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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 March 31, 2023
OR
☐ 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 127,910,957 common shares, par value $0.01, outstanding at April 30, 2023.
This document is also available on our website at http://investor.alaskaair.com.

ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023
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 | 21
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | 37
ITEM 4. | CONTROLS AND PROCEDURES | 38
PART II. | OTHER INFORMATION | 39
ITEM 1. | LEGAL PROCEEDINGS | 39
ITEM 1A. | RISK FACTORS | 39
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 39
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 41
ITEM 4. | MINE SAFETY DISCLOSURES | 41
ITEM 5. | OTHER INFORMATION | 41
ITEM 6. | EXHIBITS | 41
| SIGNATURES | 42

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.”
2

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, 2022. Please consider our forward-looking statements in light of those risks as you read this report.
3

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions) | March 31, 2023 |  | December 31, 2022
ASSETS |  |  |
Current Assets |  |  |
Cash and cash equivalents | $ | 516 |  |  | $ | 338 |
Marketable securities | 1,913 |  |  | 2,079 |
Total cash and marketable securities | 2,429 |  |  | 2,417 |
Receivables - net | 340 |  |  | 296 |
Inventories and supplies - net | 105 |  |  | 104 |
Prepaid expenses | 181 |  |  | 163 |
Other current assets | 44 |  |  | 60 |
Total Current Assets | 3,099 |  |  | 3,040 |
Property and Equipment |  |  |
Aircraft and other flight equipment | 9,189 |  |  | 9,053 |
Other property and equipment | 1,661 |  |  | 1,661 |
Deposits for future flight equipment | 580 |  |  | 670 |
| 11,430 |  |  | 11,384 |
Less accumulated depreciation and amortization | 4,178 |  |  | 4,127 |
Total Property and Equipment - Net | 7,252 |  |  | 7,257 |
Other Assets |  |  |
Operating lease assets | 1,534 |  |  | 1,471 |
Goodwill and intangible assets | 2,037 |  |  | 2,038 |
Other noncurrent assets | 374 |  |  | 380 |
Total Other Assets | 3,945 |  |  | 3,889 |
Total Assets | $ | 14,296 |  |  | $ | 14,186 |

4

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts) | March 31, 2023 |  | December 31, 2022
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |
Current Liabilities |  |  |
Accounts payable | $ | 206 |  |  | $ | 221 |
Accrued wages, vacation and payroll taxes | 431 |  |  | 619 |
Air traffic liability | 1,613 |  |  | 1,180 |
Other accrued liabilities | 908 |  |  | 846 |
Deferred revenue | 1,218 |  |  | 1,123 |
Current portion of operating lease liabilities | 213 |  |  | 228 |
Current portion of long-term debt | 268 |  |  | 276 |
Total Current Liabilities | 4,857 |  |  | 4,493 |
Long-Term Debt, Net of Current Portion | 1,795 |  |  | 1,883 |
Noncurrent Liabilities |  |  |
Long-term operating lease liabilities, net of current portion | 1,455 |  |  | 1,393 |
Deferred income taxes | 523 |  |  | 574 |
Deferred revenue | 1,325 |  |  | 1,374 |
Obligation for pension and post-retirement medical benefits | 355 |  |  | 348 |
Other liabilities | 297 |  |  | 305 |
Total Noncurrent Liabilities | 3,955 |  |  | 3,994 |
Commitments and Contingencies (Note 7) |  |  |
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: 2023 - 137,006,134 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,243,454 shares; 2022 - 127,533,916 shares | 1 |  |  | 1 |
Capital in excess of par value | 587 |  |  | 577 |
Treasury stock (common), at cost: 2023 - 9,763,498 shares; 2022 - 9,349,944 shares | (692) |  |  | (674) |
Accumulated other comprehensive loss | (365) |  |  | (388) |
Retained earnings | 4,158 |  |  | 4,300 |
| 3,689 |  |  | 3,816 |
Total Liabilities and Shareholders' Equity | $ | 14,296 |  |  | $ | 14,186 |

5

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

| Three Months Ended March 31, |  |
(in millions, except per share amounts) | 2023 |  | 2022 |  |  |  |
Operating Revenue |  |  |  |  |  |  |
Passenger revenue | $ | 1,984 |  |  | $ | 1,511 |  |  |  |  |
Mileage Plan other revenue | 154 |  |  | 112 |  |  |  |  |
Cargo and other revenue | 58 |  |  | 58 |  |  |  |  |
Total Operating Revenue | 2,196 |  |  | 1,681 |  |  |  |  |
Operating Expenses |  |  |  |  |  |  |
Wages and benefits | 723 |  |  | 606 |  |  |  |  |
Variable incentive pay | 47 |  |  | 36 |  |  |  |  |
Aircraft fuel, including hedging gains and losses | 665 |  |  | 347 |  |  |  |  |
Aircraft maintenance | 124 |  |  | 135 |  |  |  |  |
Aircraft rent | 59 |  |  | 73 |  |  |  |  |
Landing fees and other rentals | 152 |  |  | 138 |  |  |  |  |
Contracted services | 95 |  |  | 78 |  |  |  |  |
Selling expenses | 66 |  |  | 58 |  |  |  |  |
Depreciation and amortization | 104 |  |  | 102 |  |  |  |  |
Food and beverage service | 54 |  |  | 41 |  |  |  |  |
Third-party regional carrier expense | 52 |  |  | 42 |  |  |  |  |
Other | 177 |  |  | 152 |  |  |  |  |
Special items - fleet transition and other | 13 |  |  | 75 |  |  |  |  |
Special items - labor and related | 51 |  |  | — |  |  |  |  |
Total Operating Expenses | 2,382 |  |  | 1,883 |  |  |  |  |
Operating Loss | (186) |  |  | (202) |  |  |  |  |
Non-operating Income (Expense) |  |  |  |  |  |  |
Interest income | 17 |  |  | 7 |  |  |  |  |
Interest expense | (28) |  |  | (27) |  |  |  |  |
Interest capitalized | 7 |  |  | 2 |  |  |  |  |
Other - net | (9) |  |  | 14 |  |  |  |  |
Total Non-operating Expense | (13) |  |  | (4) |  |  |  |  |
Loss Before Income Tax | (199) |  |  | (206) |  |  |  |  |
Income tax benefit | (57) |  |  | (63) |  |  |  |  |
Net Loss | $ | (142) |  |  | $ | (143) |  |  |  |  |
Basic Loss Per Share: | $ | (1.11) |  |  | $ | (1.14) |  |  |  |  |
Diluted Loss Per Share: | $ | (1.11) |  |  | $ | (1.14) |  |  |  |  |
Shares used for computation: |  |  |  |  |  |  |
Basic | 127.501 |  |  | 125.984 |  |  |  |  |
Diluted | 127.501 |  |  | 125.984 |  |  |  |  |

6

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

| Three Months Ended March 31, |  |
(in millions) | 2023 |  | 2022 |  |  |  |
Net Loss | $ | (142) |  |  | $ | (143) |  |  |  |  |
Other comprehensive income (loss), net of tax |  |  |  |  |  |  |
Marketable securities | 21 |  |  | (40) |  |  |  |  |
Employee benefit plans | 4 |  |  | 1 |  |  |  |  |
Interest rate derivative instruments | (2) |  |  | 9 |  |  |  |  |
Total other comprehensive income (loss), net of tax | $ | 23 |  |  | $ | (30) |  |  |  |  |
Total Comprehensive Loss, Net of Tax | $ | (119) |  |  | $ | (173) |  |  |  |  |

7

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 |  |  |  |
Balance at December 31, 2022 | 127.534 |  |  | $ | 1 |  |  | $ | 577 |  |  | $ | (674) |  |  | $ | (388) |  |  | $ | 4,300 |  |  | $ | 3,816 |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (142) |  |  | (142) |  |  |  |  |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 23 |  |  | — |  |  | 23 |  |  |  |  |
Common stock repurchase | (0.414) |  |  | — |  |  | — |  |  | (18) |  |  | — |  |  | — |  |  | (18) |  |  |  |  |
Stock-based compensation | — |  |  | — |  |  | 12 |  |  | — |  |  | — |  |  | — |  |  | 12 |  |  |  |  |
Stock issued under stock plans | 0.123 |  |  | — |  |  | (2) |  |  | — |  |  | — |  |  | — |  |  | (2) |  |  |  |  |
Balance at March 31, 2023 | 127.243 |  |  | $ | 1 |  |  | $ | 587 |  |  | $ | (692) |  |  | $ | (365) |  |  | $ | 4,158 |  |  | $ | 3,689 |  |  |  |  |

(in millions) | Common Stock Outstanding |  | Common Stock |  | Capital in Excess of Par Value |  | Treasury Stock |  | Accumulated Other Comprehensive Income (Loss) |  | Retained Earnings |  | Total |  |  |  |
Balance at December 31, 2021 | 125.906 |  |  | $ | 1 |  |  | $ | 494 |  |  | $ | (674) |  |  | $ | (262) |  |  | $ | 4,242 |  |  | $ | 3,801 |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (143) |  |  | (143) |  |  |  |  |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | (30) |  |  | — |  |  | (30) |  |  |  |  |
Stock-based compensation | — |  |  | — |  |  | 13 |  |  | — |  |  | — |  |  | — |  |  | 13 |  |  |  |  |
Stock issued under stock plans | 0.182 |  |  | — |  |  | (4) |  |  | — |  |  | — |  |  | — |  |  | (4) |  |  |  |  |
Balance at March 31, 2022 | 126.088 |  |  | $ | 1 |  |  | $ | 503 |  |  | $ | (674) |  |  | $ | (292) |  |  | $ | 4,099 |  |  | $ | 3,637 |  |  |  |  |

8

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

|  |  |  | Three Months Ended March 31,
(in millions) |  |  |  |  |  | 2023 |  | 2022
Cash Flows from Operating Activities: |  |  |  |  |  |  |  |
Net loss |  |  |  |  |  | $ | (142) |  |  | $ | (143) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  |  |  |  | 104 |  |  | 102 |
Stock-based compensation and other |  |  |  |  |  | 23 |  |  | 5 |
Special items - fleet transition and other |  |  |  |  |  | 13 |  |  | 75 |
Special items - labor and related |  |  |  |  |  | 51 |  |  | — |
Changes in certain assets and liabilities: |  |  |  |  |  |  |  |
Changes in deferred income taxes |  |  |  |  |  | (56) |  |  | (58) |
Increase in accounts receivable |  |  |  |  |  | (44) |  |  | (112) |
Increase in air traffic liability |  |  |  |  |  | 433 |  |  | 480 |
Increase in deferred revenue |  |  |  |  |  | 46 |  |  | 74 |
Other - net |  |  |  |  |  | (206) |  |  | (136) |
Net cash provided by operating activities |  |  |  |  |  | 222 |  |  | 287 |
Cash Flows from Investing Activities: |  |  |  |  |  |  |  |
Property and equipment additions |  |  |  |  |  |  |  |
Aircraft and aircraft purchase deposits |  |  |  |  |  | (50) |  |  | (207) |
Other flight equipment |  |  |  |  |  | (50) |  |  | (24) |
Other property and equipment |  |  |  |  |  | (24) |  |  | (57) |
Total property and equipment additions |  |  |  |  |  | (124) |  |  | (288) |
Purchases of marketable securities |  |  |  |  |  | (201) |  |  | (552) |
Sales and maturities of marketable securities |  |  |  |  |  | 388 |  |  | 880 |
Other investing activities |  |  |  |  |  | (3) |  |  | (1) |
Net cash provided by investing activities |  |  |  |  |  | 60 |  |  | 39 |
Cash Flows from Financing Activities: |  |  |  |  |  |  |  |
Long-term debt payments |  |  |  |  |  | (96) |  |  | (170) |
Common stock repurchases |  |  |  |  |  | (18) |  |  | — |
Other financing activities |  |  |  |  |  | — |  |  | 2 |
Net cash used in financing activities |  |  |  |  |  | (114) |  |  | (168) |
Net increase in cash and cash equivalents |  |  |  |  |  | 168 |  |  | 158 |
Cash, cash equivalents, and restricted cash at beginning of period |  |  |  |  |  | 369 |  |  | 494 |
Cash, cash equivalents, and restricted cash at end of the period |  |  |  |  |  | $ | 537 |  |  | $ | 652 |

9

|  |  |  | Three Months Ended March 31,
(in millions) |  |  |  |  |  | 2023 |  | 2022
Supplemental disclosure: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest, net of amount capitalized |  |  |  |  |  | $ | 32 |  |  | $ | 35 |
Non-cash transactions: |  |  |  |  |  |  |  |
Right-of-use assets acquired through operating leases |  |  |  |  |  | 111 |  |  | 158 |
Reconciliation of cash, cash equivalents, and restricted cash: |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  |  |  |  | 516 |  |  | 628 |
Restricted cash included in Prepaid expenses and Other noncurrent assets |  |  |  |  |  | 21 |  |  | 24 |
Total cash, cash equivalents, and restricted cash at end of the period |  |  |  |  |  | $ | 537 |  |  | $ | 652 |

10

NOTES TO 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, and other immaterial business units. All 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, 2022. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of March 31, 2023 and the results of operations for the three months ended March 31, 2023 and 2022. 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 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 months ended March 31, 2023 are not necessarily indicative of operating results for the entire year.
NOTE 2. FLEET TRANSITION
In the first quarter of 2022, the Company announced plans to accelerate the transition of its mainline operations to an all-Boeing 737 fleet. It also announced plans to transition its regional operations to an all-Embraer fleet, retiring the Q400 fleet. All remaining A320 and Q400 aircraft were removed from operating service in January 2023. Alaska operates ten A321neo aircraft, and plans to remove them from its operating fleet by the end of the third quarter of 2023.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable.
In 2023, charges will continue to be recorded for certain accelerated aircraft ownership expenses related to the A321neo fleet consistent with the time period the aircraft are expected to remain in operation. Charges will also be recorded to reflect adjustments to estimated costs to return the A320 fleet. The Company continues to evaluate options for the A321neo aircraft and will consider the need for further impairment or adjustments for owned and leased long-lived assets whenever indicators of impairment are present.
The following table summarizes our special charges for fleet transition costs for the three months ended March 31, 2023 and 2022:

|  | Three Months Ended March 31, |  |  |  |  |
(in millions) |  | 2023 |  | 2022 |  |  |  |  |
Lease return costs and other expenses |  | $ | 7 |  |  | $ | 5 |  |  |  |  |  |
Accelerated aircraft ownership expenses |  | 6 |  |  | — |  |  |  |  |  |
Impairment of long-lived assets |  | — |  |  | 70 |  |  |  |  |  |
Special items - fleet transition and other |  | $ | 13 |  |  | $ | 75 |  |  |  |  |  |

Subsequent to quarter end, Alaska signed agreements to exit the existing leases for four of the ten leased A321neo aircraft from one lessor, and subsequently purchase the aircraft with intent to resell. The settlement of the leases and purchase of the aircraft are expected to occur in the fourth quarter of 2023. The transactions will result in cash outflows of approximately $250 million in 2023, of which approximately half will settle the outstanding lease liability, with the remainder representing the purchase price of the aircraft. The agreements were not contractually obligated at March 31, 2023, and are not reflected within the consolidated financial statements or accompanying notes.
11

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 is passenger ancillary revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the 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 10. 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 March 31, |  |
| 2023 |  | 2022 |  |  |  |
Passenger ticket revenue, including ticket breakage, net of taxes and fees | $ | 1,648 |  |  | $ | 1,232 |  |  |  |  |
Passenger ancillary revenue | 104 |  |  | 91 |  |  |  |  |
Mileage Plan passenger revenue | 232 |  |  | 188 |  |  |  |  |
Total Passenger revenue | $ | 1,984 |  |  | $ | 1,511 |  |  |  |  |

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

| Three Months Ended March 31, |  |
| 2023 |  | 2022 |  |  |  |
Passenger revenue | $ | 232 |  |  | $ | 188 |  |  |  |  |
Mileage Plan other revenue | 154 |  |  | 112 |  |  |  |  |
Total Mileage Plan revenue | $ | 386 |  |  | $ | 300 |  |  |  |  |

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

| Three Months Ended March 31, |  |
| 2023 |  | 2022 |  |  |  |
Cargo revenue | $ | 29 |  |  | $ | 29 |  |  |  |  |
Other revenue | 29 |  |  | 29 |  |  |  |  |
Total Cargo and other revenue | $ | 58 |  |  | $ | 58 |  |  |  |  |

Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $485 million and $390 million from the prior year-end air traffic liability balance for the three months ended March 31, 2023 and 2022.
Mileage Plan assets and liabilities
The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $94 million of such receivables as of March 31, 2023 and $83 million as of December 31, 2022.
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The table below presents a roll forward of the total frequent flyer liability (in millions):

| Three Months Ended March 31,
| 2023 |  | 2022
Total Deferred Revenue balance at January 1 | $ | 2,497 |  |  | $ | 2,358 |
Travel miles and companion certificate redemption - Passenger revenue | (218) |  |  | (176) |
Miles redeemed on partner airlines - Other revenue | (21) |  |  | (9) |
Increase in liability for mileage credits issued | 285 |  |  | 259 |
Total Deferred Revenue balance at March 31 | $ | 2,543 |  |  | $ | 2,432 |

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 March 31, 2023, total cost basis for all marketable securities was $2.0 billion, compared to a total fair value of $1.9 billion. The decline in value is primarily due to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of March 31, 2023.
Fair values of financial instruments on the condensed consolidated balance sheet (in millions):

| March 31, 2023 |  | December 31, 2022
| Level 1 |  | Level 2 |  | Total |  | Level 1 |  | Level 2 |  | Total
Assets |  |  |  |  |  |  |  |  |  |  |
Marketable securities |  |  |  |  |  |  |  |  |  |  |
U.S. government and agency securities | $ | 520 |  |  | $ | — |  |  | $ | 520 |  |  | $ | 505 |  |  | $ | — |  |  | $ | 505 |
Equity mutual funds | 6 |  |  | — |  |  | 6 |  |  | 5 |  |  | — |  |  | 5 |
Foreign government bonds | — |  |  | 25 |  |  | 25 |  |  | — |  |  | 25 |  |  | 25 |
Asset-backed securities | — |  |  | 235 |  |  | 235 |  |  | — |  |  | 261 |  |  | 261 |
Mortgage-backed securities | — |  |  | 160 |  |  | 160 |  |  | — |  |  | 196 |  |  | 196 |
Corporate notes and bonds | — |  |  | 909 |  |  | 909 |  |  | — |  |  | 1,025 |  |  | 1,025 |
Municipal securities | — |  |  | 58 |  |  | 58 |  |  | — |  |  | 62 |  |  | 62 |
Total Marketable securities | 526 |  |  | 1,387 |  |  | 1,913 |  |  | 510 |  |  | 1,569 |  |  | 2,079 |
Derivative instruments |  |  |  |  |  |  |  |  |  |  |
Fuel hedge contracts - call options | — |  |  | 21 |  |  | 21 |  |  | — |  |  | 44 |  |  | 44 |
Interest rate swap agreements | — |  |  | 12 |  |  | 12 |  |  | — |  |  | 15 |  |  | 15 |
Total Assets | $ | 526 |  |  | $ | 1,420 |  |  | $ | 1,946 |  |  | $ | 510 |  |  | $ | 1,628 |  |  | $ | 2,138 |

The Company uses 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 interest LIBOR-based and SOFR-based forward rates at period end multiplied by the total notional value.
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Activity and Maturities for Marketable Securities
Maturities for marketable securities (in millions):

March 31, 2023 | Cost Basis |  | Fair Value
Due in one year or less | $ | 425 |  |  | $ | 415 |
Due after one year through five years | 1,532 |  |  | 1,465 |
Due after five years | 28 |  |  | 27 |
No maturity date | 5 |  |  | 6 |
Total | $ | 1,990 |  |  | $ | 1,913 |

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 March 31, 2023, 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 (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $564 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 consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):

| March 31, 2023 |  | December 31, 2022
Fixed-rate debt | $ | 1,591 |  |  | $ | 1,660 |
Estimated fair value | $ | 1,435 |  |  | $ | 1,473 |

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 impairment charges were recorded in the three months ended March 31, 2023. Refer to Note 2 for details regarding impairment charges recorded in the three months ended March 31, 2022.
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NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the consolidated balance sheet (in millions):

| March 31, 2023 |  | December 31, 2022
Fixed-rate notes payable due through 2029 | $ | 100 |  |  | $ | 113 |
Fixed-rate PSP notes payable due through 2031 | 600 |  |  | 600 |
Fixed-rate EETC payable due through 2025 & 2027 | 891 |  |  | 947 |
Variable-rate notes payable due through 2029 | 487 |  |  | 514 |
Less debt issuance costs | (15) |  |  | (15) |
Total debt | 2,063 |  |  | 2,159 |
Less current portion | 268 |  |  | 276 |
Long-term debt, less current portion | $ | 1,795 |  |  | $ | 1,883 |
Weighted-average fixed-interest rate | 3.5 | % |  | 3.5 | %
Weighted-average variable-interest rate | 6.1 | % |  | 5.8 | %

Approximately $286 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at March 31, 2023, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.7%.
During the three months ended March 31, 2023, the Company made scheduled debt payments of $94 million and prepayments of $2 million.
Debt Maturity
At March 31, 2023, long-term debt principal payments for the next five years and thereafter are as follows (in millions):

| Total
Remainder of 2023 | $ | 185 |
2024 | 243 |
2025 | 296 |
2026 | 176 |
2027 | 535 |
Thereafter | 643 |
Total Principal Payments | $ | 2,078 |

Bank Lines of Credit
Alaska has three credit facilities totaling $486 million as of March 31, 2023. One of the credit facilities for $150 million expires in March 2025 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. A second credit facility for $250 million expires in June 2024 and is secured by aircraft. Both facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $86 million expires in June 2023 and is secured by aircraft.
Alaska 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. Alaska was in compliance with this covenant at March 31, 2023.
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NOTE 6. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):

| Three Months Ended March 31, |  |
| 2023 |  | 2022 |  |  |  |
Service cost | $ | 7 |  |  | $ | 11 |  |  |  |  |
Pension expense included in Wages and benefits | 7 |  |  | 11 |  |  |  |  |
Interest cost | 27 |  |  | 16 |  |  |  |  |
Expected return on assets | (28) |  |  | (32) |  |  |  |  |
Recognized actuarial loss | 6 |  |  | 2 |  |  |  |  |
Pension expense included in Non-operating Income (Expense) | $ | 5 |  |  | $ | (14) |  |  |  |  |

NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of March 31, 2023 (in millions):

|  | Aircraft-Related Commitments(a) |  | Capacity Purchase Agreements and Other Obligations (b) |  |
Remainder of 2023 |  | $ | 1,742 |  |  | $ | 154 |  |  |
2024 |  | 1,393 |  |  | 224 |  |  |
2025 |  | 1,440 |  |  | 227 |  |  |
2026 |  | 689 |  |  | 219 |  |  |
2027 |  | 335 |  |  | 220 |  |  |
Thereafter |  | 598 |  |  | 739 |  |  |
Total |  | $ | 6,197 |  |  | $ | 1,783 |  |  |

(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
(b)Primarily comprised of non-lease costs associated with capacity purchase agreements, as well as other various sponsorship agreements and investment commitments.
Alaska has received information from Boeing that certain B737 deliveries in 2023 are expected to be delayed into 2024. The fleet commitments outlined above reflect the expected impact of these delays.
Aircraft Commitments
Aircraft purchase commitments include contractual commitments for aircrafts and engines. Details for contractual aircraft commitments as of March 31, 2023 are outlined in the table below.
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| Firm Orders |  | Options and Other Rights |  | Total
Aircraft Type | 2023-2027 |  | 2025-2030 |  | 2023-2030
B737 | 102 |  | 105 |  | 207
E175 | 17 |  | 13 |  | 30
Total | 119 |  | 118 |  | 237

Aircraft Maintenance
Aircraft maintenance commitments include contractual commitments for engine maintenance agreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft. In turn, these maintenance agreements transfer certain risks to the third-party service provider. Alaska has contracts for maintenance on its B737-800 and B737-900ER aircraft engines through 2026 and 2032, respectively. Horizon has a contract for maintenance on its E175 aircraft engines through 2033.
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 (Bernstein v. Virgin America, Inc.). The court certified a class of approximately 1,800 flight attendants in November 2016. The Company pursued numerous appeal paths following a February 2019 federal district court order against Virgin America and Alaska Airlines awarding plaintiffs approximately $78 million, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the PAGA penalties and total judgment value, remanding the matter to the district court for further consideration. In December 2022, the district court issued a final total judgment amount of $31 million. Additional proceedings will determine the attorneys’ fee award due to plaintiffs’ counsel. The Company holds an accrual for $37 million in Other accrued liabilities on the condensed consolidated balance sheets.
In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines, and, in fact, a lawsuit based on similar claims to those asserted in Bernstein has been initiated by a Washington-based Alaska Airlines flight attendant (Krueger v. Alaska Airlines, Inc.). The Company plans to assert all available legal defenses, but to date has not determined its probable and estimable liability in this matter.
The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of these solutions may have an adverse impact on the Company’s operations and financial position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence, and has made an application to appeal in the English courts. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.
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NOTE 8. SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. In March 2020, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely. These restrictions ended on October 1, 2022. The Company restarted the share repurchase program in February 2023 pursuant to the existing repurchase program. As of March 31, 2023, the Company has repurchased 8 million shares for $562 million under this program.
Share purchase activity (in millions, except share amounts):

| Three Months Ended March 31,
| 2023 |  | 2022
| Shares |  | Amount |  | Shares |  | Amount
2015 Repurchase Program—$1 billion | 413,554 |  |  | $ | 18 |  |  | — |  |  | $ | — |

CARES Act Warrant Issuances
As additional taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the Treasury a total of 1,455,437 warrants to purchase ALK common stock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.
As of March 31, 2023, there are 1,882,517 total warrants outstanding, with a weighted average strike price of $39.06. The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, recorded in stockholders' equity at issuance.
Loss Per Share
Loss per share is calculated by dividing net loss by the average number of common shares outstanding. For the three months ended March 31, 2023 and March 31, 2022, anti-dilutive shares excluded from the calculation of loss per share were not material.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS
A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), is shown below for the three months ended March 31, 2023 and 2022:

| Marketable Securities |  | Employee Benefit Plan |  | Interest Rate Derivatives |  | Total
Balance at December 31, 2022, net of tax effect of $122 | $ | (80) |  |  | $ | (319) |  |  | $ | 11 |  |  | $ | (388) |
Reclassifications into earnings, net of tax effect of ($2) | 5 |  |  | 4 |  |  | — |  |  | 9 |
Change in value, net of tax effect of ($3) | 16 |  |  | — |  |  | (2) |  |  | 14 |
Balance at March 31, 2023, net of tax effect of $117 | $ | (59) |  |  | $ | (315) |  |  | $ | 9 |  |  | $ | (365) |
Balance at December 31, 2021, net of tax effect of $83 | $ | (4) |  |  | $ | (252) |  |  | $ | (6) |  |  | $ | (262) |
Reclassifications into earnings, net of tax effect of $0 | 2 |  |  | 1 |  |  | — |  |  | 3 |
Change in value, net of tax effect of $10 | (42) |  |  | — |  |  | 9 |  |  | (33) |
Balance at March 31, 2022, net of tax effect of $93 | $ | (44) |  |  | $ | (251) |  |  | $ | 3 |  |  | $ | (292) |

NOTE 10. 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 and 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.
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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, Costa Rica, and Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada 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.
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Operating segment information is as follows (in millions):

| Three Months Ended March 31, 2023
| Mainline |  | Regional |  | Horizon |  | Consolidating & Other(a) |  | Air Group Adjusted(b) |  | Special Items(c) |  | Consolidated
Operating Revenue |  |  |  |  |  |  |  |  |  |  |  |  |
Passenger revenue | $ | 1,690 |  |  | $ | 294 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,984 |  |  | $ | — |  |  | $ | 1,984 |
CPA revenue | — |  |  | — |  |  | 78 |  |  | (78) |  |  | — |  |  | — |  |  | — |
Mileage Plan other revenue | 143 |  |  | 11 |  |  | — |  |  | — |  |  | 154 |  |  | — |  |  | 154 |
Cargo and other revenue | 57 |  |  | — |  |  | — |  |  | 1 |  |  | 58 |  |  | — |  |  | 58 |
Total Operating Revenue | 1,890 |  |  | 305 |  |  | 78 |  |  | (77) |  |  | 2,196 |  |  | — |  |  | 2,196 |
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Operating expenses, excluding fuel | 1,390 |  |  | 256 |  |  | 84 |  |  | (77) |  |  | 1,653 |  |  | 64 |  |  | 1,717 |
Fuel expense | 561 |  |  | 85 |  |  | — |  |  | (1) |  |  | 645 |  |  | 20 |  |  | 665 |
Total Operating Expenses | 1,951 |  |  | 341 |  |  | 84 |  |  | (78) |  |  | 2,298 |  |  | 84 |  |  | 2,382 |
Non-operating Income (Expense) | (6) |  |  | — |  |  | (8) |  |  | 1 |  |  | (13) |  |  | — |  |  | (13) |
Income (Loss) Before Income Tax | $ | (67) |  |  | $ | (36) |  |  | $ | (14) |  |  | $ | 2 |  |  | $ | (115) |  |  | $ | (84) |  |  | $ | (199) |
Pretax Margin |  |  |  |  |  |  |  |  | (5.2) | % |  |  |  | (9.1) | %
| Three Months Ended March 31, 2022
| Mainline |  | Regional |  | Horizon |  | Consolidating & Other(a) |  | Air Group Adjusted(b) |  | Special Items(c) |  | Consolidated
Operating Revenue |  |  |  |  |  |  |  |  |  |  |  |  |
Passenger revenue | $ | 1,243 |  |  | $ | 268 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,511 |  |  | $ | — |  |  | $ | 1,511 |
CPA revenue | — |  |  | — |  |  | 94 |  |  | (94) |  |  | — |  |  | — |  |  | — |
Mileage Plan other revenue | 100 |  |  | 12 |  |  | — |  |  | — |  |  | 112 |  |  | — |  |  | 112 |
Cargo and other revenue | 57 |  |  | — |  |  | — |  |  | 1 |  |  | 58 |  |  | — |  |  | 58 |
Total Operating Revenue | 1,400 |  |  | 280 |  |  | 94 |  |  | (93) |  |  | 1,681 |  |  | — |  |  | 1,681 |
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Operating expenses, excluding fuel | 1,194 |  |  | 262 |  |  | 99 |  |  | (94) |  |  | 1,461 |  |  | 75 |  |  | 1,536 |
Fuel expense | 381 |  |  | 73 |  |  | — |  |  | — |  |  | 454 |  |  | (107) |  |  | 347 |
Total Operating Expenses | 1,575 |  |  | 335 |  |  | 99 |  |  | (94) |  |  | 1,915 |  |  | (32) |  |  | 1,883 |
Non-operating Income (Expense) | 1 |  |  | — |  |  | (5) |  |  | — |  |  | (4) |  |  | — |  |  | (4) |
Income (Loss) Before Income Tax | $ | (174) |  |  | $ | (55) |  |  | $ | (10) |  |  | $ | 1 |  |  | $ | (238) |  |  | $ | 32 |  |  | $ | (206) |
Pretax Margin |  |  |  |  |  |  |  |  | (14.2) | % |  |  |  | (12.3) | %

(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.
(c)Includes special items and mark-to-market fuel hedge accounting adjustments.

Total assets were as follows (in millions):

| March 31, 2023 |  | December 31, 2022
Mainline | $ | 19,896 |  |  | $ | 19,733 |
Horizon | 1,158 |  |  | 1,157 |
Consolidating & Other | (6,758) |  |  | (6,704) |
Consolidated | $ | 14,296 |  |  | $ | 14,186 |

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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, 2022. This overview summarizes the MD&A, which includes the following sections:
•First Quarter Review—highlights from the first quarter of 2023 outlining some of the major events that occurred during the period and how they affected our financial performance.
•Results of Operations—an in-depth analysis of our revenue by segment and our expenses from a consolidated perspective for the three months ended March 31, 2023. 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 2023.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
FIRST QUARTER REVIEW
First Quarter Results
We recorded consolidated pretax loss for the first quarter of 2023 under GAAP of $199 million, compared to consolidated pretax loss of $206 million in the first quarter of 2022. On an adjusted basis, we reported consolidated pretax loss for the quarter of $115 million, compared to consolidated pretax loss of $238 million in 2022.
We made progress in the first quarter on projects aimed at returning our airlines to foundational strengths of operational excellence, disciplined cost management, and high productivity. Compared to 2022, productivity has increased 6%, reflecting the stabilization of our business. When combined with doubling pilot training throughput and reducing attrition, utilization of our aircraft grew 14% year-over-year. Also during the quarter, we retired our remaining A320 and Q400 aircraft, and more recently we established September as the retirement date for our ten A321neo aircraft. Although total fleet count has decreased since the first quarter of 2022, the addition of 24 B737-9 aircraft in that time has enabled efficient growth, with 28 more seats per aircraft than the A320s they replace. The culmination of this progress resulted in first quarter capacity restoration to pre-pandemic levels.
Inflation and other structural cost pressures continued to have a significant impact on our financial results in the first quarter. Wages and benefits increased 19% compared to the prior year, driven largely by higher wage rates following the execution of five labor agreements since March 31, 2022. Fuel costs remained elevated during the quarter, with our economic cost per gallon 30% higher compared to the prior year. Departure-related costs have also continued to rise consistent with our increase in capacity.
See “Results of Operations” below for further discussion of changes in revenue and operating expenses as compared to 2022, 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.
Labor Update
In January 2023, McGee Air Services fleet and ramp service employees represented by the International Association of Machinists and Aerospace Workers' Union ratified a two-year contract extension with enhanced wages and benefits. Also in January, Alaska executed two Letters of Agreement (LOA) with its Mainline pilots, represented by the Air Line Pilots Association, to drive productivity improvement and maintain sufficient pilots on the A321neo aircraft until their retirement in September. The first LOA increases payouts of unused sick leave upon retirement. As a result of this change, we recorded a
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one-time special charge of $51 million for the three months ended March 31, 2023. Refer to the 'Results of Operations' section below for additional details. The second LOA provides increased wage rates to certain Airbus pilots as well as other quality-of-life enhancements through September that will end with the retirement of the fleet.
Outlook
As we move into the second quarter and the remainder of the year, work executed on our strategic priorities positions our airlines well for productive growth. We continue to see strength in the overall demand environment in the near-term, and as a result, we anticipate total revenue in the second quarter to be up 2.5% to 5.5% compared to 2022 on capacity growth of 6% to 9%. Labor deals executed in late 2022 and a new power-by-the-hour engine maintenance agreement pressure unit cost performance in the second quarter as compared to the prior year. Given these headwinds, we expect second quarter CASMex to be up 1% to 3% compared to 2022. Turning to the full year, we continue to expect achievement of our previous guidance of adjusted pretax margins of 9% to 12%.
We will continue to respond to emerging information and trends, which could lead to changes in the guidance we have provided above. 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 in 2023 and beyond.
RESULTS OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of aircraft fuel and special items is useful information to investors because:
•By excluding fuel expense and 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 expense and 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 expense and 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.
•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.
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OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenue and adjusted unit costs, which are non-GAAP measures.

| Three Months Ended March 31, |  |
| 2023 |  | 2022 |  | Change |  |  |  |  |  |
Consolidated Operating Statistics:(a) |  |  |  |  |  |  |  |  |  |  |
Revenue passengers (000) | 9,852 |  | 8,694 |  | 13% |  |  |  |  |  |
RPMs (000,000) "traffic" | 12,554 |  | 10,586 |  | 19% |  |  |  |  |  |
ASMs (000,000) "capacity" | 15,705 |  | 13,783 |  | 14% |  |  |  |  |  |
Load factor | 79.9% |  | 76.8% |  | 3.1 pts |  |  |  |  |  |
Yield | 15.80¢ |  | 14.27¢ |  | 11% |  |  |  |  |  |
RASM | 13.98¢ |  | 12.20¢ |  | 15% |  |  |  |  |  |
CASMex(b) | 10.53¢ |  | 10.61¢ |  | (1)% |  |  |  |  |  |
Economic fuel cost per gallon(b) | $3.41 |  | $2.62 |  | 30% |  |  |  |  |  |
Fuel gallons (000,000) | 189 |  | 173 |  | 9% |  |  |  |  |  |
ASMs per fuel gallon | 83.1 |  | 79.9 |  | 4% |  |  |  |  |  |
Departures (000) | 95.4 |  | 93.2 |  | 2% |  |  |  |  |  |
Average full-time equivalent employees (FTEs) | 22,978 |  | 21,582 |  | 6% |  |  |  |  |  |
Mainline Operating Statistics: |  |  |  |  |  |  |  |  |  |  |
Revenue passengers (000) | 7,833 |  | 6,566 |  | 19% |  |  |  |  |  |
RPMs (000,000) "traffic" | 11,669 |  | 9,512 |  | 23% |  |  |  |  |  |
ASMs (000,000) "capacity" | 14,610 |  | 12,387 |  | 18% |  |  |  |  |  |
Load factor | 79.9% |  | 76.8% |  | 3.1 pts |  |  |  |  |  |
Yield | 14.48¢ |  | 13.06¢ |  | 11% |  |  |  |  |  |
RASM | 12.94¢ |  | 11.30¢ |  | 15% |  |  |  |  |  |
CASMex(b) | 9.52¢ |  | 9.64¢ |  | (1)% |  |  |  |  |  |
Economic fuel cost per gallon(b) | $3.39 |  | $2.61 |  | 30% |  |  |  |  |  |
Fuel gallons (000,000) | 166 |  | 146 |  | 14% |  |  |  |  |  |
ASMs per fuel gallon | 88.0 |  | 85.0 |  | 4% |  |  |  |  |  |
Departures (000) | 62.6 |  | 55.8 |  | 12% |  |  |  |  |  |
Average full-time equivalent employees (FTEs) | 17,785 |  | 16,336 |  | 9% |  |  |  |  |  |
Aircraft utilization | 11.1 |  | 9.5 |  | 17% |  |  |  |  |  |
Average aircraft stage length | 1,366 |  | 1,334 |  | 2% |  |  |  |  |  |
Operating fleet(d) | 219 |  | 225 |  | (6) a/c |  |  |  |  |  |
Regional Operating Statistics:(c) |  |  |  |  |  |  |  |  |  |  |
Revenue passengers (000) | 2,019 |  | 2,128 |  | (5)% |  |  |  |  |  |
RPMs (000,000) "traffic" | 885 |  | 1,075 |  | (18)% |  |  |  |  |  |
ASMs (000,000) "capacity" | 1,095 |  | 1,396 |  | (22)% |  |  |  |  |  |
Load factor | 80.8% |  | 77.0% |  | 3.8 pts |  |  |  |  |  |
Yield | 33.19¢ |  | 24.96¢ |  | 33% |  |  |  |  |  |
RASM | 27.82¢ |  | 20.04¢ |  | 39% |  |  |  |  |  |
Departures (000) | 32.8 |  | 37.4 |  | (12)% |  |  |  |  |  |
Operating fleet(d) | 75 |  | 98 |  | (23) 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.
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 2023 TO THREE MONTHS ENDED MARCH 31, 2022
Our consolidated net loss for the three months ended March 31, 2023 was $142 million, or $1.11 per share, compared to a consolidated net loss of $143 million, or $1.14 per share, for the three months ended March 31, 2022.
Excluding the impact of special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the first quarter of 2023 was $79 million, or $0.62 per share, compared to an adjusted net loss of $167 million, or $1.33 per share, in the first quarter of 2022. The following table reconciles our adjusted net loss per share (EPS) to amounts as reported in accordance with GAAP:

| Three Months Ended March 31,
| 2023 |  | 2022
(in millions, except per share amounts) | Dollars |  | Diluted EPS |  | Dollars |  | Diluted EPS
GAAP net loss per share | $ | (142) |  |  | $ | (1.11) |  |  | $ | (143) |  |  | $ | (1.14) |
Mark-to-market fuel hedge adjustments | 20 |  |  | 0.16 |  |  | (107) |  |  | (0.85) |
Special items - fleet transition and other | 13 |  |  | 0.10 |  |  | 75 |  |  | 0.60 |
Special items - labor and related | 51 |  |  | 0.40 |  |  | — |  |  | — |
Income tax effect of reconciling items above | (21) |  |  | (0.17) |  |  | 8 |  |  | 0.06 |
Non-GAAP adjusted net loss per share | $ | (79) |  |  | $ | (0.62) |  |  | $ | (167) |  |  | $ | (1.33) |

CASM excluding fuel and special items reconciliation is summarized below:

| Three Months Ended March 31,
(in cents) | 2023 |  | 2022 |  | % Change
Consolidated: |  |  |  |  |
CASM | 15.17 | ¢ |  | 13.66 | ¢ |  | 11 | %
Less the following components: |  |  |  |  |
Aircraft fuel, including hedging gains and losses | 4.24 |  |  | 2.51 |  |  | 69 | %
Special items - fleet transition and other | 0.08 |  |  | 0.54 |  |  | (85) | %
Special items - labor and related | 0.32 |  |  | — |  |  | NM
CASM excluding fuel and special items | 10.53 | ¢ |  | 10.61 | ¢ |  | (1) | %
Mainline: |  |  |  |  |
CASM | 13.93 | ¢ |  | 11.89 | ¢ |  | 17 | %
Less the following components: |  |  |  |  |
Aircraft fuel, including hedging gains and losses | 3.97 |  |  | 2.21 |  |  | 80 | %
Special items - fleet transition and other | 0.09 |  |  | 0.04 |  |  | 125 | %
Special items - labor and related | 0.35 |  |  | — |  |  | NM
CASM excluding fuel and special items | 9.52 | ¢ |  | 9.64 | ¢ |  | (1) | %

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OPERATING REVENUE
Total operating revenue increased $515 million, or 31%, during the first quarter of 2023 compared to the same period in 2022. The changes are summarized in the following table:

| Three Months Ended March 31,
(in millions) | 2023 |  | 2022 |  | % Change
Passenger revenue | $ | 1,984 |  |  | $ | 1,511 |  |  | 31 | %
Mileage Plan other revenue | 154 |  |  | 112 |  |  | 38 | %
Cargo and other revenue | 58 |  |  | 58 |  |  | — | %
Total Operating Revenues | $ | 2,196 |  |  | $ | 1,681 |  |  | 31 | %

Passenger revenue
On a consolidated basis, Passenger revenue for the first quarter of 2023 increased by $473 million, or 31%, on a 19% increase in passenger traffic and a 11% increase in ticket yield. The first quarter year-over-year comparison benefits from suppressed passenger revenue in 2022 as a result of the omicron variant. Following the first quarter of 2022, a surge in travel demand drove significant increases in ticket sales and passenger revenue trends, which continues to drive strong revenue performance in the first quarter of 2023.
We expect to see further growth to Passenger revenue as we progress through 2023 driven by high demand and increased capacity.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue for the first quarter of 2023 increased by $42 million, or 38%. The increase was due to higher commissions received from our bank card partners driven by increased consumer spending and increased credit card acquisitions.
We expect to see continued strength in Mileage Plan other revenue for the remainder of 2023, enabled by higher commissions from increased card spend.
OPERATING EXPENSES
Total operating expenses increased $499 million, or 27%, compared to the first quarter of 2022. 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 March 31,
(in millions) | 2023 |  | 2022 |  | % Change
Fuel expense | $ | 665 |  |  | $ | 347 |  |  | 92 | %
Non-fuel operating expenses, excluding special items | 1,653 |  |  | 1,461 |  |  | 13 | %
Special items - fleet transition and other | 13 |  |  | 75 |  |  | (83) | %
Special items - labor and related | 51 |  |  | — |  |  | NM
Total Operating Expenses | $ | 2,382 |  |  | $ | 1,883 |  |  | 27 | %

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.
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Aircraft fuel expense increased $318 million, or 92%, compared to the first quarter of 2022. The elements of the change are illustrated in the following table:

| Three Months Ended March 31, |  |  |
| 2023 |  | 2022 |  |  |
(in millions, except for per gallon amounts) | Dollars |  | Cost/Gal |  | Dollars |  | Cost/Gal |  |  |
Raw or "into-plane" fuel cost | $ | 633 |  |  | $ | 3.35 |  |  | $ | 504 |  |  | $ | 2.91 |  |  |  |
(Gain)/loss on settled hedges | 12 |  |  | 0.06 |  |  | (50) |  |  | (0.29) |  |  |  |
Consolidated economic fuel expense | $ | 645 |  |  | $ | 3.41 |  |  | $ | 454 |  |  | $ | 2.62 |  |  |  |
Mark-to-market fuel hedge adjustments | 20 |  |  | 0.11 |  |  | (107) |  |  | (0.62) |  |  |  |
GAAP fuel expense | $ | 665 |  |  | $ | 3.52 |  |  | $ | 347 |  |  | $ | 2.00 |  |  |  |
Fuel gallons |  |  | 189 |  |  |  |  | 173 |  |  |  |

Raw fuel expense increased 26% in the first quarter of 2023 compared to the first quarter of 2022, due to higher per gallon costs and increased fuel consumption. Raw fuel expense per gallon increased by 15% due to higher all-in jet fuel prices. 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. Although crude oil prices have fallen 19%, the per-gallon improvement is offset by a 47% increase in refining margins, as well as benefits received in 2022 for non-indexed fuel charges which did not repeat in 2023. Fuel gallons consumed increased 9%, consistent with rising 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.
Losses recognized for hedges that settled during the first quarter were $12 million in 2023, compared to gains of $50 million in the same period in 2022. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.
In the second quarter, we expect our economic fuel cost per gallon to range between $2.95 to $3.15, as indicated by the forward curve as of the date of this filing.
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Non-fuel expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel and other special items. Significant operating expense variances from 2022 are more fully described below.

| Three Months Ended March 31,
(in millions) | 2023 |  | 2022 |  | % Change
Wages and benefits | $ | 723 |  |  | $ | 606 |  |  | 19 | %
Variable incentive pay | 47 |  |  | 36 |  |  | 31 | %
Aircraft maintenance | 124 |  |  | 135 |  |  | (8) | %
Aircraft rent | 59 |  |  | 73 |  |  | (19) | %
Landing fees and other rentals | 152 |  |  | 138 |  |  | 10 | %
Contracted services | 95 |  |  | 78 |  |  | 22 | %
Selling expenses | 66 |  |  | 58 |  |  | 14 | %
Depreciation and amortization | 104 |  |  | 102 |  |  | 2 | %
Food and beverage service | 54 |  |  | 41 |  |  | 32 | %
Third-party regional carrier expense | 52 |  |  | 42 |  |  | 24 | %
Other | 177 |  |  | 152 |  |  | 16 | %
Total non-fuel operating expenses, excluding special items | $ | 1,653 |  |  | $ | 1,461 |  |  | 13 | %

Wages and benefits
Wages and benefits increased by $117 million, or 19%, in the first quarter of 2023. The primary components of Wages and benefits are shown in the following table:

| Three Months Ended March 31,
(in millions) | 2023 |  | 2022 |  | % Change
Wages | $ | 558 |  |  | $ | 467 |  |  | 19 | %
Pension—Defined benefit plans | 7 |  |  | 11 |  |  | (36) | %
Defined contribution plans | 51 |  |  | 38 |  |  | 34 | %
Medical and other benefits | 66 |  |  | 56 |  |  | 18 | %
Payroll taxes | 41 |  |  | 34 |  |  | 21 | %
Total Wages and benefits | $ | 723 |  |  | $ | 606 |  |  | 19 | %

Wages increased $91 million, or 19%, on a 6% growth in FTEs. When combined with FTE increases, higher wage rates stemming from labor agreements executed in 2022 were the primary driver for incremental year-over-year expense. Incremental expense for defined contribution plans was driven by the change in wages as well as higher matching contributions for many labor groups. Increased expense for medical and other benefits was driven by an increase in claims compared to the prior year and the increase in FTEs. Increased expense for payroll taxes was consistent with the change in wages and FTEs. Decreased defined benefit expense was driven by changes in actuarial assumptions.
We expect to see higher wages and benefits for the remainder of 2023 due to the increase in wage rates and expected growth in overall FTEs. Wages and benefits could also increase further in 2023 due to agreements we may reach during the year with represented labor groups.
Variable incentive pay
Variable incentive pay expense increased by $11 million, or 31%, in the first quarter of 2023. The increase was primarily driven by growth in the variable incentive pay wage base from increased FTEs on increased wage rates compared to 2022. The increase is also driven by a higher assumed payout percentage compared to the prior year due to a greater degree of uncertainty in forecasted financial performance during the first quarter of 2022.
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Aircraft maintenance
Aircraft maintenance expense decreased by $11 million, or 8%, in the first quarter of 2023. The decrease was primarily driven by $35 million of lease return costs in the first quarter of 2022 that did not recur in 2023 as all lease return costs associated with the Company's fleet transition have been recorded to Special items - fleet transition and other since the second quarter of 2022. This was partially offset by the impact of a new power-by-the-hour contract for the B737-900ER fleet.
We expect aircraft maintenance to increase for the remainder of 2023 as compared to 2022 due primarily to the B737-900ER power-by-the-hour contract, which will total approximately $100 million for the year, as well as increased aircraft utilization.
Aircraft rent
Aircraft rent expense decreased by $14 million, or 19%, in the first quarter of 2023. The decrease was driven by the retirement of 30 A320 and 32 Q400 aircraft, partially offset by delivery of seven leased B737-9 aircraft since the first quarter of 2022.
We expect aircraft rent will remain below 2022 levels for the remainder of 2023, due to the net reduction in overall leased aircraft described above.
Landing fees and other rentals
Landing fees and other rentals increased by $14 million, or 10%, in the first quarter of 2023. The increase was driven by higher terminal rent costs resulting from both rate and volume increases. Additionally, 2023 expense was higher than 2022 due to non-recurring favorable settlements that were realized in 2022. Landing fees increased in the first quarter due to an overall increase in volume.
We expect landing fees and other rentals to increase for the remainder of 2023 as compared to 2022 due to increased capacity and higher rates at airports.
Contracted services
Contracted services increased by $17 million, or 22%, in the first quarter of 2023. The increase was driven by increased departures and passengers in line with increased demand, coupled with increased rates charged by vendors.
We expect contracted services to increase for the remainder of 2023 as compared to 2022 as we continue to increase capacity and departures throughout our network.
Selling expenses
Selling expenses increased by $8 million, or 14%, in the first quarter of 2023. The increase was driven by incremental credit card commissions and distribution costs incurred from increased bookings and fares as demand has grown. Commissions and fees associated with alliances and business travel also contributed to the increase.
We expect selling expenses to increase for the remainder of 2023 as compared to 2022, due primarily to higher sales and an increase in marketing costs as we build our brand.
Food and beverage service
Food and beverage service increased by $13 million, or 32%, in the first quarter of 2023. The increase was driven by a combination of 13% growth in revenue passengers, additional onboard offerings, and higher costs for food, food service supplies, and transportation.
We expect the factors described above will continue to have a similar impact on food and beverage service for the remainder of 2023 as compared to 2022.
Third-party regional carrier expense
Third-party regional carrier expense, which represents expenses associated with SkyWest under our CPA, increased by $10 million, or 24%, in the first quarter of 2023. Although total regional capacity and departures have decreased year-over-year, the
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increase in third-party regional carrier expense is driven by incremental departures and block hours for flights operated by SkyWest, which have risen due to six additional E175 aircraft operating under the CPA since March 31, 2022. Higher wage rates for flight crews have also contributed to the increase.
We expect third-party regional carrier expense will continue to be higher for the remainder of 2023 as compared to 2022 due to incremental departures and block hours, as well as higher wage rates for flight crews.
Other expense
Other expense increased $25 million, or 16%, in the first quarter of 2023. The increase was driven by higher professional services costs, as well as increases for crew hotel stays and crew per diem. Increases in crew-related costs are due to contract improvements for Alaska pilots, as well as the rise in departures.
Special items - fleet transition and other
We recorded expenses associated with fleet transition and related charges of $13 million in the first quarter of 2023. We expect to record additional special charges associated with the fleet transition in 2023, primarily related to accelerated ownership expenses of the A321neo aircraft. At this time, these costs are estimated to range between $300 million and $350 million for the remainder of 2023. The Company continues to evaluate options for the A321neo aircraft. Refer to Note 2 to the consolidated financial statements for additional details.
Special items - labor and related
We recorded an expense of $51 million in the first quarter of 2023 due to a Letter of Agreement with Alaska pilots, represented by ALPA. The charge is a one-time adjustment of accrued benefits related to expected future cash payments of pilots' unused sick leave upon retirement.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 10 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 loss of $67 million in the first quarter of 2023, compared to an adjusted pretax loss of $174 million in the first quarter of 2022. The $107 million improvement was primarily driven by a $447 million increase in Passenger revenue, offset by a $180 million increase in economic fuel cost and a $196 million increase in non-fuel operating costs.
As compared to the prior year, higher Mainline revenue is primarily attributable to a 23% increase in traffic and a 11% increase in yield, driven by a strong demand environment. Non-fuel operating expenses increased, driven by higher wage rates and higher variable costs, largely consistent with the overall growth in capacity and departures. Higher all-in fuel prices relative to 2022, combined with more gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations reported an adjusted pretax loss of $36 million in the first quarter of 2023, compared to an adjusted pretax loss of $55 million in the first quarter of 2022. The $19 million improvement was driven by a $25 million increase in Operating revenue and a $6 million decrease in non-fuel operating expenses, partially offset by a $12 million increase in fuel costs.
Regional passenger revenue increased compared to the first quarter of 2022, primarily driven by an improved load factor and a 33% improvement in yield, partially offset by a decrease in capacity. Higher fuel prices drove the increase in Regional fuel expense.
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Horizon
Horizon reported an adjusted pretax loss of $14 million in the first quarter of 2023, compared to an adjusted pretax loss of $10 million in the first quarter of 2022. The loss is driven by lower CPA revenue on decreased departures and block hours, combined with higher wage and benefit costs due to increased wage rates resulting from the annualization of new collective bargaining agreements with Horizon employees.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
•Existing cash and marketable securities of $2.4 billion;
•Cash flows from operations of $222 million;
•72 unencumbered aircraft that could be financed, if necessary;
•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million.
During the three months ended March 31, 2023, we took free and clear delivery of three owned Boeing 737-9 aircraft. We made debt payments totaling $96 million, ending the quarter with a debt-to-capitalization ratio of 48%, within our target range of 40% to 50%. We also resumed share repurchases, spending $18 million to repurchase shares in the first quarter, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.
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 financial condition and liquidity:

(in millions) | March 31, 2023 |  | December 31, 2022 |  | Change
Cash and marketable securities | $ | 2,429 |  |  | $ | 2,417 |  |  | — %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 28 | % |  | 29 | % |  | (1) pt
Long-term debt, net of current portion | 1,795 |  |  | 1,883 |  |  | (5)%
Shareholders’ equity | $ | 3,689 |  |  | $ | 3,816 |  |  | (3)%

Debt-to-capitalization, adjusted for operating leases |  |  |  |  |
(in millions) | March 31, 2023 |  | December 31, 2022 |  | Change
Long-term debt, net of current portion | $ | 1,795 |  |  | $ | 1,883 |  |  | (5)%
Capitalized operating leases | 1,668 |  |  | 1,621 |  |  | 3%
Adjusted debt | $ | 3,463 |  |  | $ | 3,504 |  |  | (1)%
Shareholders' equity | 3,689 |  |  | 3,816 |  |  | (3)%
Total invested capital | $ | 7,152 |  |  | $ | 7,320 |  |  | (2)%
Debt-to-capitalization, including operating leases | 48 | % |  | 48 | % |  | —

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Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions) | March 31, 2023 |  | December 31, 2022
Current portion of long-term debt | $ | 268 |  |  | $ | 276 |
Current portion of operating lease liabilities | 213 |  |  | 228 |
Long-term debt | 1,795 |  |  | 1,883 |
Long-term operating lease liabilities, net of current portion | 1,455 |  |  | 1,393 |
Total adjusted debt | 3,731 |  |  | 3,780 |
Less: Cash and marketable securities | (2,429) |  |  | (2,417) |
Adjusted net debt | $ | 1,302 |  |  | $ | 1,363 |
(in millions) | Twelve Months Ended March 31, 2023 |  | Twelve Months Ended December 31, 2022
GAAP Operating Income(a) | $ | 86 |  |  | $ | 70 |
Adjusted for: |  |  |
Special items | 569 |  |  | 580 |
Mark-to-market fuel hedge adjustments | 203 |  |  | 76 |
Depreciation and amortization | 417 |  |  | 415 |
Aircraft rent | 277 |  |  | 291 |
EBITDAR | $ | 1,552 |  |  | $ | 1,432 |
Adjusted net debt to EBITDAR | 0.8x |  | 1.0x

(a)Operating Income 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 three months of 2023, net cash provided by operating activities was $222 million, compared to $287 million during the same period in 2022. 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.
The $65 million net decrease in our operating cash flows is due to a combination of factors. Increased cash provided by higher ticket sales and our co-branded credit card agreement were offset by increased cash used for operating expenses. Payments made in the first quarter for our 2022 performance-based pay program were approximately $110 million higher than payments in the prior year for our 2021 program.
Cash Provided by Investing Activities
Cash provided by investing activities was $60 million during the first three months of 2023, compared to $39 million during the same period of 2022. Cash used in capital expenditures for aircraft purchase deposits and other property and equipment was $124 million in the first three months of 2023, compared to $288 million in the first three months of 2022. Additionally, there were $187 million of net sales of marketable securities during the first three months of 2023, compared to $328 million of net sales during the first three months of 2022.
Cash Used in Financing Activities
Cash used in financing activities was $114 million during the first three months of 2023, compared to $168 million during the same period in 2022. During the first three months of 2023, we utilized cash on hand to repay $96 million of outstanding long-term debt, compared to payments of $170 million during the same period in 2022. We also repurchased $18 million of our common stock during the first three months of 2023.
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MATERIAL CASH COMMITMENTS
Material cash requirements include the following contractual and other obligations:
Aircraft Commitments
As of March 31, 2023, Alaska has firm orders to purchase 102 B737 aircraft with deliveries between 2023 and 2027 and a firm commitment to lease one B737-9 aircraft with delivery in 2023. Alaska also has rights for 105 additional B737-10 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 E175 aircraft with deliveries between 2023 and 2026. Horizon has options to acquire 13 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.
The following table summarizes our anticipated fleet count by year, as of March 31, 2023:

| Actual Fleet |  | Anticipated Fleet Activity(a) |
Aircraft | March 31, 2023 |  | 2023 Additions |  | 2023 Removals |  | Dec 31, 2023 |  | 2024 Changes |  | Dec 31, 2024 |  | 2025 Changes |  | Dec 31, 2025 |
B737-700 Freighters | 3 |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | 3 |  |  | — |  |  | 3 |  |
B737-800 Freighters | — |  |  | 1 |  |  | — |  |  | 1 |  |  | 1 |  |  | 2 |  |  | — |  |  | 2 |  |
B737-700 | 11 |  |  | — |  |  | — |  |  | 11 |  |  | — |  |  | 11 |  |  | — |  |  | 11 |  |
B737-800 | 61 |  |  | — |  |  | (2) |  |  | 59 |  |  | — |  |  | 59 |  |  | — |  |  | 59 |  |
B737-900 | 12 |  |  | — |  |  | — |  |  | 12 |  |  | — |  |  | 12 |  |  | — |  |  | 12 |  |
B737-900ER | 79 |  |  | — |  |  | — |  |  | 79 |  |  | — |  |  | 79 |  |  | — |  |  | 79 |  |
B737-8 | — |  |  | 3 |  |  | — |  |  | 3 |  |  | 2 |  |  | 5 |  |  | 4 |  |  | 9 |  |
B737-9 | 43 |  |  | 28 |  |  | — |  |  | 71 |  |  | 13 |  |  | 84 |  |  | 5 |  |  | 89 |  |
B737-10 | — |  |  | — |  |  | — |  |  | — |  |  | 6 |  |  | 6 |  |  | 21 |  |  | 27 |  |
A321neo | 10 |  |  | — |  |  | (10) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total Mainline Fleet | 219 |  |  | 32 |  |  | (12) |  |  | 239 |  |  | 22 |  |  | 261 |  |  | 30 |  |  | 291 |  |
E175 operated by Horizon | 33 |  |  | 8 |  |  | — |  |  | 41 |  |  | 3 |  |  | 44 |  |  | 3 |  |  | 47 |  |
E175 operated by third party | 42 |  |  | — |  |  | — |  |  | 42 |  |  | — |  |  | 42 |  |  | 1 |  |  | 43 |  |
Total Regional Fleet | 75 |  |  | 8 |  |  | — |  |  | 83 |  |  | 3 |  |  | 86 |  |  | 4 |  |  | 90 |  |
Total | 294 |  |  | 40 |  |  | (12) |  |  | 322 |  |  | 25 |  |  | 347 |  |  | 34 |  |  | 381 |  |

(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.
We intend to finance future aircraft deliveries and option exercises using cash flow from operations or long-term debt.
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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:

| Approximate % of Expected Fuel Requirements(a) |  | Weighted-Average Crude Oil Price per Barrel |  | Average Premium Cost per Barrel
Second Quarter of 2023 | 50 | % |  | $97 |  | $7
Third Quarter of 2023 | 50 | % |  | $100 |  | $7
Fourth Quarter of 2023 | 40 | % |  | $97 |  | $7
Full Year 2023 | 47 | % |  | $98 |  | $7
First Quarter of 2024 | 30 | % |  | $88 |  | $7
Second Quarter of 2024 | 20 | % |  | $88 |  | $7
Third Quarter of 2024 | 10 | % |  | $86 |  | $6
Full Year 2024 | 14 | % |  | $87 |  | $7

Contractual Obligations
The following table provides a summary of our obligations as of March 31, 2023. For agreements with variable terms, amounts included reflect our minimum obligations. Discussion of these obligations follow the table below.

(in millions) | Remainder of 2023 |  | 2024 |  | 2025 |  | 2026 |  | 2027 |  | Beyond 2027 |  | Total
Debt obligations | $ | 185 |  |  | $ | 243 |  |  | $ | 296 |  |  | $ | 176 |  |  | $ | 535 |  |  | $ | 643 |  |  | $ | 2,078 |
Aircraft lease commitments(a) | 215 |  |  | 241 |  |  | 236 |  |  | 234 |  |  | 229 |  |  | 827 |  |  | 1,982 |
Facility lease commitments | 14 |  |  | 13 |  |  | 12 |  |  | 12 |  |  | 10 |  |  | 124 |  |  | 185 |
Aircraft-related commitments(b) | 1,742 |  |  | 1,393 |  |  | 1,440 |  |  | 689 |  |  | 335 |  |  | 598 |  |  | 6,197 |
Interest obligations(c) | 68 |  |  | 77 |  |  | 79 |  |  | 63 |  |  | 61 |  |  | 89 |  |  | 437 |
CPA and other obligations(d) | 154 |  |  | 224 |  |  | 227 |  |  | 219 |  |  | 220 |  |  | 739 |  |  | 1,783 |
Total | $ | 2,378 |  |  | $ | 2,191 |  |  | $ | 2,290 |  |  | $ | 1,393 |  |  | $ | 1,390 |  |  | $ | 3,020 |  |  | $ | 12,662 |

(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 March 31, 2023.
(d)Primarily comprised of non-lease 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. As of March 31, 2023, we repaid $96 million in debt. At March 31, 2023, our debt portfolio carries a weighted average interest rate of 3.7%. Interest is paid with regular debt service. Debt service obligations remaining in 2023 are expected to be approximately $253 million, inclusive of interest and principal. Refer to Note 5 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
34

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. Additional charges to be recorded in 2023 will reflect adjustments to estimated costs to return the A320 fleet. A total of $225 million is accrued at March 31, 2023, including costs recorded in prior year periods.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.
Sustainability Commitments
As part of our efforts to reach net-zero carbon emissions by 2040, we have outlined a five-part path that we expect to include operational efficiency, fleet renewal, sustainable aviation fuels, enabling new technologies including zero emission aircraft in the future, and using credible offsetting and removal technologies to close the gaps to the target in future years. We anticipate these efforts will require cash outlays, not all of which are reflected in our contractual commitments. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of neat 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 the CPA and other obligations row in the above table, as appropriate.
Income Taxes
For federal income tax purposes, the majority of our property and equipment 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 property and equipment difference will reverse into taxable income, potentially resulting in an increase in income taxes payable.
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, among other factors out of our control), whether “bonus depreciation” provisions are available, as well as other legislative changes beyond our control. We believe we have the liquidity to make our future tax payments.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three months ended March 31, 2023. For information regarding 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, 2022.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
35

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 A320, and Airbus A321neo jets and all associated revenue 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
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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, 2022.
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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of March 31, 2023, 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 March 31, 2023.
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 March 31, 2023, 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).
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PART II

ITEM 1. LEGAL PROCEEDINGS

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 (Bernstein v. Virgin America, Inc.). The court certified a class of approximately 1,800 flight attendants in November 2016. The Company pursued numerous appeal paths following a February 2019 federal district court order against Virgin America and Alaska Airlines awarding plaintiffs approximately $78 million, including approximately $25 million in penalties under California’s Private Attorneys General Act (PAGA). An appellate court reversed portions of the lower court decision and significantly reduced the PAGA penalties and total judgment value, remanding the matter to the district court for further consideration. In December 2022, the district court issued a final total judgment amount of $31 million. Additional proceedings will determine the attorneys’ fee award due to plaintiffs’ counsel. The Company holds an accrual for $37 million in Other accrued liabilities on the condensed consolidated balance sheets.
In June 2022, the U.S. Supreme Court declined to take the Company’s appeal for a conclusive ruling that the California laws on which the judgment is based are invalid as applied to airlines. The decision leaves open the possibility that other states in the Ninth Circuit judicial district may attempt to apply similar laws to airlines, and, in fact, a lawsuit based on similar claims to those asserted in Bernstein has been initiated by a Washington-based Alaska Airlines flight attendant (Krueger v. Alaska Airlines, Inc.). The Company plans to assert all available legal defenses, but to date has not determined its probable and estimable liability in this matter.
The Company is analyzing a range of potential options to balance new compliance obligations with operational and labor considerations. Some or all of these solutions may have an adverse impact on the Company’s operations and financial position due in part to the unresolved conflicts between the laws and federal regulations applicable to airlines.
As part of the 2016 acquisition of Virgin America, Alaska assumed responsibility for the Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of Alaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and $160 million. Alaska stopped making royalty payments in 2019 after ending all use of the Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company believes the claims in the case are without factual and legal merit, a position supported by Virgin America’s representations during pre-merger due diligence, and has made an application to appeal in the English courts. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.

ITEM 1A. RISK FACTORS

See Part I, Item 1A. "Risk Factors," in our 2022 Form 10-K for a detailed discussion of risk factors affecting Alaska Air Group.

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

39

This table provides certain information with respect to our purchases of shares of our common stock during the first quarter of 2023.

| Total Number of Shares Purchased |  | Average Price Paid per Share |  | Maximum remaining dollar value of shares that can be purchased under the plan (in millions)
January 1, 2023 - January 31, 2023 | — |  |  | $ | — |  |  |
February 1, 2023 - February 28, 2023 | 104,814 |  |  | 48.60 |  |  |
March 1, 2023 - March 31, 2023 | 308,740 |  |  | 42.43 |  |  |
Total | 413,554 |  |  | $ | 43.99 |  |  | $ | 438 |

The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.
As of March 31, 2023, a total of 1,882,517 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $31.61 (928,126 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) per share of common stock. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020 at a strike price of $31.61. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term. 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”).
Compensation Arrangements with Named Executive Officers
On May 2, 2023, the Compensation and Leadership Development Committee of the Board of Directors (the "Committee") noted the expiration of Coronavirus Aid, Relief and Economic Security Act of 2020 restrictions, which had capped certain executive’s compensation at 2019 levels since April 2020. These restrictions prevented the Committee from delivering commensurate compensation to key executives who were promoted to larger, more responsible roles during or just months before the pandemic broke out, including its chief executive officer (promoted in March 2021), chief financial officer (promoted in March 2020), chief operating officer (promoted in April 2021), chief people officer (promoted in June 2019) and chief legal officer (promoted in January 2020). The Committee recognized that impacted executives forfeited substantial equity value to remain under their 2019 compensation caps from April 2020 to April 2023, after leading the Company through a pandemic that had disproportionate effect on the airline industry and after achieving industry-leading profitability in and operational results in 2022. The Company retained these executives even though they could have taken jobs at other airlines or in other industries without being subject to compensation caps.
After consulting with its independent advisors and the full Board, the Committee approved the performance-based equity awards described below (the “Awards”) to named executive officers Ben Minicucci, the Company’s President and CEO; Shane Tackett, the Company’s Executive Vice President and Chief Financial Officer; Andrew Harrison, the Executive Vice President and Chief Commercial Officer of Alaska Airlines; Constance von Muehlen, the Executive Vice President and Chief Operating Officer of Alaska Airlines; and Andrea Schneider, the Senior Vice President People of Alaska Airlines, to address equity value forfeited during the periods in which they were performing more responsible jobs while being compensated at 2019 levels associated with their prior roles.
Performance-Based, Time-Vesting Performance Stock Units

| Number (at target) |  | Grant Date Value |  | Vesting Schedule
Mr. Minicucci | 55,380 |  |  | $3,746,457 |  |  | 12/31/23 – 25,160 12/31/24 – 30,220
Mr. Tackett | 29,370 |  |  | $1,986,881 |  |  | 12/31/23 – 14,490 12/31/24 – 14,880
Mr. Harrison | 15,800 |  |  | $1,068,870 |  |  | 12/31/23 – 14,490 12/31/24 – 1,310
Ms. Von Muehlen | 20,942 |  |  | $1,416,726 |  |  | 5/2/23 – 1,112 12/31/23 – 8,210 12/31/24 – 11,620
Ms. Schneider | 12,300 |  |  | $832,095 |  |  | 12/31/23 – 5,790 12/31/24 – 6,510

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Performance-Based, Time-Vesting Restricted Stock Units

| Number |  | Grant Date Value |  | Vesting Schedule
Mr. Minicucci | 19,215 |  |  | $833,355 |  |  | 2/25/24 – 12,580 2/7/25 – 6,635
Mr. Tackett | 10,910 |  |  | $473,167 |  |  | 2/9/24 – 7,240 2/7/25 – 3,670
Mr. Harrison | 7,240 |  |  | $313,999 |  |  | 2/9/24 – 7,240
Ms. Von Muehlen | 11,110 |  |  | $481,841 |  |  | 5/2/23 – 1,190 4/3/24 – 4,110 2/7/25 – 5,810
Ms. Schneider | 6,000 |  |  | $260,220 |  |  | 2/9/24 – 2,900 2/7/25 – 3,100

Stock Options
Ms. von Muehlen’s Award included incentive stock options (ISOs) and non-qualified stock options (NQOs).

Type | Number |  | Grant Date Black-Scholes Value |  | Vesting Schedule
ISOs | 4,834 |  |  | $76,712 |  |  | 5/2/23 – 58 2/7/24 – 1 2/11/24 – 1,293 4/3/24 – 237 4/3/25 – 1,439 2/7/26 – 1,806
NQOs | 20,097 |  |  | $327,556 |  |  | 5/2/23 – 8,222 2/7/24 – 3,442 4/3/24 – 2,278 2/7/25 – 3,442 4/3/25 – 1,076 2/7/26 – 1,637

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.
41

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/ EMILY HALVERSON |
Emily Halverson |
Vice President Finance and Controller |
May 5, 2023 |

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EXHIBIT INDEX

Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number
3.2 | Amended and Restated Certificate of Incorporation of Registrant | 10-Q | August 3, 2017 | 3.1
10.1#† | Amendment No. 20 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, Inc. | 10-Q |  |
10.2#† | Amendment No. 21 to Purchase Agreement COM0041-16 between Embraer S.A. and Horizon Air Industries, Inc. | 10-Q |  |
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
* | Indicates management contract or compensatory plan or arrangement.
# | Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10).

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