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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022
 
OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from                      to                      

Commission File Number 1-8957

ALASKA AIR GROUP, INC.
 
Delaware91-1292054
(State of Incorporation)(I.R.S. Employer Identification No.)
19300 International Boulevard,Seattle,WA98188
Telephone:(206)392-5040
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTicker SymbolName of each exchange on which registered
Common stock, $0.01 par value ALKNew York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filerAccelerated filer  Non-accelerated filer   
(Do not check if a smaller reporting company)
Smaller reporting company   Emerging growth company  

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes  No
 
The registrant has 126,837,831 common shares, par value $0.01, outstanding at October 31, 2022.

This document is also available on our website at http://investor.alaskaair.com.



ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022

 TABLE OF CONTENTS

As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”
 
2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2021. Please consider our forward-looking statements in light of those risks as you read this report.


3


PART I 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions)September 30, 2022December 31, 2021
ASSETS  
Current Assets  
Cash and cash equivalents$688 $470 
Marketable securities2,462 2,646 
Total cash and marketable securities3,150 3,116 
Receivables - net345 546 
Inventories and supplies - net94 62 
Prepaid expenses and other current assets221 196 
Total Current Assets3,810 3,920 
Property and Equipment  
Aircraft and other flight equipment8,811 8,127 
Other property and equipment1,589 1,489 
Deposits for future flight equipment300 384 
 10,700 10,000 
Less accumulated depreciation and amortization4,046 3,862 
Total Property and Equipment - Net6,654 6,138 
Other Assets
Operating lease assets1,605 1,453 
Goodwill and intangible assets2,040 2,044 
Other noncurrent assets422 396 
Total Other Assets4,067 3,893 
Total Assets$14,531 $13,951 


4


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)September 30, 2022December 31, 2021
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$202 $200 
Accrued wages, vacation and payroll taxes583 457 
Air traffic liability1,467 1,163 
Other accrued liabilities805 625 
Deferred revenue1,068 912 
Current portion of operating lease liabilities263 268 
Current portion of long-term debt321 366 
Total Current Liabilities4,709 3,991 
Long-Term Debt, Net of Current Portion1,889 2,173 
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,482 1,279 
Deferred income taxes571 578 
Deferred revenue1,413 1,446 
Obligation for pension and post-retirement medical benefits296 305 
Other liabilities345 378 
Total Noncurrent Liabilities4,107 3,986 
Commitments and Contingencies (Note 7)
Shareholders' Equity  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding
  
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares
1 1 
Capital in excess of par value549 494 
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares
(674)(674)
Accumulated other comprehensive loss(328)(262)
Retained earnings4,278 4,242 
 3,826 3,801 
Total Liabilities and Shareholders' Equity$14,531 $13,951 

5


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30,Nine Months Ended
September 30,
(in millions, except per share amounts)2022202120222021
Operating Revenues    
Passenger revenue$2,615 $1,774 $6,544 $3,785 
Mileage Plan other revenue146 120 433 332 
Cargo and other67 59 190 160 
Total Operating Revenues2,828 1,953 7,167 4,277 
Operating Expenses  
Wages and benefits686 578 1,931 1,581 
Variable incentive pay48 42 140 109 
Payroll Support Program grant wage offset   (914)
Aircraft fuel, including hedging gains and losses877 376 2,000 853 
Aircraft maintenance92 89 331 272 
Aircraft rent76 64 222 188 
Landing fees and other rentals161 141 435 414 
Contracted services83 62 243 167 
Selling expenses82 49 218 123 
Depreciation and amortization104 99 310 294 
Food and beverage service52 39 143 97 
Third-party regional carrier expense53 39 145 106 
Other207 126 536 348 
Special items - fleet transition155 (9)376 5 
Special items - labor ratification bonus90  90  
Special items - restructuring   (12)
Total Operating Expenses2,766 1,695 7,120 3,631 
Operating Income62 258 47 646 
Non-operating Income (Expense)  
Interest income17 6 35 19 
Interest expense(31)(30)(84)(101)
Interest capitalized3 3 8 9 
Other - net14 8 38 27 
Total Non-operating Income (Expense)3 (13)(3)(46)
Income Before Income Tax65 245 44 600 
Income tax expense25 51 8 140 
Net Income$40 $194 $36 $460 
Basic Earnings Per Share:$0.32 $1.55 $0.28 $3.69 
Diluted Earnings Per Share:$0.31 $1.53 $0.28 $3.64 
Shares used for computation: 
Basic126.783 125.250 126.440 124.846 
Diluted128.370 127.188 128.087 126.325 

6


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(in millions)2022202120222021
Net Income$40 $194 $36 $460 
Other comprehensive income (loss), net of tax
Marketable securities(26)(3)(86)(16)
Employee benefit plans1 6 2 19 
Interest rate derivative instruments5 2 18 9 
        Total other comprehensive income (loss), net of tax$(20)$5 $(66)$12 
Total comprehensive income (loss), net$20 $199 $(30)$472 




7


CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2021125.906 $1 $494 $(674)$(262)$4,242 $3,801 
Net income (loss) — — — — (143)(143)
Other comprehensive income (loss) — — — (30)— (30)
Stock-based compensation — 13 — — — 13 
Stock issued under stock plans0.182 — (4)— — — (4)
Balances at March 31, 2022126.088 $1 $503 $(674)$(292)$4,099 $3,637 
Net income (loss)— — — — — 139 139 
Other comprehensive income (loss)— — — — (16)— (16)
Stock-based compensation0.017 — 9 — — — 9 
Stock issued for employee stock purchase plan0.643 — 30 — — — 30 
Stock issued under stock plans0.012 —  — — —  
Balances at June 30, 2022126.760 $1 $542 $(674)$(308)$4,238 $3,799 
Net income (loss)— — — — — 40 40 
Other comprehensive income (loss)— — — — (20)— (20)
Stock-based compensation— — 8 — — — 8 
Stock issued under stock plans0.074 — (1)— — — (1)
Balances at September 30, 2022126.834$1 $549 $(674)$(328)$4,278 $3,826 

(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2020124.217 $1 $391 $(674)$(494)$3,764 $2,988 
Net income (loss)— — — — — (131)(131)
Other comprehensive income (loss)— — — —  —  
Stock-based compensation— — 12 — — — 12 
CARES Act warrant issuance— — 8 — — — 8 
Stock issued under stock plans0.225 — (2)— — — (2)
Balance at March 31, 2021124.442 $1 $409 $(674)$(494)$3,633 $2,875 
Net income (loss)— — — — — 397 397 
Other comprehensive income (loss)— — — — 7 — 7 
Stock-based compensation0.009 — 13 — — — 13 
CARES Act warrant issuance— — 8 — — — 8 
Stock issued for employee stock purchase plan0.716 — 23 — — — 23 
Stock issued under stock plans0.062 — 1 — — — 1 
Balances at June 30, 2021125.229 $1 $454 $(674)$(487)$4,030 $3,324 
Net income (loss)— — — — — 194 194 
Other comprehensive income (loss)— — — — 5 — 5 
Stock-based compensation— — 10 — — — 10 
Stock issued under stock plans0.076 — (2)— — — (2)
Balances at September 30, 2021125.305$1 $462 $(674)$(482)$4,224 $3,531 
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30,
(in millions)20222021
Cash flows from operating activities:  
Net Income$36 $460 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization310 294 
Stock-based compensation and other33 35 
Special items - fleet transition376 5 
Special items - restructuring (12)
Changes in certain assets and liabilities:
Changes in deferred tax provision 95 
Increase in accounts receivable(59)(56)
Increase in air traffic liability304 152 
Increase in deferred revenue123 73 
Pension contribution (100)
Federal income tax refund260  
Other - net26 (45)
Net cash provided by operating activities1,409 901 
Cash flows from investing activities:  
Property and equipment additions:  
Aircraft and aircraft purchase deposits(688)(52)
Other flight equipment(156)(78)
Other property and equipment(103)(60)
Total property and equipment additions, including capitalized interest(947)(190)
Purchases of marketable securities(1,670)(3,413)
Sales and maturities of marketable securities1,731 2,669 
Other investing activities(2)(9)
Net cash used in investing activities(888)(943)
Cash flows from financing activities:  
Proceeds from issuance of debt 363 
Long-term debt payments(333)(1,222)
Other financing activities37 34 
Net cash used in financing activities(296)(825)
Net increase (decrease) in cash, cash equivalents, and restricted cash225 (867)
Cash, cash equivalents, and restricted cash at beginning of period494 1,386 
Cash, cash equivalents, and restricted cash at end of the period$719 $519 
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Nine Months Ended
September 30,
(in millions)20222021
Cash paid during the period for:
Interest (net of amount capitalized)$72 $100 
Income taxes  
Non-cash transactions:
Right-of-use assets acquired through operating leases419 126 
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents688 495 
Restricted cash included in Prepaid expenses and other current assets31 24 
Total cash, cash equivalents, and restricted cash at end of the period$719 $519 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2022 and the results of operations for the three and nine months ended September 30, 2022 and 2021. Such adjustments were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of operating results for the entire year.

NOTE 2. FLEET TRANSITION

In the first quarter of 2022, the Company announced plans to accelerate the transition of its mainline operations to an all-Boeing 737 fleet. It also announced plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska is accelerating the retirement of its Airbus A320 aircraft, with all expected to exit the fleet by January 2023. Alaska also operates Airbus A321neo aircraft, and plans to remove them from its fleet by the end of 2023, subject to agreement with counterparties. The Company operated 23 A320 and ten A321neo aircraft as of September 30, 2022. Horizon plans to retire its Q400 fleet, which includes 19 owned and three leased aircraft in operation as of September 30, 2022, in January 2023.

Valuation of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable. During the first quarter of 2022, the Company recorded an impairment charge of $70 million related to the Q400 fleet, reflecting the amount by which carrying value exceeded fair value of the owned Q400 aircraft as of March 31, 2022. This amount was recorded within the "Special items - fleet transition" line in the consolidated statement of operations. Refer to Note 2 to our consolidated financial statements in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 for additional details.

In the second quarter, the Company adjusted useful lives and depreciation schedules for Airbus and Q400 capitalized leasehold improvements, spare engines, inventory, and other fixed assets, as well as the amortization schedules for the right of use assets and aircraft rent expenses. These accelerated schedules are based on the dates the aircraft are expected to be removed from operating service. Incremental costs associated with the accelerated schedules are recognized within the "Special items - fleet transition" line item.

The Company has estimated future lease return costs for the leased Airbus aircraft. Costs of returning leased aircraft begin accruing when the costs are probable and reasonably estimable, and are recognized over the remaining operating life of the aircraft. These estimates are based on the time remaining on the lease, planned aircraft usage, and lease terms. These estimates may change as actual amounts due to any lessor upon return may not be known with certainty until lease termination. In the third quarter, all lease return costs were recorded within the "Special items - fleet transition" line in the consolidated statement of operations.

A summary of special charges for fleet transition activities is included below for the three and nine months ended September 30, 2022. The impairment charges are one-time in nature, while the other special charges continue to be recorded consistent
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with the schedules described above. The majority of remaining charges will be recorded in 2022 with additional charges associated with the Airbus A321neo aircraft to be recorded in 2023. The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.

Three Months Ended
September 30, 2022
Nine Months Ended
September 30, 2022
(in millions)AirbusQ400TotalAirbusQ400Total
Lease return costs and other expenses$75 $ $75 $183 $ $183 
Accelerated aircraft ownership expenses62 18 80 102 21 123 
Impairment of long-lived assets    70 70 
Total special items - fleet transition$137 $18 $155 $285 $91 $376 


NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue is passenger ancillary revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

In the first quarter of 2022, the Company amended its Mileage Plan co-branded credit card agreement with Bank of America. The amendment extended the term of the agreement into 2030 and resulted in modifications to the separately identifiable performance obligations.

The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Passenger ticket revenue, including ticket breakage, net of taxes and fees$2,252 $1,483 $5,536 $3,122 
Passenger ancillary revenue127 101 337 235 
Mileage Plan passenger revenue236 190 671 428 
Total Passenger revenue$2,615 $1,774 $6,544 $3,785 

Mileage Plan Loyalty Program

Mileage Plan revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Passenger revenue$236 $190 $671 $428 
Mileage Plan other revenue146 120 433 332 
Total Mileage Plan revenue$382 $310 $1,104 $760 

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Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):