H2 Aviation Summit 23 - Opening Keynote: In Conversation – Diana Birkett-Rakow & Val Miftakhov

Sounds great. Thanks for having me, Val. Your background's a lot cooler than mine, but I do have airplanes. There you go.

Sure. Well, thanks for having me, Val, and you all are fantastic partners. We need this technology for the future, so I'm thrilled to be in this conversation with so many people on the summit that I know are passionate about this subject as well. Just by way of context, a little bit about Alaska Airlines' sustainability strategy. We've been on a sustainability journey for a long time. We've actually been reporting our greenhouse gas emissions since 2009 and tracking to a series of goals. The most recent prior to our current goals sunset in 2020, so it gave us an opportunity to look at what was that next set of sustainability objectives and how are we going to get there. And it was at a time that people were really talking about net zero goals, and the industry was gravitating around, or many people in the industry were gravitating around, a 2050 net zero goal. And our board, we were in conversation with our board about how to set goals, and our board said two things: one, 2050 is a long time away, we need something that's a little bit nearer and push ourselves to be bold; and second, don't just set that long-term goal, set something that's nearer term. So we ended up with a series of objectives that now guide our strategy. One is a net zero by 2040 goal, and the second one is a set of interim goals for 2025 across carbon, waste, and ecosystems. And we can talk a little bit more about why that breadth, but knowing that carbon is our main, or greenhouse gas emissions are our main environmental impact or our most significant environmental impact, one of the goals we set for 2025 is to be the most fuel-efficient US airline through that period and by that date, so that we've got the internal discipline to drive to control what we can control while we are setting that long-term target. And then the last thing we did in conversation with the board is instead of just saying okay, 2040 sure, we'll figure out how to get there as we go, we set a five-part path. And this is where ZeroAvia's technology comes in. The five parts are: operational efficiency, which is the foundation, that ethos to control what we can control; fleet renewal, so we're bringing the Boeing 737 MAX aircraft into our fleet, which is about 25% more fuel efficient on a seat-by-seat basis than the aircraft they replace, so that takes another dent; sustainable aviation fuel, which maybe we'll talk about a little bit more, which is the best near and medium term for large aircraft especially opportunity; new technology, particularly electrified aircraft, and ZeroAvia is certainly the signature part of that strategy; and then we do have that fifth part, which is carbon removal technologies, only as needed to close the gap to our target, because there is so much uncertainty in the technology evolution and timeline of some of those other steps. So hydrogen electric propulsion fits squarely into that five-part path. And one of the things, as much as there's sort of this probably particular American desire to simplify down to one thing, it's just not a one-size-fits-all strategy for this industry. We've got to have multiple strategies and we've got to execute on all of them at once.

Yeah, it's a great question, and that's partly why it's an all-of-the-above strategy. Certainly for when we fly narrow-body aircraft and regional aircraft, but for narrow-body or for wide-body, SAF is going to be the opportunity for the next couple of decades. But we fly a ton of regional and somewhat shorter-haul, medium-haul routes and connect throughout the state of Alaska, throughout the West Coast, smaller communities, larger communities. And that's where, even in the next couple of decades, smaller regional aircraft and hydrogen electric propulsion are going to be really critical. What we have to solve for is how do the infrastructure and how do those technologies sit alongside each other and operate efficiently at an aircraft at an airport. But particularly diving right into smaller regional routes as zero-emissions technology scales, I think is going to be the nearest term opportunity and a really exciting one.

That's right. In the state of Alaska, we serve 19 communities directly. Only three of those are accessible by road. The other ones are either only accessible by air or by sea. And going by boat all the time is certainly not a viable option, particularly we fly people for healthcare, we fly people for school sports. I mean, if you think about the way that life works in parts of our country and around the world that are so air travel dependent, we need a solution that can be environmentally responsible while enabling the commerce required, just the stuff of life that is required to support those communities.

Yeah, it's interesting, and I do think it's changing all the time. Edelman, a big national communications agency, just recently, I think it was about two weeks ago, came out with their latest study. And one of the stats that really jumped out at me from that study of consumers across the world: 93% were concerned about the impact of climate change. 43%, so a little less than half of that, said they've always been concerned, but 50% said I've come to believe that over time. And I do think that proportion of 'I've come to believe that over time' is really interesting because it's folks that probably have come to a greater level of awareness of the climate imperative due to being in the middle of a natural disaster or seeing wildfires or seeing the really physical impact and risk that we've seen as a result of climate change. And I think that 50% offers me a lot of hope because it means that people are willing to adapt and think about the consequences of our collective actions and what we need to do about it. The 43% is fantastic too, but we've always had them. We really need that sort of broad base of people to begin making choices and investing their mind share and their choices in more sustainable technologies, because that will lift all boats. The other interesting stat, a couple of other wrinkles on the number of people or the proportion of people that care about these issues when they're making choices within the travel realm: West Coast consumers on the West Coast of the United States self-report caring about environmental issues when thinking about their travel choices about 10 to 15% more than the national average. So that's a huge part of our operating base, so that's something that we think about. And then younger consumers self-report caring about it more, so that's another thing as the next generation of travelers and consumers in general are thinking about these issues, that's an opportunity for us to get people involved. The last thing I'll say on this question: we did a study before COVID, so I suspect that this has changed, where we asked our guests, our passengers who we call guests, to rank the issues that they cared about in terms of environmental sustainability. And they actually ranked eliminating single-use plastic more highly, or more people ranked it more highly, than getting to net zero carbon emissions. And I do suspect, back to that 50% that has come to care about climate issues over time, I think that ranking may have changed in the last couple of years. But it also is a good reminder that people gravitate to things that they can sort of touch and feel and understand and interact with. And so we've thought about it as an opportunity not to obviously not care about the carbon footprint part, but to engage consumers using what they can understand and directly impact, and engage them with those things into a conversation about the broader issues. So onboard recycling, replacing plastic cups on board with recyclable paper ones, is all sort of a really important, it's a different environmental impact, but it's an entry point to engage consumers in things like decarbonization technologies. So a little bit of a long answer.

Yeah, yeah.

Yeah, it's a fantastic question. A couple things. People say that they are willing to pay more, but when we give them an opportunity, the percentage of people that actually do pay to offset carbon emissions isn't high, but it is growing. And giving people an engaging opportunity to do that helps. So a couple thoughts on this, and I'll sort of make my way to the financial point. We actually launched last week a new platform within our end-to-end travel experience where guests can put in, 'I'm flying to San Francisco from Seattle,' and it'll show the carbon emissions of that flight, one way or return, and then it'll give you options about whether you want to offset with a proportion of sustainable aviation fuel or select nature-based projects that have been vetted that are in the service areas where we operate. And we launched that, and we're going to build on it next year, so watch this space. But we launched it with a loyalty reward: if you purchase sustainable credits from sustainable aviation fuel versus the nature-based options at certain levels of purchases, we give you 500 elite qualifying miles, and you can add those up. So one of the ways that it's been taken since it's sort of near the end of the year and people are thinking about that next elite status and that year-end mileage run is, instead of doing your year-end mileage run, go purchase SAF credits and actually contribute to SAF supply, offset your carbon footprint, and reach your elite status. So the point of telling you this story is that one of the things that we have found is that engaging people in a way that has some connection back to their end-to-end sort of travel journey, and in this case the loyalty experience and that sort of looking for the next elite level, it's a way to engage consumers in something that is motivating to them and to bring them along on that education opportunity at the same time. In terms of the long term, I think we need to build on things like that so that we can continue this education path. The more we can get consumers involved, and you and I have talked a little bit about this, but the more that things like hydrogen electric propulsion or sustainable aviation fuel or other solutions, carbon removal, become mainstream ideas in the ways that solar and wind power have, the more we can not only have people willing to choose it, fly it, advocate for it, but also the more we will have tax incentive support, the more there will be a case for private institutional capital to invest in these technologies. And you all have been incredibly successful in amassing that kind of support. I think we just need to broaden the conversation, because the more people that are thinking about it and the more people that are motivated to choose these technologies, the better off and the more momentum we'll have to advance them more quickly.

Let's into the L there, that'd be great.

Yeah, it's a great question. I think investors in carbon-intensive businesses like ours are potentially somewhat different than investors in non-carbon-intensive businesses because they recognize the nature of the business. However, increasingly there is an imperative to also be recognizing that we need to change the nature of business over time. So the conversations that we've gotten in are: one, what's your plan from a risk mitigation, long-term value creation opportunity for the business? And for Alaska Air Group, we have tended to be a long-term value creation sort of platform. That's our ethos. That's the kind of investor that we like to attract, and that's the kind of conversation that we have about our strategy, which fits well with this topic because it's not something that we can change overnight. So it's about risk mitigation, it's about value creation, and those two things in concert. And innovation goes hand in hand with that. We're not going to get there by doing the same thing over and over again. So I think folks are looking for how are you being pragmatic in your approach but how are you leveraging innovation to advance it. The other thing that investors in shareholder conversations have pushed us on that I think is really productive is: okay, and how are you holding yourselves responsible for it? So there's the annual sustainability report and verification of that data, and increasingly we're going to have more sort of regulatory required reporting starting in the state of California. But as I said, we've been doing it for a long time and we're going to continue to care about that sort of transparency. But the other thing we started a couple years ago is we actually put a carbon intensity metric in our all-employee bonus program. So every year, every employee's bonus from the CEO to anyone else across the company is based on the achievement of targets on the same set of goals. We all share the same set of goals, and they're around safety, consumer experience or guest satisfaction, cost management and profitability, and carbon emissions. And actually having sustainability as part of that sort of literally puts your money where your mouth is, but also is a way to engage individual employees in saying, 'Oh wow, part of my compensation is now based on this, what can I do to affect that change?' And right now the largest thing that they can do is to do single-engine taxi at the airport or plug in the ground power and ground air and avoid using the APU, those sorts of things, manage weight on board, other a variety of other strategies. But it's another, similar to the consumer conversation, it's a way to engage employees in the conversation. And that sort of tie between systems and structures and culture and our aspirations is one of the things that investors want to see.

Yeah, they are. It kind of gets back to that, if we're all thinking about it and it becomes more mainstream, the more it'll lift all boats in terms of individual behaviors impact and technology advancement.

Absolutely. And ZeroAvia is one of our first things in the portfolio, so thanks for helping us create it. That really stemmed out of this conversation. So the fund is called Alaska Star Ventures. And back to what I was talking about earlier about the conversation with the board about setting that bold goal for 2040 but having some sense of how we would get there, when we lay out that five-part path, we realized that a lot of the technologies that were required for that journey don't exist at the scale or scope or cost that we need today, and we needed to be involved in changing that picture. And one thing that we could do in order to help change that picture is invest in and support and enable technologies to advance. And that can come, so there is a fund that we allocate, sort of an annual budget of investments, that we allocate across the portfolio of technology on that five-part path. And we look for companies like ZeroAvia that have incredible technology, that are disciplined about the technology advancement, that have great leadership like you and the rest of your team, but that are also thinking in a pragmatic way similar to us, that we can be visionary about the long term and we have to have a disciplined way to get there. And in the case of ZeroAvia, as you and I have talked about, one of the things that really impressed me was the balance of this visionary idea, the discipline around the technology and the specificity of the engineering and the chemistry and everything else related to that, but also the pragmatic approach around pursuing certification in parallel with that technology development so that there weren't any surprises later on that we were planning for the future as we were building. The other thing that we realize, and it sort of gets to this mention of the Q400, is that sometimes our direct equity investment is the best lever to advance, and sometimes coming up alongside each other and partnering in a way that we can actually use assets of the operation is also the right way to invest in technology development for the future. So the example that you raised was handing over the keys, which we sort of figuratively did a couple of months ago, of a retired regional aircraft, which was a turbo prop that we retired out of at least for the time being into your hands so that you could retrofit it with the hydrogen electric powertrain. And that's just going to be incredible to see that aircraft that we have flown, that's been in our fleet, flying under this new propulsion system, because it's a very tangible way of saying I see how that could be part of our future operations, back to these great network of regional routes that we have.

It's a great question because it is really critical. And we operate largely in the United States, so that's the government that we're working with, but coordination across governments is another critical thing to have around the world since this is a global issue. A couple things. So the government can be catalytic, to use your term, in terms of supporting R&D, supporting testing, leveraging the platforms that they have through NASA, Department of Defense, Department of Energy, the labs that exist around the country. So that's sort of one, a little bit earlier stage or broader platform opportunity that the government has. The other thing that we have looked at a lot and has been a big focus of conversation is tax policy. How do you create tax incentives to reduce the activation energy to actually produce sustainable fuel or create a manufacturing facility where you're making your aircraft, things that will bring down the total cost of the product particularly in the near term, which can accelerate production and enable production, but also could accelerate and catalyze private institutional capital which needs to happen as well. So it's the early stage development, certainly it's certification, it is the tax policy that reduces that activation energy, and then it is trying to inspire and find ways to catalyze private institutional capital to get into the mix, because that's one of the ways that particularly for the more infrastructure-intensive technologies, of which there are many in this space, that's going to be a critical ingredient to really scale.

You're raising a challenge that I think we all see. There's two trade-off areas. One is: are you going to invest in decarbonizing ground transportation or air? Ground is easier in some respects, and I don't mean to minimize that challenge, but more of the technologies are available today. And so there might be some desire to say, 'Okay, air's going to have to wait, I'm going to go get this done.' But one of the things we're realizing is we just can't wait because the technology is going to take so long to develop and certify and do that well, we need to be working on both of them in parallel. And then similarly, is it investment in SAF or is it investment in zero-emissions propulsion technology like hydrogen electric? Again, we have to do both. And they are interrelated in some ways in terms of hydrogen's power to be a feedstock or other ingredient or even to operate in the utility and electric infrastructure space. But we just can't choose one or another. We have to prioritize the long-term thinking as well as the next few years.

No, I think that's a great way to think about it. It kind of gets back to the idea of having something become mainstream in order to have that positive flywheel effect. Solar power, some ground power, a lot of those things are more mainstream, and so there is more of a flywheel effect already there. Whereas a lot of the air technologies for aviation aren't in that sort of mainstream space yet and need that kickstart.

Very optimistic. I think, I mean, all of us are here probably in some part because we love flying. We love the space, we love the industry, and it's not going away. It makes the world smaller, it connects communities, it connects people. And it's incumbent on us to make it increasingly sustainable. But conversations like this, I think, contribute to my optimism because there's so much innovation and ingenuity and action happening. And the level, the accelerated level of that activity is so different from what it was five or ten years ago. And I just think that momentum is going to continue. And having the government involved, having consumers involved, having technologists involved, and investors involved will continue to create that more sustainable future. So I'm glad you're doing what you're doing, Val, and kudos to your team, and I hope it's a great rest of the day.