ALASKA AIR GROUP, INC.

ALASKA AIR GROUP, INC. Annual Report - Investor Summary

Alaska Air Group's annual report for the fiscal year ended December 31, 2025, offers a comprehensive overview of its performance and strategic direction, providing crucial insights for investors.

1. Business Overview

Alaska Air Group is a major airline primarily serving North America, with a growing presence in Latin America and the Pacific. Its diverse fleet, including Boeing 737 models, Airbus A321neos, and Embraer E175 regional jets (often operated by partners), supports its core business of scheduled passenger and cargo air transportation.

2. Financial Performance

Alaska Air Group achieved strong financial growth in 2025, continuing its upward trajectory:

• Passenger Revenue: Passenger revenue, the primary driver, reached $10.5 billion in 2025, a 7.1% increase from $9.8 billion in 2024 and $9.0 billion in 2023. Both traditional ticket sales and strong ancillary service performance fueled this growth.
• Loyalty Plan Revenue: Loyalty plan revenue continued its upward trajectory, growing to $1.6 billion in 2025, a 10.3% increase from $1.45 billion in 2024 and $1.3 billion in 2023. This growth highlights the program's value and its potential for further strengthening through the Hawaiian integration.
• Cargo and Other Revenue: Cargo and other revenue, including freight and miscellaneous services, grew to $550 million in 2025, up from $500 million in 2024 and $450 million in 2023.
• Geographic Revenue: North America generated the majority of passenger revenue and continued to expand. Passenger revenue from Latin America also increased, indicating successful route expansion or heightened demand in these markets.
• Air Traffic Liability: Air Traffic Liability, a key indicator of future bookings, stood at $2.5 billion at the end of 2025, an increase from $2.3 billion at the close of 2024. This reflects a solid pipeline of future revenue.
• Profitability: These metrics are crucial indicators of the company's operational efficiency and overall financial health.

3. Risk Factors

Investors should consider several potential risks that could impact Alaska Air Group's business and stock performance:

• Debt and Interest Rate Fluctuations: While a mix of fixed and variable-rate debt helps manage risk, significant interest rate increases could raise borrowing costs, particularly for variable-rate instruments or future refinancing.
• Integration Challenges with Hawaiian Holdings Inc.: While a strategic opportunity, integrating Hawaiian's operations, customer bases, and corporate cultures presents complex challenges. These could impact operational efficiency, customer retention, and financial performance if not managed effectively.
• Fleet Management and Supply Chain: Managing a diverse fleet requires significant capital for maintenance and modernization. Delays in aircraft deliveries or disruptions in the global supply chain for parts could impact capacity and operational costs.
• Fuel Price Volatility: Jet fuel is a major operating expense. Significant, sustained increases in fuel prices, or an inability to effectively hedge against them, could materially impact profitability.
• Economic Downturns and Travel Demand: The airline industry is highly sensitive to economic cycles. A recession or significant economic slowdown could reduce discretionary travel, impacting passenger volumes and revenue.
• Intense Competition: The airline industry is highly competitive, facing pricing pressure from both legacy and low-cost carriers. This competition can limit pricing power and impact market share.
• Labor Relations: Labor represents a significant portion of airline operating costs. Negotiations with various labor unions, potential strikes, or increased wage demands could impact profitability and operational stability.
• Regulatory and Environmental Changes: Extensive government regulations govern the industry, including safety standards, environmental mandates (e.g., carbon emissions targets), and consumer protection laws. New or stricter regulations could increase compliance costs or limit operational flexibility.
• Geopolitical Events and Natural Disasters: Global events, political instability, or severe weather events can disrupt travel, impact demand, and increase operational costs.

4. Management Discussion (MD&A Highlights)

Management highlighted fiscal year 2025 as a period of significant strategic expansion and operational enhancements:

• Transformative Hawaiian Holdings Inc. Integration: The acquisition of key customer relationships and co-brand partnerships from Hawaiian Holdings Inc. on September 18, 2024, marked a pivotal development. This move significantly expands Alaska Air Group's market footprint, particularly in the lucrative West Coast-Hawaii corridor, and enhances its loyalty program's value and reach. "Hawaiian Deferred Revenue" on the books highlights the immediate financial impact and future revenue potential of this integration.
• Fleet Modernization for Efficiency and Experience: Disposing of some Boeing 737-900 aircraft is part of a broader strategy to optimize the fleet for fuel efficiency, operational commonality, and passenger comfort. This transition supports long-term cost management and environmental goals.
• Enhanced Passenger Experience with Starlink: Rolling out Starlink Satellite WiFi on regional aircraft provides a significant competitive advantage, meeting growing passenger demand for seamless connectivity and elevating the in-flight experience.
• Strategic Direction: Management's 2025 focus centered on growth, modernization, and customer experience, with the Hawaiian integration representing a bold, transformative move. Complementary strategies include ongoing fleet optimization, significant technology investment, and a customer-centric approach to growth, emphasizing loyalty programs and in-flight amenities.

5. Financial Health

Alaska Air Group maintains a diversified capital structure, using various forms of debt and equity to fund its operations and growth initiatives.

• Debt Profile: The company manages a mix of fixed-rate and variable-rate debt, including equipment trust certificates (EETCs) tied to specific aircraft and loyalty program financing debt. Maturities range from 2027 to 2037, providing a staggered repayment schedule. Revolving credit facilities offer additional liquidity.
• Post-Year-End Financing: Demonstrating continued investment, Alaska Air Group issued new fixed-rate notes totaling $500 million in February 2026, with maturities extending through 2038. This capital infusion will fund ongoing operations, fleet investments, and strategic growth.
• Valuable Intangible Assets: Beyond physical aircraft, the company possesses significant intangible assets critical to its long-term value. These include robust customer relationships, valuable co-brand partnerships (bolstered by the Hawaiian acquisition), recognized trademarks, and strategic airport slots. All contribute to its competitive moat and revenue-generating capabilities.
• Pension Obligations: Alaska Air Group responsibly manages defined benefit pension plans for its employees. It strategically diversifies assets across U.S. and non-U.S. equities, fixed income, and real estate, ensuring long-term employee benefits.
• Cash and Liquidity: Maintaining a robust cash position and access to liquidity is paramount for airlines to manage operational fluctuations, capital expenditures, and unexpected events. The company's revolving credit facilities provide an important source of short-term liquidity.

6. Future Outlook

Alaska Air Group positions itself for continued growth and modernization. The $500 million in new fixed-rate notes issued in February 2026, along with deposits for future flight equipment, signal ongoing significant capital investments. These aim at fleet expansion, technological upgrades, and network development. A primary focus for the coming years will be fully integrating Hawaiian Holdings Inc. assets. The company aims to realize substantial operational synergies, expand market share, and drive revenue growth. It also seeks to capitalize on its strengthened position in key markets and deliver enhanced value to both customers and shareholders.

7. Competitive Position

Integrating Hawaiian Holdings Inc. significantly strengthens Alaska Air Group's competitive position, particularly in the strategically important West Coast and Hawaii markets. This expansion provides:

• Expanded Network and Market Share: Increased route density and access to new destinations, making it a more formidable competitor against other major carriers.
• Enhanced Loyalty Program: A more attractive and valuable loyalty program, fostering greater customer retention and attracting new travelers.
• Customer Experience Differentiation: Investments in in-flight technology like Starlink help differentiate Alaska Air Group. They offer superior passenger amenities, competing on service quality in addition to price.
• Strategic Hubs: Reinforces its presence in key West Coast hubs and establishes a stronger foothold in the Pacific.

8. Broader Market Trends and Regulatory Environment (Contextual Information)

Alaska Air Group operates within a dynamic industry shaped by several overarching trends and regulatory considerations:

• Demand for Connectivity: Starlink's adoption reflects a broader industry trend and consumer expectation for ubiquitous, high-speed in-flight internet, which is becoming a standard amenity.
• Sustainability Pressures: The airline industry faces increasing pressure to reduce its carbon footprint. Fleet modernization efforts contribute to this, but future regulations on emissions and the adoption of Sustainable Aviation Fuels (SAFs) will be critical.
• Economic Cycles: Air travel demand remains highly sensitive to global and regional economic conditions, including consumer confidence and business spending.
• Fuel Price Volatility: Geopolitical events and global supply dynamics continue to make fuel prices a significant and unpredictable factor in airline operating costs.
• Regulatory Scrutiny: Evolving regulations govern the industry concerning safety, consumer protection, and environmental impact. Antitrust reviews, particularly for major acquisitions like Hawaiian, are also a constant consideration.