Alaska Air : Announcement Transcript

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EDITED TRANSCRIPT

ALK.N - Alaska Air Group Inc Investor Call

EVENT DATE/TIME: DECEMBER 03, 2023 / 10:00PM GMT

OVERVIEW:

Company Summary

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

C O R P O R A T E P A R T I C I P A N T S

Ryan St. John Alaska Airlines, Inc. - VP, Finance, Planning & IR

Ben Minicucci Alaska Airlines Inc - Chief Executive Officer

Shane Tackett Alaska Airlines, Inc. - EVP Finance & CFO

Kyle Levine Alaska Airlines, Inc. - SVP, Chief Compliance Officer, General Counsel, Secretary & Chief Ethics Officer

Nat Pieper Alaska Airlines, Inc. - SVP Fleet, Finance & Alliances

C O N F E R E N C E C A L L P A R T I C I P A N T S

Peter Ingram Hawaiian Air Group, Inc. - President & CEO

Conor T. Cunningham Melius Research LLC - Research Analyst

Savanthi Nipunika Prelis-Syth Raymond James Ltd., Research Division - MD

Duane Thomas Pfennigwerth Evercore ISI Institutional Equities, Research Division - Senior MD

Jamie Nathaniel Baker JPMorgan Chase & Co, Research Division - U.S. Airline & Aircraft Leasing Equity Analyst Scott H. Group Wolfe Research, LLC - MD & Senior Analyst

Helane Renee Becker TD Cowen, Research Division - MD & Senior Research Analyst

Michael John Linenberg Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

Catherine Maureen O'Brien Goldman Sachs Group, Inc., Research Division - Equity Analyst

Ravi Shanker Morgan Stanley, Research Division - Executive Director

Daniel J. McKenzie Seaport Research Partners - Research Analyst

P R E S E N T A T I O N

Operator

Good afternoon, ladies and gentlemen, and welcome to the Alaska Airlines conference call. (Operator Instructions) Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speaker's remarks, we will conduct a question-and-answer session for analysts.

I would now like to turn the call over to Ryan St. John.

Ryan St. John - Alaska Airlines, Inc. - VP, Finance, Planning & IR

Thank you, operator, and thanks to everyone who has joined us on short notice for our call this evening. Today, we announced that Alaska Airlines has reached a definitive agreement to acquire Hawaiian Airlines for $18 per share in cash, for a transaction value of approximately $1.9 billion, subject to regulatory approvals and customary closing conditions. The combined entity will have more than $13 billion in revenues, over 360 aircraft, and 31,000 employees.

At a transaction multiple of 0.7 times revenue, this deal represents highly attractive economics and will position Alaska as a market leader in a premium global leisure market.

We have provided a press release and accompanying investor presentation that can be found on our website at investor.alaskaair.com. Joining us for the call today, here in Hawai'i, are Ben Minicucci, CEO, and Shane Tackett, CFO of Alaska Airlines, along with Peter Ingram, CEO of Hawaiian Airlines. Several others of our management team will also be on the line for the Q&A portion of the call.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Please note that our comments today will include forward-looking statements about the transaction, including the anticipated impact, benefits, and timing of the transaction. Please refer to the press release we issued today for information about risks and uncertainties that could cause actual results to differ materially. Additional information on risk factors that could affect both Alaska and Hawaiian's businesses can be found within each of our respective SEC filings. We will also refer to certain forward-lookingnon-GAAP financial measures. See the investor presentation on our website for additional information. We are unable to provide a reconciliation of these forward-lookingnon-GAAP measures without unreasonable effort.

And with that, I'll pass it over to Ben.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Thanks, Ryan, and thank you all again for joining us this afternoon here in Hawai'i and for others on your Sunday evening. We are excited to share with you our strategic rationale for pursuing the combination of Alaska and Hawaiian Airlines. We will spend time in our prepared remarks as well as in Q&A to fully outline the strategic and economic rationales for this transaction, both of which are incredibly strong.

However, I first want to acknowledge the respect and admiration we have for Hawaiian Airlines, its brand, its people, and its history. Anyone who has flown on Hawaiian Airlines through the years knows what I'm talking about. You feel the aloha spirit the moment you step on the plane and are greeted by the cabin crew and pilots. That same spirit is shared by employees throughout the company.

We determined early on in our diligence process, if we were to proceed with a combination, both the Alaska and Hawaiian brands would remain. The operations of the companies will be combined, but both brands will continue to fly proudly and serve guests throughout our network.

Maintaining these two brands, while unique in our industry, is an idea that we are very excited about. Both Alaska and Hawaiian have built significant legacies in our respective geographies and with guests for over 90 years.

The importance of these histories and value of these brands is too great not to preserve. Once combined, we look forward to providing a broader and more valuable network to guests throughout the United States and internationally.

As you may know, Alaska Airline's history began in the state of Alaska in 1932, and while our headquarters has since moved to Seattle, we still operate 70 daily flights that serve 19 destinations in Alaska, most of them in remote areas of the state, only three of which have road access. Our service is vital to these communities, and we take pride in the care and commitment our teams bring that have allowed us to serve the people of Alaska for decades.

Just as we feel this enduring commitment to Alaska, we appreciate the similar deep connection between Hawaiian Airlines and the state of Hawai'i. For us, assuming the responsibility to preserve and continue to build on Hawaiian's existing legacy means making several important commitments from the outset of this process.

First, we acknowledge our need to learn from Hawaiian's employees as well as the community of Hawai'i to be good stewards of the brand into the future. Second, we expect to remain a top employer in Hawai'i, maintaining and growing the 5,800 union-represented positions in the state over time. Over 80 percent of Alaska's more than 23,000 employees are union-represented. The majority by the same unions that represent Hawaiian employees, and we look forward to partnering with each of them as this process moves forward. As Hawai'i will become our second largest market, we recognize the value of local leadership and expect to maintain a significant management presence to support a strong operation.

Third, we will maintain Neighbor Island service to continue to connect and serve these air-dependent communities. This is a responsibility we take seriously, just like we do today in the state of Alaska.

Fourth, we will continue to invest in Hawai'i communities, combining and expanding our two airlines' commitments and working with local leaders to build a vibrant future for Hawai'i. And lastly, we will align both airlines' strong commitment to environmental stewardship by adopting Alaska's aggressive five-part path to net zero by 2040.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Now, let me turn to the important topic of strategic rationale. With this acquisition, Alaska adds another top 25 US market to our network, making Honolulu our second largest hub. It is a geography we have served for 16 years that perfectly complements our West Coast leisure focus.

We become the clear leader in the $8 billion Hawai'i market, unlocking hub economics in one of the most globally attractive leisure markets with a proven long-term track record of profitability. We deliver robust financial returns with near-term EPS and ROIC accretion. This is supported by an attractive valuation and significant synergy opportunities. We expand benefits and choices for guests by combining our networks and increasing utility, including tripling the number of unique destinations available to Hawai'i residents, growing access for all guests to 138 destinations, and to over 1,200 destinations across the globe through our oneworld and other international partnerships. We'll also have a comprehensive product offering focused on high-quality service and strong operational performance with greater loyalty benefits from combining our two airlines.

We combined two companies with shared values that have competed and survived longer than most through many industry cycles, enhancing our differentiated business model and creating a stronger competitor to network carriers.

Alaska has a strong organic roadmap going forward, supported by one of the best order books in the industry to fund that growth. While we do not view this combination as an imperative for the continued success of Alaska, we do see this as a unique opportunity at this moment in time to accelerate and enhance the strategy that we've been deliberately cultivating over the past several years.

During this time, we have executed several strategic decisions to fortify our business and build a profitable roadmap going forward. Financially, we restored our balance sheet without diluting shareholders and restarted share repurchases. Operationally, we rationalized our fleet to lock in productivity and efficiency savings, restored our network, and returned to operational excellence.

Commercially, we have grown our capabilities, deepening our partnership with American Airlines, joining the oneworld Global Alliance, strengthening our loyalty program with a new co-brand agreement, and building out our premium cabin offerings. And, we have retained our historic unit cost advantage versus legacy carriers.

This strategy drove our industry-leading margin performance in 2022 and our continued competition for a strong result in 2023. This very strength and discipline positioned us to be here today, announcing this opportunity to combine Alaska with Hawaiian, something we have looked at for a while.

Financially, we believe the returns of this transaction are as compelling as the strategic fit. The 0.7 times revenue multiple falls well below the industry transaction average of 1.7 times. Simply put, we are acquiring a hub in a premium global leisure market that has the potential to approach Seattle in size, at a valuation that is amongst the best achieved over the past 20 years of airline M&A.

At that compelling valuation, we see a fantastic opportunity to add this highly complementary business to drive at least $235 million in identified synergies, which we believe has significantly more upside.

And with many of the same leaders in place that managed the effective execution of the Virgin America acquisition, our team is bringing experience, a pragmatic attitude, lessons learned, and a proven playbook to drive another successful integration following a closing process that we expect may take 12 to 18 months. Together, we will build on our respective 90-plus-year legacies, do more for Hawai'i travelers and our employees, and create a stronger platform on which to compete and deliver industry-leading financial performance.

We have a unique moment in history to fortify an already strong foundation with a remarkable airline for whom we have deep admiration and respect. We are aligned in the way we do business, the way in which we treat our employees, and our engagement and support for the communities we serve. This will continue now and into the future.

Now I'll pass it over to Peter for a few words before we turn it over to Shane for more detail on the financial rationale.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Peter Ingram - Hawaiian Air Group, Inc. - President & CEO

Thank you, Ben. Aloha, everyone. Thank you for joining us today. This is an exciting day for both Hawaiian and Alaska as we take the first step in our journey together. We are thrilled to expand benefits and choice for travelers throughout Hawai'i, the US mainland cities we serve, and throughout the Pacific.

After we were initially approached by Alaska, our Board conducted a thorough review, and, with my full support, unanimously determined that this combination was in the best interest of all Hawaiian stakeholders. We've long respected Alaska as a company that is similar to our own in many ways, and we have a lot of respect for their track record of financial success, customer service, and operational quality.

Both of our airlines are named for the great states where our companies were founded. These deep roots are reflected in the dedication and commitment of our employees and our shared cultures of service to our guests. Our brands and the values of our companies embody the spirit of the places for which we are named. We call ourselves "Hawaiian" and "Alaska" with pride, and I'm excited to enter into a combination that honors and preserves the nearly century-long tradition of the two brands.

Since 1929, Hawaiian has been an integral part of life in Hawai'i, and our transaction with Alaska will enable us to begin a new phase of delivering for our guests, employees, and the communities we serve. With the additional scale and resources this transaction brings, we will be able to accelerate investments in guest experience and technology while preserving the best of the Hawaiian brand.

Importantly, our fantastic frontline employees will benefit from this combination thanks to Alaska's commitment to maintaining and growing our union-represented workforce in Hawai'i and from the opportunities that will come with being part of a larger organization. The Hawaiian brand will remain an important part of our home state, with Honolulu becoming a strategic hub for the combined company and expanded service for Hawai'i residents. Together, we are looking forward to bringing our authentic brands and award-winning hospitality to more of the world. Finally, we believe this all-cash transaction will deliver significant, immediate, and compelling value to our shareholders.

Before I turn the call over to Shane, I want to take a moment to thank our employees for their tremendous effort and commitment to Hawaiian Airlines. I've said on many investor calls that my teammates are the best in the business. Their commitment to operational excellence and delivering authentic Hawaiian hospitality has allowed us to compete successfully with the largest airlines in the world. Joining forces with Alaska will create an even stronger platform from which to deliver for our guests for decades to come. With that, I'll now turn the call over to Shane.

Shane Tackett - Alaska Airlines, Inc. - EVP Finance & CFO

Thanks, Peter, and good afternoon, everyone. All of us at Alaska Airlines are honored by the opportunity to be here with you today. You and the people of Hawaiian Airlines have built a remarkable airline that we deeply respect, and we look forward to building an even stronger airline together.

This combination is exciting both strategically and financially. Our balance sheet will remain healthy with this transaction, and we expect we'll return to our target leverage metrics within two years post-close.

Strategically, we increase our network relevance with additional scale. We further diversify our revenue with incremental international and premium cabin exposure, and we become a market share leader in the Hawai'i market, which long-term, has produced double-digit margins for the industry.

We view the Hawai'i market as attractive long-term, and by combining our network with Hawaiian's, we anticipate we can drive more revenue to Alaska throughout the geographies we are already strong in. This transaction also will make Honolulu our second-largest hub, one that has the potential over time to approach Seattle in terms of revenue, providing us with another major geography of strength that will help profitably grow the broader company network over the long term. And we couldn't be more excited to work with a team grounded in similar values, culture, and approach to service as our own.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Let's now pivot to the financial benefits of this combination and why we are confident this transaction creates immediate and long-term value for our stakeholders. To finance the transaction, we plan to use cash on hand and new acquisition debt to fund the $18 per share all-cash purchase price. The enterprise value will be $1.9 billion, $1 billion of which is equity value, and $900 million of which will be assumed Hawaiian net debt.

At a transaction revenue multiple of only 0.7 times revenues, this deal represents one of the most attractive valuations in the last 20 years of airline mergers. The final amount of acquired debt will be determined later and is sensitive to both the timing of transaction close and the underlying conditions of the industry over the next year or two.

That said, we expect that this transaction will minimally impact our balance sheet, which will remain one of the strongest in the industry. We expect our adjusted net debt to EBITDAR to peak at around 3 times before declining back below 2 times within two years of closing, which means our leverage should remain below almost all of our peers. This will not preclude Alaska from continuing to fund shareholder returns. That will be influenced more by the industry backdrop and our ability to create free cash flow from the core business.

Turning to value creation, we expect to achieve run rate synergies of at least $235 million. This estimate, we believe, is conservative and lands at the lower end of precedent airline merger announced synergies. Over 80% of these synergies will be produced from combining our networks and from loyalty. These are areas we believe are the most reliable historically from a synergy production perspective. We believe there's significant potential upside to our $235 million synergy estimate.

Network integration represents the largest opportunity at $110 million at run rate. Combining our networks creates new domestic pathways and greater relevance for our collective customers, giving us a high degree of confidence in our synergy estimate. There's further potential network upside given there are pockets within the Hawaiian network that remain depressed from a demand perspective. We believe these are driven by temporary factors, and quicker recovery in these areas will be additive to our baseline expectations.

The second significant synergy category is loyalty, where we expect to achieve $85 million in run rate synergies. Alaska is fortunate to have an incredibly strong loyalty program, inclusive of terrific co-brand credit card performance. Our card is often top of wallet, driving robust average card spend, while our renewed deal with Bank of America provides very attractive economics. Our synergy estimate assumes that we can grow card spend across the existing Hawaiian co-brand portfolio at our contract terms over time.

There's additional upside to this estimate if we can increase credit card penetration amongst existing Hawaiian loyalty members. Hawaiian's member base includes significant loyalty amongst residents of Hawai'i, all of whom will enjoy the increased attractiveness and utility of our combined network, as well as the entire suite of our airline partners, including access to seamless travel and redemption across oneworld.

We believe we will have an especially enhanced loyalty value proposition to residents of Hawai'i who travel regularly. They will not only continue to benefit from the robust Neighbor Island schedule, but will gain three times more options for their trips to the continent, given our extensive network and code share partnership with American Airlines.

Cargo is the third area of synergy. We estimate $20 million in run rate synergies. However, this transaction has the potential to unlock even further growth in this category. Like the passenger side, connecting our networks will provide materially more cargo pathways to customers shipping to or from the state.

Additionally, Alaska operates the passenger industry's only dedicated freighter fleet, which we are actively expanding to five aircraft. Hawaiian has, of course, just initiated freighter flying for Amazon, and we will be closely assessing whether further dedicated freighter flying for ourselves or in an asset-light model for others could make sense for the combined company over time.

An added benefit to the Amazon partnership is growing the number of wide-body pilot positions, as well as inheriting a pilot base in the Midwest. This provides all current and future Hawaiian and Alaska pilots more attractive career options over the long term, and we believe will be a net positive to pilot attraction and retention for us.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

The final synergy category is costs. We expect significant cost synergies to be realized, consistent with what we achieved in our Virgin America acquisition. However, we also expect to incur incremental wage and benefit costs as we integrate collective bargaining agreements amongst our workgroups. Net of each other, we anticipate $20 million in run rate cost savings.

In total, we expect to incur between $400 million and $500 million in one-time transaction costs to complete the integration. We will leverage our learnings from our Virgin integration with the goal of making this process even more efficient and less disruptive to our business and guests. In the last acquisition, we executed one of the fastest integrations of operating certificates and PSS systems with no noticeable disruption to guests during that time.

Our $235 million in run rate synergies represent less than 2% of trailing 12-month revenue, which falls on the most conservative end of prior transaction history, which is closer to 5%. We've purposefully adopted a synergy commitment that we have full confidence in achieving relatively quickly, while also preserving the chance to realize further upside. As this process moves forward, we will continue to update both our progress and expectations on synergies should there be any change to our estimates.

A final point on the value of this deal. We expect this transaction to be accretive to earnings within two years of close. Realizing synergies evenly over a four-year period, we expect the transaction to be EPS accretive near-term and high teens percent accretive by years three and four. We also expect the transaction ROIC to materially exceed our internal return threshold in the first year post-close and to be accretive to current Alaska ROIC by year three.

Before we wrap up, I'd like to touch on the fleet setup we will inherit upon close, including 37 narrowbodies and 24 widebodies for 61 aircraft in total. First and foremost, we are acquiring a fleet that is 66% owned and 43% unencumbered. Hawaiian's leased aircraft portfolio is modest, with several leases maturing in the next few years. This is a stark contrast to the fleet we inherited in our prior acquisition, in which 86% were leased, most of which had long-term duration remaining.

Hawaiian has a high-quality fleet with net equity value and a range of capabilities that will allow us to maximize future flying opportunities. We remain strong believers in fleet rationalization and simplification, but we'll take appropriate time to determine what the best long-term fleet setup for us will be, given the diversity of flying we will be doing, from high-frequency short stage lengths to widebody trans-oceanic flying.

To close, and I'll reiterate something Ben said up front, while we don't view a combination as required to continue to compete for operational and margin leadership in this industry, we view it as a unique opportunity to enhance the value and growth proposition of Alaska, and to do so in a way that honors, preserves, and grows the Hawaiian brand legacy. We are undertaking this at attractive economic valuations, with a strong balance sheet, and with synergies we are confident can be achieved with further potential upside that may be unlocked.

Alaska has the opportunity with this deal to become a leader in a second top-25 market more quickly and cost-effectively than any alternative options. We are excited to grow our capabilities and step into a dedicated international network while we bolster our already strong West Coast presence and acquire a leading position in a familiar geography.

And as we progress on our own roadmap to enhance our commercial initiatives, this combination accelerates our ability to move closer to unit revenue parity with network carriers in the industry. We will become the US airline that has combined high-quality, differentiated cabin offerings, and operational excellence at a cost much lower than network legacy carriers. We see this combination as one that increases our ability to produce the industry's best returns over the long term.

And with that, we will open the call to questions.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Conor Cunningham, Melius Research.

Conor T. Cunningham - Melius Research LLC - Research Analyst

Hi, everyone. Thank you. Congratulations. Over the past several years, you've spent a lot of time cleaning up the fleet and the cost story while also improving the product, and you just got back to investment grade. So I'm just trying to understand why the change in thought process now and why the timing here makes sense. Thank you.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Conor, are you talking about the fleet or just the general strategic rationale?

Conor T. Cunningham - Melius Research LLC - Research Analyst

I mean, like, it kind of felt like everything was coming to, you were kind of clicking on all your messages from the cost story and so on.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

No, look, yeah, look, you're absolutely right. Look, we got a great balance sheet. The airline, we had best profitability in '22. We're going to be amongst the best in profitability in '23. We have a great organic growth plan. We're back to single fleet. We've got a great order book with Boeing. Like we said in the script, we believe that plan is solid and we'll continue to execute on this plan.

This opportunity came to us and then when we really looked at the Hawaiian market, it's an $8 billion market where this combination allows us to be the clear market leader with, as Shane and I said in our script, with a top 25 market and it'll be our second largest hub. So given the transaction dollars that we paid, we feel this is just strategically a step change for us to accelerate not only our financial performance, but the growth of our network.

So in terms of the fleet, that was the right decision for us on the Alaska side. The 737 is a phenomenal airplane for our network utility. Shane mentioned in his remarks, we'll see how the fleet -- how we rationalize it going forward. The airplanes that Hawaiian have are perfectly suited for their geographies, for the domestic market, for the international market. And we have the time to assess as we go forward.

Conor T. Cunningham - Melius Research LLC - Research Analyst

Okay. And then maybe as a follow-up, have you spoken to the government about the transaction? Are you expecting to hear any pushback? I mean, when I look at these numbers, I think you have like a 40% seat share from mainland to Hawai'i. Just curious on how you're talking about the pro-consumer benefits of the transaction in general. Thank you again.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Yeah. Thanks, Connor. Look, we haven't spoken to the government yet on this, but again, I think our deal is unique in a lot of ways. If you look at our networks and when you combine these complementary networks, we'll have about 1,400 flights a day. On those 1,400 flights, we only have 12 overlap markets. So from a competitive standpoint, I think that lands really, really well.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

And when you join the networks as well, it gives customers both on the West Coast and the state of Hawai'i tremendous choice, an expanded domestic platform, an expanded international platform. And just one example I'll give, if you're a resident of Hawai'i today and you want to fly to DC, just on the Hawaiian network, you can't get there with the existing network. Once you add Alaska's network, that customer can easily get to DC with the combined network. They'll have three times more options, more departures to get to the continental US.

So I think this is a pro-consumer combination. It's pro-competitive. It makes us larger to compete against the big four (corrected by company after the call) who have an 80% domestic market share. So we're hopeful that it will be seen in a positive light.

Conor T. Cunningham - Melius Research LLC - Research Analyst

Great. Thank you.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Thanks, Connor.

Operator

Savanthi Syth, Raymond James Financial.

Savanthi Nipunika Prelis-Syth - Raymond James Ltd., Research Division - MD

Hey, good afternoon, everyone. Can I go a little bit off of Connor's question? Just the one thing that strikes us is that this brings complexity to your business model, a model that you've kind of had very simplified and that's driven a lot of your kind of cost advantages. So could you talk about a little bit, like if I think about just fleet, there's a lot of fleet types there. If I think about configuration, you've kind of stayed away from lay flat seats and there are those kind of configurations here.

And then just in the sense that from a pilot and flight attendant integration, it sounds like you're going to have a combined AOC, even though you're going to have separate brands. But can you just talk a little bit about those kind of various complexity aspects?

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Yeah. No, thanks, Savi. Well, look, let me start with the similarities. I think when you look at the Hawaiian brand and the product offering and you look at the Alaska brand and the product offering, we're both offering a premium product. You know, if I just exclude the international airplanes for now, what Hawaiian flies with 321s and the 717s and our 737s, the product offering is very similar and very compelling.

I think having an international fleet, you need the lie flat seats. I think that's required. Now, does it create a little more complexity? Of course, it does. But I think the advantages far outweigh the complexities that we have to deal with.

And I'm sure there'll be some things that we can rationalize going forward. Our DNA, Savi, we're ones that like to drive costs down. And if we see abilities to do that, we will. But what I would just say is the opportunities far outweigh some of the complexities that we have to deal with, with this combination.

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DECEMBER 03, 2023 / 10:00PM, ALK.N - Alaska Air Group Inc Investor Call

Savanthi Nipunika Prelis-Syth - Raymond James Ltd., Research Division - MD

Can I ask on a slightly related -- What are the assets that you're getting from this as you try to think about kind of unlocking where that might not be as kind of fitting with the combined offering and just in terms of potentially monetizing assets, either financially divesting them or just the assets that you bring into Alaska as a result of this acquisition?

Shane Tackett - Alaska Airlines, Inc. - EVP Finance & CFO

Yeah. Hey, Savi, it's Shane. I'll answer that. I think a couple of things, and we mentioned this in the script, and obviously, we'll want to talk a lot about this as we go forward. One, and I think most important, is this notion of getting a market leadership position in a top 25 US market. It's the 13th most popular leisure destination in the globe just by passenger traffic.

It is a premium market. If you look at Hawai'i, that's a market that's $8 billion by revenue. And we'll have, hopefully, $4 billion-plus of that. Our Seattle hub is a $6 billion hub. So we've got a second top 25 market whose revenue can start to approach the revenue production of Seattle.

And I think over time, once you layer in synergies and I think just underlying core recovery of the Hawai'i market and Hawaiian's business, it should be able to have margin production that is quite strong. In fact, the Hawai'i market has been a double-digit margin market for people who fly there over the long term.

And we're getting that at a really attractive valuation. It's 0.7 times revenue. The valuation from an EBITDAR perspective is very good. Pre-COVID, Hawaiian was a $600 million EBITDAR company. So there's a lot of runway left for recovery and economics for the combined networks. And I think that is just an opportunity that doesn't come along very often. And it's an opportunity that's really hard, even if we like our organic growth plan, which we do, to do organically.

And so at that valuation for that network combination and the strength of another hub that will unlock hub economics, given the similarities in brands and product offerings and cultures and approaches in the complementary geography, a place that we've operated for many, many years, the strategic rationale just starts to make a lot of sense to us. We get that there's complexity with these things. We're the management team that's most recently gone through one. And so we know what we're taking on. And I think we'll do better with the integration, and we'll do better with the synergy production on this one, just given that recent knowledge.

So I mean, that's really the strategic case, it is the hub economics in the Hawai'i market, which is a really attractive market, at a great, great valuation. And we know that all of the other things, like complexities and needing to manage and be focused on costs, we're going to have to go deliver on those things, which we fully intend to do.

Savanthi Nipunika Prelis-Syth - Raymond James Ltd., Research Division - MD

Makes sense. I appreciate it. Thanks.

Shane Tackett - Alaska Airlines, Inc. - EVP Finance & CFO

Thanks, Savi.

Ben Minicucci - Alaska Airlines Inc - Chief Executive Officer

Thanks, Savi.

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