Earnings Call Transcript
Alaska Air Group, Inc. (ALK)
Earnings Call Transcript - ALK Q3 2021
Operator, Operator
Good morning, my name is Sia, and I will be the conference Operator today. At this time, I would like to welcome everyone to the Alaska Air Group 2021 Third Quarter Earnings Release Conference Call. Today's call is being recorded, and will be accessible for future playback at alaskaair.com. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session for analysts. Thank you. I will now turn the call over to Alaska Air Group's Managing Director of Investor Relations, Emily Halverson. Please go ahead.
Emily Halverson, Managing Director of Investor Relations
Thank you, Sia, and good morning. Thanks for joining us for our third quarter 2021 Earnings call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you will hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q and A portion of our call. This morning, Air Group reported third quarter GAAP net income of $194 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group recorded adjusted net income of $187 million. Pre-tax margins were 12%, a 15-point improvement from the prior quarter. This marks our first profitable quarter on an adjusted basis since the pandemic began. 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 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. Ben, over to you.
Benito Minicucci, CEO
Thanks, Emily. And good morning, everyone. Air Group's $187 million adjusted net income marks an inflection point on our path to recovery. During our last earnings call, we forecasted a double-digit third-quarter pre-tax margin. And despite the impact of the Delta COVID variant, we delivered. A 12% pre-tax margin solidly leads the industry and was just 6 points shy of our Q3 2019 margin. I'm proud of how our company is emerging strong from the pandemic, and I'm looking forward to when the recovery is stable and less likely to undergo demand shocks due to variants. Our approach from the beginning has been deliberate, scaling our business back in a measured way, leveraging our strong balance sheet, and running our operations to produce consistent industry-leading financial performance, no matter what the external circumstances. Our third-quarter results reflect the strength of the summer season, with pent-up leisure demand bringing passengers back to the skies. For the 4th of July and Labor Day, passenger numbers and plane usage approached 2019 levels. Even with the dampening impact that the Delta variant had on demand in August and beyond, our third-quarter load factor came in at 80% and total revenue was down just 18% on a year-over-year basis, a 15-point improvement sequentially from the second quarter. Our unit costs were up 9% in the third quarter, beating the better end of our guidance range. The solid cost execution reflects incremental progress towards our productivity goals as passengers per FTE increased 6% sequentially, falling just 12 points below 2019 levels for the quarter. Shane will provide more details about our cost performance and pressures we're seeing in a few cost categories. Looking forward, our long-term approach to recovery remains intact. Despite the transient choppiness we're experiencing from the Delta variant, our plan is still to return to our pre-COVID size no later than next summer and then to grow from there. We anticipate recovery will continue to be volatile at times as we learn to live with COVID, and until demand ultimately normalizes. Our job is to deliver consistently strong financial and operational performance, no matter what course the recovery takes. Q3 has shown us that when demand does come back, our business model is tuned for success. Looking ahead to the fourth quarter, we plan to increase our capacity to 13% to 16% below Q4 of 2019, and given the dampening effect of the Delta variant, we expect to deliver breakeven to slightly positive pre-tax margins. If the pace of the recovery accelerates from here, there will be upside to our expectations. This quarter's results were only possible because of the hard work of our frontline employees and crews. Their dedication to delivering an efficient operation with our culture of kindness and caring is at the heart of our success. I want to thank them for their efforts and for putting Air Group amongst the top performers in the industry in on-time arrivals and completion rates once again this quarter. Our guests have shown their appreciation for that great service as well. Guest satisfaction scores have exceeded internal targets every month so far in 2021, sustaining operational performance with high guest satisfaction is a remarkable achievement given how complex re-ramping our operations has proven to be. Several quarters of improving demand and financial performance have provided the stability necessary to invest in repairing our balance sheet. Year-to-date, we have made gross debt repayments of $1.2 billion, driving our debt-to-capitalization ratio down 10 points from year-end 2020 to 51% and moving within reach of our sweet spot for leverage between 40% to 50%. Having deleveraged so quickly from our pandemic borrowings makes clear to me that we made the right decision in not diluting shareholders during the depths of the crisis, even though that is not yet something the market is rewarding us for. We're making progress each quarter on our path to a single fleet. This quarter we took delivery of two more 737-9 aircraft and also exercised options for 12 incremental firm airplanes to be delivered in 2023 and 2024. In total, we will have 93 737-9 aircraft in our fleet by 2024 with options for 52 additional airplanes. This fleet order not only replaces our departing Airbus 319 and 320 fleet but positions us for significant growth when demand comes back, which we expect will be in the back half of 2022. Importantly, we're in a financial position to take these deliveries while also maintaining our strong balance sheet. To close, I'm optimistic about the foundation we have laid to prepare for Air Group's return to growth and profitability. We have a fantastic Boeing order book creating flexibility for significant growth through 2025, a low-cost structure that allows us to compete with low fares supported by a strong balance sheet, a great onboard product meshed with industry-leading customer service and operational performance, a powerful domestic West Coast network supported by the OneWorld Alliance, a brand with fierce customer loyalty behind it, and most importantly, a culture rooted in kindness and caring. I'd like to thank our people one more time for a great quarter. And with that, I will turn it over to Andrew.
Andrew Harrison, CRO
Thanks, Ben, and good morning, everyone. Our comments today will focus on third-quarter performance, recent demand trends, progress with our alliances, and revenue guidance for the fourth quarter. Our third-quarter revenues came in at $1.9 billion, down 18% versus 2019. This was on flown capacity that was also down approximately 18%, resulting in near flat unit revenues. We were very happy with this result, especially the impact of the Delta variant started showing up in a meaningful way at the end of July. Our revenue performance reflects a 15-point sequential improvement from last quarter, while capacity was just 3.5 points higher; load factor sequentially increased 3 points to 80%, but the bigger revenue driver was strong sequential yields, which improved 13 points from last quarter to up 4% versus 2019. On a monthly basis, loads were strongest in July at approximately 88%, then deteriorated to 81% in August, and bottomed at 72% in September. In the same timeframe, yield deteriorated about 5 points from up 3.6% in July to down 1.5% in September, both on a year-over-two basis. These negative trends were all driven by the emergence of the Delta variant. Geographically, Hawaii represents 16% of our capacity and was our weakest performing region during the quarter given the travel advisories for the state, which damaged demand for Hawaii. In fact, the impact to our system results was to reduce RASM by 2.5 points. Considering the headwinds in Hawaii, along with the broader impact of the Delta variant, I would characterize our Q3 revenue performance as strong. Our commercial team did a fantastic job managing revenue in a volatile demand environment. As I'll expand on momentarily, the consequences from the Delta variant have not yet dissipated, and we're still working to build back Q4 bookings that were lost from the fourth COVID wave, given that occurred during the important periods of building Q4 traffic. But focusing on third-quarter results for a moment longer, there are two bright spots that have steadily bucked trends for several quarters now: premium product performance and our loyalty program. On the premium product side, this quarter's paid load factor in our first-class cabin was 3 points over 2019, and the premium class cabin exceeded 2019 by 9 points. We continue to see strong demand for our premium products, and we believe this will only continue as business demand returns along with international demand associated with our entry into OneWorld. Regarding our loyalty program, this quarter we received the highest level of cash compensation in our airline's history, which was up 7% from the same quarter in 2019. Our loyalty program is one of our most durable competitive advantages, and we are squarely focused on maintaining and improving this momentum over the coming quarters. Now, looking at our network, it's been our priority throughout the recovery to quickly rebuild Seattle and restore the Pacific Northwest capacity. This approach is producing results as is evident from our revenue performance this quarter. We're also seizing opportunities to capitalize on demand shifts as they arise. Reflecting on the year, we've added 30 new markets and only discontinued 3. In short, choices for our guests, when combined with our strong relationship with American, have improved significantly. Today, we are flying approximately 85% of our pre-COVID network. Now, Seattle hub capacity is fully restored with capacity above 2019 while overall Pacific Northwest flying is quickly approaching 2019 levels. California's recovery remains slower as we flew 65% of 2019 capacity during the quarter. I still expect that by the summer of next year, our California flying will be back to pre-pandemic levels. As part of the California rebuild, we've recently announced that we're expanding our service from the Bay Area to Mexico, positioning Alaska with more nonstop flights to Mexico from the West Coast than any other U.S. carrier. Now turning to the future, the current revenue environment has certainly been challenging, but as I mentioned last call, my team is focused on building a strong commercial engine that will serve this company for a long time. One of the ways we'll do this is by leveraging the unique benefits available to us as part of OneWorld. I'd like to give a shout out to the alliance team, who have been working tirelessly to establish robust commercial agreements that will unlock flexibility and benefits for our guests. So far in 2021, we've added 195 incremental codeshare routes with 5 OneWorld partners, increasing our codeshare portfolio by 43%. This figure includes our recently announced agreements with Iberia and Qatar. In very short order, we've seen Qatar become one of our top international partners as they efficiently connect our network with their nonstop services between Seattle, San Francisco, and Los Angeles with their global hub in Doha. The Seattle-Doha nonstop, which was launched in January, has been especially strong. This success is an indication Alaska guests value our global portfolio and are eager to see their responses to American's upcoming Seattle route launches to Shanghai and Bangalore in 2022. With American and our OneWorld partners, our potential to capture international traffic out of Seattle and California is significant. OneWorld and our partnership with American have also opened the door to greater access to corporate travel, and we believe Air Group is uniquely positioned to capture more of our pre-COVID corporate market share with the tools we are putting in place. On September 1, we activated, for the first time, our preferred partner status with American Express GBT, enabling greater access to more corporate guests and quality traffic. I'm really looking forward to sharing more details with you about these new initiatives, as well as many others in the spring. Now, turning to the fourth-quarter guidance, although the Delta variant surge looks to be behind us, its impact on bookings has left an unfavorable imprint on our Q4 expectations. Bookings deteriorated from down 20% in July to down 35% in August and flirted with down 50% on a few booking days during the peak of the surge. While that rate of recovery since the peak has been slower than we experienced after the last surge this spring, over the last 7 days, we've seen bookings recover to down 10% year-over-two. Ultimately, we believe the Delta variant has reduced fourth-quarter revenues by approximately $200 million. Although the trajectory of bookings today has improved, it is not enough to fully make up for what was lost in Q4. With this as our backdrop, we expect Q4 revenues to be down 16% to 19% on a year-over-year basis. However, our assumptions reflect weaker performance in October with total revenue down approximately 25%. So just looking at November and December, revenue is expected to be down between 13% and 16%, right in line with our capacity reduction. From a unit revenue perspective, October RASM is shaping up to be down about 10% versus 2019, while November and December could improve to nearly flat versus 2019. Filling our planes is a top priority, but we're using discounts cautiously with an eye on preserving yields, especially in a rising fuel environment. While we aren't making any predictions about what awaits us around the corner, improving rates of vaccination, availability of booster shots, the expected near-term approval for vaccines for children, and the opening of international borders could have a positive impact on recovery and the economy. However the recovery unfolds, I'm very optimistic that our commercial model will deliver relative outperformance as we saw in Q3 and that our work to date has positioned us well. As Ben just shared, we expect our efforts to lead to a breakeven quarter with upside potential. And with that, I'll pass it to Shane.
Shane Tackett, CFO
Thank you, Andrew, and good morning, everyone. As we highlighted today, another quarter of sequential improvement and strong margins underscores the durability of Alaska's business model. Underlying our industry-leading results were July and August performance that came within about 2 points of 2019 margin levels. I'm impressed by our team's execution and the results they delivered in such an unpredictable environment. In my commentary today, I'll provide insights on these results, our cash flows and liquidity, cost performance, and our expectations going forward. I'll begin with cash flows and liquidity. We ended the quarter with $3.6 billion in total liquidity, inclusive of on-hand cash and undrawn lines of credit. This is down from $4.4 billion of total liquidity in June, as we paid down nearly $550 million in debt and made a $100 million voluntary pension contribution. Debt repayment included retiring our $425 million 364-day loan, and our pension contribution brings our funded status to 94%, and also allowed us to capture a one-time permanent tax benefit of $14 million. Q3 cash flows from operations were essentially breakeven, excluding pension funding. The sequential decline from Q2 to Q3 was expected due to the absence of PFP grant inflows this quarter and the normal seasonal drawdown of ATL. However, as Andrew described in his commentary, the Delta variant stalled otherwise strong demand recovery in the quarter, and as a result, the ATL drawdown was higher than originally forecast. Fourth-quarter cash flows from operations are expected to be between negative $100 million and $0 exclusive of tax refunds and payments, which we expect to net to a positive $100 million in the quarter, depending on when we receive our anticipated 2020 tax refund. This forecast factors in the reduced cash intakes due to the impact on bookings of the Delta variant. Planned debt service for the remainder of the year is approximately $120 million, and we have no plans for further pre-payments through the end of the year. With this quarter's debt retirements, our debt-to-cap has dropped to 51%, placing us just shy of our intended range as Ben shared. Today, our outstanding debt bears a relatively low weighted average effective rate of 3.3% and our 2022 debt service is very manageable at about $375 million for the year, roughly a quarter that of 2021. Moving beyond 2022, annual debt service is in the range of $250 to $400 million. For the sustained return to profitability, I expect our net debt to EBITDA levels to move to approximately 2 times or less in 2022. Our liquidity and balance sheet are in great shape, and we plan to leverage both as we fund our fleet order and eventually look forward to reactivating shareholder distributions, which we can do towards the end of next year. As of now, I expect our total liquidity to move to approximately $2.5 billion in 2022. Moving to costs, I will touch briefly on our Q3 performance and then focus on our cost trajectory over the next several months as we prepare for a return to growth. This quarter, non-fuel costs were $1.3 billion with unit costs up 9.3% versus 2019, better than the guidance we issued in September. Our teams have continued to do a superb job meeting their internal cost plans, and we also saw lower-than-expected medical costs in the quarter. Fuel costs rose again this quarter to $2.05 per gallon, up approximately 25% from where we started the year. With crude at $70 per barrel for the quarter, our fuel hedges provided a $21 million benefit or $0.11 per gallon. We currently have 50% of our planned fuel consumption hedged for the next 6 months at an average strike price of $61 in Q4 and $69 in Q1. Given the current spot prices of oil, we expect to continue to realize hedge benefits in Q4 and into 2022. Meaning we also expect to see fuel cost headwinds impact absolute margin performance in the near-term. Looking forward, we continue to make steady progress on getting costs back to pre-COVID levels. That remains an expectation and priority of the leadership team. Our progression through 2021 has been solid with mainline CASM-X compared to the same month in 2019, up 19% in June, up 7% in September, and likely to be up 4% to 5% in December. Capacity in December compared to 2019 levels is expected to still be down 13%. Capacity pressure is more acute for our Horizon operations, as aggressive pilot hiring across the industry is expected to lead to abnormal attrition levels, creating lower capacity capability and consequently, also pressuring their unit costs in the near-term. We're also seeing modest pressure in entry-level wages, which we believe is both an industry and general trend in the economy at large, and wage adjustments in this category are adding approximately $7 million to the fourth quarter. Additionally, as we ramp to 100% of pre-COVID capacity, we are onboarding more employees earlier than we normally would, given our training throughput capacity. Costs associated with additional training and carrying employees for the quarter are approximately $5 million. The costs associated with ramping capacity will normalize by next summer. In 2022, we will continue to reduce unit costs as capacity returns. Doing so is not without its challenges, as we have two particular headwinds to offset. One is airport-related costs, as our airport partners run through CARES grants and return to fully charging airlines for both operations and capital expenses. The other area is a step-up in transition costs related to returning our Airbus fleet to lessors. The cost of returning aircraft is fully contemplated in our decision to return to a single fleet, and the end economics of doing so are strongly favorable long-term. As we step into the return window, we will be recognizing these expenses through the P&L in earnest. I expect the largest impact in 2022 with a significant step-down from there into 2023 and a final one down in 2024, which will provide a nice tailwind to our CASM-X trajectory as we exit 2022 and move through 2023. Notwithstanding the headwinds, we will emerge as an airline with a cost structure equal to or better than 2019 in short order. Our cost restructuring targets are intact, and this quarter's results reflect increased utilization, our realization of productivity savings, as well as the efficiencies of now 7 737-9 aircraft flying for our mainline fleet. As a result of the headwinds and tailwinds I've described, our expectations for Q4 unit costs are that they will be up 7% to 9% versus 2019 on roughly 15% lower capacity. To close, I would just say again that our underlying business model is strong. While demand is choppy, and we regret that we don't get to have the fourth quarter that we think we were set up to have because of the Delta variant, we're confident that when reasonably strong demand returns, we are poised to deliver strong financial performance. We are looking forward to re-scaling to our pre-COVID size and demand allowing growth from there. As we do this, we will be continuing to deliver on our cost restructuring and fleet transition and unlocking commercial levers to drive additional value to our bottom line. And with that, let's go to your questions.
Operator, Operator
At this time, I would like to invite analysts who would like to ask a question to please do so. We'll pause for just a moment to compile the Q&A roster. And the first question will come from Savi Syth with Raymond James. Please go ahead.
Savi Syth, Analyst
Hi, good morning, everyone. As you talk about rebuilding the network here, I was just curious; there are big airports: Seattle, Portland, San Francisco, and LA. As you build those back, what is the strategy behind those airports, how you operate them, and how does that change post-crisis versus before?
Andrew Harrison, CRO
Hi Savi. Good morning, this is Andrew. I wouldn't say it's changed, but we have actually made some refinements and tweaks. Obviously, Seattle, we serve everywhere from there and Portland to a lesser extent. I think some of the pivots you've seen us make, especially in Los Angeles, you're going to see a little more leisure flying for us out of there, and we do very, very well. And in San Francisco, we've built out a pretty good network, and what you're going to see us focus more on is the largest OND out of there, making sure we drive the top 20, 25 business markets. And so that's where we're landing on all of this.
Savi Syth, Analyst
Got it. And then, just Andrew, perhaps if I could follow up on that a little bit more on the other focus cities that you've tried to build in the past, such as San Diego, Salt Lake City, Boise. How do those fit in within the network, and any kind of learnings in the past trying to build those out?
Andrew Harrison, CRO
Yeah, especially on the secondary cities, we've done a lot of traffic moves from the Pacific Northwest to California. We used to flow that traffic over our major hubs, and given the demand and loyalty strength in the evolution of those markets, we’re finding nonstop service to be very viable there. I think San Jose is part of the Bay Area, and San Diego is also very important to us, all about loyalty as well and making sure we've got utility for all of our guests. So while we focus mainly on Seattle, Portland, San Francisco, and Los Angeles, the Boise and secondary cities will always be very important to us, and we’re going to continue to grow those over time.
Savi Syth, Analyst
Makes sense. And just one last clarification, where is business demand these days?
Andrew Harrison, CRO
Business demand is coming back. In fact, we've had the best day, or rather, best week I should say recently versus the previous one in the pandemic, which was just before summer. So what we're seeing is an increased steady forward momentum of business demand starting to return.
Savi Syth, Analyst
Okay. Got it. Thank you.
Andrew Didora, Analyst
Hi. Good morning, everyone. Thanks for the questions. I have a question for Andrew. I know industry capacity plans are pretty fluid here, but you've benefited from below-average competitive capacity growth through much of the pandemic, and I know this has been helping all the yield performance that you talked about earlier. But we do see some of this capacity picking up, particularly into the first quarter based on schedules. Can you maybe talk about what you're seeing in the competitive environment and how you see it unfolding over the next quarter or two?
Andrew Harrison, CRO
We look at the West Coast, Andrew, and we've looked at how the competitive environment goes. I think a little bit the West Coast is being subjected to weaker demand and risks compared to the rest of the country. So even though you may see that competitive capacity is not as high compared to others, I do think when you think about California specifically, demand has been stopped there. But at the end of the day, we feel really good about our network mix and how it's structured and we feel really good. As you can see by the third quarter, our network is configured for good performance.
Andrew Didora, Analyst
Shane and maybe Ben, I mean, Shane, you mentioned in your prepared remarks, and I think you’re the first airline to say this: you were looking forward to shareholder returns this time next year? Your balance sheet can certainly handle it, but I guess Shane or Ben, when you're allowed, when you think about your capital return policy, do you think it will be as high up on your priority list as it was pre-pandemic? And the way you think about it now, do you think it'll be a little bit more focused on sort of a buyback or a dividend once you're allowed to? And thanks for the questions.
Shane Tackett, CFO
Andrew, I think our thinking here is that we want to put ourselves into a position to be able to do shareholder returns. We're not committing to any particular timeframe today to do that. We'll obviously get together with our Board and make decisions about what the best avenue is and at what levels. But I don't think a lot about our capital deployment and capital allocation philosophy has changed. We do have to understand what our go-forward environment with COVID looks like and how stable demand and returns are. But I think our philosophy pre-pandemic is going to be very consistent with the one we have coming out in terms of shareholder distribution returns. Our first priority is making sure we have a stable business, enough liquidity on hand to manage the ups and downs and to grow the airline. But shareholder returns are also super important to us.
Andrew Didora, Analyst
Thank you.
Jamie Baker, Analyst
Hey, good morning, everybody. So you echoed what other airlines have said this season about premium demand. To the extent that this phenomenon is permanent and growing, do you need to do anything differently to continue capitalizing on it, or are you optimized for this mix demand leg up, however you want to describe it?
Andrew Harrison, CRO
Hi, Jamie. Our cabins, I believe, are very well configured with first-class and premium class, so I don't foresee any product changes. But to your point, we are definitely going to focus on how we book business traffic in that cabin historically. I think we've probably denied business traffic in that cabin historically, and I think we're going to get more fine-tuned on that. I think that would be the largest change. And then the other part is just making sure that our network—we're going to be a little bit more disciplined about timing our flights for that business demand. I see just increased demand coming for that premium cabin going forward.
Jamie Baker, Analyst
Okay. That's helpful. And second, and I apologize for pivoting to the model. Did you say the Delta variant sapped fourth-quarter revenue by $200 million? Was that right?
Andrew Harrison, CRO
That's correct.
Jamie Baker, Analyst
Okay. It's on the tape that it was $400 million, so I just wanted to make sure I wasn't wrong. So even if we allow for some variable costs associated with that, if we were to just tack that $200 million to today's guide, it implies that you'd be back in the double-digit pre-tax margin territory in the fourth quarter, and I know that's where the fourth-quarter plan was in July because you said so, but that was on cheaper fuels. So I guess my question is whether, well one, is there anything wrong with my math? Hopefully not. But if not, it feels like your ex-Delta fourth-quarter plan actually strengthened over the summer despite the rise in fuel. Is that a fair, albeit mangled interpretation?
Shane Tackett, CFO
Hey Jamie, the one thing you can never do is go backwards and redo things over again and know what happens if there wasn't a variant. But I think what we had going for us were very strong load factor builds. When we were sitting on load factor builds that were above 2019 levels at almost every forward month and on yields that were above 2019 levels in every single month. So yes, we were feeling quite optimistic if that demand pattern played out and wasn't interrupted, then we could've had a really strong fourth quarter. Hard to exactly know if strengthened over between that and now is the right way to think about it. But yeah, it would've been a strong quarter, for sure.
Benito Minicucci, CEO
I think, Jamie, and we said in our prepared statements, this is why we're confident about our business model. I think it's a business model that when recovery comes back, that we're going to produce strong returns and it just goes down to score that. But, I think you had a follow-up?
Jamie Baker, Analyst
Yes. Sorry. Go ahead. Just a real quick labor clarification, do I recall correctly that you are the only airline of size in the U.S. that still doesn't have a preferential bidding system? Is that right?
Shane Tackett, CFO
We don't with our pilot group; we do, however, with our flight attendant group. That is true, Jamie.
Benito Minicucci, CEO
Thanks, Jamie.
Ravi Shanker, Analyst
Thanks. Morning all. If I can just follow up on the last two questions. Are you guys surprised at all that the mix is so strong coming out of the pandemic? Again is that something that you had expected given the people's preference to travel and then the front of the plane given everything that's going on, or is that a surprise? And second, on the competitive side, just given the concentration of travel are you surprised at all that the industry has pulled back on traveling to certain lanes and it's not a free-for-all out there?
Andrew Harrison, CRO
Hey, Ravi. I can't speak for the rest of the industry, but I can speak for Alaska. Knowing business demand was where it was, we materially reduced space in the front of the cabin. Our first-class fares were coming down, but they did weigh made up plus much on the volume side. So I feel the team did an outstanding job at lowering fares and driving net incremental value through volume. So that's part of what we're going to have to measure going forward, but just to be clear, who doesn't want to travel in first or premium class? I mean, I don't believe there's anybody. So it's a matter of what price and volume. So there's demand, that's the first place people want to sit. And so we've been working well there. I think on the industry capacity again, I don't know if you all look at the network and the system. We look at the west coast and as I look across, you see a lot of adjustments by other carriers coming down closer in. I think one of the things that I'm particularly proud of, especially with our operations folks and Ben's leadership here, is that we have not been volatile; adding back, reducing, adding back, reducing capacity. We've been on a steady path that has allowed for really good cost control, really good selling and inventory, and minimal guest disruption. So I feel like all of that has been working for us.
Ravi Shanker, Analyst
If I may add something.
Benito Minicucci, CEO
Go ahead. Go ahead.
Ravi Shanker, Analyst
No, sorry. Go ahead.
Benito Minicucci, CEO
I was going to say, just with leisure travel, I think with this COVID environment, they are looking for more space and to have more comfort when they fly, and we have competitive fares up in our premium class and first-class. I do think we're seeing the benefit of that. But sorry, go ahead, you had another question.
Ravi Shanker, Analyst
Yes, I would like to follow up on that specific point. How do we approach this as we head into 2022 and 2023? Will you aim to maintain this elevated mix of premium cabin at current fares, or will you consider lowering fares to previous levels, even if that results in a shift back towards the main cabin?
Shane Tackett, CFO
The other thing I'll comment on that is it's not so much the fares that we're focused on, but of course, as business travel returns, as our road warriors return and loyalty returns, we are still committed to having robust opportunity for our guests to upgrade into the first-class cabin. So we're going to be balancing fares with first-class upgrade occupancy rates. And that's going to be our challenge going forward, but it's a good problem to have.
Constance Von Muehlen, COO
Thanks for the question, Duane. I think as our performance has shown in the third quarter, we've really delivered among the top performers in the industry despite all the challenges we have. That is for two reasons. One, you mentioned, which is a disciplined return to capacity, and secondly, a really resilient, proactive team in solving all the many challenges we have. I think those are true across the industry. I think our Mehen leadership team has done a great job addressing those as we see them. I'm confident we'll continue to address that through the Mehen fourth quarter and beyond.
Duane Pfennigwerth, Analyst
Fair. All very fair comments which we agree with. I guess the question is, I guess the effort per hire or to the extent you're trying to acquire airport staffing, is that getting any easier or is it just as difficult as it was?
Constance Von Muehlen, COO
I would say it's consistently difficult. Perhaps the acquisition is one thing, and then the retention piece, and the consistent staffing on every day continues to be a challenge. I think that's true across the industry, so we do put an inordinate amount of effort into that relative to what we may have done in 2019.
Shane Tackett, CFO
Yeah Duane, let me just quickly add because we want to tighten our answers in real quick. It'll be a thing— I think everybody is dealing with it, certainly in the Seattle region. It's been tough to get entry-level workers. Just that pool of labor hasn't been what it used to be. But I will say it's improving. I think as we've gotten through the summer and into the fall, our need for staffing is a little bit less, and I think the labor pool is starting to expand a bit. So I think that things are going in the right direction. But one thing I know confidence would also say is we still appreciate the employees who came to work every single day, put everything they had into the operation, worked tons of overtime to keep our guests moving, and really minimize operational disruption—they did a phenomenal job.
Duane Pfennigwerth, Analyst
That's super helpful. And then just for my follow-up, I'm sorry if you mentioned this. But how are you thinking about CapEx in '22 and '23? And thanks again.
Shane Tackett, CFO
CapEx right now, Duane, we're looking at about $1.5 billion for 2022 with airplanes, obviously in the midst of our fleet growth, and then a little bit north of that in 2023 as well. Again, based on our liquidity forecast, and based on our conservative pre-tax margin forecast, the plan is to pay cash for all of those airplanes and still be well above our minimum liquidity value at year-end 2023.
Mike Linenberg, Analyst
Good morning, everyone. I have two questions. Shane, you mentioned the challenge related to redelivering the Airbus airplanes, specifically for 2022 and 2023. How many airplanes are we talking about? Would the cost be in the range of one to two million per airplane? I'm trying to gauge the size of this cost challenge that should resolve in a few years.
Andrew Harrison, CRO
Thanks, Mike. It's well north of that. These are full engine restorations and airplane restorations as a condition of the lease. What we would've had to do if we had extended the leases, or really all of these aircraft are due for heavy maintenance cycles. The number of aircraft, specifically, by— I think Chris might have—
Shane Tackett, CFO
Yeah. So we've got about 24 operating Airbus A320s that will all be gone by the end of 2023. So that's really the number you're looking at, and to change the point, these are—we've had some history of returning these. These are anywhere between $6 to $12 million a tail on the return cost. And so that's the bubble you're looking at for the next couple of years. Mike, we've got maintenance incurred for a lot of this, and that's the P&L expense portion.
Michael Linenberg, Analyst
Now that's actually super helpful, because it gives us a good sense of what's going to go away and then just to my second question, I guess to Andrew, there's been some comments about some qualitative commentary about your relationship with American and OneWorld. Interestingly, American on their call, they said that the benefit they were getting from you and JetBlue was accretive to revenue thus far by I think they threw out a half to 1%. They said something on the order of about 750,000 passengers. And obviously, we'd have to split and figure out what's your piece and what's JetBlue's piece. But the fact is they're five times bigger than you are. So I'm curious if anything that you can throw out as it relates to what you've seen on the revenue front. Is it a couple of percentage points, some accretion to revenue since it's been up and running? Any quantitative would be helpful. Thank you.
Andrew Harrison, CRO
Yeah. That's a great question. And we're not probably prepared to make a whole lot of comments here, other than to say that we're going to unpack this for you on Investor Day. We’re going to give you a lot more transparency then, and that will be a little later.
Benito Minicucci, CEO
We're seeing a lot of the value of this partnership with American and OneWorld. Again, it's not totally a lot because of COVID, but we do see upside and will give you more details on Investor Day.
Michael Linenberg, Analyst
And when is Investor Day by the way?
Emily Halverson, Managing Director of Investor Relations
It's going to be in March.
Michael Linenberg, Analyst
Very good.
Emily Halverson, Managing Director of Investor Relations
The invites will be sent out mid-March.
Benito Minicucci, CEO
We promise it won't be raining.
Helane Becker, Analyst
Thank you, Operator. Hello, everyone. I appreciate your time. I have a couple of questions. First, I want to discuss ESG. You’ve made several changes to the board over the past few years. As you reflect on this, do you feel the board is where you want it to be? Are there any upcoming retirements that would allow for more diversity, or are you satisfied with the current composition? Secondly, I’d like to ask about Alaska Star Ventures. What is its primary focus? Are you aiming for SAF acquisition, or do you see other impacts? Thank you.
Kyle, ESG Representative
Good morning, I'll take the first question and Diana will take the second, I think. Our board is fantastic, and we just added a new member bringing us to 12 independent directors. Adrienne Lofton just joined last week, bringing really fantastic marketing and brand experience to our board. I'll also note, I think currently we're at 50% gender diversity and about 40% plus ethnic diversity. We're super proud of that, and we're very happy with the board composition right now.
Diana, ESG Representative
Yeah. Thanks for asking. So specifically, Alaska Star Ventures is currently focused on the five parts of our path to net zero, which we announced earlier this year. So just briefly, those are operational efficiency, the fleet evolution, which our interest is not focused on but sustainably, synfuel novel propulsion, and incredible carbon offsets to close the gap to our target. So we're looking specifically for technologies or in the case of our first investment, specifically a sector-focused fund, that can help us to accelerate those paths and bring technology into the system that can help us do that in the next 3 to 5 years.
Helane Becker, Analyst
That's very helpful. Thank you very much. I just have a question. Maybe Dan, for you, I don't want you to share anything you can't regarding the pilot negotiations. But what's the status of those?
Benito Minicucci, CEO
Helane, first, I want to state we have a fantastic group of pilots. They're highly skilled professionals that keep us safe and on-time, and we value their contributions; they do a great job for us. We've got some sticky issues we're working our way through, and we've asked the National Mediation Board for some help. We're comfortable we are going to get to a deal. We have a history of getting deals with our unions, and so we know we're going to get there. What I'll say is we have an exciting future for our pilots; you heard our growth plans, we plan to grow the airline a lot over the next 3 to 4 years, so this will be a phenomenal place for our pilots to spend their careers. So we'll get there. I appreciate the question.
Conor Cunningham, Analyst
Hey, everyone. Thank you for the time. I might be wrong, but I think your credit card agreement is up soon. The market's been reset a little with a recent agreement from another carrier. I was wondering if you could just provide some details around how many signups you've had since closing on the Virgin America acquisition, or maybe just how spend has evolved on the card over the past couple of years?
Shane Tackett, CFO
Hi, Conor. We've been—we've still got a little bit of time on our agreement; that said, we are very aware of other agreements done, and we’re working very closely with Bank of America, who we have a 30-year relationship with. Things are changing, and they're working to change with us. I think as I said in my prepared remarks, since the team, we've got a compounded annual growth rate of 9% on both our portfolio of members and spend. So this program has done nothing but deliver and return, as I also shared, we've had the highest cash receipts we've ever had. More to come there, and as we get into '22, we've got a lot of exciting things planned that I think are only going to fuel growth in our loyalty program.
Conor Cunningham, Analyst
Okay. Great. And then Ben, in the past you've talked about making Alaska a national brand, and I assume that would involve some further investment in markets that are off the West Coast. I saw that you put in for slots at Newark, and clearly, that would be big for the brand in the Northeast. Just wondering how you made benchmark that success of just brand awareness outside of the West Coast, outside of where you guys are already pretty dominant. Thanks for the time.
Benito Minicucci, CEO
Yeah. No, thanks, Conor. This is a big strategic initiative for us. It won't just be a 6-month or 12-month initiative. This will span the next 3 to 4 years. It's really linked to what Andrew was saying about how we build back our network from 80% to 100% and growth from there. We will first focus on the West Coast and ensure people understand who Alaska is, the strength we bring with our network, brand, loyalty, and product. So we’re going to focus first on the West Coast and then move east from there.
Catherine O’Brien, Analyst
Hey, everyone. Thanks for the time. So it sounds like you laid out a path to have capacity flat to up for 2022. I mean, I guess, correct me if I'm wrong, and then from earlier comments, it sounds like in that scenario, we should be expecting unit costs down versus 2019. I guess, is anything wrong there? And if that's right, are there any larger tailwinds you want to flag? Thanks.
Shane Tackett, CFO
Thanks, Katy. I want to stop short of giving guidance for next year because we don't want to be doing that today. We do totally recognize that there's an appetite to understand what our view on 2022 capacity and costs is for the full year. I think when we have our earnings call in January, we'll strongly consider giving full-year guidance instead of just quarterly guidance. But the essential thing is to get back to pre-COVID size by summer of next year, and we've got planes coming in the second half that could allow us to grow if the demand is there and we're configured to do it. As we go along that capacity trajectory, we see our unit costs ultimately step back to hopefully flat and then down, but I don't want to commit to a timing for that right now.
Catherine O’Brien, Analyst
Okay, that's fair enough. And then it sounds like you've already locked in either some new contracts with corporate clients or perhaps have made adjustments that give you greater wallet share with existing accounts that have recurred since the onset of the pandemic with your American and OneWorld partners. Can you help us frame the upside you have on the books as of now? If you were to assume that all else equals your pre-pandemic corporate volumes returned to 100%, I'm sure you can't give an exact number, but just is it a 110? Is it a 150? This really high-level will be helpful. Thanks, guys.
Andrew Harrison, CRO
Thanks. I appreciate the question. But what I'll say is that, you know how these things go. They have RFPs that cycle through every few years. We’re rapidly in the process of changing our agreements for joint contracting, RFPs planned in full. We've found an overwhelming engagement and we're also being more competitive on business and working with big TMCs like GBT. That's only going to help us propel that more. So I think that's what I'll share. And again, on Investor Day, we will share more about our strategy around that.
Myers Walton, Analyst
Thanks. Morning or afternoon. I was wondering, maybe I'll follow up on Katy's question, and it's a little bit cart before the horse. But is it reasonable to think '22 is a double-digit margin year? And maybe some of the frustration you sensed the market not recognizing your performance is simply that everybody is losing money, losing less isn't necessarily a big deal. But maybe the market isn't differentiating your uniquely higher gearing on the volume as it drops through from a pretax basis?
Benito Minicucci, CEO
Yeah. Myles, I appreciate it. It’s really hard to say. If you look at the revenue impact that we mentioned from this one wave, it's a couple of hundred million for Q4 alone. It was more than that if you add in Q3 impact. So if there are no more waves and demand comes back and the economy is strong, then yeah we're configured to deliver really strong financial performance. But I think what we've been saying all along, and Ben opened with, is we expected a choppy recovery; that's what we're mentally prepared for. Oil prices are spiking right now; that's going to be a headwind. So it's hard to give you exact confidence that we're headed towards those types of margins. We would love it if everything stabilized and we could deliver that. But I think the environment is really too choppy to predict that right now.
Myles Walton, Analyst
Okay. One detail, so your headcount's down about 16%, roughly in line with capacity. As you get back to 2019 capacity, where will your headcount be relative to 2019? Thanks.
Shane Tackett, CFO
Great question there as well. It should be down as we really execute on the productivity targets that we've got. Probably not a huge amount, but as we achieved the productivity targets, we will on average basis do a little bit better. So that's our expectation going forward.
Myles Walton, Analyst
All right, thank you.
Shane Tackett, CFO
And the other thing that I would just say is we've done a really nice job of managing overhead of the company, and we'll grow overhead back at a much slower rate over time relative to capacity.
Chris S., Analyst
Good afternoon. Thanks for taking my questions. So I appreciate the comments you just gave on your ASMs pro FTE. But if you've spent a lot of time going through the productivity initiatives, I was wondering if you could put a finer point on that and if there are 2 or 3 metrics that we should think about? Is it ASMs per FTE?
Andrew Harrison, CRO
Hey, Chris. Yeah, appreciate it. The two that I think are most easily consumed externally are passengers per FTE, which obviously has a demand component to it. And then the other is departures per FTE. We do manage a lot of the business from that perspective in terms of the labor inputs for departures. Internally, we track more than that, at the specific employee group level and certainly block hour production for our crews is something that we look at closely. That is probably something that can be derived externally, but not as easily as those other two numbers.
Chris, Analyst
Okay. And just a follow-up question here. So in your prepared remarks on your signaling capital returns here. As we think about 2022, cash flow from operations have a lot of moving pieces here. You have the partnership, we have concerns around inflation, higher fuel, but if there's any sort of detail, finer points, how we should be thinking about yields. Or, more specifically, CASM-X in the back half of next year. I think you've said that you're expecting to fly your 2019 book for next summer, and then what would that imply for CASM-X as we think about the second half of 2022? Thank you.
Andrew Harrison, CRO
Thanks, Chris. I appreciate the question. I'm going to stay on about my earlier comment that I don't want to give guidance for next year. I totally appreciate that there's desire to hear more about our annual full-year expectations, and I do think on our next call, we'll consider giving you all annual guidance for both CASM and ASMs for all of 2022 so you can get a better sense of the shape of what that looks like quarter-by-quarter.
Chris, Analyst
Okay.