ALASKA AIR GROUP, INC. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2021

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

For the transition period from to

Commission File Number 1-8957

ALASKA AIR GROUP, INC.


Delaware						91-1292054
(State of Incorporation)						(I.R.S. Employer Identification No.)


19300 International Boulevard,			Seattle,			WA			98188

Telephone:

(206)

392-5040


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	ALK	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange

Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer
(Do not check if a smaller reporting company)

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

The registrant has 125,232,721 common shares, par value $0.01, outstanding at July 31, 2021.

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

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	43
ITEM 4.	CONTROLS AND PROCEDURES	44
PART II.	OTHER INFORMATION	45
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	46
	SIGNATURES	46

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

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

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2020. Please consider our forward-looking statements in light of those risks as you read this report.

PART I


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions)	June 30, 2021		December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	1,025	$	1,370
Marketable securities	2,926		1,976
Total cash and marketable securities	3,951		3,346
Receivables - net	567		480
Inventories and supplies - net	52		57
Prepaid expenses, assets held-for-sale, and other current assets	201		123
Total Current Assets	4,771		4,006

Property and Equipment
Aircraft and other flight equipment	7,996		7,761
Other property and equipment	1,433		1,398
Deposits for future flight equipment	402		583
	9,831		9,742
Less accumulated depreciation and amortization	3,703		3,531
Total Property and Equipment - Net	6,128		6,211

Operating lease assets	1,375		1,400
Goodwill	1,943		1,943
Intangible assets - net	103		107
Other noncurrent assets	336		379
Other Assets	3,757		3,829

Total Assets	$	14,656	$	14,046

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


(in millions, except share amounts)	June 30, 2021		December 31, 2020
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	159	$	108
Accrued wages, vacation and payroll taxes	439		527
Air traffic liability	1,533		1,073

Other accrued liabilities	661		424
Deferred revenue	922		733
Current portion of operating lease liabilities	263		290
Current portion of long-term debt	869		1,138
Total Current Liabilities	4,846		4,293

Long-Term Debt, Net of Current Portion	2,319		2,357

Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	1,222		1,268
Deferred income taxes	439		407
Deferred revenue	1,424		1,544
Obligation for pension and postretirement medical benefits	660		665
Other liabilities	422		524
	4,167		4,408
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—		—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares	1		1
Capital in excess of par value	454		391
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares	(674)		(674)
Accumulated other comprehensive loss	(487)		(494)
Retained earnings	4,030		3,764
	3,324		2,988
Total Liabilities and Shareholders' Equity	$	14,656	$	14,046

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions, except per share amounts)	2021		2020		2021		2020
Operating Revenues
Passenger revenue	$	1,352	$	309	$	2,011	$	1,790
Mileage Plan other revenue	118		73		212		182
Cargo and other	57		39		101		85
Total Operating Revenues	1,527		421		2,324		2,057
Operating Expenses
Wages and benefits	510		472		1,003		1,084
Variable incentive pay	34		16		67		23
Payroll Support Program grant wage offset	(503)		(362)		(914)		(362)
Aircraft fuel, including hedging gains and losses	274		59		477		443
Aircraft maintenance	102		45		183		160
Aircraft rent	62		74		124		155
Landing fees and other rentals	144		83		273		214
Contracted services	54		30		105		102
Selling expenses	41		4		74		59
Depreciation and amortization	98		107		195		215
Food and beverage service	35		7		58		56
Third-party regional carrier expense	37		26		67		63
Other	117		78		222		221
Special items - impairment charges and other	(4)		69		14		229
Special items - restructuring charges	(23)		—		(12)		—
Special items - merger-related costs	—		1		—		4
Total Operating Expenses	978		709		1,936		2,666
Operating Income (Loss)	549		(288)		388		(609)
Nonoperating Income (Expense)
Interest income	6		7		13		16
Interest expense	(39)		(17)		(71)		(30)
Interest capitalized	3		1		6		4
Other - net	9		6		19		11
Total Nonoperating Income (Expense)	(21)		(3)		(33)		1
Income (Loss) Before Income Tax	528		(291)		355		(608)
Income tax expense (benefit)	131		(77)		89		(162)
Net Income (Loss)	$	397	$	(214)	$	266	$	(446)

Basic Income (Loss) Per Share:	$	3.18	$	(1.74)	$	2.13	$	(3.62)
Diluted Income (Loss) Per Share:	$	3.13	$	(1.74)	$	2.10	$	(3.62)
Shares used for computation:
Basic	124.977		123.296		124.640		123.058
Diluted	126.825		123.296		126.388		123.058

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Net Income (Loss)	$	397	$	(214)	$	266	$	(446)

Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period	—		31		(11)		30
Reclassification of gain into Other - net nonoperating income	(2)		(6)		(6)		(9)
Income tax effect	1		(6)		4		(5)
Total	(1)		19		(13)		16

Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income	9		8		17		15
Income tax effect	(2)		(2)		(4)		(4)
Total	7		6		13		11

Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	1		(2)		9		(27)
Reclassification of loss into Aircraft rent	—		—		—		1
Income tax effect	—		1		(2)		6
Total	1		(1)		7		(20)

Other Comprehensive Income	7		24		7		7

Comprehensive Income (Loss)	$	404	$	(190)	$	273	$	(439)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2020	124.217	$	1	$	391	$	(674)	$	(494)	$	3,764	$	2,988
Net loss	—	—		—		—		—		(131)		(131)
Other comprehensive income	—	—		—		—		—		—		—

Stock-based compensation	—	—		12		—		—		—		12
CARES Act warrant issuance	—	—		8		—		—		—		8


Stock issued under stock plans	0.225	—		(2)		—		—		—		(2)
Balances at March 31, 2021	124.442	$	1	$	409	$	(674)	$	(494)	$	3,633	$	2,875
Net income	—	—		—		—		—		397		397
Other comprehensive income	—	—		—		—		7		—		7

Stock-based compensation	0.009	—		13		—		—		—		13
CARES Act warrant issuance	—	—		8		—		—		—		8

Stock issued for employee stock purchase plan	0.716	—		23		—		—		—		23
Stock issued under stock plans	0.062	—		1		—		—		—		1
Balances at June 30, 2021	125.229	1		454		(674)		(487)		4,030		3,324


(in millions)	Common Stock Outstanding	Common Stock		Capital in Excess of Par Value		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
Balances at December 31, 2019	123.000	$	1	$	305	$	(643)	$	(465)	$	5,133	$	4,331

Net loss	—	—		—		—		—		(232)		(232)
Other comprehensive loss	—	—		—		—		(17)		—		(17)
Common stock repurchase	(0.538)	—		—		(31)		—		—		(31)
Stock-based compensation	—	—		9		—		—		—		9

Cash dividend declared ($0.375 per share)	—	—				—		—		(45)		(45)

Stock issued under stock plans	0.123	—		—		—		—		—		—
Balance at March 31, 2020	122.585	$	1	$	314	$	(674)	$	(482)	$	4,856	$	4,015
Net loss	—	—		—		—		—		(214)		(214)
Other comprehensive income	—	—		—		—		24		—		24

Stock-based compensation	—	—		2		—		—		—		2
CARES Act warrant issuance	—	—		7		—		—		—		7

Stock issued for employee stock purchase plan	1.000	—		27		—		—		—		27
Stock issued under stock plans	0.054	—		—		—		—		—		—
Balances at June 30, 2020	123.639	$	1	$	350	$	(674)	$	(458)	$	4,642	$	3,861

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six Months Ended June 30,
(in millions)	2021		2020
Cash flows from operating activities:
Net Income (Loss)	$	266	$	(446)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	195		215
Stock-based compensation and other	24		7
Special items - impairment charges and other	14		229
Special items - restructuring charges	(12)		—
Changes in certain assets and liabilities:
Changes in deferred tax provision	33		(98)
Increase in air traffic liability	460		231
Increase in deferred revenue	69		84
Other - net	(42)		99
Net cash provided by operating activities	1,007		321
Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(30)		(58)
Other flight equipment	(38)		(43)
Other property and equipment	(34)		(67)
Total property and equipment additions, including capitalized interest	(102)		(168)
Purchases of marketable securities	(2,524)		(1,004)
Sales and maturities of marketable securities	1,561		1,038
Other investing activities	(5)		10
Net cash used in investing activities	(1,070)		(124)
Cash flows from financing activities:
Proceeds from issuance of debt	363		1,265
Common stock repurchases	—		(31)
Dividends paid	—		(45)
Long-term debt payments	(681)		(125)
Other financing activities	37		27
Net cash provided by (used in) financing activities	(281)		1,091
Net increase (decrease) in cash, cash equivalents, and restricted cash	(344)		1,288
Cash, cash equivalents, and restricted cash at beginning of period	1,386		232
Cash, cash equivalents, and restricted cash at end of the period	$	1,042	$	1,520

Cash paid during the period for:
Interest (net of amount capitalized)	$	61	$	25
Income taxes	—		—

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	$	1,025	$	1,509
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets	17		11
Total cash, cash equivalents, and restricted cash at end of the period	$	1,042	$	1,520

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of June 30, 2021 and the results of operations for the three and six months ended June 30, 2021 and 2020. Such adjustments were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and six months ended June 30, 2021 are not necessarily indicative of operating results for the entire year.

NOTE 2. COVID-19 PANDEMIC

The public health and economic crisis resulting from the outbreak of COVID-19 in the first quarter of 2020 continues to have a significant impact on the Company. Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result, the Company continues to fly less capacity than it had pre-pandemic.

Beginning in 2020, the Company implemented various cost-saving initiatives, including permanently parking aircraft, restructuring the workforce through early-out and incentive leave programs, and obtaining funding available under programs offered by the U.S. Department of the Treasury (the Treasury). As demand has improved and the business has grown back towards pre-pandemic flying levels, these programs have been adjusted to meet the needs of the airline. The impacts of these programs for the three and six months ended June 30, 2021 are described below.

Lease Return Costs

The Company removed 40 leased Aircraft from operating service in 2020, and recorded an estimate of the expected future lease return costs for the aircraft. Lease return costs include the write off of associated maintenance deposits, as the Company no longer expects to perform maintenance events covered by those deposits. The total net charge recorded in 2020 for aircraft that were parked amounted to $209 million. In the first quarter of 2021, the Company recorded an additional $18 million in incremental costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor, which was classified as Special items - impairment charges and other on the condensed consolidated statements of operations. In the second quarter, expected costs to return leased aircraft was reduced by $4 million. The lease return cost estimates are based on the Company's best estimate of costs to return aircraft as of the date of this filing.

In the second quarter of 2021, the Company initiated a plan to reactivate up to twelve previously parked Airbus aircraft to support the Company's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. These reactivations create flexibility as management seeks to return capacity, mitigating against both staffing and supply chain risks that could constrain Alaska or Horizon's available capacity. Management's plans to return to 100% of pre-pandemic levels by no later than summer 2022 are consistent with previous plans, but some recovery has been accelerated into the second half of 2021 in response to the strong demand recovery that took place in the second quarter.The first of these reactivated aircraft are expected to reenter revenue service beginning in the third quarter of 2021, with all reactivated by the second quarter of 2022. The Company currently anticipates these aircraft will be removed from operating service beginning in late 2022 through the end

of 2023. At this time, the Company does not anticipate material changes to estimated lease return costs previously recorded, as leases for aircraft returning to service generally expire within a near term window.

Workforce restructuring

The Company continues to expect that demand will be below pre-pandemic levels through the end of 2021, but management will continue rebuilding capacity to 2019 levels. The Company reduced its workforce in 2020 to better align with the expected size of the business. To mitigate the need for involuntary furloughs, various early-out and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs, over 600 employees took permanent early-outs and over 3,300 employees took voluntary or incentive leaves. As of June 30, 2021, approximately 1,800 employees remain on a voluntary leave program. The Company expects all employees on leave to return to work by October 2021.

In 2020, as a result of these programs, the Company recorded $220 million in wage expense for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. In the first quarter of 2021, the Company refined capacity expectations and training schedules, and delayed certain recalls to a future period beyond what was anticipated in the accrual at December 31, 2020, resulting in additional expense of $11 million. In the second quarter, demand improved at an accelerated pace, and the Company issued recall notices to all pilots on incentive leave for return-to-work by October 2021. As a result, $23 million of incentive leave accrual was reversed and recognized as a benefit within Special items - restructuring charges in the condensed consolidated statements of operations during the three months ended June 30, 2021. In total, the Company has recorded a net benefit from these adjustments of $12 million during the six months ended June 30, 2021.

The table below presents a roll forward of the outstanding voluntary leave liability (in millions):


	Six Months Ended June 30, 2021
Total voluntary leave liability balance at January 1	$	127
Cash payments	(79)
Charges and adjustments	(12)
Total voluntary leave liability balance at June 30	$	36

The outstanding accrual is based on the Company's best estimate of capacity expectations and training schedules for 2021, as of the date of this filing. The Company will make the majority of the remaining cash payments associated with this liability in 2021. The balance is reflected in accrued wages, benefits and payroll taxes on the condensed consolidated balance sheet.

CARES Act Funding

During the first quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the Treasury through an extension of the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the supporting agreements, Alaska and Horizon received total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska and Horizon received an additional $80 million in funds made available under PSP 2.

Also in April 2021, Alaska, Horizon and McGee finalized additional agreements with the Treasury under a third round of the PSP, made available under the American Rescue Plan Act of 2021 (PSP 3). Under PSP 3 and the supporting agreements, Alaska, Horizon, and McGee received total funds of $585 million in the second quarter of 2021.

Of the amounts received during the six months ended June 30, 2021, $311 million represented unsecured debt and was recorded at par, and $16 million represented warrants recorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance sheet. The remaining $892 million was recorded as grant proceeds. These amounts are inclusive of additional funding of $8 million made available to McGee under the first installment of the PSP program (PSP 1). The grant is recorded as an offset to wages, salaries and benefits as eligible expenses are incurred. During the six months ended June 30, 2021, the Company recognized $914 million of the PSP grant proceeds as a wage offset. Included within this $914 million is approximately $21 million for employee retention credits as provided for in the CARES Act. The Company does not expect to record any additional wage offset in 2021.

Total funds contracted from the Treasury under the three Payroll Support Programs are allocated as follows (in millions):


	Grants		Loans		Warrants		Total Proceeds
PSP 1	$	757	$	293	$	9	$	1,059
PSP 2	457		160		9		626
PSP 3	431		147		7		585
Total	$	1,645	$	600	$	25	$	2,270

Funds are exclusively used for payment of employee salaries, wages and benefits. Upon receipt of the funds issued under PSP 3, certain conditions and restrictions were extended. These conditions include, but are not limited to, refraining from conducting involuntary furloughs or reducing employee pay rates through September 30, 2021 and placing limits on executive compensation and severance through April 1, 2023. Alaska Air Group also agreed to continue the suspension of dividends and share repurchases until September 30, 2022.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. In 2020, the Company eliminated ticket change fees indefinitely from its main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from our co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

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

Passenger Ticket and Ancillary Services Revenue

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,114	$	222	$	1,639	$	1,435
Passenger ancillary revenue	84		31		134		147
Mileage Plan passenger revenue	154		56		238		208
Total Passenger revenue	$	1,352	$	309	$	2,011	$	1,790

Mileage Plan™ Loyalty Program

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Passenger revenue	$	154	$	56	$	238	$	208
Mileage Plan other revenue	118		73		212		182
Total Mileage Plan revenue	$	272	$	129	$	450	$	390

Cargo and Other

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cargo revenue	$	34	$	28	$	61	$	52
Other revenue	23		11		40		33
Total Cargo and other revenue	$	57	$	39	$	101	$	85

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $36 million and net refunds from the prior year-end air traffic liability balance for the three months ended June 30, 2021 and 2020, and $175 million and $484 million for the six months ended June 30, 2021 and 2020.

Given the increase in demand for air travel from the recovery from the COVID-19 pandemic, advance bookings and associated cash receipts have significantly increased in relation to prior year. The Company also experienced increased revenue recognition from credits redeemed for travel, for which the remaining balance is included in the air traffic liability balance, and total $387 million, net of breakage. In April 2021, the Company announced updated expiration terms for these credits, extending to December 31, 2021 for possible travel through November 30, 2022.

Mileage PlanTM assets and liabilities

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $61 million of such receivables as of June 30, 2021 and $48 million as of December 31, 2020. As demand for air travel continues to increase unpredictably, the timing of recognition of mileage credits may differ from current assumptions.

The table below presents a roll forward of the total frequent flyer liability (in millions):


	Six Months Ended June 30,
		2021		2020
Total Deferred Revenue balance at January 1		$	2,277	$	1,990
Travel miles and companion certificate redemption - Passenger revenue		(238)		(208)
Miles redeemed on partner airlines - Other revenue		(17)		(21)
Increase in liability for mileage credits issued		324		313
Total Deferred Revenue balance at June 30		$	2,346	$	2,074

NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of June 30, 2021, total cost basis for all marketable securities was $2.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the condensed consolidated balance sheet (in millions):


	June 30, 2021						December 31, 2020
	Level 1		Level 2		Total		Level 1		Level 2		Total

Assets
Marketable securities
U.S. government and agency securities	$	298	$	—	$	298	$	407	$	—	$	407
Equity mutual funds	5		—		5		7		—		7
Foreign government bonds	—		31		31		—		20		20
Asset-backed securities	—		330		330		—		224		224
Mortgage-backed securities	—		253		253		—		290		290
Corporate notes and bonds	—		1,943		1,943		—		978		978
Municipal securities	—		66		66		—		50		50
Total Marketable securities	303		2,623		2,926		414		1,562		1,976
Derivative instruments
Fuel hedge - call options	—		92		92		—		15		15

Total Assets	$	303	$	2,715	$	3,018	$	414	$	1,577	$	1,991

Liabilities
Derivative instruments

Interest rate swap agreements	—		(16)		(16)		—		(25)		(25)
Total Liabilities	$	—	$	(16)	$	(16)	$	—	$	(25)	$	(25)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts are determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available information as of June 30, 2021.

Maturities for marketable securities (in millions):


June 30, 2021	Cost Basis		Fair Value
Due in one year or less	$	1,538	$	1,539
Due after one year through five years	1,280		1,294
Due after five years through 10 years	88		88

Total	$	2,906	$	2,921

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents, and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: To estimate the fair value of all fixed-rate debt as of June 30, 2021, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $780 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.

Fixed-rate debt on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):


	June 30, 2021		December 31, 2020


Total fixed-rate debt	$	1,896	$	1,662

Estimated fair value	$	2,019	$	1,778

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairments were recorded during the three and six months ended June 30, 2021.

NOTE 5. LONG-TERM DEBT

Long-term debt obligations on the condensed consolidated balance sheet (in millions):


	June 30, 2021			December 31, 2020
Fixed-rate notes payable due through 2029	$	180		$	198
Fixed-rate PSP notes payable due through 2031	600			290
Fixed-rate EETC payable due through 2025 & 2027	1,116			1,174
Variable-rate notes payable due through 2029	1,315			1,866
Less debt issuance costs and unamortized debt discount	(23)			(33)
Total debt	3,188			3,495
Less current portion	869			1,138
Long-term debt, less current portion	$	2,319		$	2,357

Weighted-average fixed-interest rate	3.7		%	4.3		%
Weighted-average variable-interest rate	1.6		%	1.9		%

Approximately $562 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at June 30, 2021, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.1%.

During the six months ended June 30, 2021, the Company issued $363 million of debt, comprised of $311 million of unsecured loans from the PSP and $54 million in proceeds from issuance of debt. Debt proceeds were offset by $681 million in debt

payments. Included within total debt payments is the full repayment of the $135 million loan from the U.S. Treasury made available under the CARES Act and the $363 million outstanding balance on two credit facilities.

The $600 million PSP notes are unsecured senior term loans with a 10-year term, bearing an interest rate of 1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The PSP notes are prepayable at par without penalty.

CARES Act

In 2020, the Company finalized an agreement with the Treasury to obtain up to $1.9 billion via a secured term loan facility. Obligations under the loan agreement were secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 30 aircraft and 15 spare engines. In 2020, the Company drew $135 million under the agreement, which was used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act. The full balance was repaid in the second quarter of 2021. In accordance with the related agreement, the facility terminated at the time of payment.

Debt Maturity

At June 30, 2021 long-term debt principal payments for the next five years and thereafter are as follows (in millions):


	Total
Remainder of 2021	$	227
2022	796
2023	334
2024	240
2025	261
Thereafter	1,353
Total	$	3,211

Bank Lines of Credit

The Company has three credit facilities with availability totaling $486 million as of June 30, 2021, resulting from the second quarter 2021 repayment of $363 million. One of the credit facilities for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The second credit facility for $250 million expires in June 2024 and is secured by aircraft. These two facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June 2022 and is secured by aircraft.

The Company has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at June 30, 2021.

NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Service cost	$	13	$	13	$	26	$	26
Pension expense included in Wages and benefits	13		13		26		26

Interest cost	14		19		28		38
Expected return on assets	(30)		(27)		(61)		(55)

Recognized actuarial loss	9		8		18		17
Pension expense included in Nonoperating Income (Expense)	$	(7)	$	—	$	(15)	$	—

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of June 30, 2021 (in millions):


	Aircraft Commitments(a)		Capacity Purchase Agreements (b)
Remainder of 2021	$	107	$	82
2022	1,458		173
2023	1,207		178
2024	291		183
2025	76		188
Thereafter	12		877
Total	$	3,151	$	1,681

(a)Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management.

(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.

Aircraft Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of June 30, 2021, Alaska had commitments to purchase 63 B737-9 MAX aircraft, with contracted deliveries between 2021 and 2024. Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change. Horizon also has commitments to purchase 12 E175 aircraft with deliveries between 2022 and 2025. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2027. In addition, Alaska has options to purchase 39 B737-9 MAX aircraft, and Horizon has options to purchase 21 E175 aircraft. The cancelable purchase commitments and option payments are not reflected in the table above.

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal.

The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.

NOTE 8. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of June 30, 2021, the Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.

CARES Act Warrant Issuances

As additional taxpayer protection required under PSP programs, during the six months ended June 30, 2021 the Company granted the Treasury a total of 539,508 warrants to purchase Alaska Air Group (ALK) common stock. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a five-year term.

Additionally, in conjunction with the October 2020 draw on the CARES Act Loan, the Company granted the Treasury 427,080 warrants to purchase ALK common stock. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in stockholders' equity.

Total warrants outstanding are as follows as of June 30, 2021:


	Number of shares of ALK common stock	Strike Price
PSP 1	928,127	31.61
CARES Act loan warrants	427,080	31.61
PSP 2	305,499	52.25
PSP 3	221,812	66.39
Total	1,882,518

Accumulated other comprehensive loss

Components of accumulated other comprehensive loss, net of tax (in millions):


	June 30, 2021		December 31, 2020
Related to marketable securities	$	10	$	23
Related to employee benefit plans	(485)		(498)
Related to interest rate derivatives	(12)		(19)
Total	$	(487)	$	(494)

Earnings (Loss) Per Share (EPS)

EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and six months ended June 30, 2021, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines – Alaska and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with SkyWest, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

•Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.

•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under a CPA. This segment includes the actual revenues 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 CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

Operating segment information is as follows (in millions):


	Three Months Ended June 30, 2021
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	1,072	$	280	$	—	$	—	$	1,352	$	—	$	1,352
CPA revenues	—		—		111		(111)		—		—		—
Mileage Plan other revenue	102		16		—		—		118		—		118
Cargo and other	55		—		—		2		57		—		57
Total Operating Revenues	1,229		296		111		(109)		1,527		—		1,527
Operating Expenses
Operating expenses, excluding fuel	984		286		91		(127)		1,234		(530)		704
Economic fuel	253		66		—		1		320		(46)		274
Total Operating Expenses	1,237		352		91		(126)		1,554		(576)		978
Nonoperating Income (Expense)
Interest income	6		—		—		—		6		—		6
Interest expense	(34)		—		(5)		—		(39)		—		(39)
Interest capitalized	3		—		—		—		3		—		3
Other - net	9		—		—		—		9		—		9
Total Nonoperating Income (Expense)	(16)		—		(5)		—		(21)		—		(21)
Income (Loss) Before Income Tax	$	(24)	$	(56)	$	15	$	17	$	(48)	$	576	$	528

	Three Months Ended June 30, 2020
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	225	$	84	$	—	$	—	$	309	$	—	$	309
CPA revenues	—		—		81		(81)		—		—		—
Mileage Plan other revenue	56		17		—		—		73		—		73
Cargo and other	39		—		—		—		39		—		39
Total Operating Revenues	320		101		81		(81)		421		—		421
Operating Expenses
Operating expenses, excluding fuel	746		210		68		(82)		942		(292)		650
Economic fuel	45		20		—		—		65		(6)		59
Total Operating Expenses	791		230		68		(82)		1,007		(298)		709
Nonoperating Income (Expense)
Interest income	11		—		—		(4)		7		—		7
Interest expense	(18)		—		(5)		6		(17)		—		(17)
Interest capitalized	1		—		—		—		1		—		1
Other - net	6		—		—		—		6		—		6
Total Nonoperating Income (Expense)	—		—		(5)		2		(3)		—		(3)
Income (Loss) Before Income Tax	$	(471)	$	(129)	$	8	$	3	$	(589)	$	298	$	(291)


	Six Months Ended June 30, 2021
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	1,578	$	433	$	—	$	—	$	2,011	$	—	$	2,011
CPA revenues	—		—		215		(215)		—		—		—
Mileage Plan other revenue	182		30		—		—		212		—		212
Cargo and other	99		—		—		2		101		—		101
Total Operating Revenues	1,859		463		215		(213)		2,324		—		2,324
Operating Expenses
Operating expenses, excluding fuel	1,877		551		179		(236)		2,371		(912)		1,459
Economic fuel	427		118		—		—		545		(68)		477
Total Operating Expenses	2,304		669		179		(236)		2,916		(980)		1,936
Nonoperating Income (Expense)
Interest income	13		—		—		—		13		—		13
Interest expense	(61)		—		(10)		—		(71)		—		(71)
Interest capitalized	6		—		—		—		6		—		6
Other - net	19		—		—		—		19		—		19
Total Nonoperating Income (Expense)	(23)		—		(10)		—		(33)		—		(33)
Income (Loss) Before Income Tax	$	(468)	$	(206)	$	26	$	23	$	(625)	$	980	$	355

	Six Months Ended June 30, 2020
	Mainline		Regional		Horizon		Consolidating & Other(a)		Air Group Adjusted(b)		Special Items(c)		Consolidated
Operating Revenues
Passenger revenues	$	1,459	$	331	$	—	$	—	$	1,790	$	—	$	1,790
CPA revenues	—		—		186		(186)		—		—		—
Mileage Plan other revenue	154		28		—		—		182		—		182
Cargo and other	83		—		—		2		85		—		85
Total Operating Revenues	1,696		359		186		(184)		2,057		—		2,057
Operating Expenses
Operating expenses, excluding fuel	1,905		479		160		(192)		2,352		(129)		2,223
Economic fuel	358		82		—		—		440		3		443
Total Operating Expenses	2,263		561		160		(192)		2,792		(126)		2,666
Nonoperating Income (Expense)
Interest income	25		—		—		(9)		16		—		16
Interest expense	(30)		—		(10)		10		(30)		—		(30)
Interest capitalized	4		—		—		—		4		—		4
Other - net	12		—		—		(1)		11		—		11
Total Nonoperating Income (Expense)	11		—		(10)		—		1		—		1
Income (Loss) Before Income Tax	$	(556)	$	(202)	$	16	$	8	$	(734)	$	126	$	(608)

(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges. See Note A in the accompanying pages for further information.

(c)Includes Payroll Support Program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.

Total assets were as follows (in millions):


	June 30, 2021		December 31, 2020
Mainline	$	19,920	$	19,754
Horizon	1,251		1,170
Consolidating & Other	(6,515)		(6,878)
Consolidated	$	14,656	$	14,046


ITEM 2. 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, segment operations and the 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 "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020. This overview summarizes the MD&A, which includes the following sections:

•Second Quarter Review—highlights from the second quarter of 2021 outlining some of the major events that happened during the period and how they affected our financial performance.

•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and six months ended June 30, 2021. 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 includes forward-looking statements regarding our view of the remainder of 2021.

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

SECOND QUARTER REVIEW

Business Recovery and Financial Outlook

Second quarter 2021 results indicate we have reached a turning point in our recovery from the significant impacts of the COVID-19 pandemic. Early in the pandemic we shared plans to return capacity in a prudent manner, only when demand supported doing so. We also established structural cost removal targets that have positioned the airline well for returning to profitability in recovery. With the strong return of demand in the second quarter, we reported an adjusted net loss that was significantly better than previous quarterly losses, and we currently expect double-digit adjusted pre-tax profit margins in the third quarter.

In the second half of 2021, we remain committed to returning capacity in a deliberate manner to match the return of leisure and business demand in the markets we serve. We also continue to return to 2019 capacity levels no later than the summer of 2022, though we have increased our near-term flying expectations as we ramp towards that target. To support this plan and prepare for growth beyond 2022, in the second quarter of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and 2024, and nine E175 to be operated by Horizon Air with deliveries in 2022 and 2023. In addition, we expanded our long-term capacity agreement with SkyWest by eight aircraft beginning in 2022.

Our guidance for 2021 compares against 2019 as we believe it provides a more meaningful indication of the pace and quality of recovery to pre-pandemic levels. For the third quarter, we are planning for capacity to be approximately 17% to 20% below the same period in 2019, coupled with increased passenger counts as leisure travel continues through the summer months and business travel rebuilds as workplaces reopen. As we continue to be disciplined with returning capacity and optimizing the aircraft gauge for flown routes, we anticipate third quarter load factors to range between 82% and 85%.

The guidance we have provided and our outlook more broadly are sensitive to health trends, exposure to variants of the COVID-19 virus, and regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. Our people continue to focus on keeping costs low, running a great operation, and welcoming guests back to travel with Next-Level Care to ensure they are safe and comfortable when they fly. These competitive advantages we have cultivated over many years will continue to serve us well in 2021 and beyond, and we are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.

Sustainability Updates

As we move beyond the impacts of the COVID-19 pandemic, we have shifted our focus back to our 2025 strategic plan, which was announced in 2019. During the second quarter, we continued to make strides towards our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. As part of these commitments, we announced a partnership with Boeing on the 737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies to enhance the safety and sustainability of air travel. In the second quarter we also announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and machine learning to optimize air traffic and enable more fuel-efficient flight paths for aggregate savings of fuel, carbon emissions and time.

As a reflection of the importance of the commitments made, we continue to tie a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emission target into our company-wide performance-based pay program, for which we currently expect to meet the targeted goal.

Financial Overview

Our consolidated pre-tax income for the second quarter of 2021 was $528 million, compared to a pre-tax loss of $291 million in the second quarter of 2020. The $819 million improvement is primarily driven by an increase of $1.1 billion in operating revenue and $141 million of increased wage offsets provided by extensions of the PSP of the CARES Act. These improvements were offset by a $292 million increase in non-fuel operating costs, excluding special items, and a $215 million increase in fuel expense as the operation ramps up to meet increased demand.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses 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 this Item 2.

RESULTS OF OPERATIONS

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

We believe disclosure of earnings excluding the impact of the Payroll Support Program grant wage offset, special items, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

•By excluding fuel expense and certain special items (including the Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. 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 special items, such as the Payroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual cash incentive plan, which covers the majority of employees within the Air Group organization.

•CASM excluding fuel and certain special 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.

•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 revenues, we do not (nor are we able to) evaluate unit revenues 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 revenues 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.

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

OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.


	Three Months Ended June 30,			Six Months Ended June 30,
	2021	2020	Change	2021	2020	Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)	8,712	1,485	486.7%	13,379	10,417	28.4%
RPMs (000,000) "traffic"	10,334	1,654	524.8%	15,727	12,310	27.8%
ASMs (000,000) "capacity"	13,413	4,307	211.4%	23,810	19,612	21.4%
Load factor	77.0%	38.4%	38.6 pts	66.1%	62.8%	3.3 pts
Yield	13.09¢	18.68¢	(29.9)%	12.79¢	14.54¢	(12.0)%
RASM	11.38¢	9.77¢	16.5%	9.76¢	10.49¢	(7.0)%
CASM excluding fuel and special items(b)	9.20¢	21.87¢	(57.9)%	9.95¢	12.00¢	(17.1)%
Economic fuel cost per gallon(b)	$1.90	$1.20	58.3%	$1.85	$1.77	4.5%
Fuel gallons (000,000)	168	54	211.1%	294	248	18.5%
ASMs per fuel gallon	79.8	79.8	—%	81.0	79.1	2.4%
Average full-time equivalent employees (FTEs)	19,001	15,836	20.0%	18,071	19,115	(5.5)%
Mainline Operating Statistics:
Revenue passengers (000)	6,151	905	579.7%	9,302	7,580	22.7%
RPMs (000,000) "traffic"	8,966	1,276	602.7%	13,555	10,858	24.8%
ASMs (000,000) "capacity"	11,611	3,363	245.3%	20,464	17,060	20.0%
Load factor	77.2%	37.9%	39.3 pts	66.2%	63.6%	2.6 pts
Yield	11.96¢	17.63¢	(32.2)%	11.64¢	13.44¢	(13.4)%
RASM	10.59¢	9.52¢	11.2%	9.09¢	9.94¢	(8.6)%
CASM excluding fuel and special items(b)	8.48¢	22.19¢	(61.8)%	9.17¢	11.17¢	(17.9)%
Economic fuel cost per gallon(b)	$1.88	$1.20	56.7%	$1.84	$1.78	3.4%
Fuel gallons (000,000)	135	38	255.3%	233	201	15.9%
ASMs per fuel gallon	86.0	88.5	(2.8)%	87.8	84.9	3.4%
Average FTEs	14,021	12,340	13.6%	13,247	14,579	(9.1)%
Aircraft utilization	9.9	5.6	76.8%	9.2	8.8	4.5%
Average aircraft stage length	1,320	1,144	15.4%	1,313	1,270	3.4%
Operating fleet(d)	202	225	(23) a/c	202	225	(23) a/c
Regional Operating Statistics:(c)
Revenue passengers (000)	2,562	580	341.7%	4,077	2,837	43.7%
RPMs (000,000) "traffic"	1,367	378	261.6%	2,172	1,452	49.6%
ASMs (000,000) "capacity"	1,802	945	90.7%	3,346	2,552	31.1%
Load factor	75.9%	40.0%	35.9 pts	64.9%	56.9%	8.0 pts
Yield	20.48¢	22.12¢	(7.4)%	19.95¢	22.80¢	(12.5)%
RASM	16.41¢	10.63¢	54.4%	13.84¢	14.07¢	(1.6)%
Operating fleet	94	94	— a/c	94	94	— 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.

Given the unusual nature of 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 2021 to 2019.


FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited)
Alaska Air Group, Inc.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021		2019		Change		2021		2019		Change
Passenger revenue	$	1,352	$	2,111	(36)	%	$	2,011	$	3,827	(47)	%
Mileage plan other revenue	118		118		—	%	212		228		(7)	%
Cargo and other	57		59		(3)	%	101		109		(7)	%
Total operating revenues	$	1,527	$	2,288	(33)	%	$	2,324	$	4,164	(44)	%

Operating expense, excluding fuel and special items	$	1,234	$	1,414	(13)	%	$	2,371	$	2,819	(16)	%
Economic fuel	274		502		(45)	%	477		922		(48)	%
Special items	(530)		8		NM		(912)		34		NM
Total operating expenses	$	978	$	1,924	(49)	%	$	1,936	$	3,775	(49)	%

Total nonoperating expense	(21)		(13)		62	%	(33)		(32)		3	%
Income (loss) before income tax	$	528	$	351	50	%	$	355	$	357	(1)	%

Consolidated Operating Statistics(a):
Revenue passengers (000)	8,712		12,026		(28)	%	13,379		22,442		(40)	%
RPMs (000,000) "traffic"	10,334		14,638		(29)	%	15,727		27,087		(42)	%
ASMs (000,000) "capacity"	13,413		16,980		(21)	%	23,810		32,487		(27)	%
Load Factor	77.0%		86.2%		(9.2)	pts	66.1%		83.4%		(17.3)	pts
Yield	13.09¢		14.43¢		(9)	%	12.79¢		14.13¢		(9)	%
RASM	11.38¢		13.48¢		(16)	%	9.76¢		12.82¢		(24)	%
CASMex	9.20¢		8.33¢		10	%	9.95¢		8.68¢		15	%
FTEs	19,001		21,921		(13)	%	18,071		21,876		(17)	%

(a) 2019 comparative operating statistics have been recalculated using the information presented above, and as filed in our second quarter 2019 Form 10-Q.

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2021 TO THREE MONTHS ENDED JUNE 30, 2020

Our consolidated net income for the three months ended June 30, 2021 was $397 million, or $3.13 per share, compared to a net loss of $214 million, or $1.74 per share, for the three months ended June 30, 2020.

Excluding the impact of the Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the second quarter of 2021 was $38 million, or $0.30 per share, compared to an adjusted net loss of $439 million, or $3.57 per share, in the second quarter of 2020. The following tables reconcile our adjusted net loss per share (EPS) to amounts as reported in accordance with GAAP:


	Three Months Ended June 30,
	2021				2020
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
GAAP net income (loss) per share	$	397	$	3.13	$	(214)	$	(1.74)
Payroll Support Program grant wage offset	(503)		(3.97)		(362)		(2.94)
Mark-to-market fuel hedge adjustments	(46)		(0.36)		(6)		(0.05)
Special items - impairment charges and other	(4)		(0.03)		69		0.56
Special items - restructuring charges	(23)		(0.18)		—		—
Special items - merger-related costs	—		—		1		0.01
Income tax effect of reconciling items above	141		1.11		73		0.59
Non-GAAP adjusted net loss per share	$	(38)	$	(0.30)	$	(439)	$	(3.57)

CASM reconciliation is summarized below:


	Three Months Ended June 30,
(in cents)	2021		2020		% Change
Consolidated:
CASM	7.29	¢	16.46	¢	(56)	%
Less the following components:
Payroll Support Program grant wage offset	(3.75)		(8.40)		(55)	%
Aircraft fuel, including hedging gains and losses	2.04		1.37		49	%
Special items - impairment charges and other	(0.03)		1.60		(102)	%
Special items - restructuring charges	(0.17)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	9.20	¢	21.87	¢	(58)	%

Mainline:
CASM	6.24	¢	15.79	¢	(60)	%
Less the following components:
Payroll Support Program grant wage offset	(3.79)		(9.69)		(61)	%
Aircraft fuel, including hedging gains and losses	1.78		1.16		53	%

Special items - impairment charges and other	(0.03)		2.11		(101)	%
Special items - restructuring charges	(0.20)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	8.48	¢	22.19	¢	(62)	%

OPERATING REVENUES

Total operating revenues increased $1.1 billion during the second quarter of 2021 compared to the same period in 2020. The changes are summarized in the following table:


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Passenger revenue	$	1,352	$	309	338	%
Mileage Plan other revenue	118		73		62	%
Cargo and other	57		39		46	%
Total operating revenues	$	1,527	$	421	263	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the second quarter of 2021 increased by $1.0 billion, primarily driven by a significant increase in passenger traffic. In the second quarter of 2020, we experienced a near complete loss of demand driven by the COVID-19 pandemic. As recovery has taken hold, including wide availability of the vaccine and removal of restrictions throughout the markets we serve, demand for air travel has increased exponentially driven primarily by leisure travelers.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased by $45 million, or 62%, as compared to the same prior-year period, largely due to an increase in commissions from our bank card partners driven by increased consumer spending and new card acquisitions. Performance of Mileage Plan other revenues outpaced all other revenue sources, and resulted in the best performance of the program ever in the second quarter of 2021.

Cargo and other

On a consolidated basis, Cargo and other revenue for the second quarter of 2021 increased by $18 million, or 46%, as compared to the same prior-year period. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.

OPERATING EXPENSES

Total operating expenses increased $269 million, or 38%, compared to the second quarter of 2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Fuel expense	$	274	$	59	364	%
Non-fuel operating expenses, excluding special items	1,234		942		31	%
Payroll Support Program grant wage offset	(503)		(362)		39	%
Special items - impairment charges and other	(4)		69		(106)	%
Special items - restructuring charges	(23)		—		NM
Special items - merger-related costs	—		1		(100)	%
Total operating expenses	$	978	$	709	38	%

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 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 $215 million, compared to the second quarter of 2020. The elements of the change are illustrated in the following table:


	Three Months Ended June 30,
	2021				2020
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	330	$	1.96	$	60	$	1.11
(Gain)/loss on settled hedges	(10)		(0.06)		5		0.09
Consolidated economic fuel expense	320		1.90		$	65	$	1.20
Mark-to-market fuel hedge adjustments	(46)		(0.27)		(6)		(0.11)
GAAP fuel expense	$	274	$	1.63	$	59	$	1.09
Fuel gallons	168				54

Raw fuel expense per gallon for the three months ended June 30, 2021 increased by approximately 77% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the second quarter of 2021 was primarily driven by a 24% increase in crude oil prices. This is coupled with an increase in consumption of 114 million gallons, on an increase in scheduled departures.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, 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. When we refer to economic fuel expense, we include 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 second quarter were $10 million in 2021, compared to losses of $5 million in the same period in 2020. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.

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 2020 are more fully described below.


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Wages and benefits	$	510	$	472	8	%
Variable incentive pay	34		16		113	%
Aircraft maintenance	102		45		127	%
Aircraft rent	62		74		(16)	%
Landing fees and other rentals	144		83		73	%
Contracted services	54		30		80	%
Selling expenses	41		4		925	%
Depreciation and amortization	98		107		(8)	%
Food and beverage service	35		7		400	%
Third-party regional carrier expense	37		26		42	%
Other	117		78		50	%
Total non-fuel operating expenses, excluding special items	$	1,234	$	942	31	%

Wages and Benefits

Wages and benefits increased during the second quarter of 2021 by $38 million, or 8%, compared to 2020. The primary components of Wages and benefits are shown in the following table:


	Three Months Ended June 30,
(in millions)	2021		2020		% Change
Wages	$	386	$	350	10	%
Pension - Defined benefit plans service cost	13		13		—	%
Defined contribution plans	26		30		(13)	%
Medical and other benefits	59		54		9	%
Payroll taxes	26		25		4	%
Total wages and benefits	$	510	$	472	8	%

Wages increased $36 million, or 10%, on a 20% increase in FTEs. Increased wages as compared to the prior period are primarily the result of leaves of absence taken and reduction in executive pay and hours for management employees in 2020 which were not repeated in 2021.

Defined contribution plan expense decreased 13% as compared to 2020 as a result of a one-time adjustment recorded in the second quarter of 2021 for employer contributions to those participating in incentive leave programs.

Variable Incentive Pay

Variable incentive pay expense increased $18 million during the second quarter of 2021 compared to the same period in 2020 on increased expectation of achievement of key financial and operational metrics.

Aircraft Maintenance

Aircraft maintenance expense increased by $57 million during the second quarter of 2021 compared to the same period in 2020. This is primarily due to a significant increase in utilization of aircraft as we return to capacity, resulting in increased engine events, heavy checks and power-by-the-hour expense.

Aircraft Rent

Aircraft rent expense decreased by $12 million, or 16%, during the second quarter of 2021 compared to the same period in 2020 primarily the result of the full impairment taken on certain leased Airbus aircraft in 2020.

Landing fees and other rentals

Landing fees and other rentals increased by $61 million, or 73%, during the second quarter of 2021 compared to the same period in 2020 primarily due to a significant increase in departures. Increased departure-related costs were coupled by rate increases at many of our hub airports, including the renegotiated lease at our largest airport hub Seattle-Tacoma International Airport.

Contracted Services

Contracted services increased by $24 million, or 80%, during the second quarter of 2021 compared to the same period in 2020 driven primarily by increased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.

Selling Expense

Selling expense increased by $37 million during the second quarter of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions incurred with the increase of overall travel.

Food and Beverage Service

Food and beverage service increased by $28 million during the second quarter of 2021 compared to the same period in 2020. This increase is consistent with the overall increase in revenue passengers as compared to the prior-year period, as well as the return of many of our on-board products in the second quarter of 2021.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased by $11 million, or 42%, during the second quarter of 2021 compared to the same period in 2020. The increase in expense is primarily due to increases in departures flown by SkyWest as compared to the prior-year period. Increased expense was partially offset by a pass through of CARES Act PSP funding of $5 million received in the second quarter to offset SkyWest pilot and flight attendant wages and benefits.

Other expense

Other expense increased $39 million, or 50%, during the second quarter of 2021 compared to the same period in 2020. Increased expense is primarily driven by incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity, as well as additional expense for professional services.

Special Items - Impairment and other charges

We recorded a benefit associated with impairment and other charges of $4 million in the second quarter of 2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor.

Special Items - Restructuring charges

We recorded a benefit for workforce restructuring of $23 million in the second quarter of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline recorded an adjusted pretax loss of $24 million in the second quarter of 2021, compared to a pretax loss of $471 million in the second quarter of 2020. The $447 million improvement was primarily driven by an $847 million increase in Passenger revenues as a result of increased demand for air travel, offset by a $238 million increase in non-fuel operating costs and a $208 million increase in economic fuel cost.

The increase in Mainline passenger revenue for the second quarter of 2021 was primarily driven by a significant increase in traffic and capacity due to increased demand for air travel.

Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher raw fuel prices, combined with a significant increase in gallons consumed, drove the increase in Mainline fuel expense.

Regional

Regional operations generated an adjusted pretax loss of $56 million in the second quarter of 2021, compared to a pretax loss of $129 million in the second quarter of 2020. The improved pretax loss was attributable to a $195 million increase in operating revenues, partially offset by a $76 million increase in non-fuel operating expenses and a $46 million increase in fuel costs.

Regional passenger revenue increased significantly compared to the second quarter of 2020, primarily driven by increased traffic and capacity driven by the resurgence in demand for air travel.

The increase in non-fuel operating expenses is primarily due to increased variable costs and higher CPA rates on an increase in capacity, offset by the pass through of CARES Act PSP funds recorded in the second quarter of 2021.

Horizon

Horizon achieved an adjusted pretax profit of $15 million in the second quarter of 2021 compared to $8 million in the second quarter of 2020. Increased profit is primarily the result of increased capacity flown, coupled with substantial progress in cost reduction efforts.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2021 TO SIX MONTHS ENDED JUNE 30, 2020

Our consolidated net income for the six months ended June 30, 2021 was $266 million, or $2.10 per diluted share, compared to a net loss of $446 million, or $3.62 per diluted share, for the six months ended June 30, 2020.

Our adjusted net loss for the six months ended June 30, 2021 was $474 million, or $3.75 per diluted share, compared to an adjusted net loss of $541 million, or $4.40 per diluted share, in the six months ended June 30, 2020. The following tables reconcile our adjusted net loss and adjusted diluted EPS to amounts as reported in accordance with GAAP:


	Six Months Ended June 30,
	2021				2020
(in millions, except per share amounts)	Dollars		Diluted EPS		Dollars		Diluted EPS
Reported GAAP net income (loss) and diluted EPS	$	266	$	2.10	$	(446)	$	(3.62)
Payroll Support Program grant wage offset	(914)		(7.23)		(362)		(2.94)
Mark-to-market fuel hedge adjustments	(68)		(0.54)		3		0.02
Special items - merger-related costs	—		—		4		0.03
Special items - impairment charges and other	14		0.11		229		1.86
Special items - restructuring charges	(12)		(0.09)		—		—
Income tax effect of reconciling items above	240		1.90		31		0.25
Non-GAAP adjusted net loss per share	$	(474)	$	(3.75)	$	(541)	$	(4.40)

Our operating costs per ASM are summarized below:


	Six Months Ended June 30,
(in cents)	2021		2020		% Change
Consolidated:
CASM	8.13	¢	13.59	¢	(40)	%
Less the following components:
Payroll Support Program grant wage offset	(3.84)		(1.85)		108	%
Aircraft fuel, including hedging gains and losses	2.00		2.26		(12)	%
Special items - impairment charges and other	0.07		1.17		(94)	%
Special items - restructuring charges	(0.05)		—		NM
Special items - merger-related costs	—		0.01		(100)	%
CASM excluding fuel and special items	9.95	¢	12.00	¢	(17)	%

Mainline:
CASM	6.72	¢	12.39	¢	(46)	%
Less the following components:
Payroll Support Program grant wage offset	(4.21)		(1.91)		120	%
Aircraft fuel, including hedging gains and losses	1.75		2.12		(17)	%
Special items - impairment charges and other	0.07		0.99		(93)	%
Special items - restructuring charges and other	(0.06)		—		NM
Special items - merger-related costs	—		0.02		(100)	%
CASM excluding fuel and special items	9.17	¢	11.17	¢	(18)	%

OPERATING REVENUES

Total operating revenues increased $267 million, or 13%, during the first six months of 2021 compared to the same period in 2020. The changes are summarized in the following table:


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Passenger revenue	$	2,011	$	1,790	12	%
Mileage Plan other revenue	212		182		16	%
Cargo and other	101		85		19	%
Total operating revenues	$	2,324	$	2,057	13	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the first six months of 2021 increased by $221 million, or 12%, on a 28% increase in passenger traffic, driven primarily by rebounding demand for leisure travel experienced in the second quarter of 2021. As travel restrictions were removed, including the full removal of restrictions in the state of California in June of 2021, passenger counts increased dramatically as compared to the prior year. These improvements were offset by a decrease of 12% in yield, stemming from promotional activities undertaken to stimulate demand and increase bookings during what is typically a low booking period.

We expect to see continued improvement to Passenger revenue as we progress through 2021, driven by continued growth in demand and capacity, as well as improvements to business travel as employees return to work.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue increased $30 million, or 16%, in the first six months of 2021 compared to the first six months of 2020, due largely to an increase in commission received from our affinity card partner stemming from growing consumer spend and incremental new card acquisitions.

Cargo and other

On a consolidated basis, Cargo and other revenue increased $16 million, or 19%, in the first six months of 2021 compared to the first six months of 2020. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.

We expect that our cargo and other revenues will be positively impacted as compared to 2020 due to the elimination of freighter limitations.

OPERATING EXPENSES

Total operating expenses decreased $730 million, or 27%, compared to the first six months of 2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Fuel expense	$	477	$	443	8	%
Non-fuel operating expenses, excluding special items	2,371		2,352		1	%
Payroll Support Program grant wage offset	(914)		(362)		152	%
Special items - impairment charges and other	14		229		(94)	%
Special items - restructuring charges	(12)		—		NM
Special items - merger-related costs	—		4		(100)	%
Total operating expenses	$	1,936	$	2,666	(27)	%

Fuel Expense

Aircraft fuel expense increased $34 million, or 8%, compared to the six months ended June 30, 2020. The elements of the change are illustrated in the table:


	Six Months Ended June 30,
	2021				2020
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	552	$	1.87	$	430	$	1.73
(Gain)/loss on settled hedges	(7)		(0.02)		10		0.04
Consolidated economic fuel expense	545		1.85		$	440	$	1.77
Mark-to-market fuel hedge adjustments	(68)		(0.23)		3		0.01
GAAP fuel expense	$	477	$	1.62	$	443	$	1.78
Fuel gallons	294				248

The raw fuel price per gallon increased 8% 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. The increase in raw fuel price per gallon during the first six months of 2021 was driven by a 10% increase in crude oil prices, offset by a 65% decrease in refining margins.

Gains recognized for hedges that settled in the first six months of 2021 were $7 million, compared to losses of $10 million in the same period in 2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.

We expect our economic fuel cost per gallon in the third quarter to range between $1.95 and $2.00 per gallon based on current market West Coast jet fuel prices.

Non-fuel Expense and Non- special items


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Wages and benefits	$	1,003	$	1,084	(7)	%
Variable incentive pay	67		23		191	%
Aircraft maintenance	183		160		14	%
Aircraft rent	124		155		(20)	%
Landing fees and other rentals	273		214		28	%
Contracted services	105		102		3	%
Selling expenses	74		59		25	%
Depreciation and amortization	195		215		(9)	%
Food and beverage service	58		56		4	%
Third-party regional carrier expense	67		63		6	%
Other	222		221		—	%
Total non-fuel operating expenses, excluding special items	$	2,371	$	2,352	1	%

Wages and Benefits

Wages and benefits decreased during the first six months of 2021 by $81 million, or 7%. The primary components of wages and benefits are shown in the following table:


	Six Months Ended June 30,
(in millions)	2021		2020		% Change
Wages	$	743	$	803	(7)	%
Pension—Defined benefit plans service cost	26		26		—	%
Defined contribution plans	58		68		(15)	%
Medical and other benefits	124		130		(5)	%
Payroll taxes	52		57		(9)	%
Total wages and benefits	$	1,003	$	1,084	(7)	%

Wages decreased $60 million, or 7%, on a 5% decrease in FTEs. Decreased wages as compared to the prior period are primarily the result of voluntary early-outs, as well as leaves of absence and incentive lines accepted in 2020 which carried into 2021. These reductions were offset by increased wages in the second quarter as we began to rebuild staffing and provide incentives to employees in response to increasing demand. Reductions to defined-contribution plan expense, medical and other benefits, and payroll taxes are a direct result of the decline in wages.

For the full year, we expect wages and benefits will increase compared to 2020 as we increase scheduled flying and return workers from incentive leaves or other absences to align with our expectation of increased demand. Additionally, as labor shortages continue to impact many of our markets, we expect to see continued wage pressure as we offer premium and bonus pay to attract and retain employees.

Variable Incentive Pay

Variable incentive pay expense increased $44 million, or 191%, during the first six months of 2021 as compared to the same period in 2020. The increase is primarily due to the expectation that incremental key targets will be achieved under the performance based pay program.

Aircraft Maintenance

Aircraft maintenance expense increased by $23 million, or 14%, during the first six months of 2021 compared to the same period in 2020. The increase is primarily due to increased component repairs which were delayed from 2020 as a result of increased flight hours, as well as increased power-by-the-hour combined with increased utilization of covered aircraft.

We expect full year aircraft maintenance expense to be higher than 2020 on increased aircraft utilization.

Landing fees and other rentals

Landing fees and other rentals increased by $59 million, or 28%, during the first six months of 2021 compared to the same period in 2020, primarily due to a significant increase in departures, combined with increased rates at certain of our airports.

For the full year we expect landing fees and other rentals to increase as compared to 2020 as we continue to increase capacity and departures on increased rates at many of our hub airports.

Selling Expense

Selling expense increased by $15 million, or 25%, during the first six months of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions. Increased marketing spend and sponsorship costs given the return of professional sports and events also contributed to the year-over-year increase.

We expect full year selling expense will increase in-line with the increase to revenue as a result of increased distribution costs on higher bookings, as well as increased sponsorship and marketing costs.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $4 million, or 6%, during the first six months of 2021 compared to the same period in 2020. The increase is primarily due to a 26% increase in SkyWest departures as compared to the prior year. Increased SkyWest activity was offset by the receipt and recognition of $14 million in pass-through of CARES Act PSP funding for pilot and flight attendant wages and benefits.

For the full year, we expect third-party regional carrier expense to be higher than 2020 driven by increased departures.

Special Items - Impairment and other charges

We recorded impairment and other charges of $14 million in the first six months of 2021, consisting of costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor. We continue to evaluate total estimated costs to return these permanently parked aircraft, and make updates to total expense where necessary.

Special Items - Restructuring charges

We recorded a restructuring benefit of $12 million in the first six months of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline reported an adjusted pretax loss was $468 million in the first six months of 2021, compared to an adjusted pretax loss of $556 million in the same period in 2020. The $88 million improvement to pretax loss was driven by a $163 million increase in Mainline operating revenues coupled with a $28 million decrease in Mainline non-fuel operating expense. These improvements were offset by a $69 million increase in Mainline fuel expense.

As compared to the prior year, higher Mainline revenues are primarily attributable to a 25% increase in traffic on a 20 point increase in capacity, driven by the significant increase in demand recovering from the COVID-19 pandemic. Non-fuel operating expenses increased from higher variable costs on increased capacity, as well as rising wages and benefits expense as we expand our workforce to meet growing demand and leisure travel seasonality. Higher raw fuel prices, combined with increased consumption drove the growth in Mainline fuel expense.

Regional

Regional operations incurred an adjusted pretax loss of $206 million in the first six months of 2021, compared to an adjusted pretax loss of $202 million in the first six months of 2020. The increased loss was attributable to a $72 million increase in non-fuel operating expenses and a $36 million increase in fuel costs, offset by a $104 million increase in operating revenues.

The increase to regional revenues is driven by a 50% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses.

Horizon

Horizon achieved an adjusted pretax profit of $26 million in the first six months of 2021, compared to an adjusted pretax profit of $16 million in the same period in 2020, primarily due to improved operational performance and cost management.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, manage liquidity and preserve the relative strength of our balance sheet. In 2020, we took significant actions to enhance and preserve our liquidity, withstand depressed demand, and prepare for the recovery ahead. In 2021, we have achieved the following, which we believe positions us well for recovery:

•Generated positive operating cash flow of $1.0 billion, bolstered by improved advance bookings for increased demand for air travel, and the receipt of $1.2 billion in payroll support funding from the U.S. Treasury under extensions of CARES Act programs, $892 million of which is included in operating cash flow;

•Repaid $681 million in debt, including the termination of the CARES Act loan, and the full repayment of two outstanding lines of credit;

•Decreased debt-to-capitalization ratio to 56% at June 30, 2021 from 61% at December 31, 2020;

•Finalized a previously announced amendment to the existing aircraft purchase agreement with Boeing, which significantly reduced our 2021 capital commitments and provides slide rights to defer commitments from 2022 to later years, and;

•Maintained low capital expenditures, which are expected to be approximately $225 million in 2021, including renegotiated timing of pre-delivery payments and deferral of non-essential capital projects.

Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors.

As the business continues to recover and returns to profitability, reducing outstanding debt and strengthening our balance sheet is a high priority. Based on our expectations about the recovery ahead, we expect to generate cash flow from operations of zero to $100 million in the third quarter. This is lower than in the second quarter due to the expectation of no further government support and seasonal booking patterns that result in less cash bookings for future travel.

We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations and meet our debt payment obligations, and to remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.

The table below presents the major indicators of financial condition and liquidity:


(in millions)	June 30, 2021			December 31, 2020			Change
Cash and marketable securities	$	3,951		$	3,346		18 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	103		%	94		%	9 pts
Total debt	3,188			3,495			(9) %
Shareholders’ equity	$	3,324		$	2,988		11%


Debt-to-capitalization, adjusted for operating leases
(in millions)	June 30, 2021			December 31, 2020			Change
Long-term debt, net of current portion	$	2,319		$	2,357		(2)%
Capitalized operating leases	1,485			1,558			(5)%
COVID-19 related borrowings(a)	425			734			(42)%
Adjusted debt, net of current portion of long-term debt	$	4,229		$	4,649		(9)%
Shareholders' equity	3,324			2,988			11%
Total invested capital	$	7,553		$	7,637		(1)%

Debt-to-capitalization, including operating leases	56		%	61		%	(5) pts

(a)To best reflect our leverage, we included the remaining short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.


Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)	June 30, 2021		December 31, 2020
Current portion of long-term debt	$	869	$	1,138
Current portion of operating lease liabilities	263		290
Long-term debt, net of current portion	2,319		2,357
Long-term operating lease liabilities, net of current portion	1,222		1,268
Total adjusted debt	4,673		5,053
Less: Cash and marketable securities	(3,951)		(3,346)
Adjusted net debt	$	722	$	1,707

(in millions)	Twelve Months Ended June 30, 2021		Twelve Months Ended December 31, 2020
GAAP Operating Loss(a)	$	(778)	$	(1,775)
Adjusted for:
Payroll Support Program grant wage offset and special items	(712)		71
Mark-to-market fuel hedge adjustments	(79)		(8)
Depreciation and amortization	400		420
Aircraft rent	268		299
EBITDAR	$	(901)	$	(993)
Adjusted net debt to EBITDAR	(0.8x)		(1.7x)

(a)Operating loss can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first six months of 2021, net cash provided by operating activities was $1.0 billion, compared to $321 million during the same period in 2020. The $686 million increase in our operating cash flows is primarily attributable to a $712 million improvement to net income, aided by the receipt and recognition of $892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is due to continued increases in advanced bookings and a significant reduction in refund activity when compared to the first six months of 2020.

Cash Used in Investing Activities

Cash used in investing activities was $1.1 billion during the first six months of 2021, compared to $124 million during the same period of 2020. The increase to cash used in investing activities is primarily due to net purchases of marketable securities, which were $963 million in the first six months of 2021, compared to net sales of $34 million in the six months ended June 30, 2020. The shift to net purchases is primarily driven by additional cash on hand from increased operating cash flow and the PSP program, which allowed the Company to invest additional funds.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities was $281 million during the first six months of 2021 compared to cash provided by financing activities of $1.1 billion during the same period in 2020. During the first six months of 2021, we utilized cash on hand to repay $681 million of outstanding long-term debt, compared to payments of $125 million during the same period in 2020. These payments were offset by proceeds from debt issuances of $363 million, primarily a result of the loan portion of the proceeds from the CARES Act PSP, compared to $1.3 billion issued in 2020 in response to the COVID-19 pandemic.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Commitments

As of June 30, 2021, we have firm orders to purchase 75 aircraft, and firm commitments to lease 13 aircraft. Alaska also has an agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by eight aircraft in 2022. Alaska also has cancellable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2027. At this time, we do not expect to take delivery of these 30 Airbus aircraft. Alaska also has options to acquire 39 B737-9 MAX aircraft with deliveries from 2024 through 2026, and Horizon has options to acquire 21 E175 aircraft with deliveries from 2023 through 2024. Options will be exercised only if we believe return on invested capital targets can be met over the long term.

The following table summarizes our anticipated fleet count by year, as of June 30, 2021:


	Actual Fleet	Anticipated Fleet Activity(a)
Aircraft	June 30, 2021	2021 Additions	2021 Removals	Dec 31, 2021	2022 Changes	Dec 31, 2022	2023 Changes	Dec 31, 2023
B737 Freighters	3	—	—	3	—	3	—	3
B737-700	11	—	—	11	—	11	—	11
B737-800	61	—	—	61	—	61	—	61
B737-900	12	—	—	12	—	12	—	12
B737-900ER	79	—	—	79	—	79	—	79
B737-9 MAX	5	7	—	12	31	43	22	65
A320(b)	21	7	(1)	27	(3)	24	(24)	—
A321neo	10	—	—	10	—	10	—	10
Total Mainline Fleet	202	14	(1)	215	28	243	(2)	241
Q400 operated by Horizon(c)	32	—	—	32	—	32	—	32
E175 operated by Horizon(c)	30	—	—	30	5	35	4	39
E175 operated by third party(c)	32	—	—	32	8	40	—	40
Total Regional Fleet	94	—	—	94	13	107	4	111
Total	296	14	(1)	309	41	350	2	352

(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted yet.

(b)Actual fleet at June 30, 2021, excluding Airbus aircraft permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12 of these aircraft to operating service, seven of which are planned for 2021 and five for 2022.

(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. Under the terms of our capacity purchase agreement with a third party, in 2023 an additional spare aircraft will be leased to support the operational integrity of the network.

For future firm orders and option exercises, we may finance the aircraft through cash flow from operations or long-term debt.

Fuel Hedge Positions

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. Our crude oil positions are as follows:


	Approximate Gallons Hedged (in millions)	Weighted-Average Crude Oil Price per Barrel	Average Premium Cost per Barrel







Third Quarter 2021	100	$60	$2
Fourth Quarter 2021	90	$61	$3
Remainder of 2021	190	$60	$2
First Quarter 2022	80	$67	$3
Second Quarter 2022	60	$66	$3
Third Quarter 2022	40	$70	$3
Fourth Quarter 2022	20	$71	$3
Full Year 2022	200	$68	$3

Contractual Obligations

The following table provides a summary of our contractual obligations as of June 30, 2021. For agreements with variable terms, amounts included reflect our minimum obligations.


(in millions)	Remainder of 2021		2022		2023		2024		2025		Beyond 2025		Total
Current and long-term debt obligations	$	227	$	796	$	334	$	240	$	261	$	1,353	$	3,211
Aircraft lease commitments(a)	162		280		219		167		159		633		1,620
Facility lease commitments	6		10		9		8		6		88		127
Aircraft-related commitments(b)	107		1,458		1,207		291		76		12		3,151


Interest obligations (c)	55		98		72		57		51		175		508
Other obligations (d)	89		184		189		196		197		898		1,753
Total	$	646	$	2,826	$	2,030	$	959	$	750	$	3,159	$	10,370

(a)Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.

(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.

(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of June 30, 2021.

(d)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.

Credit Card Agreements

We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

Deferred Income Taxes

For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.

While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates during the three months ended June 30, 2021. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2020.

GLOSSARY OF AIRLINE 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 leases) 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 settled fuel-hedging contracts in the period

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 revenues 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. In this segment, Regional records 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 Alaska 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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2021, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of June 30, 2021.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).

PART II


ITEM 1. LEGAL PROCEEDINGS

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. In February 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.


ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.

In the second quarter of 2021, the Company issued 271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 1,455,436 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $52.25 (49,625 shares related to PSP2) and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS

The following documents are filed as part of this report:

1.Exhibits: See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


ALASKA AIR GROUP, INC.

/s/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller

August 3, 2021

EXHIBIT INDEX

Exhibit
Number

Exhibit
Description

Form

Date of First Filing

Exhibit Number

3.1

Amended and Restated Certificate of Incorporation of Registrant

10-Q

August 3, 2017

3.1

4.1†

Closing Date Warrant to Purchase Common Stock, dated April 8, 2021

4.2†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.3†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.4†

Closing Date Warrant to Purchase Common Stock, dated April 29, 2021

4.5†

Closing Date Warrant to Purchase Common Stock, dated June 3, 2021

4.6†

Promissory note, dated April 29, 2021, by Alaska Airlines, Inc., issuer, and each of Alaska Air Group, Inc. and Horizon Air Industries, Inc., as guarantors

10.1†

Payroll Support Program 3 Agreement, dated April 29, 2021, between Alaska Airlines, Inc., and the United States Department of the Treasury

10.2†

Warrant Agreement, dated April 29, 2021, between Alaska Air Group, Inc. and the United States Department of the Treasury

10.3†

Supplemental Agreement No. 16 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.

10.4†

Supplemental Agreement No. 17 to Purchase Agreement No. 3866 between the Boeing Company and Alaska Airlines, Inc.

10.5†*

Amendment No. 15 to Purchase Agreement dated April 11, 2016, between Embraer S.A. and Horizon Air Industries, Inc.

10.6†

Alaska Air Group Performance Based Pay Plan, Amended and Restated May 6, 2021

10.7†

Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended May 6, 2021

31.1†

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

31.2†

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

10-Q

32.1†

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

32.2†

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10-Q

101.INS†

XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

Filed herewith

Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended.