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Text: Information on risk factors that could affect our business, can be found in our SEC filings.
We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel.
Over to you, Ben.
In 2021, Alaska has established a track record of leading the industry in the recovery from the pandemic.
This has been enabled by the strength of our business model, our measured approach to capacity and our financial discipline.
Our 2.4% pre-tax margin in the fourth quarter continues that trend, especially considering the disproportionate impact that severe weather had on our hubs, and the Omicron-related impacts we began to face at the end of the year.
While I'll discuss the impact of weather on our fourth quarter and the impact of Omicron on our first quarter, let me start by saying, both of these are temporary challenges that do not deter my confidence in our underlying business model and its ability to outperform the industry.
Starting with recent events.
The combination of severe snow, multiple consecutive days of sub-freezing temperatures in our Pacific Northwest hub and stacking disruptions caused by the Omicron variant, resulted in one of the challenging holiday travel periods we have ever experienced.
Our completion factor was extremely challenged at the end of the year, which resulted in flying approximately 1 point less than our expected capacity in the quarter and 2.5 points less than we planned to operate in December alone.
In terms of the financial impact of these events, they were material.
Our fourth quarter result was worse by approximately $70 million, and our pre-tax margin was reduced by 3.5 points.
Even with this outsized impact, Alaska was profitable in Q4 and strongly led the industry in pre-tax performance over the second half of 2021.
In response to the ongoing impacts of Omicron in early January, we proactively reduced our remaining Q1 scheduled client by about 10%.
I am pleased to report that Omicron absences are down significantly, and our operation is once again stable.
Omicron has not only impacted our ability to operate fully and has dampened closer to the mainline substantially as well.
Andrew will provide more detail on the demand environment.
But the silver lining is that demand for travel from presence date and beyond, remain strong and booking trends have rebounded week over week since their low point in early January.
We expect the bulk of the Omicron impact to be felt in the first quarter, specifically in January and February, as revenue has reduced and as unit costs are pressured, given lower ASM production and higher staffing-related costs.
However, as I opened with, this will be short term in nature and has not changed our expectations about the overall recovery.
Clearly, this was a tough way to end a year that otherwise had progress worth celebrating.
First, our revenues recovered to $6.2 billion or 70% of 2019 levels, and we achieved this while flying less capacity than many of our peers, who had similar revenue-recovery results.
Second, while the full year adjusted pre-tax loss was $342 million, we recorded $282 million of adjusted pre-tax profit during the second half of the year.
Our second-half adjusted pre-tax margin was over 7%, clearly outperforming the industry, even though West Coast travel has recovered slower than much of the country.
Third, with decent demand recovery and disciplined cost management, we returned to positive operating cash flows.
Excluding any CARES funding, we generated more than $100 million in operating cash flow for the year, which reflects $100 million pension contribution we funded in the third quarter.
Fourth, as profits and cash flow returned to positive territory, we have essentially repaired our balance sheet.
We closed the year with a 49% debt-to-cap ratio, 12 points lower than prior year and within our target range.
And lastly, given we were able to meet or exceed several of our recovery goals, our employees earn the industry's highest bonus pay through our incentive-based pay program.
For the average employee, this payout amounts to about 6.2% on top of their annual pay.
All told, I'm really pleased to report that our bonus programs will pay out $151 million to our employees for the year.
In addition to these financial milestones, we also cemented several critical strategic decisions during 2021 that will help drive our success well into the future.
We made the decision to return to a single fleet of Boeing aircraft, which will drive revenue and cost benefits.
The remaining 27 Airbus A320s that are flying today, will be retired by the end of 2023, enabled by our Boeing MAX order of 93 firm and 52 options.
We joined oneworld and launched our West Coast international alliance with American Airlines, which will unlock additional revenues and loyalty across our West Coast hubs, especially in Seattle.
We announced sustainability goals, committed to net zero carbon emissions by 2040 and further embracing a sustainability mindset by linking a portion of our annual performance-based pay plan for all employees to the carbon intensity of our operations.
We also integrated this goal into our executive compensation targets.
Let me close with a brief look ahead at 2022.
Like our industry peers, Q1 will clearly be impacted by Omicron, both for revenues and unit costs.
We do believe that virus will move to endemic status and that demand will ultimately stabilize.
And when it does, our business model is set to outperform.
Notwithstanding a challenging first quarter, we expect to be profitable for the month of March and for the remainder of the year.
We remain committed to returning to pre-COVID capacity by the summer and plan to grow from there.
I expect full year capacity to be up versus 2019, between 2% and 6%, dependent on demand.
This guidance reflects first-half capacity that is flat, to slightly up and second-half capacity that could be up as much as 10% versus 2019.
As we did throughout 2021, we will continue scaling our business back in a measured way, leveraging our strong balance sheet and running our operation to produce consistent, industry-leading financial performance in 2022.
I hope you'll join us at our upcoming investor day.
We plan to share our long-term expectations, including comprehensive 2022 guidance.
This event is set for March 24 in New York.
It is no secret that this is a tough business, but the pandemic has surprised and challenged even the most seasoned in our industry.
The strength of our company comes from our people and culture of care, our focus on safety and operational excellence, our reputation for customer service and our financial discipline.
I am confident these strengths will serve us well again in 2022.
Fourth quarter revenues totaled $1.9 billion and were only down 15% versus 2019, which was better than our guide.
And with flowing capacity also down 15%, our fourth quarter unit revenues were flat in 2019.
As Ben mentioned, end-of-quarter weather disruptions were significant, impacting revenue by approximately $45 million.
Even with these setbacks, our revenue recovery improved by 3 points from what we viewed was a relatively strong third quarter.
Load factors showed continued improvement throughout the quarter as well, progressing from 75% in October to 80% in November and 83% in December, signaling demand for travel continues to move in the right direction.
The strength of this demand clearly played out in our November revenue results.
November revenues were down just 7% versus 2019 on 12% less capacity.
My take from that result is that our fundamental revenue results were better this November than in 2019.
Even though we've not seen anywhere close to a full business demand recovery, the full impact of our oneworld and American partnerships or a complete West Coast recovery.
Our network is well-positioned for recovery.
Another encouraging indicator of yields, which ended the quarter up 3% versus 2019.
This was driven by the strength of holiday bookings and solid demand management by our RM team, despite the Delta and Omicron variants bookending the quarter.
For the winter holiday period, we were on pace for flat-to-positive load factors and double-digit yield gains, prior to the impact of the winter disruption.
They came together as a fully integrated team and did a tremendous job stimulating demand and welcoming guests back to flying, managing loads and yields and taking care of guests during disruptions.
The net result of all of this was posting the best unit revenue performance in the industry for the second half of 2021 is down just 0.5%.
As we've seen all year, guest preference for our first- and premium-class products remained strong in the fourth quarter.
First-class-paid load factor ended the quarter up 2 points and premium-class-paid load factor was up 8 points, both versus the fourth quarter of 2019.
Royalty strength also carried through year end, particularly from our credit card program.
Our bank card remuneration reached record levels in the fourth quarter, up 13% versus the fourth quarter of 2019.
We have a tremendous partner in Bank of America, who issued our co-brand card.
And we're excited about the highly engaged cardholder base that we've established together.
Looking ahead, while the impact of Omicron will be transitory, each successive variant has been expensive for our business.
Impacts also blend in the February 3 Presidents Day, but at a much reduced rate from January.
We estimate Q1 bookings lost to this way by approximately $160 million.
As Ben mentioned, we've seen bookings start to recover from down 40% versus 2019 in the first week of January, to around 25% today.
March loads and yields are strong.
And we expect them to remain this way, as the negative impact of the variant continues to subside.
Given the abrupt softening of close-in demand, we've moderated our capacity plans in the first quarter.
We will fly approximately 10% to 13% below the same period in 2019.
With the lost bookings in January and February, we expect total revenues in Q1 to be down 14% to 17% from 2019 levels.
Q1 is our seasonally weakest quarter.
And while it's unfortunate, it will be significantly impacted by Omicron, I prefer Q1 was impacted versus any other quarter.
We do anticipate that when Omicron moves behind us, demand will snap back to recovery path we were seeing, leading into the holidays.
As that has been the trend after prior waves, spring and summer travel should be strong on the leisure side and benefit from further unlocking of business and international travel.
I look forward to quantifying our expectations for the full year, but we're saving many of those details for our upcoming investor day.
That said, I do want to speak in a bit more detail about our '22 capacity plans.
As Ben shared, we're targeting to return to pre-COVID capacity by the summer and the growth through the back half of the year for full year 2022 capacity growth of between 2% and 6%, depending on demand.
In Seattle, we are already above pre-COVID capacity.
A material portion of our planned growth in the back half of 2022 will be from our Pacific Northwest hubs, as we look to continue to enhance relevance and scale, mostly through scheduled debt.
California demand has recovered more slowly than the rest of the network.
But as we bring California fully back in '22, I'm excited about the opportunities that await us.
This must be brought onboard a new regional vice president of California, Neil Thwaites, who will be a pivotal part of growing our presence in the state, from both a business and leisure perspective.
From a commercial perspective, I'm anxious to capitalize on a full recovery.
I believe, we have the right cost structure, the right commercial offerings and the right balance sheet to allow us to grow versus 2019, as the recovery continues to unfold.
We have flexibility to adjust our capacity as needed to match supply with demand, and we are looking at the back half of 2022 as a period that pivots from capacity recovery to one of capacity growth.
And as we plan for growth across our West Coast hubs, we're eager to maximize the potential of our Loyalty program and leverage the international capabilities of our oneworld partners to provide our guests with global access.
Beginning summer of 2022, British Airways will fly non-stop service from Portland to London, Heathrow, and Finnair is set to launch non-stop flight from Seattle to Helsinki.
This summer, Alaska partners will have over 100 non-stop flights per week of the West Coast to Europe.
We've been navigating the ups and downs of this pandemic for nearly two years now.
And while we know the first quarter will be weaker than we expected just a month ago, I'm very optimistic about how we are positioned for March and beyond.
And with that, I'll pass it to Shane.
I'll start, as I always do with an update on cash flow, liquidity and our balance sheet.
We ended the year with $3.5 billion in total liquidity, inclusive of on-hand cash and undrawn lines of credit, which is essentially unchanged from Q3 and reflects $112 million in debt repayments during the quarter.
Our Q4 cash flow from operations was $129 million, above our previous guidance, largely driven by stronger demand recovery than anticipated, given we were dealing with the now old news Delta variant, as we came into the quarter.
Our balance sheet remains a bright spot in point of differentiation within the industry.
This year, our debt-to-cap ratio fell to 49%, 12 points below year-end 2020, placing us within our stated target range and as Ben said, essentially back to our pre-COVID balance sheet strength.
In fact, in a period marked by increasing debt across the industry, our adjusted net debt ended the year 40% lower than 2019.
We're pleased to have received a credit upgrade in late December as well, moving us one step closer to an investment-grade rating.
The weighted average effective rate of our outstanding debt is 3.3% and our debt service is entirely manageable going forward.
Contractual debt repayments in 2022 are about $370 million with $170 million in Q1.
Given the low-cost nature of our debt, we don't plan to make any significant prepayments during 2022.
Rounding out the strength of our balance sheet, our pension plans ended the year at 98% funded, the highest level we've achieved since 2013.
Our strong balance sheet and ample liquidity put us in a terrific position to pay cash for the 32 737-9 aircraft deliveries we have in 2022.
We feel very comfortable with our liquidity position, especially given our belief that we are back to annual profitability and consistent annual positive cash flow generation.
By the end of 2022, I expect our total liquidity will step down to around $2.5 billion.
Our net debt-to-EBITDA to settle around two times or less.
Turning to the P&L, our 2.4% pre-tax profit was a solid outcome, given the circumstances in the quarter.
Andrew spoke to the revenue results, and I'll dive into our cost.
Our non-fuel costs were $1.4 billion in the fourth quarter, inclusive of approximately $25 million of unexpected costs from the December disruption.
This was driven by approximately $18 million for overtime and wage premiums, as we worked to stabilize the operation from staffing disruptions, and $7 million incurred for passenger remuneration, EIC and other related costs.
Typical bad weather event for Alaska might last a couple of days and impact a single hub.
The December event lasted an entire week, impacted both Seattle and Portland and was exacerbated by the start of a surge in Omicron-related staffing shortages.
In short, a literal perfect storm.
As Andrew indicated, the revenue impact of our cancellations was $45 million.
And given the $25 million in incremental cost, this event alone raised $70 million of profit from the December month and quarter.
The combination of lower ASM production and higher costs, resulted in our CASMex being up 12% versus 2019 outside the high end of our range.
Absent the disruption, our cost results would have been in line with our guide.
Looking ahead on costs, our commitment to returning to 2019 CASMex levels remains unchanged.
We know we've got our work cut out for us.
Our business model drives some predictability and execution.
And it is obvious that COVID has inserted a level of volatility into our industry that makes managing a high fixed-cost business more difficult.
2022 will start off very challenged, but we fully expect it to sequentially improve materially, as the year progresses.
For the first quarter, Q1 CASMex is expected to be up 15% to 18% and capacity down 10% to 13% versus 2019.
7 points of this is purely driven by our late pull down of first-quarter capacity.
While the reduction will help ensure our ability to operate the flights we sell, given Omicron's impact on staffing, and as a hedge against lower-closing demand.
The reality is, we cannot pull out most cost.
Absent the capacity pull down, our unit cost guide would have been up 8% to 11%.
In addition, our costs in Q1 include two items contributing another 3.5 points of pressure that are worth detailing.
First, approximately 2.5 points of our Q1 unit cost increase is related to lease return expenses for our Airbus aircraft.
As previously noted, given the speed with which we plan to return to a single fleet, we will be incurring significant costs associated with returning these leased Airbus aircraft, primarily over the next two years.
I currently expect the total waste return expense to be between $200 million and $275 million in total with more than half of that being recorded this year.
These transitory return costs begin in earnest in the first quarter of 2022 will peak by Q4 of this year and will then taper through 2023, as the last A320 leaves the fleet.
So while a headwind right now, it will become a tailwind to our cost structure in the next eight quarters, which will be further helped as we replace the 150-seat Airbus with the 178-seater, cost-efficient Boeing 737-9 aircraft.
Second, approximately one point of our expected Q1 unit costs are being driven by incremental trading costs and wages of newly hired employees, as we prepare to recover to pre-COVID capacity by the summer.
To move from 80% to 85% of pre-COVID flying to 100% and then beyond, we must staff up early, given the throughput capacity of our hiring and training infrastructure.
We expect fuel prices to be between $2.45 and $2.50 per gallon in Q1, also increased from the last quarter.
Despite this quarter's cost guide, largely driven by the late pull down of capacity that I noted, we expect significant sequential improvement in unit cost, as we recover capacity throughout the year.
We expect full year 2022 unit costs inclusive of lease return expense, to be up 3% to 6%, and on an ex-lease return basis, to be up 1% to 3%.
This estimate implies returning to our pre-COVID cost structure during the second half of the year.
This entire pandemic and our recovery has been, obviously, unpredictable, but I'm excited about what lies ahead for Alaska.
I truly believe we've set up our business to deliver superb results, as demand fully stabilizes.
With continued focus on our cost initiatives, fleet transition and our commercial opportunities, we have valuable levers that set us up for a great next couple of years.

user
alaska air group delivers strong fourth quarter 2021 and full-year results.
alaska air group sees q1 capacity (asms) change versus 2019 down 10% to 13%.
sees q1 capacity (asms) change versus 2019 down 10% to 13%.
sees q1 total revenue % change versus 2019 down 14% to 17%.
sees q1 cost per asm excluding fuel and special items change versus 2019 up 15% to 18%.
in late dec, early jan, omicron drove significant increase in employee absences, having acute impact on ability to fully operate.
proactively reduced our q1 scheduled flying.
close-in demand also weakened amidst the omicron surge, specifically impacting january and february bookings.
have recently seen demand start to recover, with bookings strengthening for presidents day and beyond.

assistant