Andrew Harrison
Chief Revenue Officer, Chief Commercial Officer and Employee Value Proposition at Alaska Air Group
Thanks, Ben, and good morning, everyone. My comments today will focus on third quarter performance, recent demand trends, progress with our alliances, and revenue guidance for the fourth quarter. Our third quarter revenues came in at $1.9 billion, down 18% versus 2019. This was on flown capacity that was also down approximately 18%, resulting in near flat unit revenues. We were very happy with this result, especially as the impact of the Delta variance started showing up in a meaningful way at the end of July.
Our revenue performance reflects a 15-point sequential improvement from last quarter, while capacity was just 3.5 points higher. Load factor sequentially increased 3 points to 80%, but the bigger revenue driver was strong sequential yields, which improved 13 points from last quarter to up 4% versus 2019. On a monthly basis, loads were strongest in July at approximately 88%, then deteriorated to 81% in August and bottomed at 72% in September. In the same timeframe, yield deteriorated about 5 points from up 3.6% in July to down 1.5% in September, both on a year-over-two basis.
These negative trends were all driven by the emergence of the Delta variant. Geographically, Hawaii represents 16% of our capacity and was our weakest performing region during the quarter given the travel advisories for the state, which damaged demand for Hawaii. In fact, the impact to our system results was to reduce RASM by 2.5 points. Considering the headwinds in Hawaii, along with the broader impact of the Delta variant, I would characterize our Q3 revenue performance as strong. Our commercial team did a fantastic job managing revenue in a volatile demand environment.
As I'll expand on momentarily, the consequences from the Delta variant have not yet dissipated, and we're still working to build back Q4 bookings that were lost from the fourth COVID wave, given it occurred during the important period of building Q4 traffic. But sticking with third quarter results for a moment longer, there are two bright spots that have steadily bucked trends for several quarters now, premium product performance and our loyalty program. On the premium product side, this quarter's paid load factor in our first-class cabin was 3 points over 2019 and premium class cabin exceeded 2019 by 9 points. We continue to see strong demand for our premium products, and we believe this will only continue as business demand returns along with international demand associated with our entry into oneworld.
Regarding our loyalty program, this quarter we received the highest level of cash compensation in our airline's history, which was up 7% from the same quarter in 2019. Our loyalty program is one of our most durable, competitive advantages and we are squarely focused on maintaining and improving this momentum over the coming quarters.
Now looking at our network, it's only-- it's been our priority throughout the recovery to quickly rebuild Seattle and restore the Pacific Northwest capacity. This approach is producing results as is evident from our revenue performance this quarter. We're also seizing opportunities to capitalize on demand shift as they arise. Reflecting on the year, we will have added 30 new markets and only discontinued 3. In short, choices for our guests when combined with our strong relationship with American have improved significantly.
Today we are flying approximately 85% of our pre-COVID network. Now Seattle hub capacity is fully restored with capacity above 2019, while overall Pacific Northwest flying is quickly approaching 2019 levels. California recovery remain slower as we flew 65% of 2019 capacity during the quarter. I still expect that by the summer of next year our California flying will be back to pre-pandemic levels. As part of the California rebuild, we have recently announced that we're expanding our service from the Bay-Area to Mexico, positioning Alaska with more non-stop flights to Mexico from the West Coast than any other U.S. carrier.
Now turning to the future, the current revenue environment has certainly been challenging, but as I mentioned last call, my team is focused on building a strong commercial engine that will serve this company for a long time. One of the ways we'll do this is by leveraging the unique benefits available to us as part of oneworld. I'd like to give a shout out to the alliances team who have been working tirelessly to establish robust commercial agreements that will unlock flexibility and benefits for our guests.
So far in 2021 we've added 195 incremental codeshare routes with 5 oneworld partners, increasing our codeshare portfolio by 43%. This figure includes our recently announced agreements with Iberia and with Qatar. In very short order we've seen Qatar become one of our top international partners as they efficiently connect our network with their nonstop services between Seattle, San Francisco, and Los Angeles with a global hub in Doha.
The Seattle-Doha non-stop, which was launched in January has been especially strong. This success is an indication Alaska gets value our global portfolio, and are eager to see their responses to American upcoming Seattle route launches to Shanghai and Bangalore in 2022. With American and our oneworld partners, our potential to capture international traffic out of Seattle and California is significant. Oneworld and our partnership with American have also open the door to greater access to corporate travel, and we believe Air Group is uniquely positioned to get more than our pre-COVID corporate market share with the tools we're putting in place.
On September 1 we activated, for the first time, our preferred partner status with American Express GBT, enabling greater access to more corporate guests and quality traffic. I'm really looking forward to sharing more details with you about these new initiatives, as well as many others in the spring.
Now turning to the fourth quarter guidance, although the Delta variant surge looks to be behind us, its impact on bookings have left an unfavorable imprint on our Q4 expectations. Bookings deteriorated from down 20% in July to down 35% in August and flooded [Phonetic] was down 50% on a few booking days during the peak of the surge. While that rate of recovery since the peak has been slower than we experienced after the last surge this spring, over the last seven days we've seen bookings recover to down 10% year-over-two.
Ultimately, we believe the delta variant has reduced fourth quarter revenues by approximately $200 million. Although, the trajectory of bookings today is improved, it is not enough to fully make up for what was lost in Q4. With this as our backdrop, we expect Q4 revenues to be down 16% to 19% on a year-over-two-year basis. However, our assumptions reflect weaker performance in October with total revenue down approximately 25%.
So just looking at November and December, revenue is expected to be down between 13% and 16%, right in line with our capacity reduction. From a unit revenue perspective, October RASM is shaping up to be down about 10% versus 2019, while November and December could improve to nearly flat versus 2019.
Filling our planes is a top priority, but we're using discounts cautiously with an eye on preserving yields, especially in a rising fuel environment. While we aren't making any predictions about what awaits us around the corner, improving rates of vaccination, availability of booster shots, the expected near-term approval for vaccine for children, and opening of international borders could have a positive impact on the recovery and the economy.
However the recovery unfolds, I'm very optimistic that our commercial model will deliver relative outperformance as we saw in Q3, and that our work to-date has positioned us well. As Ben just shared, we expect our efforts to lead to a breakeven quarter with upside potential.
And with that, I'll pass it to Shane. Thank you, Andrew, and good morning, everyone. As we highlighted today, another quarter of sequential improvement and strong margins underscore the durability of Alaska's business model. Underlying our industry leading results were July and August performance that came within about 2 points of 2019 margin levels. I'm impressed by our team's execution and the results they delivered in such an unpredictable environment. In my commentary today, I will provide insights on these results, our cash flows and liquidity, cost performance and our expectations going forward. I'll begin with cash flows and liquidity. We ended the quarter with $3.6 billion in total liquidity inclusive of on-hand cash and undrawn lines of credit. This is down from $4.4 billion of total liquidity in June, as we paid down nearly $550 million in debt and made a $100 million voluntary pension contribution. Debt repayment included retiring our $425 million 364 day loan and our pension contribution brings our funded status to 94%, and also allowed us to capture a onetime permanent tax benefit of $14 million. Q3 cash flows from operations were essentially breakeven, excluding pension funding. The sequential decline from Q2 to Q3 was expected due to the absence of PSP grant inflows this quarter, and the normal seasonal drawdown of ATL. However, as Andrew described in his commentary, the Delta variant stalled the otherwise strong demand recovery in the quarter, and as a result the ATL drawdown was higher than originally forecast. Fourth quarter cash flows from operations are expected to be between negative $100 million and $0, exclusive of tax refunds and payments, which we expect to net to a positive $100 million in the quarter depending on when we receive our anticipated 2020 tax refund. This forecast factors in the reduced cash intakes due to the impact on bookings of the Delta variant. Plan debt service for the remainder of the year is approximately $120 million and we have no plans for further pre-payments through the end of the year. With this quarter's debt retirements our debt-to-cap is dropped to 51%, placing us just shy of our intended range as Ben shared. Today, our outstanding debt bears a relatively low weighted average effective rate of 3.3% and our 2022 debt service is very manageable at about $375 million for the year, roughly a quarter of that of 2021. Moving beyond 2022 annual debt services in the range of $250 million to $400 million. For the sustained return to profitability, I expect our net debt to EBITDA levels to move to approximately 2 times or less in 2022. Our liquidity and balance sheet are in great shape and we plan to leverage both as we fund our fleet order and eventually look forward to reactivating shareholder distributions, which we can do towards the end of next year. As of now I expect our total liquidity to move to approximately $2.5 billion in 2022. Moving to costs, I will touch briefly on our Q3 performance and then focus on our cost trajectory over the next several months as we prepare for a return to growth. This quarter, non-fuel costs were $1.3 billion, with unit costs up 9.3% versus 2019, better than the guidance we issued in September. Our teams have continued to do a superb job meeting their internal cost plans and we also saw lower than expected medical costs in the quarter. Fuel costs rose again this quarter to $2.05 per gallon, up approximately 25% from where we started the year. With crude at $70 per barrel for the quarter, our fuel hedges provided a $21 million benefit or $0.11 per gallon. We currently have 50% of our planned fuel consumption hedge for the next six months, at an average strike price of $61 in Q4 and $69 in Q1. Given the current spot price of oil, we expect to continue to realize hedge benefits in Q4 and into 2022. Meaning we also expect to see fuel cost headwinds impact absolute margin performance in the near-term. Looking forward, we continue to make steady progress on getting costs back to pre-COVID levels. That remains an expectation and priority of the leadership team. Our progress into through 2021 has been solid with mainline CASMex compared to the same month in 2019, up 19% in June, up 7% in September, and likely to be up 4% to 5% in December. Capacity in December compared to 2019 levels is expected to still be down 13%. Capacity pressure is more acute for our Horizon operations as aggressive pilot hiring across the industry is expected to lead to abnormal attrition levels, creating lower capacity capability and consequently, also pressuring their unit costs in the near-term. We're also seeing modest pressure in entry-level wages, which we believe is both an industry and general trend in the economy at large, and wage adjustments in this category are adding approximately $7 million for the fourth quarter. Additionally, as we ramp to 100% of pre-COVID capacity, we are onboarding more employees earlier than we normally would, given our training throughput capacity. Costs associated with additional training and carrying employees for the quarter are approximately $5 million. The costs associated with ramping capacity will normalize by next summer. In 2022, we will continue to reduce unit costs as capacity returns. Doing so is not without its challenges as we have two particular headwinds to offset, one is airport-related costs as our airport partners run to CARES grants and return to fully charging airlines for both operations and capital expenses. The other area is step-up in transition costs related to the returning our Airbus fleet to lessors. The cost of returning aircraft were fully contemplated in our decision to return to a single fleet, and the economics of doing so are strongly favorable long-term. As we step squarely into the return window, we will be recognizing these expenses through the P&L in earnest. I expect the largest impact in 2022 with a significant step down from there into 2023 and a final one down in 2024, which will provide a nice tailwind to our CASMex trajectory as we exit 2022 and move through 2023. Notwithstanding the headwinds, we will emerge as an airline with a cost structure equal to or better than 2019 in short order. Our cost restructuring targets are intact, and this quarter's results reflect increased utilization --realization of productivity savings as well as the efficiencies of now 7, 737-9 aircraft flying for our mainline fleet. As a result of the headwinds and tailwinds I've described, our expectations for Q4 unit costs is that they will be up 7% to 9% versus 2019 on roughly 15% lower capacity. To close, I would just say again that our underlying business model is strong. While demand is choppy and we hate that we don't get to have the fourth quarter that we think we were set up to have because of the Delta variant, we are confident that when reasonably strong demand returns we are poised to deliver strong financial performance. We're looking forward to rescaling to our pre-COVID size and demand allowing growing from there. As we do this, we will be continuing to deliver on our cost restructuring and fleet transition and unlocking commercial levers to drive additional value to our bottom line. And with that, let's go to your questions.