Earnings Call Transcript
Alaska Air Group, Inc. (ALK)
Earnings Call Transcript - ALK Q2 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 Second Quarter Earnings Release Conference 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 Managing Director of Investor Relations, Emily Halverson. Please go ahead.
Emily Halverson, Director of Investor Relations
Thank you, Sia, and good morning. Thank you for joining us for our Second Quarter 2021 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. Our financial results published this morning reflect a clear step forward in the recovery of our business. In the second quarter, Air Group reported an adjusted pretax loss of 3%. For the first time since February 2020, monthly adjusted pretax margins turned positive in June at approximately 14%. These results exclude any CARES Act payroll support program benefits. The pace of recovery during the quarter drove approximately $840 million in cash flow from operations, inclusive of the $489 million of CARES Act payroll support program grants received. 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. Over to you, Ben.
Benito Minicucci, CEO
Thanks, Emily, and good morning, everyone. The results we published this quarter showed that we are successfully rebuilding our company and returning to profitability. As Emily shared, our second quarter pretax loss was 3%, lining us close to breakeven as we had initially forecast during our Q1 call. Margins improved significantly during the quarter, as we exited March with a 41% loss and closed June with a pretax income of 14%. Our Q2 adjusted pretax margin is the best in the industry among carriers who have reported so far. This quarter, we hit several milestones that validate our strategy is working. The first milestone was our return to profitability, exiting the quarter with solid double-digit margins. The second is that our business returned to positive cash flow generation of $351 million, excluding any PSP grant funding. Third, we used our strong liquidity position to begin to delever, bringing debt to cap down 6 points from the prior quarter to 56%. And lastly, with the strong return of passenger demand, our productivity levels rebounded to near 2019 levels. Underlying these achievements is a dramatic return in leisure demand that began to gain momentum in March. To a lesser extent, business travel demand has been increasing more recently as well. Air Group's passenger enplanements progressed from down 34% in April to down 18% in July. We are consistently flying about 110,000 passengers per day, and forward bookings are approximately 85% of 2019 normalized levels. This progress and our second quarter results give us confidence that the worst of the downturn is behind us, but the impact of the Delta variant may pose some risk in the recovery trajectory. To date, we are seeing no signs of demand slowing, but we will continue to watch booking trends carefully so that we can appropriately match capacity with demand. With that in mind, our plan is to return to 100% of 2019 flying levels by no later than the summer of 2022. However, given that the recent surge in demand has been consistently strong and has not shown signs of slowing, we may accelerate our return to pre-COVID levels accordingly. To create flexibility for that faster ramp-up in capacity, we are planning to reactivate approximately 10 Airbus aircraft and begin flying them this fall and winter. This temporary return of several Airbus airplanes allows us to create capacity quickly and protects against unforeseen events that could be outside of our control, such as supply chain disruptions. Last quarter, we spoke about deleveraging our cost structure, fleet plans, and commercial tailwinds to move back to a path of sustained profitability quickly. It's clear from this quarter's financial results that our approach to managing the business is working. For Q2, we expect our pretax margin, load factor, and unit revenues to be near the top of the industry as a result of our disciplined approach to capacity. With growing passenger counts, our productivity has increased 1.5x between March and June and is expected to be within a few points of 2019 levels in July and beyond. This sets us up well to further close the gap on 2019 CASMex levels. As we look forward to the next 6 months, we expect to deliver double-digit margins throughout the third quarter and high single-digit margins in the fourth quarter. It's also worth noting that the gap between our 2021 and 2019 margins is closing each quarter. I'm proud of how quickly we've returned to profitability and how, as Shane will detail, we have begun reinforcing the fortress balance sheet that has been a hallmark of our business for many years. Our financial strength sets us up well for sustainable growth in the future. Impressively, our operation performed near the top of the industry in on-time arrivals and completion rates even with the rapid return in traffic during the quarter. At our Seattle hub, where our flying is essentially back to 2019 levels already, we have found that entry-level labor pools are limited, making hiring a challenge, particularly for ramp workers. With this staffing pressure, along with record-breaking heat waves during the quarter, have put stress on our operations. Yet through these challenges, we've delivered for our guests with caring service, creative solutions, and teamwork. I want to recognize the incredible efforts of our employees across the operation, including airports, ground handling, contact centers, in-flight, flight operations, and maintenance teams, many of whom have covered extra shifts to keep our operation and guests moving as peak summer travel got underway. Even our back-office management employees at all levels have jumped in to help the operation in the past couple of months. One of the things I truly love about this company is our culture and how our employees support each other and take care of our guests no matter what it takes. While it is inevitable that we will encounter new challenges and uncertainty as the recovery advances, our momentum continues to build. Our measured deployment of capacity allows us to maximize financial results while allowing our operations to scale up successfully. It's exciting to see Air Group's progress as we rebuild our network and operation, harvest savings from cost and productivity initiatives, and reinforce our strong balance sheet. I am confident that this is exactly the strong foundation we need to further grow our partnerships with oneworld America, leverage our 737 fleet order, and launch our upcoming commercial initiatives. And with that, I'll turn it over to Andrew.
Andrew Harrison, CRO
Thanks, Ben, and it's great to be with you all again. My comments this morning are going to center around 3 areas. First, we're going to be talking about our second quarter revenue performance. But I'll focus on sequential monthly improvements in revenue versus quarter-over-quarter so that the trajectory of our revenue recovery is clear. Second, I will provide capacity and revenue guidance for the third quarter. And then lastly, I'll be touching on revenue initiatives that are getting ready to take effect or will be rolled out in the future to further enhance our revenue performance. Starting with revenue this quarter, our second quarter revenues were $1.5 billion, down 33% from 2019, but nearly double the revenue we generated in the first quarter. As Ben shared, this reflects material increases in passenger volumes as well as sequential improvements in yields. This quarter, we flew 21% below 2019 capacity levels with load factors climbing from 70% in April, 75% in May, and 86% in June. This acceleration put us just above our load factor guidance range for the quarter, and we expect load factors in the mid-80s for the rest of the summer. I'll speak more to our guidance in a few minutes. Our RASM was down 15.5% for the quarter, but the improvement from the beginning of the quarter versus the end was dramatic. Our RASM was down 25% in April, 18% in May, and only 5.5% in June. Much of this improvement was driven by passenger volumes, but yield also played an important role, which improved 8.5 points during the quarter from down 14% in April to down 5.5% in June. Mileage Plan revenues, including commission revenues from our co-brand credit card program and award redemption revenue showed particular strength during the quarter. Collectively, Mileage Plan revenues represent nearly 20% of total revenues and were down just 9% versus the second quarter of 2019, with June down just 0.9%. Bank commission revenues were particularly strong for the quarter, up 7% versus 2019. Additionally, we saw credit card acquisitions for the quarter exceed those of 2019. We're encouraged by loyalty program performance and it's clear that our guests are excited to engage with our program as they return to travel. So turning to our network. Our strong sequential revenue performance was enabled by our network team's rebuild strategy. Air Group has returned to approximately 80% of its pre-COVID network size. But we prioritize Seattle growth, given the strength of demand here. Our Seattle hub capacity in Q2 was approximately 2% higher than in the second quarter of 2019. And the team also restructured the Seattle hub to gain access to greater flow traffic, which has helped fuel this growth. As of July, our Pacific Northwest flying is only down 4% from 2019. We expect to continue to grow Pacific Northwest capacity from here. And Hawaii capacity has also been returned more quickly than system average and was only down 7% in the second quarter from 2019. We've reallocated some Hawaii flying across different markets, which includes adjustments to frequencies in both California and the Pacific Northwest, which has proven to be a positive move. Our California capacity was down 40% in the second quarter, reflecting the reality that demand in the States has been amongst the weakest in the nation. As we shared last quarter, we will add back capacity to California as demand returns, which we believe has now started. During the first half of the year, there was an 8-point load factor gap that existed between our California and non-California flying. And with the state reopening mid-June, I can report that the gap has fully closed in the past several weeks. With California load factors improving, we're experiencing relatively stronger pricing and yields on flights to California than the rest of the system on a year-over-year basis. As with our entire network, our priority is to continue to match supply with demand, and we fully expect to have returned 100% of pre-COVID capacity to California sometime in the first half of 2022. Even though system capacity remains below 2019 levels, we have been adding new markets to our network to maximize revenues as the recovery takes hold. We've seen a shift in demand during the pandemic to getaway destinations and cities with lower costs of living, and our recent focus on growth in places like Boise, Austin, and Florida reflects this reality. Since the beginning of the pandemic, we will have either commenced or announced over 50 net new markets, which reflects the shifting demand landscape in our network. Booking momentum remains strong, stabilizing at about 85% of pre-COVID levels. This level of demand is consistent with our capacity plans, which are also approximately 85% of pre-COVID levels and supports our objective of returning to 80%+ load factors and pre-pandemic yields. On the business travel front, we've been encouraged by what appears to be an acceleration of the return of business travel. In fact, over the past 3 weeks, our indirect corporate bookings have reflected 40% to 50% recovery of 2019 levels, and we're optimistic this will continue to improve. Similarly, direct corporate bookings that utilize EasyBiz were over 50% recovered in the second quarter. EasyBiz users generally skew geographically towards the Pacific Northwest and State of Alaska customers but provide a good indicator of recovery trends for small and medium businesses. We mentioned on our prior call that we expect the business to recover to about 50% by the end of the year. But with recent trends, we expect it will reach sustained 50% or better ahead of that. As I also mentioned last quarter, oneworld and our partnership with American have opened the door to greater access to corporate travel. Just to give you a sense of our progress against that opportunity, to date, over 90% of Alaska's top-tier corporate accounts are being executed or are expected to execute a joint contract with Alaska and American, which will offer their travelers greater access to flight options, more competitive fares, and seamless elite guest benefits. Additionally, we will soon be working with several TMCs in a much deeper way. We have spent a fair amount of time over the last few quarters, getting ready to fully leverage this distribution channel, which will ensure we are well positioned to get at least our fair share of corporate traffic as business travel recovers. In short, we will be competing on a more level playing field, and I'll have more to share on that soon. With this backdrop, I'll turn to our third quarter guidance. For capacity, we plan to fly 17% to 20% below 2019 levels. Given the strength we see in summer demand, passengers are expected to be down just 15% to 18%, and load factors will improve to 82% to 85%. Revenue is expected to be in line with capacity at down 17% to 20% versus 2019, which means our unit revenues will be close to flat. Looking beyond this year, I've shared that our larger share of corporate travel, new revenue management system, along with unique benefits available to us as part of oneworld will be critical to our return to sustained and profitable growth. Our team is in the process of sizing these and new commercial opportunities with a directive to deliver at least $300 million of incremental annual revenue to our pre-COVID revenue baseline. We plan to provide a deeper look into these initiatives and our expected delivery timeline at a future investor event. As the next stages of this recovery play out, I look forward to bringing clarity to our investors who are eager to hear about our growth plans. June was a turning point for us, and delivering an adjusted pretax margin of over 14% gives me great confidence that our airline's revenue and cost model is configured to return us to industry-leading margins as we climb out of this pandemic. And with that, I'll pass it over to Shane.
Shane Tackett, CFO
Thank you, Andrew, and good morning, everyone. As our results this quarter indicate, the initial recovery of our business has been rapid and strong. After a deep loss in Q1, we saw margins improve substantially throughout the quarter, posting the double-digit margin in June that Ben mentioned. Non-fuel costs increased just 9% versus Q1, while capacity increased 29%, and our revenues increased 191%. Our results are solidly amongst the best in the industry, which is worth noting, particularly given that California was relatively later to reopen than the rest of the country. Our results underscore the strength of Alaska's business model and our ability to execute as a company. My comments will focus on our financial performance, cash flows and liquidity, cost performance, and our plans for the rest of the year. Beginning with cash flows and liquidity. We generated $840 million of cash flow from operations this quarter, which is inclusive of $489 million in payroll support grants. Excluding PSP grants, we generated $351 million of cash flow from operations at the business. Most of the cash flow improvement was driven by ATL growth, which ended the quarter at $1.5 billion. $385 million of our ATL represents travel credits which guests continue to utilize for purchasing tickets. In the quarter, $185 million of travel was booked using credits versus our normal $40 million a quarter pre-pandemic. Our on-hand liquidity at June 30 was $4 billion, up from $3.5 billion in March. We shared last quarter that we had plans to begin retiring debt in the second half of the year but accelerated that plan given the pace of recovery of cash inflows. Debt retirements in the quarter totaled approximately $570 million, including the repayment of our $135 million balance under our CARES Act loan. We have now closed that facility and the underlying collateral that originally secured the facility is once again unencumbered, the largest of which is our Mileage Plan program. We expect to end 2021 with around $3.5 billion in on-hand liquidity, but we'll continue to reduce this balance throughout 2022. We have not yet determined a new normal level of on-hand cash in the future, but I do expect it will be somewhat higher than what we held pre-pandemic. The debt repayments this quarter, as Ben shared, improved our debt to cap by 6 points from 62% to 56%. It's worth noting that our adjusted net debt levels dropped to approximately $725 million this quarter, given the excess cash we have on the books today. If we reduce the cash by $1.5 billion to retire debt, our debt to cap would be at 47%, which is equivalent to when we entered the pandemic. I share this only to give a sense of how strong our balance sheet is as we move into the recovery. We do plan to use cash to pay down more debt this quarter, including our $425 million 364-day term loan. Going forward, we will move from focusing on adjusted net debt, which was an important metric for us during the depths of the pandemic, back to focusing on debt to cap and net debt to EBITDAR. Turning to costs. Our cost execution was solid this quarter as productivity levels ramped. Total adjusted non-fuel operating expenses were $1.2 billion for the quarter, up 9% from Q1, while capacity increased 29% sequentially as I mentioned a moment ago. We saw productivity levels rise from 42% below 2019 levels in March to 15% below 2019 levels in June, and we expect July to be within a few points of 2019 levels. Our Q2 unit costs were up 10.4% versus 2019, which was better than our mid-June guidance and was helped by $15 million in one-time favorable adjustments to wage and benefit-related expenses. During the quarter, we also accrued $34 million in expenses related to our performance-based pay incentive plan. As many of you know, our approach to incentive pay is unique in the industry, and we continue to see the value it has in driving clarity and alignment throughout our business on the goals we need to achieve to produce strong results as a company over the long term. Also during the quarter, we were able to finalize 3 labor agreements, including a new wage agreement with our Horizon pilots and 1-year contract extensions with Alaska's flight attendants and dispatchers. I'd like to thank our employees and their IDT, ASA, and TWU representatives for their diligent work to develop and ratify these agreements. Looking ahead to the end of the year, I expect that our CASMex will continue to progress toward 2019 levels even though we're not fully back to 2019 capacity by year-end, with mainline approaching 2019 levels as we exit the year. To recap our expectations for the third quarter, we plan on flying 17% to 20% below 2019 capacity. Revenue should be down in line with capacity, resulting in unit revenues that are approximately flat to 2019. We expect unit costs to be up 10% to 12%, similar to our Q2 performance, given the relatively modest capacity increase quarter-over-quarter. Given these ranges, we expect to achieve double-digit margins for the third quarter. Cash flow from operations is expected to be between 0 and $100 million for the quarter. The sequential decline in cash flow from operations is primarily driven by no PSP grant inflows and normal seasonality that we expect to see in ATL, which tends to decline in the third quarter. Before we move on to questions, we want to express our appreciation for all the employees who have tirelessly contributed to our success in recovery. As you've heard today, folks in our operations have been working incredibly hard. The improved financial results that we are excited to be sharing with you today would not be a reality without the hard work of the 22,000 employees who bring our airlines to life each day. And with that, let's go to your questions.
Operator, Operator
Our first question will come from Catherine O'Brien with Goldman Sachs.
Catherine O'Brien, Analyst
So your June Q cash flow came in quite a bit better than initial expectations, in part driven by better forward bookings. But your capacity cut for the third quarter is only, I think, 2.5 points narrower in the second quarter. Is that the max capacity you could produce given the fleet changes you've made over the last year? Or is the demand uptick we're going to see that more in higher modes and yields?
Andrew Harrison, CRO
Katie. Yes, our capacity is sort of where it's going to be for the third quarter. And so the loads and the yields are what's going to drive the revenue performance.
Catherine O'Brien, Analyst
And so when you say the capacity is where it's going to be, does that mean that's kind of the max in terms of headcount and fleet availability?
Andrew Harrison, CRO
Yes, that's correct. Our capacity guide because what we've tried to do when we set this up, costs are always certain. Revenues are not so much. So we've set this up so that we've got a very solid handle on our costs with a good level of capacity because there is room for growth on the yield front and the load factors. And so that's where we're going to be for the third quarter, in that range that I shared.
Shane Tackett, CFO
Yes, Katie, I would like to add that we have discussed this before. Our goal is to achieve consistent load factors of over 80%. We aim to minimize fluctuations as we transition from peak to shoulder seasons. The pent-up demand we're experiencing this summer was uncertain in terms of its continuation into the fall. We have approached our capacity planning methodically, which is also reflected in our headcount for the third quarter. We plan to reactivate these 10 Airbus aircraft, and if they become operational and demand supports it, we will utilize them. However, it's likely that this will take place in the fourth quarter.
Catherine O'Brien, Analyst
Okay. Very clear. And then just for my follow-up. Like most of the industry has reported so far, you're expecting capacity cuts to narrow a little bit in the third quarter versus 2Q, but CASMex inflation to pick up a little bit sequentially. Is that all just ramp-up costs tied to bringing on more capacity? Or what's driving that? And how should we think about maybe some of those ramp-up costs flowing or not flowing into the fourth quarter?
Shane Tackett, CFO
Yes, thanks, Catie. I'll address that. There is some increased cost in Q3 as we prepare for Q4 next year. A few points to note: we significantly exceeded our Q2 guidance and benefited from $15 million in one-time items. Additionally, medical expenses were much lower than we initially projected, and it's challenging to predict when patients will visit doctors, leading to lower volumes that aren't accounted for in our Q3 guidance. We don't anticipate one-time items moving forward and expect medical expenses to stabilize. The main factor contributing to our sequential growth is the increase in selling expenses, which are rebounding significantly. While ASMs have only increased slightly from last quarter, passenger numbers and revenue have risen by 25% to 30%. This means commissions and credit card costs are also increasing. Furthermore, in the third quarter, we will have our full catering operations, resulting in more food and beverage services similar to pre-COVID levels. These are all variable costs—not structural—and I'm not concerned about them, but they are returning strongly with demand in the third quarter.
Operator, Operator
The next question will come from Helane Becker with Cowen.
Helane Becker, Analyst
So my first question is related to something you said, Shane. I think you mentioned that you were seeing about $185 million worth of bookings using credits compared to $40 million pre-pandemic. As you look ahead to the end of the third and fourth quarters and work through those travel credits, do you anticipate returning to that $40 million level? Or is there a new level that we should consider?
Christopher Berry, CFO
Helane, this is Chris. We won't get to that $40 million level this year because, obviously, the remaining travel credits are much more elevated over where they were pre-pandemic. We've got about 25% of our total ATL, as Shane mentioned, in travel credits that still remain. Most of those do expire at the end of this year. So we expect those to be used at a pretty heavy pace for the remainder of this year. And then as we get into 2022, we would expect those to start to normalize then.
Helane Becker, Analyst
Okay. And then it normalizes back to around $40 million?
Benito Minicucci, CEO
Well, I mean, that's hard to tell. I mean that's just what it was. And yes, we do have the element of no change fees anymore. And so it may be higher than it has historically been, but it will definitely level off from where it is now.
Helane Becker, Analyst
For my follow-up question, Ben, you mentioned that hiring ramp workers and possibly other nonunion workers has been challenging. How should we consider attracting individuals to the airline industry? If these workers are unionized and pay cannot be increased, can you raise starting salaries to draw them in? Would this contribute to wage inflation for your company?
Benito Minicucci, CEO
Helane, it's a great question. I think this is a national issue as you're hearing a lot of companies talk about this labor shortage. I would say the only place we're seeing it now. We're not seeing it with pilots or flight attendants or a lot of labor groups. Where we're seeing it is really at the entry-level position, particularly in Seattle. There are spots across the country, but particularly in Seattle. So what we're doing is really looking at the market. I think we want to be prudent about this. We're looking at the market. We're looking at what it might be in September and October when the stimulus and the unemployment run out, this thing needs to find its water level. So we're going to approach slowly. What we've done now and our operations team has done just a phenomenal job at some incentives to attract workers. And so we're doing fine now. But it's just something that's on our windshield. And I don't think we know where that number is going to be for just a few more months.
Operator, Operator
The next question will come from Duane Pfennigwerth with Evercore ISI.
Duane Pfennigwerth, Analyst
Congrats on this outlook. Only because you gave it, and I apologize for asking this because you gave good disclosure. But just on June 14%, can you put that in context? Like what does a June typically look like relative to kind of the rest of the second quarter?
Shane Tackett, CFO
Yes. So Duane, I'll give you some context. I mean if you look back at 2019, the June 14% this time is about 10 points lower than say it was in 2019. So June, July, August tend to be our highest margin months, and they're typically in the 20s.
Duane Pfennigwerth, Analyst
I was asking about the other months of the quarter because it seems like you're indicating that you experienced a much better growth trajectory and sequential increase in margin than usual.
Andrew Harrison, CRO
Yes, Duane, it's Andrew. I think the best way to describe that is the capacity was fairly even in April, May, and June. But what you saw was load factors going from 70% to 86% and yield declines from down 25% to 5.5%. So the revenue and volumes really made the difference there over the quarter.
Duane Pfennigwerth, Analyst
That's great. And then just with respect to 3Q, and this might just relate to what you just said. Maybe you can speak a little bit to kind of the visibility coming in and kind of the advanced book yields. Because it felt like the industry needed to overcome kind of the advanced book yields coming into 2Q, but they're in a much better place coming into 3Q. And maybe you could just comment on like your stage changes because this is, listen, this is not a massively long-haul network that's contouring to be short haul, like flat RASM in 3Q feels a great outcome.
Andrew Harrison, CRO
Yes. Thanks, Duane. On the top of my head, I don't know our stage, but that's not really the story. I think to your point, what we're seeing is, and honestly, as I look out, that's why we shared flat RASM. From what we've seen today, our yield position looks good and much better than it was in the second quarter, and the bookings are coming in well. I think on the business fare side, the environment is still weak. Just to be frank, the leisure is much better, but I suspect as business travel demand returns, I think we might see a strengthening there. But as I look forward right now, I feel pretty good about how we're positioned from both a load factor and a yield perspective and incremental improvement from the second quarter.
Benito Minicucci, CEO
And in all, I think we're just being disciplined on how we deploy capacity. I think that's the big story for us. We've been very thoughtful from a year ago and how we're going to deploy capacity, bring people back, scale up the operation. And I think we're going to do that through the third quarter and the fourth quarter and into next year as we ramp up to 100%. We're going to watch what's going on, watch demand and react appropriately.
Operator, Operator
The next question will come from Savi Syth with Raymond James.
Savi Syth, Analyst
Just to follow up on Catie's question, as you bring those 10 Airbus back this year and considering your fleet order, where do you think the capacity can go in 2022, both at a high level and a low level?
Andrew Harrison, CRO
Savi, it's Andrew. Yes, so if you look out, these Airbus aircraft start to return by the end of the year. But if we flew them all at normal utilization, so summer of '22, we could increase summer of '22's capacity up to 8% versus where we are in '19. So as it stands today, we've talked about getting to flat. But if we really needed to or wanted to, we could get up 8%.
Savi Syth, Analyst
That's helpful. And then Andrew, I know you teased this a little bit on the $300 million incremental. I was just kind of wondering if that's related to items that you have put in place today? Or if there are things that you have to actually turn on to start achieving that at some point? I realize it's not $300 million next year, but just from an execution standpoint, what's involved related to that?
Benito Minicucci, CEO
Yes, Savi, I'll begin with that and then pass it over to Andrew. When we developed our 2025 strategic plan before the pandemic, it included several strong commercial initiatives aimed at achieving that $300 million. However, once the pandemic occurred, we had to pause everything to manage cash burn and return to profitability. At our recent offsite, we revisited all these initiatives, and I can assure you that Andrew is very enthusiastic about moving forward. Andrew, I wanted to provide some context that these initiatives are not new; they have been in development for at least 18 to 24 months. Perhaps you could share a bit more on that.
Andrew Harrison, CRO
Thanks, Ben. Yes, Savi, I mean there's sort of 7 categories. And yes, some of them were there pre-pandemic that were ready, but there's also been big changes in our business like corporate contracts, TMC, American, oneworld, merchandising, and we've got some network restructuring and changes. So I think as we roll this out, but I feel very confident that it's almost like we're on the runway barreling down at full speed and then the pandemic hit. And we were so close to starting to roll some of these out. And now that demand is returning and our businesses are reestablishing, we're going to get to rolling these out.
Shane Tackett, CFO
So Savi, I'll jump in as well to make sure you hear from all three of us on this. I want to emphasize that this is a 4- or 5-year plan. We'll discuss specific timing at an investor event that we plan to hold in the next quarter or two. The cost restructuring plan and the commercial plan are fundamentally designed to lead us to 2025. I just want to caution everyone not to get overly optimistic about next quarter regarding these aspects. However, we are enthusiastic about the initiatives we will be pursuing.
Operator, Operator
The next question is from Hunter Keay with Wolfe Research.
Hunter Keay, Analyst
Andrew, have you and your team ever thought about a fully transparent or predictable revenue management strategy, essentially a non-dynamic pricing model?
Andrew Harrison, CRO
Hunter, I think no, is my short answer to that. But if you want to expand on your question, happy to give you more color.
Hunter Keay, Analyst
That's fine. If the answer is no, then it's no. We'll talk about it some other time. But...
Andrew Harrison, CRO
I believe we aim to be simpler than many others in the industry, even though it is a complicated field. We were among the first domestic airlines to offer one-way fares and have maintained a relatively small number of fare categories compared to others. Historically, we've imposed limits on our highest fares and have endeavored to remain fair and straightforward in our pricing. However, a one-price-fits-all approach could negatively impact our revenue, which is why we haven't pursued that option.
Benito Minicucci, CEO
And it's all good to hear. I mean all similarly are thinking. So maybe following this, we can hear more.
Hunter Keay, Analyst
Yes, let's discuss that for a moment. I have some ideas. But anyway, Shane, you mentioned removing the Airbuses and referenced supply chain disruptions. Are you indicating there might be some risk to the MAX delivery schedule?
Shane Tackett, CFO
Hunter, no, I mentioned that. I will tell you, I am 100% confident in Boeing's ability to deliver. Our view is that there are things right now in the economy with supply chains that some of us can't even see. Out of our control, out of Alaska's control, out of Boeing's control. And these Airbus, what it does, it just gives us dry powder to either backfill any issues that we may experience because of it. Or like Andrew said, we can grow up to 8% for the next summer of 2022. So again, with a prudent approach to capacity discipline. So it's just more arrows in our quiver for us to manage going forward.
Operator, Operator
The next question is from Joseph DeNardi with Stifel.
Joseph DeNardi, Analyst
Shane, just following up on an earlier question, if capacity in summer 2022 is up 8%. What does CASMex look like in that environment?
Shane Tackett, CFO
I'm going to be cautious. If we see an increase of about 8%, I'm not sure it will happen. However, we believe that by the middle of next year, with the full implementation of our cost restructuring initiatives, we will be in a strong position. We expect to be at or below pre-COVID CASMex, which we have consistently stated from the beginning. I can't say if we will reach it by next summer, but we should be very close. I won't provide more specific details than that. I believe we will have an excellent cost structure. One thing we are certain about is that we will not lose our competitive edge in the industry. We are highly committed to maintaining cost discipline and execution. The productivity improvements we are currently observing give us a lot of confidence in our performance so far.
Joseph DeNardi, Analyst
Okay. That's helpful. And then, Andrew, can you just talk about kind of customer behavior you're seeing? Like are folks flying more? Are they spending more than they did in 2019? Or is it just kind of compressing normal behavior into a tighter window? I'm just curious kind of what changes in behavior maybe beyond that you're seeing and the degree to which that speaks to kind of the sustainability of this leisure demand strength?
Andrew Harrison, CRO
Yes, thanks, Joe. I was discussing this with my team yesterday. Looking ahead to the fourth quarter, from our network's perspective, it appears that people are booking their trips earlier and for longer durations compared to 2019. Currently, we are seeing strong booking volumes for the fourth quarter. Our credit card spending and loyalty portfolio reflect this, as we recorded the highest spending in our company's history this quarter on our credit card offerings. We are observing sustained strength, and as I look further ahead, it seems to be holding steady. That's my perspective today.
Operator, Operator
The next question is from Jamie Baker with JPMorgan.
Jamie Baker, Analyst
Ben, not long ago, we discussed when you might reinstate your long-term pretax margin targets and whether it would revert to the pre-COVID range of 13% to 15% or exceed that. In your prepared remarks today, it seemed like you were heading in that direction, but you didn't fully commit. What additional factors do you need to consider? Is it related to the macro environment, specific issues in Alaska, or future labor conditions? What would make you comfortable with setting those margin targets again?
Benito Minicucci, CEO
It's a great question. What we need is a bit more stability in the economy. For instance, the Delta variant might cause some disruption in the recovery. We want to be cautious. From my perspective, I feel confident that the worst is behind us. We started with a strong pretax profit in June, and I believe we can sustain that going forward. However, we want a bit more certainty and to see what's happening with labor markets and the economy's strength, as well as inflation and other factors. We need these situations to settle down a bit. I think we'll provide more information come Investor Day and increase visibility. As you mentioned, we're gradually making progress, and I believe we've reached our current limit for now.
Jamie Baker, Analyst
And as a follow-up, I think it was Joe's ex-fuel CASM question. Can you just review for us what the headwinds and tailwinds are? Because on my list, I have more entries in the tailwind category. But of course, not every entry is equally weighted. I'm just having a hard time coming up with anything that would prevent you from having modest to materially better ex-fuel CASM by next summer. So just looking for a little more color headwinds to tailwinds.
Benito Minicucci, CEO
Thank you, Jamie. I believe it's primarily about capacity. Our fixed costs are relatively stable, and we're satisfied with where they stand. Many of the reductions we implemented during the pandemic remain in place, and we will maintain discipline in that area. The variable costs are returning at a steady pace, as anticipated. For us, capacity remains the key factor; we need to increase ASMs to effectively manage our fixed costs. Currently, there aren't any significant obstacles. There will likely be another wave of labor agreements in the future, though the timing is uncertain. Many groups were negotiating prior to the pandemic, and it's challenging to predict when those discussions will resume. My expectation is that the impact will be fairly consistent throughout the industry. So, once we reach our pre-pandemic levels, I believe we'll be in a strong position regarding unit costs.
Operator, Operator
The next question will come from Dan McKenzie with Seaport Global.
Daniel McKenzie, Analyst
So I wanted to follow up on that question as well. Returning to industry-leading margins in the next cycle. That's what caught my ear in the prepared remarks. It sounds like from the last question that you can get back to your historical margins. Big picture, what are the biggest drivers for getting there? What are the biggest pieces to the Alaska story for achieving that? And I'm just wondering, maybe you could rank the revenue and commercial initiatives versus the cost initiatives? I mean there's a lot of new things in play for you guys in this next cycle that didn't exist in the last cycle.
Andrew Harrison, CRO
I appreciate it. I want to revisit our performance this quarter, which was largely driven by recovery. Achieving the industry's best margin, very close to breakeven, in a quarter that began with low demand and poor pricing highlights the strength of our business and our execution capabilities. We have substantial confidence moving forward. We have outlined $265 million in cost reduction initiatives that we are on track to capture, along with $300 million in revenue initiatives that we discussed today. We anticipated that demand might be subdued as it was in the last two major industry downturns, and we aimed to return to pre-COVID margins regardless of any slight dip in demand. Fortunately, demand turned out to be better than expected, presenting more opportunities for the company. Overall, we are looking at about $565 million in improvements over the next few years compared to our pre-COVID baseline, which we believe will drive our success. We have an excellent product, outstanding employees, and great customer service. We are located in a growing part of the country, and we are eager for things to stabilize, as Ben mentioned, so we can return to normalized business conditions and be ready for the recovery.
Daniel McKenzie, Analyst
Understood. For my second question, considering that you have one of the industry's strongest balance sheets, how do you plan to utilize that in the next cycle? Are capital returns something you're considering implementing soon? Or does it make more sense to potentially accelerate the retirement of older aircraft in favor of upgrading to more efficient models? How are you evaluating that balance sheet?
Nathaniel Pieper, CFO
Dan, it's Nat. Thanks for the question. I think from the balance sheet perspective, as Ben and Shane said, we're in pretty good shape from our historical debt-to-cap measures. We've got a $425 million facility. We'll look to repay in the next 90 days or so. And then I think going forward, it becomes a dilemma against repaying other debt, which really, in our situation, is at pretty cheap rates, further investment in our business. And then, as you know, we've got the restriction on shareholder repayment until the end of September next year due to some of the government aid. So we'll balance all 3 of those things as we move forward.
Operator, Operator
The next question will come from Ravi Shanker with Morgan Stanley.
Ravi Shanker, Analyst
As a follow-up to that question, how far are you willing to go with the new revenue initiatives and the use of your balance sheet? Are you planning to stick with your current strategies and maximize existing opportunities, or are you considering completely different approaches?
Shane Tackett, CFO
This is about the revenue initiatives. Ravi, I think most of it is what you would expect, and Andrew can elaborate further, but we have a new arm system replacing one that was 20 years old, and we are excited to have the new one operational. There are a few aspects we’re not particularly eager to discuss, such as distributing our premium economy cabin and our use of indirect channels, as we currently only utilize prior and direct channels. The American, oneworld, WCI initiatives are all on the list of factors that will contribute. We prefer not to delve into new areas we might consider differently at this time. However, as we approach an investor event, we will provide more clarity on these matters.
Ravi Shanker, Analyst
Got it. I think you guys are doing a really good job of ramping up the excitement here. So looking forward to that. And maybe as a follow-up, kind of how would you describe the competitive environment out there right now? I mean, clearly, there's a lot of demand still concentrated in relatively narrow regions and there's a lot of capacity kind of going into that region. So how do you characterize the pricing environment this year?
Benito Minicucci, CEO
Ray, I'll start and then I'll have Andrew jump in. I think we always expect competition in our markets is the West Coast. They're very competitive markets. Our mindset, again, as you see from where we were last year, how we brought back capacity, it's always been in a disciplined prudent approach. And I think that's the approach we're going to take. We have dry powder. We can scale it up or scale it back. We have a strong regional airline Horizon that was just fantastic throughout this pandemic to fill in a lot of holes. So our view is just, again, a disciplined measured approach over the next 12 and 18 months. Andrew, anything? Does that make sense?
Operator, Operator
The next question will come from Conor Cunningham with MKM Partners.
Conor Cunningham, Analyst
The revenue figures are impressive. I have a recurring question that I've noticed you receive each quarter. There has been a significant emphasis on premium offerings from other carriers, especially with the recent changes at JFK. Given your focus on attracting higher-yielding passengers and corporate clients, are you considering revisiting your product strategy to allocate more space for premium offerings or even transitioning to lie-flat seats? I suspect corporates may be requesting that again. I mention this because you referenced the A320 subset of aircraft, which seems like a potential test bed for such changes. I realize this would require investment, but your financial situation suggests you could manage it. I'm interested in your perspective on this matter.
Andrew Harrison, CRO
Conor, it's Andrew. A couple of quick things. Just to be clear on the LA movement. We just redistributed JFK slots across the rest of our network. We're still in Newark. So we still fly to New York City from LA. We've just reallocated those. I think on the product side, of course, like we're always looking at product. But I think we've got 12 and 16 seats in the front cabin. And if we did live flat, it would probably still be 12 and 16 seats. But we have big airplanes to fill. So I think where we're at right now is just to get back in the recovery stage. We still feel really good about our front cabin product that we continue to improve. We have the best pitch in the industry on traditional seats by none. And then our premium class cabin is also very generous. And I think a big thing for corporates, too, is our network utility. And I did touch on network, and I will say, we've done a lot of expansion on breadth over the years. We're going to focus more on depth frequency.
Operator, Operator
The next question is from Mike Linenberg with Deutsche Bank.
Michael Linenberg, Analyst
Shane, just a quick one right here. As best as I can tell, it seems like you're in the best position to get back to investment grade next. Is it a stated objective of the company to get to an IG rating? Where are you on that?
Shane Tackett, CFO
It's frustrating that we aren't labeled as an investment grade company. However, Nat and I plan to address this issue. We need to shift our approach to engaging with the agencies, but that process will take some time since they make the final decisions. Although we haven't announced it publicly, we definitely aim to reach that goal eventually.
Michael Linenberg, Analyst
Yes. Look, the reason why I bring it out is there's a lot of carriers that they will tell you that they want to get back to investment grade-like metrics, and then they'll go out and lever up an airplane and borrow at a single A credit. But never actually really do the work that they need to do on their balance sheet. And so it does instill a level of discipline that I think many of us are hats off to a carrier like Delta who wants to get to the IG rating. So I'm just throwing it out there.
Shane Tackett, CFO
Got it.
Andrew Harrison, CRO
Then just a second question for Andrew. You and your team have done an excellent job. I don’t want to dwell on the revenue too much, but considering that your entire operation relies heavily on coastal hubs, which have been lagging compared to many Mid-Con hubs, you're already at a disadvantage in terms of revenue. Yet, you remain among the leaders in the industry. I understand you mentioned a recalibration of the network and talked about adding 50 net new city pairs. I’m interested in how much of the revenue improvement comes from stepping back from those underperforming markets. You provided a net figure, but could you share details about the specific markets you’ve reduced involvement in that weren’t performing well? You also mentioned focusing more deeply on Seattle. Therefore, I may be answering my own question; it's a mix of these factors. Any extra information on this topic would be appreciated. And every CEO, Ben and before, have held this strong belief. And I'm just going to be very transparent with you on this one is that loyalty. I will tell you that never in my career, when you look at your network and specifically your areas of strength and there's unlimited seats given demand. And when you look at the T-100 data, and you see your load factors compared to your competitors' load factors. When there's unlimited seats to choose from, and you see your loads on multiples, you know loyalty is powerful. And I'm just going to be transparent, moving networks around is good; it's needed. But the strength of our loyalty and our guests and their commitment to us and what we hope to continue to invest in them on service, loyalty program, and meeting their needs has just proven to be very, very strong for us.
Operator, Operator
The final question is from Myles Walton with UBS.
Myles Walton, Analyst
I was hoping you could just clarify, I think you said 4Q you hope the mainline CASMex would be in line with 2019. Can you give us color on regional? And then on the fleet side, that 8% higher 2022 potentially is the exercise, is that similar to the number in the fleet as well, 8% higher than where you were? Or are you getting there through still down relative to the prior fleet levels?
Andrew Harrison, CRO
Yes, so Nat, you can maybe close the fleet levels. The 8% that was really enabled primarily by the reactivation of these Airbus for a short additional period of time. I just don't have the fleet count in my head for next year. And then on Q4, I just want to make sure we got it right, Myles. We're talking about December exit rate really focused on mainline getting to very close within a few points of pre-COVID unit costs. And I think we don't expect to have pre-COVID mainline capacity back yet. Regional side is a little bumpy, the sort of very rapid regrowth and hiring of pilots around the industry puts a little bit more pressure on both the ability to deploy capacity on the regional side and also needing to get out and start the hiring for the funnel for regional sooner. So we're still working through that. Those numbers in terms of how many pilots airlines are going to hire have been changing a bunch. But that's going to be a headwind for the regional side of the business for a little bit here.
Nathaniel Pieper, CFO
Myles, regarding the aircraft side, 2022 is a significant delivery year for us with 31 737-9s and 13 regional jets arriving. As we move forward and begin to phase out the A320s, we anticipate all of those will be gone by the end of 2023, with more 737-9s joining our fleet as well. This will naturally lead to some replacements and also some growth.
Operator, Operator
And at this time, there are no further questions. I would like to turn the conference over to Ben Minicucci for any closing comments.
Benito Minicucci, CEO
Well, thank you so much for everyone joining us this morning, and we'll talk to all of you soon. Thank you so much.
Operator, Operator
Thank you for participating in today's conference call. The call will be available for future playback at alaskaair.com. Ladies and gentlemen, you may all disconnect.