Alaska Air Group, Inc. · NYSE:ALK
Alaska Air — Investor Day (March 2017)
99 slides from Alaska Air's investor day presentation, Mar 30, 2017
Slide 1: 2017 Investor Day Alaska Air Group
2017 Investor Day Alaska Air Group
Slide 2: Safe harbor
This presentation may contain forward-looking statements subject to the safe harbor protection provided by 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. These statements
Slide 3: Creating an airline people love
Creating an airline people love Brad Tilden 3
Slide 4: We have a track record of successful growth
We have a track record of successful growth 2001 2015 4
Slide 5: Taking growth to a bigger platform in California
39 million people #1 state GDP Opportunity 3x PNW …And we are taking it to a bigger platform in California 5
Slide 6: The Crane Index: West Coast
62 25 24 29 12 19 20 2756 5 21 11 The “Crane Index” West Coast 2.5x bigger 140 cranes on the West Coast 59 cranes on the East Coast 6
Slide 7: Why Virgin America?
Why merge? Growth in California Outstanding guest service Complement strong presence in Seattle Access to constrained real estate Why Virgin America? 7
Slide 8: Building on our track record of successful growth
2001 2015 Today We’re building on our track record of successful growth 8
Slide 9: Building on our history
Building on our history Baseline Genuine & caring service 2013 Schedule breadth & depth 2005 Low costs, low fares 2012 Align employees 2009 Reliable operations 2014 Loyalty 9
Slide 10: Our Purpose: Creating an airline people love
Our Purpose: Creating an airline people love 10
Slide 11: Our values
Our values Do the right thing Be kind hearted Deliver performance Be remarkable Own safety 11
Slide 12: Our strategy: five focus areas
Our strategy Five focus areas Be safe and On Time Focus on People Build a deep, emotional connection with our brand Defend and grow our customer base Win with low costs and low fares 12
Slide 13: Executing to integrate our airlines
Executing to integrate our airlines Ben Minicucci 13
Slide 14: Culture matters – a lot
Culture matters – a lot Guiding principles Project management Our Integration Playbook The “Integration Management Office” (IMO) is coordinating our integration effort 14
Slide 15: We started by studying mergers
We started by studying: Culture & ValuesAirline Mergers Other Mergers 15
Slide 16: Our guiding principles
Our guiding principles Keep everyone aligned and moving Capture the value Make fast, effective decisions Obsess about guests Culture is the key to success Run three great airlines throughout integration 16
Slide 17: Goals broken out into sub-projects
Goals are further broken out into 80 separate sub-projects We’ve identified 20 goals that are directly mapped to synergies and IMO is ‘quarterbacking’ the entire integration process Single Operating Certificate (SOC)Single integrated call centerSingle guest loyalty program EnablingOperationalCommerc
Slide 18: We measure and track everything
We measure and track everything Sample Project Tracking – SOC 18
Slide 19: We are moving quickly
We are moving quickly… Launched reciprocal loyalty accrual Activated codeshare to drive connectivity Elevate elite status matched by Mileage Plan Launched reciprocal loyalty redemptions Days after close 5 days 5 days 3½ weeks 3½ weeks 19
Slide 20: On track to hit major milestones by end of 2018
*Current timeline as of March 2017. Selected milestones only. Milestone timing subject to change. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019–2020 Single Operating Certificate (SOC) 20182017 Initial values rollout complete Completion of remaining integration objectives Single Passenger Service System Single labor
Slide 21: Planning for PSS
Planning for PSS Approach minimizes customer impact and risk Engaged experts (external/internal) Sabre to Sabre Migration Learned from other airlines’ success & challenges Minimize data migration Leverage codeshare to bridge to new Alaska 21
Slide 22: Labor philosophy has not changed due to the merger
Labor philosophy has not changed due to the merger Sustainable cost advantage creates growth and stability High Productivity Pay Well Aligned Rewards Good Benefits 22
Slide 23: Long track record of engaged employees
Long track record of engaged employees… 73% 84% 84% 87% 86% 2011 2013 2014 2015 2016 Employee engagement scores 2012 did not have an employee engagement survey Kenexa Average: 72% 23
Slide 24: Culture doesn't just happen
Our Purpose: Creating an airline people love Culture doesn’t just “happen” 24
Slide 25: Aligning all 19,000 employees to our purpose
Culture doesn’t just “happen” Aligning all 19,000 employees to our purpose 5,000 employees & teammates completed culture survey 50 focus groups used to refine values Momentum sessions held 24
Slide 26: Investments in culture are showing progress
Investments in culture (including Momentum and Lift) are already showing progress 96% “feel more engaged and excited about our future” after Lift 85% said Momentum was a “good start in welcoming Virgin America to the Alaska family” 26
Slide 27: Growing an airline people love
“Growing” an airline people love Andrew Harrison Sangita Woerner John Kirby Shane Tackett 27
Slide 28: DNA and brand roadmap will drive synergies
We are confident that our DNA and brand roadmap will drive synergies from the combined airline 40% Network & schedule 30% Price 20% Brand, service & loyalty 10% Product Purchase Criteria for Air Travel
Slide 29: Revenue synergies across seven categories, target $240M
We have identified annual revenue synergies across seven distinct categories and we are raising our target to $240M Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA 29
Slide 30: Defining the future of our brand
Defining the future of our brand Sangita Woerner 30
Slide 31: Both brands have strong attributes
Both brands have strong attributes Service-oriented Authentic Professional Feel-good Hip Bold & modern 31
Slide 32: A ten month journey: one brand or two?
We undertook a ten month journey to answer the question – one brand or two? Hired an expert brand consulting firm 1 Performed extensive qualitative research in CA and WA 2 Conducted a national survey with approx. 6,000 qualified respondents 3 Completed a financial and operational analysis 4 32
Slide 33: Leisure Enthusiasts segment valued at $25B
Leisure Enthusiasts are an area of strength and continued focus. This segment has a value of $25B. High fit Low fit Note: Chi-squared indices measure brand fit with each demand space's needs based on brand perceptions. Source: Alaska Airlines Brand Survey #1, June 2016 Trade-up Trade-up &Fun / Relax
Slide 34: Leisure Enthusiast needs and traits
…and have these emotional & functional needs …tend to have these traits… Frequent flyers Medium to high-spend Higher income Spend more for a better flight experience 2/3rd Leisure – 1/3rd Business (Bleisure) “ “ I want to feel good when I fly I expect my flight experience to be service-oriented and
Slide 35: Alaska and Virgin have strength in Leisure Enthusiasts
The research supports our hypothesis that Alaska and Virgin already have a real strength in the Leisure Enthusiasts segments Brand fit measures how well each brand's perceptions match up with demand space needs High FitLow Fit Brand fit Both Alaska & Virgin among highest for brand fit Airline D Airl
Slide 36: Brand preference by familiarity and loyalty
General fliers have a strong preference for Virgin America, while Elites have developed a deeper relationship with Alaska Preference for Alaska grows exponentially as familiarity with the brand increases Source: Alaska Airlines Brand Survey #2, August 2016 segmented by “Aware”, “Have Flown”, “Loyalt
Slide 37: One name will best serve guests, employees and shareholders
We concluded that one name would best serve our guests, employees and shareholders. The name will be… The Virgin America name will retire likely sometime in 2019 Leverage Alaska’s appealing core product and embrace generosity when it comes to our loyalty program Infuse feel-good, modern, hip element
Slide 38: Warm and welcoming West Coast-inspired vibe
Warm & welcoming with a modern, West Coast-inspired vibeEase Comfort Generosity Enjoyment Personalization Thoughtful Vibrant Unconventional HOSPITALITY PERSONALITY 38
Slide 39: Lighting and music across the fleet and airport
Lighting and music will play a prominent role across the fleet and at the airport Blue Mood Lighting Music in Lobbies, Gates, Onboard 39
Slide 40: A comforting new look and feel for the cabin
A comforting new look and feel for the cabin 40
Slide 41: Connectivity and entertainment
The brand will focus on connectivity and entertainment Satellite Connectivity Free Movies Free Chat 41
Slide 42: Premium seating with generous upgrades
Offering premium seating with generous upgrades New 41’ Pitch First Class Seats 35” Premium Class Seats 42
Slide 43: Fresh West Coast food with pre-order
Fresh, healthy West Coast food offerings with the ability to order and pay pre-flight Premium Food & Beverage Pre-Order & Pre-Pay 43
Slide 44: Bold changes to lounges and uniforms
Bold changes to our lounges and uniforms Lounges Custom Uniforms 44
Slide 45: Unlocking Revenue Synergies
Unlocking Revenue Synergies Shane Tackett John Kirby 45
Slide 46: Fares ~20% lower than legacy carriers
Alaska and Virgin offer fares that are ~20% lower the legacy carriers, and in line with LCCs Source: U.S. Department of Transportation, 12 months ended Q3 2016 North American Origin and Departures (stage-length adjusted to industry average stage length of 1,157) $150 $152 $160 $161 $195 $199 $206 46
Slide 47: Passengers increasingly demand low fares and premium product
Net Change in Seats by Airline Segment 2000 to 2015 Industry Network ULCC LCC Premium Value (26M) (97M) 18M 25M 27M Passengers are increasingly demanding low fares and a premium product 47
Slide 48: Raising revenue synergy target to $240M
We have identified annual revenue synergies across seven distinct categories and today we are raising our target to $240M Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA 48
Slide 49: Building PacNW-like relevance in California
2.5x PacNW Daily Passengers California 39.1 Million Population Daily North American Passengers 185,700 AS/VX Loyalty Members 2 Million AS/VX Nonstop Markets 120 3x PacNW Population AS/VX Relevance 38% Alaska Washington Oregon Population 11.9 Million Daily North American Passengers 71,700 AS/VX Loyal
Slide 50: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 50
Slide 51: Larger network creates more options
A larger network presence creates more options for our guests JFK SEA SFO JFK SEA SFO More non-stop flights allows us to compete for a larger share of passenger spend 51
Slide 52: Increased choice of schedule times and fares
Providing our guests with an increased choice of schedule times and fares will allow us to effectively compete for new guests Merger creates new itinerary options for our guests without adding incremental capacity Seattle – San Francisco +4 Seattle – Los Angeles +3 Portland – San Francisco +3 Palm S
Slide 53: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 53
Slide 54: Combining networks enables new growth markets
Combining our networks enables over 50 new growth markets Kona New Orleans Minneapolis Orlando Kansas City Nashville Indianapolis Philadelphia Baltimore Raleigh Orange County To Mexico City Albuquerque San Francisco Alaska did not have SFO network depth or facilities to support growth Economies of S
Slide 55: New California markets increase West Coast relevance
The new markets in California substantially increase our relevance for guests on the West Coast 36% 35% 34% 30% 26% San Francisco 13 New Destinations San Jose 3 New Destinations LA Basin 4 New Destinations San Diego 7 New Destinations New California Markets27 Relevance is percent of North American O
Slide 56: Increasing relevance with San Francisco guests
Our growth is quickly increasing our relevance with San Francisco guests Rank Market 1 LAX 2 JFK 3 Las Vegas 4 Newark 5 Chicago 6 Seattle 7 Boston 8 San Diego 9 Denver 10 Dulles 11 Phoenix 12 Santa Ana 13 Portland 14 Atlanta 15 Dallas 9% 59% 70% Rank Market 16 Minneapolis 17 Philadelphia 18 Honolulu
Slide 57: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 57
Slide 58: Fleet mix matches capacity to demand
Our fleet mix will enable us to match capacity to demand better than ever before B737-900ER 178 Seats More seats in capacity constrained markets and lower trip costs on off-peak flights A320 146–149 Seats B737-900ER 178 SeatsA320 146–149 Seats 58
Slide 59: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 59
Slide 60: Boosting partner revenue with expanded LAX and SFO service
Our opportunity to boost partner revenue increases exponentially with our expanded LAX & SFO service * International enplanement figures are 2016 YE totals published by airports 2.1m Intl Partners SEA SFO LAX Partners 6 10 12 Departures 8 14 32 Intl Enplanements 2.1M 6.0M 11.4M 6.0m 11.4m 60
Slide 61: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 61
Slide 62: Premium seating expansion increases revenue by $40M
*A320 based on 146 seat configuration…149 seat configuration will also be configured to 150 Expansion of premium seating on the Airbus fleet will increase revenue by $40M and lower unit costs Larger Premium Class sectionComplimentary F upgrades First 12 @ 41” Premium 18 @ 35” Main Cabin 84 @ 32”; 12
Slide 63: Seven categories of revenue synergies
Network presence LoyaltyCargo Alliance portfolio Fleet deployment Network growth Aircraft retrofit/LOPA We have identified annual revenue synergies across seven distinct categories 63
Slide 64: Loyalty and credit card programs contribute over $900M cash flow
Our loyalty and credit card programs attract high value guests – and contributed over $900 million in annual cash flow last year 4X more revenue 65% more likely to book direct 30% have a credit card Mileage Plan Members: 64
Slide 65: Most generous benefits reward loyalty
• Miles for miles • Low redemption prices • Fastest path to elite • Earn towards status on Global Partners • Complimentary Upgrades for elites (75% to F or PC for Golds+) Top Loyalty Program ? Annual Fee $75 $95-$99 Companion Certificate $99 ? Miles on Airline Spend 3X 2X Mileage Plan Credit Card We
Slide 66: California opportunity to build loyalty and cash flows
California Alaska Washington Oregon CA presents a sizeable opportunity for us to build loyalty and create strong cash flows Population 11.9 Million AS/VX Loyalty Members 3 Million Credit Card penetration 40% AS/VX Loyalty Members 2 Million 39.1 Million Population Credit Card penetration Negligible 3
Slide 67: Revenue synergies from $175M to $240M
We have identified annual revenue synergies across seven distinct categories $175M $240M Due-Diligence Final Targets 37% 67
Slide 68: Creating long-term value
Creating long-term value Brandon Pedersen 68
Slide 69: Creating a durable business
Creating a durable business Focusing on Alaska’s “thing” Low costs Industry leading margins Smart spending on capex to support growth Investment grade balance sheet Balanced capital allocation 69
Slide 70: Virgin acquisition enabled by low costs and strong balance sheet
Virgin’s acquisition was enabled by our low costs, strong margins, and fortress balance sheet – “Alaska’s thing” 23% pretax margin $1.6B cash flow from operations 27% leverage 13 of14 years cost reduction Metrics are as of 12/31/15 (before acquisition announcement) 70
Slide 71: Low costs create a durable moat of ~$900M
Low costs are critical to our business model and reductions since 2009 have created a durable ‘moat’ of ~$900M $1,427M $591M $521M ALK 2016 ALK w LCC cost trajectory ALK w Industry cost trajectory ALK Pretax Profitability with varying cost structures 8.24¢ 10.33¢ 9.16¢ 10.17¢ 2009 2010 2011 2012 201
Slide 72: Creating a durable business with room to grow
Creating a durable business with room to grow Focusing on Alaska’s “thing” Low costs Industry leading margins Smart spending on capex to support growth Investment grade balance sheet Balanced capital allocation Acquisition Creates Longer Runway for Growth 72
Slide 73: Cost Synergies
Cost Synergies Lavanya Sareen 73
Slide 74: Cost synergies overview
Cost Synergies Synergy Targets Focused on growth not shrinking operations Robust Tracking Process Clear Ownership 74
Slide 75: This merger is different: focus on growth
This merger is different Focus is on growth, not shrinking operations 21% increase in routes since announcement No hub closures 12% increase in people Investments in on-board product 75
Slide 76: Cost synergies across three broad categories
We evaluated cost synergies across 23 work streams that fall into 3 broad categories Overhead1 Purchasing Power/ Market Rates2 Improved Efficiencies/ Asset Utilization3 › 3rd Party services › Insurance rates › Credit card rebates › Gates › GSE › Aircraft › Officers › Board › Legal/Consulting › Corp
Slide 77: Example: improve asset utilization (PDX gates)
Example: Improve asset utilization (PDX Gates) PDX 7 Preferential Gates 5.5 Turns/Day/Gate Concourse C B Concourse D E 1 Preferential Gate 3 6 Turns/Day/Gate Common Use Gates 11 8 Turns/Day Common use gate usage 3 Per Day Cost Per Turn ~ $650 Savings/ Year ~ $700,000 77
Slide 78: Aligning Virgin infrastructure adds incremental costs
Aligning Virgin’s startup infrastructure to Alaska standards adds certain incremental costs Data Center / Data Security Training Curriculum Enterprise Software Frontline Mobile 78
Slide 79: Robust synergy tracking
We are building robust synergy tracking into our reporting structure and our business owners are committed to hitting their numbers 79
Slide 80: Cost synergy targets up 20% since announcement
Despite headwinds, cost synergy targets are up 20% since announcement… At announcement Mar 2017 Updated Target $50M Dis- synergies $60M Incremental synergies Not to Scale 80
Slide 81: Offsetting future cost pressures
…which will help offset future cost pressures Flat (ish) AAG CASM ex Fuel History 9.16¢ 8.82¢ 8.55¢ 8.48¢ 8.47¢ 8.36¢ 8.31¢ 8.24¢ 2009 2010 2011 2012 2013 2014 2015 2016 2017 Guidance 81
Slide 82: Synergy Recap
Synergy Recap $175M $240M $50M $60M At Announcement Mar - 2017 $300M33% $225M
Slide 83: Synergies in line with recent deals in the sector
Source: SEC filings by other airlines Notes: Delta / Northwest announced merger with $1.1b in synergies and revised upward to $2.0b after closing. Average reflects actuals only (excludes Alaska-Virgin America projection). $680m $2.0b > $400m > $1.0b 6.5% 6.3% 3.9% 2.8% 2.7% $1.0b - $1.2b$300m 4.0% T
Slide 84: SOC and PSS by late 2H18 enable revenue synergies
Achieving SOC and PSS by late 2H18 enable majority of the revenue synergies $36M $45M $195M $255M $300M 2017 2018 2019 2020 2021 84
Slide 85: Modest one-time cost increase
While run-rate synergies went up significantly, aligning our businesses also results in a modest one-time cost increase $350M $400M $25M $15M $10M Original Estimate LOPA Retrofit Scope Change Consulting/Legal Fees Technology Costs Current Estimate 85
Slide 86: Creating a durable business with room to grow
Creating a durable business with room to grow Focusing on Alaska’s “thing” Low costs Industry leading margins Smart spending on Capex to support growth Investment grade balance sheet Balanced capital allocation Acquisition Creates Longer Runway for Growth 86
Slide 87: Industry and sector leading pretax margin
Industry and Sector Leading Pretax Margin 13% 13% 14% 19% 22% S&P 500 Industrials Legacy Airlines LCC's excl Alaska AlaskaAir Group including Virgin Air Group as reported Virgin America 2016 Pretax Margin 24% 14% 22.3% Industry leading margins helped by deal synergies 25% above equals actual Air Gro
Slide 88: Consensus pretax margin
Consensus Pretax Margin* 14% 19% 22% 10% 16% 19% Legacy Airlines LCC's excl Alaska Alaska 2016 2017 Consensus shows margin decline in 2017, but Alaska is still expected to lead industry* *Not an endorsement of consensus 88
Slide 89: ROIC remains well above cost of capital
21.3% ~15% 2016 2016 Pro Forma 8% WACC Even with higher invested capital base, ROIC remains well above our cost of capital Invested Capital Base (2016 Proforma) Pre-Acquisition Capital Base Acquisition Financing VX Debt + Rent @ 7X $4.0B $1.8B $1.6B $7.4B Post-Acquisition Capital Base We are committ
Slide 90: Creating a durable business with room to grow
Creating a durable business with room to grow Focusing on Alaska’s “thing” Low costs Industry leading margins Smart spending on Capex to support growth Investment grade balance sheet Balanced capital allocation Acquisition Creates Longer Runway for Growth 90
Slide 91: Fleet options support growth plans
109 options 91 retirements 297 minimum fleet count (including existing firm deliveries) Cumulative Fleet options support growth plans, but provide flexibility if conditions change 285 307 313 331 333 328 318 303 297 91 109 285 323 346 385 427 460 485 493 497 2016 2017 2018 2019 2020 2021 2022 2023 2
Slide 92: Evaluating fleet type mix
We are evaluating fleet type mix, and expect to have a decision by end of 2017… 10 10 10 10 10 10 10 10 10 10 53 58 63 62 60 51 37 19 13 10 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Leased Owned Majority of Airbus leases run through at least 2021 92
Slide 93: Cost of operating dual fleets already baked in
…but the cost of operating dual fleets is already baked into the current operating and cost structure $20M–$25M <1% of overall non- fuel operating costs Incremental cost could be offset through better pricing Higher reserve % Training cycles Overhead Costs e.g., parts, admin. 93
Slide 94: Fleet growth results in higher near-term capex
$1,225 $1,260 $1,275 2017F 2018F 2019F Firm Aircraft Capex Non-Aircraft Capex Option Aircraft Capex $ . B $1.0 - $1.3B.3B Fleet growth, along with non-aircraft investment, will result in higher near-term capex Capex is primarily funded through cash flows 94
Slide 95: Plan to re-de-leverage
Even with higher Capex, we feel comfortable with our plan to ‘re-de-leverage’… 81% 67% 54% 27% 59% 45% 2008 2010 2012 2015 2016 2020 Alaska Air Group Debt-to-Cap (%) Half of S&P 500 Industrials have leverage above 45% 95
Slide 96: Commitment to growing the dividend
$28 $68 $102 $136 ~$145 2013 2014 2015 2016 2017F ????? ????? 2013 2017 200% Increased dividend each year since inception In millions, except per share values Dividend initiated in August 2013; spend subject to Board approval Share repurchase based on current expected case – subject to change Annual
Slide 97: Balanced approach to capital allocation
We will continue our balanced approach to capital allocation, albeit the priorities will continue to shift as we get through the merger 2005–2009 Organic Growth Fund Pensions Delever Balance Sheet Buyback Stock 2010–2016 Organic Growth Delever Balance Sheet Initiate Dividend Buyback Stock Fund Pensi
Slide 98: Creating a durable business with room to grow
Creating a durable business with room to grow Focusing on Alaska’s “thing” Low costs Industry leading margins Smart spending on Capex to support growth Investment grade balance sheet Balanced capital allocation Acquisition Creates Longer Runway for Growth 98
Slide 99: Integration on track; creating an airline people love
Integration is on track, and we expect to reach SOC and single PSS in 2018 Synergies from deal are real and now part of internal tracking We’re focused on low costs and balanced capital allocation This is a durable business with room to grow We’re creating an airline people love 99