Alaska Air Group, Inc. · NYSE:ALK
Alaska Air — Investor Day (November 2018)
92 slides from Alaska Air's investor day presentation, Nov 27, 2018
Slide 1: ALK Investor Day 2018
Slide 2: 2018 Investor Day Agenda
2018 Investor Day Agenda Brad Tilden, CEO Introduction: Who We Are & Where We're Going Ben Minicucci, President & COO Merger Update & Our Roadmap For Margin Improvement 11:30am — 12:40pm | = | Andy Schneider, VP People | Investing In Culture | Shane Tackett, EVP Planning & Strategy Executing Our Roa
Slide 3: Safe Harbor
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, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. These statements relate to f
Slide 4: Who We Are & Where We're Going
Who We Are & Where We’re Going Brad Tilden, CEO
Slide 5: Our Business Model
Our Business Model Profitable growth creates value for all of our stakeholders. Our People ef ™~ Communities Profitable AN Growth Y.. Our Owners
Slide 6: We have a great team
We have a great team ct! Ben Minicucci Brandon Pedersen Andrew Harrison Gary Beck Shane Tackett President CFO cco Horizon Air CEO EVP Planning & Strategy G> By Average Andy Schneider Diana Birkett Rakow Kyle Levine Brad Tilden VP People VP External Relations General Counsel CEO
Slide 7: We have a great team
We have a great team Wayne Newton John Ladner VP Airports MD Flight Ops Chris Berry Mark Eliasen Controller Treasurer Sangita Woerner VP Marketing David Oppenheim VP Sales Matt Grady Investor Relations
Slide 8: We have durable competitive advantage
We have durable competitive advantage Low Costs, Low Fares Excellent Operations Best Loyalty Program “One Team” Culture
Slide 9: We have a long track record of successful growth
We have a long track record of successful growth... * Minneapolis F eitwauoe \_Deloit + ‘omaha pes * Kansas City * incianapotis + Wie *oklanomacity Nashville. aaa * Raleigh/Durham 2001 63 destinations North-South orientation Lveria * along West Coast eae
Slide 10: We have a long track record of successful growth
We have a long track : record of 115+ destinations \ successful | National orientation with growth... | West Coast focus 10
Slide 11: Pre-Tax Margin, FCF Margin, ROIC
Pre-Tax Margin 10.4% 13.0% 15.1% Free Cash Flow Margin 2.1% 7.7% 7.8% ROIC 13.6% 14.8% 16.7% Adj. Net Debt / EBITDAR 1.8x 1.6x 0.9x P/E Multiple 13.9x 18.6x 10.7x 11
Slide 12: Our Roadmap for Margin Improvement
Our Roadmap for Margin Improvement Merger Synergies ; 13%-15% Pre-Tax Margin Operational Target Efficiencies Marinos Cost | Management Commercial Opportunities Revenue Efficiencies Investments In Our Culture & Values
Slide 13: Merger Update & Our Roadmap
Merger Update & Our Roadmap Ben Minicucci, President & COO
Slide 14: We achieved a lot before the merger
We achieved a lot before the merger 50%+ #1 #1 Market Share On-Time Customer in PNW Performance Satisfaction 11% 27% Annual Loyalty Debt-to-Total- Program Growth Capitalization 2010-2016 27% Annual EPS Growth $1.9B Capital returned to shareholders
Slide 15: U.S. Market Share of Four Largest Carriers
U.S. Market Share of Four Largest Carriers* *Total domestic revenue from Form 41. Airlines included in sample set: American, Aloha, Alaska, Jetblue, Continental, Delta, Frontier, Airtran, Hawaiian, America West, Midway, Spirit, Northwest, Pan American, Sun Country, TWA, ATA, United, US Airways, Virg
Slide 16: Today, we have a highly relevant West Coast network
Today, we have a highly relevant West Coast network... We offer the highest guest relevance of any carrier Our departures per day have increased significantly in from West Coast points of origin our California focus cities abe Rank 2018 vs. 2016 4% aie 4. Seattle 29815 32% 2. Portland 129 47 27% 3.
Slide 17: With significant long-term growth potential
...with significant long-term growth potential Populati 3-Yr GDP Seat Network Guest bedstead CAGR Share Relevance Loyalty t-} ~12M 5.3% 50% 70% 44% aN Oregon penetration a % 40m) 4.5% 12% 40% (65%) California penetration
Slide 18: We've completed more than 90% of our integration milestones
We’ve completed more than 90% of our integration milestones over the past two years... ee 1 = most critical Status Status e Aligned Revenue Management J @® Co-located System Operations J ® Integrated Payroll & Benefits J e Cross-Trained Flight Attendants J ee a ce 1 Single Operating Certificate JV '
Slide 19: Our labor integration has progressed at a rapid clip
Our labor integration has progressed at a rapid clip... We've signed Joint CBAs or TAs with our entire ..and achieved Integrated Seniority Lists for Pilots & unionized workforce in under two years FAs more rapidly than comparable airline mergers Agreement Time to Status Completion Airports J 2 month
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Slide 21: Robust processes deliver industry-leading operational reliability
Our robust processes enable us to deliver industry-leading operational reliability... lass operating as led to years of industry-leading performance On-Time Departures (DO) 77.3% 2015 2016 2017 2018 YTD AL, DAL, UAL, LUV, JBLU, SAVE a
Slide 22: Virgin America Controllable Departures and Block Hours
Virgin America Controllable Departures on Zero Virgin America Block Hours per Aircraft per Day 22
Slide 23: Room to improve productivity across our system
We have room to improve productivity across our system going forward We carry ~3.5 fewer passengers per FTE today than we ..and though division-level productivity remains did prior to the merger... strong, it is also below pre-merger levels ~3.5 Pilot Productivity ___Pax/FTE So 13 pts: _ Pre-Merger
Slide 24: Realize the full value of the merger
We will realize the full value of the merger by optimizing our operation and executing key initiatives Commercial Opportunities ° ° Initiatives 13 %-15 %o main oe _ Efficiencies Cost Support Function Efficiencies Investments In Our Culture & Values
Slide 25: Investing in Culture
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Slide 26: Investing in our culture is foundational to our success
Investing in our culture is foundational to our success
Slide 27: Our vision and values guide our thinking, and our actions
Our vision and values guide our thinking, and our actions ision: The West Coast Favorite Our Values Own Safety Do the right thing Be kindhearted Deliver performance Be remarkable ———— tts
Slide 28: Our culture enables award-winning service
Our culture enables our award-winning service, which builds guest loyalty and ultimately drives financial results Genuine, Caring Guest AGir Traveler TESGkE #1 Customer Satisfaction Loyal Customers 4 Consistent Demand > Higher Margins
Slide 29: Our proven people management philosophy remains the same
As we grow, our proven people management philosophy remains the same Employee Count Approach to Managing People @ = Pay Well Aligned Rewards 23,420* 15,143 Le High Productivity 2015, Today * Includes 1,800 employees at our ground operations subsidiary, McGee Air Services 29
Slide 30: Performance-Based Pay
Pre-Tax Guest Income Satisfaction (50%) (10%) Performance- Based Pay Loyalty for weighted Safety Growth targets achieved (20%) (10%) Non-Fuel CASM (10%) 30
Slide 31: Interactive sessions with leadership
Aseries of interactive 2 sessions with leadership ji to engage and align all of us to our shared E vision, values and go-forward strategy
Slide 32: Executing Our Roadmap & Driving Financial Performance
Executing Our Roadmap & Driving Financial Performance Shane Tackett, EVP Planning & Strategy
Slide 33: We've faced multiple headwinds since the merger closed
We’ve faced multiple headwinds since the merger closed 85% increase over the past 12 quarters Rising Fuel Prices Elevated competitive capacity growth Competitive Intensity 44 New Markets in 2017 CA Network Investments Market-rate JCBAs signed] with 93% of unionized workforce New Labor Agreements ~10
Slide 34: Annual synergies expected from Virgin America integration
Annual synergies (revenue & cost) expected from Virgin America integration 34
Slide 35: Initiatives on our Roadmap put us on the path to target
The initiatives on our Roadmap put us on the path to achieving our target + Loyalty Growth Merger + Cross-Fles Synergies + Airbus Modifications * Global Partner Growth Commercial + Saver Fare + Bag Fees & Other Ancillaries + Corporate Sales Revenue Initiatives Margin Drivers + Productivity + Schedul
Slide 36: Commercial opportunities are a significant contributor
Commercial opportunities are well underway, and are a significant contributor to our plan me Commercial Opportunities Merger . Synergies . Loyalty Growth Cross-Fleeting $235M Airbus Modifications Revenue Global Partner Growth + Saver Fare 7 EY en + s24ome + Corporate Sales 36
Slide 37: ~80% of merger synergy value has yet to be realized
~80% of merger synergy value has yet to be realized Cross-Fleeting Loyalty Growth ble Airbus Retrofits Slaska GLOBAL PARTNERS Global Partners
Slide 38: Revenue initiatives will produce more upsell and ancillary revenue
Revenue initiatives will produce more upsell and ancillary revenue without changing our generous brand position 2016 Going Forward ...vs. Industry Cabin Segments 2 4 2 Parity First Class Fare (Avg.) $416 ~$400 gy Lower Main Cabin Fare (Avg.) $144 ~$150 s Lower First / Second Bag Fee $25 / $25 $30 /$
Slide 39: Disciplined cost management remains central to strategy
Disciplined cost management remains central to our strategy, as it has been historically Marinos L_| Cost Management me (Operational : Efficiencies 7 Support . — is Efficiencies [i Productivity + Schedule Optimization sree : Guest Self-Service ving! Constraining Overhead + Vendor Management oes “ Se
Slide 40: Without cost initiatives, we need to grow ASMs 4%-5%
Without cost initiatives, we need to grow ASMs 4%-5% to achieve flat CASMx Annual $ Cost Increases, Before Cost Initiatives ~4% YOY ~2h Increase 2% | Current Year Labor Other Inflation Future Year’s Non-Fuel Costs Inflation & Investments Non-Fuel Costs
Slide 41: Robust planning process has identified savings opportunities
Our robust planning process has identified savings opportunities to offset cost pressures Targets & Stretch poe Execution Plans Goals For All Accompany Bi Divisions MERE Budgets Aggressive Targets Focus on Divisions provide Frequent help surface “Should Costs,” clear path to Execution Reviews trade-
Slide 42: Opportunities to mitigate non-fuel cost increases
We see multiple opportunities to mitigate non-fuel cost increases going forward Labor & Asset Productivity $) Constraining Overhead Vendor Management Selling & Distribution
Slide 43: We will close productivity gaps in our operation
We will close productivity gaps in our operation - Mainline Pilots S75M+ 2. Airport Ops Optimization Opportunity 3. Schedule Optimization 4. Guest Self-Service | ByYear | a [Future | 1. Labor Productivity - Mainline Flight Attendants & Ew t =s - Regional Crews & Fleet tf t Bp tt
Slide 44: We will continue to constrain overhead cost growth
We will continue to constrain overhead cost growth Overhead as a % of Total Non-Fuel Costs * Zero-based Budgeting + Prudent deployment of technology / automation + Insource vs. Outsource 2018 2019 Plan $55M+ Opportunity 4 4
Slide 45: Vendor Management presents a sizeable opportunity
Vendor Management presents a sizeable opportunity + We benchmarked our contracts to Benchmarking identify rate reduction opportunities Vendor Rates * We will leverage our larger size Renegotiating to renegotiate existing contract Opportunity rates lower Contracts + We will negotiate larger deals wit
Slide 46: Alaska Affinity Card sales and credit card commission rate
% of sales on Alaska Affinity Card Blended Credit Card Commission Rate 46
Slide 47: 2019 Cost Outlook
2019 Cost Outlook ‘CASMx YOY A am 0.8% \ 2.0%-2.5% | CASMxYOYA 1.2% 8.51¢ ma (1.1%) [EE Flat-0.5% je a (11%-1.6%) 2OIS.CASMx: iLabor® GR ASM Cost 2019 With Regionalvs. Investments 2019 Guidance Other Growth Management fnitiatives Mainline Mix Plan Midpoint Inflation Initiatives
Slide 48: Identified savings partially offset by investments in culture and product
In 2019, identified savings will be partially offset by continued investments in our culture and product ~$20 million ~$15 million ~$10 million Flight Path Higher Culture Satellite Variable Pay Investments WiFi $45M Investment in 2019
Slide 49: Committed to protecting our unit cost advantage
We are committed to protecting our unit cost advantage as we slow capacity growth Stage-Length Adjusted Non-Fuel CASM! 10.80 © 10.31 Neo 8.89 ’ a N = ‘. N A taska. jetBlue +. Trailing 12-Months Ended 6/50/18, U.S, West Coost-originating fights to North America 49 9
Slide 50: Building for Brand Strength & Revenue Growth
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Slide 51: Positioned to unlock significant revenue growth
We are positioned to unlock significant revenue growth in the years ahead Network Relevance - A Ail rport | nfra Revenue Growth Value Proposition ——— ttt
Slide 52: Network Relevance
Network Relevance #MostWestCoast
Slide 53: Built a leading network position on the West Coast
After two years of significant investment, we have built a leading network position on the West Coast... = Nonstop Markets 233 285 @ Daily Flights 756 931* @ Seat Share 20% 24% @ Utility 33% 48% #1) * from WC origins only; we have ~1,300 daily flights network-wide Source: DOT/Published Schedules Wes
Slide 54: A strong foundation in California
...and a strong foundation in California California Pre-Merger vs. Today Nonstop Markets +53% Daily Flights +93% Seat Share +71% Utility +111% Source: DOT/Published Schedules California to North Amerie for 2018 vs. 2016
Slide 55: We have not taken our eye off of our Seattle hub
We have not taken our eye off of our primary Seattle hub... Seattle-to-North America Seat Share 55% 55% 54%, 55% fo 2013 2015 2017 2019* Daily 236 257 291 304 +2019 bas
Slide 56: Service from Paine Field beginning in 1Q 2019
...where utility and loyalty will strengthen with service from Paine Field beginning in 1Q 2019 2019 Destinations Frequencies / Day Everett 1. Portland Seattle 2. Los Angeles Fc N 3. San Francisco ff 4. San Jose Mi 5. Las Vegas \ \\ 6. San Diego \ ees 7. Phoenix Las Vegas 8. Orange County ee, | TOTA
Slide 57: Strong regional network using 95 aircraft
+ Boston Anchérage @ « é *+New York +, Washington D.C. * Raleigh/Durham Honoluld ea . stor + “Orlando We have built a strong lz regional network using 95 aircraft... 57
Slide 58: Feeds our expansive mainline network
Boston New York Washington D.C. * Releigh/Durham that feeds our expansive mainline network...
Slide 59: Connects to our Global Partner gateways
that connects to our Global Partner gateways... 59
Slide 60: Travel to 900+ destinations globally
...and beyond to allow our gues: c travel to 900+ destinations globally.
Slide 61: Alaska Global Partners represent a diverse portfolio of carriers
Alaska Global Partners represent a diverse portfolio of international flagship carriers... FIJI aways tceranoan f & Emirates SINGAPORE sngareae () AIRLINES 4 brie Stlaska Aer Lingus 2% Qrran anes GLOBAL PARTNERS AINNAIR BRITISH AIRWAYS —> K6REAN AIR @ condor cava Weoantas American® F AIRLINES Airlin
Slide 62: Robust global utility and connectivity for our guests
...enabling us to provide robust global utility and connectivity for our guests Seattle to non-North America Seat Share West Coast to non-North America Seat Share YE September each time period YE September each time period AMaska a) ZMaska ip elles Sennen Ag, % 9 38% 39% 38% 29% ceed 26% 2017 2019 2
Slide 63: Mileage Plan accruals on Global Partners nearly tripled
Mileage Plan member accruals on Global Partners have nearly tripled over the past three years +172% accrual growth on 11% partner capacity growth 2015 2016 2017 2018 mEconomy Premium *Acerusl data is YE September for each stated year. Capacity growth is ternational Global Partnors from the US West C
Slide 64: Airport Infrastructure
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Slide 65: PNW Airports
PNW Airports SEA * Grow with 33 preferential gates * 20 gates consolidated at the new North Satellite concourse by summer 2021 + New 15,000 sq ft flagship lounge in 2Q19 PDX + New gates coming in North Terminal + Room to expand across South Terminal + $100M redevelopment of Concourse A&B will provid
Slide 66: California Airports
California Airports LAX + Competitive position with 10 gates in T6 + Working with LAWA on a $200M program to grow capacity, expand our lounge and improve security throughput for guests. SFO + 10 preferential gates in Terminal 2, with additional T2 gates expected in 2020 + In discussions to construct
Slide 67: Value Proposition
@&, Nalue Proposition rnd Low Fares =| — Value ~— Wee fone a>
Slide 68: Unique position offering both Low Fares and High Value
We own a unique position in the industry by offering both Low Fares and High Value spirit g Me allegiant FRONTIER Alaska’s Value Proposition: + Low Fares + + High Value: v Award-Winning Service v Generous Rewards v Premium Product
Slide 69: We offer low fares
We offer low fares... $210 $217 $204 7 i nnn a Source: US Dopartmont of Transportation YETOIE Stage longth adjusted average
Slide 70: High value, leading to high customer satisfaction
...and high value, leading to high customer satisfaction JD Power Customer Satisfaction Ratings! 816 819 784 755 a A 1, 2019 Mig-Yoor Results
Slide 71: Award-winning loyalty program is the most generous
Our award-winning loyalty program is the most generous in the industry Mileage Plan™ Credit Card = Masha Pett Miles for Miles Annual Fee $75 $99 Low redemption prices Starting at 5K Companion Certificate $99 x Fastest path to elite 20K = MVP Miles on Airline Spend 3X 2x Global Partner access Earn an
Slide 72: Strong loyalty growth since the merger
Since the merger, we’ve achieved strong loyalty growth with revenues increasing ~$280M to ~$1B annually wy ae Masha. +38% oon +51% 417% +10% +354%
Slide 73: Progress on brand awareness, especially in California
We’ve made great progress on brand awareness, especially in California where guests are still getting to know us Alaska Airlines Brand Awareness 82% 32% PNW cA Nov-16 Sep-18 Sep-18 (2016, 2017), PNW 7 5)
Slide 74: Revenue Growth
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Slide 75: Revenue Growth
1988 Revenue Growth 1998 2008 75
Slide 76: Poised to capture $235M in additional revenue synergies
Over the next few years, we are poised to capture $235M in additional revenue synergies Yet wg ‘elel: || zMlaska Cross-Fleeting Loyalty Growth Airbus Retrofits Global Partners ~80% of merger synergy value has yet to be realized
Slide 77: Cross-Fleeting and Airbus Retrofit synergies
Cross-Fleeting synergies will benefit 2019, while Airbus Retrofit benefits reach run-rate in 2020 Cross-Fleeting Airbus Retrofits Example: JFK-LAX from A320 to 737-900ER Example: LAX-SEA A320 146 seats to 150 Incremental Seats 32 Incremental Seats | 4 Incremental Revenue ~$3,600 ake ~$300 a) | _new
Slide 78: Additional $240M+ from initiatives
We also expect an additional $240M+ from initiatives $100 million > Saver Fare $50 million Increased Bag Fees $50 million GO OO Other Ancillary Initiatives $40 million+ Corporate Sales
Slide 79: New cabin segmentation with Saver Fare
We’re adding new cabin segmentation with the launch of our Saver Fare product STANDARD + Competitive pricing tool to drive load $100M Revenue factors while limiting yield dilution Opportunity + $20-40 buy up opportunity per ticket + System-wide launch by end of 2018
Slide 80: Ancillary Revenue Per Passenger
Ancillary Revenue Per Passenger, excluding Loyalty Revenue • • • • • 80
Slide 81: ALK Corporate Customers
ALK Corporate Customers % of TMC revenue under contract 81
Slide 82: Substantial revenue momentum heading into 2019
We have substantial revenue momentum heading into 2019 Network Relevance > Airport Infr rastru Revenue y Growth Value Proposition ...and we are raising our 4Q 2018 RASM Guidance to +3%-5
Slide 83: Financial Outlook
Ah, ~ JE — Financial Outlook Brandon Pedersen, CFO
Slide 84: Roadmap For Improving Margins
Roadmap For Improving Margins Multi-Year Targeted Merger eee §6S235M OD Commercial Opportunities Revenue $240M+ rt ) Initiatives Margin Drivers fim Operational Efficiencies $75 M+ SG Cost Containment Fonction CT En? ) Efficiencies
Slide 85: Favorable results on key metrics in 2019-2020
We expect favorable results on key metrics in 2019-2020 9, 9, e 2%-4% Improving Stable Annual Capacity ASMs / Gallon of Growth Bes CA oN x Spread Fuel Consumed ~$750M Annual Capex Investment
Slide 86: Favorable setup for 2019 Revenue Growth
We have a favorable setup for 2019 Revenue Growth... $130 million px W Merger Synergies $200 million ©) Revenue Initiatives Slower Growth vf = Few New Markets 86
Slide 87: Tightly manage costs next year on ~2% capacity growth
...and we will tightly manage costs next year on ~2% capacity growth CASMx YOY A aoe 0.8% | 2.0%-2.5% |; CASMx YOY 6 1.2% 8.51¢ (1.1%) MEN) Flat-0.5% py == (1.1% -1.6%) 2018CASMx Lebor& = 2% ASM Cost 2019 With Regionalvs. Investments 2019 Guidance Other Growth Management fnitiatives Mainline Mix Pla
Slide 88: Fleet growth slowing in line with lower capex
Our fleet growth is slowing in line with our lower capex, which will decline to $750M in 2019 and 2020 Fleet History & Plan Capex History & Plan = Mainline wAircraft m= Regional Non-Aircraft 30g 3350S $1.0B $1.08 304 ~$750M ~$750M 285 : ; os on 97 93 ne | 67 | 83 $678M ’ 2016 2017 2018 2019 2020 201
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Slide 90: Adjusted for net present value of future operating lease commitments
Adjusted for net present value of future operating lease commitments $ millions 90
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