Good morning ladies and gentlemen, and welcome to the Alaska Air Group 2022 Second Quarter Earnings Call. [Operator Instructions] Today’s call is being recorded and will be accessible for future playback at alaskaair.com. [Operator Instructions] I would now like to turn the call over to Alaska Air Group’s Vice President of Finance, Emily Halverson.

Thank you, operator, and good morning. Thank you for joining us for our second quarter 2022 earnings call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. On today’s call, you’ll hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported second quarter GAAP net income of $139 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $280 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found in our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs, excluding fuel. And as usual, we’ve provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today’s earnings release. Over to you, Ben.

Thanks, Emily, and good morning, everyone. Our performance this quarter continues to demonstrate the underlying strength of our business model and ability to adapt to a rapidly evolving external environment. We are in a period of record breaking demand, which is reflected in the solid Q2 results we reported this morning. Our 14%, second quarter pretax margin lands us near the top of the industry. A remarkable achievement given the fact that fuel expense is up 65% versus the same period in 2019. June, especially was a phenomenal month as revenue surpassed $1 billion, the highest monthly revenue recorded in our history. And we achieved this on capacity still below 2019 levels. Bank cash remuneration increased 40% in June, demonstrating the power of our renewed credit card deal and the strength of our terrific partnership with Bank of America. And lastly, we generated record revenue from our airline partnerships during the month, representing over 8% of coupon revenue, an exciting result, given that international and business travel haven’t fully unlocked yet. Meeting these historic levels of demand is both exciting and challenging. And we are rising to the occasion. June is proof of this. Marking an important turnaround in our operation as we were at or near the top of the industry in both on time performance and completion rate for the month with this trend, continuing into July. Our fundamental commitment to our guests and our people is to run a safe, reliable on-time airline. It’s that simple, and we will continue to prioritize those requirements as we move forward. I’m very proud of the turnaround our team of 23,000 has delivered over the past two months, and I want to extend my thanks to all of them. This is a complex industry that has become more challenging lately.…

Thanks, Ben, and good morning, everyone. My comments today will focus on second quarter results, our third quarter guidance, as well as progress on commercial initiatives. I want to start with a tremendous revenue result for the quarter. This was the highest revenue generating quarter in our history. Second quarter revenues totaled $2.7 billion demonstrating the swift change in environment compared to how we started the year. Second quarter revenue was up 16% on capacity that was down 8% leading to an impressive 26% increase in unit revenues. Very strong demand coupled with reduced industry capacity resulted in Air Group flying record load factors for all three months of the quarter, April at 87%, May at 87.5% and June finishing at 89.6%. Yields increased over 20 points from April to June, and we outperformed our own midpoint guidance for the quarter by three percentage points. I’m also excited to share that May marked the first time revenues from our business channels exceeded pre-pandemic levels, a testament to our partnership with Amex GBT American Airlines and the resilience of our small and medium business customers. We saw revenue strength across all regions and from a product perspective, premium revenues continue to accelerate from the first quarter. For this quarter, both first class and premium class revenues were up 30% with paid load factor up eight points in first and 16 points in premium versus 2019. We offer a fantastic premium product which aligns well with our long average stage length for our domestic carrier. Today, premium seats account for about one quarter of our total seats. And this mix will only continue to improve as we retire the A320s and bring on the MAX-9, which will have 11% more premium seating. As we shared with you at Investor Day, our loyalty…

Thanks, Andrew, and good morning, everyone. Our second quarter results highlight a dramatic turnaround in our financial performance, especially given the significant losses we experienced to start the year. Our adjusted profit this quarter in absolute dollar terms was higher than 2019 on record revenue for Air Group. Our teams have done a great job managing the revenue side of the ledger as the man returned quickly after this winter’s Omicron wave. More importantly, our operation has stabilized and we have returned to running an airline with high completion factors and high on time performance. Operational reliability and performance will remain our priority as we move forward into 2023 and towards single fleets at both Alaska and Horizon. Turning to second quarter results, our financial performance and strength remains solid. We ended the quarter with $3.8 billion in total liquidity inclusive of on hand cash and undrawn lines of credit. Year-to-date cash flows from operations are $1.2 billion, including tax refunds and free cash flow is approximately $600 million. Debt-to-cap ended the quarter at 50% within our target leverage range, debt payments are very manageable with approximately $100 million scheduled for Q3 and $50 million in Q4. CASMex was up 19% versus 2Q 2019 sequentially we increased capacity by 13% from Q1 while non-fuel operating costs rose 6%. Aside from performance based pay accruals, which as you know is a program we believe strongly in. There are two primary cost pressure areas, wages, both for our employees and from our third-party partners and airport rents and related expenses, as large capital improvement projects are completed across our system. These pressures we believe are consistent throughout the industry and not unique to Alaska. Obviously our unit costs were also highly sensitive to our capacity and the lower capacity levels we are…

Operator, we’re ready for the Q&A.

[Operator Instructions] And our first question comes from Ravi Shanker [Morgan Stanley]. Your line is open.

Thanks morning, everyone. I want to follow up on the yield commentary. I think your random [ph] guidance of 3Q is still pretty strong, but I think there was some indication that maybe in the recent weeks there’s been some slowing in trends. So, can you just help us quantify that? And you had said, you’re still going to run well ahead of 2019, but compared to the mid-20s kind of, where is that looking at the very tail end of the booking curve?

Yes, thanks for the question, Ravi. I think, what we’re starting to see now obviously is that bookings that are coming in are now coming in progressively for the fall period, which as we move out of the peak summer period. But just to reiterate demand is still extremely strong for July, August, and September. Our load factors are on average one to two points ahead of 2019. So, we’re just saying the last few weeks at these very peak yields, they’re just starting to flatten out and come down just a small tad. But again, it’s still extremely strong and as per our guidance, we expect a very strong third quarter unit revenue performance.

Got it. Would you say that that’s different from normal seasonality or is that consistent?

Yes, I think as seasonality as the get away from the peak summer period in the fall that’s, that wouldn’t be unexpected.

Understood. And just one follow up kind of on the at the Analyst Day, I think you guys had spoken about line of site to resuming cash return, obviously very choppy environment out there, but do you have any latest update on that?

.:

Very good. Thank you.

And our next question comes from Jamie Baker [JPMorgan]. Your line is open.

Hey, good morning everybody. Any update on tech sector contribution to corporate travel?

Yes, Jamie, I would say for us, at least that that tech has probably been the weakest just to be frank given our network. But as I also have shared in our prepared remarks, we are very excited about the restructuring of our distribution channels for business, with Amex GBT as well as joint contracting with American Airlines. But the tech sector still has a ways to go to recover. And so we look forward to seeing that happen.

Okay. And second and bear with me, it’s a bit of a throwback. I remember pre-bankruptcy American used to say, if we had Continentals pilot contract, our earnings, would’ve been, whatever X, I’m just wondering if you’ve run the pay rates from the American and United TAs through your model. I’m not suggesting the work rules in those TAs would be applicable for Alaska, but if you simply ran the MAX wage rates through your earnings model, what’s the impact on margins or ex-fuel CASM, if you’ve done the analysis?

Yes. Hey, Jamie, it’s Shane. Thanks for the question. We obviously are aware of sort of movements at other properties when it comes to this; we are at the table regularly almost weekly with our pilots. We’re looking forward to getting a TA with them as soon as we can. Yes, we understand the economic impact on the business and it’s totally fine. Our employees across the both companies need to be at market. And that’s where we’re ultimately going to take folks. I’m not going to share anything about the impact, because that sort of gets into like guidance that we haven’t provided, but we’re well aware of what it will mean in terms of the cost structure of the business.

Okay. It’s worth a shot. Thanks everybody.

Thanks, Jamie.

Our next question is from Andrew Didora [Bank of America/Merrill Lynch]. Your line is open.

Hey, good morning, everyone. Shane, Ben, two quick questions on cost here. One more housekeeping. Just what was the fuel hedge benefit in 2Q and what is implied in your 3Q fuel guide? And then just on 2023 potential CASM, if you’re on track for being basically, well fully staffed next year, if your capacity is up, say 10% in 2023 versus 2019, kind of where do you think CASMex shakes out in that type of scenario?

Yes. Thanks, Andrew. I hope Nat take the fuel hedge, and then I’ll follow back with the CASM question.

Hey Andrew. The 2Q impact on our, with our hedge book is about $90 million. And then for third quarter, it’s about $50. And again, that’s based on, we snap the curve on the 18th. So on Monday.

Great.

Yes. And on CASM into sort of next year. And we’re not going to talk a lot about like potential growth rates next year. I think it’s, we’re still in the middle of trying to plan for that. But as I mentioned in the script, the real pressure areas are wages and then productivity we’re carrying the same amount of FTs are maybe slightly more today than we had in 2019, but we’re a smaller company. And so there’s a lot of opportunity as we move forward to recover sort of more traditional productivity levels which will help us. I think Andrew, the big structural change is likely to be labor costs and wages across the industry. It’s not unique to us and we’ll participate in that. And so, that will probably be the headwind into next year. Certainly we’re flying less capacity today than we had prepared for and have costs for. And I think in 2022, it’s sort of a one for one exchange, had we flown 1% more ASMs. We would’ve seen 1% lower unit costs give or take on the margin. So just to give you some flavor of, where we had anticipated, we could be in terms of capacity versus what the practical reality of what we can fly is right now.

Got it. That’s really helpful. So then second question just for Andrew, you mentioned a little bit, on the corporate booking side, maybe your tech exposure is, might be hurting you a little bit there. And I guess, if I’m doing my math correct this morning, it looks like kind of your 4Q revenue growth might decel [ph] a little bit from 3Q to hit your margin outlook. So yes, with all that you said, and what’s going on in the macro, kind of just, how are you thinking about kind of, the demand trajectory from here between, across your network and then sort of your thoughts about broken down between corporate and leisure? Thanks.

Yes. I think again, Q2 had a very, very strong run up, RASM was up 15 in April, 25 in May and 35 in June. And I think we’ve sort of flattened out again as we’re nearly done with July and I’m looking at August is very, very strong. And even September as we sit here today. We are very pleased with what we see coming in. I think corporate, they’re a little bit choppy, but I think we’ve seen good strength there relatively speaking. And so again, where I sit today, demand and pricing environment, we still very, very good about the third quarter. And that’s what reflected in our guide.

And Andrew, I might just say, because I know you’re sort of inferring the pretax guide reiteration. I think we don’t know exactly what will happen with revenues in Q4 and it wouldn’t be prudent to assume that what we just experienced in July is the new normal. And so we’re just sort of being thoughtful about how we look at the rest of the year, but hopefully demand stays stay super robust and we can outperform those.

Yes. That’s perfect. Thanks so much.

Thank you, Andrew.

Thank you. We have a question from Mike Lindenberg [Deutsche Bank].

Oh, yes. Hey good morning, everyone. Andrew, I want to get back to just these, significant yield increases. I sort of think back, in years past when the demand environment was strong, we’d see lots of fair increases. The industry would put through and there’d be good successes. And I, my sense is that we really haven’t seen, meaningful increases. It seems like it’s a lot more about, just harnessing the power of, call it next generation revenue management systems and maybe distribution changes in how people purchase tickets and buying them off of their phones. And the impulse buys, you know, that’s driving it as well. And I’m just curious, if there is, maybe structurally changes in how, airlines are able to revenue manage up, right. Rather than just, across the board fair increases that we read about, where everybody moves $5 and $10 because demand is strong. Has there been a structural change there, or just anything that you can kind of tell us on how things have evolved and maybe this is sort of a pandemic, consequence your thoughts on that.

Yes, that’s a very interesting question. The thing that come to mind are two things excuse me. Yes, we’ve seen, pricing increases here or there, but I think, the team is leveraged heavily on inventory, bucket closure and being very, very active with that. I think secondly just to be frank, the one good thing about the pandemic is we are way more dialed in and way more granular on how we manage revenues every single day versus the weekly or whatever, because the volatility and revenue over the last two years has given us muscles and skills that quite frankly were there, but we didn’t use. So I think with the new pricing and inventory management systems with the volatility index for our teams, looking at things way more closely, I think you’re seeing better performance, better connection to the demand in the marketplace. So, I think those are all good things.

Okay, great. And then just the second question, and Ben, maybe this is to you, given your exposure in California, relative to your system, I’m curious about maybe any initial thoughts about that state court ruling as it pertains to duty times, and rest requirements for flight attendants. And again, historically I always thought the Deregulation Act sort of meant that federal rule would trumps state rule and you’re kind of opening up a Pandora’s box. It looks like at least for now it’s prevailing. Any thoughts on that, and I guess, the dust hasn’t yet settled, but potential impacts and unintended consequences maybe initial take? Thanks. Thanks for answering my questions.

Hey yes. Thanks, Mike. Yes. I think we’re going slow on that Mike, and we’re going to see how we head towards compliance on that and so we’ll take that step by step. And Kyle, I don’t know if you have anything to add on that. I know you’ve been working it.

Yes. Thanks Mike. Hey, you’re preaching to the choir about the Deregulation Act. We had the same hope as you; The Supreme Court didn’t see it that way. So our legal options are up and as Ben mentioned, we need to figure out what happens next.

And we have a question from Duane Pfennigwerth [Evercore ISI]. Your line is open.

Hey, thanks. As you look at your plan, and your recovery trajectory and your competitor’s plans, when do you think, assuming a stable macro like, when do you think supply catches back up with demand? It certainly doesn’t feel like the third quarter. You’ve already gotten a couple questions about the fourth quarter, and my guess is that’s just a plug at this point, but as you just think, supply demand and stable macro, when is the earliest shot at sort of supply catching back up with demand?

Duane for us at Alaska, right now, what we’re focused on is getting our single fleet transition done. And I think what we’re trying to do is, set ourselves up for 2023 and beyond. So that is job one for us, both on the mainline side and the regional side. We want to be really well configured heading into 2023. We talked about some headwinds in the economy. So, we’re not sure right now we’re really happy with demand and yields, but we really want to configure our company to withstand whatever external shocks are out there. But also set ourselves up for growth. So once we get to single fleet, then the opportunity for growth is going to be there for us. And so that’s how we’re looking at it.

Okay. It was a bit of…

Duane, I would just, I would just add, I think it all depends on how much demand is, is it 120% of normal today in capacity is negative 10%. It’s probably several quarters before it catches up. If it’s a 100% sort of normal demand in 2019 demand and for negative 10% capacity, it’s probably a couple quarters. So it seems like it’s to the right before we sort of fully catch up assuming a stable economic backdrop.

Yes. And then just could you comment a little bit on Hawaii? The level of recovery that you’ve seen there what the booking curve looks like and maybe just the competitive environment, what level of industry capacity has been restored there? Thank you for taking the questions.

Yes, Duane, I think Hawaii, while we don’t specifically talk a huge amount about regions. We feel very good about how we’ve constructed that obviously the industry has pumped more seats into that marketplace. So relatively speaking, there’s some headwinds there, but I’ll also say, as I said, in my prepared remarks, our premium cabin is off the chart in performance. And Hawaii is one place where our premium cabin is really performing, and helping mitigate some of those supply issues. So, overall very full airplanes, great demand and business as usual for now.

Our next question is from Helane Becker [Cowen]. Your line is open.

Thanks very much operator. Hi everybody. And thank you for the time. So, two questions. One is with respect to Horizon Air, you own that company. And you mentioned that you’re seeing issues with your regional providers as most other airlines are as well. So, how should we think about Horizon’s future over the next phase? I don’t know, one year to three years given the constraints that regional airlines have?

Hey, Helane, it’s Ben. Hey, thanks for the question. It’s a great question. Well, first, what I’ll say is, our regional network is critical to our success. So, all the Pacific Northwest markets we serve are just integral to our entire domestic network. So one it’s needed and required. I think, secondly, there’s no doubt there’s a pilot shortage in the industry and where you see it is in the regional industry. It’s down, like I said, 20% to 30%. So, we’re working again, this path to single fleet for us is one of our strategies to really try and mitigate that. And we’ve got a lot of plans with pipelines and pathways to mitigate, the pilot shortage on the regionals. But we’re working on it. And I think honestly, Helane, this thing is going to evolve. It continues to evolve every quarter with changes in the industry and we’re going to stay close to it. Joe, did you want to add anything?

No, I think, Helane, this is Joe with Horizon. There is some optimism. We have a new fleet order for Horizon that was announced earlier this week. And we’re excited about the timing of those deliveries over the next four years, that in addition to the Q400s going away, which will make us smaller in the near term, it allows us to sort of rebuild our fleet size alongside sort of in tandem with rebuilding our pilot staffing capability over the next few years. And there is a lot of interest in becoming an airline pilot. There’s never been a better time in history to become an airline pilot. We’re seeing that interest at both Horizon and Alaska with the strong applicant pool and some things that we’re doing at the sort of the top end of the funnel to encourage people to come in into the industry. And there definitely is interest.

That’s good to hear. And then my other question, my follow up question has to do with like the decline, and I don’t know, maybe Andrew, this is for you. Airline traffic tends to be good until it’s not good. And I’m just wondering, like, when would you see a decline in bookings related to an economic slowdown? When would that start to manifest itself?

Why, as you know, Helane, we look at this, every day, I think, sometimes it can get confusing here, because demand is obviously is really a big part of pricing as well. I mean, just to be clear. And so demand right now, as I’ve shared is very strong at very high yield increases over 2019. So, I think the first thing we’ll see is, maybe a slowdown in demand if, and when it comes and then we’ll start to obviously play with the yield levers. But there is a lot of room to go before we really come down and reach the floors of 2019. So, I would say as of today and this business changes we’re still seeing relatively good strong position and even our held yields in September are well into the high-20s as we sit here today.

That’s great color. Thanks, Andrew. Thanks everybody.

Thanks Helane.

Thank you. And our next question comes from Savi Syth [Raymond James]. Your line is open.

Hey, good morning, everyone. First off, I wonder if I could just clarify a previous answer on the 2023 potential. I know at Investor Day, I think you mentioned 2023 could be up 9% capacity type of outlook. Not that you gave specific guidance, but I’m curious given, the moves that you made here in the second half, and just kind of building in this caution and you have this transition going on, and the early part, what could be kind of a realistic range for 2023? Or what do you think you can deliver in terms of capacity for 2023, demand pending obviously?

Hey, Savi, its Shane, one thing that we’ve all learned over the last two years is most of our ability to forecast what’s going to happen is not very – not as good as it used to be pre-pandemic. So take some of this with a grain of salt. I think the two things that are going to be sort of critical, absent, whatever the economy is doing is just our fleet transition. Ben mentioned that we’re totally committed to that. Our ability to get replacement aircraft is sort of quickly from our supplier, and then just our ability to produce the right number of pilots and other staff for the operation. So, I think if anything, we’re going to be a little more conservative until we have several quarters under our belt of really good operational reliability really good staffing levels. I just think, over the last year or two, we’ve sort of assumed everything was going to work exactly as originally planned. And we’ve just, that was probably a two aggressive set of assumptions. So, I think in terms of aircraft units we’re going to have enough planes ultimately to grow quite a bit next year. I think what we decide to do with those is still up in the air and that’s a discussion we’re going to be having over the next couple of months internally. And obviously we know folks are interested in, and we’ll say more as we get clarity on what our 2023 growth plans are. But they’re probably somewhat moderated from what we were talking about at Investor Day.

That’s helpful. Thank you, Shane. And somewhat related one of basically, there’s a regional airlines that are in house is one of your competitors, you’ve got pretty big pay increases. And I know as you pointed out the regional capacity at Alaska is down quite a bit, and you’re doing a fleet transition there as well, that’s kind of bringing that regional fleet down. I was just kind of curious, if Horizon and I had to match some of those rates. What does that mean for kind of regional lift economics from a longer-term perspective, because it’s pretty much going where you’re – you can almost fly these with the mainline pilot?

Yes, Savi, it’s Joe again. I think no question there’s cost pressure for regional airline pilots. The American deal certainly stood out. I think there’s a lot of folks sort of watching to see what else transpires. We are working with our pilots to find some ways to improve retention at Horizon. But it’s definitely a changing dynamic for the industry right now. And I bet Shane having some additional thoughts.

Yes. And I – number one, I just a shout out to Joe, he’s done a phenomenal job leading Horizon. Savi, you may – you’ve been with us a long time. We actually had spent a lot of time repairing the regional business model pre-pandemic. We had gotten it back to be a profitable contributor to the whole. So it’s just the reality that it’s going a different direction. The costs of operating regionals are going to go up. In terms of what that means for a long-term strategy, I think it’s way too early to sort of tell or to share anything. What I will just reiterate is what Ben said, that the – we have a large part of our network that requires regional lift. We’re committed to those communities. We have not exited a community yet. We don’t want to, and so that aircraft E175 fits really well within our network whole, and we see a future for them. And we’re just going to have to figure out once we understand where everything ends up in terms of costs, how to make that a reasonable part of our network from economic standpoint.

Helpful. Thank you.

Thanks, Savi.

Our next question is from Dan McKenzie. [Seaport Global] Your line is open.

Yes. Hey, thanks. Good morning guys. So my question is sort of similar to Savi’s. It’s really a flex sub flex down question on supply next year. And I’m just curious, what percent of the fleet is fully paid for? Or if you’re looking to flex on supply is the easier move simply to accelerate Airbus retirements. And I guess I’m just trying to get some sense of the ability to flex down flex up under sort of a tougher economic backdrop?

Yes. Dan, a couple things, some color give or take, I think Q4 Airbus capacity is about 8% of total Air Group capacity. Half of that is the A320 fleet that we’re drawing down. And the remainder is A321 fleet, which will be with us next year. It’s about 4% of capacity. You could potentially move to retire that more quickly. And that’s roughly the amount of ASMs you’d be talking about. I think the flex up thing, that’s really a utilization question. And it gets back to how much sort of stress we want to put into the operation. And as I said, a couple questions ago, I think we were too aggressive in the spring. We’re going to be a little more conservative for the next several quarters. So I would suspect we work the utilization level a little more next year, but not try to maximize it. So there’s – I think there’s a pretty tight range of capacity that we’re going to end up in next year.

Hey, Dan, it’s Nat. One other point too, just on your question, aircraft paid for unencumbered, et cetera. We’ve got large part 60, 65 airplanes that are fully paid for, should capacity really go south because of the economy, et cetera. We could pull aircraft down with no problem at all and not have to pay leases on that, on any of those fully depreciated and owned.

Yes, well. Thanks guys. Next question here. I know Seattle is solid. I can see the competitive dynamic in that market. And just following up on an earlier question, on Hawaii and inter-California, the pre-tax margin outlook is really solid. But in the back of my mind, I’m thinking that you have a couple entities here that are still a drag on the system margin. So I’m just wondering if you could elaborate a little bit more on some of these entities?

Yes, Dan, I think in generally what you’ve seen us do is obviously bring back capacity, the quickest and the fastest to Seattle, and obviously exceeds. As far as the rest of our network and I presume you’re alluding to California. I think again the good news there is that our capacity has been down significantly and we are working to sort of bring that back. We have new corporate deals. We have new credit card programs. We have our Vice President in the bay area now who’s full time job. It is to make sure other parts of our network continue to get better. So we feel very good. We think there’s sort of only up from where we’ve been just to be quite frank as we continue to work it. The last thing I will mention, just because it’s becoming a theme here. I think for me personally, what 2022 has taught me is the best economic driver for Alaska Air Group, its loyalty and its guest is to set a financial plan and capacity and hit it. The amount of economic frustration and guest frustration when you set the plans and don’t do it is very, very large. So I think that’s why we feel very confident that whatever we grow next year that we will hit it and we will execute extremely well. And that’ll be the best cost and revenue adds up for Air Group.

Thanks guys. Great job.

Thanks, Dan.

Our next question is from Chris Stathoulopoulos. [Susquehanna Financial Group] Your line is open.

Hey, thanks for taking my question. So Shane, the 4% to 8% targeted growth through 2025, you outlined a few months ago. In light of everything that’s happening right now, operational issues for the industry, labor tightness, likely economics slow down, does the 10% in the new market still makes sense or the 70% from frequency and as peers, as you know are taking down out your capacity guides, but the moving parts at least for me still are a bit murky. So any color on what’s moving or what could move around with respect to that four buckets of growth you outlined up a few months ago? Thank you.

Yes, no, I think – thanks, Chris. I think, yes, the idea of – and I’m not saying we wouldn’t get into new markets. But obviously we’re most focused on recovering the pre-pandemic network, even though it’s been reshaped, but getting our California network backup or network back. Those are going to remain the priorities. That’s where the incremental capacity from here forward will go. And if there’s a smart market opportunity in there that’s new, we’ll definitely take advantage of it, but a little bit less biased towards doing that as we grow at a slower rate than we had anticipated.

Okay. And as follow-up, so as we think about exit rates for CASMex and your pretax margins for this year if you can, how are you thinking about volumes and yields here? Are you waiting the ladder more heavily as you plan for 2023? Thank you.

Sorry, Chris. That was on CASMex exit rate.

Yes. Well, it’s just we think about the CASMex, we have a CASMex guide. We have your pretax margin guide. I think a lot of investors here are looking at exit rates and the setup for next year and the extent, how are you thinking about the weight or the split between volume and yields? What are you emphasizing here in your projections? Thank you.

Got you. Yes. In terms of like the pretax sort of, yes. I think what we’ll see and what we anticipate we’re going to fly marginally more capacity in Q3 relative to Q2. And then I think Q4, it’s – there’s an implied guide out there based on our full year, but it’s still a little bit up in the air based on the economy and ultimately the Airbus and Q400 draw down. And I think those are going to be meaningful sort of determinants of how we exit the year on CASMex. As I had said before, I think there’s kind of a one to one relationship right now. If we can fly the capacity we’ll – one point of capacity should equal something like a point to reduced CASMex. I think, right now, as it stands here today, our plan is to hit all of those guides that we set forth. And it would take a pretty dramatic economic and demand turnaround for us to think differently about that right now. Because we’re still smaller than we were in 2019 and we think demand is higher than 2019. So I just think right now, there’s not a lot of bias to try to take further capacity down in Q4. We’re going to go and execute what we’ve just shared in terms of guidance.

Okay. Thank you.

And our final question comes from Scott Group. [Wolfe Research] Your line is open.

Hey, thanks for squeezing me in. I’ll just keep it to one. Shane, you talked about some puts and takes for CASMex next year. Just directionally would you think that CASMex is up or down in 2023 versus 2022?

I think assuming we get labor deals done that it very likely could be up.

Versus 2022?

I was thinking versus 2019 – versus 2022. I don’t know. It’s probably, it’s going to be highly levered against the growth rate, but there’s a chance it could be up. And I do anticipate us getting labor deals done. We’re not sharing sort of guidance around that, but our hope is that they are not in our cost base next year.

Okay. All right. Thank you guys.

Thanks, Scott.

Thanks, Scott. And thank you everyone for joining us and we’ll talk to you next quarter.

This concludes today’s conference call. Thank you for attending.