Alaska Air Group Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 27, 2022

Key Takeaways

  • In Q4 2021, Alaska Air reported GAAP net income of $18 M and adjusted net income of $31 M with a 2.4% pre-tax margin despite a ~$70 M hit from severe weather and Omicron disruptions.
  • For full-year 2021, revenues recovered to $6.2 B (70% of 2019), second-half adjusted pre-tax margin topped 7%, operating cash flow was positive (>$100 M ex-CARES), debt-to-cap ratio improved to 49%, and employees earned $151 M in bonuses.
  • Key strategic initiatives in 2021 include a shift to a single Boeing fleet with 93 MAX orders, joining the OneWorld alliance for West Coast international service, committing to net-zero carbon by 2040, and setting DEI targets tied to executive pay.
  • In 2022, Alaska expects Q1 impact from Omicron but to be profitable from March, return to pre-COVID capacity by summer, and achieve full-year capacity growth of 2–6% versus 2019.
  • The company ended 2021 with $3.5 B in liquidity, a 3.3% average debt rate, 98% pension funding, plans ~$1.6 B in CapEx for 32 aircraft deliveries, and aims for net debt/EBITDAR around 2× by year-end 2022.
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Earnings Conference Call
Alaska Air Group Q4 2021
00:00 / 00:00

There are 20 speakers on the call.

Operator

Good morning. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group 2021 4th Quarter Earnings Release Conference Call. Today's call is being recorded and will be accessible for future playback at alaskaair.com. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session Analyst. Thank you. I would now like to turn the call over to Alaska Air Group's Managing Director of Investor Relations, Emily Halverson.

Speaker 1

Thank you, operator, and good morning. Thank you for joining us for our Q4 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.

Speaker 1

Several others of our management team are also on the line to answer your questions during the Q and A portion of the call. This morning, Air Group reported 4th quarter GAAP net income of income of $18,000,000 Excluding special items and mark to market fuel hedge adjustments, Air Group reported adjusted net income of $31,000,000 pre tax margins were 2.4 percent for the quarter. As a reminder, 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.

Speaker 1

And as usual, we have provided a reconciliation in the most directly comparable GAAP and non GAAP measures in today's earnings release. Over to you, Ben.

Speaker 2

Thanks, Emily, and good morning, everyone. In 2021, Alaska established a track record of leading the industry in the recovery from the pandemic. This has been enabled by the strength of our business model, Our measured approach to capacity and our financial discipline. Our 2.4% pretax margin in the 4th quarter continues that trend, especially considering the disproportionate impact that severe weather had on our hubs and the omicron related impacts we began to face at the end of the year. While I'll discuss the impact of weather on our Q4 and the impact of Omicron on our Q1, let me start by saying both of these are temporary challenges that do not deter my confidence in our underlying business model and its ability to outperform the industry.

Speaker 2

Starting with recent events, the combination of severe snow, multiple consecutive days of sub freezing temperatures in our Pacific Northwest hubs and staffing disruptions caused by the Omicron variant resulted in one of the most challenging holiday travel periods we have ever experienced. Our completion factor was extremely challenged at the end of the year, which resulted in flying approximately 1 point less than our expected capacity in the quarter And 2.5 points less than we planned to operate in December alone. I want to apologize for letting our guests down during one of the most travel periods of the year. And I also want to acknowledge the strain our teams were under as everyone worked to stabilize the operation. In terms of the financial impact of these events, they were material.

Speaker 2

Our 4th quarter result was worse by approximately 70,000,000 And our pre tax margin was reduced by 3.5 points. Even with this outsized impact, Alaska was Profitable in Q4 and strongly led the industry in pre tax performance over the second half of twenty twenty one. In response to the ongoing impacts of Omicron in early January, we proactively reduced our remaining Q1 scheduled client by about 10%. I am pleased to report that Omicron absences are down significantly and our operation is once again stable. Omicron has not only impacted our ability to operate fully, it has dampened close in demand substantially as well.

Speaker 2

Andrew will provide more detail on the demand environment, but the silver lining is that demand for travel from present state and beyond Remain strong and booking trends have rebounded week over week since their low point in early January. We expect the bulk of the Omicron impact will be felt in the Q1, specifically in January February as revenue is reduced and as unit costs are pressured given lower ASM production and higher staffing related costs. However, as I opened with, this will be short term in nature and has not changed our expectations about the overall recovery. Clearly, this was a tough way to end a year that otherwise had progress worth celebrating. And in that vein, I want to acknowledge that 2021 was a year of significant recovery and highlights some of the important successes from the full year we've just closed out.

Speaker 2

First, our revenues recovered to $6,200,000,000 or 70% of 2019 levels and we achieved this while flying less capacity and many of our peers who had similar revenue recovery results. 2nd, while the full year adjusted pretax loss was $342,000,000 We recorded $282,000,000 of adjusted pre tax profit during the second half of the year. Our second half adjusted pre tax margin was over 7%, clearly outperforming the industry even though West Coast travel has recovered slower than much of the country. 3rd, with decent demand recovery and disciplined cost management, we returned to positive operating cash flows. Excluding any CARES funding, we've generated more than $100,000,000 in operating cash flow for the year, which reflects a $100,000,000 pension contribution we funded in the 3rd quarter.

Speaker 2

4th, as profits and cash flow return to positive territory, We have essentially repaired our balance sheet. We closed the year with a 49% debt to cap ratio, 12 points lower than prior year and within our target range. And lastly, given we were able to meet or exceed several of our recovery goals, Our employees earn the industry's highest bonus pay through our incentive based pay program. For the average employee, This payout amounts to about 6.2% on top of their annual pay. All told, I'm really pleased to report that our bonus programs will pay out $151,000,000 to our employees for the year.

Speaker 2

In addition to these financial milestones, We also submitted several critical strategic decisions during 2021 that will help drive our success well into the future. We made the decision to return to a single fleet of Boeing aircraft, which will drive revenue and cost benefits. The remaining 27 Airbus A320s that are flying today will be retired by the end of 2023, enabled by our Boeing MAX order of 93 firm F52 options. We joined OneWorld and launched our West Coast international alliance with American Airlines, which will unlock additional revenues and loyalty across our West Coast hubs, especially in Seattle. We announced sustainability goals committed to net zero carbon emissions by 2,040 and further embracing a sustainability mindset by linking a portion of our annual performance based pay plan for all employees to the carbon intensity of our operation.

Speaker 2

And we renewed our commitment to diversity, equity and inclusion by establishing a 5 year goal to increase leadership representation to match that of our frontline. We also integrated this goal into our executive compensation targets. Let me close with a brief look ahead at 2022. Like our industry peers, Q1 will clearly be impacted by Omicron, both for revenues and unit costs. We do believe the virus will move to endemic status and that demand will ultimately stabilize.

Speaker 2

And when it does, our business model is set to outperform. Notwithstanding a challenging Q1, We expect to be profitable for the month of March and for the remainder of the year. We remain committed to returning to pre COVID capacity by the summer and plan to grow from there. I expect full year capacity to be up versus 2019 between 2% and 6% dependent on demand. This guidance reflects first half capacity that is flat to slightly up and second half capacity that could be up as much as 10% versus 2019.

Speaker 2

As we did throughout 2021, we will continue scaling our business back in a measured way, leveraging our strong balance sheet and running your operation to produce consistent industry leading financial performance in 2022. I hope you'll join us at our upcoming Investor Day, We plan to share our long term expectations including comprehensive 2022 guidance. This event is set for March 24 in New York. Before I hand it off to Andrew, I want to thank the people of Alaska and Horizon for all that they do. It is no secret that this is a tough business, The pandemic has surprised and challenged even the most seasoned in our industry.

Speaker 2

The strength of our company comes from our people and culture of care, Our focus on safety and operational excellence, our reputation for customer service and our financial discipline. I am confident these strengths will serve us well again in 2022. And with that, I'll turn it over to

Speaker 3

Thanks, Ben, and good morning, everyone. 4th quarter revenues totaled $1,900,000 and were only down 15% versus 2019, which was better than our guide. And with flown capacity also down 15%, our 4th quarter unit revenues were flat in 2019. As Ben mentioned, end of quarter weather disruptions were significant, impacting revenue by approximately $45,000,000 Even with these setbacks, our revenue recovery improved by 3 points from what we viewed was a relatively strong 3rd quarter. Load factors showed continued improvement throughout the quarter as well, progressing from 75% in October to 80% in November and 83% in December, signaling demand for travel continues to move in the right direction.

Speaker 3

The strength of this demand clearly played out in our November revenue results. November revenues were down just 7% versus 2019 on 12% less capacity. My take from that result is that our fundamental revenue results were better this November than in 2019. Even though we've not seen anywhere close to a full business demand recovery, the full impact of our One World and American partnerships or a complete West Coast Recovery. Our network is well positioned for recovery.

Speaker 3

Another encouraging indicator is yields, which ended the quarter up 3% versus 2019. This was driven by the strength of holiday bookings and solid demand management by our RM team Despite the Delta and Omicron variants bookending the quarter, for the winter holiday period, we were on pace for flat to positive load factors and double digit yield gains prior to the impact of the winter disruption. Given all the volatility this year, We achieved great results and I want to thank my entire commercial organization. They came together as a fully integrated team and did a tremendous job stimulating demand and welcoming guests back to flying, managing loads and yields and taking care of guests during disruptions. The net result of all of this was posting the best unit revenue performance in the industry for the second half of twenty twenty one is down just 0.5%.

Speaker 3

As we've seen all year, guest preference for our 1st and premium class products remained strong in the 4th quarter. 1st class paid load factor ended the quarter up 2 points and premium class paid load factor was up 8 points, growth versus the Q4 of 2019. Loyalty strength also carried through year end, particularly from our credit card program. Our bank card remuneration reached record levels in the 4th quarter, up 13% versus the Q4 of 2019. We have a tremendous partner in Bank of America who issues our co brand card and we're excited about the highly engaged cardholder base that we've established together.

Speaker 3

Looking ahead, while the impact of Omicron will be transitory, each successive variant has been expensive for our business. Post Thanksgiving, we saw a softening of bookings for the Q1, but most acutely in January. Impacts also bled into February, pre Presidents' Day, But at a much reduced rate from January. We estimate Q1 bookings lost to this wave are approximately $160,000,000 As Ben mentioned, we've seen bookings start to recover from down 40% versus 2019 in the 1st week of January to around 25% today. March loads and yields are strong and we expect them to remain this way as the negative impact of the variant continues to subside.

Speaker 3

Given the abrupt softening of closing demand, we've moderated our capacity plans in the Q1. We will fly approximately 10% to 13% below the same period in 2019. With the lost bookings in January February, We expect total revenues in Q1 to be down 14% to 17% from 2019 levels. Q1 is our seasonally weakest quarter. And while it's unfortunate, it will be significantly impact by Omicron, I prefer Q1 was impacted versus any other quarter.

Speaker 3

We do anticipate that when Omicron moves behind us, demand will snap back to recovery path we were seeing leading into the holidays, That has been the trend after prior waves. Spring and summer travel should be strong on the leisure side And benefit from further unlocking of business and international travel. I look forward to quantifying our expectations for the full year, We're saving many of those details for our upcoming Investor Day. That said, I do want to speak in a bit more detail about our 2022 capacity plan. As Ben shared, we're targeting to return to pre COVID capacity by the summer and to grow through the back half of the year for full year 2022 capacity growth of between 2% 6% depending on demand.

Speaker 3

In Seattle, We're already above pre COVID capacity. A material portion of our planned growth in the back half of twenty twenty two will be from our Pacific Northwest subs as we look to continue to enhance relevance and scale, mostly through scheduled depth. California demand has recovered more slowly than the rest of the network. And as we bring California fully back in 2022, I'm excited about the opportunities that await us. This month, we brought on board a new Regional Vice President of California, Neil Thwaites, who will be pivotal part of growing our presence estate from both business and leisure perspective.

Speaker 3

From a commercial perspective, I'm anxious to capitalize on a full recovery. I believe we have the right cost structure, the right commercial offerings, the right balance sheet to allow us to grow versus 2019 as the recovery continues to unfold. We have flexibility to adjust our capacity as needed to match supply with demand. And we are looking at the back half of twenty 22 as a period that pivots from capacity recovery to 1 of capacity growth. And as we plan for growth across our West Coast hubs, We're eager to maximize the potential of our loyalty program and leverage the international capabilities of our One World partners to provide our guests with global access.

Speaker 3

Beginning summer of 2022, British Airways will fly nonstop service from Portland to London Heathrow And Finnair is set to launch nonstop flights from Seattle to Helsinki. This summer, Alaska partners will have over 100 nonstop flights Per Week of the West Coast to Europe. We've been navigating the ups and downs of this pandemic for nearly 2 years now. And while we know the Q1 will be weaker than we expected just a month ago, I'm very optimistic about how we are positioned for March and beyond. With that, I'll pass it to Shayne.

Speaker 4

Thanks, Andrew, and good morning, everyone. I'll start as I always do with an update on cash flow, liquidity and our balance sheet. We ended the year with $3,500,000,000 in total liquidity, inclusive of on hand cash and undrawn lines of credit, Which is essentially unchanged from Q3 and reflects $112,000,000 in debt repayments during the quarter. Our Q4 cash flow from operations was 100 $29,000,000 above our previous guidance, largely driven by stronger demand recovery than anticipated given we were dealing with the now old news Delta variant as we came into the quarter. Our balance sheet remains a bright spot and point of differentiation within the industry.

Speaker 4

This year, our debt to cap fell to 49%, 12 points below year end 2020, placing us within our stated target range and has been set essentially back to our pre COVID balance sheet strength. In fact, in a period marked by increasing debt across the industry, our adjusted net debt ended the year 40% lower than 2019. We're pleased to have received credit upgrade in late December as well, moving us one step closer to an investment grade rating. The weighted average effective rate of our outstanding debt is 3.3% and our debt service is entirely manageable going forward. Contractual debt repayments in 2022 are about $370,000,000 with $170,000,000 in Q1.

Speaker 4

Given the low cost nature of our debt, we don't plan to make any significant prepayments during 2022. Rounding out the strength of our balance sheet, our Pension Plans ended the year at 98% funded, the highest level we've achieved since 2013. Our strong balance sheet and ample liquidity put us in a terrific position to pay cash for the 30 two-seven thirty seven-nine aircraft deliveries we have in 2022. We feel very comfortable with our liquidity position, especially given our belief that we are back to annual profitability and consistent annual positive cash flow generation. By the end of 2022, I expect our total liquidity will step down to around $2,500,000,000 and our net debt to EBITDAR to settle around 2 times or less.

Speaker 4

Turning to the P and L, our 2.4% pre tax profit was a solid outcome given the circumstances in the quarter. Andrew spoke to the revenue results and I'll dive into our costs. Our non mule costs were $1,400,000,000 in the 4th quarter, inclusive of approximately $25,000,000 of unexpected costs from the December disruption. This was driven by approximately $18,000,000 for overtime and wage premiums as we work to stabilize the operation from staffing disruption and $7,000,000 incurred for passenger remuneration, de icing and other related costs. A typical bad weather event for Alaska might last a couple of days and impact a single hub.

Speaker 4

The December event lasted an entire week, impacted both Seattle and Portland And was exacerbated by the start of a surge in omicron related staffing shortages. In short, a literal perfect storm. As Andrew indicated, the revenue impact of our cancellations was $45,000,000 And given the $25,000,000 in incremental costs, This event alone erased $70,000,000 of profit from the December month and quarter. The combination of lower ASM production and higher costs resulted in our CASMex being up 12% versus 2019, outside the high end of our range. Absent the disruption, our cost Results would have been in line with our guidance.

Speaker 4

Looking ahead on costs, our commitment to returning to 2019 CASM ex levels remains unchanged. We know we've got our work cut out for us. Our business model thrives on predictability and execution, and it is obvious that COVID has inserted a level of volatility into our that makes managing a high fixed cost business more difficult. 2022 will start off very challenged, but we fully expect it to sequentially improve materially As the year progresses, for the Q1 Q1 CASM ex is expected to be up 15% to 18% and capacity down 10% to 13% versus 2019. Seven points of this is purely driven by our late pull down of Q1 capacity.

Speaker 4

While the reduction will help Sure, our ability to operate the flights we sell given Omicron's impact on staffing and is a hedge against lower close in demand. Reality is we cannot pull out most costs this close in. Absent the capacity pull down, our unit cost guide would have been up 8% to 11%. In addition, our costs in Q1 include 2 items contributing another 3.5 points of pressure that are worth detailing. 1st, approximately 2.5 points of our Q1 unit cost increase is related to lease return expenses for our Airbus aircraft.

Speaker 4

As previously noted, given the speed with which we plan to return to a single fleet, we will be incurring significant costs associated with returning these leased Airbus aircraft, primarily over the next 2 years. I currently expect the total lease return expense to be between $200,000,000 $275,000,000 in total, with more than half of that being recorded this year. These transitory return costs begin in earnest in the Q1 of 2022, Will peak by Q4 of this year and will then taper through 2023 as the last A320 leaves the fleet. So while a headwind right now, it will become a tailwind to our cost structure in the next 8 quarters, which will be further helped as we replace 150 Seat Airbus with the 178 seat more cost efficient Boeing 737-nine aircraft. 2nd, approximately one point of our expected Q1 unit costs are being driven by incremental training costs and wages of newly hired employees as as we prepare to recover to pre COVID capacity by the summer.

Speaker 4

To move from 80% to 85% of pre COVID flying to 100 We expect fuel prices to be between $2.45 $2.50 per gallon in Q1, also increased from the last quarter. Despite this quarter's cost guide, largely driven by the late pull down of capacity that I noted, we expect significant sequential improvement in unit costs as we recover capacity throughout We expect full year 2022 unit costs inclusive of lease return expense to be up 3% to 6% and on an ex lease return basis to be up 1% to 3%. This estimate implies returning to our pre COVID cost structure during the second This entire pandemic and our recovery has been obviously unpredictable, but I'm excited about what lies ahead for Alaska. I truly believe we've set up our business to deliver superb results as demand fully stabilizes. With continued focus on our cost initiatives, fleet transition and and our commercial opportunities.

Speaker 4

We have valuable levers that set us up for a great next couple of years. And with that, let's go to your questions.

Operator

And the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first caller is Duane Pfennigwerth of Evercore ISI. Your line is open.

Speaker 5

Hey, thanks. Good morning. Good morning. I wanted to ask you kind of an industry revenue management question. And I think it's a little tricky to answer here in January, but I'll give it a shot nevertheless.

Speaker 5

So As we have these waves, these recurring waves, probably the first time we saw one of these waves, The industry's willingness to sort of hold back on the future and hold back on inventory management into the summer, etcetera, It was probably pretty limited. I wondered if you could contrast maybe the second wave with this period of time And to what extent, have we already sold forward kind of summer yields at less than optimal levels?

Speaker 3

Yes. Thanks, Duane. That's actually a really interesting question. I think if you looked at our 3rd quarter performance, It evidenced very, very strong demand. November December again evidenced very, very strong demand.

Speaker 3

With each of these waves, it's about 4 weeks from the peak of the negative bookings down to recovery in the mid teens. And specifically to your question, From a revenue management perspective, we don't think it's much of a pricing issue as it is a volume. And So that's why we've returned really good yields. We've been holding out for that excess demand and that strong demand when it comes. Even as of March and beyond, we're sitting in a very good yield and unit revenue position.

Speaker 3

So from our perspective, the demand is the problem with the waves, but when the waves go, the demand comes back. And when we see that, we manage the revenue accordingly.

Speaker 5

Thanks for that. And then maybe just sticking with revenue, is there anything You'd call out regionally as we think about the rest of this year and again into the summers. Can you remind us what was better, what was worse, And any commentary you might have on Hawaii specifically. Thanks for taking the questions.

Speaker 3

Yes. We don't Really talk a lot about regions per se. I think the thing that our team has done a really good job with is really managing the capacity in those regions. And you'll see as we've shared in our prepared remarks, California was in a weak position and we have most of the capacity coming out of there where we're stronger. We We have more capacity coming back.

Speaker 3

I think Hawaii has been doing quite well. I think we've got past the Issues with vaccination and all the rest of it, and guests are flying. It's a little lower than pre pandemic, but overall the business is performing.

Speaker 2

Okay. Thank you.

Operator

Your next caller is Hunter Keay of Wolfe Research. Your line is

Speaker 6

open. Good morning. Thanks. Andrew, have you ever or Ben, have you ever thought about using price to manage costs In the sense that we've got these you just mentioned you're always willing to push for yield a little bit. And we have these really peaky periods where the operation just gets So stressed with volume.

Speaker 6

Have you thought about pushing yields a little harder, maybe to save yourself some IROP or ReaCom cost Risk or maybe you lose a point of load factor, but you save a point and a half of CASM because you're intentionally keeping volumes down at peak periods.

Speaker 3

Maybe I'll start, Hunter. It's an interesting thought. I think, honestly, we've sort of built our brand On being value for money. And so we have their caps, just to be frank. We will get to a point where we will not charge guests More than certain amounts.

Speaker 3

And so we're very much focused that when our guests come to book, that they feel like they're getting good value for money. And so to take that approach, we probably

Speaker 6

Thanks. Ben, here's another interesting question for you. Have you seen the weakness in tech stocks every day Impact your bookings. I mean, a lot of your passengers are Seattle based. They have tech stocks in their personal portfolios.

Speaker 6

And I've always thought that the days the market is down, People don't book airfare. I would imagine that's particularly acute with you guys being the Pacific Northwest. So have you ever given any thought Andrew to tying your daily bookings with what you're seeing in the market

Speaker 3

Yes. Hanna, you've hit on obviously a very key point. And I'll just Our business got back to 50% in December. I'm just going to say the largest tech companies, Their travel is anywhere down from 70% to 90% right now. They are not traveling.

Speaker 3

And that The volumes in those high-tech markets. As far as general demand, as I shared earlier, I don't see a willingness to pay really being the issue. It's just volumes is really the challenge for these pipes.

Speaker 4

Hey, Hunter, take the clarifying by the same. Andrew's giving you the sort of business traffic. I think on the leisure side, people who work at tech companies are still traveling, if that's your We haven't seen a pullback in that based on a few weeks ago.

Speaker 6

Yes, that's not exactly the question, Shane, but regardless, I appreciate the color. Thank you.

Operator

Your next caller is Dan McKenzie of Seaport Global. Your line is open.

Speaker 7

Hey, good morning. Thanks. Just going back to that last comment, It seems that December yields were up double digits, if I heard that correct, and that's really without a lot of your corporate travel. I'm just wondering if you could Elaborate a little bit more on pent up demand. The script was helpful, but does it feel different this time versus past downturns?

Speaker 7

And if so, What's driving

Speaker 3

that? Yes. I think one thing that's a little different is Q1, doesn't other than starting in March, does not have sort of the peak bookings that sort of when you came off the Delta variant, November December. So again, I think the yield environment from where I sit is very good, Quite frankly, and I fully expect that after the Omicron, as we get this behind us, we're going to start to see the spring and beyond booking come back to life.

Speaker 7

Okay. Andrew, you've digested a lot of growth over the years. You've done a great job with it. Does the growth later this year skew towards long, medium or short haul flying? And if you're exiting the second half of the year at double digit growth, does 2023.

Speaker 7

Should we think about that trending closer to the historical 4% to 6% or 4% to 8% growth rate? Or Are there anomalies that we need to keep in mind as we kind of build out through next year?

Speaker 3

Yes. I think as it relates to capacity, we what we're planning to grow in the second half of the year, we've grown a number of times at those rates, maybe 2015 2016 for sure. So we feel really good about that. I think I can't really comment on 2023, but again our goal was to get California back pre COVID levels and then, in the back half continue to grow and fill in the depths of our schedule in the Pacific Northwest. And that's sort of what we plan to do.

Speaker 7

Okay. Thanks for the time you guys.

Operator

Your next caller is Savi Syth of Raymond James. Your line is open.

Speaker 8

Hey, good morning, everyone. Just on the I was wondering if you could provide a view on CapEx for 202220 23 and any other kind of notable demands on cash this year and next year other than kind of the depth color that you provided?

Speaker 9

Savi, it's Matt Pieper. Thanks for the question. CapEx for 2022, looking at about $1,600,000,000 and we've been Open, as Ben referenced in the script, really taking the decision to go single fleet and over index with Boeing on deliveries over the next couple of years as we phase out A319s, 320s and get the most efficient airplanes in the sky that we can. From a debt obligation perspective, we don't have, as Shane referenced, a lot of expensive obligations coming. We've got about $450,000,000 principal plus interest over the year, which Frankly, given our cash balance, given where our debt ratio is set, we should be able to stomach that very, very easily.

Speaker 8

Makes sense. So a couple of years of kind of elevated CapEx here at least. Is this fair?

Speaker 9

Yes. Yes. And as we've said With 2023, again, number of airplanes coming.

Speaker 8

Okay. That makes sense. And then I know the regional operation It is not a

Speaker 10

big part of your kind

Speaker 8

of overall capacity, but just curious how that is impacting your 2020 outlook as Horizon and your partner is going to deal with pilot supply issues and now more recently this kind of whole seabed rollout issue.

Speaker 11

Hey, Savi. It's Joe from Horizon. Yes, mileage attrition is definitely a reality in the regional industry right now. Horizon has We've seen a fair bit of it over the past quarter. The attrition that we're seeing, I would say, has so far been right in line with our projections though.

Speaker 11

So the adjustments that we made to our flying for this year so that we can sort of get folks hired up to replace those that are departing and account for the training cycles that That's baked into our plan and is proceeding as it had sort of been sketched out last fall. We have not dropped any cities and the amount of production in our flying has been pretty much in line with other regionals. 5 gs is definitely a little bit of an impact. We do operate the E175 and we're working through that with the FAA. Hope to get a resolution on that

Speaker 3

Savi, I might just add that, yes, regional in total is around 10% of our capacity. And really all of this growth is coming from gauge and And MAX and retirement of Airbus and mainline growth. That's really what's driving what we see in 2022.

Speaker 8

Makes sense. That's super helpful. Thank you.

Speaker 2

Thanks, Fabienne.

Operator

Your next caller is Connor Cunningham of MKM Partners. Your line is open.

Speaker 12

Hey, thanks. Maybe a follow-up To Savi's question, just again, when we think about the hiring issues, it's always about the regional is the one that people are most concerned about. And Your MAX order right now is under the larger variant, but has there ever been any thought to actually replacing Or maybe up gauging the regional effort to a smaller MAX, just because it's probably easier to hire at the mainline going forward than And it is at Horizon. I realize that there's a big jump in capacity, but some of those markets seem like they may be able to support, a larger plane now.

Speaker 2

Hey, Connor. Thanks for the question. I think when we look at the fleet structure, I like where we are. I mean, we serve small Pacific Northwest markets that are just suitable for our semi fixed seat airplanes. So we like the fleet mix.

Speaker 2

When you look at 737 MAX or you're looking at -seven, 8 or We skew towards the larger airplanes in terms of unit cost per seat. So I pretty much like where we are and I think we're going to continue on that path.

Speaker 12

Okay, great. You guys get unique questions because you're a unique airline that made money in the second half last year.

Speaker 3

So

Speaker 12

Then maybe just on the second half capacity ramp. So just trying to reconcile everything. You talked a little bit about it, but Potentially going to be 10% larger or double digits, I guess, is what you said. And I was a little surprised by that. I mean, I think your fleet is only 5% larger.

Speaker 12

So, and I realize that there's some stage engage, maybe you can quantify what that is. But is your utilization potentially going to be higher In 2022 in the second half of twenty twenty two versus twenty nineteen, I'm just trying to again reconcile all the moving parts there. Thank you.

Speaker 3

Hey, Connor, Shane. You've got all three of

Speaker 4

the factors. There's some stage length growth. There's certainly some sea gauge growth given the larger MAX Dash 9 aircraft. And then there's utilization that we can press the fleet a little bit harder than we are right now.

Speaker 12

Do you care to share the moving parts or is that a later date?

Speaker 4

Yes. Actually, stage is one of the larger drivers. It's probably half of that And then the other 2 are probably similar in terms of their guidance.

Speaker 12

Okay. All right. Thank you.

Speaker 3

Thank you.

Operator

Your next caller is Ravi Shanker of Morgan Stanley. Your line is open.

Speaker 13

Thank you. Good morning, everyone. If I can ask the first question, but from the cost side rather than revenue side, Has everything that's happened in the last 3 to 6 months with Omicron and Delta and everything else fundamentally changed the way you think of staffing and resourcing the airline going forward. Or do you feel like this is pretty much an idiosyncratic pandemic driven issue and once we get back normal, it should be kind of going back to normal service resumed in terms of just operational efficiency.

Speaker 2

Hey, Ravi, it's Ben. I think being under this COVID umbrella, I think there is a different mindset in terms of staffing. There is a little more sliding towards overstaffing just to take care of People who get sick, this is an infection that goes through people rather completely. So with our own. If you look long term, our plan is to get back to productivity levels, back to what we had pre pandemic.

Speaker 2

So We're in a COVID phase right now, and we have to staff appropriately for that, which will be a little higher than we would normally be. But our goal is to get back to pre pandemic levels.

Speaker 13

Understood. And for my follow-up, not to steal the thunder from your Analyst Day, but on last call, you guys Hinted at the potential of returning to the cash return by the end of this year. And clearly, you guys are flexing our muscle on the balance sheet. Any updated thoughts on that at this

Speaker 4

point? Hey, Ravi, it's Shane. No, I think what we've said is, Number 1, our philosophy hasn't changed. So shareholder returns are part of our long term capital allocation philosophy. And number 2, we wanted to be in a position sort of For others to make a decision to go back into shareholder returns, but it's not an active discussion.

Speaker 4

We're precluded from doing it, as you know, until the end of the year. So sometime over

Speaker 12

the 1st

Speaker 4

of the year, we'll start talking about it with our Board and certainly, but once we know something, we'll share it with you all.

Speaker 13

Great. Thank you.

Operator

Your next caller is Andrew Didora of Bank of America. Your line is open.

Speaker 14

Hey, Good morning, everyone. First question for Shane and there's a question I'm asking a lot of the airlines this earnings season. But Can you maybe talk to sort of the wage inflation that you're considering for your labor groups when you kind of model out year 2022 cost plan.

Speaker 4

Yes. Hey, Andrew. I'll take this in 2 parts. The first is we noted last call some entry level wage pressure, and we've had to move wages For a few of our groups, just in order to attract folks in the tight labor market, we had priced that at about $7,000,000 for the quarter. That remains in the business today, and it may end up being permanent.

Speaker 4

I'm not sure. We'll see how the labor market unfolds. Our cost guides don't typically include new CBA costs. And so that's just been our standard for many years. I think it's worked well.

Speaker 4

And so right now, those don't include changes to CBAs. And we'll be in negotiations with several of our groups over the course of the year.

Speaker 14

Got it. And is that $7,000,000 pretty standard across each of the quarters, so Talking about maybe a $30,000,000 wage rate headwind. That's fair. Okay. Yes.

Speaker 14

And then, Shane, also you had A decent hedge gain in the quarter. What's your hedge position like today? And I guess, more importantly, how are you thinking about the program today given kind of the continued mismatch between the revenue recovery and where fuel is going. Thanks.

Speaker 9

Hey, it's Nat. I'll take this one. So our current hedge position, as you know, we've had an established program since 2015, where We hedged 50% of expected gallons with call options 20% out of the money. And For 2022, we're currently 42% hedged at $72 And so Decent position on that and projecting right now for 2022 similar sort of return as we saw in 2021 and obviously Very volatile markets. I think that program works well for us.

Speaker 9

We had internal debate on it and frequently do, but it's just consistent with what Alaska has done financially of being stable, conservative and just sticking to the program And not being overwhelmed with reactionary actions when fuel spikes or when fuel drops.

Speaker 14

That's perfect. Thank you.

Speaker 3

Thanks, Andrew.

Operator

Your next caller is Jamie Baker of JPMorgan. Your line is open.

Speaker 15

Hey, Good morning, everybody. I'll start with a yield question, but I'll try to make it interesting. I think it was the April call last year when I asked about the steepening booking curve for leisure and the potential for strong summer yields. I'm just wondering if we should be contemplating the opposite now. So as demand recovers, that's a good thing, but as consumers increasingly have the confidence to book further out.

Speaker 15

Is it inevitable that you see some yield erosion in that scenario? Or is there Some optimism that you can hold on to some of the yield benefits that presumably accompany

Speaker 6

a steeper curve.

Speaker 3

Yes. This is something that you look at every week To make sure you understand the changing dynamics, I think all I can share with you is where we are today, the reference points. As we look at the current bookings and the reductions in bookings because of the Omicron variant, we're seeing the highest level or the highest reduction close in. Obviously, business is a part of that, but also leisure. As you move out to 2 months away, 3 months away and in fact 4 plus months a day, 4 plus month bookings, although smaller on an absolute scale are actually in the best position.

Speaker 3

So What we're seeing right now is good booking progression in the outer years. And as we look at our network Today, as we look at our demand, we don't hit really big decision points on the question you're asking for another few months to sum up for sure. And we feel pretty good right now and we're just holding out for a summer that was as good as 2019 or maybe even better.

Speaker 15

Okay. That's helpful. And then for Ben, sort of a high level question, but when you think about your 2022 guide Or outlook rather, what you're looking at, not necessarily what you're sharing with us. What do you think are the 2 or 3 most idiosyncratic components that are unique to Alaska. I mean, the rising demand tide, fuel, labor challenges, that's all industry stuff.

Speaker 15

I want to hear what you think is most unique to you or rather Alaska preferably in rank order.

Speaker 2

That's a great question, Jing. Let me see let me give it a shot here in 30 seconds. 1, Like I have just tremendous confidence in our business model. And if you look how we're positioned in the Pacific Northwest and on the West Coast, What really excites me is the West Coast coming back to life

Speaker 3

out of this

Speaker 2

pandemic and getting our network back to 100 percent of pre COVID levels. So that is priority number 1 for me is getting back to 2019. And second, setting the stage for growth in the back half of the year. So those are 2 big things that I think about and I think there's a lot of potential on the West Coast, particularly in California, where it's just it's ramped up a little slower than the rest of the country. But I think there's a lot of potential there.

Speaker 2

Those are 2 big things. And 3rd, I think as international travel comes back, The one thing I'm really excited about in here, we've sown the seeds with One World is seeing international traffic Come back in our West Coast hub, particularly in Seattle, where we give global access to our guests. And I think you'll see accretive revenue to Alaska with that.

Speaker 15

Okay. That's really helpful. Thank you very much. Take care.

Speaker 3

Thanks, Jason.

Operator

Your next caller is Helane Becker of Cowen and Company. Your line is open.

Speaker 16

Thank you very much, operator. Hi, everybody, and thanks for the time. I noticed that you pulled down capacity out of Paine Field. Could you Just talk about what the plans are for that, I guess, for Payne going forward.

Speaker 3

Hi, Elaine. Pain, we've obviously 5 gs has been a massive issue for Painfield, just to be frank. So that's why that's Are struggling right now, but if you look out into the schedule, we're going to get back to our 18 touches a day full slug complement Sort of by the summerfall. So it was just a matter of ramping that up and digesting what Joe has talked about a little bit, Because it's all regional up there. We are going to put some mainline in there, but just getting the regional fleet to a place where we can serve that at full capacity.

Speaker 3

So you should

Speaker 2

we have 12 departures a day now, going to 18 departures by the summer.

Speaker 16

Okay. That's helpful. And then My other follow-up question also has to do with the network. During the pandemic, you restructured the network to be more focused on the Pacific Northwest and North South, especially California. As you think about ramping back up, How should we think about getting back to some of the transcon flying you were doing pre pandemic that Might make sense to go back to going forward.

Speaker 16

And then just as a part of that, Do you have an actual number for how many people you're intending to hire this year?

Speaker 3

Maybe I'll start with the first one, Helane. Our network, obviously, we have slots in New York. But if you look forward at our booking Schedule in April May beyond, you're going to see what our network looks like. The reality is, I I think we've announced 2 of them. Really, you're going to see very, very, very few new markets from Alaska Airlines.

Speaker 3

It's just returning scheduled debt. And that's what's really going to happen. And so especially with California, you're going to see the return of scheduled debt.

Speaker 2

And Elena, we're going to hire about 3,000 people in

Speaker 16

Okay. That's very helpful. Thank you, gentlemen.

Operator

Your next caller is Catherine O'Brien of Goldman Sachs. Your line is open.

Speaker 10

Hey, everyone. Thanks for the time. I just have a couple on the cost outlook. I know the full year outlook is negatively impacted by IROPS from 1Q. But you had previously said that on slightly less than 2019 capacity, Needs to be below 19 CASM ex.

Speaker 10

That was a while ago now, a lot of stuff has changed. But I guess, should we still expect that to be true as the operation normalizes in 2023, just with less training, research costs or has inflation just changed that? I know it's a little wonky to compare since you actually be growing versus 2019. Just any color there would be great. Thank you.

Speaker 4

Yes. Hey, Katie. I appreciate the question. And yes, A couple of things. Number 1, we are planning to grow now.

Speaker 4

So it's a little bit of a different dynamic. And when we were talking about them, We're still very committed to getting back to pre COVID cost structure. I think our underlying

Speaker 9

assumption or sort of

Speaker 4

fear at the time was This might be a very long recovery cycle and that demand may be depressed for a longer period of time. And I think What we believe is that there's a lot of demand. It's just not able to be fully actualized until these waves go away and we can sort of normalize And the economy remains healthy. I know there's inflation worries and stuff like that, but it didn't have the dampening effect on the economy and demand that we may have originally We know it's the only sort of way we can create stability for our people and for investors long term. And we are going to ultimately head back towards pre COVID

Speaker 3

efficiency and productivity and cost levels.

Speaker 4

But it is a different setup that we're dealing with today. We're looking at a growth scenario, not sort of a shrink scenario.

Speaker 10

Got it. So maybe just to follow-up that, I don't want to put words in your mouth, Shane, but maybe this year More heavily impacted by some of these incremental training, kind of like startup or restart costs, I guess you could call it, than you might have thought, Which hits chasm, but is ultimately a good thing if demand is going back faster. Is that do I have that right?

Speaker 4

Absolutely right. Plus, I think had we not decided to go single fleet, we would have had these lease return costs spread out over a much longer period of time. So there's an acute sort of impact From that this year as well. So I think those are 2 of the biggest drivers. The degree inflation runs through the industry, I mean, it's going to hit Everybody, so we're not assuming that that's going to be a major obstacle for us for a long period of time.

Speaker 4

It hasn't, I think, been a major obstacle at BOSIM for us. It's more about ramping for growth and some of these transitory costs we've got to go to a single fleet.

Speaker 10

Okay, got it. And lease returns are happening on a bit of a faster pace than when you first said that too, right?

Speaker 4

Yes. We really didn't have a mindset around the fleet. We had spent, I think, 3 years talking to all about needing to make a fleet decision. The Sort of gave us an opportunity to actually sit down and make one, and we were happy that we had to be forced to make one. It's hard to do a fleet transition With COVID, when you're trying to grow and the whole economy and industry are growing, it's hard to think about taking some of that growth away.

Speaker 4

And so this has given us a chance To move through that fleet transition pretty quickly. Even though 2 years feels long, it's actually

Speaker 12

a pretty quick time period to

Speaker 4

get 60 to 70 units out the door.

Speaker 10

Got it. All right. Thanks for letting me do that multi part. I'll leave it there. Thank you.

Speaker 4

Thank you.

Operator

Your next caller is Brandon Oglenski of Barclays. Your line is open.

Speaker 17

Yes. Hey, everyone. Thanks for taking my question. I guess a real quick follow-up on that and maybe I've just missed it in the last few months, but have you guys made an announcement as well on the 21s then?

Speaker 4

No, Brandon, we haven't.

Speaker 17

Okay. And I'll just put

Speaker 4

a lot more. Okay, that's fine. No, we have not. I think they're leased through 2,030 essentially. We don't In a perfect world, we wouldn't hold them that long.

Speaker 4

We haven't really started working on dispositioning those. But I wouldn't be shocked if we held them for a while and I wouldn't be shocked if we were able to find a place for them to go.

Speaker 17

Okay. I appreciate that. Just want to make sure I wasn't missing it. And then I guess maybe this question is for Ben, but I'm not sure. As you look out, you said you could even be growing maybe 10% by the end of the year, I think if I heard you correctly.

Speaker 17

To what level of profitability do you hold those thresholds? Because obviously you're baking in a lot of costs right now to restore the network Just as a lot of your competitors are too. Is this a game where not a game, but do investors just have to wait for everyone to get back to full restoration of capacity before we can start talking about restoration of profitability.

Speaker 2

Brian, it's a great question. I think if you look at our track record, you look at our second half of twenty twenty one with everything that's been thrown at us, we generated a 7% pretax margin, and we were the most profitable airline in the industry. So our mindset is always to grow profitably. We don't grow Without believing that we can grow properly. So that's our mindset.

Speaker 2

That's the plan going forward and that's how we plan to execute.

Speaker 17

Thanks, Ben.

Operator

Your next caller is Mike Linenberg of Deutsche Bank. Your line is

Speaker 18

open. Hey, just sort of 2 quick ones here. Andrew, we've obviously seen Some correlation between case counts and bookings. And I'm curious, case counts have just collapsed on the East Coast. And yet I think, You know, out west like State of Washington, State of Alaska, as I last checked, they're still asymptotic.

Speaker 18

Are you seeing point of sale differences for your Particularly in your transcon flights where you're getting stronger bookings, maybe east of the Mississippi versus west. Any color there? Thanks.

Speaker 3

Mike, it's a little hard to answer that question. I think the vast majority of our network is really anchored on the West Coast. And given slots and everything, we're probably bringing back capacity a little bit quicker than we'd like on the transcons. You nailed it on the Case counts and I celebrate New York City every day with other accounts coming in. We normally lag a few weeks behind And I think we've sort of peaked and we're going to start to come down.

Speaker 3

And I think you're going to see the same behavior you do there on the East Coast as you do here as it relates to bookings. Okay.

Speaker 18

That's great. And then just second, just a quick one here. You gave us kind of the increase in your loyalty program remuneration in the 4th quarter. Can you give us a rough number of what that is on an annual basis? I know some of your competitors will provide that number.

Speaker 18

Anything rough, What you're bringing in on that Bank of America card deal? Thank you.

Speaker 3

Yes. I think, not on the exact number, but I think this was our 1st year where we generated over $1,000,000,000 just I think $1,100,000,000 from our card program this year, which is higher And it's ever been before the pandemic. So we feel very, very good about that. Now that's fantastic.

Speaker 4

This is Chris. And it is the highest It was a year over year year over 2 year, it was definitely about 5% or 6% higher than it had been in 2019. So it was a remarkable year from that respect.

Speaker 18

That's fantastic. Thanks everyone.

Operator

Your next caller is Myles Walton of UBS. Your line is open.

Speaker 19

Thanks. Good afternoon. I think, Ben, from your comments, You were implying the first half was going to be about flat with 2019, obviously implies a pretty big step in the Q2, I think the largest sequential growth in ASMs you've had Since the pandemic and restoration, can you just talk about the risks in achieving that objective? I know you're putting costs in and you're putting the training in now, but Is that sort of the trajectory you're looking for?

Speaker 2

Yes. Miles, we Getting back to pre COVID capacity was always on our radar from 18 months ago, just to be honest. And so we've been planning towards that, the hiring, structure, the training. So we're on a good path. The pipeline for hiring is full, but it is a competitive market.

Speaker 2

It's a tight labor market and we've got to fight for good employees. So that's always a risk, but it's a risk everybody has. In the second half, the same thing we have set up. Our whole leadership team is really poised on executing growth. That's been our plan for the last 12 months.

Speaker 2

And of course, there are risk factors that everyone's facing, but we feel good about where we are right now.

Speaker 19

Okay. And your Q1 implies only a 300 basis point or 400 basis point difference in the capacity versus 2019 or revenue versus 2019. Is that a fair way to think about the remainder of the year? Or do you think there'll be a little bit more unit revenue pressure as the capacity comes back with speed?

Speaker 3

Sorry, could you repeat that? I didn't quite track the new question. I apologize.

Speaker 19

Sure. Yes, the capacity restoration versus Revenue restoration versus 2019.

Speaker 3

Okay.

Speaker 19

There's only about a 400 basis point difference. Do you think that closes or expands as you move through the rest of the year?

Speaker 3

I'm probably not going to sit here today to answer that question, but I will say that Ben shared, we plan to grow profitably. And so we don't grow if there's no And we're not able to turn that growth into something that's profitable. So, that's where we should play.

Speaker 6

Okay. Thanks,

Speaker 2

everybody, for joining us for our Q4 call and we look forward to talking to you guys soon at Investor Day. Thank you so much.

Operator

Thank you for participating in today's conference call. This call will be available for future playback at alaskaair.com. You may now disconnect.

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