# ALASKA AIR GROUP, INC. (ALK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ALASKA AIR GROUP, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/766421/000076642123000009/alk-20221231.htm
Accession: 0000766421-23-000009
Filing date: 2023-02-13
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ALK/
All MD&A years: /company/ALK/mda/
Previous year: /company/ALK/mda/fy2021/ (FY 2021)
Next year: /company/ALK/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:

•Year in Review—highlights from 2022 outlining some of the major events that happened during the year and how they affected our financial performance.

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•Results of Operations—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the most recent two years presented in our consolidated financial statements. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section also includes forward-looking statements regarding our view of 2023. 

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

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

This section of the Form 10-K covers discussion of 2022 and 2021 results, and comparisons between those years. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

YEAR IN REVIEW

2022 Results

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

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

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

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

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

Labor Update

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

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Outlook

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

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

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

RESULTS OF OPERATIONS

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

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

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

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

•CASM excluding fuel and certain other items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

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

•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•Although we disclose our unit revenue, we do not, nor are we able to, evaluate unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

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

2022 COMPARED WITH 2021

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

Excluding the impact of special items, mark-to-market fuel hedge adjustments, and the Payroll Support Program grant wage offset, our adjusted consolidated net income for 2022 was $556 million, or $4.35 per share, compared to an adjusted consolidated net loss of $256 million, or $2.03 per share, in 2021. The following table reconciles our reported GAAP net income per share (EPS) during the full year 2022 and 2021 to adjusted amounts.

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2022","","2021"],["(in millions, except per-share amounts)","Dollars","","Diluted EPS","","Dollars","","Diluted EPS"],["GAAP net income per share","$","58","","","$","0.45","","","$","478","","","$","3.77"],["Payroll Support Program grant wage offset","\u2014","","","\u2014","","","(914)","","","(7.21)"],["Mark-to-market fuel hedge adjustments","76","","","0.60","","","(47)","","","(0.37)"],["Special items - fleet transition and other","496","","","3.88","","","(1)","","","(0.01)"],["Special items - labor and related","84","","","0.66","","","(10)","","","(0.08)"],["Income tax effect of reconciling items above","(158)","","","(1.24)","","","238","","","1.87"],["Non-GAAP adjusted net income (loss) per share","$","556","","","$","4.35","","","$","(256)","","","$","(2.03)"]]
[[/GREPCENT_TABLE]]

CASMex is reconciled to CASM below:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["(in cents)","2022","","2021","","% Change"],["Consolidated:"],["CASM","15.76","\u00a2","","10.47","\u00a2","","51%"],["Less the following components:"],["Payroll Support Program grant wage offset","\u2014","","","(1.75)","","","(100)%"],["Aircraft fuel, including hedging gains and losses","4.39","","","2.44","","","80%"],["Special items - fleet transition and other","0.82","","","\u2014","","","NM"],["Special items - labor and related","0.14","","","(0.02)","","","NM"],["CASM excluding fuel and special items","10.41","\u00a2","","9.80","\u00a2","","6%"],["Mainline:"],["CASM","14.42","\u00a2","","9.52","\u00a2","","51%"],["Less the following components:"],["Payroll support program grant wage offset","\u2014","","","(1.75)","","","(100)%"],["Aircraft fuel, including hedging gains and losses","4.11","","","2.33","","","76%"],["Special items - fleet transition and other","0.71","","","\u2014","","","NM"],["Special items - labor and related","0.15","","","(0.02)","","","NM"],["CASM excluding fuel and special items","9.45","\u00a2","","8.96","\u00a2","","5%"]]
[[/GREPCENT_TABLE]]

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OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure performance.

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2022","","2021","","Change"],["Consolidated Operating Statistics:(a)"],["Revenue passengers (000)","41,468","","32,407","","28.0%"],["RPMs (000,000) \"traffic\"","51,330","","38,598","","33.0%"],["ASMs (000,000) \"capacity\"","60,773","","52,445","","15.9%"],["Load factor","84.5%","","73.6%","","10.9 pts"],["Yield","17.16\u00a2","","14.25\u00a2","","20.4%"],["RASM","15.87\u00a2","","11.78\u00a2","","34.8%"],["CASMex(b)","10.41\u00a2","","9.80\u00a2","","6.3%"],["Economic fuel cost per gallon(b)","$3.42","","$2.02","","69.3%"],["Fuel gallons (000,000)","758","","656","","15.5%"],["ASMs per gallon","80.2","","79.9","","0.3%"],["Departures (000)","404","","377","","7.2%"],["Average full-time equivalent employees (FTEs)","22,564","","19,375","","16.5%"],["Employee productivity (PAX/FTEs/months)","153.1","","139.4","","9.9%"],["Mainline Operating Statistics:"],["Revenue passengers (000)","31,795","","23,268","","36.6%"],["RPMs (000,000) \"traffic\"","46,812","","33,755","","38.7%"],["ASMs (000,000) \"capacity\"","55,224","","45,741","","20.7%"],["Load factor","84.8%","","73.8%","","11.0 pts"],["Yield","15.92\u00a2","","13.07\u00a2","","21.8%"],["RASM","14.91\u00a2","","10.99\u00a2","","35.7%"],["CASMex(b)","9.45\u00a2","","8.96\u00a2","","5.5%"],["Economic fuel cost per gallon(b)","$3.40","","$2.01","","69.2%"],["Fuel gallons (000,000)","646","","530","","21.9%"],["ASMs per gallon","85.5","","86.2","","(0.8)%"],["Departures (000)","244","","207","","17.9%"],["Average full-time equivalent employees (FTEs)","17,224","","14,366","","19.9%"],["Aircraft utilization","9.9","","9.7","","2.1%"],["Average aircraft stage length","1,347","","1,324","","1.7%"],["Operating fleet(d)","225","","217","","8 a/c"],["Regional Operating Statistics:(c)"],["Revenue passengers (000)","9,673","","9,139","","5.8%"],["RPMs (000,000) \"traffic\"","4,518","","4,842","","(6.7)%"],["ASMs (000,000) \"capacity\"","5,549","","6,704","","(17.2)%"],["Load factor","81.4%","","72.2%","","9.2 pts"],["Yield","29.97\u00a2","","22.49\u00a2","","33.3%"],["RASM","25.34\u00a2","","17.12\u00a2","","48.0%"],["Departures (000)","160","","170","","(5.9)%"],["Operating fleet (d)","86","","94","","(8) a/c"]]
[[/GREPCENT_TABLE]]

(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

(c)Data presented includes information related to flights operated by Horizon and third-party carriers.

(d)Excludes all aircraft removed from operating service as of December 31, 2022 and December 31, 2021.

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Given the unusual nature of 2021 and 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2022 to 2019.

[[GREPCENT_TABLE]]
[["FINANCIAL INFORMATION AND OPERATING STATISTICS - 2022 Compared with 2019 (unaudited)"],["Alaska Air Group, Inc."],["","2022","","2019","","Change"],["Passenger revenue","$","8,808","","","$","8,095","","","9%"],["Mileage Plan other revenue","590","","","465","","","27%"],["Cargo and other revenue","248","","","221","","","12%"],["Total Operating Revenue","$","9,646","","","$","8,781","","","10%"],["Operating expense, excluding fuel and special items","$","6,328","","","$","5,796","","","9%"],["Aircraft fuel, including hedging gains and losses","2,668","","","1,884","","","42%"],["Special items","580","","","38","","","NM"],["Total Operating Expenses","$","9,576","","","$","7,718","","","24%"],["Total Non-operating Income (Expense)","9","","","(47)","","","119%"],["Income Before Income Tax","$","79","","","$","1,016","","","(92)%"],["Consolidated Operating Statistics:"],["Revenue passengers (000)","41,468","","46,733","","(11)%"],["RPMs (000,000) \"traffic\"","51,330","","56,040","","(8)%"],["ASMs (000,000) \"capacity\"","60,773","","66,654","","(9)%"],["Load factor","84.5%","","84.1%","","0.4 pts"],["Yield","17.16\u00a2","","14.45\u00a2","","19%"],["RASM","15.87\u00a2","","13.17\u00a2","","21%"],["CASMex","10.41\u00a2","","8.70\u00a2","","20%"],["Average full-time equivalent employees (FTEs)","22,564","","22,126","","2%"]]
[[/GREPCENT_TABLE]]

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OPERATING REVENUE

Total operating revenue increased $3.5 billion, or 56%, during 2022 compared to the same period in 2021. The changes are summarized in the following table:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["(in millions)","2022","","2021","","% Change"],["Passenger revenue","$","8,808","","","$","5,499","","","60","%"],["Mileage Plan other revenue","590","","","461","","","28","%"],["Cargo and other revenue","248","","","216","","","15","%"],["Total Operating Revenue","$","9,646","","","$","6,176","","","56","%"]]
[[/GREPCENT_TABLE]]

Passenger Revenue

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

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

Mileage Plan Other Revenue

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

Cargo and Other Revenue

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

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

OPERATING EXPENSES

Total operating expenses increased $4.1 billion, or 74%, compared to 2021. We consider it useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["(in millions)","2022","","2021","","% Change"],["Aircraft fuel, including hedging gains and losses","$","2,668","","","$","1,279","","","109","%"],["Non-fuel operating expenses, excluding special items","6,328","","","5,137","","","23","%"],["Payroll Support Program grant wage offset","\u2014","","","(914)","","","NM"],["Special items - fleet transition and other","496","","","(1)","","","NM"],["Special items - labor and related","84","","","(10)","","","NM"],["Total Operating Expenses","$","9,576","","","$","5,491","","","74","%"]]
[[/GREPCENT_TABLE]]

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

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Fuel Expense

Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile based on fuel consumption and because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense increased $1.4 billion, or 109%, compared to 2021. The elements of the change are illustrated in the following table:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2022","","2021"],["(in millions, except for per gallon amounts)","Dollars","","Cost/Gal","","Dollars","","Cost/Gal"],["Raw or \"into-plane\" fuel cost","$","2,761","","","$","3.64","","","$","1,383","","","$","2.11"],["(Gain)/loss on settled hedges","(169)","","","(0.22)","","","(57)","","","(0.09)"],["Consolidated economic fuel expense","$","2,592","","","$","3.42","","","$","1,326","","","$","2.02"],["Mark-to-market fuel hedge adjustments","76","","","0.10","","","(47)","","","(0.07)"],["GAAP fuel expense","$","2,668","","","$","3.52","","","$","1,279","","","$","1.95"],["Fuel gallons","","","758","","","","","656"]]
[[/GREPCENT_TABLE]]

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

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. Economic fuel expense includes gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

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

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

Non-fuel Expenses

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

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[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["(in millions)","2022","","2021","","% Change"],["Wages and benefits","$","2,640","","","$","2,218","","","19","%"],["Variable incentive pay","257","","","151","","","70","%"],["Aircraft maintenance","424","","","364","","","16","%"],["Aircraft rent","291","","","254","","","15","%"],["Landing fees and other rentals","581","","","555","","","5","%"],["Contracted services","329","","","235","","","40","%"],["Selling expenses","295","","","173","","","71","%"],["Depreciation and amortization","415","","","394","","","5","%"],["Food and beverage service","197","","","139","","","42","%"],["Third-party regional carrier expense","182","","","147","","","24","%"],["Other","717","","","507","","","41","%"],["Total non-fuel operating expenses, excluding special items","$","6,328","","","$","5,137","","","23","%"]]
[[/GREPCENT_TABLE]]

Wages and Benefits

Wages and benefits increased during 2022 by $422 million, or 19%, compared to 2021, excluding the impact of the Payroll Support Program grant wage offset. The primary components of Wages and benefits are shown in the following table:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["(in millions)","2022","","2021","","% Change"],["Wages","$","2,024","","","$","1,643","","","23","%"],["Pension - Defined benefit plans","45","","","52","","","(13)","%"],["Defined contribution plans","160","","","126","","","27","%"],["Medical and other benefits","263","","","275","","","(4)","%"],["Payroll taxes","148","","","122","","","21","%"],["Total wages and benefits","$","2,640","","","$","2,218","","","19","%"]]
[[/GREPCENT_TABLE]]

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

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

Variable Incentive Pay

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

Aircraft Maintenance

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

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

Aircraft Rent

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

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

Landing Fees and Other Rentals

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

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

Contracted Services

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

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

Selling Expenses

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

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

Food and Beverage Service

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

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

Third-party Regional Carrier Expense

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

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

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Other Expense

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

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

Special Items - fleet transition and other

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

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

Special items - labor and related

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

ADDITIONAL SEGMENT INFORMATION

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

Mainline

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

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

Regional

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

Horizon

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

40

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

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

•Cash flows from operations;

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

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

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

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

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

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

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

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

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

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

[[GREPCENT_TABLE]]
[["(in millions)","December 31, 2022","","December 31, 2021","","Change"],["Cash and marketable securities","$","2,417","","","$","3,116","","","$","(699)"],["Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue","29","%","","57","%","","(28)","pts"],["Long-term debt, net of current portion","$","1,883","","","$","2,173","","","$","(290)"],["Shareholders\u2019 equity","$","3,816","","","$","3,801","","","$","15"]]
[[/GREPCENT_TABLE]]

41

Debt-to-capitalization, adjusted for operating leases

[[GREPCENT_TABLE]]
[["(in millions)","December 31, 2022","","December 31, 2021","","Change"],["Long-term debt, net of current portion","$","1,883","","","$","2,173","","","(13)%"],["Capitalized operating leases","1,621","","","1,547","","","5%"],["Adjusted debt","$","3,504","","","$","3,720","","","(6)%"],["Shareholders' equity","3,816","","","3,801","","","\u2014%"],["Total invested capital","$","7,320","","","$","7,521","","","(3)%"],["Debt-to-capitalization, including operating leases","48%","","49%"]]
[[/GREPCENT_TABLE]]

Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent

[[GREPCENT_TABLE]]
[["(in millions)","December 31, 2022","","December 31, 2021"],["Current portion of long-term debt","$","276","","","$","366"],["Current portion of operating lease liabilities","228","","","268"],["Long-term debt","1,883","","","2,173"],["Long-term operating lease liabilities, net of current portion","1,393","","","1,279"],["Total adjusted debt","3,780","","","4,086"],["Less: Cash and marketable securities","(2,417)","","","(3,116)"],["Adjusted net debt","$","1,363","","","$","970"],["(in millions)","December 31, 2022","","December 31, 2021"],["GAAP Operating Income","$","70","","","$","685"],["Adjusted for:"],["Special items and Payroll Support Program grant wage offset","580","","","(925)"],["Mark-to-market fuel hedge adjustments","76","","","(47)"],["Depreciation and amortization","415","","","394"],["Aircraft rent","291","","","254"],["EBITDAR","$","1,432","","","$","361"],["Adjusted net debt to EBITDAR","1.0x","","2.7x"]]
[[/GREPCENT_TABLE]]

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

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

Net cash provided by operating activities was $1.4 billion in 2022 compared to $1 billion in 2021. Cash provided by ticket sales and from our co-branded credit card agreement are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state and local taxing authorities.

42

The $388 million net increase in our operating cash flows is due to a combination of factors. Increased remuneration from our co-branded credit card provided $374 million in incremental cash as compared to 2021 on improved economics and increased volumes. Additionally, in 2022 we received $295 million in federal income tax refunds. The prior year also included a nonrecurring voluntary contribution of $100 million to Alaska pilots' defined benefit plan. These amounts were partially offset by uses of cash on increasing operating expenses as the business returned flying capacity.

Cash Used in Investing Activities

Cash used in investing activities was $1.2 billion during 2022 compared to $1 billion in 2021. Cash used in capital expenditures for aircraft purchase deposits and other property and equipment was $1.7 billion in 2022, compared to $292 million in 2021. This increase in cash used in capital expenditures was partially offset by marketable securities activity, which amounted to $455 million of net sales in 2022, compared to $706 million of net purchases in 2021.

Cash Used in Financing Activities

Cash used in financing activities was $325 million during 2022 compared to $914 million in 2021. During the year, we had no new proceeds from issuance of debt and utilized cash on hand to make $385 million in debt payments, compared to debt proceeds of $363 million and payments of $1.3 billion in the prior year.

MATERIAL CASH COMMITMENTS

Material cash requirements include the following contractual and other obligations: 

Aircraft Commitments

As of December 31, 2022, Alaska has firm orders to purchase 105 B737 aircraft with deliveries between 2023 and 2027 and firm commitments to lease four B737-9 aircraft with deliveries in 2023. Alaska also has rights for 105 additional B737 aircraft through 2030.

Alaska has received information from Boeing that certain B737 deliveries in 2023 are expected to be delayed into 2024. The anticipated fleet count outlined below reflects the expected impact of these delays. Alaska will continue to work with Boeing on delivery timelines that support Alaska's plans for growth.

Horizon has commitments to purchase 17 Embraer E175 aircraft with deliveries between 2023 and 2026. Horizon has options to acquire 13 Embraer E175 aircraft between 2025 and 2026.

Options will be exercised only if we believe return on invested capital targets can be met over the long term.

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The following table summarizes our anticipated fleet count by year, as of the date of this filing:

[[GREPCENT_TABLE]]
[["","Actual Fleet Count","","Anticipated Fleet Activity(a)"],["Aircraft","Dec 31, 2021","","Dec 31, 2022","","2023 Changes","","Dec 31, 2023","","2024 Changes","","Dec 31, 2024","","2025 Changes","","Dec 31, 2025"],["B737-700 Freighters","3","","","3","","","\u2014","","","3","","","\u2014","","","3","","","\u2014","","","3"],["B737-800 Freighters","\u2014","","","\u2014","","","1","","","1","","","1","","","2","","","\u2014","","","2"],["B737-700","11","","","11","","","\u2014","","","11","","","\u2014","","","11","","","\u2014","","","11"],["B737-800","61","","","61","","","(2)","","","59","","","\u2014","","","59","","","\u2014","","","59"],["B737-900","12","","","12","","","\u2014","","","12","","","\u2014","","","12","","","\u2014","","","12"],["B737-900ER","79","","","79","","","\u2014","","","79","","","\u2014","","","79","","","\u2014","","","79"],["B737-8","\u2014","","","\u2014","","","3","","","3","","","7","","","10","","","\u2014","","","10"],["B737-9","11","","","37","","","34","","","71","","","12","","","83","","","5","","","88"],["B737-10","\u2014","","","\u2014","","","\u2014","","","\u2014","","","6","","","6","","","21","","","27"],["A320","30","","","12","","","(12)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["A321neo","10","","","10","","","(10)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total Mainline Fleet","217","","","225","","","14","","","239","","","26","","","265","","","26","","","291"],["Q400 operated by Horizon","32","","","11","","","(11)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["E175 operated by Horizon","30","","","33","","","8","","","41","","","3","","","44","","","3","","","47"],["E175 operated by third party","32","","","42","","","\u2014","","","42","","","\u2014","","","42","","","1","","","43"],["Total Regional Fleet(b)","94","","","86","","","(3)","","","83","","","3","","","86","","","4","","","90"],["Total","311","","","311","","","11","","","322","","","29","","","351","","","30","","","381"]]
[[/GREPCENT_TABLE]]

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

(b)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party.

We intend to finance future aircraft deliveries and option exercises using 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 and, 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:

[[GREPCENT_TABLE]]
[["","Approximate % of Expected Fuel Requirements","","Weighted-Average Crude Oil Price per Barrel","","Average Premium Cost per Barrel"],["First Quarter 2023","50%","","$93","","$6"],["Second Quarter 2023","50%","","$97","","$7"],["Third Quarter 2023","40%","","$101","","$8"],["Fourth Quarter 2023","30%","","$99","","$8"],["Total 2023","43%","","$97","","$7"],["First Quarter 2024","20%","","$89","","$8"],["Second Quarter 2024","10%","","$86","","$8"],["Total 2024","7%","","$88","","$8"]]
[[/GREPCENT_TABLE]]

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Contractual Obligations

The following table provides a summary of our obligations as of December 31, 2022. For agreements with variable terms, amounts included reflect our minimum obligations. Discussion of these obligations follow the table below.

[[GREPCENT_TABLE]]
[["(in millions)","2023","","2024","","2025","","2026","","2027","","Beyond","","Total"],["Debt obligations","$","280","","","$","244","","","$","296","","","$","176","","","$","535","","","$","643","","","$","2,174"],["Aircraft lease commitments(a)","285","","","230","","","225","","","222","","","218","","","741","","","1,921"],["Facility lease commitments","20","","","10","","","9","","","9","","","8","","","98","","","154"],["Aircraft-related commitments(b)","1,846","","","1,580","","","1,262","","","689","","","337","","","606","","","6,320"],["Interest obligations(c)","104","","","76","","","74","","","67","","","67","","","103","","","491"],["CPA and other obligations(d)","209","","","216","","","220","","","217","","","218","","","739","","","1,819"],["Total","$","2,744","","","$","2,356","","","$","2,086","","","$","1,380","","","$","1,383","","","$","2,930","","","$","12,879"]]
[[/GREPCENT_TABLE]]

(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 contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.

(c) For variable-rate debt, future obligations are shown above using interest rates forecast as of December 31, 2022.

(d) Primarily comprised of nonlease costs associated with capacity purchase agreements.

Debt Obligations and Interest Obligations

The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. In 2022, we repaid $385 million in debt, including prepayments of $17 million. At December 31, 2022, our debt portfolio carries a weighted average interest rate of 3.7%. Interest is paid with regular debt service. Debt service obligations in 2023 is expected to be approximately $384 million, inclusive of interest and principal. Refer to Note 6 to the consolidated financial statement for further discussion of our debt and interest balances.

CPA and Other Obligations

We have obligations primarily associated with our capacity purchase agreements between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.

Leased Aircraft Return Costs

For many of our leased aircraft, we are required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is

removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. In 2022, we recorded expense of $238 million for estimated costs to return the Airbus A320 fleet. A total of $277 million is accrued at December 31, 2022, including costs recorded in prior year periods. Additional charges to be recorded in 2023 will reflect adjustments to estimated costs to return the A320 fleet, as well as remaining costs to retire our ten A321neo aircraft, which remain subject to negotiation with counterparties. We anticipate recording material cash outflows to return aircraft in 2023 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.

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.

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Sustainability Commitments

As part of our efforts to reach net-zero carbon emissions by 2040, we have made commitments related to sustainability initiatives that will require significant cash outlays. These commitments include, but are not limited to, purchasing SAF, increasing our use of electric ground equipment in our operation, and making investments through Alaska Star Ventures. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of SAF to be delivered between 2025 and 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within Other obligations in the above table, as appropriate.

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 will reverse, 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 and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, as well as other legislative changes that are beyond our control.

In 2022, the Company received a net refund of tax payments of $270 million. The Company had an effective tax rate of 26.2%. We believe that we have the liquidity available to make our future tax payments.

In August 2022, the Inflation Reduction Act ("IRA") bill was signed into law, effective for tax years beginning after December 31, 2022. The IRA includes a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted income during the most recently-completed three-year period exceeds $1 billion. We will continue to evaluate the provisions within the IRA, but at this time we do not believe it will have a material impact on our financial statements.

46

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial position and results of operations in this MD&A are based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See Note 1 to the consolidated financial statements for a description of our significant accounting policies.

Critical accounting estimates are defined as those that reflect significant management judgment and uncertainties and that potentially may lead to materially different results under varying assumptions and conditions. Management has identified the following critical accounting estimate and has discussed the development, selection and disclosure of these policies with our audit committee.

FREQUENT FLYER PROGRAMS

Alaska's Mileage Plan loyalty program awards mileage credits, referred to as miles, to members who fly on our airlines and our airline partners. We also sell services, including miles for transportation, Companion Fare™ certificates, priority boarding, bag fee waivers, and access to our brand and customer lists to major banks that offer Alaska co-branded credit cards. To a lesser extent, miles for transportation are also sold to other non-airline partners, such as hotels, and car rental agencies. Outstanding miles may be redeemed for travel on our airlines or eligible airline partners, and for non-airline products such as hotels. As long as Mileage Plan is in existence, we have an obligation to provide future travel.

Mileage credits and the various other services we sell under our loyalty program represent performance obligations that are part of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price model to allocate consideration received to the material performance obligations in these contracts. Our relative standalone selling price models are refreshed when contracts originate or are materially modified. Absent a change to relevant contracts, we review the model for potential updates annually based on observed volumes.

At December 31, 2022, we had approximately 319 billion miles outstanding, resulting in an aggregate deferred revenue balance of $2.5 billion. The deferred revenue resulting from our relative selling price allocations requires significant management judgment. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition or expenses. The most significant assumptions are described below.

1.The rate at which we defer sales proceeds related to services sold:

We estimate the standalone selling price for each performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded, and the number of miles redeemed. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables.

Following the amendment of our agreement with one of our co-branded bank card partners in the first quarter of 2022, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.

2.The number of miles that will not be redeemed for travel (breakage):

We estimate how many miles will be used per award. For example, our members may redeem mileage credits for award travel to various locations or choose between a highly restricted award and an unrestricted award. Our estimates are based on the current requirements in our Mileage Plan program and historical and future award redemption patterns.

We review significant Mileage Plan assumptions on an annual basis, or more frequently should circumstances indicate a need, and change our assumptions if facts and circumstances indicate that a change is necessary. The Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $9 million impact on annual revenue recognized.