TD Cowen Conference Fireside Transcript

internally

we're moving from peak friction to peak execution.

Give us a quarter or two. We'll get back into full execution mode. We expect to optimize the business further, to lean out the cost structure further, to go get the value from the investments we've made on the premium side of the business, and to really enjoy the combined company, the two brands, and the success, I think, that lies ahead for the companies.

Thomas Fitzgerald, Analyst, TD Cowen

I think that's a good segue into maybe more strategic long-term questions. The airline industry is notoriously difficult to survive in, but Alaska recently celebrated its 94th birthday. Congratulations. Scale, relevance, and loyalty played a big part in your success over almost a century. Can you talk about how the Hawaiian acquisition enables you to deepen scale, widen your relevance, and drive accretive growth and loyalty?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah, for sure. I appreciate the question, too, because it's more longer-term focused and strategic over a number of years. One thing — I won't belabor this, and I'm going to get the stat wrong — our prior CEO, Brad Tilden, often talked about that when he started, I think we were the 27th largest airline in the country, and we're the fifth now. And at the time, I don't think we had actually leapfrogged anybody. They just went away. And so that was the history of the industry. Heads down, run a good business, understand what drives the economics and consumer choice, and focus on that.

The industry, as it's situated today, is as competitive as ever. But it's also in a phase of being able to invest in its product in a way that wasn't the case when I started in the industry in the 2000s, when product was being taken off planes. That's what's been so exciting about the last several years for many of us in the industry. We get to go reinvest in experiences for our guests across all of our customer segments, in every seat in the aircraft. The Hawaiian acquisition and bringing the Hawaiian brand into the family just made all the sense in the world to us.

We needed more scale. Scale is going to be an important feature of successful airlines over the next 10, 15, 20 years. It was in a geography where we had more than 10 years of experience serving. We understood our guests' desires to vacation in Hawaii, and that had been a strong source of durable profitability for the company for a long time.

That was impaired a bit when some others chose to come into the market, and it gave us a chance to become the carrier of choice — not only into Hawaii off the West Coast, which we are, but also amongst resident Hawaiians in all of their flying. There's quite a bit of flying they do. Anywhere they go, they have to get off the island, whether it's between islands or back here to the continental 48.

And we're starting to see that. We're starting to see the loyalty accrue back over to the

Hawaiian Airlines brand and the Alaska Air Group network. This is pretty simple airline

economics

if you were flying off the islands before the acquisition, you were terminating at whatever place you landed. You had no chance to continue on, and we can now connect folks.

People who were vacationing to Hawaii on Hawaiian out of California — we were flying somebody else for all of the rest of their trips. There is a huge opportunity for us to go get all of that flying into our network now, given not only our network in the lower 48, but the

American Airlines partnership we have, which is really a strong partnership with great connectivity around the country.

So those two things — entry into the WCIA with American, the acquisition of Hawaiian, the connecting of these two networks — it's a premium market, a premium-oriented market. It fit everything that we felt you'd need to credibly have a viable business model in the future

of the industry

scale, premium orientation, and the ability to get people off of other airlines and onto you for flights they're already taking.

That was the thesis of the acquisition, and honestly, we don't have time to go through all the math; it's proven out as we look at the post-audit on all of this stuff. It's working really well.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah. So at Investor Day, there was a lot of various initiatives that got outlined. I think the team targets about $400 million in incremental profits on the network side, about $175 million of those from acquisition synergies. Would you dig into the network flywheel the deal creates — whether it's opening up long-haul out of Seattle, Portland becoming more of a connecting hub, enabling some growth in San Diego, and then adding the premium market in Hawaii? I would imagine it's a big redemption market for some of the West Coast travelers.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

For sure. Well, you sort of named them, Tom, but I'll repeat kind of what you said. Let's start with Portland. Portland is an amazing market for us. I think we've been the largest carrier there for the entire time I've been at the company. We want to grow Portland further; we're going to grow Portland further. We just opened a brand-new lounge down there this week — it's amazing. They did a big overhaul of the lobby experience and the gate experience at

Portland. It's one of the nicer airports you could possibly go through.

It's also really good for connecting traffic just operationally. It's less constrained than

Seattle. Our Portland connections are double today versus last year, which is probably faster than we had anticipated. That just says we need to put more nonstop flights in and then bring more connecting traffic through.

The big unlock with that — it's a better customer experience if you're coming out of Boise, say. It doesn't matter if you go to Seattle or Portland; it's a great airport, really quick connections. But that allows us to open up space in Seattle, which is more constrained, to take connections for international flying. We've been really amazed at the amount of connectivity that we've drawn through the middle of the country through Seattle to Asia, for instance, and then to recapture local customers who are probably spilling to competitors today.

The growing thesis is that's what we need to do. We need to up-gauge Seattle, get more of the local folks back. Every time we go supply the market with more seats, we see people come back to us that we were probably spilling to others, and we've got to keep those connections open to fill the widebody aircraft. So that network thesis is working really, really well.

San Diego — we saw an opportunity to go into a market that looks like a market that would really appreciate what we have to offer and what the Northwest brings. The demographics

— they just feel a lot like the type of guests that are naturally attracted to us. It's been really fun to watch. We've put more capacity in there more quickly than I think we've put anywhere in the recent history of the company, and it's doing quite well.

It's going to take time to mature, but if you just ran the math of this much capacity versus what it should do to unit revenues, you would have thought it would have done appreciably worse. It's actually holding its own.

So I think the products, the brands, what we're bringing to the market, the loyalty programs

— it's the fastest-growth market for loyalty and credit card signups that we have in the network today, and we're excited about what we can do with it in the future.

The only other thing I'll say — where you really want to see the benefit of network effects is loyalty and loyalty cash remuneration, even before the new bank deal. Volume growth in both membership and credit cards is 12%, 14%, 15% year-over-year. We're going to continue to look to have double-digit growth rates as we go forward. There is a lot of remaining opportunity in the new loyalty platform, which we've named Atmos.

Thomas Fitzgerald, Analyst, TD Cowen

Would you remind us where you see Seattle going in terms of being a global hub by the end of the decade, and just your 787 order early in the year?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. Very early on, we put a bold vision out there: 12 cities served by 2030. We have a line of sight to 17 787 aircraft by 2035. Great order book with Boeing. Hopefully, all of those aircraft are Seattle-originating. There could be uses for those aircraft out of Honolulu as well. Yeah, 12 cities — it's going to be the places people want to go. If you look at our initial composition of traffic, it's pretty remarkable, Tom. London is 70% loyalty members out of the gate; Rome is 65% or 70% loyalty members out of the gate; Reykjavik is 55% or 60%;

Asia is 30% or 40%.

I actually think those numbers are interesting. On the one hand, it tells us we're making the right choices — this is where people wanted to go, and they were going to go on somebody else because we didn't have a way of serving them. But it also says there's a huge opportunity to go get new customers into the fold. I actually would like to see those numbers a little bit lower, because I want new people who don't know us coming in — and they are. It's just that so many of our members want to take these flights now.

So I think it's been encouraging. The Asia stuff I mentioned before — the connectivity we're seeing out of the middle of the country through Seattle. We've long talked about it being the least circuitous route into Asia over Seattle. We have an opportunity to continue to attract folks into the loyalty program and really earn their loyalty over a long period of time. We're in the midst of rolling out Starlink on every one of our flights. It will be free, but you will have to become a member of Atmos to get it for free. So that will be a nice new hook to get on the loyalty journey with folks who aren't with us today.

Thomas Fitzgerald, Analyst, TD Cowen

Yes. It's a nice carrot and stick. Looking forward to it — still haven't been on Starlink in- flight, but looking forward to it.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

You've never taken one?

Thomas Fitzgerald, Analyst, TD Cowen

No, not on Starlink. No, not yet.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

You should go find one. Find a plane with it and do it. You'll love it.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah. Put it on the docket. So loyalty was another big component of Investor Day, and you raised the bar on your targets recently with the new credit card agreement. It delivers an incremental $1 billion in remuneration by the end of the decade. Could you walk us through some of the drivers of upside in loyalty — whether it's a single program with Hawaiian, in- group scale, the new economics on the agreement you just announced, things like a new premium credit card, and so on?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. There's really significant upside. In fact, we're going to have an Investor Day in

September — I think we announced that. This should be one of the clear focus areas that we take you through. If you recall, when we announced the synergies with respect to the acquisition, we sort of backdated a lot of loyalty. Loyalty actually wasn't that large. There were some initial benefits of bringing the two programs together. But now that we have the single loyalty platform, we've got the premium credit card out in the market, and we've got the new bank deal in hand — now we can really start going and growing the platform at the rates and with the value that we think are available to us.

We are seeing — and we would love to see more — the credit card move towards top of wallet in some of the key markets that are new to our network in terms of the depth that we have there, like San Diego. Certainly in the state of Hawaii, I believe 70% of the adults are now members of our program, and many of them have the credit card. The credit card represents 6% of the local GDP in Hawaii. There's an opportunity to continue to grow how much folks are using our credit card.

We're convicted about this. We routinely receive recognition for being the best loyalty program — the most value back to consumers and guests across the industry. That's happened multiple years in a row. And the Atmos program was recognized the same way when we launched it. We'll continue to invest in things that are good for guests and then watch the value accrue over a period of time with respect to loyalty. We expect further penetration just in terms of growth of loyalty folks. We know those folks are more likely to fly with us and give us all of their flying or most of their flying. And obviously, the credit card is a huge, exponential growth driver in terms of the economics that come from the loyalty program.

The new deal with the bank, I think for the first time, really puts new incentives in for us to jointly grow the program together. Bank of America has been a phenomenal partner. One of their strategic imperatives that they announced at their Investor Day is loan balance growth, which is going to require them to be working with us to grow our part of that pie as well, since we are their number one co-brand partner by a wide, wide margin. There are a lot of incentives that are now completely aligned between the two companies to drive this.

The last thing I'll say — there are other areas, like we would love ultimately for the proprietary cards that our bank partner provides to be able to convert to points and redeem. I think those types of things are all opportunities for us under the new contract.

Thomas Fitzgerald, Analyst, TD Cowen

That's really exciting. That's a fascinating stat on being 6% of Hawaii — I think it's like $125 billion.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. Yeah. Yeah.

Thomas Fitzgerald, Analyst, TD Cowen

How do you think about designing the program to widen appeal beyond some of your core strongholds in the Pacific Northwest, especially given some of the geographic advantages that channel has as a connecting market?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. I love this topic. We have 12 minutes — I'll spend like 30 seconds or a minute on this one, just because we need a little time to really build this out. But what your question speaks to is we have an underlying belief that if we build the Atmos platform the right way, we can attract other partners from non-air parts of the travel ribbon that would be very compelling to a broadened customer base that doesn't have to geographically reside in our core markets.

It's not completely uncharted territory. Maybe it is a little bit for airlines, but we've specifically designed this in a way to give ourselves the flexibility to go partner with, say, a cruise line, to give folks more redemption opportunities and broaden the appeal of just joining the program as well. We've toyed with ideas like — could Atmos be the currency for smaller partner airlines' loyalty programs as well? These are all sort of ideas on the whiteboard that we haven't had a chance to execute on or really go and look at too closely, but it's now what we're starting to think about since we're past PSS and able to focus on the future more.

We won't talk a lot about this until we feel like it has real value coming into the P&L, but we're certainly going to go explore those opportunities. We're relatively optimistic that there are going to be value drivers that we can do with those types of partnerships.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah. No, for sure, it seems like a lot of white space there for you guys. I think loyalty dovetails really well with the secular strength the industry has seen in premium demand coming out of the pandemic. Correct me if I'm wrong, but you've grown premium revenue from 27% prior to COVID, to 33% before the Hawaiian deal — and now I think it's around

36%. Maybe just walk the audience through your longer-term premium strategy and how things like your stage length and your geographic core strongholds really help you lean into that.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. You help me by giving all the stats. I don't have to remember them. Look, I think it's broader than airlines. Airlines, it gets talked about a lot, but the consumer move towards premium experience is beyond just the airline experience alone. We're following a very broad and durable — and we believe long-term — trend of consumers wanting better experiences. We started this journey with premium economy. We've always had first class

— that's always been part of our product set. It was mostly an upgrade product. And then we put premium economy in, which we call Premium Class, 10 or 11 years ago, something like that.

I may have that slightly wrong. But we were more focused on just delivering a really consistent experience across the entire aircraft, and we weren't investing more of the experience into those cabins. That's what we have started to do, and we've started to see it really provide strong returns for us. All of the revenue growth on a year-over-two and year- over-three basis has really come out of the premium end of the airplane. That's where most of the new demand is coming. Existing demand plus a lot of new demand is to be in premium economy or first class or lie-flats on international products.

So we've improved food and beverage. We've improved the soft product. We've expanded first class on our -800 fleet. We've expanded premium economy on our -900 fleet. We have begun to sell our exit rows as a premium economy seat product. And we will remodel the

A330s and the 787s in the next few years to get a traditional international premium economy section into those, and the A330s need more modern suites up front as well.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

I think 33%, 34%, 35% of the seats for us will be First Class or Premium Economy or Lie-

Flat. That seems to be what we believe the sweet spot for us will be. I know some are slightly over that, some a little bit under, but that's the target we're headed towards. Much like some of the stronger airlines you're seeing right now, the share of revenue that's outside of main cabin — I think we're over 50%, and we'll be moving towards 60% over the next couple of years.

That's going to be the largest underlying margin expansion driver that we can unlock, and we're well underway executing initiatives to do that. And then the last thing is just we've done a ton of work on the airport experience as well. Seattle is now starting to pull construction walls down. It's a beautiful, remodeled lobby that we have. We have a suites check-in area that is as good as any you can find in the industry — private for folks who are flying international Lie-Flat or who are Titanium on us.

We've got a new lounge that's going to open next summer that's going to be world-class as well. This end of the market is one that we're going to pay a lot of attention to, but not forget about the entirety of our customer set and making sure that there's a good experience for everybody.

Thomas Fitzgerald, Analyst, TD Cowen

How do you think about that from a capital allocation standpoint — balancing it's obviously very capital-intensive with the fleet, but also the importance of the non-aircraft side, whether it's in the lounges or technology or cabin retrofits?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah, it's a good question. Look, the lounge experience is as important as — I mean, the flight experience on a long-haul international flight is really important. But what we tend to see is folks who are going on those flights start their trip in the lounge. They're there a couple of hours early. They like to relax, get in the mindset of going away to Europe or wherever.

They're becoming more choiceful about what types of lounge environments they want to be in. We are clear-eyed about that, and that's why we've been going through a series of remodels of our lounges, where we've completely overhauled our food and beverage offering. We've brought in outside partners who do this really well — we've just started in

Anchorage, and we're going to bring them through the rest of our lounges.

That cannot any longer just be a space that's away from the hold rooms, where people just go and sit in a generic environment. They really want it to feel nice and comfortable and premium. So that's the type of experience that we're going to give them. And then I think,

Thomas, it's more important for us to be able to deliver on the premium experiences in the airport and have a good experience for all of our guests — and certainly in Premium

Economy and First Class domestically — if we're going to capture the folks who are buying

Lie-Flat tickets to Europe. Once you buy a Lie-Flat ticket to Europe, you're likely to give all of the rest of your flying to that same airline.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Just because of the loyalty effects for status and for accruals, it's so large on those tickets.

So it all fits together is my point. We had to do all of this end-to-end in order to make international work as well as we need it to work.

Thomas Fitzgerald, Analyst, TD Cowen

Yeah. And then you mentioned the retrofits on the A330s at some point. You've been, I believe, also on the 737 fleet. Would you remind us how that's going and the benefit?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Done. 737's done. I'm not allowed to say completely done — there are a few aircraft that are going to go after the summer, but we're 99% done. So again, expanded First Class by four seats to 16 on the -800s and expanded Premium Economy by one row on the -900s to

30 seats now, and then we added selling the exit rows as Premium Economy. That's all complete. And then the A330s and 787s — those would be like 2028 type of items.

Thomas Fitzgerald, Analyst, TD Cowen

Okay. There's been a lot of noise outside of your control this year or last year that has impacted the results. You've been going through the integration process, but it just seems like there's a lot of leverage in the model that can be unleashed if some of the events — some of the macro and the fuel stuff — normalize, and then you start to harvest the benefits from the acquisition. Would you walk us through how investors should think about that over the long term?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah. One thing I would share is when you get these types of unexpected but very material shocks to your business, you sit down and look at all of the strategies that you've adopted, invested in, and been convicted on, and just make sure those are the right strategies. It's incumbent on us to do that, and we got a chance to do that leading up to a board meeting we had here in May.

I'll tell you, we came out more convicted, perhaps, than we were even six months ago, that all of the things you would say you need to be doing to build a long-term, durable, strong financial model at an airline are the things that we're doing. We couldn't be happier with the timing of the Hawaii acquisition and the results that we're seeing, notwithstanding this 30- year storm pattern that they got.

All of the loyalty and network effects we've already talked about — and while we're in the middle of delivering on it, we got going on the need to put more premium into the market a few years ago. So we'll get through that quicker than others who are now trying to play catch-up. We'll be through it. With PSS behind us, if we can get the world to settle down a little bit and we get to focus on really optimizing this airline and running at peak execution, the underlying earnings power is there. All the right strategies have been deployed, and execution is now getting closer to the end than the beginning. So we're excited about a period of stability.

And look — others have said it, like any of us who've been in this industry a long time, what we're seeing is durable demand as long as the economy holds. People want to travel, and they want good experiences when they travel. That's been super clear since the revenge travel out of COVID, and it hasn't abated. There's no reason to think it will unnaturally abate with a strong economy behind us.

So I think there's a really good chance that input costs normalize and we have a really strong revenue environment, and there's a very, very healthy business there if that's what prevails in the next quarters or so.

Thomas Fitzgerald, Analyst, TD Cowen

Absolutely. We're almost up on time here, Shane. We really appreciate you being here with us. Any closing remarks you'd like to make in the closing seconds?

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

Yeah, Tom, I appreciate the question set. It's easy and normal for us to get very hyper- focused on the news of the day — and there's always so much news of the day. You'll see us continue to talk about the investments we're making in the future, and the future is not

10 years away. It's within line of sight. It's going to be here relatively soon. Everything we laid out at our Investor Day — Alaska Accelerate — those are the right strategies. You're going to hear us increasingly be convicted that we are doing the right things, we're executing those things well, and they are going to show up in financial results sooner rather than later.

Thomas Fitzgerald, Analyst, TD Cowen

Awesome. Well, Shane, thanks so much for being here. We really appreciate it.

Shane Tackett, Executive Vice President, Finance, and Chief Financial Officer

All right. Thanks, Tom.

Thomas Fitzgerald, Analyst, TD Cowen

Shane Tackett, CFO of Alaska Air Group. Thanks very much.