Alaska Air Group, Inc. Q2 FY23 Earnings Conference Call Insights

Key highlights from Alaska Air Group, Inc. (ALK) Q2 FY23 Earnings Concall

Management Update:

• [00:05:54] ALK said it is raising its full-year capacity guide to 11-13% versus 2022.

• [00:12:01] ALK’s revenue deceleration in 3Q was due to a combination of factors, including pricing, domestic industry capacity growth, stage length growth, and holiday timing shifts.

Q&A Highlights:

• [00:25:30] Jamie Baker at JPMorgan asked what level of capacity growth is required to push down ex-fuel CASM next year, given the 2024 guidance of ex-fuel CASM potentially declining. Shane Tackett CFO said that ALK’s long-term target range for capacity growth is 4-8%. While it is still early to say what capacity growth will be in 2024, ALK intends to continue to drive down unit costs and see a YoY reduction in 2024.

• [00:26:22] Andrew Didora of Bank of America asked why is now the right time to trade yield for more capacity, and would ALK consider cutting capacity in 2H23 if fares remain soft. Shane Tackett CFO replied that half of the three-point increase in capacity guidance is already baked into 1H23, and the other half is due to strong completion rates and Boeing and Airbus deliveries. 80% of the capacity growth in 2H23 is stage engaged, which is very efficient.

• [00:28:09] Andrew Didora of Bank of America enquired what is driving the company’s expectation that 3Q23 RASM will be the trough this year, and is it the domestic-international share shift or something else. Shane Tackett CFO replied that the deceleration in RASM in 3Q is due to core pricing, increasing capacity, and a shift in holiday travel. However, RASM is expected to accelerate slightly in 4Q if business travel and the abating of the international versus domestic demand trend come to fruition.

• [00:29:30] Helane Becker at TD Cowen asked why is the stock price down 12% despite the company’s optimistic outlook, and how could ALK explain the disconnect between the two. Benito Minicucci CEO said ALK is optimistic about its business, despite the current surge in international demand. The company believes that demand will normalize towards the end of the year, and that it is well-positioned to capitalize on this.

• [00:31:58] Helane Becker at TD Cowen also enquired why ALK has increased capacity in California, while other airlines have decreased capacity. Benito Minicucci CEO clarified that ALK is continuing to round out its California network, with a recent market entry into a top 20 market out of San Francisco. The company is also leaning into Latin America, with routes to Mexico and Costa Rica.

• [00:33:08] Conor Cunningham from Melius Research asked why there is not more leverage in the full year capacity and CASM-X guide, and is there some incremental cost bubble near term that will be offset by productivity in 4Q. Shane Tackett CFO said ALK is facing some cost challenges due to the Airbus retirement moving up and the need to transition pilots to Boeing aircraft. However, ALK is confident that it can overcome these challenges and deliver on its cost targets in the future.

• [00:37:10] Brandon Oglenski at Barclays asked if the company’s stock price is reacting to the volatility in its earnings guidance, and is ALK over-earning in 2Q and normalizing its earnings base in 2H23. Shane Tackett CFO said that while 2Q was a strong quarter, fares are off their unsustainable peaks and business travel is recovering. ALK is optimistic about its future prospects, both on the cost and revenue sides.

• [00:38:43] Brandon Oglenski at Barclays enquired about the impact of pricing and industry capacity on the sequential deterioration of RASM? Andrew Harrison CRO answered that Half of the 6-point sequential deterioration in RASM was due to core pricing coming down off the peaks, while the other half was due to industry capacity growth, stage length growth, and a minor shift in the 4th of July.

• [00:40:10] Savi Syth of Raymond James asked for an update on Boeing deliveries and ALK’s confidence in meeting capacity targets, and the key cost headwinds and tailwinds for 2023. Benito Minicucci CEO said that Boeing has been delivering planes on time, which has led to the company adding capacity to its schedule. ALK is confident in Boeing’s ability to meet its delivery targets for 2023 and is looking forward to the MAX-10 certification.

• [00:43:04] Savi Syth of Raymond James queried about fare softness, and whether ALK believes this is the start of further declines or a new level that has stabilized. Benito Minicucci CEO  said that ALK started to see a decline in fares a couple of months ago, but it is not sure if this is the start of a trend or just a temporary shift.

• [00:44:52] Catherine O’Brien at Goldman Sachs asked if ALK expects to be able to reduce unit costs in 4Q by squeezing labor costs tied to shoring up operations, or is that more of a 2024 opportunity. Benito Minicucci CEO  replied that ALK expects to reduce unit costs in 2024, when volumes are expected to be higher and the company will have completed its Airbus transition. A preferential bidding system for pilots will also help to improve cost efficiency.

• [00:47:12] Mike Linenberg of Deutsche Bank asked if ALK has considered accruing for future labor agreements, such as the flight attendants and mechanics deals, and if not, why. Benito Minicucci CEO said ALK has not considered accruing for future labor agreements, as the company prefers to keep negotiations confidential.

• [00:48:55] Mike Linenberg of Deutsche Bank enquired about any details about ALK’s plans for new routes and how much of its capacity will be allocated to new markets in the winter of 2023-2024. Andrew Harrison CRO replied that ALK is reallocating capacity across its network in 1Q23, including adding new markets in Latin America and reducing flights to New York City during the winter.

• [00:52:09] Duane Pfennigwerth with Evercore ISI enquired about the booking curve for the quarter and whether the trend of lower visibility is likely to continue. Benito Minicucci CEO said ALK has seen an increase in close-in bookings, even with business demand down. This is likely due to the availability of seats and the strong demand for leisure travel.

• [00:53:33] Stephen Trent at Citigroup asked did the unwind of the Northeast Alliance with American Airlines lead ALK to pivot its eastbound strategy. Nathaniel Pieper answered that ALK is pleased with its partnership with American Airlines, which is a traditional airline alliance that links the complementary networks of the two airlines with codeshare and reciprocal loyalty benefits.