Alaska Air Group, Inc. 2026 Q3 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2026 third quarter earnings call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers' remarks, we will conduct a question and answer session for analysts. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Planning, and Investor Relations, Ryan St. John.

Thank you, operator, and good morning. Thanks for joining us today to discuss our third quarter 2026 earnings results. Yesterday, we issued our earnings release detailing our results, which are available at investor.alaskaair.com. Today, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. Air Group reported a third quarter GAAP net loss of $147 million, or $1.32 loss per share. Excluding special items and the impact of a revised tax rate, adjusted net income was $40 million, and adjusted earnings per share was $0.36. As a reminder, forward-looking statements about future performance may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings.

We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit cost, excluding fuel. As usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben. Thanks, Ryan, and good morning, everyone.

Just a few weeks ago, we laid out the next chapter for Alaska Air Group and our path to becoming a larger, more diversified, and more resilient business. Our third quarter results reinforce our confidence in that strategy, despite unprecedented fuel prices that are adding $1.8 billion in cost this year and pressuring our profitability. Demand remains healthy. Revenue performed in line with our expectations, and we continue to execute across our initiatives in Premium, Loyalty, Cargo, and International, all helping to drive a 7-point RASM to CASMex spread for the quarter, up from two points in Q2. We continue to see strong momentum across the four strategic growth areas we highlighted at our investor day. We said the first chapter of Alaska Accelerate was about building the foundation, and the next chapter was about harvesting the value from it.

That transition is underway. The investments we've made over the last several years are driving greater scale, deepening our relevance with guests, and strengthening loyalty across our geographies. Diversified revenues now represent 54% of our total mix, up 4 points from last year and 1 point from last quarter. As this mix continues to grow, our earnings will become less dependent on fuel and more resilient. Premium demand remains robust, with revenues reaching more than 35% of our total mix, up 3 points year-over-year. That reflects the strength of our products and our growing relevance across the West Coast and beyond as we build toward our 40% target by 2030. Our international franchise in Seattle is growing rapidly. We're excited to announce that next spring, we'll launch year-round service from Seattle to Osaka, Japan, and Papeete, Tahiti.

That brings our nonstop international routes out of Seattle to nine as we build toward 15 and our goal of becoming Seattle's number one long-haul international carrier by 2030. We see even more opportunity ahead as we prepare to file with the DOT to join the Atlantic and Pacific Joint International Businesses in the coming weeks. Loyalty program cash grew 21%, another strong indication that the investments we're making are driving greater relevance and deeper loyalty with our guests. Lastly, cargo revenue grew 9%. We're optimistic about growing this business to a more meaningful level as we deploy our new 737 freighters in Alaska and Hawaiian next year and work toward renewing our partnership with Amazon with better economics and expanded service. Our focus remains on the things we can control, and as we're demonstrating, those things continue to move in the right direction.

We know we can do better than the results we're producing today. That's precisely why we're focused on the areas of the business we believe will drive higher and more resilient earnings over time. Premium, international, loyalty, and cargo are the path forward, and increasingly, we'll see the investments we've made over the last several years translate into tangible results across the business. We're doing it with a team that is engaged, energized, and excited about the future. I want to thank our employees for their continued commitment to our guests and to one another. Their dedication makes everything we're accomplishing possible, and it gives me tremendous confidence in the opportunities ahead. As we look to our next chapter, we're excited to welcome Amaresh Siva, our new Chief Information Technology Officer.

He brings deep experience and strong leadership to the role, and I know he'll be an important partner as we continue to build the capabilities that will support Air Group's future. We have a lot of work ahead of us, but I'm confident in our strategy and in this team. Now it's about execution and delivering the results. Andrew, over to you. Thanks, Ben, and good morning, everyone.

Today, I will walk through our third quarter financial performance, near-term demand and revenue, and the ways we are continuing to diversify and strengthen our revenues as part of Alaska Accelerate. In the third quarter, total revenues reached $4.3 billion, up 14% year-over-year, while capacity grew 2.4%. Unit revenue increased nearly 12%, in line with our expectations of low double-digit growth. Yield for the quarter grew 13.4%, with strong sequential improvement each month from 11% in July and finishing with a particularly strong September, up approximately 17% year-over-year. We achieved this result despite several factors impacting our coupon unit revenues, which we believe are temporary in nature, including approximately three points of pressure from strategic growth markets we outlined at Investor Day, which represent about 13% of our capacity and are growing more than 20%.

As this capacity matures, like trends we have seen in San Diego, we expect meaningful improvement in year two yields and loads, along with loyalty and corporate market share. Another one point of pressure from the rapid growth of our international long-haul flying. We expect this dynamic will continue near term as we add new routes, but we are encouraged by the progress we are seeing. As our international franchise matures, we see a clear opportunity to improve performance. A continued two-point headwind from Hawaii, excluding where we undertook double-digit capacity growth, which is included in my first point, as improvements in this market have been outpaced by those across the rest of the system. As we discussed before, this is one market where our competitive advantage is clear and differentiated.

One of the reasons we remain confident in Hawaii over the long term is that no one is more invested in the market. The Big Four have less than 4% of their network invested, nor understands the travelers and their unique needs better than we do. Just as we have demonstrated in Seattle, our sustained focus and leadership have built a competitive advantage that is difficult to replicate and will only strengthen over time. To summarize, today, over 40% of our system is absorbing six points of unit revenue pressure that we do not expect to persist long term. Many of these investments across the network are necessary to increase our West Coast passenger share, capture more premium and corporate demand, and drive industry-leading loyalty in our geographies. As our growth annualizes and international markets mature, we see real opportunity for improvement starting in 2027.

Premium traffic remained one of our strongest revenue performers, growing approximately 24.5% year-over-year and reaching more than 36% of total revenue. That is up three points versus last year. With our narrow body premium retrofits complete, we will capture the full annualized benefit next year, and we still have meaningful runway ahead as we expand premium offerings across our wide-body fleet over the next few years, giving us confidence in our path towards a 40% premium revenue mix and the earnings opportunity that comes with it. Managed corporate revenues increased 30% in third quarter, and future bookings are also running approximately 30% above prior year levels, reflecting share gains across both business and large leisure agencies.

For London Heathrow, our business class cabin performance exceeded our fair market share by 3 points in the third quarter, demonstrating our ability to convert our strong domestic corporate performance into international share as we grow our international footprint and expand our premium portfolio, making us a more relevant partner and creating meaningful long-term share opportunities. Loyalty continues to be one of the strongest proof points that our strategy is working. Program cash remuneration of $721 million increased 21% during the quarter, supported by strong card spend and continued engagement across the ecosystem. We are particularly encouraged by the performance of our premium Summit card. Just one year after launch, roughly half of cardholders are new to our portfolio, 40% come from outside our core geographies, and international spend is running several times higher than the rest of the portfolio.

Although the strength of that card product launch creates a year-over-year headwind for us in the fourth quarter, we still anticipate strong annual program cash growth through 2030, in line with the targets we shared a few weeks ago. Looking ahead to the fourth quarter, the demand environment remains healthy, supported by continued strength in pricing and yield trends across much of the network. Held yields for each month in Q4 are currently up double digits versus last year. We expect capacity growth to moderate to approximately 1%-1.5% year-over-year, with most of that growth coming from international. With continued momentum across premium and corporate travel, we expect fourth quarter unit revenue performance that is broadly in line with the strength we saw in the third quarter, up low double digits. To close, the commercial strategy we laid out at Investor Day is working.