Alaska Air Group: The Glue is Coming Unstuck

Disclosure: I am short ALK via put options. This is not investment advice. # Why Loyalty Programmes Matter Airlines only fly planes to get to those air mile profits. It's ungodly. Alaska Airlines proudly boasted their loyalty programme is worth $12BN when their market cap was $7BN. These cash machines are also the stabilisers that volatile airlines need. ALK has $2BN of debt secured against theirs. So if the programme starts to behave unexpectedly, investors should pay very close attention. If this behaviour is not openly discussed and disclosed, but is eased into financial statements without comment, investors should get away first and ask questions later. # The Sparkling Diamond: Credit Card Partnerships The crown jewel in any loyalty programme is the credit card partnership. Alaska is tied to Bank of America. Here's how it works: Bank of America uses Alaska's miles to induce customers to use their credit cards. When a customer earns miles, Alaska bills Bank of America immediately. The exact numbers aren't disclosed, but approximately 1.25 cents per mile is probably what BofA pays. When Alaska receives this cash, here's how it's accounted for: The airline calculates the fair value to fulfil this mileage balance - not the cost, the fair value. Per Alaska's 2023 10-K (the last time it was disclosed), this is about 0.75 cents per mile. This goes into deferred revenue as an issued liability. The remaining 0.50 cents? That goes straight into "Loyalty Other Revenue" - i.e. profit - because there are no further obligations beyond the 0.75 cents. This is a stable, predictable relationship. I calculated the ratio of liability issued to loyalty revenue for Alaska and peers going back to Q3 2022. Different airlines have different ratios depending on their accounting policies, but the relationship within each airline is remarkably consistent. Until Q2 2025. # The 10σ Anomaly |Period|Alaska σ|United σ|Delta σ|American σ| |:-|:-|:-|:-|:-| |Q3 2022|0.58|0.25|1.10|0.27| |Q4 2022|1.06|1.96|1.21|1.07| |Q1 2023|0.40|0.45|0.26|0.19| |Q2 2023|0.23|1.91|1.19|2.38| |Q3 2023|0.11|0.35|0.42|0.28| |Q4 2023|1.01|0.11|1.58|1.54| |Q1 2024|1.25|0.24|1.17|0.31| |Q2 2024|0.47|0.32|0.18|0.25| |Q3 2024|0.84|0.68|0.77|0.41| |Q4 2024|1.68|1.22|0.18|0.48| |Q1 2025|1.41|0.12|1.06|0.28| |Q2 2025|**10.40**|0.01|1.33|0.48| |Q3 2025|0.16|0.12|1.23|0.14| In Q2 2025, Alaska's issuance-to-revenue ratio deviated 10.40 standard deviations from its historical baseline. This isn't the universe ending though statistically it would be. This is a ratio that has completely broken down. There is $180M of liability (points issued) with no corresponding loyalty revenue. The points appeared on the books, but the profit that should accompany them did not. The temptation to grasp at Alaska's recent purchase of Hawaii Airliners and some re-balancing of the two programmes is irresistible. But where is the expense recorded? Oh perhaps in the transaction accounting? Not there either. Now look at the other side of the balance sheet. Receivables from Affinity Card Partners (read: Bank of America) jumped from $111M to $306M in a single quarter. Something has happened here. Some similar transactions have occurred. You would think this crunching disturbance of norms would demand disclosure. There is none. # The Sneaky Restatement That's not all that happened in Q2. Buried in the notes of the Q2 2025 10-Q, we find this rather vague statement: Every character in that note is drafted to make you think: "This doesn't concern me." And if you did dig, you'd have a hard time finding what changed. It's two pages away from the affected number. What changed? They restated Q4 2024 receivables from Affinity Card Partners upward by $58M - a 49% revision. Why? No explanation. Just... cute. # Where Did the Money Go? Let's see what washed out in Q3. Receivables from BofA dropped by $129M. You'd think that flowed nicely into cash as expected. But look at the operating cash flow statement. It's not there. No corresponding inflow. Instead, $120M appeared in "Other Non-Current Assets." What happened here? As an investor, I was confidently awaiting $120M in operating cash flow. Instead, all I know now is that as a non-current asset, there is no expectation that any money will be received for at least twelve months. No explanation whatsoever. # Partner Redemptions Are Spiking Too There's more trouble in this loyalty programme. When customers redeem miles, they can use them on Alaska's own aircraft or on partner airlines. On Alaska's own metal, the marginal cost approaches zero if that seat would have flown empty anyway. But partner airlines like Qatar and Cathay Pacific want to be paid in actual cash. In Q2 and Q3 2025, something extraordinary is happening. The ratio of partner airline redemptions to Alaska redemptions is shifting dramatically upward - which completely changes the economics of the mileage programme. Partner redemption went from 13.5% of total in 2024, up by 400bp for the same period in 2025. If this is a step up or more significantly, a trend, then that is a material input to the $12BN. |Metric|Q1 2025|Q2 2025|Q3 2025| |:-|:-|:-|:-| |BofA Receivables|$111M|$306M|$177M| |Other Non-Current Assets|\-|$316M|$436M| |Issuance/Revenue Ratio|Normal|10.40σ|Normal| The Q2 spike appeared. The Q3 "resolution" moved money sideways rather than into cash. The ratio reverted as quickly as it broke. This is not how normal business operations look. The absence of any disclosures point in the opposite direction. # What This Means I'm not alleging fraud. I'm pointing out that: 1. Alaska's loyalty economics produced a statistical impossibility in Q2 2025 2. The corresponding balance sheet movements cannot be reconciled from public disclosures 3. A $58M prior-period revision was buried with deliberately vague language 4. $120M migrated to non-current assets without explanation 5. Partner redemption economics are shifting materially A loyalty programme worth $12BN, securing $2BN of debt, with a 10σ accounting anomaly and no management commentary. That demands explanation. Alaska hasn't provided one.