ALK Alaska Air Group, Inc. - 10-K

ITEM 1A. RISK FACTORS

If any of the following occurs, our business, financial condition, and results of operations could be harmed. The trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.

We have adopted an enterprise-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives, and align these risks with Board oversight. These enterprise-wide risks align to the risk factors discussed below.

SAFETY, COMPLIANCE, AND OPERATIONAL EXCELLENCE

Our reputation and financial results could be harmed in the event of an airline accident or incident.

An accident or incident involving one of our aircraft or an aircraft operated by one of our commercial partners or CPA carriers could involve loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities. We could experience significant claims from injured passengers, bystanders and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our commercial partners and CPA carriers. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if it is fully insured or does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives. This would harm our business.

Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our business, financial condition, and results of operations.

As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.

Factors that might impact our operations include:

• congestion, construction, space constraints at airports, and/or air traffic control problems, all of which many restrict flow;

• lack of adequate staffing or other resources within critical third parties;

• adverse weather conditions and natural disasters;

• lack of operational approval (e.g. new routes, aircraft deliveries, etc.);

• contagious illness and fear of contagion;

• increased security measures or breaches in security;

• changes in international treaties concerning air rights;

• international or domestic conflicts or terrorist activity;

• random acts of violence on our aircraft or at airports;

• interference by modernized telecommunications equipment with aircraft navigation technology;

• disruption, failure, or inadequacy of systems or infrastructure under the control of third parties, including government entities; and

• other changes in business conditions.

Due to the concentration of our flights in the Pacific Northwest, Alaska, and Hawai'i, we believe a large portion of our operation is more susceptible to adverse weather conditions and natural disasters than other carriers with networks that cover a larger geographic area. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition, and results of operations.

We rely on vendors and third parties for certain critical activities and sourcing, which could expose us to disruptions in our operation or unexpected cost increases.

We rely on vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing, among others. We also rely on government-controlled systems such as air traffic control technology that could malfunction for reasons out of our control.

Our use of outside vendors increases our exposure to several risks. Even though we strive to formalize agreements with these vendors that define expected service levels, we may not have the ability to influence performance of all vendors. In the event that one or more vendors go into bankruptcy, ceases operation, or fails to perform as promised, for reasons such as supply chain delays, or workforce shortages, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues, or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues, or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.

Impacts of climate change, including physical and transition risks, as well as market responses, may have a material adverse result on our operations and financial position.

Concerns regarding climate change, including the impacts of a gradual increase in global temperatures leading to more severe weather conditions, continue to rise. Increased frequency or duration of extreme weather conditions could cause significant and prolonged impacts to our operation, disrupt our supply chain, and influence consumer travel decisions. These disruptions may result in increased operating costs and lost revenue should we be unable to operate our published schedules. Additionally, we have made commitments to reduce our greenhouse gas emissions which may require us to make significant investments in emerging and yet unproven technologies. Should these technologies not prove ready, not gain approval, or not be sufficiently available for use in our operation, our results of operations may be adversely impacted, and we may be required to direct new investments to different technologies. Public interest in U.S. airlines' response to climate change has continued to grow. Failure to address the concerns of our guests and our shareholders may lead to a reduction in demand for our services, including both leisure and business travel, in favor of competitors that customers perceive to be more sustainable. This could adversely impact our financial position, our results of operations, or our stock price.

The airline industry continues to face potential security concerns and related costs.

Terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a significant negative effect on the airline industry, including us, and could:

• significantly reduce passenger traffic and yields as a result of a dramatic drop in demand for air travel;

• significantly increase security and insurance costs;

• make war risk or other insurance unavailable or extremely expensive;

• increase fuel costs and the volatility of fuel prices;

• increase costs from airport shutdowns, flight cancellations, and delays resulting from security breaches and perceived safety threats; and

• result in a grounding of commercial air traffic by the FAA.

The occurrence of any of these events would harm our business, financial condition, and results of operations.

COMPETITION AND STRATEGY

The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected.

The U.S. airline industry is characterized by substantial competition. Airlines compete for market share through pricing, capacity (supply), route systems and markets served, merchandising, and products and services offered to guests. We have significant capacity overlap with competitors, particularly in our key West Coast and Hawaiian markets. This dynamic may be exacerbated by competition among airlines to attract passengers during periods of economic recovery. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity if we are unable to attract and retain guests.

We strive toward maintaining and improving our competitive cost structure by setting aggressive unit cost-reduction goals. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital. If we are unable to maintain our cost advantage over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns. Therefore, our financial results may suffer.

The airline industry may undergo further consolidation or restructuring. In addition, regulatory, policy, and legal developments could impact the extent to which airlines can merge, or form and maintain marketing alliances and joint ventures with other airlines, particularly U.S. carriers. These factors could have a material adverse effect on our business, financial condition, and results of operations.

We continue to face strong competition, mainly from other U.S. carriers. In many instances, our competitors have been able to grow and increase their competitive influence by merging with other airlines, as Alaska did with Virgin America in 2016 and Hawaiian in 2024. Some competitors have also benefited from the ability to reduce their cost structures through the U.S. bankruptcy process and restructuring laws. Competitors have also improved their competitive positions by entering marketing alliances and/or joint ventures with other airlines. Certain airline joint ventures promote competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits that can be extended to consumers, achieving many of the benefits of consolidation.

In recent years, the U.S. antitrust authorities have been increasingly reluctant to approve airline mergers, cooperative marketing arrangements, and joint ventures. The emergence of merger-friendly antitrust policy at the federal level, and the possibility that this policy may be short-lived, might prompt other entities to act on opportunities that could have a material adverse effect on our business, financial condition, and results of operations.

We may be unable to integrate Hawaiian’s business with ours successfully and realize the anticipated benefits of the acquisition, which could negatively impact our stock price and our future business and financial results.

We must devote significant management attention and resources to integrating the business practices and operations of Hawaiian Airlines. Potential difficulties we may encounter as part of the integration process include the following:

• the inability to successfully combine the Hawaiian Airlines business with that of Alaska's in a manner that permits us to achieve anticipated net synergies and other anticipated benefits of the acquisition;

• successfully managing relationships with our combined customer base and retaining Hawaiian’s customers;

• integrating complex systems, operating procedures, regulatory compliance programs, technology, aircraft fleets, networks, and other assets of the two companies in a manner that minimizes any adverse impact on customers, suppliers, employees, and other constituencies;

• managing Alaska Airlines and Hawaiian Airlines as two distinct brands, a strategy that has not been implemented in the U.S. commercial airline industry;

• managing Hawaiian's international network successfully, which comprises multiple countries in which Air Group did not have prior experience;

• integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service and running a safe and efficient operation;

• disruption of, or the loss of momentum in, our ongoing business;

• liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays associated with the acquisition, including transition costs to integrate the two businesses that may exceed the costs that we currently anticipate;

• maintaining productive and effective employee relationships and, in particular, successfully and promptly integrating seniority lists and achieving cost-competitive collective bargaining agreements that cover the combined union-represented work groups; and

• retaining key employees of our company

If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business the size of Hawaiian, then we may not achieve the anticipated benefits of the acquisition of Hawaiian and our revenue, expenses, operating results and financial condition could be materially adversely affected.

Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations.

Our strategy involves a high concentration of our business in key West Coast markets. A significant portion of our flights occur to and from our stations in Seattle, Honolulu, Portland, and California.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition, and results of operations.

We are dependent on a limited number of suppliers for aircraft and parts.

Our carriers are dependent on limited suppliers for aircraft, aircraft engines, and many aircraft parts. As a result, we are vulnerable to issues associated with the supply of those aircraft, engines, and parts including design or manufacturing defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public about safety that would result in customer avoidance or actions by the FAA. Should we be unable to resolve known issues with certain aircraft or engine suppliers, it may result in the inability to operate our aircraft for extended periods. Additionally, if effects of ongoing supply chain constraints cause our limited vendors to have performance problems, reduced or ceased operations, bankruptcies, workforce shortages, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

Should these suppliers be unable to manufacture, obtain certification for, and deliver new aircraft, we may not be able to grow our airlines' fleet at intended rates, which could impact our financial position. Boeing has significant production constraints for the B737 and B787 aircraft, as well as regulatory delays for certain B737 aircraft. These challenges have impacted and will continue to impact the timing of deliveries. If we are unable to receive aircraft in a timely manner, our growth plans could be negatively impacted. Given our size relative to its competitors, these challenges may have a disproportionate impact on us. Additionally, further consolidation among aircraft and aircraft parts manufacturers could further limit the number of suppliers. This could result in production instability in the locations in which the aircraft and its parts are manufactured or an inability to operate our aircraft.

We rely on partner airlines for codeshare and loyalty program marketing arrangements.

Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners,” including an expanded relationship with American Airlines and other one world carriers. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as codeshare flights. In addition, the agreements generally provide that members of our airlines' loyalty programs can earn credit on or redeem credit for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenue or the attractiveness of our loyalty programs, which we believe is a source of competitive advantage. Additionally, we rely on partners to provide available space for credit redemption on their aircraft. Should partners not make available enough inventory within their cabins for our members, the attractiveness of our program may be decreased.

Alaska's membership in the one world global alliance may limit options to bring non- one world carrier partners into the Atmos Rewards program. Further, maintaining an alliance with another U.S. airline may expose us to additional regulatory scrutiny. Failure to appropriately manage these partnerships and alliances could negatively impact future growth plans and our financial position.

We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and loyalty program enhancements, and will continue to pursue these commercial activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.

The Company's reputation could be harmed if it is exposed to significant negative publicity.

We operate in a highly visible industry that has significant exposure to social media and other media channels. Negative publicity, including as a result of misconduct by our guests or employees, failures by our suppliers and other vendors, failure to achieve our stated goals, or other circumstances, can spread rapidly through such channels. Should the Company not respond in a timely and appropriate manner to address negative publicity, the Company's reputation may be significantly harmed. Such harm could have a negative impact on our operating results.

FINANCIAL CONDITION

We have a significant amount of debt and fixed obligations. These obligations could lead to liquidity constraints and have a material adverse effect on our financial position. Additionally, increases in interest rates may mean that future borrowings are more costly for the Company, which could harm our future financial results.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt and aircraft lease commitments. Although we aim to keep our leverage low, due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenue could result in a disproportionately greater decrease in earnings. Similarly, a material increase in market interest rates could mean future borrowings are more costly for the Company.

Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures or working capital; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions. Further, should we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed. Certain debt agreements and credit facilities contain customary financial covenants, including compliance with certain debt service coverage ratios and minimum liquidity requirements. If we fail to comply with any of these covenants and are unable to renegotiate the terms of the agreements, this could result in default and acceleration of our outstanding obligations or repossession of collateral by our lenders. If a default were to occur, this would have a material adverse impact on our financial position.

Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs or significant disruptions in the supply of jet fuel would harm our business.

Fuel costs constitute a significant portion of our total operating expenses. Future increases in the price of jet fuel may harm our business, financial condition, and results of operations unless we are able to increase fares and fees or add ancillary services to attempt to recover increasing fuel costs. The price of jet fuel can be dependent on geography, as refining margins on the West Coast can be elevated compared to other geographic locations. Due to our concentration on the West Coast, the price of jet fuel may have a disproportionate impact on our operating results compared to other carriers which may have operations that span a larger geographic area.

We are unable to predict the future supply of jet fuel, which may be impacted by various factors, including but not limited to geopolitical conflict, economic sanctions against oil-producing countries, natural disasters, or staffing and equipment shortages in the oil industry. Any of these factors could adversely impact our operations and financial results.

Economic uncertainty, including a recession, would likely impact demand for our product and could harm our financial condition and results of operations.

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are dependent on consumer confidence, as well as the health of the U.S. economy and economies of other countries in which we operate. Unfavorable economic conditions have historically resulted in reduced consumer spending and led to decreases in both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as video conferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor, and other costs. Additionally, reduced consumer spending would adversely impact revenue and cash flows from our co-branded credit card agreements. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.

Our financial condition or results of operations may be negatively affected by increases in expenses related to the airports in which we operate.

Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers to reflect higher costs of security, updates to infrastructure, and other expenses. Additional laws, regulations, taxes, airport rates, and airport charges may be occasionally proposed that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, a higher total ticket price could influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business. Additionally, we have engaged in various redevelopment projects at the airports in which we operate to improve or add to existing infrastructure our company uses. While the airport authority may reimburse costs associated with these projects, we may be required to commit significant resources of our own to finance construction and design. Delays and cost overruns associated with these projects could have a negative impact on our financial condition or results of operations.

The application of the acquisition method of accounting resulted in us recording goodwill and identifiable intangible assets, which could result in significant future impairment charges and negatively affect our financial results.

In accordance with acquisition accounting rules, we recorded goodwill and identifiable intangible assets associated with the acquisitions of Virgin America and Hawaiian on our consolidated balance sheet. Goodwill was recorded to the extent the acquisition purchase prices exceeded the net fair value of tangible and identifiable intangible assets and liabilities as of the acquisition date. Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties. We can provide no assurance that a significant impairment charge will not occur in one or more future periods. Any such charges may materially affect our financial results.

The Company’s ability to use its net operating loss carryforwards to offset future taxable income for U.S. federal and state income tax purposes may be limited.

At December 31, 2025, Air Group had $2 billion of gross U.S. federal net operating loss (“NOL”) carryforwards, which can be carried forward indefinitely. Air Group also had $1.7 billion of gross state NOL carryforwards which begin to expire in 2026. The Company’s ability to utilize these NOLs depends on generating sufficient taxable income in future periods. In addition, NOLs remain subject to examination and adjustment by federal and state taxing authorities. If future operating results or economic conditions are less favorable than expected, the company may be required to record additional valuation allowances against its deferred tax assets, which could be material.

PEOPLE AND LABOR

A significant increase in labor costs or unsuccessful attempts to strengthen our relationships with union employees could adversely affect our business and results of operations.

Labor costs remain a significant component of our total expenses. In addition to costs associated with represented employee groups, labor costs could also increase for non-unionized employees and via vendor agreements as we work to compete for highly skilled and qualified employees against the major U.S. airlines and other businesses in a competitive job market. Labor costs have recently increased significantly driven by inflationary pressure on wages.

Ongoing and periodic negotiations with labor unions could result in job actions, such as slow-downs, sick-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during negotiations. Although unlawful until after lengthy mediation attempts, the operation could be significantly impacted. Although we have a long track record of fostering good communications, negotiating approaches, and developing other strategies to enhance workforce engagement in our long-term vision, unsuccessful attempts to strengthen relationships with union employees could divert management’s attention from other projects and issues and negatively impact the business. In addition, our bargained-for labor agreement terms for flight crew are increasingly coming into conflict with state and local laws purporting to govern benefits and duties.

The inability to attract, retain, and train qualified personnel, or maintain our culture, could result in guest impacts and adversely affect our business and results of operations.

We compete against other major U.S. airlines for pilots, aircraft technicians and other labor. Recently, there have been shortages of pilots for hire in the regional market and more pilots in the industry are approaching mandatory retirement age. Attrition beyond normal levels, or the inability to attract new pilots, could negatively impact our results of operations. The shortage of pilots and opportunities at other carriers could mean that our captains and first officers leave our airlines more often than forecasted. Additionally, the industry, including related vendor partners, has experienced and may continue to experience challenges in hiring and retaining other labor positions, such as aircraft technicians, ground handling and customer service agents, and flight attendants. The Company's or our vendor partners' inability to attract and retain personnel for these positions could negatively impact our results of operations, which may harm our growth plans. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions. This would result in increased overall costs and may adversely impact our guest experience and financial position.

Our executive officers and other senior management personnel are critical to the long-term success of our business. If we experience significant turnover and loss of key personnel, and fail to find suitable replacements with comparable skills, our performance could be adversely impacted.

Our success is also dependent on cultivating and maintaining a unified culture with cohesive values and goals. Much of our continued success is tied to our guest loyalty. Failure to maintain and grow the Air Group culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies. As part of this process, we may continue to incur substantial costs for employee programs.

The need to integrate Hawaiian’s workforce into joint collective bargaining agreements with Alaska's workforce presents the potential for delay in achieving expected synergies and other benefits or labor disputes that could adversely affect our operations and costs.

The successful integration of Hawaiian Airlines and achievement of the anticipated benefits of the acquisition depend significantly on integrating Hawaiian Airlines’ employees into Alaska and on maintaining productive employee relations. Failure to do so presents the potential for delays in achieving expected synergies and other benefits of integration or labor

disputes that could adversely affect our operations and costs. The process for integrating labor groups in an airline merger is governed by a combination of the Railway Labor Act, the McCaskill-Bond Act, and where applicable, the existing provisions of our collective bargaining agreements (“CBAs”) and internal union policies.

Under the Railway Labor Act, the National Mediation Board has exclusive authority to resolve representation disputes arising out of airline mergers. The disputes that the National Mediation Board has authority to resolve include (i) whether the carriers, through the merger, have integrated operations to the point of creating a “single transportation system” for representation purposes; (ii) determination of the appropriate “craft or class” for representational purposes, including a determination of which positions are to be included within a particular craft or class; and (iii) certification of the system-wide representative organization, if any, for each of our craft or class following the merger. Failure to resolve these disputes could result in delays in achieving expected synergies and other benefits of integration as well as adversely impact our operations and costs.

Pending operational integration of Hawaiian Airlines with Alaska, it will be necessary to maintain a “fence” between Alaska and Hawaiian Airlines employee groups that are represented by unions. During this time, we will keep the employee groups separate, each applying the terms of its own existing employment agreements unless other terms have been negotiated. Achievement of expected synergies and other benefits will be delayed until the time that operational integration is obtained.

TECHNOLOGY

We rely heavily on automated systems to operate our business, including expanded reliance on systems managed or hosted by third parties. Failure to invest in new technology or a disruption of our current systems or their operators could harm our business.

We heavily depend on automated systems to operate our business. This includes internally hosted technologies as well as third-party software solutions, such as our airline reservation system, website, telecommunication systems, maintenance systems, airline operations control systems, flight deck/route optimization systems, planning and scheduling, mobile applications and devices, and many other systems. These systems require significant investment of employee time and cost for maintenance and upgrades. Some of these systems are operated by government authorities, which limits our ability to switch vendors if issues arise. Failure to appropriately maintain and upgrade these systems may result in service disruptions or system failures. Additionally, as part of our commitment to innovation and providing an attractive guest travel experience, we invest in new technology to ensure our critical systems are reliable, scalable, and secure.

We continue to expand our reliance on third party providers for management or hosting of operational and financial systems. Should these providers fail to meet established service requirements or provide inadequate technical support, we could experience disruptions in our operation, ticketing or financial systems. All of our automated systems cannot be completely protected against events beyond our control, including natural disasters, computer viruses, cyberattacks, unexpected third party IT outages, other security breaches, or telecommunications failures.

Substantial or repeated failures or disruptions to any of these critical systems could reduce the attractiveness of our services or cause our guests to do business with another airline. Disruptions, failed implementations, untimely or incomplete recovery, or a breach of these systems or the data centers/cloud infrastructure they run on could result in the loss of important data, an increase in our expenses, loss of revenue, impacts to our operational performance, or a possible temporary cessation of our operations. In July and October of 2025, Alaska Air Group experienced IT outages that affected operations. Temporary ground stops were put in place for Alaska and Horizon. Following the outages, we brought in outside technical experts to diagnose our entire IT infrastructure. Although we are taking action to ensure the resiliency of our IT infrastructure, additional technology outages may occur in the future which could disrupt operations and may affect our results of operations.

Additionally, we rely on the FAA and its systems for critical aspects of flight operations. The failure of these systems could lead to increased delays and inefficiencies in flight operations, resulting in an adverse impact to our financial condition and results of operations.

We continue to monitor emerging technologies, including artificial intelligence, that may have disruptive impacts which are out of our control. We will continue to work with regulatory agencies and other air carriers to mitigate potential impacts of these technologies on the safety and security of air travel.

Failure to appropriately comply with evolving and expanding information security rules and regulations or to safeguard our employee or guest data could result in damage to our reputation and cause us to incur substantial legal and regulatory cost.

As part of our core business, we are required to collect, process, store and share personal and financial information from our guests and employees. Under current or future privacy legislation, both domestically and internationally, we are subject to significant legal risk should we not appropriately protect that data. Our increasing presence in international locations and our membership in the one world alliance exposes us to additional global regulations and risks. With our operations to Europe beginning in 2026, we will be subject to the European Union's General Data Protection Regulation, which imposes strict information security requirements and the potential for substantial non-compliance penalties. The regulatory environment may pose material risks to our business, including additional compliance costs, regulatory enforcement, and legal claims or proceedings.

In addition, we continue to expand our reliance on third-party software providers and data processors, including cloud providers. Unauthorized access of personal and financial data via fraud or other means of deception could result in data loss, theft, modification, or unauthorized disclosure. To the extent that either we or third parties with whom we share information experience a data breach, fail to appropriately safeguard personal data, or are found to be out of compliance with applicable laws, and regulations, we could be subject to additional litigation, regulatory risks and reputational harm. Further, as regulation of the collection and storage of personal and financial information continues to evolve and increase, we may incur significant costs to bring our systems and processes into compliance.

Cybersecurity threats have and will continue to impact our business. Failure to appropriately mitigate these risks could negatively impact our operations, onboard safety, reputation and financial condition.

Our sensitive information is securely transmitted over public and private networks. Our systems are subject to increasing and evolving cybersecurity risks. While we have not experienced a material breach of our systems and information to date, unauthorized parties have previously gained access to our systems and information, including through fraudulent misrepresentation and other means of deception. In June 2025, Hawaiian Airlines identified a cybersecurity incident affecting certain information technology systems. Upon identifying this incident, we followed our response protocols and immediately took steps to safeguard our network by disconnecting impacted Hawaiian systems and applications. Access for all systems was restored. Hawaiian's flights were not interrupted and continued to operate safely throughout our response.

Although we have protocols in place to address cybersecurity incidents, unauthorized access to or misuse of the personal and financial information of our guests and employees as a result of a cyber-attack could result in substantial costs for response and remediation, adversely affect our operations and our reputation, and expose us to litigation, regulatory enforcement, or other legal action. Additionally, a cybersecurity attack impacting our onboard or other operational systems may result in an accident or incident onboard or significant operational disruptions, which could adversely affect our reputation, operation and financial position.

Methods used by unauthorized parties are continually evolving and may be difficult to identify. Because of these ever-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices. However, the nature of these attacks means that proper policies, technical controls, and education may not be enough to prevent all unauthorized access. The continued evolution and increased usage of artificial intelligence technologies may further increase our cybersecurity risks. Further, a number of our employees have maintained remote or hybrid work arrangements, which increases our exposure to cyberattacks, and could compromise our financial or operational systems.

REGULATION

Changes in government regulation imposing additional requirements and restrictions on our operations and business model could negatively impact our revenue and operating costs and result in service delays and disruptions.

Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve substantial operational impacts and compliance costs.The FAA will periodically issue directives or other regulations regarding maintenance or operation of aircraft, which could result in temporary groundings, delays, or adjustments to operations and consequently could negatively impact our financial results. Additionally, the FAA is responsible for the efficient and safe operation of air traffic. Any inefficiencies in air traffic control, including the failure to modernize the air traffic control system in a manner consistent with the growth of air travel, could adversely affect our operations. Access to airport slots can also be limited due to government regulation. Obtaining access to these slots to support our growth plans may require significant financial commitments.

In recent years, U.S. regulators have issued regulations or mandates concerning airline operations or consumer rights that have increased the cost and complexity of our business and involve greater civil enforcement and legal liability exposure. Regulators have also proposed legislation that could negatively impact revenue associated with our loyalty program.

Similarly, legislative and regulatory initiatives and reforms at the federal, state, and local levels include increasingly stringent environmental, governance, and workers’ benefits laws. In some instances, it is impossible for us to comply with federal, state, and local laws simultaneously, exposing us to greater liability and operational complexity. These laws also affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs. New employee health and welfare initiatives with employer-funded costs, specifically those impacting Washington state, could disproportionately increase our cost structure as compared to our competitors. In recent years, the airline industry has experienced an increase in litigation over the application of state and local employment laws, particularly in California. Application of these laws may result in operational disruption, increased litigation risk and expense, and undermining of negotiated labor agreements.

Our operations are subject to federal, state, and international rules that require disclosures discussing the impact of environmental change. Increased governmental regulation involving aircraft emissions and environmental remediation costs may be difficult to implement and the cost of compliance, or failure to comply, could adversely impact our operations and financial position.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of our company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, or as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision is intended to apply to claims arising under Delaware state law and would not apply to claims brought pursuant to the Exchange Act or the Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in our certificate of incorporation will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to our company than to our stockholders.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Item 1A. "Risk Factors" within this document. This overview summarizes the MD&A, which includes the following sections:

• Year in Review - highlights from 2025 outlining some of the major events that occurred during the period, as well as forward-looking statements.

• Results of Operations - an in-depth analysis of our financial and operational results for 2025.

• Liquidity and Capital Resources - an overview of our financial position, analysis of cash flows, and relevant material cash commitments.

• GAAP to Non-GAAP Reconciliations and Operating Statistics - reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis, as well as operating statistics we use to measure operating performance.

Dollar amounts in the MD&A are generally rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to our actual figures represented in the tables below.

This section of the Form 10-K covers discussion of 2025 and 2024 pro forma results, and comparisons between those years. For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.

Items affecting comparability

As Hawaiian Holdings, Inc. was acquired by Air Group on September 18, 2024, its financial results were not reflected in reported figures in the periods preceding the acquisition date. As a result, the reported results for 2025 and 2024 are not comparable. To assist with the discussion of 2025 and 2024 results on a comparable basis and provide more meaningful discussion, certain supplemental unaudited pro forma income statement information is provided for 2024. Pro forma historical results were included with the Form 8-K filed on January 22, 2025. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.

Cybersecurity incident

As previously disclosed in a Current Report on Form 8-K filed on June 27, 2025, on June 23, 2025, Hawaiian Airlines identified a cybersecurity incident affecting certain information technology systems. Upon identifying this incident, we followed established response protocols and immediately took steps to safeguard our network by disconnecting impacted Hawaiian systems and applications. Access for all systems was restored. Hawaiian's flights were not interrupted and continued to operate safely throughout our response. We engaged the relevant authorities and experts to assist in our investigation and remediation efforts. Based on the results of the investigation, the incident did not have a material impact on Hawaiian's business, results of operations, or financial condition. For a discussion of our risk factors associated with cybersecurity threats, please refer to Item 1A. "Risk Factors" within this document.

YEAR IN REVIEW

Overview

We reported pretax income under GAAP of $146 million in 2025, compared to $545 million in 2024. On a pro forma basis, pretax income in 2024 was $228 million. Refer below for a more detailed discussion of the items impacting these results.

Single operating certificate

On October 29, 2025, Alaska and Hawaiian obtained a single operating certificate from the FAA, officially recognizing Alaska and Hawaiian as one airline under the Alaska certificate.

Labor update

In 2025, Alaska flight attendants, represented by the Association of Flight Attendants (AFA), ratified a new three-year Collective Bargaining Agreement (CBA). Hawaiian flight attendants, represented by AFA, ratified a three-year extension to their existing CBA. Horizon technicians, represented by the Aircraft Mechanics Fraternal Association (AMFA) ratified a four-year CBA. McGee Air Services employees, represented by the International Association of Machinists and Aerospace Workers (IAM) ratified a five-year CBA.

Horizon is negotiating with its pilots represented by the International Brotherhood of Teamsters (IBT), flight attendants represented by the Association of Flight Attendants (AFA), and dispatchers represented by the Transport Workers Union of America (TWU) for updated collective bargaining agreements. A mediator from the National Mediation Board is involved in negotiations with AFA and TWU.

With one exception discussed below, Alaska has begun negotiations for joint collective bargaining agreements (JCBAs) covering each represented Alaska and Hawaiian workgroup. The process for determining which union will represent the combined technicians and related workgroup remains ongoing and, as a result, JCBA negotiations have not begun concerning that workgroup. Alaska intends to initiate those negotiations after the representation issue has been resolved. At December 31, 2025, Transition and Process Agreements have been negotiated for certain workgroups which define the process for negotiating JCBAs and set forth interim agreements until a JCBA is reached.

Loyalty program update

In August 2025, we launched Atmos Rewards, a single loyalty program combining Alaska’s Mileage Plan and Hawaiian’s HawaiianMiles. We also launched a new premium Atmos Summit co-branded credit card. These launches drove significant new card acquisitions, consumer spend, and member redemptions. In September 2025, amendments to the Atmos Rewards co-branded credit card agreement with Bank of America became effective, resulting in changes to the separately identifiable performance obligations.

Irregular operations

In 2025, we experienced multiple operational disruptions. Technology incidents in July and October, involving both internal IT systems and an external third-party cloud services provider, resulted in temporary ground stops, flight cancellations and delays, and periods of irregular operations. These outages negatively impacted pretax earnings by approximately $50 million. In addition, a government shutdown in October led to FAA‑mandated flight reductions and associated cancellations. Although operations normalized quickly after the government reopened, the disruption negatively impacted pretax earnings by approximately $30 million.

Outlook

Looking ahead to 2026, we expect to continue to realize value from Alaska Accelerate initiatives and synergies from the Hawaiian integration, which remain on track or ahead of plan relative to our initial expectations. We expect capacity growth for the year of 2% to 3% compared to the prior year. Given the inherent uncertainty of the macroeconomic environment, we remain focused on disciplined cost management, strong productivity, and delivering on our initiatives.

RESULTS OF OPERATIONS

2025 COMPARED WITH PRO FORMA 2024

PRO FORMA OPERATING STATISTICS

Below are operating statistics presented on a pro forma basis, which assumes Hawaiian is included in both 2024 and 2025.

Twelve Months Ended December 31,

2024 As Reported

2024 Hawaiian Airlines (a)

2024 Pro Forma

Change

Consolidated Operating Statistics:

Revenue passengers (000)

RPMs (000,000) "traffic"

ASMs (000,000) "capacity"

Load factor

(1.0) pts

Yield

PRASM

RASM

CASMex

Economic fuel cost per gallon

Fuel gallons (000,000)

ASMs per gallon

Departures (000)

Average full-time equivalent employees (FTEs)

(a) The Hawaiian column reflects results prior to the consummation of the merger, comprising the period January 1, 2024 to September 17, 2024.

PRO FORMA OPERATING REVENUE

On a pro forma basis, total operating revenue increased $460 million, or 3%. The changes, including the reconciliation of the impact of Hawaiian on the combined results, are summarized in the following table:

Twelve Months Ended December 31,

(in millions)

2024 As Reported

2024 Hawaiian Airlines (a)

2024 Pro Forma

% Change

Passenger revenue

Loyalty program other revenue

Cargo and other revenue

Total Operating Revenue

(a) As provided on Form 8-K filed with the SEC on January 22, 2025, including certain immaterial reclassification and policy adjustments.

The table below presents operating revenue details by principal geographic region (as defined by the U.S. Department of Transportation), and the percentage change of certain operational results on a pro forma basis for the twelve months ended December 31, 2025.

Twelve Months Ended December 31, 2025

Increase (Decrease) vs. Pro Forma Prior Year

(in millions)

Total Operating Revenue

Passenger Revenue

RPMs

ASMs

Yield

PRASM

Domestic

Latin America

Pacific

Total Operating Revenue

Passenger revenue

On a pro forma basis, Passenger revenue increased $333 million, or 3%, as traffic increased by 1% and yield grew by 2%. Hawaiian passenger revenue improved meaningfully, driven by demand environment strength in the state of Hawai'i, as well as benefits from our integration synergies and commercial initiatives. Increased premium cabin revenues, corporate travel, and loyalty program award redemption on our airlines contributed to higher yield. Additionally, prior year results were negatively impacted by $150 million due to the B737-9 grounding in the first quarter of 2024.

Loyalty program other revenue

On a pro forma basis, Loyalty program other revenue increased $38 million, or 5%, due to higher commission revenue from bank card and third party partners, which was driven by increased consumer spend and incremental credit card acquisitions from the launch of the Atmos Rewards program and Summit Visa Infinite premium credit card.

Cargo and other revenue

On a pro forma basis, Cargo and other revenue increased $89 million, or 19%, primarily driven by increased revenue under the ATSA with Amazon following the addition of the four remaining contracted A330-300F aircraft to our cargo fleet in 2025. Increased international cargo volumes driven by the launch of our Seattle-Seoul route also contributed to the increase.

PRO FORMA OPERATING EXPENSES

On a pro forma basis, total operating expenses increased $467 million, or 3%. The changes, including the reconciliation of the impact of Hawaiian on the combined results, are summarized below. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

Twelve Months Ended December 31,

(in millions)

2024 As Reported

2024 Hawaiian Airlines (a)

2024 Pro Forma

% Change

Aircraft fuel, including hedging gains and losses

Non-fuel operating expenses, excluding special items

Special items - operating

Total Operating Expenses

(a) As provided on Form 8-K filed with the SEC on January 22, 2025, including certain immaterial reclassification and policy adjustments.

Fuel expense

Aircraft fuel expense includes raw fuel expense plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Alaska and Hawaiian previously used crude oil call options to hedge fuel expense. Alaska's fuel hedge program was suspended in 2023 and all remaining positions were settled in 2025. Hawaiian's fuel hedge program was suspended in 2025, with all remaining positions settled later in the year. No hedge positions remain open as of December 31, 2025.

We evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from counterparties for hedges that settle during the period and for the premium expense that we paid for those contracts. Management considers economic fuel costs to be the best estimate of the cash cost of fuel.

Twelve Months Ended December 31,

2024 Pro Forma

(in millions, except for per gallon amounts)

Dollars

Cost/Gal

Dollars

Cost/Gal

Raw or "into-plane" fuel cost

Losses on settled hedges

Economic fuel expense

Mark-to-market fuel hedge adjustments

Aircraft fuel, including hedging gains and losses

Fuel gallons

On a pro forma basis, aircraft fuel expense decreased by $166 million, or 5%. Raw fuel expense decreased 5% compared to pro forma 2024, primarily driven by lower per gallon costs on crude oil. Decreases were partially offset by higher fuel consumption consistent with increased capacity and higher refining margins associated with the conversion of crude oil to jet fuel.

Losses recognized for hedges that settled during the year were $4 million in 2025, compared to losses of $44 million in pro forma 2024. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement.

Non-fuel expenses

The table below summarizes our operating expense line items, excluding fuel and other special items, on a pro forma basis. Generally, increases to these expenses are driven by capacity increases and growth of the Company's operations. Significant or unusual changes compared to 2024 on a pro forma basis are more fully described below.

Twelve Months Ended December 31,

(in millions)

2024 As Reported

2024 Hawaiian Airlines (a)

2024 Pro Forma

% Change

Wages and benefits

Variable incentive pay

Aircraft maintenance

Aircraft rent

Landing fees and other rentals

Contracted services

Selling expenses

Depreciation and amortization

Food and beverage service

Third-party regional carrier expense

Other

Total non-fuel operating expenses, excluding special items

(a) As provided on Form 8-K filed with the SEC on January 22, 2025, including certain immaterial reclassification and policy adjustments.

Wages and benefits

The primary components of wages and benefits, including a reconciliation of 2024 on a pro forma basis, are shown in the following table:

Twelve Months Ended December 31,

(in millions)

2024 As Reported

2024 Hawaiian Airlines (a)

2024 Pro Forma

% Change

Wages

Payroll taxes

Medical and other benefits

Defined contribution plans

Pension - Defined benefit plans

Total Wages and benefits

(a) The Hawaiian column reflects results prior to the consummation of the merger, comprising the period January 1, 2024 to September 17, 2024.

On a pro forma basis, wages and benefits increased $442 million, or 10%, driven by increased headcount and higher wage rates across multiple labor groups in 2025. Increases were partially offset by nonrecurring wages from irregular operations following the B737-9 grounding in the first quarter of 2024.

On a pro forma basis, medical and other benefits expense increased $26 million, or 5%, driven by an increase in the cost of medical services and higher costs associated with our pilots long-term disability plan. Defined contribution plan expense increased $32 million, or 10%, driven by higher contribution rates for pilots and flight attendants.

Variable incentive pay

On a pro forma basis, variable incentive pay expense decreased $104 million, or 28%, driven by a lower payout percentage for the Company's Performance-Based Pay program compared to the prior year, partially offset by an increased wage base and inclusion of Hawaiian employees in the plan.

Aircraft maintenance

On a pro forma basis, aircraft maintenance expense increased $68 million, or 8%, primarily driven by incremental maintenance projects and material costs on cabin refresh initiatives. Also, Horizon engine maintenance increased due to additional coverage under its power-by-the-hour engine maintenance agreement during the year.

Landing fees and other rentals

On a pro forma basis, landing fees and other rental expense increased $186 million, or 20%, primarily driven by increased terminal rents due to higher rates and growth throughout the combined network. Increased volume of departures and landed weight, as well as nonrecurring favorable settlements received from certain airports in 2024 also contributed to the year-over-year increase.

Contracted services

On a pro forma basis, contracted services expense increased $51 million, or 9%, driven by higher rates charged by vendors as well as increased departures and passengers throughout our combined network.

Selling expenses

On a pro forma basis, selling expenses decreased $32 million, or 7%, primarily driven by lower marketing costs in comparison to pro forma prior year. Increased credit card vendor rebates driven by higher consumer spend also contributed to this decrease.

Depreciation and amortization

On a pro forma basis, depreciation and amortization increased $56 million, or 8%, primarily due to the addition of 23 owned aircraft to our fleet during the year. Incremental depreciation on ground service and other equipment also contributed to the increase.

Food and beverage service

On a pro forma basis, food and beverage service expense increased $28 million, or 8%, primarily driven by a 5% increase in departures and higher costs for food, food service supplies, and transportation.

Third-party regional carrier expense

On a pro forma basis, third-party regional carrier expense, which represents payments made to SkyWest under the CPA with Alaska, increased $29 million, or 12%, driven by incremental departures and block hours operated by SkyWest.

Other expenses

On a pro forma basis, other expense increased $24 million, or 2%, driven by higher professional services and software costs. Increases were partially offset by gains of $57 million from the sale of 12 B737-900 aircraft and certain nonrecurring passenger remuneration and crew hotel costs associated with the B737-9 grounding in 2024.

Special items - operating

On a pro forma basis, special items decreased $113 million, or 31%, driven by decreased integration costs associated with the Hawaiian acquisition and nonrecurring costs in 2024 associated with Alaska flight attendant retroactive pay, the retirement of Alaska's Airbus and Horizon's Q400 aircraft, and certain litigation matters. Contractual changes to Alaska flight attendants' sick leave benefits in 2025 partially offset this decrease. Refer to Note 15 to the consolidated financial statements for details.

Additional Segment Information

Refer to Note 13 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's results.

Alaska Airlines

Alaska Airlines reported a pretax profit, excluding special items and other adjustments, of $526 million in 2025, compared to $744 million in 2024. The $218 million decrease was primarily driven by a $407 million increase in non-fuel operating expenses, largely attributable to higher wages and increased variable costs, net of a $136 million decrease in variable incentive pay. These impacts were partially offset by $39 million in increased revenue and $185 million in lower fuel costs due to lower per gallon costs.

Hawaiian Airlines

Hawaiian Airlines reported a pretax loss, excluding special items and other adjustments, of $189 million in 2025, compared to a pro forma loss of $359 million in 2024. The $170 million improvement was driven by $370 million in increased revenue, the result of higher traffic and yield due to the optimization of Hawaiian assets in Air Group's combined network, demand environment strength in the state of Hawai'i, as well as continued recovery following the 2023 Maui wildfires. This amount was partially offset by increased non-fuel operating expenses of $192 million driven by increased capacity and variable costs, as well as higher variable incentive pay due to the inclusion of Hawaiian employees in the Company's Performance-Based Pay program.

Regional

Regional reported a pretax loss, excluding special items and other adjustments, of $1 million in 2025, compared to a profit of $111 million in 2024. The $112 million decrease was primarily due to $154 million in increased non-fuel operating expenses associated with increased capacity and variable costs. The decrease was partially offset by $48 million in increased revenue as incremental traffic mitigated the impact of a weaker yield environment.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2025, we had cash and marketable securities of $2.1 billion, excluding restricted cash. We also had 103 unencumbered aircraft, which can be financed if necessary, and an $850 million bank line-of-credit facility with no outstanding borrowings. We expect our current cash and marketable securities balance, combined with our available sources of liquidity, to be sufficient to fund our liquidity needs for the next 12 months. We expect to meet our liquidity needs for the foreseeable future using cash flows from our operations, our available sources of liquidity, and future financing arrangements. We discuss our sources and uses of cash in more detail below.

Operating cash flows

Cash provided by ticket sales and from our co-branded credit card agreements are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, aircraft fuel, payments to suppliers for goods and services, payments to lessors and airport authorities for leased aircraft, rents, and landing fees, and interest expense for our debt obligations. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.

In 2025, cash provided by operating activities was $1.2 billion, compared to $1.5 billion in 2024. Advance ticket sales and our co-branded credit card agreements are the primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, aircraft fuel, payments to suppliers for goods and services, payments to lessors and airport authorities for leased aircraft, rents, and landing fees, and interest expense for our debt obligations. In 2025, this includes more than $300 million paid to employees in recognition of their 2024 Performance-Based Pay program achievements. It also includes $98 million paid to Starlink associated with an agreement to provide in-flight connectivity on Alaska's fleet.

Investing cash flows

Capital expenditures to acquire aircraft, flight equipment, and other property and equipment is the primary use of investing cash flow. Total capital expenditures in 2025 were $1.6 billion, compared to $1.3 billion in 2024, excluding the acquisition of Hawaiian. We discuss our aircraft-related commitments in more detail below.

Cash used in investing activities was $1.6 billion in 2025, compared to $634 million in 2024. In 2025, property and equipment expenditures were $1.6 billion, driven by the addition of new aircraft as well as other equipment purchases. Net purchases of marketable securities were $190 million in 2025. These amounts were partially offset by other investing cash inflows of $155 million, including proceeds from the sale of 12 B737-900 aircraft. The difference compared to the prior year was due to a combination of factors. In 2024, we paid $659 million to acquire Hawaiian Airlines, net of Hawaiian's cash balances. We received $162 million in compensation from Boeing related to the B737-9 grounding. We also had $929 million in net sales of marketable securities, driven by the liquidation of Hawaiian's investment portfolio.

Financing cash flows

Cash provided by new financing arrangements is the primary source of our financing cash flow. Our primary uses of financing cash flow are payments of our debt service and finance lease obligations, as well as share repurchases. Refer to Note 5 to the consolidated financial statements for a detailed discussion of our debt balances, including a schedule outlining future payments.

Cash used in financing activities was $199 million in 2025, compared to cash provided by financing activities of $119 million in 2024. Cash used for share repurchases was $570 million, and debt payments were $519 million. These outflows were partially offset by proceeds from new financing arrangements, net of debt issuance costs, of $808 million. The difference compared to the prior year was primarily driven by additional share repurchases in 2025.

Indicators of financial condition and liquidity

The Company's liquidity target is between 15% and 25% of the trailing twelve months' revenue. This metric was elevated as of December 31, 2024 as it did not include a full year of Hawaiian revenue, but has returned to target levels as of December 31, 2025.

The table below presents the major indicators of financial condition and liquidity:

(in millions)

December 31, 2025

December 31, 2024

Change

Cash, marketable securities, and unused lines of credit (a)

Trailing twelve months' revenue

Liquidity as a percentage of trailing twelve months' revenue

(7) pts

Long-term debt and finance leases, net of current portion

Shareholders’ equity

(a) Excludes restricted cash of $28 million as of December 31, 2025 and $29 million as of December 31, 2024.

Debt-to-capitalization, including leases

(in millions)

December 31, 2025

December 31, 2024

Change

Long-term debt and finance leases, net of current portion

Capitalized operating leases

Current portion of finance lease liabilities (a)

Adjusted debt, net of current portion of long-term debt

Shareholders' equity

Total invested capital

Debt-to-capitalization, including leases

(a) To best reflect our leverage, we included our short-term finance lease liabilities, which are recognized within 'Current portion of long-term debt and finance leases' in our condensed consolidated balance sheets.

Material cash commitments

We have various contractual obligations that require material future outlays of cash. These obligations include the purchase of aircraft and other flight equipment, payments for Alaska's CPA with SkyWest, debt service payments, lease payments for aircraft and other property and equipment, costs for aircraft and engine maintenance, sponsorship and license agreements, and other miscellaneous agreements for services associated with operating and marketing our airlines. We also anticipate we may have material cash outlays associated with new technologies for the future of the business. Currently, Alaska has agreements to purchase sustainable aviation fuel (SAF) to be delivered in the coming years. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. We expect to satisfy these obligations using cash flows from our operations, our available sources of liquidity, and future financing arrangements.

Within the notes accompanying our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, refer to Note 5 for discussion of scheduled debt obligations, Note 6 for discussion of future minimum payments for operating and finance leases, and Note 9 for discussion of aircraft-related purchase commitments and CPA obligations. We are also obligated to make periodic interest payments at fixed and variable rates, depending on the terms of our debt agreements. As of December 31, 2025, these interest obligations are expected to be $254 million in 2026, $266 million in 2027, $230 million in 2028, $211 million in 2029, $162 million in 2030, and $217 million thereafter.

As of December 31, 2025, Alaska had firm orders to purchase 174 B737 aircraft, with deliveries expected between 2026 and 2035, and firm orders to purchase 12 B787 aircraft with deliveries expected between 2026 and 2032. Alaska also had rights for 71 additional B737 aircraft through 2035. Horizon had firm orders to purchase three E175 aircraft with deliveries in 2026. Alaska also has an agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by one aircraft in 2026.

Boeing has communicated that certain B737 and B787 aircraft are expected to be delivered later than the contracted delivery timing. This includes certain B737-8 aircraft contracted for delivery in 2025 and 2026 that have moved into 2026 and 2027, and certain B787 aircraft contracted for delivery in 2025 that have moved into 2026. B737-10 aircraft contracted for delivery between 2027 and 2035 may be delayed pending certification of the aircraft type. Management expects that other Boeing aircraft deliveries could be delayed beyond the contractual delivery. The table below reflects Boeing's communications.

Actual Fleet Count

Anticipated Fleet Activity

Aircraft

Dec 31, 2024

Dec 31, 2025

2026 Changes

Dec 31, 2026

2027 Changes

Dec 31, 2027

2028 Changes

Dec 31, 2028

Mainline Fleet:

B737-700 Freighters

B737-800 Freighters

A330-300 Freighters (a)

A321-200neo

Total Mainline Fleet

Regional Fleet:

E175 operated by Horizon

E175 operated by third party

Total Regional Fleet

Total Air Group Fleet

(a) A330-300 freighter aircraft utilized under the ATSA with Amazon.

GAAP TO NON-GAAP RECONCILIATIONS AND OPERATING STATISTICS

We are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

• By excluding certain costs from our unit metrics, we believe that we have better visibility into the results of operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. We believe that all U.S. carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management and investors to understand the impact of company-specific cost drivers which are more controllable by management. We adjust for expenses related directly to our freighter aircraft operations, including those costs incurred under the ATSA with Amazon, to allow for better comparability to other carriers that do not operate freighter aircraft. We also exclude certain special charges as they are unusual or nonrecurring in nature and adjusting for these expenses allows management and investors to better understand our cost performance.

• CASMex is one of the most important measures used by management and by the Air Group Board of Directors in assessing cost performance. CASMex is also a measure commonly used by industry analysts, and we believe it is the basis by which

they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.

• Adjusted pretax income is an important metric for the employee incentive plan, which covers the majority of Air Group employees.

• Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

• Although we disclose our unit revenue, we do not, nor are we able to, evaluate unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

• Adjusted capital expenditures includes certain amounts that are not classified as investing cash outflows within our consolidated statements of cash flows, but are viewed by management and other stakeholders as significant long-term investments in the business. We believe these adjustments provide a more complete view of our capital expenditures during the year.

We are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. Amounts in the tables below are rounded to the nearest million. As a result, a manual recalculation of certain figures using these rounded amounts may not agree directly to our actual figures presented in the tables below.

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

Adjusted Income Before Income Tax Reconciliation

Twelve Months Ended December 31,

(in millions)

Income before income tax

Adjusted for:

Mark-to-market fuel hedge adjustment

Losses (gains) on foreign debt

Special items - operating

Special items - net non-operating

Adjusted income before income tax

Pretax margin

Adjusted pretax margin

Adjusted Net Income Reconciliation

Twelve Months Ended December 31,

(in millions, except per share amounts)

Dollars

Per Share

Dollars

Per Share

Net income

Adjusted for:

Mark-to-market fuel hedge adjustments

Losses (gains) on foreign debt

Special items - operating

Special items - net non-operating

Income tax effect (a)

Adjusted net income

(a) Includes income tax effect of the adjustments in the tables above as well as one-time effects of the One Big Beautiful Bill Act which was              signed into law in the third quarter of 2025.

CASMex Reconciliation

Twelve Months Ended December 31,

(in millions, except unit metrics)

Total operating expenses

Less the following components:

Aircraft fuel, including hedging gains and losses

Freighter costs

Special items - operating

Total operating expenses, excluding fuel, freighter costs, and special items

ASMs

CASMex

Adjusted Capital Expenditures Reconciliation

Twelve Months Ended December 31,

(in millions)

Aircraft and aircraft purchase deposits

Other flight equipment

Other property and equipment

Capital expenditures

Adjusted for:

Financed aircraft acquisition

Proceeds from sales of aircraft and other equipment

Adjusted capital expenditures

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial position and results of operations in this MD&A are based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of our significant accounting policies.

Critical accounting estimates are defined as those that reflect significant management judgment and uncertainties and that potentially may lead to materially different results under varying assumptions and conditions. Management has identified the following critical accounting estimates and has discussed the development, selection and disclosure of these policies with our audit committee.

Atmos Rewards

Atmos Rewards awards points to members who fly on our airlines and our airline partners. We also provide other benefits, including Companion Fare™ certificates, priority boarding, bag fee waivers, and access to our brand and customer lists to major banks that offer our co-branded credit cards. To a lesser extent, points are also sold to other non-airline partners, such as hotels, and car rental agencies. Points can be redeemed for travel on our airlines or eligible airline partners, and for non-airline products such as hotels. Outstanding points held by Atmos Rewards members represent an obligation to provide future travel.

Points and the various other services we provide under Atmos Rewards represent performance obligations that are part of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price model to allocate consideration received to the material performance obligations in these contracts. Our relative standalone selling price models are refreshed when contracts originate or are materially modified.

At December 31, 2025, Atmos Rewards program had approximately 480 billion points outstanding, resulting in a deferred revenue balance of $2.9 billion. For the year ended December 31, 2025, Loyalty program revenue recognized from deferred revenue and recorded in passenger revenue was $1.3 billion. Determination of our relative selling price allocations require significant management judgment, impacting revenue recognition and liabilities that we carry on our balance sheet. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition or expenses. The most significant assumptions are described below.

1. The rate at which we defer sales proceeds related to services sold:

We estimate the standalone selling price for each performance obligation, including points, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of points awarded, and the number of points redeemed. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables.

2. The number of points that will not be redeemed for travel (breakage):

We estimate how many points will be used per award by employing a relative selling price method to allocate revenue from passenger ticket sales between air transportation and earned loyalty points. The portion attributed to points is deferred initially and recognized in passenger revenue upon redemption. We determine the estimated value of points using an equivalent ticket approach, considering historical data on award redemption patterns.

Our estimates are based on the current requirements in our Atmos Rewards program and historical and future award redemption patterns.

We review significant Atmos Rewards assumptions on an annual basis, or more frequently should circumstances indicate a need, and change our assumptions if facts and circumstances indicate that a change is necessary. We regularly update our breakage estimates for the portion of Atmos Rewards points not expected to be redeemed. These estimates are based upon statistical analyses of historical data. A hypothetical 1% change in the amount of outstanding points estimated to be redeemed would result in an approximately $17 million impact on annual revenue recognized.