarter of next year. We expect fourth quarter capacity to be down 7% to 10% versus 2019, approximately 2 points sequentially worse versus the third quarter, where we were down 6.7%. We still expect full year capacity to be down 8% to 9% versus 2019. Our absolute costs will increase from the third to fourth quarter, entirely driven by our new labor agreements and expected strong payouts for our performance-based pay program, as we continue to expect to meet a number of our strategic and financial goals, including being among the top margin producers for the full year. We expect CASM-ex to be up 20% to 23% in the quarter, approximately 4 points of this are structural costs related to our new labor agreements. Two points are related to anticipated strong performance-based pay program payouts and lower capacity and higher staffing complements, resulting in an approximate 4-point headwind during the quarter. Turning to fuel, while oil prices have moderated somewhat over the quarter, they remain elevated, and crack spreads continue to be both elevated and volatile. We expect fuel price per gallon to be between $3.50 and $3.70 for the fourth quarter. Our hedging program is expected to provide a significant benefit this year of around $170 million. For the full year, we now expect CASM-ex to be up 19% to 20%. However, we are reiterating our full year adjusted pretax margin guidance of 6% to 9%, and we continue to expect to close the year with some of the top pretax results industry-wide. Last quarter, we outlined that we were prioritizing securing labor deals and returning to a reliable operation above other considerations as those are foundational to the long-term success and financial performance of the company. They are also the foundation of being able to deliver higher levels of productivity and cost leverage going forward. Having solidified our operational reliability, our focus will now shift to leveraging growth in 2023 to reduce unit costs across Air Group. While there will be some continued productivity and capacity drag from fleet transitions in the first half of the year, our business plan for next year will include a return to our 2019 size during the first half of 2023 and will also include a reduction in unit costs year-over-year. While we won't share specifics on 2023 guidance until our Q4 call, we are very much looking forward to leveraging the benefits of the single fleet at Alaska and Horizon, higher levels of aircraft utilization, and the significant benefits of updating from A320s to 737-9s and ultimately 737-10s. These are all consistent with the roadmap we shared at Investor Day back in March and along with our commercial roadmap that is already producing and has further upside from here. I believe we are well positioned for continued improvement in our business in 2023 and beyond. And with that, let's go to your questions.

Operator, Operator

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

Mike Linenberg, Analyst

Can you kind of give us an update now that you have both of your pilot contracts done? What have you seen on the attrition side? Has it completely sort of turned around? Where are you with respect to having an appropriate number of both check airmen and trainers? You did mention that there's going to be a lot of training as pilots move off of the Q400s, are you ready as we enter the new year?

Benito Minicucci, CEO

Mike, yes, we’re really pleased with both contracts on the regional side and the mainline side. These are really great deals for us on the attraction and retention side of the business. In terms of what we're seeing for attrition, it's a little early to tell, but early indications are we are seeing some benefit on both the regional and mainline side. So I think this is really pivotal for us. It's going to really help us long-term in terms of growth plans. In terms of Check Airman, in terms of the training output, we've seen a lot of improvement since the spring. We're producing about 65 pilots out of the schoolhouse a month with the goal being 100. We're increasing the number of Check Airman to help us improve that throughput, but we are on track right now to deliver our pilots the batches we need per month on both the regional and the mainline side. We're confident in executing that plan going forward. Anything, Joe, you want to add or—Mike, go ahead if you have a follow-up.

Operator, Operator

In the meantime, our next question comes from Duane Pfennigwerth from Evercore ISI.

Duane Pfennigwerth, Analyst

There was a lot in there in terms of guidance points. Can you just refresh us on what you said about the first half and the rate of capacity recovery in the first half? Is it sort of comprehensively a first half back to 100%? Or is that something like you'd hit in Q2?

Shane Tackett, CFO

Yes, I think it's likely to be in the middle of the first half of the year. We're still finalizing our January and February plans. But we’ll be back to 2019 size confidently sometime in the latter half of the first quarter or early second quarter. With the transition training, it will be a little bit choppy regarding how the capacity comes back online. But we're excited to get there, and we've got a lot of aircraft coming in the first half of the year that can then take us ultimately above the 2019 size, and we feel like there's demand for it through the second half of the year.

Duane Pfennigwerth, Analyst

And on that delivery stream, can you just walk us through what you expect next year and your line of sight or confidence on those deliveries just given the environment?

Nathaniel Pieper, Representative

Duane, it's Nate. We've got 35 MAX airplanes now, and we think by the end of next year, we're projecting to have 78. Boeing is obviously five miles down the road, and we meet with them weekly to understand delivery constraints, etc. We're confident they're going to deliver and give us the airplane capacity we need to hit our targets.

Operator, Operator

Our next question comes from Savi Syth from Raymond James.

Savi Syth, Analyst

Just on the follow-up on some of the pilot training and cost, and the elevated staffing costs. How much of a drag is that still in Q1? I'm guessing the pilot training costs will kind of drop off after Q1 or early Q2. How much of what size of a drop-off will there be? And then the elevated staffing, when do you see that moderating back to historical levels?

Shane Tackett, CFO

It's about—just to put context around it, for Q4, the overstaffing and transition training is about 1.5 points of our Q4 year-over-year CASM or year-over-3 CASM guide. It's likely to be similar in Q1, and then it will start to taper and be completely gone by the end of Q2.

Savi Syth, Analyst

Okay. Got it. And then just a follow-up with the Boeing deliveries and things like that. Any kind of revised thoughts on CapEx? I know the CapEx came down a little bit here in 2022. Can you give any thoughts on 2023, '24 CapEx and the financing of that?

Shane Tackett, CFO

Yes, I'll have Emily sort of update. One thing I would just say, and it's intuitive, and I know you're hearing it from everybody, but not only on aircraft, on every capital item we’re buying things are shifting to the right. I think supply chains everywhere are elongated still. New SIMs are taking a little bit longer. GSE equipment is taking longer. So things we planned to buy seem to be taking longer to get in right now, but Emily can give you some more on the totals.

Emily Halverson, Vice President of Finance

Yes. I think Shane covered it pretty well. You saw that our guide for 2022 came down about $100 million. You should expect most of that to shift into 2023. When we give our full year 2023 guidance, we'll refresh you from the numbers we gave you at Investor Day, which we originally said was around $2 billion for 2023. I expect that to go up a little bit.

Savi Syth, Analyst

Is the financing, Emily, is that debt or cash or any thoughts on the financing side?

Emily Halverson, Vice President of Finance

Savi, it's not. It will all be cash. We still continue to hold more than 2x the liquidity we need to run the airline. So the best thing we can possibly do is pay cash for airplanes.

Operator, Operator

Our next question comes from Andrew Didora from Bank of America.

Andrew Didora, Analyst

Shane, a lot to unpack on the CASM front in Q4 and for the year. Just stepping back when we think of 2022 CASM up 19% versus 2019. Can you kind of break out for us of that up? What are the kind of the one-time items that you feel like will not repeat as we move into 2023? How much of your CASM this year is just from not having your network fully restored? Just trying to get a good run rate potential for 2023 unit costs.

Shane Tackett, CFO

Yes. No, I appreciate the question, Andrew. Number one, I just want to remind folks that in terms of the updated cost guide, the only thing that's changed for the full year for us is the new labor deals. Everything else is tracking exactly as we expected it to. The biggest drag to CASM or headwind for us this year is not producing the ASMs that we had wanted to originally. We made a deliberate decision to pull down the schedule by 6, 7, or 8 points during the summer and to hold it lower during Q4 as well as we prioritize operational stability. Now that we're stable, we've got terrific completion rates. We feel really good about our staffing levels and our ability to fill new classes across every role in the company. We're ready to get much more growth-minded and begin to leverage the goodness that comes with growing and getting back to productivity next year. As a data point, I think we're still 10 points below our historical norm for productivity. I don't know that we'll get all of that back next year, but we plan to get a big chunk of that back coming next year. So that's really the biggest thing. Everything else—the only structural real change is the labor deals. I think we're unique right now in having been the first to get the mainline pilot deal done. I suspect we won't be unique for very long. So that is something the entire industry will ultimately have to do. On a relative basis, we'll be in a really good position versus everybody as we have been historically.

Andrew Didora, Analyst

Got it. Just a second question for Ben or Andrew. Having the scale that you have in your hubs in the Pacific Northwest, do you think this is a really solid driver of your overall margin performance? I know you'll never get to the share in LAX or SFO that you have in Seattle and Portland. How long do you think it will take to build out those geographies as I think as you build up there, your margin should see a tailwind as you scale up over time? Any thoughts on the timeframe of those California markets?

Unidentified Company Representative, Representative

Thanks, Andrew. I think the all I would answer that is that as we move into next year and we give better guidance on our growth, we are returning more growth back to California. We feel really good about where we are and the markets we serve. It's about frequency and depths of those markets. It's about unlocking global connections with both our OneWorld partners and American. I think we have a head of California down there. I meet with him every month, and I'm excited about the focus and discipline we have down there where traditionally as the Pacific Northwest Company, we focus a lot up here. Overall, I don't think you're going to see a material change in the scheme of things. But what we do online there, I fully expect to get better and stronger over the next few years.

Operator, Operator

Our next question comes from Dan McKenzie from Seaport Global.

Dan McKenzie, Analyst

Shane, 2023 capacity is choppy as it comes back online. Going back to an earlier comment, does that tie to a choppy earnings recovery from here? Related to this, we are seeing some of your peers lay out pretty big earnings goals in 2023. Setting aside the 11% to 13% pretax margin goal, what's your conviction that you can at least improve on your 2022 pretax margin as we move into next year?

Shane Tackett, CFO

I don't think it portends a choppy earnings recovery. A lot of the choppiness will be the base comp. On a year-over-year basis, we’ve just had so much unexpected schedule pull-down this year. Next year, we're going to compare to 2022. I think it will be fine. I don't think the earnings trajectory necessarily will follow the return of capacity trajectory. I am really confident we can improve our margins next year. We have a strong demand backdrop, and the commercial team is doing a really good job of participating in that backdrop and currently outperforming the industry. We’ve got a lot of things that we need to do on the cost side to take advantage of the strategic decisions we made around the single fleet and getting back to historical norms in productivity. Absent a major economic pullback, I think we feel really good about our ability to get improved margins next year.

Andrew Didora, Analyst

Terrific. Andrew, second question here. Turning to you, the $400 million in revenue initiatives outlined at the Investor Day, loyalty network alliances, fleet upgauging. What percentage of revenue from premium products today versus discounted leisure? How can we think about that premium revenue target as we move into 2023, given the fleet transformation?

Andrew Harrison, CFO

I think off the top of my head, both premium and first all-in coupon and upsells are $1 billion-plus businesses each just to give you a rough size of magnitude. Our challenge is always, given the strong demand, we believe, and we continue to believe in the importance of taking care of our leads and upgrades. We also recognize there is an opportunity to continue to get more out of our premium products. We're opening up new distribution channels. Most importantly, as we upgauge our fleet and we get a 25-plus percent increase in first-class seats from the transition, we still see significant upsides. We're looking at some other things, which I won't mention today. However, my expectation is we continue to show good things in the premium product space.

Operator, Operator

Our next question comes from Scott Group from Wolfe Research.

Scott Group, Analyst

Can you clarify the full impact of these pilot deals in Q4 costs? Is it from the date of ratification? I just—made a comment that the only change in CASM is this new pilot deal, but I thought you said there's a 4-point headwind from the pilot deal in Q4. The full year CASM guidance is coming up 3 points. It feels like it's more than just labor. Maybe just—I'm not sure I'm following.

Shane Tackett, CFO

Yes, the labor deals—not just the mainline pilot deal—is what we’ve been sort of speaking to. Those are fully baked into the fourth quarter ratably. So that 4-point headwind is the structural number we’re going to go forward with at this point. The real change between prior guidance and current guidance is the labor deals being incorporated. As you know, we don’t guide to labor deals while negotiating. We closed three this quarter. There was a category that went up a bit, and it was our performance-based pay as we expect to be on the better end of many of our financial targets.

Scott Group, Analyst

When we think about next year, will we have more quarters of labor? Will we have capacity up? Which should help some of the inefficient go away? When you add it all up, would you think that CASM-ex is up or down in '23 versus '22?

Shane Tackett, CFO

Yes. No, it will be down. As I said in my script, our business plan will be to have a reduction in CASM-ex in '23 versus '22.

Operator, Operator

Our next question comes from Jamie Baker from JPMorgan.

Jamie Baker, Analyst

So Shane, following up on that last question—regarding the pilot impact in the fourth quarter. There’s a look back to September 1 on wages and then the $33,000 and $22,000 bonuses for Captain and first officers, respectively. So that's in the guide. You're not going to take that as a one-time in the fourth quarter, is that correct?

Shane Tackett, CFO

So the look back to September 1 is in the third quarter result that was recorded through the P&L. The ratification bonus lump-sum payments were special in the quarter as well; they're not in the adjusted number.

Jamie Baker, Analyst

Yes. Okay, got it. So the fourth quarter guidance is clean of that. Lastly, when it does go live, do you think it's something we would be able to identify on a margin basis, but on an ex-fuel CASM basis? I'm sure it matters to you guys, and I'm sure that was a win. I'm just wondering if it rises to the level of materiality for those of us modeling the company.

Shane Tackett, CFO

Yes. I think it's something you'll probably have to ask a detailed question to us to give a specific number when we get there, but it's not going to be inconsequential, and I'm sure you'll hear us at least speak to the benefit of it once it's live and we're starting to see the benefit. It really cleans up the transitions month to month, and that can be a significant benefit, both for pilots and for the company on a productivity basis.

Operator, Operator

Our next question comes from Brandon Oglenski from Barclays.

Brandon Oglenski, Analyst

Can we go back to your analyst meeting targets? You said pretax margin is 11% to 13% long-term and above industry peers. Given that inflation is coming in a little bit higher than that, what are some of the favorable commercial offsets that you guys are envisioning here?

Andrew Harrison, CFO

Yes. I think as we've talked about all along, on the $400 million, of course, inflation has its impact certainly on credit cards. We get paid for every swipe, and those swipes are up 7% just due to inflation alone. Commercially, Shane and Ben have hit on it—I'm most excited about is how we've worked really hard to reconfigure this business. Airplanes and labor are going to set us up to operate this airline efficiently next year. The revenue goodness that comes from that and all the good things that come from that are going to reflect the struggles we've dealt with this year.

Brandon Oglenski, Analyst

I appreciate that, Andrew. Along those lines, you guys did talk about earning above your cost of capital. Obviously, that has moved higher this year. How do you think about the long-term growth of the business, Ben? Is it right to still target 4% to 8%, especially with the higher cost base and higher cost capital as well?

Shane Tackett, CFO

Ben can jump in on this. We're fortunate—the equity valuation—we’ll have to see over time what the cost of equity is. On the debt side, we still have a very, very low cost of capital. Because of our cash position, we don’t need to access capital markets anytime soon. On the debt side, we feel incredibly sound in terms of the ability to finance ourselves going forward. You know our balance sheet story—if anybody should could be investing, it’s us. There’s still a lot of demand that we feel like we can tap into in our core markets that are highly accretive in terms of returns above cost of capital, but Ben can speak to the longer-term plan.

Benito Minicucci, CEO

Yes. I think our long-term plan is still to grow until 2025. We have a great order book from Boeing, which we plan to execute. I think exactly what Shane said. I think we're on track for that and feel good about the long-term growth.

Operator, Operator

Our next question comes from Conor Cunningham from Melius Research.

Conor Cunningham, Analyst

In 2Q, you talked a fair bit about the alliance initiatives, and I don't think I heard much about that this quarter. I'd assume that from Oneworld in particular, you would see a huge benefit now that international is coming back in a major way. If you could just kind of update us where you're at with that.

Nathaniel Pieper, Representative

Conor, thanks for the question. You go back to why Alaska joined OneWorld and why we were so eager to do that. It’s to participate in international flows and to offer our guests the ability to carry their loyalty benefits and status in our mileage program. International traffic is coming back, especially in Europe, where we're seeing tangible benefits from that. Year-over-year, we're up 40% from a contribution perspective from these partnerships. The second benefit is hard to see in the P&L, keeping our most important guests within the Alaska family, whether it's on our airplanes or using Oneworld partners. We're not losing those passengers to our critical competitors here in the Pacific Northwest anymore because we’ve built a global network that we can market as our own.

Conor Cunningham, Analyst

Great. Just on the cost structure, I mean a lot of noise going on. I'm not trying to get the labor stuff. Historically, Alaska has always been about really highly productive employees. I'm curious how you get back to high productivity levels that you had historically. Is it really just a function of capacity? Or is there something else at play there?

Shane Tackett, CFO

Thanks, Conor. A couple of things that I think are unique to COVID and transient, and time will tell if there's a new normal or not. As we were re-ramping, we had to hire larger volumes than we've ever had and get those folks through training, that is all a drag on our normal staffing posture. We had higher attrition, which every airline has seen and every industry has really experienced. Those two things, I think, will stabilize over time for the economy and for us—we're in a much more stable place today. I think we go back to a normalized training complement in terms of staffing as we get through 2023 and beyond. We didn’t reduce staffing levels at all, even though we took 6, 7, or 8 points out of the system for the second half of the year. We’ve got the people we need to support a lot of this growth next year. There’s still a lot of hiring that has to happen because of attrition, but we’re in a good place. Last year, we were trying to hire just in time to meet the new capacity. Now we’re carrying more people than needed, and it’s time to grow in the ASMs and enjoy productivity benefits from that. I don’t know if we’ll get back to pre-2019 productivity, but we’ll do much better going into next year and beyond.

Benito Minicucci, CEO

I just want to add, Conor, like this company has a low-cost mindset. We’re building budgets now that will include productivity targets. We’re setting the company up for 2023. We got five labor deals done this year. We’re getting the single fleet done and behind us. Heading into 2023, this company is going back to where we were in terms of this low-cost, high-productivity, low-overhead mindset.

Operator, Operator

Our last question comes from Helane Becker from Cowen & Company.

Helane Becker, Analyst

As you think about the record revenue that you're reporting and your guidance for the fourth quarter, how are you thinking about where revenue can go over the next few years? Do you have a new target for where you think you can see that number?

Unidentified Company Representative, Representative

I think I've said on previous calls, we can learn a lot about revenue—as much as we thought we did. We learned a lot more during COVID. I think my team specifically, just the way our network and RM team work together, is at a different place. Corporate side, we’re in a different place. Our alliances and partnerships are at a different place. We know going forward that there will be a step change in costs on an absolute basis, mostly because of labor, and we're going to get that on the revenue side.

Benito Minicucci, CEO

Regardless of the revenue environment, and I do think it will change for the better. We still need to focus on what we've done so well for two decades, which is a highly efficient, low-cost operation, highly productive. Those things benefit you in both good and not-so-good revenue environments. Those are things we're getting back to, and everything Andy said makes sense.

Operator, Operator

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

Benito Minicucci, CEO

Thanks, everybody.