Alaska Air Group Inc Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jamie Nathaniel Baker - JPMorgan Chase & Co - Analyst : Two in a row. I should be paranoid. So deal related question folks. With Virgin you disclosed you were speaking with Justice and remedies were being bantered about. I'm trying to square that against what you said in the prepared remarks regarding the August 5 date. It sounds as if you are not yet having constructive discussions rather, you're at a wait-and-see mode just as the market is to hear back from Justice as by then. Is that how I should incorporate Ben's opening remarks?

Question: Jamie Nathaniel Baker - JPMorgan Chase & Co - Analyst : Perfect. And then second, on a yield basis, what's your paid premium class? Not first class, but premium class paid premium to traditional or average economy yields? I know it's a metric you don't usually disclose. I'm estimating it's in the 15% to 20% range. Just trying to find out, if I'm close with that forecast. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes, Jamie, I think you are off the top of my head. I can tell the entire cabin is around 40% and about half of those is paid versus not. So I think you're on that sort of where we sit at that. So it's a good 40% for the cabin over the Main cabin and it's been very encouraging.

Question: Jamie Nathaniel Baker - JPMorgan Chase & Co - Analyst : Okay. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 18, 2024 / 3:30PM, ALK.N - Q2 2024 Alaska Air Group Inc Earnings Call Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. There's about half of them, yes.

Question: Duane Thomas Pfennigwerth - Evercore ISI Institutional Equities - Analyst : Hi, thanks. I don't know if you have this metric, but overall competitive capacity in your markets, what was that growth in 2Q? And how do you see that evolving in 3Q and perhaps for 4Q? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Duane, it was elevated as you're aware and as in my prepared remarks, an area like Alaska long haul industry's capacity was up over 20%, which is 12% of our network. But as you look through all of our hubs, looking forward and certainly September, October seats sort of flat to very low single digits up. So very much a significant reduction in the overall trajectory of growth that we see today.

Question: Duane Thomas Pfennigwerth - Evercore ISI Institutional Equities - Analyst : Okay. Thank you.

Question: Scott H. Group - Wolfe Research, LLC - Analyst : Hi thanks. So Shane, I want to focus on the cost side a little bit. So I totally get the year-over-year comps are harder on CASM and less capacity growth hurts unit cost. I want to trying to focus on just absolute costs for a minute. So if you just look like Q2 to Q3, you're guiding to a 10%, 11% increase, just an absolute cost ex fuel with capacity only up five and or it's like almost $200 million. Help us bridge that - how much is pilot, I'm sorry flight attendant, how much is the other factors? And does that new level of costs stay, does that start to come down again as you go out to fourth quarter next year? Just any thoughts?

Question: Scott H. Group - Wolfe Research, LLC - Analyst : Okay. That's helpful. And then so everyone is all the airlines so far have talked about, hey, look at August, September things start to flatten out on capacity and looks good. When I just look at current schedules, it looks like you guys reaccelerate in Q4. Is that just a placeholder and you think that gets revised down for Q4 closer to flat and for you like you are in September and then any early thoughts about how to think about capacity in '25? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Just on the Scott, on the capacity on, as you heard in our prepared remarks, the year will be sort of sub 2.5%. What I'm expecting is that Q4 on a

Question: Andrew George Didora - BofA Securities - Analyst : Hi, good morning, everyone. Shane I was actually going to ask the 2025 capacity question as well, but I guess kind of big picture given kind of the delivery delays, is it fair to say that next year we'll continue to remain below sort of your medium to longer term targets of kind of mid-single digit growth?

Question: Andrew George Didora - BofA Securities - Analyst : Yes, got it. Makes sense. And just thinking about it in that type of growth environment. So will we see unit cost kind of at that similar high single digit level into the first half of '25 because it doesn't seem like much of these headwinds will ease by then? Or do you expect some sort of relief earlier than that? Thanks.

Question: Andrew George Didora - BofA Securities - Analyst : Right, that's fair. Thanks much.

Question: Daniel J. McKenzie - Seaport Research Partners - Analyst : Oh! Hi. Thanks. Good morning, guys. Going back to the premium on Economy Plus is the 40% premium over mainline cabin across all stage lengths or is it reasonable assume it's a little bit higher in the longer haul and a little bit less on the shorter haul flights ? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Hi, Dan. Yes, that's absolutely correct. And just as a reminder, we have premium class across our entire regional fleet as well. And our stage length is one of the longest domestically in the industry. And so this is why premium class is such a huge asset for us. And I think our regional aircraft probably fly most longer than most other regional aircraft as well. So that's why the PC product is a really good fit for us.

Question: Daniel J. McKenzie - Seaport Research Partners - Analyst : Okay. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. And I think we have the network post COVID positioned very well in California. And as you look at our growth, certainly in the Bay Area has been very moderate just because we're not going to get ahead of the demand curve there. And again, in Los Angeles, we've been focusing more on some of these Latin and high leisure markets, which have generating revenue done quite well for us. But again, we are on a low growth cadence here for the next little bit and what we will be doing is spending a lot of time, there's sort of no autopilot here on network. We will be managing this dynamically through this year and into next year to ensure that we've got the airplanes in the right markets to maximize our revenues and to accommodate where our guess actually want to fly.

Question: Ravi Shanker - Morgan Stanley - Analyst : Thanks. Good afternoon everyone and kudos for sneaking in that autopilot pun in there. Just on the Premium Cabin, kind of just given the new initiatives and the target to kind of raise the mix there. Where is that incremental customer coming from? Is that converting from Main Cabin? Is that coming from oneworld partner airlines? Is that coming from other legacy carriers, who's that incremental customer? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes, thanks, Ravi. I think it's sort of all of the above. And I think we are being going to tell a lot more of a story around our premium product in general, both First Class and Premium Class. Our international partners can sell into that. And we've just seen, as I shared earlier, just a real appetite in demand for that Premium Class Cabin. I think as you look at the industry and you look at the lower end of fares, we meet those very well with our Saver Fare, but we are doing a much better job actually selling the product we have. For instance, not too long ago, the only way you could buy Premium Class on us directly was to go into the seat map while you were choosing your seat and we would upsell you there. Now we have it fully on our front page matrix and then it will be coming to mobile here soon. So I think we have real merchandising opportunity to catch demand out there that perhaps folks haven't seen it as much as we could have put it in front of them.

Question: Ravi Shanker - Morgan Stanley - Analyst : Understood. That's great color and look forward experiencing that. Maybe as a follow up, just wanted to confirm that, when you check your Net Promoter Scores and customer like booking behavior and everything. Is everything back to normal after the January incident or is there still some lingering impact? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes. I think as we actually even said last quarter, I think the -- we've not seen any lingering impact or effect at all from the grounding in the first quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 18, 2024 / 3:30PM, ALK.N - Q2 2024 Alaska Air Group Inc Earnings Call

Question: Ravi Shanker - Morgan Stanley - Analyst : Wonderful. Thank you.

Question: Conor T. Cunningham - Melius Research LLC - Analyst : Hi, everyone. Thank you. Just -- as you -- just on the premium topic for a quick second, when you're expanding the First Class, I'm just curious on how much CapEx that's actually driving for you. I don't know if you've mentioned that anywhere. And then it seems like a pretty quick turnaround time, just on the whole overhaul thing. Did you have any issues finding MRO capacity at all to do this retrofit? I'm just curious. Thank you.

Question: Conor T. Cunningham - Melius Research LLC - Analyst : Okay. That's helpful. And then when I think about your historical seasonality of your business, you guys make the vast majority of your money in 2Q, 3Q. Ben, you mandated significant change in 1Q. As you think about the opportunity in fourth quarter, what are your learnings that you saw in 1Q that you could apply to the fall? Is it more of just an off-peak versus peak, changing of capacity? Just curious on how you're thinking about evolving seasonality in general of your earning stream? Thank you.

Question: Conor T. Cunningham - Melius Research LLC - Analyst : Appreciate it. Thank you.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : oh, hey. Good morning, everyone. I want to just go back; you call it out in the guide about this moderating domestic revenue environment. I think, Andrew, you kind of mentioned it. I think Andrew, you kind of mentioned it, I felt like I heard it a few times. How much of it is pure macro versus just supply demand out of kilter? And maybe another way of asking it is that we see volumes domestically running up 6%, 7% right now. But I think the prevailing view is that maybe a much greater portion of that is stimulated demand. Like what's your REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 18, 2024 / 3:30PM, ALK.N - Q2 2024 Alaska Air Group Inc Earnings Call -- when you look at your forecasting and where you see things, what do you think organic demand, like true demand absent any sort of stimulation or are we really starting to see some macro softness? And then I have a follow-up. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes, hi, great question. What I would say is this. Firstly, there's just the general population and then there's flyers and people who travel and I do think there's a little bit of a difference there. I do think on the lower end of fares, just even the last 28 days, we've seen more of a shift out of OTA mix into direct, which sometimes at, they're the lower fares. So that would seem that there's softness there. But I think mostly for us, it's just really a capacity story. As I said, we grew seats 8% in first class in our revenues went up 8% in the second quarter. The main cabin was a little bit of a different story. So I do think that in general demand, if we -- the adjustments we're making to our capacity, I think will go a long way of getting in equilibrium there.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : Okay, yes.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : Great. And then just quick one on now that you're well established as a oneworld partner, although maybe you're still saying you would probably tell me that you're still maybe in the third or fifth inning, not the seventh. What are you seeing like the contribution and it may even be what is driving you to go from 25% to 28% because someone who comes off a BA flight and maybe is connecting to, I don't know Portland or Medford or wherever maybe even the state of Alaska, they want that front seat product. So if we think about it, I don't know if it's load factor points or whatever that you're getting now that you've synced up very nicely. I mean, you gave some numbers on how much more you're selling in the oneworld ecosystem. What is that driving on your own metal? Thanks for taking my question. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 18, 2024 / 3:30PM, ALK.N - Q2 2024 Alaska Air Group Inc Earnings Call Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes. Yeah. That's a great question. And I would just say in the scheme of size, if you will, that the number of international connections onto our network, given our domestic size and what we do carry is not a huge component of it. I think the oneworld is really our loyalty members being able to carry their elite benefits globally and staying within the oneworld system and Alaska's loyalty system is the real upside. But nonetheless, to your point, as we continue to put more First Class seats on our aircraft, as well as Premium, that opens up more opportunity for all the long-haul connections we do to provide them and many of them also choosing premium seats up their long trip.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : Does that include regionals? Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Again.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : That's perfect.

Question: Michael John Linenberg - Deutsche Bank AG - Analyst : Yes, very good. Thank you, everyone.

Question: Savi Syth - Raymond James - Analyst : Hi. Good morning. If I might, the 3Q cost bridge chart was very helpful. I'm just curious what in there might have been incremental versus what you were thinking before and just along that the line of questions that you've gotten so far on the cost side. I think, historically, I think the thinking was, if you grew about 5% or a little bit higher than that, you can keep unit costs flat. Is that relationship still holding?

Question: Savi Syth - Raymond James - Analyst : That's helpful. Thanks, Shane. And finally, on the new product launch, you're not taking away seats, but in fact, you might be actually adding a few seats. So is that -- should we think of that being kind of a unit cost and unit revenue guy as we kind of look to the next 18 months or so?

Question: Savi Syth - Raymond James - Analyst : Appreciate it. Thanks.

Question: Tom Fitzgerald - Cowen and Company. - Analyst : Hi, everyone. Thanks for the time. Most of it might have been answered and maybe this is too granular, but I'm just curious on the new routes into Mexico. Is -- do you have like -- is that all just pretty much US point-of-sale leisure or do you have -- do you participate in any of the VFR traffic that goes back and forth between the two countries? Thanks very much. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes. Hi, Tom. Most of it, if you look at the cities, it's just expanding our core US leisure side point-of-sale, which have done well. And again, the good thing about these is that these are 100% new revenue sources and while we trim capacity in other areas, this, again, you'll see the 18 routes. This is -- a lot of this doesn't start until December or even January and a lot of this is focused on the depths of the winter in the first quarter. So we feel really good about these changes.

Question: Tom Fitzgerald - Cowen and Company. - Analyst : You got it. Thanks very much, everyone.

Question: Stephen Trent - Citigroup Inc. - Analyst : Yes. Hello, everybody, and thanks for taking my question. Just a follow-up if I may. Appreciate the color on the premium increase, and forgive me if I missed this, but do you see any parallel adjustments that you might make to your app, or for example, any pivots in your thinking on changes in the distribution channel as you increase that premium? Thank you. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Yes. Steve, that's a great question. And as I shared earlier, we now have on our website full category of premium. And our web, excuse me, our app will be updated here in the next month or so, as well as some other significant changes to our app. So we have upside in distributing our products through our app, which is increasingly where bookings are going.

Question: Stephen Trent - Citigroup Inc. - Analyst : Okay, appreciate that. And thanks for the time.

Question: Christopher Nicholas Stathoulopoulos - Susquehanna Financial Group, LLP - Analyst : Good morning, everyone. Thanks for taking my question. I want to go back to, I think, it was Duane's question on competitive capacity. You did give, I think, a number for 2Q and 3Q. I think you said that you would expect, I'm not sure for 3Q whether you were referencing that competitive capacity drop versus your network or sort of domestic as a whole. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 18, 2024 / 3:30PM, ALK.N - Q2 2024 Alaska Air Group Inc Earnings Call I'm just trying to kind of localize as we think about potential opportunities for yield acceleration, whether it's broad-based or we look at your network map and see potential opportunities around hubs and things like that? Thank you. Andrew Harrison - Alaska Air Group Inc - Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. Hi, Chris. It obviously varies by carrier, by hub, I will say, at the higher level. The amount of competitive increase in seats in our core hubs at the highest level is extremely low single-digit on average as we go into September and October, and we continue to see adjustments to the further out. So, I would just say, they're somewhat flat to marginally up.