ALASKA AIR GROUP, INC. [ALK] Filings

10-Q 1 alk-20230930.htm 10-Q alk-20230930

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, 2023

☐ 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.


Delaware						91-1292054
(State of Incorporation)						(I.R.S. Employer Identification No.)


19300 International Boulevard,			Seattle,			WA			98188

Telephone:

(206)

392-5040


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	ALK	New 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 filer

☒

Accelerated 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 128,053,077 common shares, par value $0.01, outstanding at October 31, 2023.

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, 2023

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	42
ITEM 4.	CONTROLS AND PROCEDURES	43
PART II.	OTHER INFORMATION	44
ITEM 1.	LEGAL PROCEEDINGS	44
ITEM 1A.	RISK FACTORS	44
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45
	SIGNATURES	45

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.”

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, 2022. Some of these risks include competition, labor costs, relations and availability, general economic conditions including those associated with pandemic recovery, increases in operating costs including fuel, inability to meet cost reduction, ESG and other strategic goals, seasonal fluctuations in demand and financial results, supply chain risks, events that negatively impact aviation safety and security, and changes in laws and regulations that impact our business. Please consider our forward-looking statements in light of those risks as you read this report.

PART I


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	September 30, 2023		December 31, 2022
ASSETS
Current Assets
Cash and cash equivalents	$	647	$	338
Marketable securities	1,804		2,079
Total cash and marketable securities	2,451		2,417
Receivables - net	341		296
Inventories and supplies - net	122		104
Prepaid expenses	187		163
Assets held for sale	385		3
Other current assets	158		57
Total Current Assets	3,644		3,040

Property and Equipment
Aircraft and other flight equipment	10,015		9,053
Other property and equipment	1,756		1,661
Deposits for future flight equipment	538		670
	12,309		11,384
Less accumulated depreciation and amortization	4,283		4,127
Total Property and Equipment - Net	8,026		7,257

Other Assets
Operating lease assets	1,171		1,471
Goodwill and intangible assets	2,034		2,038
Other noncurrent assets	290		380
Total Other Assets	3,495		3,889

Total Assets	$	15,165	$	14,186

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	September 30, 2023		December 31, 2022
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	229	$	221
Accrued wages, vacation and payroll taxes	561		619
Air traffic liability	1,359		1,180
Other accrued liabilities	806		846
Deferred revenue	1,233		1,123
Current portion of operating lease liabilities	150		228
Current portion of long-term debt and finance leases	736		276
Total Current Liabilities	5,074		4,493

Long-Term Debt, Net of Current Portion	2,128		1,883

Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	1,113		1,393
Deferred income taxes	662		574
Deferred revenue	1,366		1,374
Obligation for pension and post-retirement medical benefits	368		348
Other liabilities	361		305
Total Noncurrent Liabilities	3,870		3,994

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: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares	1		1
Capital in excess of par value	659		577
Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares	(744)		(674)
Accumulated other comprehensive loss	(360)		(388)
Retained earnings	4,537		4,300
	4,093		3,816
Total Liabilities and Shareholders' Equity	$	15,165	$	14,186

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	2023		2022		2023		2022
Operating Revenue
Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544
Mileage Plan other revenue	159		146		483		433
Cargo and other revenue	62		67		190		190
Total Operating Revenue	2,839		2,828		7,873		7,167

Operating Expenses
Wages and benefits	782		686		2,259		1,931
Variable incentive pay	45		48		149		140
Aircraft fuel, including hedging gains and losses	694		877		1,932		2,000
Aircraft maintenance	118		92		367		331
Aircraft rent	48		76		161		222
Landing fees and other rentals	183		161		502		435
Contracted services	100		83		290		243
Selling expenses	84		82		231		218
Depreciation and amortization	113		104		330		310
Food and beverage service	62		52		176		143
Third-party regional carrier expense	58		53		164		145
Other	185		207		544		536
Special items - fleet transition and other	156		155		355		376
Special items - labor and related	—		90		51		90
Total Operating Expenses	2,628		2,766		7,511		7,120
Operating Income	211		62		362		47

Non-operating Income (Expense)
Interest income	23		17		62		35
Interest expense	(34)		(31)		(90)		(84)
Interest capitalized	7		3		21		8
Special items - net non-operating	(8)		—		(14)		—
Other - net	(6)		14		(22)		38
Total Non-operating Income (Expense)	(18)		3		(43)		(3)
Income Before Income Tax	193		65		319		44
Income tax expense	54		25		82		8
Net Income	$	139	$	40	$	237	$	36

Basic Earnings Per Share:	$	1.09	$	0.32	$	1.86	$	0.28
Diluted Earnings Per Share:	$	1.08	$	0.31	$	1.84	$	0.28
Shares used for computation:
Basic	127.187		126.783		127.375		126.440
Diluted	129.188		128.370		129.085		128.087

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2023		2022		2023		2022
Net Income	$	139	$	40	$	237	$	36
Other comprehensive income (loss), net of tax
Marketable securities	2		(26)		18		(86)
Employee benefit plans	3		1		11		2
Interest rate derivative instruments	—		5		(1)		18
Total other comprehensive income (loss), net of tax	$	5	$	(20)	$	28	$	(66)

Total Comprehensive Income (Loss), Net of Tax	$	144	$	20	$	265	$	(30)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at December 31, 2022	127.534	$	1	$	577	$	(674)	$	(388)	$	4,300	$	3,816
Net loss	—	—		—		—		—		(142)		(142)
Other comprehensive income	—	—		—		—		23		—		23
Common stock repurchase	(0.414)	—		—		(18)		—		—		(18)
Stock-based compensation	—	—		12		—		—		—		12



Stock issued under stock plans	0.123	—		(2)		—		—		—		(2)
Balance at March 31, 2023	127.243	$	1	$	587	$	(692)	$	(365)	$	4,158	$	3,689
Net income	—	—		—		—		—		240		240
Other comprehensive income	—	—		—		—		—		—		—
Common stock repurchase	(0.872)	—		—		(39)		—		—		(39)
Stock-based compensation	0.017	—		26		—		—		—		26


Stock issued for employee stock purchase plan	0.924	—		34		—		—		—		34
Stock issued under stock plans	0.036	—		1		—		—		—		1
Balance at June 30, 2023	127.348	$	1	$	648	$	(731)	$	(365)	$	4,398	$	3,951
Net income	—	—		—		—		—		139		139
Other comprehensive income	—	—		—		—		5		—		5
Common stock repurchase	(0.249)	—		—		(13)		—		—		(13)
Stock-based compensation	—	—		11		—		—		—		11


Stock issued under stock plans	0.021	—		—		—		—		—		—
Balance at September 30, 2023	127.120	$	1	$	659	$	(744)	$	(360)	$	4,537	$	4,093


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Total
Balance at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801

Net loss	—	—		—		—		—		(143)		(143)
Other comprehensive loss	—	—		—		—		(30)		—		(30)

Stock-based compensation	—	—		13		—		—		—		13



Stock issued under stock plans	0.182	—		(4)		—		—		—		(4)
Balance at March 31, 2022	126.088	$	1	$	503	$	(674)	$	(292)	$	4,099	$	3,637
Net income	—	—		—		—		—		139		139
Other comprehensive loss	—	—		—		—		(16)		—		(16)

Stock-based compensation	0.017	—		9		—		—		—		9


Stock issued for employee stock purchase plan	0.643	—		30		—		—		—		30
Stock issued under stock plans	0.012	—		—		—		—		—		—
Balance at June 30, 2022	126.760	$	1	$	542	$	(674)	$	(308)	$	4,238	$	3,799
Net income	—	—		—		—		—		40		40
Other comprehensive loss	—	—		—		—		(20)		—		(20)

Stock-based compensation	—	—		8		—		—		—		8
Stock issued under stock plans	0.074	—		(1)		—		—		—		(1)
Balance at September 30, 2022	126.834	$	1	$	549	$	(674)	$	(328)	$	4,278	$	3,826

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,
(in millions)		2023		2022
Cash Flows from Operating Activities:
Net Income		$	237	$	36
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		330		310
Stock-based compensation and other		73		33
Special items - fleet transition and other		344		376
Special items - labor and related		51		—

Changes in certain assets and liabilities:
Changes in deferred income taxes		90		—
Increase in accounts receivable		(45)		(59)
Increase in air traffic liability		179		304
Increase in deferred revenue		102		123

Federal income tax refund		—		260
Other - net		(258)		26
Net cash provided by operating activities		1,103		1,409
Cash Flows from Investing Activities:
Property and equipment additions
Aircraft and aircraft purchase deposits		(669)		(688)
Other flight equipment		(153)		(156)
Other property and equipment		(169)		(103)
Total property and equipment additions		(991)		(947)
Purchases of marketable securities		(519)		(1,670)
Sales and maturities of marketable securities		806		1,731

Other investing activities		(106)		(2)
Net cash used in investing activities		(810)		(888)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt, net of issuance costs		313		—
Long-term debt payments		(242)		(333)
Common stock repurchases		(70)		—

Other financing activities		11		37
Net cash provided by (used in) financing activities		12		(296)
Net increase in cash and cash equivalents		305		225
Cash, cash equivalents, and restricted cash at beginning of period		369		494
Cash, cash equivalents, and restricted cash at end of the period		$	674	$	719


	Nine Months Ended September 30,
(in millions)		2023		2022
Supplemental disclosure:
Cash paid during the period for:
Interest, net of amount capitalized		$	85	$	72

Income taxes, net of refunds received		14		—

Non-cash transactions:
Right-of-use assets acquired through operating leases		120		419
Operating leases converted to finance leases		505		—
Property and equipment acquired through the issuance of debt		179		—

Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents		647		688
Restricted cash included in Other noncurrent assets		27		31
Total cash, cash equivalents, and restricted cash at end of the period		$	674	$	719

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, and other immaterial business units. All 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, 2022. 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, 2023 and the results of operations for the three and nine months ended September 30, 2023 and 2022. Such adjustments were of a normal recurring nature. Certain rows, columns, figures, or percentages may not recalculate due to rounding.

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 revenue and expenses, including impairment charges. 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, 2023 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. The removal of all A320 and Q400 aircraft from operating service was completed in January 2023. The removal of all A321neo aircraft from operating service was completed in September 2023. At September 30, 2023, Alaska had reached agreements with multiple lessors to exit its ten A321neo operating leases and purchase the aircraft. Three aircraft purchases closed by September 30, 2023. Subsequent to quarter end, Alaska finalized an agreement to sell the ten aircraft to American Airlines. The remaining seven purchases and all sales to American Airlines are expected to occur in the fourth quarter of 2023 and first quarter of 2024. As a result of the new agreements, the operating leases associated with the seven aircraft that were not purchased by September 30, 2023 were considered modified, and upon evaluation were reclassified as finance leases.

Valuation of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the total carrying value of an asset or asset group may not be recoverable. In the second quarter, the Company performed an impairment analysis for the A321neo fleet and recorded an impairment charge of $156 million.

In the third quarter, the Company determined there was additional impairment related to the A321neo fleet due to new purchase activity in the period. The Company estimated the fair market value for the A321neo aircraft using available market price information with adjustments based on quantitative and qualitative considerations. Based on this fair market value, the Company recorded an impairment charge of $123 million, reflecting the amount by which carrying value exceeded fair value of the aircraft. This charge is included within Special items - fleet transition and other in the condensed consolidated statements of operations.

Other Fleet Related Disclosure

The ten A321neo aircraft that have been removed from operating service are classified as Assets held for sale in the condensed consolidated balance sheets as of September 30, 2023. Seven of these aircraft are classified as finance leases, whose lease liabilities are reflected within Current portion of long-term debt and finance leases and total $452 million as of September 30, 2023. Interest expense associated with the finance leases of $8 million for the third quarter of 2023 was recognized within Special items - net non-operating in the condensed consolidated statements of operations.

Special charges were also recognized during the three and nine months ended September 30, 2023 for other fleet transition costs, including accelerated aircraft ownership expenses, certain aircraft maintenance work performed as a result of the fleet retirements, adjustments to estimated costs to return the A320 fleet, and penalty rent for Airbus aircraft which have not yet been returned to the lessor as of the lease expiration date.

The following table summarizes our special charges for fleet transition costs for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2023		2022		2023		2022
Impairment of long-lived assets(a)	$	120	$	—	$	271	$	70

Other fleet transition costs	36		155		84		306
Special items - fleet transition and other	$	156	$	155	$	355	$	376

(a) Net of other immaterial activity recognized in the three and nine months ended September 30, 2023.

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.

The Company disaggregates revenue by segment in Note 10. 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,
	2023		2022		2023		2022
Passenger ticket revenue, net of taxes and fees	$	2,226	$	2,252	$	6,081	$	5,536
Passenger ancillary revenue	135		127		362		337
Mileage Plan passenger revenue	257		236		757		671
Total Passenger revenue	$	2,618	$	2,615	$	7,200	$	6,544

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,
	2023		2022		2023		2022
Passenger revenue	$	257	$	236	$	757	$	671
Mileage Plan other revenue	159		146		483		433
Total Mileage Plan revenue	$	416	$	382	$	1,240	$	1,104

Cargo and Other Revenue

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cargo revenue	$	29	$	37	$	97	$	102
Other revenue	33		30		93		88
Total Cargo and other revenue	$	62	$	67	$	190	$	190

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $33 million and $65 million from the prior year-end air traffic liability balance for the three months ended September 30, 2023 and 2022, and $621 million and $587 million from the prior year-end air traffic liability balance for the nine months ended September 30, 2023 and 2022.

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 $91 million of such receivables as of September 30, 2023 and $83 million as of December 31, 2022.

The table below presents a roll forward of the total frequent flyer liability (in millions):


	Nine Months Ended September 30,
	2023		2022
Total Deferred Revenue balance at January 1	$	2,497	$	2,358
Travel miles and companion certificate redemption - Passenger revenue	(712)		(632)
Miles redeemed on partner airlines - Other revenue	(86)		(45)
Increase in liability for mileage credits issued	900		800
Total Deferred Revenue balance at September 30	$	2,599	$	2,481

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 September 30, 2023, total cost basis for all marketable securities was $1.9 billion, compared to a total fair value of $1.8 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 industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of September 30, 2023.

Fair values of financial instruments on the condensed consolidated balance sheets (in millions):


	September 30, 2023						December 31, 2022
	Level 1		Level 2		Total		Level 1		Level 2		Total

Assets
Marketable securities
U.S. government and agency securities	$	508	$	—	$	508	$	505	$	—	$	505
Equity mutual funds	5		—		5		5		—		5
Foreign government bonds	—		10		10		—		25		25
Asset-backed securities	—		216		216		—		261		261
Mortgage-backed securities	—		123		123		—		196		196
Corporate notes and bonds	—		889		889		—		1,025		1,025
Municipal securities	—		53		53		—		62		62
Total Marketable securities	513		1,291		1,804		510		1,569		2,079
Derivative instruments
Fuel hedge contracts - call options	—		40		40		—		44		44
Interest rate swap agreements	—		13		13		—		15		15
Total Assets	$	513	$	1,344	$	1,857	$	510	$	1,628	$	2,138

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts are determined based on the difference between the fixed interest rate in the agreements and the observable interest SOFR-based forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Maturities for marketable securities (in millions):


September 30, 2023	Cost Basis		Fair Value
Due in one year or less	$	403	$	395
Due after one year through five years	1,386		1,320
Due after five years	73		68
Due after 10 years	18		16
No maturity date	4		5
Total	$	1,884	$	1,804

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents, and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper, and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs, or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: To estimate the fair value of all fixed-rate debt as of September 30, 2023, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $566 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.

Fixed-rate debt on the condensed consolidated balance sheets and the estimated fair value of long-term fixed-rate debt (in millions):


	September 30, 2023		December 31, 2022


Fixed-rate debt	$	1,520	$	1,660

Estimated fair value	$	1,372	$	1,473

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating and finance lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for details regarding impairment charges recorded in the three and nine months ended September 30, 2023.

NOTE 5. LONG-TERM DEBT

Long-term debt obligations on the condensed consolidated balance sheets (in millions):


	September 30, 2023			December 31, 2022
Fixed-rate notes payable due through 2029	$	85		$	113
Fixed-rate PSP notes payable due through 2031	600			600
Fixed-rate EETC payable due through 2025 & 2027	835			947
Variable-rate notes payable due through 2035	907			514
Less debt issuance costs	(15)			(15)
Total debt	2,412			2,159
Less current portion(a)	284			276
Long-term debt, less current portion	$	2,128		$	1,883

Weighted-average fixed-interest rate	3.4		%	3.5		%
Weighted-average variable-interest rate	6.8		%	5.8		%

(a) Excludes finance lease liabilities recognized within Current portion of long-term debt and finance leases in the condensed consolidated balance sheets as of September 30, 2023.

Approximately $216 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2023, resulting in an effective weighted-average interest rate for the full debt portfolio of 4.3%.

During the nine months ended September 30, 2023, the Company incurred debt of $495 million from multiple lenders and sources. New debt includes proceeds of $316 million which is secured by aircraft. Additionally, $179 million was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement is reflected as a non-cash transaction within the supplemental disclosures in the condensed consolidated statements of cash flows. Also during the nine months ended September 30, 2023, the Company made scheduled debt payments of $240 million and prepayments of $2 million.

Debt Maturity

At September 30, 2023, long-term debt principal payments for the next five years and thereafter are as follows (in millions):


	Total
Remainder of 2023	$	45
2024	286
2025	343
2026	292
2027	597
Thereafter	864
Total Principal Payments	$	2,427

Bank Lines of Credit

Alaska has three credit facilities totaling $626 million as of September 30, 2023. One of the credit facilities for $150 million expires in March 2025 and is secured by certain accounts receivable, spare engines, spare parts, and ground service equipment. A second credit facility, which is secured by aircraft, was amended by the Company in the third quarter to increase its size to $400 million and extend its term to June 2026. Both facilities have variable interest rates based on SOFR plus a specified margin. A third credit facility for $76 million expires in June 2024 and is secured by aircraft.

Alaska has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. Alaska was in compliance with this covenant at September 30, 2023.

NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Service cost	$	8	$	12	$	22	$	34
Pension expense included in Wages and benefits	8		12		22		34

Interest cost	27		17		81		49
Expected return on assets	(28)		(32)		(85)		(96)
Amortization of prior service cost (credit)	—		(1)		—		(1)
Recognized actuarial loss	5		2		17		6
Pension expense included in Non-operating Income (Expense)	$	4	$	(14)	$	13	$	(42)

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of September 30, 2023 (in millions):


	Aircraft-Related Commitments(a)		Capacity Purchase Agreements and Other Obligations (b)
Remainder of 2023	$	460	$	56
2024	1,754		224
2025	1,438		227
2026	688		219
2027	334		220
Thereafter	591		739
Total	$	5,265	$	1,685

(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.

(b)Primarily comprised of non-lease costs associated with capacity purchase agreements, as well as other various sponsorship agreements and investment commitments.

Aircraft Commitments

Aircraft purchase commitments include contractual commitments for aircraft and engines. Details for contractual aircraft commitments as of September 30, 2023 are outlined below.


	Firm Orders	Options and Other Rights	Total
Aircraft Type	2023-2027	2025-2030	2023-2030
B737	89	105	194
E175	9	13	22
Total	98	118	216

The B737 fleet commitments outlined above represent the contractual commitments as defined in Alaska's existing order with Boeing as of September 30, 2023. Boeing has communicated to Alaska that certain B737 deliveries contracted in 2023 are expected to be delayed into 2024.

Alaska has contractual agreements as of September 30, 2023 to purchase seven of its leased A321neo aircraft. These transactions are expected to occur in the fourth quarter of 2023 and first quarter of 2024. The obligations for these aircraft, including both the remaining lease payments and subsequent purchase, are reflected within Current portion of long-term debt and finance leases in the condensed consolidated balance sheets as of September 30, 2023 and are not reflected in the tables above. Refer to Note 2 to the condensed consolidated financial statements for additional details.

Aircraft Maintenance

Aircraft maintenance commitments include contractual commitments for engine maintenance agreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft. In turn, these maintenance agreements transfer certain risks to the third-party service provider. Alaska has contracts for maintenance on its B737-800 and B737-900ER aircraft engines through 2026 and 2032, respectively. Horizon has a contract for maintenance on certain E175 aircraft engines through 2033.

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company has appealed the decision and believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. In March 2020, the Company suspended the share repurchase program as required by the CARES Act. These restrictions ended on October 1, 2022. The Company restarted the share repurchase program in February 2023 pursuant to the existing repurchase program. As of September 30, 2023, the Company has repurchased 9.1 million shares for $613 million under this program. No shares were repurchased in 2022.

Share purchase activity (in millions, except share amounts):


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	248,988	$	13	1,534,529	$	70

CARES Act Warrant Issuances

As taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the U.S. government a total of 1,455,437 warrants to purchase ALK common stock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.

As of September 30, 2023, there are 1,882,517 total warrants outstanding, with a weighted average strike price of $39.06. The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, recorded in stockholders' equity at issuance.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, restricted stock units, and warrants, using the treasury-stock method. Anti-dilutive common stock equivalents excluded from the calculation of diluted earnings per share were 1.2 million and 1.9 million for the three and nine months ended September 30, 2023, and 1.4 million and 1.7 million for the three and nine months ended September 30, 2022.

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), is shown below for the three and nine months ended September 30, 2023 and 2022:

Marketable Securities

Employee Benefit Plan

Interest Rate Derivatives

Total

Balance at June 30, 2023, net of tax effect of $116

(64)