UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

OR

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

 For the transition period from                      to                      

Commission File Number 1-8957

ALASKA AIR GROUP, INC.

 

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 126,837,831 common shares, par value $0.01, outstanding at October 31, 2022.

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

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022

 TABLE OF CONTENTS

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	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	45
PART II.	OTHER INFORMATION	46
ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	47
ITEM 5.	OTHER INFORMATION	47
ITEM 6.	EXHIBITS	47
	SIGNATURES	47

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

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

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

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

3

PART I 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)	September 30, 2022		December 31, 2021
ASSETS
Current Assets
Cash and cash equivalents	$	688	$	470
Marketable securities	2,462		2,646
Total cash and marketable securities	3,150		3,116
Receivables - net	345		546
Inventories and supplies - net	94		62
Prepaid expenses and other current assets	221		196
Total Current Assets	3,810		3,920
Property and Equipment
Aircraft and other flight equipment	8,811		8,127
Other property and equipment	1,589		1,489
Deposits for future flight equipment	300		384
	10,700		10,000
Less accumulated depreciation and amortization	4,046		3,862
Total Property and Equipment - Net	6,654		6,138
Other Assets
Operating lease assets	1,605		1,453
Goodwill and intangible assets	2,040		2,044
Other noncurrent assets	422		396
Total Other Assets	4,067		3,893
Total Assets	$	14,531	$	13,951

4

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)	September 30, 2022		December 31, 2021
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	202	$	200
Accrued wages, vacation and payroll taxes	583		457
Air traffic liability	1,467		1,163
Other accrued liabilities	805		625
Deferred revenue	1,068		912
Current portion of operating lease liabilities	263		268
Current portion of long-term debt	321		366
Total Current Liabilities	4,709		3,991
Long-Term Debt, Net of Current Portion	1,889		2,173
Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	1,482		1,279
Deferred income taxes	571		578
Deferred revenue	1,413		1,446
Obligation for pension and post-retirement medical benefits	296		305
Other liabilities	345		378
Total Noncurrent Liabilities	4,107		3,986
Commitments and Contingencies (Note 7)
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—		—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2022 - 136,184,043 shares; 2021 - 135,255,808 shares, Outstanding: 2022 - 126,834,099 shares; 2021 - 125,905,864 shares	1		1
Capital in excess of par value	549		494
Treasury stock (common), at cost: 2022 - 9,349,944 shares; 2021 - 9,349,944 shares	(674)		(674)
Accumulated other comprehensive loss	(328)		(262)
Retained earnings	4,278		4,242
	3,826		3,801
Total Liabilities and Shareholders' Equity	$	14,531	$	13,951

5

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per share amounts)	2022		2021		2022		2021
Operating Revenues
Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785
Mileage Plan other revenue	146		120		433		332
Cargo and other	67		59		190		160
Total Operating Revenues	2,828		1,953		7,167		4,277
Operating Expenses
Wages and benefits	686		578		1,931		1,581
Variable incentive pay	48		42		140		109
Payroll Support Program grant wage offset	—		—		—		(914)
Aircraft fuel, including hedging gains and losses	877		376		2,000		853
Aircraft maintenance	92		89		331		272
Aircraft rent	76		64		222		188
Landing fees and other rentals	161		141		435		414
Contracted services	83		62		243		167
Selling expenses	82		49		218		123
Depreciation and amortization	104		99		310		294
Food and beverage service	52		39		143		97
Third-party regional carrier expense	53		39		145		106
Other	207		126		536		348
Special items - fleet transition	155		(9)		376		5
Special items - labor ratification bonus	90		—		90		—
Special items - restructuring	—		—		—		(12)
Total Operating Expenses	2,766		1,695		7,120		3,631
Operating Income	62		258		47		646
Non-operating Income (Expense)
Interest income	17		6		35		19
Interest expense	(31)		(30)		(84)		(101)
Interest capitalized	3		3		8		9
Other - net	14		8		38		27
Total Non-operating Income (Expense)	3		(13)		(3)		(46)
Income Before Income Tax	65		245		44		600
Income tax expense	25		51		8		140
Net Income	$	40	$	194	$	36	$	460
Basic Earnings Per Share:	$	0.32	$	1.55	$	0.28	$	3.69
Diluted Earnings Per Share:	$	0.31	$	1.53	$	0.28	$	3.64
Shares used for computation:
Basic	126.783		125.250		126.440		124.846
Diluted	128.370		127.188		128.087		126.325

6

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2022		2021		2022		2021
Net Income	$	40	$	194	$	36	$	460
Other comprehensive income (loss), net of tax
Marketable securities	(26)		(3)		(86)		(16)
Employee benefit plans	1		6		2		19
Interest rate derivative instruments	5		2		18		9
Total other comprehensive income (loss), net of tax	$	(20)	$	5	$	(66)	$	12
Total comprehensive income (loss), net	$	20	$	199	$	(30)	$	472

7

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)

(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2021	125.906	$	1	$	494	$	(674)	$	(262)	$	4,242	$	3,801
Net income (loss)	—	—		—		—		—		(143)		(143)
Other comprehensive income (loss)	—	—		—		—		(30)		—		(30)
Stock-based compensation	—	—		13		—		—		—		13
Stock issued under stock plans	0.182	—		(4)		—		—		—		(4)
Balances at March 31, 2022	126.088	$	1	$	503	$	(674)	$	(292)	$	4,099	$	3,637
Net income (loss)	—	—		—		—		—		139		139
Other comprehensive income (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	—		—		—		—		—		—
Balances at June 30, 2022	126.760	$	1	$	542	$	(674)	$	(308)	$	4,238	$	3,799
Net income (loss)	—	—		—		—		—		40		40
Other comprehensive income (loss)	—	—		—		—		(20)		—		(20)
Stock-based compensation	—	—		8		—		—		—		8
Stock issued under stock plans	0.074	—		(1)		—		—		—		(1)
Balances at September 30, 2022	126.834	$	1	$	549	$	(674)	$	(328)	$	4,278	$	3,826

(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2020	124.217	$	1	$	391	$	(674)	$	(494)	$	3,764	$	2,988
Net income (loss)	—	—		—		—		—		(131)		(131)
Other comprehensive income (loss)	—	—		—		—		—		—		—
Stock-based compensation	—	—		12		—		—		—		12
CARES Act warrant issuance	—	—		8		—		—		—		8
Stock issued under stock plans	0.225	—		(2)		—		—		—		(2)
Balance at March 31, 2021	124.442	$	1	$	409	$	(674)	$	(494)	$	3,633	$	2,875
Net income (loss)	—	—		—		—		—		397		397
Other comprehensive income (loss)	—	—		—		—		7		—		7
Stock-based compensation	0.009	—		13		—		—		—		13
CARES Act warrant issuance	—	—		8		—		—		—		8
Stock issued for employee stock purchase plan	0.716	—		23		—		—		—		23
Stock issued under stock plans	0.062	—		1		—		—		—		1
Balances at June 30, 2021	125.229	$	1	$	454	$	(674)	$	(487)	$	4,030	$	3,324
Net income (loss)	—	—		—		—		—		194		194
Other comprehensive income (loss)	—	—		—		—		5		—		5
Stock-based compensation	—	—		10		—		—		—		10
Stock issued under stock plans	0.076	—		(2)		—		—		—		(2)
Balances at September 30, 2021	125.305	$	1	$	462	$	(674)	$	(482)	$	4,224	$	3,531

8

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended September 30,
(in millions)	2022		2021
Cash flows from operating activities:
Net Income	$	36	$	460
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	310		294
Stock-based compensation and other	33		35
Special items - fleet transition	376		5
Special items - restructuring	—		(12)
Changes in certain assets and liabilities:
Changes in deferred tax provision	—		95
Increase in accounts receivable	(59)		(56)
Increase in air traffic liability	304		152
Increase in deferred revenue	123		73
Pension contribution	—		(100)
Federal income tax refund	260		—
Other - net	26		(45)
Net cash provided by operating activities	1,409		901
Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(688)		(52)
Other flight equipment	(156)		(78)
Other property and equipment	(103)		(60)
Total property and equipment additions, including capitalized interest	(947)		(190)
Purchases of marketable securities	(1,670)		(3,413)
Sales and maturities of marketable securities	1,731		2,669
Other investing activities	(2)		(9)
Net cash used in investing activities	(888)		(943)
Cash flows from financing activities:
Proceeds from issuance of debt	—		363
Long-term debt payments	(333)		(1,222)
Other financing activities	37		34
Net cash used in financing activities	(296)		(825)
Net increase (decrease) in cash, cash equivalents, and restricted cash	225		(867)
Cash, cash equivalents, and restricted cash at beginning of period	494		1,386
Cash, cash equivalents, and restricted cash at end of the period	$	719	$	519

9

	Nine Months Ended September 30,
(in millions)	2022		2021
Cash paid during the period for:
Interest (net of amount capitalized)	$	72	$	100
Income taxes	—		—
Non-cash transactions:
Right-of-use assets acquired through operating leases	419		126
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	688		495
Restricted cash included in Prepaid expenses and other current assets	31		24
Total cash, cash equivalents, and restricted cash at end of the period	$	719	$	519

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

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

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

NOTE 2. FLEET TRANSITION

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

Valuation of long-lived assets

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

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

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

A summary of special charges for fleet transition activities is included below for the three and nine months ended September 30, 2022. The impairment charges are one-time in nature, while the other special charges continue to be recorded consistent

11

with the schedules described above. The majority of remaining charges will be recorded in 2022 with additional charges associated with the Airbus A321neo aircraft to be recorded in 2023. The Company will continue to evaluate the need for further impairment or adjustments for owned and leased long-lived assets as fleet decisions evolve.

	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
(in millions)	Airbus		Q400		Total		Airbus		Q400		Total
Lease return costs and other expenses	$	75	$	—	$	75	$	183	$	—	$	183
Accelerated aircraft ownership expenses	62		18		80		102		21		123
Impairment of long-lived assets	—		—		—		—		70		70
Total special items - fleet transition	$	137	$	18	$	155	$	285	$	91	$	376

NOTE 3. REVENUE

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

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

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

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Passenger ticket revenue, including ticket breakage, net of taxes and fees	$	2,252	$	1,483	$	5,536	$	3,122
Passenger ancillary revenue	127		101		337		235
Mileage Plan passenger revenue	236		190		671		428
Total Passenger revenue	$	2,615	$	1,774	$	6,544	$	3,785

Mileage Plan Loyalty Program

Mileage Plan revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Passenger revenue	$	236	$	190	$	671	$	428
Mileage Plan other revenue	146		120		433		332
Total Mileage Plan revenue	$	382	$	310	$	1,104	$	760

12

Cargo and Other

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cargo revenue	$	37	$	34	$	102	$	95
Other revenue	30		25		88		65
Total Cargo and other revenue	$	67	$	59	$	190	$	160

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $65 million and $101 million from the prior year-end air traffic liability balance for the three months ended September 30, 2022 and 2021, and $587 million and $