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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
 
☒   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
 
OR

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to        
             
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
Delaware91-1292054
(State of Incorporation)(I.R.S. Employer Identification No.)
19300 International Boulevard, Seattle, Washington 98188
Telephone: (206) 392-5040

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 Par ValueALKNew York Stock Exchange
 Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒   No  ☐ 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ☐      No   ☒
 
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 every Interactive Data File required to be submitted 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, a 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☐Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
 
As of January 31, 2023, shares of common stock outstanding totaled 127,542,279. The aggregate market value of the shares of common stock of Alaska Air Group, Inc. held by nonaffiliates on June 30, 2022, was approximately $5.1 billion (based on the closing price of $40.05 per share on the New York Stock Exchange on that date). 



DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement relating to 2023 Annual Meeting of Shareholders are incorporated by reference in Part III.




ALASKA AIR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2022
 
TABLE OF CONTENTS
 

 
As used in this Form 10-K, 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
 
In addition to historical information, this Form 10-K 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
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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.” Please consider our forward-looking statements in light of those risks as you read this report.

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Table of Contents
PART I 
ITEM 1. BUSINESS

Alaska Air Group (the "Company" or "Air Group") is a Delaware corporation incorporated in 1985 that operates two airlines, Alaska and Horizon. Alaska was organized in 1932 and incorporated in 1937 in the state of Alaska. Horizon is a Washington corporation that was incorporated and began service in 1981, and was acquired by Air Group in 1986. Air Group acquired Virgin America in 2016, then legally merged the entity with Alaska in 2018, at which time the airlines' operating certificates were also combined. The Company also includes McGee Air Services, an aviation services provider that was established as a wholly-owned subsidiary of Alaska in 2016, and other subsidiaries.

Alaska and Horizon operate as separate airlines, with individual business plans, competitive factors and economic risks. We organize the business and review financial operating performance by aggregating our business in three operating segments, which are as follows:

•Mainline - includes scheduled air transportation on Alaska's Boeing and Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Mexico, Costa Rica and Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under capacity purchase agreements (CPA). This segment includes the actual revenue and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

Together we are the fifth largest airline in the United States, offering unparalleled guest service, connectivity and schedules from our hub markets along the West Coast. With our regional partners, we fly to more than 120 destinations throughout North America. We have operated in a highly competitive and often challenging industry for 90 years. Our top priority as an airline is ensuring the safety of our guests and employees, an area that we continually invest in. Our success over many decades and resilience in difficult times is attributable to our people, business model, and commitment to sustainable growth over the long-term.

In 2022, we outlined three strategic priorities to enhance our competitive advantage and support future growth. First, strengthening operational integrity across the network was key to providing guests with reliable service during a period of historic travel demand. We finished the year with completion and on-time performance rates near the top of the industry. Second, we focused on updating labor contracts with represented labor groups to ensure our employees receive market competitive rates, and to recognize their valuable contributions to our success. The five contracts signed during the year include significant improvements for our employees and position us well to focus on the future. Third, we prioritized transitioning our Mainline and Regional operations to single fleets. The single fleet operating models, anchored by Boeing MAX aircraft for the Mainline fleet and Embraer E175 aircraft for the Regional fleet, will drive more productivity and cost efficiency in the business.

The execution of these priorities, in combination with a strong demand environment and success of our commercial initiatives, enabled Air Group to deliver record-breaking revenue for the year of $9.6 billion and unit revenue improvements of 23% vs 2019. Although our airlines experienced significant cost pressures during 2022 driven by higher fuel prices, increased labor expenses, supply chain constraints, and effects from inflation, we generated $1.4 billion in operating cash flows for the year.

The improved results in 2022 set a foundation for our return to pre-COVID flying levels early in 2023 and sustainable growth thereafter. Our 2025 Plan is ambitious, including aligning our growth strategy with environmental, social, and governance targets. Instrumental to achieving this is our restructured fleet agreement with Boeing, which includes firm orders for 105 owned B737 aircraft to be delivered through 2027, with rights for 105 additional aircraft through 2030. In January 2023, we removed the last Airbus A320 aircraft from operating service. The ten A321neo aircraft are expected to exit the fleet no later than the end of 2023. A single fleet of Boeing MAX aircraft will significantly improve per-seat economics as a result of larger gauge and improved fuel efficiency. This advantage will serve as the baseline for high-margin capacity growth over the next several years. Although we have ambitious growth plans, we will continue to deploy capacity in a disciplined manner that is responsive to changing demand trends.

In 2022, recovery of leisure demand continued to outpace recovery of business demand. Responding to these trends, we adapted our network to take our guests where they want to fly. With new routes launched in 2022, we serve 100 nonstop destinations from Seattle-Tacoma International Airport, more than any other carrier. As a member of the oneworld® alliance, we provide our guests with global access to more than 900 destinations in 170 territories. As we grow our West Coast hubs, we plan to
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maximize connectivity to partner airlines, allowing our guests greater global connectivity. Alaska guests are able to access over 100 weekly nonstop flights to Europe from the West Coast on oneworld partners.

Our success over 90 years has been fueled by our dedicated and engaged employees. In 2022, we hired nearly 8,000 employees to support our growth. Additionally, the five labor contracts signed during the year provide improvements and stability for our people. Aligning our employees' goals with the Company's goals is critical in achieving success. To that end, Alaska and Horizon employees participate in our Performance-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which reward employees across all work groups based on metrics related to profitability, safety, sustainability, low costs, on-time performance, and customer satisfaction. In 2022, employees earned a record award payout of $257 million under these incentive programs.

AIR GROUP

Our airlines operate different aircraft and missions. Alaska operates a fleet of narrowbody passenger jets on primarily longer stage-length routes. Alaska contracts with Horizon and SkyWest Airlines, Inc. (SkyWest) for shorter-haul capacity and receives all passenger revenue from those flights. Horizon operates Embraer E175 regional jet aircraft and Bombardier Q400 turboprop aircraft and sells all of its capacity to Alaska pursuant to a Capacity Purchase Agreement (CPA). Horizon removed all Q400 aircraft from operating service in January 2023. The majority of our revenue is generated by transporting passengers.

The percentage of revenue by category is as follows:
 202220212020
Passenger revenue91 %89 %85 %
Mileage Plan other revenue6 %7 %10 %
Cargo and other revenue3 %4 %5 %
Total100 %100 %100 %

We deploy aircraft in ways that we believe will best optimize our revenue and profitability and reduce the impacts of seasonality.

The percentage of our capacity by region is as follows:
 202220212020
West Coast(a)
27 %31 %32 %
Transcon/midcon43 %37 %41 %
Hawaii 13 %16 %10 %
Alaska11 %11 %11 %
Latin America 6 %5 %5 %
Canada— %— %1 %
Total100 %100 %100 %
(a)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.

MAINLINE

Our Mainline operations include Boeing 737 (B737) and Airbus A320 family (A320 and A321neo) jet service offered by Alaska. We offer extensive passenger service from the western U.S. throughout the contiguous United States, Alaska, Hawaii, Mexico, Costa Rica, and Belize. Our largest concentrations of departures are in Seattle, Portland, and the Bay Area. We also offer cargo service throughout our network and have three dedicated cargo aircraft that operate primarily to and within the state of Alaska. In 2022, we carried 32 million revenue passengers in our Mainline operations, up from 23 million in 2021, on improved demand for air travel.
 
During the year, we announced plans to accelerate the transition of our Mainline operations to an all-Boeing 737 fleet. At December 31, 2022, our Mainline operating fleet consisted of 203 Boeing 737 jet aircraft and 22 Airbus A320 family jet aircraft. All A320 aircraft were retired from our fleet in January 2023; our ten A321neo aircraft are expected to exit the operating fleet no later than the end of 2023. We continue to actively seek agreements to move the aircraft to interested counterparties.
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The percentage of Mainline passenger capacity by region and average stage length is presented below:
 202220212020
West Coast(a)
22 %24 %22 %
Transcon/midcon46 %40 %47 %
Hawaii14 %18 %12 %
Alaska11 %12 %13 %
Latin America7 %6 %6 %
Total100 %100 %100 %
Average Stage Length (miles)1,347 1,324 1,272 
(a)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.

REGIONAL
 
Our Regional operations consist of flights operated by Horizon and SkyWest. In 2022, our Regional operations carried approximately 10 million revenue passengers, primarily in the states of Washington, Oregon, Idaho, and California. Horizon is the largest regional airline in the Pacific Northwest and carried approximately 58% of Air Group's Regional revenue passengers.

Based on 2022 Horizon passenger enplanements on Regional aircraft, our most significant concentration of Regional activity was in Seattle and Portland.

During the year, we announced plans to transition our regional operations to an all-Embraer fleet. At December 31, 2022, Horizon’s operating fleet consisted of 33 E175 aircraft and 11 Q400 aircraft. The Regional fleet operated by SkyWest consisted of 42 E175 aircraft. All Bombardier Q400 turboprop aircraft were retired from our fleet in January 2023.

The percentage of Regional passenger capacity by region and average stage length is presented below:
 202220212020
West Coast75 %74 %75 %
Pacific Northwest8 %7 %9 %
Canada2 %— %1 %
Alaska3 %3 %1 %
Transcon/midcon12 %16 %14 %
Total100 %100 %100 %
Average Stage Length (miles)488 521 524 

FREQUENT FLYER PROGRAM

Alaska Airlines Mileage Plan™ provides members with a comprehensive suite of frequent flyer benefits. Members can earn miles by flying on our airline, which are awarded based on distance traveled. Awarding based on distance, not spend, is unique and provides the program a competitive advantage over other airlines' programs as miles accumulate faster. Miles can also be earned by flying with one of our partner airlines, by using the co-branded credit card, or through other non-airline partners. Miles awarded do not expire and can accumulate until such time a member chooses to redeem. Members can redeem miles earned for flights on our airlines or partner airlines, hotel stays, or for first class upgrades on Alaska Airlines.

For the most frequent flyers, the program offers multiple tiers of MVP status, including MVP Gold, MVP Gold 75K, and MVP Gold 100K, which can be achieved annually by earning qualifying miles or by flying a specified number of segments on Alaska or any of our 24 partner airlines. For those achieving MVP tier status, the program offers benefits, including bonus miles on flown segments, complimentary upgrades, free checked bags, and priority boarding. Members qualifying for higher tiers are offered incremental benefits. As a member of oneworld, Mileage Plan members with tier status are provided reciprocal status and benefits when flying on other oneworld members.

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Alaska has an agreement with Bank of America N.A which offers Mileage Plan members in the United States the Alaska Airlines Visa Signature card (co-branded credit card). Cardholders receive miles for spend on the card, as well as an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black-out dates, and a free first checked bag for up to seven people traveling on the same itinerary. The co-branded credit card agreement provides the Company a material cash inflow on an annual basis, and is an important source of value for Mileage Plan members.

In 2022, Mileage Plan members redeemed miles and companion certificates for 6.4 million award tickets on our airlines. Mileage Plan revenue, including those in the Passenger revenue income statement line item, represented approximately 16% of Air Group's total revenue in 2022. Accounting policies for Mileage Plan revenue are described more fully in Note 3 to the consolidated financial statements.

MARKETING AGREEMENTS WITH OTHER AIRLINES

Our marketing agreements with other airlines fall into three categories: frequent flyer, codeshare, and interline.

•Frequent flyer agreements enable our Mileage Plan members to accrue miles and redeem them for flights on partner airlines.

•Codeshare agreements allow one or more marketing carriers to sell seats on a single operating carrier that services passengers under multiple flight numbers. The sale of codeshare seats can vary depending on the sale arrangement. For example, in a free-sale arrangement, the marketing carrier sells the operating carrier's inventory without any restriction; whereas in a block-space arrangement, a fixed amount of seats are sold to the marketing carrier by the operating carrier. The interchangeability of the flight code between carriers provides a greater selection of flights for customers, along with increased flexibility for mileage accrual and redemption.

•Interline agreements allow airlines to jointly offer a competitive, single-fare itinerary to customers traveling via multiple carriers to a final destination. An interline itinerary offered by one airline may not necessarily be offered by the other, and the fares collected from passengers are prorated and distributed to interline partners according to preexisting agreements between the carriers.

Frequent flyer, codeshare, and interline agreements help increase our traffic and revenue by providing a more diverse network and schedule options to our guests.

As a oneworld member, Alaska's elite Mileage Plan members now receive tier status matching across member airlines. Depending on tier status, guests can enjoy a variety of privileges, including access to more than 620 international first and business class lounges, fast track through security, priority baggage benefits, priority check-in desks, upgrades, and priority boarding.

Alliances are an important part of our strategy and enhance our revenue by:
 
•offering our guests more travel destinations and better mileage credit and redemption opportunities, including elite qualifying miles on U.S. and international airline partners;

•providing a consistent and seamless guest experience whether flying on Alaska or one of our partners;
 
•giving us access to more connecting traffic from other airlines; and
 
•providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska and our regional partners while earning mileage credit in our partners’ programs.
 
Most of our codeshare relationships are free-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time. Our codeshare and interline agreements generated 5%, 2%, and 3% of our total marketed flight revenue for the years ended December 31, 2022, 2021, and 2020.


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A comprehensive summary of Alaska's alliances with other airlines is as follows:    
Codeshare
 AirlineFrequent
Flyer
Agreement		Alaska Flight # on
Flights Operated by
Other Airline		Other Airline Flight #
on Flights Operated by
Alaska or CPA Partners
Aer LingusYesNoNo
Air Tahiti NuiYesYesYes
American AirlinesYesYesYes
British AirwaysYesNoYes
Cathay Pacific AirwaysYesNoYes
Condor Airlines(a)
YesNoNo
EL AL Israel AirlinesYesNoYes
Fiji Airways(a)
YesNoYes
FinnairYesNoYes
Hainan AirlinesYesNoNo
IberiaYesNoYes
IcelandairYesNoYes
Japan AirlinesYesNoYes
Korean AirYesNoYes
LATAMYesNoYes
Malaysia AirlinesYesNoNo
QantasYesYesYes
Qatar AirwaysYesYesYes
Ravn AlaskaYesNoNo
Royal Air MarocYesNoNo
Royal JordanianYesNoNo
S7 Airlines(b)
SuspendedNoNo
Singapore AirlinesYesNoYes
Southern Airways Express/Mokulele Airlines(a)
YesNoNo
SriLankan AirlinesYesNoNo
(a)These airlines do not have their own frequent flyer program. However, Alaska's Mileage Plan members can earn and redeem miles on these airlines' route systems.
(b)Effective April 19, 2022, S7 Airlines' membership in the oneworld alliance was suspended indefinitely, including earning and redeeming miles on Alaska Airlines.

CARGO AND OTHER REVENUE

The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or is transferred to a third-party carrier for delivery.

The Company also earns other revenue for lounge memberships, hotel and car commissions, travel insurance, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue.

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GENERAL

The airline industry is highly competitive and subject to potentially volatile business cycles, resulting from factors such as uncertain economic conditions, volatile fuel prices, pandemics, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation—including taxes and fees, and potential aircraft incidents. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership, and facilities rents. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact to our operating and financial results. Passenger demand and ticket prices are, in large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity.

FUEL

Our business and financial results are highly impacted by the price and the availability of aircraft fuel. Aircraft fuel expense includes raw fuel expense, or the price that we generally pay at the airport, including taxes and fees, plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. The cost of aircraft fuel is volatile and outside of our control, and can have a significant and immediate impact on our operating results. Over the past three years, aircraft fuel expense ranged from 14% to 28% of operating expenses. Fuel prices are impacted by changes in both the price of crude oil and refining costs and can vary by region in the U.S.
The price of crude oil on an average annual basis for the past three years has ranged from a low of $39 per barrel in 2020 to a high of $94 in 2022. For us, a $1 per barrel change in the price of oil equates to approximately $18 million of raw fuel expense annually based on 2022 consumption levels. Said another way, a one-cent change in our fuel price per gallon would have impacted our 2022 raw fuel expense by approximately $8 million.

Refining margins, which represent the price of refining crude oil into aircraft fuel, are a smaller portion of the overall price of jet fuel, but have also contributed to the price volatility in recent years. Over the last three years, average annual West Coast refining margin prices have fluctuated from a low of $11 per barrel in 2020 to a high of $48 per barrel in 2022.

Our average raw fuel cost per gallon increased 73% in 2022, after increasing 37% in 2021 and decreasing 29% in 2020.

The percentages of our aircraft fuel expense by crude oil and refining margins, as well as the percentage of our aircraft fuel expense of operating expenses, are as follows:
 202220212020
Crude oil64 %84 %64 %
Refining margins35 %16 %16 %
Other(a)
1 %— %20 %
Total100 %100 %100 %
Aircraft fuel expense28 %23 %14 %
(a)Other includes gains and losses on settled fuel hedges, unrealized mark-to-market fuel hedge gains or losses, taxes and other into-plane costs.

We use crude oil call options as hedges against our exposure to the volatility of jet fuel prices. Call options effectively cap our price for crude oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With call options, we are hedged against spikes in crude oil prices, and during a period of declines in crude oil prices, we only forfeit cash previously paid for hedge premiums. We begin hedging approximately 18 months in advance of consumption.

In 2020, Alaska began using sustainable aviation fuel (SAF) for certain flights departing from San Francisco International Airport. SAF prices are currently higher than traditional fuel prices as the market is developing. We are evaluating options for obtaining the volume of SAF that we expect will be necessary to move us toward our long-term sustainability goals. These options include partnerships with alternative fuel companies and industry groups focused on ways to accelerate innovation in this area.

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We believe that operating fuel-efficient aircraft and executing on operational best practices are the best hedges against high fuel prices. Maintaining a young, fuel-efficient fleet helps reduce our fuel consumption rate, as well as the amount of greenhouse gases and other pollutants that our aircraft emit.

COMPETITION

Competition in the airline industry can be intense and unpredictable. Our competitors consist primarily of other airlines and, to a lesser extent, other forms of transportation. Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport. We compete with other domestic airlines and a limited number of international airlines on nearly all of our scheduled routes. Our largest competitor is Delta Air Lines Inc. (Delta). Approximately 75% of our capacity to and from Seattle competes with Delta. As we have grown in California and have expanded our transcontinental route offerings, United Airlines and Southwest Airlines have also become large competitors and have increased their capacity in markets we serve. Our California and transcontinental routes have a higher concentration of competitors when compared to our historical route structure, which was predominately concentrated in the Pacific Northwest.

We believe that the following competitive factors matter to guests when making an air travel purchase decision:
 
•Routes served, flight schedules, codesharing and interline relationships, and frequent flyer programs

We compete with other airlines based on markets served, the frequency of service to those markets and frequent flyer opportunities. Some airlines have more extensive route structures than we do, and they offer significantly more international routes. In order to expand opportunities for our guests, we enter into codeshare and interline relationships with other airlines that provide reciprocal frequent flyer mileage credit and redemption privileges. These relationships allow us to offer our guests access to more destinations than we can on our own, gain exposure in markets we do not serve and allow our guests more opportunities to earn and redeem frequent flyer miles. Our Mileage Plan offers some of the most valuable benefits in the industry, allowing our members the ability to earn and redeem miles on 24 partner carriers.

Our membership in the oneworld alliance provides our guests increased global network utility and benefits, and positions us to capture an incremental share of global travelers and corporate accounts. Through oneworld, guests can travel to more than 900 destinations in 170 territories and can enjoy privileges on member airlines including upgrades, lounge access, priority boarding, and more.

•Safety

Safety is our top priority and is at the core of everything we do. In 2022, we held our inaugural Safety Day in order to reaffirm our commitment to safety across our company. In its most recent rankings for 2023, AirlineRatings.com has again ranked Alaska as the safest U.S. airline within its ranking of the Top 20 safest airlines in the world. We also received our 22nd Diamond Award of Excellence from the Federal Aviation Administration (FAA), recognizing both Alaska and Horizon aircraft technicians for their dedication to training.

•Fares and ancillary services

Ticket and other fee pricing is a significant competitive factor in the airline industry. Travelers are able to easily compare fares and identify competitor promotions and discounts. Pricing is driven by a variety of factors including, but not limited to, market-specific capacity, market share per route/geographic area, cost structure, fare vs. ancillary revenue strategies, and demand.

Airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares. These factors can reduce our pricing power and that of the airline industry as a whole.

Domestic airline capacity is dominated by four large carriers, representing 78% of total seats. One of our advantages is that we offer low fares and a premium value product and experience. However, given the large concentration of industry capacity, some carriers in our markets may discount their fares substantially to develop or increase market share. Fares that are substantially below our cost to operate can be harmful if sustained over a long period of time. We will defend our position in our core markets and, if necessary, adjust capacity to better match supply with demand. Our strong financial
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position and low cost advantage have historically enabled us to offer competitive fares while still earning returns for our shareholders.
 
•Customer service and reputation

We compete with other airlines in areas of customer service such as on-time performance and guest amenities - including first class and other premium seating, quality of on-board products, aircraft type and comfort. By April 2023, we expect to complete our installation of satellite Wi-Fi on nearly all aircraft in the Mainline fleet. In 2024, we will begin installing satellite Wi-Fi on our Regional fleet, becoming the first major airline to do so.

Our employees are a critical element of our reputation. We have a highly engaged workforce that strives to provide genuine and caring service to our guests, both at the airport and onboard. We heavily emphasize our service standards with our employees through training and education programs and monetary incentives related to operational performance and guest satisfaction.

In addition to domestic or foreign airlines that we compete with on most of our routes, we compete with ground transportation in our short-haul markets. Our airlines also compete with technology, such as video conferencing and internet-based meeting tools. We expect that the advancement and increased utilization of these tools will eliminate the need for some business-related travel.

TICKET DISTRIBUTION
 
Our tickets are distributed through three primary channels:
 
•Direct to customer: Selling direct at alaskaair.com is less expensive than other channels. We believe direct sales through this channel are preferable from a branding and customer relationship standpoint because we can establish ongoing communication with the guest and tailor offers accordingly. As a result, we prioritize efforts that drive more business to our website.
 
•Traditional and online travel agencies: Both traditional and online travel agencies typically use Global Distribution Systems to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee that is charged to the airline. Many large corporate customers require us to use these agencies. Some of our competitors rely on this distribution channel to a lesser extent than we do, and, as a result, may have lower ticket distribution costs.
 
•Reservation call centers: Our call centers are located in Phoenix, AZ, Seattle, WA, and Boise, ID. We generally charge a $15 fee for booking reservations through the call centers.

Our sales by channel are as follows: 
 202220212020
Direct to customer64 %68 %73 %
Traditional agencies18 %12 %12 %
Online travel agencies7 %9 %9 %
Reservation call centers11 %11 %6 %
Total100 %100 %100 %

SEASONALITY AND OTHER FACTORS

Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. In typical years, our profitability is generally lowest during the first and fourth quarters due principally to fewer departures and passengers. Profitability typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel. In a typical year, some of the impacts of seasonality are offset by travel from the West Coast to leisure destinations, like Hawaii and Costa Rica, and expansion to leisure and business destinations in the mid-continental and eastern U.S. Seasonality and operational fluctuations are not predictable in the current environment and may be permanently changed post-pandemic.

In a typical year, in addition to passenger loads, factors that could cause our quarterly operating results to vary include:  

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•pricing initiatives by us or our competitors,

•      changes in fuel costs,

•increases in competition at our primary airports,

•general economic conditions and resulting changes in passenger demand,
 
•increases or decreases in passenger and volume-driven variable costs, and

•air space and Air Traffic Control delays, particularly in Seattle and San Francisco.
 
Many of the markets we serve experience inclement weather conditions in the winter, causing increased costs associated with deicing aircraft, canceling flights and accommodating displaced passengers. Due to our geographically concentrated area of operations, we can be more susceptible to adverse weather conditions, particularly in the state of Alaska and the Pacific Northwest, than some of our competitors who may be better able to spread the impact of weather-related risks over larger route systems.

No material part of our business, or that of our subsidiaries, is dependent upon a single customer, or upon a few high-volume customers.

SUSTAINABILITY

SUSTAINABILITY INITIATIVES

Taking responsibility for our impact on the environment is an integral part of delivering value for all those who depend on us – employees, guests, owners, and communities. To that end, we are focused on mitigating or reducing our most significant environmental impacts. Our sustainability goals are anchored by our commitment to reduce our carbon emissions. We have both short and long-term targets, with the long-term aim to reach net-zero carbon emissions by 2040. Our roadmap for achieving this goal includes the following focus areas:

•Increasing operational efficiency - Alaska and Horizon take pride in consistently delivering top-of-industry operational performance, which is part of optimizing fuel efficiency and thus avoiding carbon emissions. Alaska's use of Required Navigational Performance provides more direct and fuel-efficient approaches and reduces weather-related diversions. Alaska was also the first in the industry to adopt Flyways AI, a technology which leverages artificial intelligence and machine learning to optimize air traffic and enable more fuel-efficient flight paths. In 2022, Horizon began to adopt Flyways AI for its flights as well.

•Renewing our fleet with more efficient airplanes - Alaska received 26 B737-9 aircraft in 2022 and has firm commitments to take 109 additional B737 aircraft. Alaska has also secured 105 additional rights for B737 aircraft through 2030. These aircraft will provide improved fuel efficiency compared to the aircraft they are slated to replace, and enable fuel-efficient growth as well. Alaska has also partnered with Boeing on the B737-9 ecoDemonstrator program, which tests advanced technologies designed to enhance the safety and sustainability of air travel.

•Using SAF - Among available technologies, SAF has the greatest potential for enabling near-term progress towards our net-zero emissions goal, as it can be used alongside traditional jet fuel as a drop-in fuel but with lower carbon emissions on a lifecycle basis. Currently, there are supply constraints in the SAF market and expanding our use of SAF at the quantities necessary to reach our sustainability goals is dependent on its reliable availability. Alaska is working with others in the aviation community, companies in the private sector, and governments at the federal and state levels towards advancing the scalability of SAF production and reducing its cost.

Alaska currently offtakes SAF from Neste at San Francisco International Airport. In 2022, Alaska signed agreements to purchase approximately 200 million gallons of SAF to be delivered between 2025 and 2030. Additionally, Alaska launched a SAF program to join with business travel customers to support the development of the SAF market.

•Increasing the use of electric or alternative power - We have invested in electric ground-service equipment (GSE) and have partnered with our airports to install electric charging infrastructure. Successfully increasing our use of electric GSE is in part dependent on the sufficient availability of this infrastructure at airports. In 2021, we launched
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Alaska Star Ventures LLC (ASV), an investment arm with a primary focus on identifying and funding companies working on emerging green technologies. In 2022, ASV contributed $7 million in funding to venture capital groups focused on sustainable transportation technology. ASV has additional contribution commitments of $22 million in cash and in-kind investments through 2028. Alaska also announced a collaboration with ZeroAvia to begin development on a hydrogen-electric powertrain engine capable of flying regional aircraft in excess of 500 nautical miles.

•Harnessing carbon offset and carbon removal technology - To close any remaining gaps on the path to net-zero, we have partnered with industry experts to develop criteria for assessing credible, high-quality carbon offsetting and carbon removal technologies. Alaska does not currently purchase or invest in any carbon offsets or carbon removal technology. We will continue to evaluate various strategies, including these technologies, as we refine our plans to achieving net-zero.

This roadmap and our net-zero ambitions require technologies not yet fully developed or available at the scale required to decarbonize our industry. In these areas, we are focused on doing our part to aid in their development and growth as well as galvanizing support from both public and private sectors through public policy and capital investment.

In 2022, we included a carbon emissions metric in our company-wide Performance-Based Pay program, as we believe it is important to embed these critical targets into the incentives that align all of our employees. This metric was paid out at maximum achievement for the year.

Aside from our commitments to reducing our airlines' carbon footprint, we also recognize the impact our operation has in generating waste. Specific measures in recent years include replacing plastic water bottles and cups with plant-based cartons and recyclable paper cups, as well as ending the use of plastic straws and stir sticks. Alaska leads the industry in inflight recycling, and continues to evaluate new ways to further reduce inflight waste.

SUSTAINABILITY GOVERNANCE

The Governance, Nominating, and Corporate Responsibility Committee of the Board of Directors oversees Air Group’s Environmental, Social, and Governance (ESG) program and is responsible for oversight of the strategy, goals, and public disclosures on ESG matters. The Committee regularly reviews performance on publicly reported sustainability goals and climate-related issues. The Board has a dedicated Climate Working Group to oversee management’s climate strategy and path to net zero. This working group is comprised of four members from the board who bring deep expertise in energy, aviation, finance, and governance. The Audit Committee of the Board of Directors oversees Air Group's financial reporting process, including disclosures on ESG matters within the Company's financial statements.

We have formalized governance and oversight of ESG at the management level. As a member of the Executive Committee, the Senior Vice President (SVP) of Public Affairs and Sustainability is responsible for leading ESG strategy and development. The SVP also chairs Air Group’s ESG Executive Steering Committee, which includes leaders from many different groups within the Company. This Committee is responsible for overseeing the performance toward our climate goals and providing input on Air Group’s climate strategy.


HUMAN CAPITAL

OUR PEOPLE

Our business is labor intensive. As of December 31, 2022, we employed 25,469 active employees (19,549 at Alaska, 3,281 at Horizon, and 2,639 at McGee Air Services). Of those employees, 90% are full-time and 10% are part-time. Wages and benefits, including variable incentive pay, represented approximately 42% of our total non-fuel operating expenses in 2022 and 56% in 2021.

Most major airlines, including Alaska and Horizon, have employee groups that are covered by collective bargaining agreements. Airlines with unionized workforces generally have higher labor costs than carriers without unionized workforces. Those with unionized workforces may not have the ability to adjust labor costs downward quickly in response to new competition or slowing demand. At December 31, 2022, labor unions represented 86% of Alaska’s, 44% of Horizon’s, and 87% of McGee Air Services' employees.

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Our relations with U.S. labor organizations are governed by the Railway Labor Act (RLA). Under the RLA, collective bargaining agreements do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self-help.

In 2022, we reached five new labor agreements with our employees. Alaska employees represented by the Transport Workers Union, the International Association of Machinists and Aerospace Workers, and the Air Line Pilots Association ratified new contracts. Horizon employees represented by the Aircraft Mechanics Fraternal Association ratified a new contract and Horizon pilots represented by the International Brotherhood of Teamsters ratified a pilot retention agreement.

Alaska’s union contracts at December 31, 2022 were as follows:
UnionEmployee GroupNumber of EmployeesContract Status
Air Line Pilots Association, International (ALPA)Pilots3,292 Amendable 10/17/2025
Association of Flight Attendants (AFA)(a)
Flight attendants6,620 Amendable 12/17/2022
International Association of Machinists and Aerospace Workers (IAM)Ramp service and stock clerks789 Amendable 9/27/2026
IAMClerical, office and passenger service4,907 Amendable 9/27/2026
Aircraft Mechanics Fraternal Association (AMFA)Mechanics, inspectors and cleaners973 Amendable 10/17/2023
Mexico Workers Association of Air Transport(b)
Mexico airport personnel109 Amendable 9/29/2019
Transport Workers Union of America (TWU)Dispatchers99 Amendable 3/24/2027
(a)Negotiations with AFA for an updated collective bargaining agreement are ongoing as of the date of this filing.
(b)As a result of amendments to Mexican labor laws, the Company has up to four years to make changes to the existing labor agreements. During that time, the existing contracts remain in place.

Horizon’s union contracts at December 31, 2022 were as follows:
UnionEmployee GroupNumber of EmployeesContract Status
International Brotherhood of Teamsters (IBT)Pilots625 Amendable 12/31/2024
AFAFlight attendants549 Amendable 4/30/2024
AMFAMechanics and related classifications216 Amendable 5/10/2024
UniforStation personnel in 
Vancouver and Victoria, BC, Canada		41 Expires 5/9/2025
TWUDispatchers25 Amendable 1/29/2026

McGee Air Services union contract at December 31, 2022 was as follows:
UnionEmployee GroupNumber of EmployeesContract Status
IAMFleet and ramp service2,297 Amendable 7/19/2025

Alaska and Horizon invest in employee programs and training that aid advancement throughout the Company. Our Pilot Pathways Program provides a clear and direct path for Horizon pilots to progress to Mainline flying. Since its inception in 2018, 365 pilots have advanced through the program. In 2022, we launched a new Leader Academy program to help Alaska and Horizon supervisors and managers further develop their leadership and communication skills. Providing meaningful advancement opportunities to employees throughout Air Group is important, and we continue to evaluate new programs which support our people and advance our long-term strategic goals.

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DIVERSITY, EQUITY, AND INCLUSION

At Alaska and Horizon, we believe that every person deserves respect regardless of race, ethnicity, capability, age, gender, or sexual orientation. We are committed to advancing equity in all forms, and have set specific and measurable goals to deliver on our commitments to racial equity and diversity by 2025. Our primary goals in this arena are to increase racial diversity in our leadership team and build a culture of inclusion for all employees. As a reflection of the importance of these commitments, a portion of long-term executive compensation has been tied to achievement of these goals.

We are working with existing partners such as United Negro College Fund (UNCF) to create career pathways for at least 175,000 young people. Progress to this goal ramped in 2022, as we held in-person Aviation Days and career panels designed to educate young people on careers in the aviation industry. Also in 2022, we launched the Ascend Pilot Academy, in partnership with the Hillsboro Aero Academy, which will provide aspiring pilots a simpler and more financially accessible path to become a pilot at Horizon. This academy will help make careers in aviation possible for a broader and more diverse population of future pilots.

COMMUNITY INVOLVEMENT

Alaska and Horizon are dedicated to actively supporting the communities we serve. In 2022, Air Group companies donated $6 million in cash and in-kind travel to approximately 1,500 charitable organizations, and our employees volunteered more than 26,000 hours of community service related to youth and education, medical research and transportation.

The Alaska Airlines Foundation provides grants to nonprofits that offer educational and career-development programs to young people. Organizations are invited to apply bi-annually for grants ranging from $5,000 to $20,000, with preference given to organizations that can demonstrate partnership and long-term program sustainability. Since inception in 1999, the Foundation has donated more than $4 million in grants, including more than $500,000 in 2022.

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EXECUTIVE OFFICERS
 
The executive officers of Alaska Air Group, Inc. and its primary subsidiaries, Alaska Airlines, Inc. and Horizon Air Industries, who have significant decision-making responsibilities, their positions and their respective ages are as follows:
 
NamePositionAgeAir Group
or Subsidiary
Officer Since
Benito MinicucciPresident and Chief Executive Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.562004
Shane R. TackettExecutive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.442011
Kyle B. LevineSenior Vice President Legal, General Counsel and Corporate Secretary of Alaska Air Group, Inc., Alaska Airlines, Inc. and Horizon Air Industries, Inc., and Chief Ethics and Compliance Officer of Alaska Air Group, Inc. 512016
Joseph A. SpraguePresident of Horizon Air Industries, Inc. 542019
Andrew R. HarrisonExecutive Vice President and Chief Commercial Officer of Alaska Airlines, Inc.532008
Constance E. von MuehlenExecutive Vice President and Chief Operating Officer of Alaska Airlines, Inc.552021
Andrea L. SchneiderSenior Vice President People of Alaska Airlines, Inc.572003
Diana Birkett-RakowSenior Vice President Public Affairs and Sustainability of Alaska Airlines, Inc.452017
 
Mr. Minicucci was elected President and Chief Executive Officer (CEO) of Alaska Air Group effective March 31, 2021, and has been President of Alaska Airlines since May 2016. Prior to that he was Executive Vice President/Operations of Alaska Airlines from December 2008 to May 2016, and was Alaska’s Chief Operating Officer from December 2008 until November 2019. He was Chief Executive Officer of Virgin America Inc. from December 2016 to July 2018, when Virgin America was merged into Alaska. He leads Air Group’s Management Executive Committee, and was elected to the Alaska Air Group Board of Directors in May 2020.

Mr. Tackett was elected Chief Financial Officer in March 2020 and is a member of Air Group’s Management Executive Committee. Mr. Tackett joined Alaska Airlines in 2000 and has served in a number of roles including Managing Director Financial Planning and Analysis (2008-2010), Vice President Labor Relations (2010-2015), Vice President Revenue Management (2016), Senior Vice President Revenue and E-commerce (2017-2018), and Executive Vice President Planning and Strategy (2018-2020).

Mr. Levine was elected Senior Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines in January 2020 and is a member of Air Group’s Management Executive Committee. Mr. Levine was previously Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines (January 2016 - January 2020). He was elected Corporate Secretary of Alaska Air Group and Alaska Airlines in August 2017 and of Horizon Air in January 2020. Mr. Levine joined Alaska Airlines in February 2006 as a Senior Attorney. He also served as Associate General Counsel and Managing Director Commercial Law and General Litigation from July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016.

Mr. Sprague was elected President of Horizon Air effective November 6, 2019 and is a member of Air Group’s Management Executive Committee. Mr. Sprague previously served as Senior Vice President External Relations of Alaska Airlines from May 2014 until his resignation in September 2017. Mr. Sprague also served Alaska Airlines as Vice President of Marketing from March 2010 to April 2014 and Vice President of Alaska Air Cargo from April 2008 to March 2010.
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Mr. Harrison was elected Executive Vice President and Chief Commercial Officer in August 2015. He is a member of Air Group's Management Executive Committee. Mr. Harrison joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008. He was elected Senior Vice President of Planning and Revenue Management in 2014 and Executive Vice President and Chief Revenue Officer in February 2015.

Ms. von Muehlen was elected Executive Vice President and Chief Operating Officer of Alaska Airlines effective April 3, 2021 and is a member of Air Group’s Management Executive Committee. Prior to that she served as Senior Vice President of Maintenance and Engineering of Alaska Airlines from January 2019 to April 2021. Ms. von Muehlen served as Chief Operating Officer at Horizon Air from January 2018 to January 2019, and Managing Director of Airframe, Engine, Components MRO at Alaska Airlines from December 2012 to January 2018.

Ms. Schneider was elected Senior Vice President of People at Alaska Airlines in June 2019 and is a member of Air Group’s Management Executive Committee. Ms. Schneider was previously Vice President of People at Alaska (August 2017-May 2019) Vice President of Inflight Services at Alaska (2011-2017), and later also took responsibility for Call Centers at Alaska (February 2017). She began her career at Alaska as Manager of Financial Accounting in 1989 and she held a number of positions until her election as an officer in 2003.

Ms. Birkett-Rakow was elected Senior Vice President of Public Affairs and Sustainability at Alaska Airlines in November 2021. She was previously elected Vice President of Public Affairs and Sustainability in February 2021 and also served as Vice President of External Relations at Alaska Airlines from September 2017 to February 2021. Ms. Birkett Rakow is a member of Air Group's Management Executive Committee.

REGULATION
 
GENERAL
 
The airline industry is highly regulated, most notably by the federal government. The Department of Transportation (DOT), the Transportation Security Administration (TSA) and the FAA exercise significant regulatory authority over air carriers.
 
•DOT: A domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT in order to provide passenger and cargo air transportation in the U.S. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U.S. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates. While airlines are permitted to establish their own fares without government regulation, the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes. International treaties may also contain restrictions or requirements for flying outside of the U.S. and impose different carrier liability limits than those applicable to domestic flights. The DOT has been active in implementing a variety of consumer protection regulations and directives, covering subjects such as advertising, passenger communications, denied boarding compensation, tarmac delay response, ticket refunds, family seating requirements, and fee disclosures for ancillary services. Following operational difficulties across the industry, the DOT has increased its review of airline operational performance. Airlines are subject to enforcement actions that are brought by the DOT for alleged violations of consumer protection and other economic regulations. We are not aware of any regulatory investigations or enforcement proceedings that could either materially affect our financial position or impact our authority to operate.

•FAA: The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations, we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate. Each maintenance program provides for the ongoing maintenance of the relevant aircraft type, ranging from frequent routine inspections to major overhauls. Periodically, the FAA issues Airworthiness Directives (ADs) that must be incorporated into our aircraft maintenance program and operations. All airlines are subject to enforcement actions that are brought by the FAA from time to time for alleged violations of FARs or ADs. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.

•TSA: Airlines serving the U.S. must operate a TSA-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations. Under TSA authority, we are required to collect a September
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11 Security Fee of $5.60 per one-way trip from passengers and remit that sum to the government to fund aviation security measures. Airlines are subject to enforcement actions that are brought by the TSA for alleged violations of the AOSSP, SDs or security regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.

The Department of Justice and DOT have jurisdiction over airline competition matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the RLA. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies and international treaties.

We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The OSHA and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes. Many state and local governments have adopted employee safety and health laws and regulations. We maintain our safety and health programs in order to meet or exceed these requirements.

ENVIRONMENTAL
 
We are also subject to various laws and government regulations concerning environmental matters, both domestically and internationally. Domestic regulations that have an impact to our operations include the Airport Noise and Capacity Act of 1990, the Clean Air Act, Resource Conservation and Recovery Act, Clean Water Act, Safe Drinking Water Act, the Comprehensive Environmental Response and Compensation Liability Act, the National Environmental Policy Act (including Environmental Justice), Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act. Many state and local environmental regulations exceed these federal regulations. We expect there to be continued incremental legislation aimed at further reduction of greenhouse gas emissions, hazardous substances, and additional focus on environmental justice.

The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions.

The domestic US airline industry committed to carbon neutral growth starting in 2020 for both domestic and international growth. The mechanism to comply with this commitment internationally is through the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a global, market-based measure that allows for eligible emissions offsets or the use of CORSIA-eligible sustainable aviation fuel to mitigate the growth emissions. The program is regulated by the FAA who then affirms compliance to the International Civil Aviation Organization. The FAA has approved both Alaska and Horizon's monitoring, verification, and reporting plans.

As a result of the COVID-19 pandemic, the growth baseline year was modified and set to 85% of 2019 carbon dioxide emissions during the initial phase. This does not have a direct impact on domestic flights, however the EPA finalized a rule in 2020 on aircraft emission standards which aligns with the international agreements. Additional commitments to decarbonize through the Paris Climate Accord and domestic carbon neutrality remain a potential impact to our industry.

The federal government has proposed rules that would expand required disclosures discussing the impact of environmental change. While the rules are not yet final at the time of this filing, costs associated with compliance could be significant. Except for these proposed rules, we do not currently anticipate adverse financial impacts from specific existing or pending environmental regulation or reporting requirements, new regulations, related to our existing or past operations, or compliance issues that could harm our financial condition, results of operations, or cash flows in future periods.

INSURANCE

We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements. The insurance policies principally provide coverage for airline hull, spares and comprehensive legal liability, war and allied perils, and workers’ compensation. In addition, we currently carry a cyber insurance policy in the event of security breaches from malicious parties.

We believe that our emphasis on safety and our state-of-the-art flight deck safety technology help to control the cost of our insurance.

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WHERE YOU CAN FIND MORE INFORMATION
 
Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. The information contained on our website is not a part of this annual report on Form 10-K.
 
GLOSSARY OF TERMS

Adjusted Net Debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Adjusted Net Debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-Capitalization Ratio - represents adjusted debt (long-term debt plus capitalized operating lease liabilities) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737, Airbus 320 family and Airbus 321neo jets and all associated revenue and costs

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon and SkyWest. Financial results in this segment include actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and SkyWest under the respective capacity purchased arrangement (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Air Group and on behalf of Horizon

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

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ITEM 1A. RISK FACTORS
 
If any of the following occurs, our business, financial condition, and results of operations could be harmed. The trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.

We have adopted an enterprise-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives, and align these risks with Board oversight. These enterprise-wide risks align to the risk factors discussed below.

SAFETY, COMPLIANCE, AND OPERATIONAL EXCELLENCE

Our reputation and financial results could be harmed in the event of an airline accident or incident.
 
An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities. We could experience significant claims from injured passengers, bystanders and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if it is fully insured and does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives. This would harm our business.

Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our business, financial condition, and results of operations.

As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.

Factors that might impact our operations include:

•contagious illness and fear of contagion;

•congestion, construction, space constraints at airports, and/or air traffic control problems, all of which many restrict flow;

•lack of adequate staffing or other resources within critical third parties;

•adverse weather conditions;

•lack of operational approval (e.g. new routes, aircraft deliveries, etc.);
 
•increased security measures or breaches in security;
 
•changes in international treaties concerning air rights;

•international or domestic conflicts or terrorist activity;

•interference by modernized telecommunications equipment with aircraft navigation technology;

•disruption or failure of systems or infrastructure under the control of third parties, including government entities; and

•other changes in business conditions.

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Due to the concentration of our flights in the Pacific Northwest and Alaska, we believe a large portion of our operation is more susceptible to adverse weather conditions than other carriers with networks that cover a larger geographic area. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition and results of operations.

We rely on vendors and third parties for certain critical activities and sourcing, which could expose us to disruptions in our operation or unexpected cost increases.
 
We rely on vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing, among others. We also rely on government-controlled systems such as air traffic control technology that could malfunction for reasons out of our control.
 
Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, for reasons such as supply chain delays, or workforce shortages, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.

Impacts of climate change, including legal, regulatory, or market responses, may have a material adverse result on our operations and financial position.

Concerns regarding climate change, including the impacts of a gradual increase in global temperatures leading to more severe weather conditions, continue to rise. Increased frequency or duration of extreme weather conditions could cause significant and prolonged impacts to our operation, disrupt our supply chain, and influence consumer travel decisions. These disruptions may result in increased operating costs and lost revenue should we be unable to operate our published schedules.

Many aspects of our operation are subject to increasing regulation driven by environmental change. The federal government has proposed rules that would significantly expand required disclosures discussing the impact of environmental change. These regulations and requirements may be difficult to implement and the cost of compliance, or failure to comply, could adversely impact our operations and financial position. Increased governmental regulation involving aircraft emissions and environmental investigation and remediation costs coupled with public expectations for reductions in greenhouse gas emissions may require us to make significant investments in emerging and yet unproven technologies. Should these technologies not prove ready, not gain approval, or not be sufficiently available for use in our operation, our results of operations may be adversely impacted, and we may be required to direct new investments to different technologies. Public interest in U.S. airlines' response to climate change has continued to grow. Failure to address the concerns of our guests and our shareholders may lead to a reduction in demand for our services in favor of competitors that customers perceive to be more sustainable. This could adversely impact our financial position, our results of operations, or our stock price.

Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions.
 
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve substantial operational impacts and compliance costs. In recent years, U.S. regulators have issued regulations or mandates concerning airline operations or consumer rights that have increased the cost and complexity of our business and involve greater civil enforcement and legal liability exposure.

Similarly, legislative and regulatory initiatives and reforms at the federal, state, and local levels include increasingly stringent environmental, governance, and workers’ benefits laws. In some instances, it is impossible for us to comply with federal, state, and local laws simultaneously, exposing us to greater liability and operational complexity. These laws also affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs. New employee health and welfare initiatives with employer-funded costs, specifically those impacting Washington state, could disproportionately increase our cost structure as compared to our competitors. In recent years, the airline industry has experienced an increase in litigation over the application of state and local employment laws, particularly in
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California. Application of these laws may result in operational disruption, increased litigation risk and expense, and undermining of negotiated labor agreements.

Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers to reflect higher costs of security, updates to infrastructure, and other expenses. Additional laws, regulations, taxes, airport rates, and airport charges may be occasionally proposed that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, a higher total ticket price could influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business. Additionally, changes in laws and regulations at the local level may be difficult to track and maintain compliance. Any instances of non-compliance could result in additional fines and fees.

The airline industry continues to face potential security concerns and related costs.

Terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a significant negative effect on the airline industry, including us, and could:
 
•significantly reduce passenger traffic and yields as a result of a dramatic drop in demand for air travel;
 
•significantly increase security and insurance costs;
 
•make war risk or other insurance unavailable or extremely expensive;
 
•increase fuel costs and the volatility of fuel prices;
 
•increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and
 
•result in a grounding of commercial air traffic by the FAA.
 
The occurrence of any of these events would harm our business, financial condition and results of operations.

The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and could continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.

Our financial condition and results of operations have been, and could continue to be, adversely affected by the COVID-19 pandemic. Although our operation has largely recovered from the impacts of the COVID-19 pandemic, the pace of recovery has varied. Our strategies for encouraging air travel or managing future pandemic-related issues, such as a resurgence of adverse health conditions or other factors, may evolve over time and will be responsive to new information or regulatory guidance. At this time, we are unable to predict how COVID-19 will influence future customer behavior, and whether any changes in behavior are temporary or permanent. These new strategies may require further investment, and if not successful, may not generate related revenue to offset these costs.

STRATEGY

The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected.

The U.S. airline industry is characterized by substantial competition. Airlines compete for market share through competitive pricing, increasing or decreasing their capacity, route systems and markets served, and products and services offered to guests. We have significant capacity overlap with several of our competitors in locations we serve, particularly in our key West Coast markets. This dynamic may be exacerbated by competition among airlines to attract passengers during periods of economic recovery. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity if we are unable to attract and retain guests.

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We strive toward maintaining and improving our competitive cost structure by setting aggressive unit cost-reduction goals. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital. If we are unable to maintain our cost advantage over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns. Therefore, our financial results may suffer.

The airline industry may undergo further consolidation or restructuring. In addition, regulatory, policy, and legal developments could impact the extent to which airlines can merge, or form and maintain marketing alliances and joint ventures with other airlines, particularly U.S. carriers. These factors could have a material adverse effect on our business, financial conditions, and results of operations.

We continue to face strong competition, mainly from other U.S. carriers. In many instances, our competitors have been able to grow and increase their competitive influence by merging with other airlines, as Alaska did with Virgin America in 2016. Some competitors have also benefited from the ability to reduce their cost structures through the U.S. bankruptcy process and restructuring laws. Competitors have also improved their competitive positions by entering marketing alliances and/or joint ventures with other airlines. Certain airline joint ventures promote competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits that can be extended to consumers, achieving many of the benefits of consolidation.

In recent years, the U.S. antitrust authorities have been increasingly reluctant to approve airline mergers, cooperative marketing arrangements, and joint ventures. The proposed joint venture between American Airlines, with which Alaska has its own alliance, and JetBlue is subject to a pending legal challenge that could impact the landscape for other airline ventures. The continuation of merger-adverse antitrust policy and/or the finality of legal rulings limiting airline mergers, joint marketing activities, and joint ventures could have a material adverse effect on our business, financial, and results of operations.

Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations.
 
Our strategy involves a high concentration of our business in key West Coast markets. A significant portion of our flights occur to and from our Seattle, Portland, and Bay Area hubs. In 2022, passengers to and from Seattle, Portland, and the Bay Area accounted for 82% of our total guests.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition and results of operations.

We are dependent on a limited number of suppliers for aircraft and parts.
 
Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly dependent on Embraer. Additionally, each carrier is dependent on sole suppliers for aircraft engines for each aircraft type. As a result, we are vulnerable to issues associated with the supply of those aircraft and parts including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or actions by the FAA. Should we be unable to resolve known issues with certain aircraft or engine suppliers, it may result in the inability to operate our aircraft for extended periods. Additionally, if effects of the ongoing supply chain backlog causes our limited vendors to have performance problems, reduced or ceased operations, bankruptcies, workforce shortages, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

Should these suppliers be unable to manufacture, obtain certification for, and deliver new aircraft, we may not be able to grow our fleet at intended rates, which could impact our financial position. Boeing has significant production constraints and regulatory delays for the B737 family of aircraft, which may impact the timing of deliveries. If we are unable to receive these aircraft and future aircraft in a timely manner, our growth plans could be negatively impacted. Additionally, further consolidation amongst aircraft and aircraft parts manufacturers could further limit the number of suppliers. This could result in production instability in the locations in which the aircraft and its parts are manufactured or an inability to operate our aircraft.

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We rely on partner airlines for codeshare and frequent flyer marketing arrangements.
 
Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners," including an expanded relationship with American and other oneworld carriers. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. Refer to Item 1 above for details regarding these codeshare agreements. In addition, the agreements generally provide that members of Alaska’s Mileage Plan program can earn credit on or redeem credit for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our loyalty program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenue or the attractiveness of our Mileage Plan program, which we believe is a source of competitive advantage.

Our membership in the oneworld global alliance may limit options to bring non-oneworld carrier partners into our Mileage Plan program. Further, maintaining an alliance with another U.S. airline may expose us to additional regulatory scrutiny. Failure to appropriately manage these partnerships and alliances could negatively impact future growth plans and our financial position.

We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and frequent flyer program enhancements, and will continue to pursue these commercial activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.

Economic uncertainty, including a recession, would likely impact demand for our product and could harm our financial condition and results of operations.
 
The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are dependent on U.S. consumer confidence and the health of the U.S. economy. Unfavorable U.S. economic conditions have historically resulted in reduced consumer spending and led to decreases in both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as video conferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs. Additionally, reduced consumer spending would adversely impact revenue and cash flows from our co-branded credit card agreements. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.

TECHNOLOGY
We rely heavily on automated systems to operate our business, including expanded reliance on systems managed or hosted by third parties. Failure to invest in new technology or a disruption of our current systems or their operators could harm our business.
We heavily depend on automated systems to operate our business. This includes our airline reservation system, check-in kiosks, website, telecommunication systems, maintenance systems, airline operations control systems, flight deck/route optimization systems, planning and scheduling, mobile applications and devices, and many other systems. These systems require significant investment of employee time and cost for maintenance and upgrades. Some of these systems are operated by government authorities, which limits our ability to switch vendors if issues arise. Failure to appropriately maintain and upgrade these systems may result in service disruptions or system failures. Additionally, as part of our commitment to innovation and providing an attractive guest travel experience, we invest in new technology to ensure our critical systems are reliable, scalable, and secure.

We continue to expand our reliance on third party providers for management or hosting of operational and financial systems. Should these providers fail to meet established service requirements or provide inadequate technical support, we could experience disruptions in our operation, ticketing or financial systems. All of our automated systems cannot be completely protected against events beyond our control, including natural disasters, computer viruses, cyberattacks, other security breaches, or telecommunications failures.

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Substantial or repeated failures or disruptions to any of these critical systems could reduce the attractiveness of our services or cause our guests to do business with another airline. Disruptions, failed implementations, untimely or incomplete recovery, or a breach of these systems or the data centers/cloud infrastructure they run on could result in the loss of important data, an increase in our expenses, loss of revenue, impacts to our operational performance, or a possible temporary cessation of our operations.

Additionally, we rely on the FAA and its systems for critical aspects of flight operations. The failure of these systems could lead to increased delays and inefficiencies in flight operations, resulting in an adverse impact to our financial condition and results of operations.

We continue to monitor emerging technologies, including technologies which may have disruptive impacts which are out of our control, such as the introduction of 5G wireless service. We will continue to work with regulatory agencies and other air carriers to mitigate potential impacts of these technologies on the safety and security of air travel.

Failure to appropriately comply with evolving and expanding information security rules and regulations or to safeguard our employee or guest data could result in damage to our reputation and cause us to incur substantial legal and regulatory cost.

As part of our core business, we are required to collect, process, store and share personal and financial information from our guests and employees. Under current or future privacy legislation, we are subject to significant legal risk should we not appropriately protect that data. Our membership in the oneworld alliance exposes us to incremental global regulation and therefore risk. In addition, we continue to expand our reliance on third-party software providers and data processors, including cloud providers. Unauthorized access of personal and financial data via fraud or other means of deception could result in data loss, theft, modification, or unauthorized disclosure. To the extent that either we or third parties with whom we share information experience a data breach, fail to appropriately safeguard personal data, or are found to be out of compliance with applicable laws, and regulations, we could be subject to additional litigation, regulatory risks and reputational harm. Further, as regulation of the collection and storage of personal and financial information continues to evolve and increase, we may incur significant costs to bring our systems and processes into compliance.

Cyber security threats have and will continue to impact our business. Failure to appropriately mitigate these risks could negatively impact our operations, onboard safety, reputation and financial condition.
Our sensitive information is securely transmitted over public and private networks.  Our systems are subject to increasing and evolving cyber security risks. Unauthorized parties have attempted and continue to attempt to gain access to our systems and information, including through fraudulent misrepresentation and other means of deception. Methods used by unauthorized parties are continually evolving and may be difficult to identify. Because of these ever-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices. However, the nature of these attacks means that proper policies, technical controls, and education may not be enough to prevent all unauthorized access. Emerging cybercrime threats include the loss of functionality of critical systems through ransomware, denial of service, or other attacks. A compromise of our systems, the security of our infrastructure, or those of our vendors or other business partners that result in our information being accessed or stolen by unauthorized persons could result in substantial costs for response and remediation, adversely affect our operations and our reputation, and expose us to litigation, regulatory enforcement, or other legal action. A cybersecurity attack impacting our onboard or other operational systems may result in an accident or incident onboard or significant operational disruptions, which could adversely affect our reputation, operation and financial position. Further, a significant portion of our office employees have maintained remote work arrangements, which increases our exposure to cyberattacks, and could compromise our financial or operational systems.

FINANCIAL CONDITION AND FINANCIAL MARKETS

Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs or significant disruptions in the supply of jet fuel would harm our business.
 
Fuel costs constitute a significant portion of our total operating expenses. Future increases in the price of jet fuel may harm our business, financial condition, and results of operations unless we are able to increase fares and fees or add ancillary services to attempt to recover increasing fuel costs.

We are unable to predict the future supply of jet fuel, which may be impacted by various factors, included but not limited to geopolitical conflict, economic sanctions against oil-producing countries, natural disasters, or staffing and equipment shortages in the oil industry. Any of these factors could adversely impact our operations and financial results.

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We have a significant amount of debt and fixed obligations. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position. Additionally, increases in interest rates may mean that future borrowings are more costly for the Company, which could harm our future financial results.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt and aircraft operating lease commitments. Although we aim to keep our leverage low, due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenue could result in a disproportionately greater decrease in earnings. Similarly, a material increase in market interest rates could mean future borrowings are more costly for the Company.

Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures or working capital; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions. Further, should we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

In response to the COVID-19 pandemic, the Company, Alaska, Horizon, and McGee entered agreements with the United States Department of the Treasury (Treasury) to secure financing under the Coronavirus Aid, Relief, and Economic Security (CARES) Act Payroll Support Program (PSP). In addition to our financial commitments under the CARES PSP program, we remain subject to limitations on compensation and severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 through April 1, 2023. This may adversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate at market-competitive levels and retain key personnel.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.

Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the timing of maintenance events of our aircraft.

As of December 31, 2022, the average age of our Boeing Next Gen passenger aircraft (B737-700, -800, -900, -900ERs) was approximately 11.9 years, the average age of our B737-9 aircraft was approximately 0.8 years, the average age of our A321neo aircraft was approximately 4.7 years, and the average age of our owned E175 aircraft was approximately 4.2 years. Typically, our newer aircraft require less maintenance than they will in the future. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations. In addition, expenses for aircraft coming off lease could result in incremental maintenance expense as we are required to return leased planes in a contractually specified condition.

The application of the acquisition method of accounting resulted in us recording goodwill, which could result in significant future impairment charges and negatively affect our financial results.

In accordance with acquisition accounting rules, we recorded goodwill on our consolidated balance sheet to the extent the Virgin America acquisition purchase price exceeded the net fair value of Virgin America’s tangible and identifiable intangible assets and liabilities as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties. We can provide no assurance that a significant impairment charge will not occur in one or more future periods. Any such charges may materially affect our financial results.

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BRAND AND REPUTATION

As we evolve our brand we will engage in strategic initiatives that may not be favorably received by all of our guests.

We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers. These efforts could include significant enhancements to our in-airport and on-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile) and optimization of our customer loyalty programs. In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base.
The Company's brand and reputation could be harmed if it is exposed to significant negative publicity.

We operate in a highly visible industry that has significant exposure to social media and other media channels. Negative publicity, including as a result of misconduct by our guests or employees, failure to address our environmental, social, and governance goals, or other circumstances, can spread rapidly through such channels. Should the Company not respond in a timely and appropriate manner to address negative publicity, the Company's brand and reputation may be significantly harmed. Such harm could have a negative impact on our financial results.

PEOPLE AND LABOR STRATEGY

A significant increase in labor costs, unsuccessful attempts to strengthen our relationships with union employees, or loss of key personnel could adversely affect our business and results of operations.

Labor costs remain a significant component of our total expenses. In addition to costs associated with represented employee groups, labor costs could also increase for non-unionized employees and via vendor agreements as we work to compete for highly skilled and qualified employees against the major U.S. airlines and other businesses in a competitive job market. Labor costs have recently increased significantly driven by inflationary pressure on wages.

Ongoing and periodic negotiations with labor unions could result in job actions, such as slow-downs, sick-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during negotiations. Although unlawful until after lengthy mediation attempts, the operation could be significantly impacted. Although we have a long track record of fostering good communications, negotiating approaches, and developing other strategies to enhance workforce engagement in our long-term vision, unsuccessful attempts to strengthen relationships with union employees could divert management’s attention from other projects and issues and negatively impact the business. In addition, our bargained-for labor agreement terms for flight crew are increasingly coming into conflict with state and local laws purporting to govern benefits and duties.

Our executive officers and other senior management personnel are critical to the long-term success of our business. If we experience significant turnover and loss of key personnel, and fail to find suitable replacements with comparable skills, our performance could be adversely impacted.

The inability to attract, retain and train qualified personnel, or maintain our culture, could result in guest impacts and adversely affect our business and results of operations.

We compete against other major U.S. airlines for pilots, aircraft technicians and other labor. Recently, there have been shortages of pilots for hire in the regional market and more pilots in the industry are approaching mandatory retirement age. Attrition beyond normal levels, or the inability to attract new pilots, could negatively impact our results of operations. The shortage of pilots and opportunities at other carriers could mean that our captains and first officers leave our airlines more often than forecast. Additionally, the industry, including related vendor partners, has experienced and may continue to experience challenges in hiring and retaining other labor positions, such as aircraft technicians, ground handling and customer service agents, and flight attendants. The Company's or our vendor partners' inability to attract and retain personnel for these positions could negatively impact our results of operations, which may harm our growth plans. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions. This would result in increased overall costs and may adversely impact our guest experience and financial position.

Our success is also dependent on cultivating and maintaining a unified culture with cohesive values and goals. Much of our continued success is tied to our guest loyalty. Failure to maintain and grow the Alaska culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies. As part of this process, we may continue to incur substantial costs for employee programs.
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REGULATION

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of our company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, or as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision is intended to apply to claims arising under Delaware state law and would not apply to claims brought pursuant to the Exchange Act or the Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in our certificate of incorporation will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to our company than to our stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

 None.

ITEM 2. PROPERTIES

AIRCRAFT
 
The following table describes the aircraft we operate and their average age at December 31, 2022:
Aircraft Type (a)
SeatsOwnedLeasedTotalAverage
Age in
Years
B737 Freighters—3 — 3 21.9 
B737 Next Gen124-178153 10 163 11.9 
B737-917827 10 37 0.8 
A320150— 12 12 13.2 
A321neo190— 10 10 4.7 
Total Mainline Fleet183 42 225 10.0 
Q4007610 1 11 12.9 
E1757633 42 75 4.5 
Total Regional Fleet43 43 86 5.6 
Total226 85 311 8.8 
(a) The table above does not include 24 Airbus and 21 Q400 non-operating aircraft, which have been permanently removed from operating service as of January 2023.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft. “Liquidity and Capital Resources" provides more information about aircraft that are used to secure long-
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term debt arrangements or collateralize credit facilities. Note 7 to the consolidated financial statements provides more information regarding leased aircraft as capitalized on our consolidated balance sheets.

Alaska’s leased B737 Next Gen aircraft have lease expiration dates between 2026 and 2028. Alaska's leased B737-9 aircraft have lease expiration dates between 2031 and 2034. Alaska’s leased A319 and A320 aircraft have lease expiration dates between 2023 and 2025, including those aircraft that have been permanently removed from our operating fleet, but have not been returned to lessors. A321neo aircraft have lease expiration dates between 2029 and 2031. Horizon’s leased Q400 aircraft have lease expiration dates in 2023. The leased E175 aircraft support Alaska's capacity purchase agreement with SkyWest, and are under agreement through 2034. Alaska has the option to extend some of the leases for additional periods.

GROUND FACILITIES AND SERVICES
 
In various cities in the state of Alaska, we own terminal buildings and hangars. We also own or lease several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac). These include a multi-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, a data center, and various other commercial office buildings.

At the majority of the airports we serve, we lease ticket counters, gates, cargo and baggage space, ground equipment, office space, and other support areas. Airport leases contain provisions for periodic adjustments of lease rates. We are typically responsible for maintenance, insurance and other facility-related expenses and services under these agreements. We also lease operations, training, administrative, and data center facilities in Burlingame, CA; Long Beach, CA; Portland, OR; Puyallup, WA; Quincy, WA; Renton, WA; Seattle, WA; and Spokane, WA, call center facilities in SeaTac, WA; Phoenix, AZ; and Boise, ID, and hangars in Portland, OR and Everett, WA.

ITEM 3. LEGAL PROCEEDINGS
 
The Company is a party to various litigation matters incidental to our business. Other than as described in Note 10 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, Management believes the ultimate outcome of these matters is not likely to materially affect our financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of December 31, 2022, there were 136,883,042 shares of common stock of Alaska Air Group, Inc. issued, 127,533,916 shares outstanding, and 2,394 shareholders of record. In March 2020, the Company suspended the payment of dividends indefinitely. Our common stock is listed on the New York Stock Exchange (symbol: ALK).

SALES OF NON-REGISTERED SECURITIES
 
None.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely; these restrictions ended on October 1, 2022. In December 2022, the Company announced plans to resume share repurchases in early 2023. The plan has remaining authorization to purchase an additional $456 million in shares.
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PERFORMANCE GRAPH
 
The following graph compares our cumulative total stockholder return since December 31, 2017 with the S&P 500 Index and the NYSE ARCA Airline Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2017.

alk-20221231_g1.jpg

ITEM 6. [RESERVED]

None.

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, our operations and our 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 Part I, “Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:
 
•Year in Review—highlights from 2022 outlining some of the major events that happened during the year and how they affected our financial performance.
 
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•Results of Operations—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the most recent two years presented in our consolidated financial statements. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section also includes forward-looking statements regarding our view of 2023. 

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, sources and uses of cash, contractual obligations and commitments, and off-balance sheet arrangements.

•Critical Accounting Estimates—a discussion of our accounting estimates that involve significant judgment and uncertainties.

This section of the Form 10-K covers discussion of 2022 and 2021 results, and comparisons between those years. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, 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, 2021.

YEAR IN REVIEW

2022 Results

Air Group's recorded consolidated pretax income under GAAP of $79 million and consolidated pretax income on an adjusted basis of $736 million, or 7.6%. This industry leading financial performance reflects the strength and resilience of our business model. Strong demand for air travel underpinned our results and enabled record breaking full year revenue of $9.6 billion, 10% above 2019 levels, despite flying capacity 9% below 2019 levels. As we ramped our operation significantly in 2022, we encountered disruptions including pilot training throughput issues in the spring, and weather related irregular operations in the winter. Despite these challenges, we had one of the industry's best completion rates and on-time performance rates for the year. As a result of the strength of our results, our employees earned a historic performance-based pay award, amounting to $257 million in 2022.

During 2022 our teams focused on several strategic priorities designed to strengthen our competitive advantages and set the stage for future growth. We signed five new labor contracts, we invested in fortifying our operational reliability, and we executed our single fleet transitions at both Alaska and Horizon. This progress positions our airlines well for the future. During the year we incurred $580 million in special charges, primarily driven by our fleet transitions and contract ratification bonuses paid to Alaska's pilots.

Fuel is a significant component of our cost structure, and significant increases in fuel costs in 2022 impacted our financial results. Economic fuel cost per gallon was 69% above prior year levels, at $3.42 per gallon for the year, inclusive of a $0.22 per gallon hedge benefit. As a result of elevated fuel prices and increased consumption, total economic fuel cost incurred was $1.3 billion higher than 2021.

Non-fuel operating expense, excluding special items, increased 23% in 2022 over the prior year period, while capacity was up 16%. Increases in non-fuel operating expense were primarily due to higher employee wages and related costs, driven by increased staffing levels relative to our level of flying, increased training, and the impacts of new labor deals.

See “Results of Operations” below for further discussion of changes in revenue and operating expenses as compared to 2021, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of Item 1.

Labor Update

At Alaska, employees represented by the Transport Workers Union, International Association of Machinists and Aerospace Workers, and Airline Pilots Association all ratified new agreements. At Horizon, mechanics represented by the Aircraft Mechanics Fraternal Association and pilots represented by the International Brotherhood of Teamsters also reached new agreements during the year. All agreements provide increased pay and enhanced benefits designed to remain competitive with the market.

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Outlook

The work executed in 2022 on new labor deals and the single-fleet transition sets the foundation for growth and expanding earnings in 2023. Our growth is predominantly enabled by increases in aircraft gauge and the stage lengths we fly. As a result, it is highly leveraged to improve productivity without much incremental cost. As we work through our remaining transition training in early 2023, we are scheduled to return to pre-pandemic levels of capacity in the first half of the year.

Given these factors, we anticipate first quarter 2023 capacity will grow versus 2022 by 11% to 14%, with unit costs flat to down 2% year over year. For full year 2023, we expect capacity to be up 8% to 10%, with unit costs down 1% to 3%, both versus 2022. Early in 2023, the demand for future travel has remained strong, and we anticipate full year revenue will be up 8% to 10% versus 2022. As a result, we anticipate full-year adjusted pretax margin will range from 9% to 12%. We also introduced earnings per share guidance of $5.50 to $7.50 for 2023, which implies restoration of pre-COVID earnings levels at the midpoint.

Our plans will continue to be responsive to emerging information and the guidance above continues to be subject to greater uncertainty than pre-pandemic. As we leverage our network, Mileage Plan program, and fleet for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years that will continue to serve us well in 2023 and beyond. We are confident in our ability to execute on our strategic plans, which we expect will drive continued industry out-performance.

RESULTS OF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of aircraft fuel, the Payroll Support Program grant wage offset, and other special items is useful information to investors because:

•By excluding fuel expense and certain other items, such as the Payroll Support Program grant wage offset and other special items, from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction and productivity initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•Cost per ASM (CASM) excluding fuel and certain other items, such as the Payroll Support Program grant wage offset and other special items, is one of the most important measures used by management and by our Board of Directors in assessing quarterly and annual cost performance.

•CASM excluding fuel and certain other items is a measure commonly used by industry analysts and we believe it is an important metric 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 income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual incentive plan, which covers the majority of employees within the Alaska Air Group organization.

•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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Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are nonrecurring, infrequent, or unusual in nature.

2022 COMPARED WITH 2021

Our consolidated net income for 2022 was $58 million, or $0.45 per diluted share, compared to a net income of $478 million, or $3.77 per diluted share, in 2021.

Excluding the impact of special items, mark-to-market fuel hedge adjustments, and the Payroll Support Program grant wage offset, our adjusted consolidated net income for 2022 was $556 million, or $4.35 per share, compared to an adjusted consolidated net loss of $256 million, or $2.03 per share, in 2021. The following table reconciles our reported GAAP net income per share (EPS) during the full year 2022 and 2021 to adjusted amounts.
 Twelve Months Ended December 31,
 20222021
(in millions, except per-share amounts)DollarsDiluted EPSDollarsDiluted EPS
GAAP net income per share$58 $0.45 $478 $3.77 
Payroll Support Program grant wage offset— — (914)(7.21)
Mark-to-market fuel hedge adjustments76 0.60 (47)(0.37)
Special items - fleet transition and other496 3.88 (1)(0.01)
Special items - labor and related84 0.66 (10)(0.08)
Income tax effect of reconciling items above(158)(1.24)238 1.87 
Non-GAAP adjusted net income (loss) per share$556 $4.35 $(256)$(2.03)

CASMex is reconciled to CASM below:
 Twelve Months Ended December 31,
(in cents)2022 2021 % Change
Consolidated:
CASM15.76 ¢10.47 ¢51%
Less the following components:
Payroll Support Program grant wage offset— (1.75)(100)%
Aircraft fuel, including hedging gains and losses4.39 2.44 80%
Special items - fleet transition and other0.82 — NM
Special items - labor and related0.14 (0.02)NM
CASM excluding fuel and special items10.41 ¢9.80 ¢6%
Mainline:
CASM14.42 ¢9.52 ¢51%
Less the following components:
Payroll support program grant wage offset— (1.75)(100)%
Aircraft fuel, including hedging gains and losses4.11 2.33 76%
Special items - fleet transition and other0.71 — NM
Special items - labor and related0.15 (0.02)NM
CASM excluding fuel and special items9.45 ¢8.96 ¢5%

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OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure performance.
Twelve Months Ended December 31,
20222021Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)41,46832,40728.0%
RPMs (000,000) "traffic"51,33038,59833.0%
ASMs (000,000) "capacity"60,77352,44515.9%
Load factor84.5%73.6%10.9 pts
Yield17.16¢14.25¢20.4%
RASM15.87¢11.78¢34.8%
CASMex(b)
10.41¢9.80¢6.3%
Economic fuel cost per gallon(b)
$3.42$2.0269.3%
Fuel gallons (000,000)75865615.5%
ASMs per gallon80.279.90.3%
Departures (000)4043777.2%
Average full-time equivalent employees (FTEs)22,56419,37516.5%
Employee productivity (PAX/FTEs/months)153.1139.49.9%
Mainline Operating Statistics:
Revenue passengers (000)31,79523,26836.6%
RPMs (000,000) "traffic"46,81233,75538.7%
ASMs (000,000) "capacity"55,22445,74120.7%
Load factor84.8%73.8%11.0 pts
Yield15.92¢13.07¢21.8%
RASM14.91¢10.99¢35.7%
CASMex(b)
9.45¢8.96¢5.5%
Economic fuel cost per gallon(b)
$3.40$2.0169.2%
Fuel gallons (000,000)64653021.9%
ASMs per gallon85.586.2(0.8)%
Departures (000)24420717.9%
Average full-time equivalent employees (FTEs)17,22414,36619.9%
Aircraft utilization9.99.72.1%
Average aircraft stage length1,3471,3241.7%
Operating fleet(d)
2252178 a/c
Regional Operating Statistics:(c)
Revenue passengers (000)9,6739,1395.8%
RPMs (000,000) "traffic"4,5184,842(6.7)%
ASMs (000,000) "capacity"5,5496,704(17.2)%
Load factor81.4%72.2%9.2 pts
Yield29.97¢22.49¢33.3%
RASM25.34¢17.12¢48.0%
Departures (000)160170(5.9)%
Operating fleet (d)
8694(8) a/c
(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)Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)Excludes all aircraft removed from operating service as of December 31, 2022 and December 31, 2021.
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Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2022 to 2019.

FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared with 2019 (unaudited)
Alaska Air Group, Inc.
20222019Change
Passenger revenue$8,808 $8,095 9%
Mileage Plan other revenue590 465 27%
Cargo and other revenue248 221 12%
Total Operating Revenue$9,646 $8,781 10%
Operating expense, excluding fuel and special items$6,328 $5,796 9%
Aircraft fuel, including hedging gains and losses2,668 1,884 42%
Special items580 38 NM
Total Operating Expenses$9,576 $7,718 24%
Total Non-operating Income (Expense)9 (47)119%
Income Before Income Tax$79 $1,016 (92)%
Consolidated Operating Statistics:
Revenue passengers (000)41,46846,733(11)%
RPMs (000,000) "traffic"51,33056,040(8)%
ASMs (000,000) "capacity"60,77366,654(9)%
Load factor84.5%84.1%0.4 pts
Yield17.16¢14.45¢19%
RASM15.87¢13.17¢21%
CASMex10.41¢8.70¢20%
Average full-time equivalent employees (FTEs)22,56422,1262%













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OPERATING REVENUE

Total operating revenue increased $3.5 billion, or 56%, during 2022 compared to the same period in 2021. The changes are summarized in the following table:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Passenger revenue$8,808 $5,499 60 %
Mileage Plan other revenue590 461 28 %
Cargo and other revenue248 216 15 %
Total Operating Revenue$9,646 $6,176 56 %

Passenger Revenue

On a consolidated basis, Passenger revenue for 2022 increased by $3.3 billion, or 60%, on a 33% increase in passenger traffic and a 20% increase in ticket yield. The improvement in traffic was driven by robust leisure demand. The improvement in yield was driven by a combination of increased demand and capacity constraints, leading to higher fares. Although our airlines experienced some operational volatility, demand for both leisure and business travel continued to drive revenue results to historic levels.

We anticipate Passenger revenue for 2023 will increase compared to 2022 on increased capacity and our commercial initiatives, consistent with our overall growth plan.

Mileage Plan Other Revenue

On a consolidated basis, Mileage Plan other revenue increased $129 million, or 28%, as compared to 2021, largely due to an increase in commissions from our bank card partners driven by increased consumer spending and improved economics from our new co-branded credit card agreement.

Cargo and Other Revenue

On a consolidated basis, Cargo and other revenue increased $32 million, or 15%, from 2021. Other ancillary revenue was the primary driver of the year-over-year increase, consistent with the return in demand for travel. Incremental freight revenue also contributed due to greater use of belly capacity, which grew on an increase in scheduled departures.

We expect Cargo and other revenue to increase in 2023 as compared to 2022, driven by growth in our cargo business and greater ancillary revenue.

OPERATING EXPENSES

Total operating expenses increased $4.1 billion, or 74%, compared to 2021. We consider it useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Aircraft fuel, including hedging gains and losses$2,668 $1,279 109 %
Non-fuel operating expenses, excluding special items6,328 5,137 23 %
Payroll Support Program grant wage offset— (914)NM
Special items - fleet transition and other496 (1)NM
Special items - labor and related84 (10)NM
Total Operating Expenses$9,576 $5,491 74 %

Significant operating expense variances from 2021 are more fully described below.
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Fuel Expense

Aircraft fuel expense includes raw fuel expense (as defined below) 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 based on fuel consumption and because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins 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.

Aircraft fuel expense increased $1.4 billion, or 109%, compared to 2021. The elements of the change are illustrated in the following table:
Twelve Months Ended December 31,
2022 2021
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$2,761 $3.64  $1,383 $2.11 
(Gain)/loss on settled hedges(169)(0.22) (57)(0.09)
Consolidated economic fuel expense$2,592 $3.42  $1,326 $2.02 
Mark-to-market fuel hedge adjustments76 0.10  (47)(0.07)
GAAP fuel expense$2,668 $3.52  $1,279 $1.95 
Fuel gallons758  656 

Raw fuel expense increased 100% in 2022 compared to 2021, due to significantly higher per gallon costs and increased fuel consumption. Raw fuel price per gallon increased 73% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. Crude oil prices have risen 37% while refining margins are four times as high as 2021. Increased fuel costs were also driven by a 16% increase in gallons consumed compared to 2021, consistent with a 16% increase in capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge 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 incentive pay plans.

Gains recognized for hedges that settled during the year were $169 million in 2022, compared to gains of $57 million in 2021. These amounts represent cash received from settled hedges, offset by cash paid for the premium cost on related call options.

We expect our economic fuel cost per gallon in the first quarter of 2023 to range between $3.15 and $3.35 per gallon based on current market West Coast jet fuel prices.

Non-fuel Expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel, the Payroll Support Program grant wage offset and special items. Significant operating expense variances from 2021 are more fully described below.

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 Twelve Months Ended December 31,
(in millions)20222021% Change
Wages and benefits$2,640 $2,218 19 %
Variable incentive pay257 151 70 %
Aircraft maintenance424 364 16 %
Aircraft rent291 254 15 %
Landing fees and other rentals581 555 5 %
Contracted services329 235 40 %
Selling expenses295 173 71 %
Depreciation and amortization415 394 5 %
Food and beverage service197 139 42 %
Third-party regional carrier expense182 147 24 %
Other717 507 41 %
Total non-fuel operating expenses, excluding special items$6,328 $5,137 23 %

Wages and Benefits

Wages and benefits increased during 2022 by $422 million, or 19%, compared to 2021, excluding the impact of the Payroll Support Program grant wage offset. The primary components of Wages and benefits are shown in the following table:
 Twelve Months Ended December 31,
(in millions)20222021% Change
Wages$2,024 $1,643 23 %
Pension - Defined benefit plans45 52 (13)%
Defined contribution plans160 126 27 %
Medical and other benefits263 275 (4)%
Payroll taxes148 122 21 %
Total wages and benefits$2,640 $2,218 19 %

Wages and payroll taxes increased by a combined $407 million, or 23%, on a 17% increase in FTEs as Alaska, Horizon, and McGee hired to support the ramp up in operations. The ratification of five labor agreements during the year resulted in significant wage increases for the represented groups. As a result of the new agreements, the Company recorded $97 million in incremental wage expense during the year, $16 million of which relates to a one-time adjustment of accrued benefits for new wage rates. Increased expense for defined contribution plans and payroll taxes are consistent with the change in wages.

We expect wages and benefits expense to be higher in 2023 compared to 2022 given expected growth in overall FTEs needed to support our planned capacity growth, as well as the annualization of cost increases due to the five labor agreements in 2022. Our new ALPA contract also includes a clause that could further increase pay-rates as a result of other airlines' new labor agreements following a market comparison that will occur in the fourth quarter 2023. Our guidance does not include the impacts of any future agreements we may reach in 2023, most notably with our Mainline flight attendants whose contract became amendable in December 2022.

Variable Incentive Pay

Variable incentive pay expense increased to $257 million in 2022 from $151 million in 2021. The increase is primarily due to higher payouts achieved under the Performance Based Pay Plan. The higher payouts were achieved by exceeding certain profitability, safety, and emissions targets, as well as by finishing the year with the highest adjusted pretax margin among U.S. airlines.

Aircraft Maintenance

Aircraft maintenance costs increased by $60 million compared to 2021. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft recorded in the first quarter of 2022 and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.

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We expect aircraft maintenance expense to be higher in 2023 due to increased aircraft utilization and a new power-by-the-hour contract for our B737-900ER fleet.

Aircraft Rent

Aircraft rent expense increased $37 million, or 15%, compared to 2021. Increased expense is due to the delivery of five leased B737-9 aircraft and ten leased Embraer E175 aircraft operated by SkyWest since December 31, 2021.

We expect aircraft rent to decrease in 2023 driven by lease terminations in 2022 for certain Airbus and Q400 aircraft, partially offset by incremental deliveries of leased B737-9 aircraft during 2023 and the annualization of expense of lease deliveries in 2022.

Landing Fees and Other Rentals

Landing fees and other rental expenses increased $26 million, or 5%, compared to 2021. Landing fees rose significantly in Seattle and San Francisco, driven by rate and departure increases. Airport rents rose significantly in Seattle, Portland, and the New York metropolitan area, driven by passenger increases. These increases were partially offset by favorable resolution for certain pandemic period airport accruals, as well as decreases to landing fees and airport rents in other locations we serve.

We expect landing fees and other rental expense to increase in 2023 as we continue to increase capacity and departures across our network.

Contracted Services

Contracted services increased by $94 million, or 40%, compared to 2021, driven primarily by increased departures and passengers in line with increased demand, coupled with increased rates charged by vendor partners.

We expect contracted services to increase in 2023 as we continue to increase capacity and departures throughout our network.

Selling Expenses

Selling expenses increased by $122 million, or 71%, compared to 2021 primarily driven by higher credit card commissions and distribution costs incurred from both an increase in bookings and an increase in fares as demand for travel returned. Commissions and fees associated with alliances and business travel also contributed to the increase.

We expect selling expense to increase in 2023, due primarily to higher sales and an increase in marketing costs as we expand our network.

Food and Beverage Service

Food and beverage service increased by $58 million, or 42%, compared to 2021, primarily driven by the 28% increase in revenue passengers as well as additional offerings of on-board products as compared to the prior-year period. Higher costs for food, food service supplies, and transportation also contributed to the increase.

We expect food and beverage service to increase in 2023 as we continue to increase capacity and departures throughout our network.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA agreements, increased $35 million, or 24%, in 2022 compared to 2021. The increase in expense is due to incremental departures flown by SkyWest with ten additional aircraft in operating service, as well as the prior year impact of CARES Act PSP funding for SkyWest pilot and flight attendance wages.

We expect third-party regional carrier expense to be higher in 2023 on the annualization of expense for the ten E175 aircraft deliveries in 2022 under the CPA with SkyWest.

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Other Expense

Other expense increased $210 million, or 41%, compared to 2021. The most significant drivers of the increased cost were training events and related travel costs, crew hotel stays, and crew per diem. Increases in crew-related costs are consistent with the rise in departures. The increase within Other expense also includes $28 million incurred for employee recognition related to the 90,000 mile gift granted to all employees.

We expect other expense to increase in 2023 as we increase departures and hire more employees, resulting in incremental crew costs.

Special Items - fleet transition and other

We recorded expenses associated with fleet transition and other of $496 million in 2022. Refer to Note 2 to the consolidated financial statements for additional details.

We will continue recording special charges in 2023 associated with our mainline fleet transition in 2023, primarily due to the expected retirement of the Airbus A321neo aircraft.

Special items - labor and related

We recorded an expense of $84 million in 2022 primarily for a one-time bonus for Alaska pilots following the ratification of a new collective bargaining agreement.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 13 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline operations reported an adjusted pretax profit of $855 million in 2022, compared to an adjusted pretax loss of $179 million in 2021. The $1 billion improvement was primarily driven by a $3.2 billion increase in Passenger revenue, offset by a $1.1 billion increase in economic fuel cost and a $1.1 billion increase in non-fuel operating costs.

As compared to the prior year, higher Mainline revenue is primarily attributable to a 39% increase in traffic and a 22% increase in yield, driven by a historically strong demand environment. Non-fuel operating expenses increased, driven by higher variable costs, largely consistent with the overall growth in capacity and departures. Higher fuel prices, combined with more gallons consumed, drove the increase in Mainline fuel expense.
Regional

Regional operations reported an adjusted pretax loss of $76 million in 2022, compared to an adjusted pretax loss of $210 million in 2021. Improved results were attributable to increased operating revenue of $259 million driven by higher demand and yields, partially offset by a $136 million increase in fuel expense driven by higher fuel prices.

Horizon

Horizon reported an adjusted pretax loss of $46 million in 2022 compared to an adjusted pretax profit of $12 million in 2021. The shift to adjusted pretax loss is driven by lower CPA revenue on decreased departures, combined with higher wage and benefit costs on incremental FTEs and increased wage rates resulting from the new collective bargaining agreements with Horizon employees.

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LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sources of liquidity are:

•Existing cash and marketable securities balance of $2.4 billion;

•Cash flows from operations;

•73 unencumbered aircraft that could be financed, if necessary;

•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million

Improved results and increased demand in 2022 allowed us to strengthen our balance sheet and available liquidity as we prepare for growth in 2023 and thereafter. Key liquidity and capital resources updates from the year include:

•Generated positive operating cash flow of $1.4 billion, bolstered by improved advance bookings in a historic demand environment as well as our co-branded credit card agreement with Bank of America. Operating cash flows included $295 million in federal income tax refunds;

•Repaid $385 million in debt and ended the year with a debt-to-capitalization ratio of 48%;

•Took free and clear delivery of 21 owned B737-9 aircraft and 3 owned E175 aircraft;

•Announced plans to resume share repurchases in early 2023, to be made pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015, which has remaining authorization of $456 million.

We anticipate funding our planned 2023 capital expenditures of $1.8 billion to $2.0 billion with cash and marketable securities on-hand. We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.

In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.

The table below presents the major indicators of our financial condition and liquidity: 
(in millions)December 31, 2022December 31, 2021Change
Cash and marketable securities$2,417 $3,116 $(699)
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue29 %57 %(28) pts
Long-term debt, net of current portion$1,883 $2,173 $(290)
Shareholders’ equity$3,816 $3,801 $15 

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Debt-to-capitalization, adjusted for operating leases
(in millions)December 31, 2022December 31, 2021Change
Long-term debt, net of current portion$1,883 $2,173 (13)%
Capitalized operating leases1,621 1,547 5%
Adjusted debt$3,504 $3,720 (6)%
Shareholders' equity3,816 3,801 —%
Total invested capital$7,320 $7,521 (3)%
Debt-to-capitalization, including operating leases48%49%

Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)December 31, 2022December 31, 2021
Current portion of long-term debt$276