ALASKA AIR GROUP, INC. Q2 2025 earnings call

Thank you, Operator, and good morning. Thanks for joining us today to discuss our second quarter 2025 earnings results. Yesterday we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today's call you 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&A portion of the call, Air Group reported a second quarter GAAP net income of $172 million, excluding special items and mark-to-market fuel hedge adjustments. Air Group reported adjusted net income of $215 million. Our comments today will include discussion of Air Group reported results and forward-looking guidance compared to prior year pro forma results as if Alaska and Hawaiian were a combined company for the full periods referenced.

Lastly, as a reminder, forward-looking statements about future performance may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit cost excluding fuel. As usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben.

Thanks, Ryan, and good morning, everyone. First, I want to acknowledge the operational disruption we experienced earlier this week due to an IT outage. To our guests whose travel plans were impacted, I sincerely apologize. Safety is always our top priority, and upon identifying the issue, we made the decision to pause operations until it was safe to resume. Our teams worked around the clock to restore operations as quickly as possible.

We are actively partnering with our hardware vendor to investigate the root cause and will take appropriate action once the review is complete. Now turning to our earnings, we delivered a strong second quarter result, marking another step forward in achieving our long-term ambitions. Our adjusted earnings per share of $1.78 exceeded the high end of our guidance. Clear evidence of our team's disciplined execution and unwavering focus on what we can control, delivering a remarkable guest experience, driving operational excellence, and unlocking the value of our newly combined network and commercial platform. Alaska Accelerate is working. The powerful combination of these two networks and the changes we've made are already delivering greater utility and choice for Hawaii residents and visitors alike. These changes drove our Hawaiian assets to its first profitable quarter since 2019 and just 10 months post acquisition.

We're excited to continue building scale, relevance, and loyalty as Hawaii's trusted airline. In total, Air Group generated a record $3.7 billion in revenue with year-over-year unit revenue performance that we are confident will lead the industry. As we continue to implement our initiatives, our sights are set on diversifying our revenues even further from the 50% we generate outside the main cabin today. A key driver of this growth is premium revenue, which continues to outperform. We've now retrofitted nearly 90 of our 737 aircraft, expanding our ability to deliver a more premium experience as part of a seamless end-to-end journey for our guests. Next month we're launching our newly branded loyalty program and premium credit card, uniting Alaska Mileage Plan and HawaiianMiles. This will better reflect the expanded reach of our combined networks, strengthen loyalty, and connect with more guests.

In May, we launched our inaugural intercontinental flight from Seattle to Tokyo Narita, marking the first step in establishing an international gateway at our hometown hub. As Andrew will share shortly, the route has gotten off to a very successful start. This September, we'll begin service from Seattle to Seoul Incheon, followed by the launch of our first transatlantic route to Rome next May. To support this international growth, we've also ordered five additional Boeing 787s, bringing our future fleet total to 17 aircraft. With the Boeing 787 crew base established in Seattle, we're laying the foundation to expand our international operations to at least 12 destinations from Seattle in the coming years. Beyond our targeted initiatives at Air Group, the broader industry is also making necessary and meaningful changes.

Capacity adjustments continue to align more closely with current demand trends, creating a more favorable setup for the second half of the year and providing further upside. Although demand remains softer than initially expected, it has stabilized and consumer sentiment is gradually improving amid the broader macroeconomic environment. We're also encouraged by the recent uptick in bookings, early signs of positive demand momentum, and the potential for easing fuel prices, all factors that position us well for stronger performance in the latter half of the year. Given this improving outlook, we expect to deliver at least $3.25 in adjusted earnings per share in 2025, an important step on our path to reaching $10 in earnings per share by 2027, a target we remain fully confident in. Our focus remains on executing Alaska Accelerate and unlocking a billion dollars in incremental profit over the next two years.

Early results are promising, with synergies and key initiatives tracking ahead of plan. In closing, there's a renewed sense of energy and purpose across our company, driven by our shared vision to transform Alaska Air Group into a larger global airline. With the Alaska Accelerate plan as our guide, our people are moving forward with clarity, confidence, and a deep commitment to what we're building together. I want to thank all our incredible employees for their dedication and hard work on this journey. The opportunities ahead are significant, and we're eager to capitalize on them and position Air Group for long-term growth, success, and value creation. With that, I'll turn it over to Andrew.

Thanks Ben and good morning everyone. Today my comments will focus on second quarter results, continued progress on our Alaska Accelerate vision, and demand trends we're seeing for the third quarter. For the second quarter, total revenues reached a record $3.7 billion, up 2% year-over-year on capacity growth of 2.7%. We expect that our unit revenue performance will meaningfully lead the industry, finishing on the better end of our prior guidance, down less than 1%. As we had expected, the industry capacity backdrop pressured monthly yields sequentially throughout the quarter, but our planes flew full with a second quarter load factor of 84%. This performance, despite softer than anticipated main cabin demand across the industry, highlights the strength of our loyalty program and continued guest preference for the Alaska and Hawaiian experience. Not surprisingly, outperformance of First and Premium Class revenues have persisted.

Second quarter premium revenues were up 5% year-over-year, led by our Hawaiian assets, with Premium up nearly 19%. As Ben highlighted, we're making strong strides in expanding our premium offerings. We've now completed 40% of our 737 retrofits, increasing premium seat share from 26% to 27%, a segment that already drives 35% of our total revenue. We're targeting 29% premium seat share by next summer when all 218 Boeing narrow-body aircraft retrofits will be complete. We will also be elevating the guest experience by upgrading our Airbus 330 fleet with refreshed interiors and enhanced amenities. These strategic investments are not only meeting a structurally growing demand for premium travel, they're diversifying our revenue base and reinforcing our long term competitive edge. Touching on loyalty, we generated $558 million in cash remuneration from our co-brand cards, up 5% year-over-year.

Card spend and acquisitions remain robust with active cards in the portfolio up 10% year-over-year, and just this week, Alaska Mileage Plan was named U.S. News Best Airline Rewards Program for the 11th year in a row. We're gearing up for the mid-August launch of our newly branded unified loyalty program along with our new premium credit card with unique benefits targeting global travelers on the West Coast. With an international Competitive Companion Award certificate, shareable lounge passes, and three times points on foreign spend, this card is strategically positioned to attract a high quality mix of new cardholders across broader geographies and drive greater engagement from our most loyal members, especially our high-value elites, which we believe will accelerate significant program growth in the back half of the year.

Turning to synergies and revenue initiatives, these are on track and continue to deepen our conviction in our path forward. Hawaii has continued to produce strong network leading results with robust bookings and high single-digit yield growth throughout the quarter. Neighbor island has improved significantly, boasting double-digit margin improvements. Our bank schedules are also performing well in Seattle and Portland. In Seattle, this has supported strong load factors with connecting passengers up mid-single digits for the quarter. There is opportunity to further optimize our Seattle banks in 2026 to leverage the seasonality of our business, winter versus summer, as well as feed our growing international gateway. In Portland, we carried over 130% more connecting passengers year-over-year and future connecting bookings are over 200% higher.

Our Portland team has done an outstanding job supporting the expanded flight schedule and we're very excited to open our new and expansive 12,500 sq ft lounge in 2026, complementing one of the nation's newest and most impressive terminals and lobbies. I also like to briefly highlight the launch of our global Seattle Gateway. We've commenced Seattle-Narita service on May 12th with ticket sales starting only in December of 2024. For the month of June, we achieved a load factor of greater than 80% and stage-length-adjusted RASM was 18% higher than our discontinued Honolulu-Narita service for the same period last year. I want to personally recognize both the commercial and operational organizations. Taking Air Group from zero Seattle long-haul capability to announcing and launching long-haul operations from Seattle within just eight is an incredible achievement.

We are well positioned to launch Korea in September and Rome in May of 2026 with plans to add more destinations at a steady cadence as we build to our fleet of 17 787s while continually improving our product and commercial selling infrastructure. Our goal remains clear to serve at least 12 long-haul destinations from Seattle by 2030. To wrap up our Q2 discussion, cargo revenues are performing extremely well, up 34% year-over-year. We successfully brought the last two of our Airbus 330 Amazon freighters into service this quarter and look forward to maturing and growing this relationship. The launch of our Seattle-Tokyo Narita route has rapidly expanded our international cargo capabilities from Asia's third largest market.

We've already surpassed our initial cargo volume targets on this route and have effectively backfilled much of the volume we anticipated might shift from Honolulu with the new high-value revenue streams. While there's still much more to unlock, our focus this year is on building a strong foundation to accelerate our cargo contribution in 2026 and beyond as we scale and optimize this business as a key profit growth engine for Air Group. Now turning to our outlook, we expect third quarter capacity to be down about 1%, nearly two points below our prior expectations shared back in April. This is predominantly driven by deliberate reductions in off-peak flying. Similarly, we have reduced fourth quarter flying by approximately 2 points, bringing our full year capacity growth to around 2% year-over-year. These adjustments are expected to be margin accretive.

Importantly, much of our growth continues to be sourced from increased utilization of our Hawaiian assets, which comes at very low incremental cost. Coupled with domestic industry capacity now expected to be nearly flat in the third quarter, we're confident that our continued commercial momentum will drive sequential improvement throughout the third quarter resulting in unit revenues flat to up low single digits. Demand has stabilized following the abrupt pullback we experienced earlier this year and we're seeing encouraging signs of resilience. Our Q3 builds have seen a strong inflection since late June with our traffic yield and total revenue intakes moving from negative to positive. We have experienced this on Alaska and Hawaiian assets alike, although the strength is mostly close in at this stage. With recent July revenue intakes up low double digits, August low single digits, and September flat, we are seeing positive momentum.

In summary, builds have been positive and improving on a year-over-year basis since late June. This is the first time all three have been in the black since early Q1. As mentioned earlier, Hawaii continues to book well with high single digit yield growth and solid load factors in the second quarter, momentum that is carrying through year end and supports the region's continued outperformance. Managed corporate revenue declined 5% year-over-year in Q2 primarily due to lower yields. While large managed corporates, particularly in sectors like manufacturing and technology, remain cautious, small and medium businesses continue to demonstrate resilience. Factoring in small and medium business performance, total corporate revenue was down only 1%. Encouragingly, July has seen an uptick in closer in managed corporate bookings, a shift from what we saw in early Q2.

Most importantly, despite a more challenging corporate setup on the West Coast compared to our peers, we still delivered industry leading unit revenue in Q2 and we're well positioned to do so again in Q3. With greater economic clarity ahead, we're cautiously optimistic about renewed corporate confidence, offering potential upside to corporate travel in our geographies. Our second quarter results and outlook reinforce our confidence in our commercial strategy. Alaska Accelerate is working and continues to drive meaningful progress across the network. The synergies we've targeted are taking hold, validating our strategic direction and operational discipline. Even in a dynamic environment, Air Group's revenue performance reflects the strength of our brands, the loyalty of our guests, and the adaptability of our teams. Importantly, we are not standing still. We are making necessary adjustments to support improvements in overall unit revenues and profits.

As conditions improve and we continue to execute, we're well positioned to build on this momentum and deliver even greater value and resilience over time. With that, I'll pass it over to Shane.

Thanks Andrew and good morning everyone. We reported earnings per share of $1.78 this quarter, exceeding our guidance range and delivering a pre-tax margin in the top three of the industry. Even as we work through an integration, our strategic plan continued to gain traction in the second quarter with strong execution against our commercial initiatives and synergy capture. The momentum we are seeing reinforces our conviction in Alaska Accelerate and the long-term value it is designed to create. Turning to our financial position, we ended the quarter with total liquidity of $3 billion inclusive of on-hand cash and undrawn lines of credit. We made $80 million in scheduled debt repayments during the quarter and expect to repay approximately $150 million in Q3. Net leverage ended the quarter at 2.4 times while our debt to cap ended at 60%.

During the quarter, we repurchased $428 million in shares, bringing our year-to-date total to $535 million, more than double our original repurchase expectations for the year. We executed our repurchases at attractive prices, returning value to shareholders without compromising the strength of our balance sheet. We continue to believe that our equity does not reflect the earnings power of the company and we remain confident in our trajectory towards $10 in earnings per share by 2027. Turning to our cost performance, second quarter unit costs were up 6.5% year-over-year in line with our expectations and prior guidance. The primary drivers of our unit cost profile remain elevated airport real estate cost growth rates as well as maintenance costs and new labor contracts. We also remain disciplined in our capacity deployment and will continue to choose growth rates that focus on maximizing margin over minimizing unit costs.

Our absolute non-fuel costs remain on plan thanks to strong execution and our team's commitment to cost discipline, which is challenging when integrating two companies quickly. We have lowered our third quarter growth by approximately 2 points from the rate we expected earlier in the year and now expect year-over-year unit costs in the third quarter will be similar to our second quarter result. However, this will be on 1% fewer year-over-year ASMs in the third quarter versus 2.7% more ASMs year-over-year in the second. Had we not cut capacity as close in as we did, we would have seen a step down in third quarter unit costs, and we still expect to see a meaningful step down in Q4 unit costs, setting up a strong exit rate into 2026.

As a reminder, we've generally shared that growth of 4-5% would be required to cover normal cost inflation. I'm pleased that we are on track to deliver full year unit costs up mid-single digits on just 2% full year capacity growth, which includes roughly 2 points of cost growth from our four new labor agreements. Our fuel price averaged $2.39 per gallon during the second quarter, trending down through June both for crude and West Coast refining margins. We did see a temporary spike in refining margins to start the third quarter, reaching as high as $0.90 in early July due to supply fluctuations. This volatility should moderate as we move past peak summer demand, and we expect our economic fuel cost to remain stable around $2.45 per gallon in the third quarter.

We expect to deliver adjusted earnings per share between $1 and $1.40 in the third quarter, which incorporates an expected $0.10 impact from the IT outage. We now expect at least $3.25 EPS for the full year. This outlook assumes that we continue to deliver on our synergy and commercial initiative commitments and that the recent inflection in demand and pricing holds for the rest of the year. As we look ahead, we are genuinely excited by the opportunities in front of us. We have seen strong initial execution against both the commercial roadmap and synergy capture we shared in December at our Investor Day and are encouraged by the setup we see for the rest of 2025.

We believe we are uniquely positioned to deliver more value to customers, employees, and owners as we continue execution of the Alaska Accelerate plan and develop deeper loyalty and preference with existing and new customers to Air Group. With that, let's go to your questions.