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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 June 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 126,764,811 common shares, par value $0.01, outstanding at July 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 JUNE 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)June 30, 2022December 31, 2021
ASSETS  
Current Assets  
Cash and cash equivalents$778 $470 
Marketable securities2,647 2,646 
Total cash and marketable securities3,425 3,116 
Receivables - net401 546 
Inventories and supplies - net93 62 
Prepaid expenses and other current assets313 196 
Total Current Assets4,232 3,920 
Property and Equipment  
Aircraft and other flight equipment8,569 8,127 
Other property and equipment1,532 1,489 
Deposits for future flight equipment292 384 
 10,393 10,000 
Less accumulated depreciation and amortization3,922 3,862 
Total Property and Equipment - Net6,471 6,138 
Other Assets
Operating lease assets1,669 1,453 
Goodwill and intangible assets2,041 2,044 
Other noncurrent assets387 396 
Total Other Assets4,097 3,893 
Total Assets$14,800 $13,951 


4


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)June 30, 2022December 31, 2021
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$286 $200 
Accrued wages, vacation and payroll taxes416 457 
Air traffic liability1,778 1,163 
Other accrued liabilities794 625 
Deferred revenue1,012 912 
Current portion of operating lease liabilities274 268 
Current portion of long-term debt342 366 
Total Current Liabilities4,902 3,991 
Long-Term Debt, Net of Current Portion1,961 2,173 
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,505 1,279 
Deferred income taxes552 578 
Deferred revenue1,429 1,446 
Obligation for pension and post-retirement medical benefits299 305 
Other liabilities353 378 
Total Noncurrent Liabilities4,138 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 - 136,109,649 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,759,705 shares; 2021 - 125,905,864 shares
1 1 
Capital in excess of par value542 494 
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares
(674)(674)
Accumulated other comprehensive loss(308)(262)
Retained earnings4,238 4,242 
 3,799 3,801 
Total Liabilities and Shareholders' Equity$14,800 $13,951 

5


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(in millions, except per share amounts)2022202120222021
Operating Revenues    
Passenger revenue$2,418 $1,352 $3,929 $2,011 
Mileage Plan other revenue175 118 287 212 
Cargo and other65 57 123 101 
Total Operating Revenues2,658 1,527 4,339 2,324 
Operating Expenses  
Wages and benefits639 510 1,245 1,003 
Variable incentive pay56 34 92 67 
Payroll Support Program grant wage offset (503) (914)
Aircraft fuel, including hedging gains and losses776 274 1,123 477 
Aircraft maintenance104 102 239 183 
Aircraft rent73 62 146 124 
Landing fees and other rentals136 144 274 273 
Contracted services82 54 160 105 
Selling expenses78 41 136 74 
Depreciation and amortization104 98 206 195 
Food and beverage service50 35 91 58 
Third-party regional carrier expense50 37 92 67 
Other177 117 329 222 
Special items - fleet transition and related charges146 (4)221 14 
Special items - restructuring charges (23) (12)
Total Operating Expenses2,471 978 4,354 1,936 
Operating Income (Loss)187 549 (15)388 
Non-operating Income (Expense)  
Interest income11 6 18 13 
Interest expense(26)(39)(53)(71)
Interest capitalized3 3 5 6 
Other - net10 9 24 19 
Total Non-operating Income (Expense)(2)(21)(6)(33)
Income (Loss) Before Income Tax185 528 (21)355 
Income tax expense (benefit)46 131 (17)89 
Net Income (Loss)$139 397 $(4)$266 
Basic Earnings (Loss) Per Share:$1.10 $3.18 $(0.03)$2.13 
Diluted Earnings (Loss) Per Share:$1.09 $3.13 $(0.03)$2.10 
Shares used for computation: 
Basic126.543 124.977 126.265 124.640 
Diluted127.795 126.825 126.265 126.388 

6


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(in millions)2022202120222021
Net Income (Loss)$139 $397 $(4)$266 
Other comprehensive income (loss), net of tax
Marketable securities(20)(1)(60)(13)
Employee benefit plans 7 1 13 
Interest rate derivative instruments4 1 13 7 
        Total other comprehensive income (loss), net of tax$(16)$7 $(46)$7 
Total comprehensive income (loss), net$123 $404 $(50)$273 




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 

(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 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30,
(in millions)20222021
Cash flows from operating activities:  
Net Income (Loss)$(4)$266 
Adjustments to reconcile net gain (loss) to net cash provided by operating activities:  
Depreciation and amortization206 195 
Stock-based compensation and other20 24 
Special items - fleet transition and related charges221 14 
Special items - restructuring charges (12)
Changes in certain assets and liabilities:
Changes in deferred tax provision(14)33 
Increase in accounts receivable(115)(86)
Increase in air traffic liability615 460 
Increase in deferred revenue83 69 
Federal income tax refund260  
Other - net(37)44 
Net cash provided by operating activities1,235 1,007 
Cash flows from investing activities:  
Property and equipment additions:  
Aircraft and aircraft purchase deposits(509)(30)
Other flight equipment(69)(38)
Other property and equipment(54)(34)
Total property and equipment additions, including capitalized interest(632)(102)
Purchases of marketable securities(1,410)(2,524)
Sales and maturities of marketable securities1,323 1,561 
Other investing activities(2)(5)
Net cash used in investing activities(721)(1,070)
Cash flows from financing activities:  
Proceeds from issuance of debt 363 
Long-term debt payments(239)(681)
Other financing activities33 37 
Net cash used in financing activities(206)(281)
Net increase (decrease) in cash, cash equivalents, and restricted cash308 (344)
Cash, cash equivalents, and restricted cash at beginning of period494 1,386 
Cash, cash equivalents, and restricted cash at end of the period$802 $1,042 
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Six Months Ended June 30,
(in millions)20222021
Cash paid during the period for:
Interest (net of amount capitalized)$35 $61 
Income taxes  
Non-cash transactions:
Right-of-use assets acquired through operating leases378 77 
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents778 1,025 
Restricted cash included in Prepaid expenses and other current assets24 17 
Total cash, cash equivalents, and restricted cash at end of the period$802 $1,042 



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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 June 30, 2022 and the results of operations for the three and six months ended June 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 six months ended June 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 mainline operations to an all-Boeing 737 fleet. It also announced new plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. Under these plans, Alaska will accelerate the retirement of its Airbus A320 aircraft, with all expected to exit the fleet by early 2023. Alaska also operates A321neo aircraft, and is evaluating options to remove them from its fleet by the end of 2023, subject to agreement with counterparties. The Company operated 29 A320 and ten A321neo aircraft as of June 30, 2022. Horizon plans to retire its Q400 fleet, which includes 25 owned and seven leased aircraft in operation at June 30, 2022, in early 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 and related charges" 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 and were effective beginning this quarter. Incremental costs associated with the accelerated schedules are recognized within the "Special items - fleet transition and related charges" 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 second quarter, all lease return costs were recorded within the "Special items - fleet transition and related charges" line in the consolidated statement of operations.

A summary of special charges for fleet transition activities is included below for the three and six months ended June 30, 2022. The impairment charges are one-time in nature, while the other special charges continue to be recorded consistent with the
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schedules described above. The majority of remaining special charges associated with the fleet transition will be recorded in 2022, with additional amounts 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 June 30, 2022Six Months Ended June 30, 2022
(in millions)AirbusQ400TotalAirbusQ400Total
Impairment of long-lived assets$ $ $ $ $70 $70 
Accelerated aircraft ownership expenses40 3 43 40 3 43 
Lease return costs and other expenses103  103 108  108 
Total special items - fleet transition and related charges$143 $3 $146 $148 $73 $221 


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 June 30,Six Months Ended June 30,
2022202120222021
Passenger ticket revenue, including ticket breakage, net of taxes and fees$2,052 $1,114 $3,284 $1,639 
Passenger ancillary revenue119 84 210 134 
Mileage Plan passenger revenue247 154 435 238 
Total Passenger revenue$2,418 $1,352 $3,929 $2,011 

Mileage Plan Loyalty Program

Mileage Plan revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Passenger revenue$247 $154 $435 $238 
Mileage Plan other revenue175 118 287 212 
Total Mileage Plan revenue$422 $272 $722 $450 

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Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Cargo revenue$36 $34 $65 $61 
Other revenue29 23 58 40 
Total Cargo and other revenue$65 $57 $123 $101 

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $132 million and $36 million from the prior year-end air traffic liability balance for the three months ended June 30, 2022 and 2021, and $522 million and $175 million for the six months ended June 30, 2022 and 2021.

Mileage Plan assets and liabilities

The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $76 million of such receivables as of June 30, 2022 and $64 million as of December 31, 2021.

The table below presents a roll forward of the total frequent flyer liability (in millions):
Six Months Ended June 30,
20222021
Total Deferred revenue balance at January 1$2,358 $2,277 
Travel miles and companion certificate redemption - Passenger revenue(409)(238)
Miles redeemed on partner airlines - Other revenue(26)(17)
Increase in liability for mileage credits issued518 324 
Total Deferred revenue balance at June 30$2,441 $2,346 
NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of June 30, 2022, total cost basis for all marketable securities was $2.7 billion, compared to a total fair value of $2.6 billion. The decline in value is primarily due to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available information as of June 30, 2022.
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Fair values of financial instruments on the condensed consolidated balance sheet (in millions):
June 30, 2022December 31, 2021
Level 1Level 2TotalLevel 1Level 2Total
Assets
Marketable securities
U.S. government and agency securities$522 $ $522 $331 $ $331 
Equity mutual funds5  5 6  6 
Foreign government bonds