ALASKA AIR GROUP, INC. Q2 2026 earnings call

Thank you operator, good morning. Thanks for joining us today to discuss our second quarter 2026 earnings results. Yesterday, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. Air Group reported a second quarter GAAP net loss of $76 million. Excluding special items, Air Group reported an adjusted net loss of $102 million. As a reminder, forward-looking statements about future performance may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit cost, excluding fuel.

As usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben.

Thanks, Ryan, good morning, everyone. Let me start by directly acknowledging our financial performance. While we beat our initial guidance for the second quarter, we still reported a loss, and we're not satisfied with that outcome, especially in what should be one of our strongest quarters of the year. At the same time, it's important to recognize what this quarter represented for our company. It was one of the most consequential and strategically important quarters in our history. We achieved the most complex technology milestone of our integration, successfully operated the largest summer schedule in our history, and launched our first ever service to Europe, an investment that has exceeded our expectations right out of the gate. While these accomplishments don't change our financial results, they do reinforce our confidence in the future.

The work we're doing today is strengthening our foundation, improving our competitiveness, and positioning us to deliver meaningful long-term value. Most importantly, none of this would have been possible without our people. I want to thank our more than 30,000 employees across Alaska, Hawaiian, and Horizon. They delivered these milestones while continuing to provide outstanding care for our guests, and their commitment has been the driving force behind everything we've accomplished this quarter. While there was no way around the overwhelming fuel headwind, we saw an extremely positive earnings trajectory throughout the quarter that only deepens our confidence in our long-term strategy. The momentum we are seeing is clear. Unit revenues strengthened, unit cost improved, and we returned to profitability in June with a double-digit pre-tax margin despite fuel prices up nearly 70% year-over-year.

Absent the fuel spike, this would have been a solidly profitable quarter, which underscores that our underlying business is running well and that Alaska Accelerate is working. With significant commercial momentum, industry-leading operational performance, and an integration that's paying off, combined with easing fuel prices, disciplined cost execution, and demand holding firm, we're set up for a strong earnings inflection into the back half of the year. Operationally, the second quarter was a strong continuation and expansion of the themes I highlighted last call. We led the industry in on-time performance year to date, up five points year-over-year in Q2. At the same time, our team successfully completed the most complex milestone of our integration, migrating to a single passenger service system and establishing the industry's first dual-brand PSS platform.

Delivering industry-leading reliability while undertaking a transformation of this scale speaks to the strength of our operation and our people. Our net promoter scores continue to lead the industry, and our guest experience is only getting better. With the reservation cutover behind us, guest satisfaction has climbed seven points since last quarter, led by Hawaii, which jumped 10 points. Our investment in Starlink Wi-Fi is driving that experience further, with guest satisfaction on Starlink-equipped flights 20% higher than non-equipped flights. The onboard portal is also allowing us to deepen loyalty, with nearly 75% of non-members signing up for Atmos accounts to utilize this benefit. With 1/3 of our fleet now equipped and the remainder expected by 2027, we're excited to be delivering a best-in-class onboard experience.

On fleet, cabin retrofits across our 737s are now complete, adding 1.3 million incremental first and premium class seats, and demand is absorbing them well, with premium revenues up 15% in the quarter. Yesterday, we announced our plan to retire the 717 fleet beginning in 2028 and transition Neighbor Island flying to more modern, fuel-efficient Boeing 737s, bringing improved reliability, better economics, and more cargo capability as we continue investing in Hawaii. Cargo remains an important strategic growth opportunity for us. After restructuring our Amazon flying under a more profitable contract, we're now moving into the next phase of growth, adding four additional 737-800 freighters deployed across Hawaii and Alaska.

This further strengthens our position as the only U.S. airline with a dedicated cargo fleet, as we scale the international operation and capture the benefits of these investments, cargo will become an increasingly meaningful contributor to the profitability of our airline. Our international long-haul launches from Seattle are off to a strong start. Atmos members told us they were excited to fly internationally with us, and it's materializing. Our new Rome, London, and Reykjavik routes are each carrying 50% or more of Atmos members, an early signal of the loyalty demand behind this expansion. With every new long-haul route, our global relevance and perception grows, and we move closer to becoming Seattle's largest international carrier. Last but not least, our new premium credit card continues to perform well.

Total account holders are nearly 50% above our expectation, with over 60% of new accounts this quarter coming from outside the Pacific Northwest. Taken together, this quarter is proof that our plan is working. Even against a volatile backdrop and an outsized fuel headwind, we made real progress on every front that matters, building a business that can absorb short-term pressures and keep moving forward. Heading into the second half, we're set up well. Demand is holding firm, and our integration milestones are increasingly behind us. We look forward to continuing to deliver on the commitments we've made to our people, our guests, and our owners as we build scale, relevance, and loyalty for the long term. Before I close, I want to touch on a recent leadership announcement. Shane Tackett was promoted to President of Alaska Airlines, taking on responsibility for the commercial organization while continuing as CFO.

Shane is a 25-year veteran of the company and has been instrumental in guiding us through the Hawaiian acquisition and execution of Alaska Accelerate. This expanded role reflects the breadth of his leadership as we move into the company's next chapter. More broadly, we have conviction in our business model and the initiatives we've put in place. They're working, and the results we're seeing only strengthen our confidence that we're building a business model that is structurally capable of producing the $10 of earnings per share that we originally envisioned and laid out under our Alaska Accelerate plan. We'll discuss this and more about what's ahead for Air Group at our upcoming Investor Day on September 29th, here in Seattle. With that, I'll turn it over to Andrew.

Thanks, Ben, and good morning, everyone. Today, I'll walk through our second quarter financial performance, our perspective on the near-term demand and revenue environment, and the step change in the results and performance of core levers that underpin Alaska Accelerate. In the second quarter, revenue grew to $4.1 billion, a 10% increase year-over-year on capacity that grew 1%. Unit revenues was up 8.6%, which includes a three-point drag from the historic Hawaii rainstorms. The second quarter marked the beginning of what I would describe as the full commercial activation of Alaska Accelerate and what I expect will be a strong ramping of revenue growth, loyalty penetration, and the elimination of integration friction from our industry-leading guest satisfaction.

The foundation of this activation was the implementation of a single reservation system, launch of Europe service, along with our Asia service, strong adoption of Atmos Rewards, and a solid operation that has led the industry as the number one on-time airline in the United States year-to-date. The full activation and achievement of these elements have resulted in an immediate step change in commercial results across Air Group. I want to spend some time unpacking the largest of these. Let's start with revenue. We had a material acceleration of unit revenues across April, May, and June at 5.5%, 8.8%, and 11% respectively, with total June revenues up 13.2%. This resulted in a double-digit pre-tax margin for June, despite higher fuel prices. Managed corporate revenues. We generated what we believe will be industry-leading revenue increases this quarter.

The combination of a single PSS, single loyalty program, and network growth has resulted in large share gains. Portland and San Diego managed corporate share growth of 5 points and 4 points respectively, with Portland reaching a historic milestone, exceeding 50% share of managed corporate revenues. Looking to Seattle, we've seen the percentage volume of managed corporate passenger exceed system materially at 9% growth. This is driven by the unlock of new revenues from managed corporate accounts as we begin serving the largest international markets to Europe and Asia out of Seattle, namely London, Tokyo, and Incheon, as well as our continued growth in scale, relevance, and loyalty in our Seattle hub. Moving to loyalty, co-brand remuneration reached $663 million in the quarter. That's up 19% year-over-year. The unlock of Atmos Rewards has been remarkable.

Evidence of the loyalty flywheel and Atmos Unlocked can be seen across our ecosystem, including active Atmos members up 15%, with attrition down over 30% year-over-year as members engaged more broadly with the program. Hawaii loyalty growth materially outpacing systems performance with a 73% uptick in new cardholders year-over-year and a 34% increase in members in our Huaka'i by Hawaiian community. We saw a double-digit increase in top-tier activity and spend as members strive for the unique benefits offered by our Titanium status, including access to same-day upgrades to our suites product. An eight-point increase in redemption activity on the Air Group network as members shift their global travel activity to flights operated by Alaska. Our loyalty program performance is an undeniable marker that Alaska Accelerate is not only working, but also just getting started given our foundational programs and technology are now in place. Premium products.

There is unquestionable demand for our premium products and service. Premium revenues grew 15% this quarter. In addition to our domestic product, premium demand for our newly launched international long-haul service from Seattle to Rome, London Heathrow, and Reykjavik came out of the gate hard. We've already achieved our fair share in premium cabin in U.S. point of sale and across several corporate channels, and we see substantial opportunity to grow share internationally with our fair share in the premium cabin already improving after just recently turning on our ability to sell in the U.K. Premium revenue now represents 35% of total revenue, up 1.5 points this quarter. We are far from done and have more room to optimize our premium product configuration. It's worth reiterating from a diversification perspective, which premium has helped fuel.

More than half of every revenue dollar we generate now comes from outside the main cabin. A mix that looks nothing like the airline of even a few years ago. Finally, Alaska Accelerate has launched us into meaningful cargo revenues, a source of durable, diversified revenue. Our second quarter revenues were up 21% year-over-year, well above system revenue growth of approximately 10%. As Ben mentioned, we announced the addition of four Boeing 737-800 freighters to be flown in Hawaii and Alaska, nearly doubling our dedicated 737 freighter fleet to nine aircraft. We expect service to begin in early 2027, these aircraft will not only strengthen our reliable service for the communities we serve, but also create new revenue opportunities.

Looking forward, we ended 2026 with one of the leanest growth plans in the industry, we've continued to adjust as fuel prices remain elevated, pulling roughly a point of capacity out of both the third and fourth quarters. We expect Q3 capacity to grow approximately 2%-3%, the entirety of which is intercontinental. With slightly lower sequential growth in Q4, this puts full year growth right around 2% year-over-year at the low end of our original guidance of 2%-3%. Demand has proven durable even as fares moved higher. Bookings into the summer peak and early fall shoulder are pacing well, with unit revenues running solidly in the mid-teens year-over-year. We're especially encouraged by the strength of higher-yielding demand.

Forward corporate bookings are up 37%, seven points higher than the 30% achieved in Q2, reinforcing the improved domestic and international relevance of our expanded network. At the same time, our new long-haul international flying continues to gain share as premium demand builds out of Seattle. Hawaii is also getting back to strength. Loads are recovering, new bookings are coming in at system levels. The historic storms not only impacted spring break, but also peak summer bookings that occur in the second quarter. Summer revenue performance remains well under system, in part due to elevated industry capacity, which was up 7%, we expect the third quarter to have a similar several point unit revenue headwind that we saw in the second quarter. Encouragingly, as we move into the fall, on-hand bookings West Coast to Hawaii show demand returning to historical levels with September yields accelerating.

Given these trends, we expect system unit revenues to improve sequentially from Q2 into the third quarter, reaching low double digits year-over-year. With roughly 65% of Q3 revenue and 15% of Q4 revenue booked, the balance of the back half will be shaped by closing demand. The trends we're seeing today give us confidence in healthy unit revenue trajectory through the rest of the year. To wrap up, while the first half of the year was volatile, our June exit rate tells the real story, an inflection back to profitability and strong unit revenue growth. Coupled with prudent capacity, the second half is shaping up well, we've kept our focus on controlling what we can control while delivering results.

Completing the single passenger service system cut-over, an enhanced single loyalty program, and the launch of a European and Asian network from Seattle was the unlock we've been building towards. It lets us finally deliver the full range of our product and services consistently across our global network. As we move forward, we're focused on continuing to strengthen and diversify revenue across premium, loyalty, cargo, and international to build more durable, resilient earnings power that compounds over time. With that, I'll pass it over to Shane.

Thanks, Andrew, and good morning, everyone. As Ben already indicated, we are not satisfied with losses this quarter, it is important to also look through the result to the underlying business. Absent the added fuel costs, this was a fundamentally healthy quarter. Non-fuel cost performance and the trajectory of unit revenue through the quarter were both strong. As fuel normalizes, the timing of which is difficult to predict, we see a clear path toward meaningful earnings expansion back towards our goal of $10 of earnings per share. Also, with our customer-facing integration milestones now behind us, we are moving forward with strategic momentum as we move to full optimization and harvesting of value from our Alaska Accelerate initiatives. Regarding the balance sheet, we finished the quarter with $3.8 billion in total liquidity after proactively raising $1 billion of financing during the quarter.

A $500 million issue of senior unsecured notes, our first ever unsecured bond, alongside a $500 million term loan. While this transaction was largely neutral from a net debt perspective, it was a deliberate choice to bolster liquidity toward the top end of our target range of 15%-25% as we navigate an elevated and unpredictable fuel environment. With all the challenges of the last two years, our balance sheet remains strong and is backed by roughly $20 billion in unencumbered assets. Given fuel cost-impacted earnings, we closed the quarter with a debt-to-capitalization ratio of 65% and trailing 12-month adjusted net leverage of 4.8x. With normalized fuel prices and current demand trends, this could very quickly pivot back toward our long-term leverage goals. Our balance sheet has long been a strategic asset that underpins our agility and durability, restoring that strength will be a top priority.

As the environment further stabilizes and our earnings profile improves, we intend to put excess liquidity to work, paying down debt, reducing leverage, and ultimately bringing liquidity back toward our target 20% level. Second quarter unit costs, excluding fuel, rose 6.5% year-over-year, a strong result compared against others who have reported. This result included some significant transitory costs, including above normal crew training costs related to our 787 fleet ramp, an employee recognition expense tied to completing our single passenger service system, and material aircraft sale gains booked in 2025 we are comparing against. Setting those aside, core cost growth was up low to mid-single digits on only 1% capacity growth.

Moving into the back half of the year, our cost plan remains on track. We expect non-fuel unit costs to step down to low to mid-single digits with closer in-capacity cuts versus our original plan providing slight pressure. Economic fuel cost averaged $4.43 per gallon, slightly better than our $4.50 guide. While crude has remained volatile between $70 and $90 per barrel, refining margin volatility normalized throughout the quarter. We expect third quarter fuel price per gallon of $3.75. This reflects expected July fuel cost of $3.60 per gallon and $3.85 for August and September, which is simply the recent average spot price we have seen. At this fuel price guidance range, we anticipate third quarter earnings between breakeven and $1 per share.

We expect our second half RASM to CASM ex-fuel spread to improve several points from our two-point spread in the second quarter, evidence that Alaska Accelerate initiatives are working and the business is structurally strong. Given we've seen recent volatility in fuel prices and further fare movement, we plan to provide an update on full-year earnings guidance at our Investor Day in late September. This isn't the first half any of us drew up, but the demand backdrop and continued execution of our initiatives gives us confidence in where we're headed. With our big integration milestones behind us, our focus now is squarely on optimizing the airline, building strategic momentum, and fortifying structural advantages, our scale, our relevance in the markets we serve, and the strength of our loyalty franchise.

As premium loyalty, cargo, and ancillary revenue take an ever-larger share of the mix over time, our earnings will become more durable across cycles, underpinning our path to steady state earnings power north of $10 a share and double-digit margins. We'll lay out the building blocks of this in more detail at our Investor Day on September 29th, so we hope you can join us. With that, let's go to your questions.