ALASKA AIR GROUP, INC. Q4 2025 earnings call

Thank you, Operator, and good morning. Thanks for joining us today to discuss our Fourth Quarter and Full Year 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'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. Air Group reported fourth quarter and full year GAAP net income of $21 million and $100 million, respectively. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted fourth quarter and full year net income of $50 million and $293 million, respectively.

Our comments today will include discussion of Alaska 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. Before we dive in, I want to start by thanking our 30,000 employees for their efforts throughout 2025. Last year was a year of transformation, where we laid the groundwork for the next chapter of Alaska Air Group. It did not come without growing pains, but we delivered bold initiatives, strengthened our competitive position, improved our relevance, and set the stage for long-term growth under our Alaska Accelerate vision. Our employees navigated a lot of change last year, and I can't thank them enough for their commitment to helping us realize our long-term potential and for taking care of our guests every step of the way. My belief in our future has never been more evident in the last few weeks as we secured the largest aircraft order in our history with Boeing.

This solidifies our growth through 2035, resulting in an outstanding order book of 261 aircraft if all options are exercised. This now includes firm orders that will take our 787 fleet to a total of 17 aircraft, supporting our goal of building Seattle into a world-class global hub with at least 12 destinations. I want to thank Boeing and Transportation Secretary Duffy for their support in our commitment to being the country's fourth global airline. While 2025 did not result in the financial returns we had initially laid out at the start of the year, we strongly delivered against our Alaska Accelerate vision, ticking off many major milestones, with several of them outperforming expectations. By many measures, 2025 was a major success for our company. We firmly controlled the areas within our control.

Synergies finished ahead of plan for the year, notably on the network side, as the power of the combination of Alaska and Hawaiian was evident all year long. Hawaii was by far our strongest region in the network on a year-over-year basis, demonstrating the benefits of the utility the merger has created. We embarked on our journey to build Seattle into a world-class global hub, launching flights to Tokyo and Seoul, and we're thrilled to begin service to London, Rome, and Reykjavik this spring, three iconic European destinations that elevate Alaska's global relevance. Our unified loyalty program, Atmos Rewards, went live in August, creating a single platform for engagement and brand reach. We launched an industry-leading and premium credit card that saw 75,000 sign-ups in just four months, exceeding our expectations by three times, demonstrating the power of the industry's best loyalty program.

Importantly, we achieved a single operating certificate in October, just 13 months post-merger, an impressive accomplishment. The hard work behind the scenes was completed for our combined passenger service system, with operational cutover scheduled for April of this year. This will deliver a seamless, cohesive guest experience, eliminating friction from operating dual systems. These accomplishments demonstrate our ability to execute a complex integration while transforming ourselves into the country's fourth global airline. While many things went exceptionally well last year as we rolled out a slew of new initiatives at a record pace, we know there is room for improvement. Our goal is to build world-class technology infrastructure. The two outages we experienced last year were painful for our guests, employees, and financial results. Corrective actions are underway and will continue throughout the year, supported by third-party experts as we invest in both near-term fixes and long-term sustainable solutions.

Turning to 2025 results, for the fourth quarter, we delivered adjusted EPS of $0.43, and for the full year, adjusted EPS of $2.44, both ahead of our revised guidance put out in early December. As we had shared at the time, results were impacted by the IT outage, elevated fuel costs, and the impact from the government shutdown. In the end, we delivered a better cost result and benefited from slightly lower fuel in December than anticipated. Given our conviction in Alaska Accelerate and our ability to generate $10 of earnings per share by 2027, we executed $570 million of share repurchases when our stock price was below its long-term potential. This puts us more than halfway through the $1 billion buyback authorization we unveiled at the end of 2024.

As we look ahead to 2026, our overarching focus is on harvesting the investments we made in 2025 and driving margin expansion as we progress toward our goal of $10 per share by 2027. We expect full year earnings per share to be in the range of $3.50-$6.50, representing a meaningful improvement over 2025. This reflects continued delivery of incremental earnings from our $1 billion Alaska Accelerate plan, the benefit of lapping transitory challenges experienced in 2025, and the trajectory of the macroeconomic environment and industry capacity growth. At Alaska Air Group, we feel the momentum building and accelerating in 2026 as our bold strategy comes to life. Our team is inspired and motivated to win. We have a winning business model, and are continuing to configure it to meet the market where it's headed: more premium experiences, more international, and fierce loyalty.

With that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, my comments will focus on fourth quarter and full year results, along with our outlook and trends for 2026. For the Fourth Quarter, we delivered total revenues of $3.6 billion. That's up 2.8% year-over-year on 2.2% capacity growth. This resulted in unit revenues up 0.6 of a point. I'm proud of the team for delivering positive unit revenue performance, considering we had one of the industry's most difficult year-over-year comparisons, in addition to contending with a government shutdown. As we shared in our investor update back in early December, the government shutdown impacted fourth quarter earnings by approximately $30 million, or $0.15 of earnings per share.

Bookings were solidly positive going into the heart of the shutdown, then went negative on a year-over-year basis for a short period and rebounded in early December back to positive territory to finish the year out strong. For the full year, we delivered total revenues of $14.2 billion, up 3.3% year-over-year on 1.9% capacity growth, resulting in unit revenues up 1.4%. This performance reflects our continued leadership in unit revenue growth, which we believe will finish the year ahead of the industry average, illustrating the benefits of our Alaska Accelerate synergies and initiatives. As has been the case all year, we continue to see strong demand in our premium cabins. In the fourth quarter, first and premium class revenues were up 7.1% year-over-year, outperforming Main Cabin by 9.5 points. Premium revenues represented 36% of total revenue, up one point from Q3.

Main cabin revenues were down 2.4%, which is a modest improvement versus the third quarter. The fourth quarter has a much harder comparison than the third quarter, so the improvement in Main Cabin performance is encouraging as we look to 2026. For the full year, premium cabin revenues increased 6.7% and outperformed the Main Cabin by seven points. We are excited to see continued growth in our premium cabin revenues and now have 86% of our 218 Boeing 737 aircraft seat retrofits complete. All that remain are 31 737-800 aircraft. As a reminder, all these retrofits will be finished in time for selling into the summer travel, enabling us to sell all 1.3 million incremental premium seats across our network, which will help us fully realize $100 million in incremental profit we outlined as part of Alaska Accelerate.

Managed corporate revenues in the fourth quarter were up 9%, notwithstanding the government shutdown and related flight reductions, a 2-point quarter-over-quarter sequential improvement. I'm also pleased to report that our share of corporate travelers in our business class cabins on our Seattle to Tokyo and Seoul routes is about to cross over our fair market share, demonstrating that we have successfully tapped into the lucrative international corporate revenue pool off the West Coast that we previously did not have access to. Forward-looking business bookings for 2026 are also very encouraging. Held managed corporate revenue on the books is up 20% year-over-year for Q1, with significant increases in the technology, manufacturing, and financial services sectors. Turning to loyalty, the launch of Atmos Rewards, our new single loyalty program, including our new premium credit card, the Atmos Summit Card, drove unprecedented increases in absolute card spend and new card members.

In the fourth quarter, loyalty revenues, which include bank cash and member redemptions, were up 12% year-over-year. For the full year, bank cash remuneration was $2.1 billion, up 10% year-over-year. Turning to credit card, acquisitions for the full year finished up 17% year-over-year, with a significant portion of those coming after the launch of Atmos in August. Our new premium card, the Atmos Summit Card, has been a resounding success. To put it in perspective, in Q4, we had record card acquisitions for any single quarter in our history, and nearly one-fourth of those new acquisitions were for the Summit Card. This is particularly important because premium cardholders are spending two times more than holders of the base credit card, demonstrating the value this new card product has brought to our portfolio from these high-value travelers.

The demand for new global benefits that come with the card, when combined with our global network expansion, was truly amazing. Importantly, in the fourth quarter, nearly 60% of all new card accounts came from outside our core in the Pacific Northwest, with 25% of new accounts coming from California. Our thesis that the new program and our new card products would appeal to a wider audience has proven true in the first four months post-launch, helping us expand our reach. The Atmos Rewards Business Card also had an impressive quarter. New accounts are up more than 185% year-over-year, benefiting from the new Atmos for Business platform we launched, which is aimed at making travel for small and medium businesses more integrated and seamless.

Looking forward to 2026, as Ben said, this will be a year of harvesting and optimizing the investments we made in 2025, with a focus on our guests and other key touchpoints. These include the premium seat expansion I already touched on, which will be complete by spring, offering an overall better experience for our guests and higher revenue generation across our fleet. We're rolling out expanded lounge footprints and new food and beverage program, and introducing curated onboard experiences for international service. We believe our new international service will be measured amongst the best. We now sell in six foreign currencies and recently unveiled our Japanese, Korean, and Italian language-based websites, helping us drive point of sale outside of the United States to support our new international service. Starlink Wi-Fi installation is already underway on the Alaska-branded fleet, with 24 aircraft complete.

Adding these 24 to the existing Hawaiian-branded fleets, a total of 66, or 16% of our aircraft are now equipped with Starlink. We expect to have 50% of the fleet online by the end of 2026 and 100% complete by the end of 2027. We will offer this for free to Atmos Rewards members, and we believe Starlink is a clear differentiator as it's the fastest Wi-Fi in the sky. Turning to our outlook, growth will be modest this year, given only 6 737 deliveries as we await certification of the MAX 10. We'll also take one 787 delivery and 4 Embraer 175s. The MAX 10, when it's delivered, will add 5.5% more seats and increase first-class seats by 25% when compared to the MAX 9. We expect first-quarter capacity to be up 1%-2%, with full-year capacity projected to be up between 2%-3%.

Given that the demand environment is still recovering from the economic shocks experienced in 2025, we believe our low growth rate is prudent given the current backdrop. 100% of our net growth is represented by new long-haul out of Seattle, and we have moved our domestic capacity around to focus on higher growth in both Portland and San Diego, which are geographies our brand, product, and loyalty base is poised for further growth. As Ben mentioned, we are also eager to launch flights to London, Rome, and Iceland. All three new markets are selling extremely well. Not only have we turned on network access beyond Tokyo and Seoul, but we've also recently enabled access beyond all three European cities.

We're also finalizing regulatory approvals for 17 codeshare destinations beyond London, which would bring us to 55 total destinations and enable us to take our guests to all the high-demand cities in Europe. Additionally, we were awarded more favorable departure times on our Seattle to Seoul Incheon route, which will improve connectivity options deeper into Asia, effective late April of 2026. Advanced bookings across the network have been robust since we started the year, well into the double digits since January 6th. We've seen several of the highest booking days in Air Group's history the last few weeks. The falloff in bookings and yields last year began the first half of February when demand was hit hard, so we expect sequential improvement each month throughout the quarter. First-quarter industry capacity is also projected to remain in line with macroeconomic growth.

With strong demand momentum and a constructive backdrop, we expect solidly positive unit revenue growth in Q1 on the back of the toughest industry comp. Recall last year that even with the shock in demand, our first-quarter unit revenue still finished up 5%. I want to close by stating what might seem obvious: 2025 was a monumental year for the commercial team at Alaska Air Group, with respect to systems integration, synergies, and guest benefit unlock. Not only did our synergies and initiatives finish the year slightly ahead of plan, but we also built the new foundation for our commercial engine and are just getting started on maximizing its potential. There is plenty of optimization and maturation opportunity within initiatives that have already been rolled out, and we unveil dynamic pricing later this year and begin rolling out our new O&D revenue management system in 2027.

While 2025's progress was slowed by macroeconomic challenges and integration friction, bookings momentum has been building since last July, and we are off to a strong start to the year. Managed corporate business is looking strong. We continue to roll out new premium seats for sale, hub banking efforts continue to bear fruit, and we're excited to land our first scheduled service in Europe. We are well on our way to realizing the full $800 million in incremental revenue by 2027 that we laid out in Alaska Accelerate. Importantly, our guests will begin to experience the full breadth and depth of what a seamless and integrated airline can offer, both domestically and now globally.

Thanks, Andrew, and good morning, everyone. As our fourth-quarter earnings indicate, and as Ben and Andrew both shared, we exited 2025 on a strong trajectory, which has continued to strengthen further in the first three weeks of the year.

At this time last year, we were coming off of our investor day, and we're experiencing a similar historically strong demand backdrop, which felt like a very constructive start on our path to $10 of earnings per share by 2027. Ultimately, the macroeconomic backdrop in 2025 played out differently, reducing revenues by more than $500 million and underscoring that our industry remains a volatile one. Changes can occur quickly in either direction, and that direction has been increasingly positive since September of last year, trends which were only briefly interrupted by the government shutdown. While slightly below our guide, which was set a couple of weeks after our full flight schedule was restored when the government reopened, our fourth-quarter unit revenues finished closer to our original plan versus any other quarter in 2025.

Demand rebounded quickly post-shutdown, flattening modestly through the holiday, and has since accelerated further, with current bookings now improved on a year-over-year basis on difficult comps versus January and February 2025. Given our 2026 capacity growth is in line with forecasted overall economic growth, we expect this trend can continue, hopefully backfilling the entire macro-driven revenue reduction from last year. This strength, along with further synergy and initiative execution, is expected to drive healthy earnings expansion this year. For the Fourth Quarter, we reported adjusted earnings per share of $0.43, $0.33 above the guidance we released in early December. Roughly half of the beat was attributable to better non-fuel cost performance, with the other half coming from a combination of lower fuel in December as West Coast refining margins normalized, plus a lower tax rate due to higher earnings.

For the full year, we reported earnings per share of $2.44, with an adjusted pre-tax margin of 2.8%, which is down about one point compared to 2024 on a pro forma basis. In addition to the macro-driven revenue gap to expectation, our full-year earnings were also impacted by approximately $100 million of transient items we do not expect to recur moving forward. Despite the headwinds from macro and these transitory items, we generated $1.2 billion of operating cash flow for the year. Our total liquidity, inclusive of on-hand cash and undrawn lines of credit, stood at $3 billion at year-end. Debt repayments for the quarter were approximately $130 million and are expected to be approximately $240 million in the first quarter. As Ben mentioned, we repurchased $570 million of ALK stock in 2025, including $30 million of repurchases in the fourth quarter.

With these purchases, we more than offset dilution and reduced our diluted share count to 117 million shares, down from 129 million shares last year and well below pre-pandemic levels. We expect to continue to execute share repurchases in 2026 to at least offset dilution. Our Debt-to-Cap ended the year at 61%, with our Net Debt to EBITDA at 3 times. Our long-term target remains 1.5 times, which is achievable as earnings expand, though could shift to the right slightly given macro factors and our share repurchase activity in 2025 that modestly slowed our debt repayment cadence. Fourth-quarter unit costs were up 1.3% year-over-year, ending the year below guidance and on a trajectory in line with our original plan.

As we pass integration milestones, we anticipate we will increasingly be able to fully focus on running excellent and productive core airline operations, allowing us to return fully to our historic strength of cost discipline. For the full year, unit costs were up approximately 4.7% year-over-year on just 1.9% capacity growth. Given this capacity was three-quarters of a point less than our original plan, and given a nearly two-point cost headwind from market-based labor deals, I view our overall cost performance as very strong. This was partly helped by the unlocking of early cost synergies from the merger. Turning to our outlook, first-quarter adjusted earnings per share are expected to be a loss of $1.50-$0.50, while full-year adjusted earnings per share is expected to be between $3.50 and $6.50.

First-quarter earnings per share is expected to be approximately flat year-over-year, which would mark another sequential improvement towards earnings expansion. With planned CapEx of $1.5 billion, we expect to generate positive free cash flow this year. Our guidance range is wider than normal, but as I noted at the top of my remarks, our industry remains volatile. For further context, our range generally assumes the following: that we deliver on synergy and initiative value as we did in 2025, that we lap one-time issues that impacted earnings this year, and the low end of the range would require a deceleration of current booking strength due to macroeconomic factors or supply-demand imbalances in the industry, or there is extreme price pressure on fuel. And the high end of the range can be achieved if current demand trends hold and fuel prices steady with normalized refining margins.

As we talk today, the macro backdrop, bookings, and overall supply side of the equation look quite positive, but fuel has been volatile in January, and for context, every $0.10 change for the full year in fuel price translates to $0.75 of earnings per share. We remain committed to driving $10 of earnings per share. This requires that we execute on our $1 billion of profit unlock, which we are progressing well on, and that the macro backdrop looks as it did when we first set that goal. We are excited to see how 2026 plays out to fully execute year two of our Accelerate plan and to deliver on our commitment of generating durable financial performance for our people and our owners. With that, let's get to your questions.