ALASKA AIR GROUP, INC. (ALK) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Item 1A. "Risk Factors" within this document.

This section of the Form 10-K covers discussion of 2024 and 2023 results, and comparisons between those years. For a discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023.

GAAP TO NON-GAAP RECONCILIATIONS AND OPERATING STATISTICS

We are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

•By excluding certain costs from our unit metrics, we believe that we have better visibility into the results of operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. We believe that all U.S. carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management and investors to understand the impact of company-specific cost drivers which are more controllable by management. We adjust for expenses related directly to our freighter aircraft operations, including those costs incurred under the ATSA with Amazon, to allow for better comparability to other carriers that do not operate freighter aircraft. We also exclude certain special charges as they are unusual or nonrecurring in nature and adjusting for these expenses allows management and investors to better understand our cost performance.

•CASMex is one of the most important measures used by management and by the Air Group Board of Directors in assessing cost performance. CASMex is also a measure commonly used by industry analysts, and we believe it is the basis by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

•Adjusted pretax income is an important metric for the employee incentive plan, which covers the majority of Air Group employees.

•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•Although we disclose our unit revenue, we do not, nor are we able to, evaluate unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

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We are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. Amounts in the tables below are rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to our actual figures presented in the tables below.

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

(a) Certain integration costs are non deductible for tax purposes, resulting in a smaller income tax effect for current year adjustments.

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OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure performance.

(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

(c)Excludes operations under the ATSA with Amazon.

(d)Includes aircraft owned and leased by Alaska, Hawaiian, and Horizon as well as aircraft operated by third-party regional carriers under CPAs. Excludes all aircraft removed from operating service.

(e)Data presented includes information related to flights operated by Horizon and third-party carriers.

YEAR IN REVIEW

Overview

On September 18, 2024, we completed our acquisition of Hawaiian, combining two highly complementary networks and expanding our international reach. Results for the year include Hawaiian activity beginning September 18, 2024.

In 2024, Air Group reported consolidated pretax income of $545 million compared to $323 million in 2023. For the period September 18, 2024 through December 31, 2024, Hawaiian produced $869 million of revenue and a loss before income tax and special items of $58 million.

See “Results of Operations” below for further discussion of changes in revenue and operating expenses as compared to 2023. A glossary of financial terms can be found at the end of Item 1.

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Labor update

In 2024, Alaska technicians, represented by AMFA, ratified a new five-year CBA that includes wage increases and quality of life improvements. Alaska pilots, represented by ALPA, ratified a two-year extension of its existing CBA. In January 2025, Alaska reached a tentative agreement with its flight attendants, represented by AFA, for an updated CBA. Voting on the tentative agreement will be completed in the first quarter of 2025. Horizon is in negotiations with certain labor groups for updated CBAs, including its pilots, represented by IBT; its flight attendants, represented by AFA; and its technicians, represented by AMFA.

Alaska and Hawaiian are working towards JCBAs for workgroups represented by the same unions. At December 31, 2024, Transition and Process Agreements have been negotiated for certain workgroups which define the process for negotiating JCBAs and set forth interim agreements until a JCBA is reached.

Outlook

Looking ahead to 2025, we are focused on the successful integration of Hawaiian into Air Group. We expect capacity growth for the year of 2% to 3% as compared to historical Air Group and Hawaiian combined capacity in the prior year. In addition to growth in revenue and expenses due to the the impact of Hawaiian on Air Group results for the full year, 2025 results will be impacted by other factors throughout the year. We expect revenue improvements to be driven by continued strength in leisure and corporate demand, and by network and loyalty synergies as integration work continues. Wage rate increases stemming from new labor agreements and rising costs at airports in which we operate will drive cost pressures during the year, but we anticipate some benefit from synergy capture in the second half of the year.

RESULTS OF OPERATIONS

Items affecting comparability

Results for 2024 are inclusive of Hawaiian's operations from the acquisition date of September 18, 2024 through December 31, 2024, while the prior period does not include combined results. Consolidated revenue and expenses increased compared to the prior period due to the incorporation of Hawaiian's operations into Air Group. The below discussion of changes to our revenue and expenses compared to the prior year largely focus on material factors independent of the acquisition.

2024 COMPARED WITH 2023

Operating Revenue

Total operating revenue increased $1.3 billion, or 13%, of which $869 million was attributable to Hawaiian. The changes are summarized in the following table:

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The table below presents operating revenue details by principal geographic region (as defined by the U.S. Department of Transportation), inclusive of Hawaiian Airlines for the period from September 18, 2024 through December 31, 2024.

Passenger revenue

On a consolidated basis, Passenger revenue increased $1.1 billion, or 12%, of which $757 million was attributable to Hawaiian. The remaining $371 million increase was driven by increased traffic due to increased gauge and departures throughout the network. Strength in premium class products and increased redemptions by Mileage Plan members on both Alaska and partner airlines also contributed to this increase. These improvements were partially offset by approximately $200 million of lost revenue from the B737-9 grounding.

Loyalty program other revenue

On a consolidated basis, Loyalty program other revenue increased $85 million, or 13%, of which $53 million was attributable to Hawaiian. The remaining $32 million increase was primarily driven by higher commissions from bank card and third party partners.

Cargo and other revenue

On a consolidated basis, Cargo and other revenue increased $96 million, or 38%, of which $59 million was attributable to Hawaiian. The remaining $37 million increase was driven by two additional B737-800 freighters in Alaska's cargo fleet for the full year and increases to other ancillary revenue.

Operating Expenses

Total operating expenses increased $1.1 billion, or 11%. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

Fuel expense

Aircraft fuel expense includes raw fuel expense plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

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We evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. Economic fuel expense includes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and our incentive pay plan.

Aircraft fuel expense decreased $135 million, or 5%. The elements of the change are illustrated in the following table:

Raw fuel expense decreased 3% compared to 2023. The decrease was driven primarily by lower refining margins associated with the conversion of crude oil to jet fuel, as well as lower per gallon costs on crude oil. It was partially offset by higher fuel consumption consistent with increased capacity and the inclusion of $193 million of raw fuel expense attributable to Hawaiian.

Losses recognized for hedges that settled during the year were $38 million in 2024, compared to losses of $64 million in 2023. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Alaska's fuel hedge program was suspended in 2023. Hawaiian's program was temporarily paused as of September 30, 2024. A summary of Alaska's WTI positions and Hawaiian's Brent crude positions is provided below:

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Non-fuel expenses

Wages and benefits

Wages and benefits expense increased $547 million, or 18%, of which $299 million was attributable to Hawaiian. The primary components of wages and benefits are shown in the following table:

Wages increased $368 million, or 16%, of which $229 million was attributable to Hawaiian. The remaining $139 million increase was driven by increased wage rates across multiple labor groups since the prior year, as well as additional impact from irregular operations following the the B737-9 grounding in the first quarter of 2024. Increased expense for payroll taxes is consistent with the change in wages.

The change in medical and other benefits was primarily driven by an increase in the cost of medical services compared to the prior year, as well as higher expenses associated with Alaska's long-term disability plan for its pilots. Increased expense for defined contribution plans was driven by higher wages as well as higher matching contributions for Alaska technicians.

Variable incentive pay

Variable incentive pay expense increased $158 million, or 79%, compared to 2023. The increase was driven by a higher payout percentage for Alaska's and Horizon's Performance-Based Pay program compared to the prior year on an increased wage base.

Aircraft maintenance

Aircraft maintenance expense increased $132 million, or 27%, of which $82 million was attributable to Hawaiian. The remaining $50 million increase was primarily driven by higher rates for outside maintenance work and additional maintenance projects.

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Aircraft rent

Aircraft rent expense was flat compared to 2023. An increase of $18 million attributable to Hawaiian's leased aircraft was offset by a decrease of $19 million, primarily due to the retirement of ten leased A321neo aircraft from Alaska's fleet in 2023.

Landing fees and other rentals

Landing fees and other rental expense increased $101 million, or 15%, of which $61 million was attributable to Hawaiian. The remaining $40 million increase was primarily driven by increased volume of Regional departures and landed weight. Increases to terminal rents were primarily driven by growth throughout the network, partially offset by favorable settlements received from certain airports in 2024.

Contracted services

Contracted services expense increased $55 million, or 14%, of which $39 million was attributable to Hawaiian. The remaining $16 million increase was primarily driven by higher rates charged by vendors for services as well as increased passengers throughout our network.

Selling expenses

Selling expenses increased by $46 million, or 15%, of which $40 million was attributable to Hawaiian. The remaining $6 million increase was driven by incremental credit card commissions and additional marketing costs.

Depreciation and amortization

Depreciation and amortization increased $132 million, or 29%, of which $44 million was attributable to Hawaiian. An additional $20 million of the increase was due to the amortization of acquired intangible assets and the change in fair value of certain acquired tangible assets. The remaining $68 million increase was primarily due to the addition of 12 owned B737 aircraft and three owned E175 aircraft during the year. Incremental depreciation on ground service and other equipment also contributed to the increase.

Food and beverage service

Food and beverage service expense increased $46 million, or 19%, of which $28 million was attributable to Hawaiian. The remaining $18 million increase was driven by growth in revenue passengers, as well as higher costs for food, food service supplies, and transportation.

Third-party regional carrier expense

Third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $25 million, or 11% driven by incremental departures and block hours operated by SkyWest.

Other expense

Other expense increased $125 million, or 17%, of which $66 million was attributable to Hawaiian. The remaining $59 million increase was primarily driven by crew hotel costs, passenger remuneration due to the B737-9 grounding, software costs, and other miscellaneous services.

Special items - operating

In 2024, we recognized $345 million of special operating expenses, compared to $443 million in 2023. Refer to Note 16 to the consolidated financial statements for details.

Additional Segment Information

Refer to Note 14 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's results.

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Alaska Airlines

Alaska Airlines reported a pretax profit, excluding special items and other adjustments, of $703 million in 2024, compared to $733 million in 2023. The $30 million decrease was driven by a combination of factors, including lost revenue from the B737-9 grounding, higher non-fuel operating expenses, including increased wages and higher variable incentive pay, and higher variable costs associated with overall network growth. This decrease was partially offset by a lower economic fuel cost per gallon.

Hawaiian Airlines

Hawaiian Airlines reported a pretax loss, excluding special items and other adjustments, of $58 million in 2024, representing its operations as a part of Air Group for the period from September 18, 2024 through December 31, 2024.

Regional

Regional reported a pretax profit, excluding special items and other adjustments, of $152 million in 2024, compared to a profit of $65 million in 2023. The $87 million improvement was driven by higher passenger revenue consistent with the increase in traffic, partially offset by higher operating expenses driven by increased capacity.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2024, we had cash and marketable securities of $2.5 billion. We also had 104 unencumbered aircraft, which can be financed if necessary, and an $850 million bank line-of-credit facility with no outstanding borrowings. We expect our current cash and marketable securities balance, combined with our available sources of liquidity, are sufficient to fund our liquidity needs for the next 12 months. We expect to meet our liquidity needs for the foreseeable future using cash flows from our operations, our available sources of liquidity, and future financing arrangements. We discuss our sources and uses of cash in more detail below.

Operating cash flows

Cash provided by ticket sales and from our co-branded credit card agreements are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, aircraft fuel, payments to suppliers for goods and services, payments to lessors and airport authorities for leased aircraft, rents, and landing fees, and interest expense for our debt obligations. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.

In 2024, cash provided by operating activities was $1.5 billion, compared to $1.1 billion in 2023. The increase in our operating cash flows was primarily due to increased cash provided from ticket sales, higher cash remuneration from our co-branded credit card partners, and other changes in various working capital account balances. As Hawaiian's operations are producing losses, the business contributed negative operating cash flow following the acquisition.

Investing cash flows

Capital expenditures to acquire aircraft, flight equipment, and other property and equipment is the primary use of investing cash flow. Total capital expenditures in 2024 were $1.3 billion, excluding the acquisition of Hawaiian. We discuss our aircraft-related commitments in more detail below.

Cash used in investing activities was $634 million in 2024, compared to cash used in investing activities of $1 billion in 2023. The change was due to a combination of factors. In the first quarter, we received $162 million in compensation from Boeing related to the B737-9 grounding. In the third quarter, we paid $659 million to acquire Hawaiian Airlines, net of Hawaiian's cash balances. Total property and equipment expenditures decreased $213 million, primarily driven by fewer deliveries of Alaska-owned B737 aircraft in 2024 compared to 2023. Net sales of marketable securities increased $313 million, driven by the liquidation of Hawaiian's investment portfolio following completion of the acquisition. We also received $177 million for the sale of certain Alaska and Horizon-owned aircraft and equipment during 2024.

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Financing cash flows

Cash provided by new financing arrangements is the primary source of our financing cash flow. Our primary uses of financing cash flow are payments of our debt service and finance lease obligations, as well as share repurchases. Refer to Note 6 to the consolidated financial statements for a detailed discussion of our debt balances, including a schedule outlining future payments.

Cash provided by financing activities was $119 million in 2024, compared to cash used in financing activities of $147 million in 2023. The Company had $2.3 billion in proceeds from new financing, including $2 billion backed by Alaska's Mileage Plan program. Debt payments were $1.9 billion, including $1.6 billion which was used to retire certain debt acquired from Hawaiian Airlines. The Company also increased its share repurchases, spending $312 million, compared to $137 million in 2023.

Indicators of financial condition and liquidity

The table below presents the major indicators of financial condition and liquidity:

(a) Excludes restricted cash balance of $29 million as of December 31, 2024.

Debt-to-capitalization, including leases

Material cash commitments

We have various contractual obligations that require material future outlays of cash. These obligations include the purchase of aircraft and other flight equipment, payments for our CPA with SkyWest, debt service payments, lease payments for aircraft and other property and equipment, costs for aircraft and engine maintenance, sponsorship and license agreements, and other miscellaneous agreements for services associated with operating and marketing our airlines. We also anticipate we may have material cash outlays to meet our fuel efficiency targets. Currently, Alaska and Hawaiian have agreements to purchase SAF to be delivered in the coming years. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF.

We expect to satisfy these obligations using cash flows from our operations, our available sources of liquidity, and future financing arrangements. Within the notes accompanying our consolidated financial statements, refer to Note 6 for discussion of scheduled debt obligations, Note 7 for discussion of future minimum payments for operating and finance leases, and Note 10 for discussion of aircraft-related purchase commitments and CPA obligations. We are also obligated to make periodic interest payments at fixed and variable rates, depending on the terms of our debt agreements. As of December 31, 2024, these interest obligations are expected to be $243 million in 2025, $228 million in 2026, $229 million in 2027, $196 million in 2028, $179 million in 2029, and $240 million thereafter.

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As of December 31, 2024, Alaska had firm orders to purchase 74 B737 aircraft with deliveries expected between 2025 and 2029. Alaska also had rights for 100 additional B737 aircraft through 2030. Hawaiian had firm orders to purchase 10 B787-9 aircraft with deliveries expected between 2025 and 2028. Horizon had firm orders to purchase six E175 aircraft with deliveries between 2025 and 2026.

Boeing has communicated that certain B737 and B787-9 aircraft are expected to be delivered later than the contracted delivery timing. For Alaska, this includes B737-9 aircraft contracted for delivery in 2024 that have been moved to 2025, certain B737-8 aircraft contracted for delivery in 2024 and 2025 that have been moved later in the contracted year or into the year following the contracted delivery, and certain B737-10 aircraft contracted for delivery in 2025 and 2026 that have been moved to 2026 or 2027, pending certification of the aircraft type. For Hawaiian, this includes B787-9 aircraft contracted for delivery between 2024 and 2026 that have been moved later into the contracted year or into the year following the contracted delivery. Management expects that other Boeing aircraft deliveries could be delayed beyond the contractual delivery. The table below summarizes our fleet plan, reflecting Boeing's communications and management's internal expectations.

(a) A330-300 freighter aircraft to be utilized under the ATSA with Amazon. The ATSA provides for the operation of ten aircraft with customer options to expand the fleet.

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CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial position and results of operations in this MD&A are based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See Note 1 to the consolidated financial statements for a description of our significant accounting policies.

Critical accounting estimates are defined as those that reflect significant management judgment and uncertainties and that potentially may lead to materially different results under varying assumptions and conditions. Management has identified the following critical accounting estimates and has discussed the development, selection and disclosure of these policies with our audit committee.

Recognition of Goodwill and Acquired Assets and Liabilities

To record the value of assets acquired and liabilities assumed as a result of our acquisition of Hawaiian on September 18, 2024, we have performed a purchase price allocation utilizing the best information available to management. Business combination accounting requires management to make assumptions and apply judgment, particularly for those assets acquired and liabilities assumed for which a fair value may not be easily determined by reference to market data, such as the Hawaiian trademark, customer relationships and co-brand credit card agreement. Of the assumptions utilized in valuing the assets and liabilities, the growth rate selected to project future revenues as well as the royalty rate utilized in the valuation of the Hawaiian trademark require a high degree of judgment. Under the relief-from-royalty methodology utilized to derive the value of the trademark, these assumptions have a material impact on the concluded value.

Inputs utilized in the valuation of these assets are subjective and require a high degree of judgment by management. As a result, actual results may differ from the estimates utilized in the valuation. Management will continue to evaluate these estimates and assumptions should new information become available, and may record adjustments to the fair value of the assets acquired and liabilities assumed as soon as practicable, but no later than September 18, 2025.

Alaska Mileage Plan

Alaska's Mileage Plan program awards mileage credits, referred to as miles, to members who fly on our airlines and our airline partners. We also sell services, including miles for transportation, Companion Fare™ certificates, priority boarding, bag fee waivers, and access to our brand and customer lists to major banks that offer Alaska co-branded credit cards. To a lesser extent, miles for transportation are also sold to other non-airline partners, such as hotels, and car rental agencies. Outstanding miles may be redeemed for travel on our airlines or eligible airline partners, and for non-airline products such as hotels. The existence of outstanding miles held by Mileage Plan members represents an obligation to provide future travel.

Mileage credits and the various other services we sell under Mileage Plan represent performance obligations that are part of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price model to allocate consideration received to the material performance obligations in these contracts. Our relative standalone selling price models are refreshed when contracts originate or are materially modified.

At December 31, 2024, Alaska's Mileage Plan program had 360 billion miles outstanding, resulting in a deferred revenue balance of $2.7 billion. For the year ended December 31, 2024, Mileage Plan revenue recognized from deferred revenue and recorded in passenger revenue was $1.1 billion. The deferred revenue resulting from our relative selling price allocations requires significant management judgment. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition or expenses. The most significant assumptions are described below.

1.The rate at which we defer sales proceeds related to services sold:

We estimate the standalone selling price for each performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded, and the number of miles redeemed. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables.

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2.The number of miles that will not be redeemed for travel (breakage):

We estimate how many miles will be used per award by employing a relative selling price method to allocate revenue from passenger ticket sales between air transportation and earned mileage credits. The portion attributed to mileage credits is deferred initially and recognized in passenger revenue upon redemption. We determine the estimated value of mileage credits using an equivalent ticket approach, considering historical data on award redemption patterns.

Our estimates are based on the current requirements in our Mileage Plan program and historical and future award redemption patterns.

We review significant Mileage Plan assumptions on an annual basis, or more frequently should circumstances indicate a need, and change our assumptions if facts and circumstances indicate that a change is necessary. We regularly update our breakage estimates for the portion of Mileage Plan mileage credits not expected to be redeemed. These estimates are based upon statistical analyses of historical data. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $12 million impact on annual revenue recognized.