Good morning, ladies and gentlemen. And welcome to the Alaska Air Group 2024 Second Quarter Earnings Call. At this time, all participants have been placed on mute to prevent background noise. Today’s call is being recorded and will be accessible for future playback at alaskaair.com. After our speaker’s remarks, we will conduct a question-and-answer session for analysts. I would now like to turn the call over to Alaska Air Group’s Vice President of Finance, Planning and Investor Relations, Ryan St. John.

Thank you, Operator, and good morning. Thank you for joining us for our second quarter 2024 earnings call. Yesterday, we issued our earnings release along with several accompanying slides detailing our results, which are 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 $220 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $327 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 within 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 have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today’s earnings release. Over to you, Ben.

Thanks, Ryan, and good morning, everyone. As we closed out another strong quarter, we remain steadfast in executing on the key pillars that are paramount to our success, safety and operational excellence, financial strength, and taking care of our guests and employees. A few highlights for the quarter include achieving $2.9 billion in revenue, the highest quarterly result in our history, with nearly a $1 billion generated from our premium segments. Our 15.8% adjusted pre-tax margin will likely lead the entire industry, differentiating us from other domestic-focused peers in terms of profitability. We continue to prove that our ability to achieve industry-leading profits during the second quarter and the summer peak is unmatched, and at the same time, we are actively working to improve margins in the seasonally weaker Q1 and Q4. We’re happy to announce a record tentative agreement with our flight attendants, underscoring our deep appreciation for their vital role in our business. This includes a 32% increase in compensation, aligning with industry standards and reflecting our commitment to their futures. This would mark the completion of our last major labor contract, and pending ratification in August, it will conclude this labor cycle for us. Making investments in our people remains a focus, and we look forward to the stability and alignment that our labor contracts bring as we focus on being best-in-class operators. Our resolute focus on cost management and productivity across the business remains strong, driving a unit cost result that is among the best in the industry, down nearly 2% year-over-year. This was even better than our expectations, reflecting the dedication of our teams and carrying out our aggressive internal plans. We ran a safe, reliable operation with a completion rate of 99.5% or better each month this quarter, as our teams were focused on…

Thanks, Ben, and good morning, everyone. Today, my comments will highlight our second quarter results, as well as provide color on our third quarter outlook and capacity guidance. We achieved a record $2.9 billion in revenue this quarter, up 2% year-over-year. This was on capacity increase of 6%, resulting in unit revenues down 3.7%. Notably, this unit revenue result reflects the impact of $60 million in lost revenue attributed to the fleet grounding or 2 points of lost RASM. Throughout the quarter, unit revenues moderated as our and industry capacity reached peak growth in the month of June. Load factors also increased sequentially, reaching 87% in June. Our 84% load factor for the quarter, below the records of the past two years, saw outsized impacts from regions with double-digit capacity additions that pressurized both yields and loads more than originally anticipated. As you know, the past few years have demonstrated significant volatility in passenger demand, but I believe trends are stabilizing and should continue to allow us to optimize further. For the most part, booking patterns are similar to what they were pre-pandemic and business travel has largely returned. For Alaska, I still see opportunity in Front Cabins given guest preferences, as well as network refinement to match when and where guests want to fly. Our Premium Cabins continue to be the bright spot in our performance. First Class and Premium Class revenues were up 8% and 6% year-over-year, respectively, and continue to outpace Main Cabin revenue growth. Paid First Class load factor was 71% for the quarter, up four points on flat yields. As Ben mentioned, we are continuing to invest in premium seating. Late last year, we added a row of Premium Class to our Regional Embraer 175 fleet, and starting this fall, approximately 220 of our Mainline…

Thanks, Andrew, and good morning, everyone. We delivered a strong second quarter, which is now by a large distance our strongest quarter of the year. June has become our strongest margin month of the year and while margins were down slightly year-over-year, the gap to 2023 narrowed in each month of the quarter sequentially. Absent the impacts of the fleet grounding during the first quarter, our results in the first half of this year would have improved nicely versus 2023, an indication of the strong underlying business model we have created. And while we are seeing similar trends demand-wise as others and will experience a significant step up in labor costs, should our tentative agreement with our flight attendants ratify, our expectation is that our full year pre-tax results, again, adjusted for the impact of the fleet grounding, would be similar or better than 2023’s full year result of 7.5%. Turning to our second quarter, our adjusted earnings per share was $2.55, with what we believe will be an industry-leading adjusted pre-tax margin of 15.8%. Fuel price per gallon was $2.84, down from $3.08 in the first quarter. In particular, we were encouraged to see West Coast refining margins return to being on par with Gulf Coast during the quarter. Our total liquidity, inclusive of on-hand cash and undrawn lines of credits, stood at $3.1 billion at quarter end. Debt repayments for the quarter were approximately $50 million and are expected to be approximately $110 million in the third quarter. We continue to have one of the healthiest balance sheets in the industry, with debt-to-cap at 45% and net debt-to-EBITDAR at 1 turn. Share repurchases totaled $28 million this quarter, for a year-to-date total of $49 million and we are tracking to at least fully offset dilution for the year.…

[Operator Instructions] And our first question today will come from Jamie Baker with JPMorgan. Please ask your question.

Oh! It’s two in a row. I should be paranoid. So a deal related question, folks. So with Virgin, you disclosed you were speaking with justice and remedies were being bantered about. I’m trying to square that against what you said in the prepared remarks regarding the August 5th date. It sounds as if you’re not yet having constructive discussions. Rather, you’re at a wait and see mode, just as the market is, to hear back from justice by then. Is that how should I -- how I should incorporate Ben’s opening remarks?

Yeah. Jamie, look, we went through the entire process with the DOJ and all the documents and discussions have occurred. We’re in the homestretch here in two weeks and we’re waiting to see what DOJ comes back to us with. So we’ve made our case and we feel pretty strong about our case on being a pro-consumer and pro-competitive. So we’ll wait the DOJ’s decision and go from there.

Perfect. And then second, on a yield basis, what’s your paid Premium Class, not First Class, but Premium Class paid premium to traditional or average economy yields? I know it’s a metric you don’t usually disclose. I’m estimating it’s in the 15% to 20% range, just trying to find out if I’m close with that forecast.

Yeah. Jamie, I think, you are off the top of my head. I can tell the entire cabin is around 40% and about half of those are paid versus not. So, I think, you’re -- that’s sort of where we sit at that. So it’s a good 40% for the cabin over the Main Cabin and it’s been very encouraging.

Sure. But, and again, but your 40% includes elite upgrades, right?

Correct. Which about…

Okay.

There’s about half of them. Yeah.

Okay. Perfect. Just wanted to make sure I understood. Okay. Thank you both. Appreciate it. Take care.

Thanks, Jamie.

And we’ll move next to Duane Pfennigwerth with Evercore ISI.

Hey. Thanks. I don’t know if you have this metric, but overall competitive capacity in your markets, what was that growth in 2Q and how do you see that evolving in 3Q and perhaps 4Q?

Yeah. Duane, it was elevated, as you’re aware, and even in my prepared remarks, an area like Alaska long-haul, industry capacity was up over 20%, which is 12% of our network. But as you look through all of our hubs, looking forward in certainly September, October, seats are sort of flat to very low-single digits up. So, very much a significant reduction in the overall trajectory of growth that we see today.

Great. And sorry to stay with you, but you piqued my interest with the 65% book comment. Can you put that in context for us, revenue pacing of 65% at this point? How would that compare to, say, last year or maybe 2019?

2019, off the top of my head, we might need to follow up on that, but it’s -- this is in line. It’s normally anywhere in the mid-60s headed towards the higher 60s. So, it’s certainly right in line over the last year or two.

Okay. Thank you.

Thank you, Duane.

Thanks, Ben.

And our next question will come from Scott Group with Wolfe Research.

Hey. Thanks. So, Shane, I want to focus on the cost side a little bit. So, I totally get the year-over-year comps are harder on CASM and less capacity growth versus unit cost. I want to try and focus on just absolute cost for a minute. So if you just look like Q2 to Q3, you’re guiding to like a 10%, 11% increase just in absolute cost ex-fuel with capacity only up 5%, and in another word, it’s like almost $200 million. Help us bridge that to -- a little less than $200 million, help us bridge that. How much is pilot, sorry, flight attendant? How much is the other factors? And does that new level of cost stay, does that start to come down again as you go out to fourth quarter next year? Just any thoughts?

Yeah. Thanks, Scott, and good morning. In terms of like proportionality, I think, labor is going to be a third or so of the increase just on a percentage basis with the bulk of that being the flight attendant contract. We do have another much more modest snap up with our pilots that will occur in September, again very different in magnitude than last year, but the last rate adjustment we have in the current contract. The rest is really like there’s some shifting timing things. We had a significant credit on the airport cost side in the first half of the year that hit June. And as I noted in my prepared remarks, you’ve got new rates coming in with airports in July 1, and so we’ve got, a slightly lower base in Q2 that rolls over to Q3. Maintenance is similar. There’s some shifts from Q2 to Q3. I don’t think any of our costs are structurally different than any of our competitors and that’s -- we’ve talked about this quite a bit and we will continue to. We are going to ultimately maintain our cost advantage against the legacies and shrink the cost gap to the LCCs. We have lower costs than JetBlue today, we’re close to Southwest and we’re not letting Delta United or American encroach on us. And that’s what our expectation is for the balance of the year and as we go forward. The other thing I just want to make sure I note, I think, we had six consecutive quarters of productivity improvement. That will continue even though we’re having to adjust growth lower and it’s going to be a tailwind throughout the rest of this year and into next year. So, we don’t expect a high single-digit number to be a new normal for us at all I think it’s timing and some material step-up costs and labor rates which, I think, this is probably the last of this size as we close this particular negotiation cycle down if our flight attendants ratify their deal.

Okay. That’s helpful. And then so everyone is, all the airlines so far have talked about, hey, you look at August, September things start to flatten out on capacity and looks good. When I just look at current schedules, it looks like you guys reaccelerate in Q4. So I -- is that just a placeholder and you think that gets revised down for Q4 closer to flat and for you like you are in September and then any early thoughts about how to think about capacity in 2025?

Just on the Scott on the capacity, as you heard in our prepared remarks the year will be sort of sub 2.5%. What I’m expecting is that Q4 on a year-over-year basis will actually be a little lower than Q3 is what I’m seeing.

Yeah. In 2025 not ready to speak to one thing. I will share though as we expect to take fewer deliveries next year of aircraft and we do expect to retire more aircraft than we did this year. And so, I think, it’s going to -- we’re going to be judicious about capacity and really be thoughtful about the network and making sure we’re -- as I said in remarks this time and on the last call and I think the call before that really focused on expanding margins for the company as we go forward.

Okay. Thank you, guys.

Thanks, Scott.

And we’ll take our next question from Andrew Didora with BofA Global Research.

Hey. Good morning, everyone. Shane I was actually going to ask the 2025 capacity question as well, but I guess, kind of big picture given kind of the delivery delays. Is it fair to say that next year will continue to remain below sort of your medium to longer term targets of kind of mid-single-digit growth?

Yeah. Hey, Andrew. Good morning. I think that’s a fair way to look at it. I think we’re going to -- we really want the 10 and I think that certification is extending to the right. That’s really what the bulk of our forward order book is now positioned as is a MAX10 and I think there’s a lot of opportunity for us to continue to work and further optimize the network and so I think it’s fair that we would likely be below as we sit here today looking out our longer term sort of growth target in 2025.

Yeah. Got it. Make sense. And just thinking about it, in that type of growth environment, what we see unit costs kind of at that similar high single-digit level into the first half of 2025, because it doesn’t seem like much of these headwinds will ease by then or do you expect some sort of relief earlier than that? Thanks.

Yeah. Thanks. I really early for us to be thinking about or talking about 2025. What I would say is philosophically. No, we wouldn’t expect to see this level of elevated unit costs. It’s not been a part of our thinking about the business or the business model. It’s not going to become a part of our thinking about the business model to have high single-digit unit cost. And I think for the full year we’re going to be in a fair place and if you look at us against 2022 or against 2019 we’re no different holding our own on a unit cost basis against all of the industry and we’ll be very mindful about continuing to work on the productivity and other efficiency levers in the business and some of these things do begin to actually lap and they’re part of the base next year. And the last thing I just remind you, we had a lot of capacity out of Q1 of last year, so there’s going to be some noise in the comps even as we go forward in 2025.

Right. That’s fair. Thanks so much.

Thank you.

And we will move next to Dan McKenzie with Seaport Global.

Oh! Hey. Thanks. Good morning, guys. Going back to the premium on Economy Plus is the 40% Premium over Mainline Cabin across all stage links or is it reasonable assume it’s a little bit higher in the longer haul and a little bit less on the shorter all flights.

Hi, Dan. Yeah. That’s absolutely correct, and just as a reminder, we have Premium Class across our entire Regional fleet as well and our stage length is one of the longest domestically in the industry and so this is why Premium Class is such a huge asset for us and I think our Regional aircrafts probably fly longer than most other Regional aircraft as well. So that’s why the PC product is a really good fit for us.

Yeah. Of course. And then going back to San Francisco being 80% recovered, how much revenue does that account for and is it primarily corporate that hasn’t recovered or leisure, and then how we -- how are you thinking about the recovery cadence from here?

Yeah. Hi, Dan. My comments were specifically to business travel.

Okay.

And I think we have the network post-COVID position very well in California and as you look at our growth, certainly in the Bay Area has been very moderate just because we’re not going to get ahead of the demand curve there. And again, in Los Angeles, we’ve been focusing more on some of these Latin and high leisure markets, which have generating revenue done quite well for us. But again, we are on a low growth cadence here for the next little bit and what we will be doing is spending a lot of time, there’s sort of no autopilot here on network. We will be managing this dynamically through this year and into next year to ensure that we’ve got the airplanes in the right markets to maximize our revenues and to accommodate where our guests actually want to fly.

Yeah. Thanks for the time you guys.

Thanks, Dan.

And our next question will come from Ravi Shanker with Morgan Stanley.

Thanks. Good afternoon, everyone, and kudos for sneaking in that autopilot pun in there. Just on the Premium Cabin, kind of just given the new initiatives and the target to kind of raise the mix there, where is that incremental customer coming from? Is that converting from Main Cabin? Is that coming from oneworld partner airline? Is that coming from other legacy carriers, who’s that incremental customer?

Yeah. Thanks, Ravi. I think it’s sort of all of the above and I think we are being -- going to tell a lot more of a story around our premium product in general, both First Class and Premium Class. Our international partners can sell into that. And we’ve just seen, as I shared earlier, just a real appetite and demand for that Premium Class Cabin. I think as you look at the industry and you look at the lower end of fares, we meet those very well with our Saver Fare, but we are doing a much better job at actually selling the product we have. For instance, not too long ago, the only way you could buy Premium Class on us directly was to go into the seat map while you were choosing your seat and we would upsell you there. Now we have it fully on our front page matrix and then it will be coming to mobile here soon. So I think we have real merchandising opportunity to catch demand out there that perhaps folks haven’t seen it as much as we could have put it in front of them.

Ravi, it’s Ben. I just -- even higher level, we’re talking about not just a premium seat, but a premium experience. And I think this is what really differentiates us from our domestic competitors. From the time you check in, we’re innovating lobbies with automated backdrop. We have lounges. We have partnership with oneworld. We have a fantastic loyalty program, with great rewards. We have the premium product on board. We’ve got excellent food and beverage, local food and beverage. And so you look at the entire experience, we’re providing a premium experience and I think this is where the accretion comes from with the premium seats.

Understood. That’s a great color and look forward to experiencing that. Maybe as a follow up, I just wanted to confirm that, when you check your Net Promoter Scores and customer like booking behavior and everything, is everything back to normal after the January incident or is there still some lingering impact?

Yeah. I think as we actually even said last quarter, I think, the -- we’ve not seen any lingering impact or effect at all from the grounding in the first quarter.

Yeah. And I’ll just add, I’m so proud of how our company got through the first quarter. If you think about the how immense that incident was on January 5th and the grounding, how our company came out of it with losses in Q1 to this fantastic quarter where we’re posting in the street league margins, it’s really a tribute to all the people here. And I’m so proud of him and Ravi and no, I think, everything is behind us and we feel pretty but pretty good going forward in the future. And I mentioned in my script, in 2023 DOT data, we had the lowest customer complaints of any airline in the industry and I think that’s just a tribute of what our people are doing out there in our operation.

Wonderful. Thank you.

Thanks, Ravi.

We’ll move next to Conor Cunningham with Melius Research.

Hi, everyone. Thank you. Just -- as you -- just on the premium topic for a quick second, when you’re expanding the First Class, I’m just curious on how much CapEx is actually driving for you. I don’t know if you’ve mentioned that anywhere. And then it seems like a pretty quick turnaround time, just on the whole overhaul thing. Did you have any issues finding MRO capacity at all to do this retrofit? I’m just curious. Thank you.

Well, let me start. I think I said in my script, Conor, we just didn’t come up with this a month ago and put it in here. This is something we’ve been thinking about a lot. We’ve invested in our premium experience now for many, many years and this just doesn’t happen overnight. So, on the 800s, on the First Class seats, we have 12 in there. It’s a smaller airplane. But over time, we feel that we need to match with the rest of our fleet. So that’s where we’re going to 16. In terms of CapEx.

It -- Conor, it’s going to be roughly a $1 million an airplane and it’ll be spread out over a couple of years. It’s a new seat in the 800. The 900ER is easier. It’s just re-pitching and that will be done relatively quickly. And, no, we’ve had good allocation from our MRO partners available to us the last few years and good capacity looking forward.

Okay. That’s helpful. And then when I think about your historical seasonality of your business, you guys make the vast majority of your money in 2Q, 3Q. Ben, you mandated significant change in 1Q. As you think about the opportunity in fourth quarter, what are your learnings that you saw in 1Q that you could apply to the fall? Is it more of just an off-peak versus peak, changing of capacity? Just curious on how you’re thinking about evolving seasonality in general of your earning stream? Thank you.

Yeah. Connor, thanks for the question. I’ll let Andrew provide more detail. But for us, as you know, like we are, the Q2 and Q3, you’re right, we’re super, super strong, and we outperform mostly everyone. And Q1 and Q4, there’s just several weeks in both of those quarters where it’s weaker than the rest of the year and those are the ones that we are attacking. And like I said in my script, we try and control the things we can control and we’re going to point airplanes in places where we know we can make money. So with that, we made some -- actually some pretty significant announcements. Andrew, just a little more color on that.

Yeah. And Ben’s exactly right. And I think we are being more judicious than we’ve ever been before on the first -- on the fourth quarter and the capacity side and the days of week. But I just want to just remind folks that this is not just about network. I think, we’re nearly done with a three-year modernization of our digital platform. So conversion rates, what we’re able to sell, how we’re able to sell. We just think there is more merchandising opportunity. You heard that we’ve re-racked out the whole sort of the loyalty program and how we’ve rolled that out and looked at redemptions domestically, globally. And the awards, we’re monetizing more of the cabins and seats in front of the exit row, excuse me, and then also the exit rows and Premium Class. So I think we’re looking at the entire portfolio of being very exact and disciplined on the network side. But we also have numerous revenue initiatives offering guests better product and service and more options and I think we’re going to just see those continue to improve.

Appreciate it. Thank you.

Thanks, Conor.

Our next question comes from Mike Linenberg with Deutsche Bank.

Oh! Hey. Good morning, everyone. I want to just go back. You call it out in the guide about this moderating domestic revenue environment. I think, Andrew, you kind of mentioned it, I felt like I heard it a few times. How much of it is pure macro versus just supply demand out of kilter? And maybe another way of asking it is that, we see volumes domestically running up 6%, 7% right now. But I think the prevailing view is that maybe a much greater portion of that is stimulated demand. Like what’s your -- when you look at your forecasting and where you see things, what do you think organic demand, like true demand absent any sort of stimulation or are we really starting to see some macro softness? And then I have a follow-up.

Yeah. Hey. Great. Great question. What I would say is this. Firstly, there’s just the general population and then there’s flyers and people who travel, and I do think there’s a little bit of a difference there. I do think on the lower end of fares, just even the last 28 days, we’ve seen more of a shift out of OTA mix into direct, which sometimes they’re the lower fares, so that would seem that there’s softness there. But I think mostly for us, it’s just really a capacity story. As I said, we grew seats 8% in First Class and our revenues went up 8% in the second quarter.

Yeah.

The Main Cabin was a little bit of a different story. So I do think that in general demand if we -- the adjustments we’re making to our capacity, I think, will go a long way of getting equilibrium there.

And Mike just…

Okay. Yeah.

Just to remind you on that, if you look at our -- again, what counts as the bottomline, if you look at our margin, and if you look at ex the impact of 1282, our full year margin, even with all the incremental cost step ups that we have, it will be the same or better for 2024 than it was in 2023. And I think that’s a remarkable achievement and I think it’s a tribute of the business model we have and the investment we made in premium. And so I do think there’s a lot of resilience there and that we’re attracting the right set of customers and we have enough segmentation in our product to win and so we feel pretty good about where we are and where we’re going.

Great. And then just a quick one on now that you’re well established as a oneworld partner, although maybe you’re still saying, you would probably tell me that you’re still maybe in the third or fifth inning, not the seventh. What are you seeing like the contribution and it may even be what is driving you to go from 25% to 28%, because someone who comes off a BA flight and maybe is connecting to, I don’t know, Portland or Medford or wherever, maybe even the State of Alaska, they want that front seat product. So if we think about it, I don’t know if it’s load factor points or whatever that you’re getting now that you’ve synced up very nicely. I mean, you gave some numbers on how much more you’re selling in the oneworld ecosystem. What is that driving on your own…

Yeah.

… metal? Thanks for taking my question.

Yes. Yeah. That’s a great question. And I would just say in the scheme of size, if you will, that the number of international connections onto our network, given our domestic size and what we do carry is not a huge component of it. I think the oneworld is really our loyalty members being able to carry their elite benefits globally and staying within the oneworld system and Alaska’s loyalty system is the real upside. But nonetheless, to your point, as we continue to put more First Class seats on our aircraft, as well as Premium, that opens up more opportunity for all the long-haul connections we do to provide them and many of them also choosing premium seats up their long trip.

Very good.

Andrew, it’s 7%. What percentage of revenues?

Total revenues from the partners is about 7% of the mix.

Does that include…

… again.

Andrew, is that your Regionals as well or is that Non-Regional connections?

Sorry, I think, Mike, he’s just saying 7% of our revenue is enabled by our partnerships. He wasn’t -- we weren’t talking Mainline versus Regional. So that’s coming from our oneworld and other partners.

That’s perfect. Perfect.

Yeah. And I think it’s going to grow from there. And to your point, it’s a high value traveler, generally speaking.

Yes. Yes. Very good. Thank you, everyone.

Thanks, Mike.

We’ll hear next from Savi Syth with Raymond James.

Hey. Good morning. If I might, the 3Q cost bridge chart was very helpful. I’m just curious what in there might have been incremental versus what you were thinking before and just along that the line of questions that you’ve gotten so far on the cost side. I think, historically, I think the thinking was, if you grew about 5% or a little bit higher than that, you can keep unit costs flat. Is that relationship still holding?

Yeah. Hi, Savi. Thanks for the question. Yeah. I think in terms of the second half forecast, what has changed from like earlier in the year, certainly the growth rate coming down and us holding resources and sort of having been configured to fly more, that -- it’s not like we haven’t had line of sight to that, but it’s certainly different than our original expectation for the year. Our labor deal was somewhat higher in terms of the final negotiated compensation than we had been thinking about and planning for not excessively, but it was a higher deal than we had originally thought at the beginning of the year it might be. And then the rest is really some timing shifts of airport credits and how those land relative to the rest of the year and some shift in maintenance timing. So, I think, the shifting of expenses happens kind of every year. It’s hard to predict. And in this year, it just happened to be relatively significant on the maintenance side and airport credit side. The thinking in terms of leverage against growth, we have not changed our thinking. If we grow 4% or 5%, we would expect unit costs to be flattish. And in fact, I’d like to do even a little better than that over time. That is still a philosophy that’s intact and alive at Alaska.

That’s helpful. Thanks, Shane. And finally, on the new product launch, you’re not taking away seats, but in fact, you might be actually adding a few seats. So is that -- should we think of that being kind of a unit cost and unit revenue guy as we kind of look to the next 18 months or so?

Absolutely. And I think I mentioned that, I think, it was the last couple of words in my prepared remarks that, yeah, we’re not losing seats one fleet [ph]. We’re adding two seats to the other. We’re going to get premium revenue into all of those seats and we’ll have slightly more seats to spread costs over.

Appreciate it. Thanks.

Thanks, Savi.

Our next question will come from Tom Fitzgerald with Cowen & Company.

Hi, everyone. Thanks for the time. Most of it might have been answered and maybe this is too granular, but I’m just curious on the new routes into Mexico. Is -- do you have like -- is that all just pretty much U.S. point-of-sale leisure or do you have -- do you participate in any of the VFR traffic that goes back and forth between the two countries? Thanks very much.

Yeah. Hi, Tom. Most of it, if you look at the cities, it’s just expanding our core U.S. leisure side point-of-sale, which have done well. And again, the good thing about these is that these are 100% new revenue sources and while we trim capacity in other areas, this, again, you’ll see the 18 routes. This is -- a lot of this doesn’t start until December or even January and a lot of this is focused on the depths of the winter in the first quarter. So we feel really good about these changes.

And Tom, welcome to the earnings call. Thanks for being on. And we won’t do this again, but please send our best to the new, I guess, managing director and mentor, Helane, who will miss on these calls for sure.

You got it. Thanks very much, everyone.

Thanks, Tom.

Our next question will come from Stephen Trent with Citigroup.

Yes. Hello, everybody, and thanks for taking my question. Just a follow-up, if I may. Appreciate the color on the premium increase, and forgive me if I miss this, but do you see any parallel adjustments that you might make to your app, or for example, any pivots in your thinking on changes in the distribution channel as you increase that premium? Thank you.

Yeah. Steve, that’s a great question. And as I shared earlier, we now have on our website full category of premium. And our web, excuse me, our app will be updated here in the next month or so, as well as some other significant changes to our app. So we have upside in distributing our products through our app, which is increasingly where bookings are going.

Oh! Okay. I appreciate that, Andrew. And just one other quick question. I appreciate what you have mentioned on the Boeing deliveries and what have you. Over the long-term, do you see any possibility that perhaps the Embraer E2 could potentially play a bigger role in your fleet, depending on what happens with supply from the larger OEMs?

Hey, Steve. I don’t have -- we’re not looking at that aircraft today. I think we’re really excited about the order book we have with Boeing. We want to get the 10 into the stable of aircraft and that’s really our focus. We’ve got a great arrangement and deal with them. They do a great job for us and we’re really focused on executing that fleet order over the next several years.

Okay. I appreciate that and thanks for the time.

Thanks, Steve.

Thanks, Steve.

And our next question comes from Chris Stathoulopoulos with Susquehanna Financial Group.

Good morning, everyone. Thanks for taking my question. I want to go back to, I think, it was Duane’s question on competitive capacity. You did give, I think, a number for 2Q and 3Q. I think you said that you would expect, I’m not sure for 3Q whether you were referencing that competitive capacity drop versus your network or sort of domestic as a whole. I’m just trying to kind of localize as we think about potential opportunities for yield acceleration, whether it’s broad-based or we look at your network map and see potential opportunities around hubs and things like that? Thank you.

Hey, Chris. It obviously varies by carrier, by hub, I will say, at the higher level. The amount of competitive increase in seats in our core hubs at the highest level is extremely low single-digit on average as we go into September and October, and we continue to see adjustments to the further out. So, I would just say, they’re somewhat flat to marginally up.

Okay. And the second question, I realize you don’t want to speak to or explicitly give any color on capacity here for next year, but as we think about the goal of expanding margins here and you have fewer deliveries, so should we think about the pieces of capacity, departure stage and gauge as sort of more stage-engaged, dependent or positive or accretive for next year? I just want to understand sort of at a high level how you’re thinking about that because each of those pieces do come with different margin profiles? Thank you.

Yeah. Hey, Steve. Look, I think -- sorry, I think, it’s -- I think the growth next year is likely to be really similar to the number of units we take on. We have one of the longer stage lengths in the domestic industry because of where we fly off of the West Coast. Most of the places people are going are three hours, four hours, five hours, six hours away, which is also one of the reasons our segmentation and premium configuration works so well for us. The real next opportunity for gauge growth is when we have the MAX10 come in and that seems to be a --it’s not next year, so maybe in 2026 we get to see a benefit from that, but we are excited to see a pickup in gauge once we start to take the 10, probably, in 2026.

Okay. Thank you.

Thanks.

Well, thanks, Chris, and thank you, everyone, for joining us. We’ll talk to you next quarter.

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