ALASKA AIR GROUP, INC. Q1 2026 earnings call

Thank you operator, and good morning. Thanks for joining us today to discuss our first quarter 2026 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 a first quarter GAAP net loss of $193 million. Excluding special items, Air Group reported an adjusted net loss of $192 million. 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. To start, I want to thank our more than 30,000 employees across Alaska, Hawaiian, and Horizon for their continued focus, professionalism, and commitment to taking care of our guests through another unpredictable start to the year. The operating backdrop shifted rapidly this quarter. Sharply higher fuel prices driven by geopolitical events created uncertainty across global markets and meaningful pressure on the airline industry. At the same time, our network faced more disruption than normal, from once-in-a-generation rainstorms in Hawaii to civil unrest in Puerto Vallarta. Through it all, our teams have demonstrated remarkable resilience. Their response day in and day out remains the foundation of our performance and a long-term success.

While these events created close-in challenges, we remain convicted and excited about our strategy and the future we're building at Alaska Air Group as we continue to unlock the initiatives we laid out under Alaska Accelerate. Throughout our history, we have leaned into periods of disruption to strengthen the company. After the 2001 downturn, we built a transcontinental network. Coming out of the 2008 financial crisis, we established our Hawaii franchise. Most recently, following the COVID pandemic, we acquired Hawaiian Airlines, secured more than 50% market share in Hawaii, and launched long-haul international travel out of Seattle. Each of these moments shaped who we are today. The near-term pressure facing the industry today is real. Fuel costs were more than $100 million higher in the first quarter, and we expect incremental fuel costs of $600 million or more in the second quarter.

That represents approximately a $0.70 impact to earnings per share in Q1 and over $3 in Q2. Offsetting some of that pressure is a strong demand backdrop with fare increases holding. Andrew will share more in his comments. Importantly, our position of strength allows us to manage through environments like this while continuing to build long-term earnings power. Today's backdrop reinforces why we designed Alaska Accelerate the way we did: to create a structurally stronger, more diversified, and more resilient airline capable of delivering value across cycles for our owners, employees, and guests. Scale, relevance, and loyalty with an emphasis on premium experiences and international travel remains central to that foundation. While fuel volatility may dominate near-term headlines, the initiatives most critical to our trajectory remain firmly within our control, and we will continue to execute on them because it is the right strategy.

Now turning to the business, we continue to make meaningful progress on Alaska Accelerate, advancing our priorities and not standing still, even in a challenging environment. From an integration standpoint, we've completed preparations for our single passenger service system cutover, our final major guest-facing milestone. Beginning tomorrow, our systems will operate on a single platform, eliminating the friction of a dual environment. This is a significant moment for Alaska Air Group. We're moving forward with our combined and globally expanding network, an award-winning loyalty program, and premium offerings across our entire fleet. Along with the PSS cutover, Hawaiian Airlines has officially joined Oneworld, expanding benefits for our loyal guests in Hawaii, attracting new Oneworld guests onto the Hawaiian brand, and extending our global reach to meet the full range of business and leisure travel needs. Our network continues to grow as we connect our guests to the world.

We launch Rome next week and London and Reykjavík later this spring, all tracking toward full flights. I could not be more excited to see the Alaska brand set foot in Europe for the first time in our 94-year history, marking a major milestone in becoming the fourth global carrier in the United States. At the same time, our premium and guest experience continues to improve. Premium retrofits on our 737 fleet are now more than 90% complete, increasing our share of premium seats across the network and driving higher premium revenue. Our entire regional fleet is now retrofitted with free Starlink Wi-Fi, and Boeing 737 installations are underway, further enhancing our end-to-end guest experience. Guest satisfaction has already improved 15 points across all Starlink-equipped aircraft and nearly 30 points on regional jets. Another core pillar of Alaska Accelerate, our loyalty platform, continues to gain momentum.

We recently agreed to a multi-year extension with enhanced economics and a deeper partnership with Bank of America, supporting continued growth in our loyalty ecosystem and reinforcing loyalty as one of the most powerful earnings drivers in our business. We're also pleased to have reached an agreement with Amazon that eliminates losses under the legacy Hawaiian terms and creates mutual value as the relationship evolves, with still more to do. Despite winter weather and severe rainstorms in Hawaii, we delivered the industry's number one on-time performance in the first quarter, along with very high net promoter scores, another indicator that integration friction is in the rear-view mirror for Air Group. Collectively, these initiatives are reshaping the composition of our revenues and making our business more durable.

Today, more than half of our revenues come from outside the main cabin, driven by premium products, loyalty, cargo, and ancillary streams, and we expect that share to keep growing. To close, Alaska is operating from a position of strength. We have a healthy balance sheet, strong liquidity, and a fleet and network that provide flexibility as conditions evolve. I want to reiterate my confidence in our people, our strategy, and our future. We are navigating this environment with discipline, clarity, and purpose. The challenges we're navigating today do not change our longer-term trajectory, our ability to achieve a $10 EPS target, or remain a top margin-producing airline. While the path is rarely linear, the direction is clear, and our conviction in where we're headed has not wavered.

Airlines with caring and committed people, strong brands, loyal guests, disciplined cost structures, and financial flexibility are best positioned to emerge stronger, and I firmly believe Air Group fits that profile. With that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, I'll walk through our first quarter financial performance, our perspective on the near-term demand and revenue environment, and the significant progress we're realizing on the core initiatives that underpin Alaska Accelerate. Total Q1 revenues reached $3.3 billion, up 5% year-over-year on capacity growth of just 1.7%. Our unit revenues were up 3.5%, in line with our initial expectations for the quarter and building on a strong prior year comparison. From a demand and revenue perspective, performance in the first quarter was resilient despite the volatile macro backdrop and material demand headwinds uniquely impacting our spring break revenue, given our network. Specifically, we experienced significant headwinds in Hawaii and Puerto Vallarta, which together represent approximately 30% of our system capacity.

In Hawaii, unprecedented storms, with rainfall reaching as much as 3,000% of normal historical levels during March, disrupted travel plans and drove a spike in cancellations and near-term book away. In Puerto Vallarta, where Air Group is the largest U.S. carrier, civil unrest leading up to the spring break travel period had a meaningful impact on demand as well. Together, these impacts reduced first quarter unit revenues by nearly one point, with effects continuing into April and May. In response, we've reduced Puerto Vallarta flying by approximately 30% in the second quarter to better align capacity with demand. In Hawaii, we have maintained near-term capacity as the severe weather was transitory. We are busy taking great care of local travelers and welcoming visitors with the Hawaiian experience they know and love. This past week saw bookings return to last year's level on strong fare increases.

Setting aside these regions, we saw broad-based strength across our network. Premium demand continued to outperform the system and was up 8% year-over-year. With over 90% of our premium fleet retrofits complete, we're on track to sell all 1.3 million incremental premium seats across the network ahead of the peak summer travel season. Encouragingly, first-class revenue continues to produce positive unit revenues even as capacity increases 5%. Internationally, the relevance of our network continues to drive strong results as guests are choosing to fly with us in more ways than ever before. Seattle to Tokyo reached profitability in March, less than a year after its launch, and load factors for both Seattle to Tokyo and Seoul exceeded 90%. We're extending this momentum with the launch of Rome next week, followed by London and Reykjavík next month.

Early booking trends are tracking in line with expectations, with demand building nicely and premium cabins performing particularly well. Notably, more than 70% of guests booked on our new Rome service are Atmos members, materially higher than the rest of our network. Managed corporate travel was exceptionally strong, up 19% in the first quarter. Our international expansion has meaningfully increased Alaska's relevance with corporate customers. As a result, we are competing for, and in some cases, exceeding our fair market share in business travel on these long-haul routes, particularly in the U.S. point of sale. We're also seeing improved domestic corporate relevance as global connectivity strengthens our value proposition for corporate travelers.

Managed corporate demand remains robust into Q2, withheld revenue over the next 90 days up almost 30%. We are seeing broad-based strength across all industries, in particular manufacturing, financial services, and technology, and are beginning to see traction through greater sign-ups for small and medium businesses in our Atmos for Business platform. Turning to loyalty. Growth remains a priority for Alaska. Every major initiative we're executing on is driving relevance and growth for our members. These large-scale enablers, such as the Hawaiian acquisition and resulting domestic and international network expansion, the launch of our Atmos Rewards platform, issuance of a premium co-brand card, and free, high-speed Wi-Fi on board for Atmos members, are all designed to accelerate growth across our portfolio and deepen engagement with our most valuable guests, and it's working. In the first quarter, we generated $615 million in cash remuneration from our co-brand cards.

That's up 12% year-over-year, while active membership in the Atmos program grew by 13% year-over-year. Importantly, we're seeing particular strength in our Hawaii loyalty metrics with double-digit year-over-year growth across members, new cardholders, and card spend. Over 70% of the Hawaii adult resident population is now enrolled in Atmos Rewards, reflecting the strong value proposition of our combined network and loyalty program with two beloved airline brands and Oneworld's expansive global connectivity. Spend from our Hawaii-based cardholders increased 19% year-over-year and now accounts for nearly 6% of the state's GDP. Our top-rated Atmos Rewards program is clearly resonating, attracting more guests, keeping them within our ecosystem, and reinforcing the strength of our loyalty flywheel. As we look to further accelerate the growth and relevance of our Atmos Rewards program, yesterday we announced a long-term extension of our multi-decade relationship with Bank of America.

This newly expanded agreement delivers improved economics, all new capabilities, and a significant step-up in marketing investment as we move to a single issuer of Atmos-branded co-brand products. Through 2030, the agreement secures an additional $1 billion of total cash remuneration while offering what we believe will be a step change in portfolio growth. These economics are incremental to what we shared as part of the Alaska Accelerate vision and go meaningfully beyond the $150 million of loyalty profit we targeted by 2027. We're grateful to the team at Bank of America for their long-standing and continued partnership. Turning to our outlook. We ended the year with one of the most prudent growth plans in the industry. The vast majority of our 2026 growth is concentrated in long-haul flying out of Seattle as we continue to build our new global hub and generate new revenue streams.

At the same time, in response to current fuel environment, we've proactively trimmed nearly a point of capacity in May and June, including reductions in Mexico and select late-night departures in high-frequency markets. We now expect second quarter capacity to be up approximately 1% year-over-year, again among the lowest growth rates in the industry, comprised entirely of our long-haul international service out of Seattle, while our North America capacity is down slightly year-over-year. The overwhelming majority of our capacity remains deployed in core hubs where we have scale, relevance, and strong loyalty. As conditions evolve, we will continue to prioritize margins consistent with the disciplined actions we took last year when we were the first large airline to reduce capacity in response to a challenging macro environment. Demand has shown resilience in the face of higher fares.

Incoming yields for continental U.S. markets have sustained an increase of 20% plus year-over-year in recent weeks, pushing held unit revenues in these regions to up double digits for the back half of the quarter. Given that we still have 35% of revenue to book in the quarter, and provided this demand continues, we would expect to see the system achieve high single-digit unit revenue gains with a path to 10% in Q2, despite an overall two-point drag from Hawaii specific impacts in the quarter. To wrap up, while the near-term environment remains volatile, we continue to make strong strides on the initiatives that matter most to the long-term value of this business.

Importantly, we are not standing still, as evidenced by our new co-brand agreement with Bank of America and the transition to a single passenger service system this week, which will unlock the depth and breadth of our guest products and services seamlessly across our global network. We're executing against Alaska Accelerate, improving the durability and quality of our revenue, maintaining prudent capacity discipline, and investing in areas that strengthen our earnings power over time. I remain confident that the actions we're taking today position Alaska Air Group to emerge stronger as conditions evolve. With that, I'll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. While we entered 2026 with strong momentum, geopolitical events have quickly disrupted that trajectory, driving an acute run-up in fuel prices that has put pressure on the entire industry. In moments like this, it's important to separate what has changed from what has not. Fuel has moved sharply higher and remains volatile. Demand for air travel has remained both resilient and strong, and we have continued to execute on both our integration and the Alaska Accelerate plan, which is focused on building strength into the business for the long term. While we are once again navigating an unexpected and challenging backdrop, we know that successful airlines will be those with scale, relevance and loyalty.

The Alaska Accelerate Plan delivers in each of those areas and also broadens our commercial model as we expand internationally and in our premium offerings, two areas of the industry where demand continues to grow rapidly. As we navigate the near term, we will double down on our core business model, operational excellence, high productivity and providing award-winning service to our guests, while also delivering on continued investment in the initiatives that will grow our earnings over time. Against that backdrop, our first quarter adjusted loss per share of $1.68 came in better than the midpoint of our revised guidance, reflecting both the resilience of demand and the discipline with which we're managing the business.

Absent fuel, which alone accounted for approximately $0.70 of incremental EPS pressure versus our original plan, and the impactful, though transitory events in Puerto Vallarta and Hawaii that Andrew mentioned, we would've been well above the midpoint of our original guide. Our financial position also remains strong. We have approximately $2.9 billion of total liquidity, including cash on hand and our undrawn line of credit, and $20 billion in unencumbered assets. Net leverage was 3.3 times, and our debt-to-capital ratio finished the quarter at 61%. During the quarter, we repaid $340 million of debt, and we expect to repay $65 million in the second quarter. Given the dislocation in our share price in March and April, our share repurchases accelerated, bringing our year-to-date total to $250 million, which should more than offset dilution this year.

We have $180 million remaining under our $1 billion authorization, but we'll pause further repurchases to evaluate the outlook for the remainder of the year. Turning to first quarter results and the second quarter outlook, first quarter unit costs were up 6.3% year-over-year, in line with our expectations as we lapped the final quarter of our new flight attendant CBA and experienced some pressure from winter weather and storms in Hawaii. Unit costs for the second quarter, given a close-in reduction of one point of capacity, will be modestly higher than our first quarter result. There are three areas driving this that are transitory in nature.

These include the crew training costs for ramp-in of our 787 international flying, a headwind year-over-year, given gains on the sale of our 737-900 fleet last year, and a planned employee recognition expense tied to achieving a single PSS system, the last major customer-facing milestone of the integration. There were several positive trends in our core costs in the first quarter as well, including strong improvements in both aircraft utilization and in productivity across our operation, which were achieved while moving back into the position of the industry's best operation. We also had strong performance in our maintenance division and positive trends in selling related expenses where we will continue to realize incremental synergies as we drive revenue growth. Our first quarter fuel price averaged just $2.98 per gallon, reflecting the initial increase in fuel costs that began in late February.

We have seen refining margins more than double, and in Singapore, refining margins spiked more than 400% during the quarter. As a result, fuel sourced from Singapore, which historically has been consistently the lowest cost portion of our supply, became the most expensive, impacting roughly 20% of our total consumption. Given how dynamic the current fuel price and demand backdrop are, we are suspending our full year guide until conditions stabilize and we have better line of sight to earnings beyond the current quarter. For the second quarter, the range of potential financial outcomes remains wide and difficult to predict. In just the past seven days, fuel prices have moved to as high as $5.15 per gallon and as low as $4.45.

Given this, we are providing more detailed information on close-in unit revenues and unit costs than last quarter, where we focused our guide on an EPS range and capacity only. In the future, we plan to revert to EPS-focused guides as the long-term health and earnings capability of our business remains our top financial priority. For the second quarter, we expect unit cost to be about 1.5 points above our first quarter result, given we have reduced 1 point of capacity close in. Unit costs will inflect down in Q3 and Q4 to low single digits. Assuming continued strength in demand where the balance of bookings that come during the quarter are at currently observed yields, we expect a path to unit revenues of 10%.

For fuel, in April, we will pay approximately $4.75 all in, and given the current forward curve, we would put the quarter average at $4.50 per gallon. As of today, we are recovering approximately one-third of incremental fuel costs. We are also assuming a 32% tax rate, though this could change meaningfully depending on both in-quarter performance and also our full year outlook as we exit the quarter. Any tax accrual changes are not expected to have cash flow impacts, as we expect to not be exposed to cash taxes in the near term. These assumptions result in an EPS estimate of a loss of approximately $1 per share. It is important to step back from the immediate challenges of fuel price, as fuel alone is driving the change in our expected immediate financial performance, and we believe that will normalize over time.

Fuel price assumptions are adding $600 million of expense versus expectation for the second quarter, which is a $3.60 impact to EPS alone. The underlying business model is strong, and we see it getting stronger with all of the work we are doing on the commercial side of the business. Absent the fuel price spike, we would've expected to be guiding to a solidly profitable quarter, and absent the transitory Hawaii headwind to RASM, we believe our unit revenue trends are as strong as others who have reported. While this is not how we envisioned starting the year, the underlying demand environment gives us confidence, and the work ahead of us is clear. We are now on the eve of our single passenger service system cut over, a peak integration milestone that, once complete, puts much of the integration friction firmly in the rear-view mirror.

That unlocks a simpler, faster-moving airline and allows us to fully turn our energy toward the opportunities in front of us. We remain fully committed to deepening the structural advantages that drive long-term success in this industry, scale, relevance, and loyalty. Over time, we expect our revenue profile to increasingly reflect that shift with a growing share of premium loyalty and ancillary streams that provide greater earnings durability across cycles. We are building the right business model, making real progress on the areas within our control, and don't anticipate slowing down in that pursuit. With that, let's go to your questions.