from10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2009.
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to ___________
Commission
file number 1-8957
ALASKA
AIR GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
91-1292054
|
(State or other jurisdiction
of
incorporation or
organization)
|
(I.R.S.
Employer
Identification
No.)
|
19300
International Boulevard, Seattle, Washington 98188
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (206) 392-5040
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller reporting
company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
The
registrant has 36,386,119 common shares, par value $1.00, outstanding at March
31, 2009.
Quarterly Report on Form 10-Q for
the three months ended March 31, 2009
TABLE
OF CONTENTS
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4
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4
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18
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36
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37
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38
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38
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38
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38
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38
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38
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38
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38
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39
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40
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As used
in this Form 10-Q, the terms “Air
Group,” “our,” “we” and the “Company” refer to Alaska Air Group, Inc. and its
subsidiaries, unless the context indicates otherwise. Alaska
Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and
together as our “airlines.”
Cautionary
Note Regarding Forward-Looking Statements
In
addition to historical information, this Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of
1995. Forward-looking statements are those that predict or
describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements
containing the words "believe," "expect," "will," "anticipate," "intend,"
"estimate," "project," "assume" or other similar expressions, although not all
forward-looking statements contain these identifying
words. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical experience
or the Company’s present expectations. Some
of the things that could cause our actual results to differ from our
expectations are:
|
·
|
general economic conditions,
including the impact of the economic recession on customer travel
behavior;
|
· changes in our operating costs,
including fuel, which can be volatile;
· the competitive environment in our
industry;
|
·
|
labor disputes and our ability to
attract and retain qualified
personnel;
|
|
·
|
the amounts of potential lease
termination payments with lessors for our remaining CRJ-700 and Q200
leased aircraft and related sublease payments from sublessees, if
applicable;
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|
·
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our significant
indebtedness;
|
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·
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compliance with our financial
covenants;
|
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·
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potential downgrades of our credit
ratings and the availability of
financing;
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|
·
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our ability to meet our cost
reduction goals;
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·
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operational
disruptions;
|
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·
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the concentration of our revenue
from a few key markets;
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|
·
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actual or threatened terrorist
attacks, global instability and potential U.S. military actions or
activities;
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|
·
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our inability to achieve or
maintain profitability;
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|
·
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fluctuations in our quarterly
results;
|
|
·
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an aircraft accident or
incident;
|
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·
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liability and other claims
asserted against us;
|
|
·
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our reliance on automated systems
and the risks associated with changes made to those
systems;
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·
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our reliance on third-party
vendors and partners;
|
|
·
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changes in laws and regulations;
and
|
|
·
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increases in government fees and
taxes.
|
You
should not place undue reliance on our forward-looking statements because the
matters they describe are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our
control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date on which this report was
filed with the SEC. We expressly disclaim any obligation to issue any
updates or revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters discussed in those
statements. Over time, our actual results, performance or
achievements will likely differ from the anticipated results, performance or
achievements that are expressed or implied by our forward-looking statements,
and such differences might be significant and materially adverse to our
shareholders. For a discussion of these and other risk factors, see
"Item 1A: Risk Factors” of the Company’s annual report on Form 10-K for the year
ended December 31, 2008. Please consider our forward-looking
statements in light of those risks as you read this report.
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Item
1: Condensed
Consolidated Financial Statements
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|
|
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CONDENSED CONSOLIDATED BALANCE
SHEETS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
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|
ASSETS
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December
31,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
237.1 |
|
|
$ |
283.1 |
|
Marketable
securities
|
|
|
805.9 |
|
|
|
794.3 |
|
Total cash and
marketable securities
|
|
|
1,043.0 |
|
|
|
1,077.4 |
|
Receivables -
net
|
|
|
113.5 |
|
|
|
116.7 |
|
Inventories and supplies -
net
|
|
|
43.4 |
|
|
|
51.9 |
|
Deferred income
taxes
|
|
|
170.3 |
|
|
|
164.4 |
|
Fuel hedge
contracts
|
|
|
13.4 |
|
|
|
16.5 |
|
Prepaid expenses and other current
assets
|
|
|
82.3 |
|
|
|
82.0 |
|
Total Current
Assets
|
|
|
1,465.9 |
|
|
|
1,508.9 |
|
|
|
|
|
|
|
|
|
|
Property and
Equipment
|
|
|
|
|
|
|
|
|
Aircraft and other flight
equipment
|
|
|
3,481.7 |
|
|
|
3,431.0 |
|
Other property and
equipment
|
|
|
618.2 |
|
|
|
608.6 |
|
Deposits for future flight
equipment
|
|
|
253.3 |
|
|
|
309.8 |
|
|
|
|
4,353.2 |
|
|
|
4,349.4 |
|
Less accumulated depreciation and
amortization
|
|
|
1,226.0 |
|
|
|
1,181.7 |
|
Total Property and Equipment -
Net
|
|
|
3,127.2 |
|
|
|
3,167.7 |
|
Fuel Hedge
Contracts
|
|
|
27.5 |
|
|
|
35.9 |
|
Other
Assets
|
|
|
158.4 |
|
|
|
123.1 |
|
Total
Assets
|
|
$ |
4,779.0 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
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|
|
CONDENSED CONSOLIDATED BALANCE
SHEETS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
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|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December
31,
|
|
(in millions except share
amounts)
|
|
2009
|
|
|
2008
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
63.8 |
|
|
$ |
59.6 |
|
Accrued aircraft
rent
|
|
|
52.2 |
|
|
|
64.4 |
|
Accrued wages, vacation and
payroll taxes
|
|
|
100.1 |
|
|
|
119.5 |
|
Other accrued
liabilities
|
|
|
499.8 |
|
|
|
475.4 |
|
Air traffic
liability
|
|
|
399.6 |
|
|
|
372.7 |
|
Fuel hedge contracts
liability
|
|
|
5.7 |
|
|
|
24.1 |
|
Current portion of long-term
debt
|
|
|
164.4 |
|
|
|
244.9 |
|
Total Current
Liabilities
|
|
|
1,285.6 |
|
|
|
1,360.6 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, Net of Current
Portion
|
|
|
1,619.3 |
|
|
|
1,596.3 |
|
|
|
|
|
|
|
|
|
|
Other Liabilities and
Credits
|
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
|
37.2 |
|
|
|
36.7 |
|
Deferred
revenue
|
|
|
424.7 |
|
|
|
421.3 |
|
Obligation for pension and
postretirement medical benefits
|
|
|
589.4 |
|
|
|
584.7 |
|
Other
liabilities
|
|
|
165.5 |
|
|
|
174.1 |
|
|
|
|
1,216.8 |
|
|
|
1,216.8 |
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par
value
|
|
|
|
|
|
|
|
|
Authorized: 5,000,000
shares, none issued or outstanding
|
|
|
- |
|
|
|
- |
|
Common stock, $1 par
value
|
|
|
|
|
|
|
|
|
Authorized: 100,000,000
shares
|
|
|
|
|
|
|
|
|
Issued: 2009
- 43,263,925 shares
|
|
|
|
|
|
|
|
|
2008 - 43,171,404 shares
|
|
|
43.3 |
|
|
|
43.2 |
|
Capital in excess of
par value
|
|
|
921.7 |
|
|
|
915.0 |
|
Treasury stock
(common), at cost: 2009 - 6,877,806 shares
|
|
|
|
|
|
|
|
|
2008 - 6,896,506 shares
|
|
|
(161.0 |
) |
|
|
(161.4 |
) |
Accumulated other comprehensive
loss
|
|
|
(320.9 |
) |
|
|
(328.3 |
) |
Retained
earnings
|
|
|
174.2 |
|
|
|
193.4 |
|
|
|
|
657.3 |
|
|
|
661.9 |
|
Total Liabilities and
Shareholders' Equity
|
|
$ |
4,779.0 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
(in millions except per share
amounts)
|
|
2009
|
|
|
2008
|
|
Operating
Revenues
|
|
|
|
|
|
|
Passenger
|
|
$ |
684.1 |
|
|
$ |
775.7 |
|
Freight and
mail
|
|
|
19.4 |
|
|
|
22.2 |
|
Other - net
|
|
|
38.9 |
|
|
|
41.6 |
|
Total Operating
Revenues
|
|
|
742.4 |
|
|
|
839.5 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
246.0 |
|
|
|
244.7 |
|
Variable incentive
pay
|
|
|
9.3 |
|
|
|
3.6 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
157.7 |
|
|
|
282.0 |
|
Aircraft
maintenance
|
|
|
59.7 |
|
|
|
58.0 |
|
Aircraft
rent
|
|
|
38.0 |
|
|
|
43.6 |
|
Landing fees and other
rentals
|
|
|
54.2 |
|
|
|
56.0 |
|
Contracted
services
|
|
|
38.4 |
|
|
|
44.5 |
|
Selling
expenses
|
|
|
25.0 |
|
|
|
34.5 |
|
Depreciation and
amortization
|
|
|
52.8 |
|
|
|
49.3 |
|
Food and beverage
service
|
|
|
11.6 |
|
|
|
12.3 |
|
Other
|
|
|
56.8 |
|
|
|
57.2 |
|
Fleet transition costs -
Q200
|
|
|
4.8 |
|
|
|
5.8 |
|
Total Operating
Expenses
|
|
|
754.3 |
|
|
|
891.5 |
|
Operating
Loss
|
|
|
(11.9 |
) |
|
|
(52.0 |
) |
Nonoperating Income
(Expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8.3 |
|
|
|
10.3 |
|
Interest
expense
|
|
|
(26.8 |
) |
|
|
(23.4 |
) |
Interest
capitalized
|
|
|
2.8 |
|
|
|
6.5 |
|
Other - net
|
|
|
(2.0 |
) |
|
|
0.2 |
|
|
|
|
(17.7 |
) |
|
|
(6.4 |
) |
Loss before income
tax
|
|
|
(29.6 |
) |
|
|
(58.4 |
) |
Income tax
benefit
|
|
|
(10.4 |
) |
|
|
(21.1 |
) |
Net Loss
|
|
$ |
(19.2 |
) |
|
$ |
(37.3 |
) |
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss Per
Share:
|
|
$ |
(0.53 |
) |
|
$ |
(1.01 |
) |
Shares used for
computation:
|
|
|
|
|
|
|
|
|
Basic and
Diluted
|
|
|
36.326 |
|
|
|
37.024 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY (unaudited)
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Common
|
|
|
|
|
|
Capital in
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess of
|
|
|
Stock,
|
|
|
Accumulated
Other
|
|
|
Retained
|
|
|
|
|
(in
millions)
|
|
Outstanding
|
|
|
Stock
|
|
|
Par Value
|
|
|
at Cost
|
|
|
Comprehensive
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balances at December 31,
2008
|
|
|
36.275 |
|
|
$ |
43.2 |
|
|
$ |
915.0 |
|
|
$ |
(161.4 |
) |
|
$ |
(328.3 |
) |
|
$ |
193.4 |
|
|
$ |
661.9 |
|
Net loss for the three months
ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.2 |
) |
|
|
(19.2 |
) |
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Related to marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Change in fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
|
|
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|
Reclassification to
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
Income tax
effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
|
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|
2.1 |
|
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|
2.1 |
|
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|
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|
|
Adjustments related to
employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
Income tax
effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.3 |
|
|
|
|
|
|
|
5.3 |
|
Total comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.4 |
|
Treasury stock issued under stock
plans
|
|
|
0.018 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Stock issued for employee stock
purchase plan
|
|
|
0.043 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
Stock issued under stock
plans
|
|
|
0.050 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Balances at March 31,
2009
|
|
|
36.386 |
|
|
$ |
43.3 |
|
|
$ |
921.7 |
|
|
$ |
(161.0 |
) |
|
$ |
(320.9 |
) |
|
$ |
174.2 |
|
|
$ |
657.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(19.2 |
) |
|
$ |
(37.3 |
) |
Adjustments to reconcile net loss
to net cash
|
|
|
|
|
|
|
|
|
provided by operating
activities:
|
|
|
|
|
|
|
|
|
Fleet transition
costs - Q200
|
|
|
4.8 |
|
|
|
5.8 |
|
Depreciation and
amortization
|
|
|
52.8 |
|
|
|
49.3 |
|
Stock-based
compensation
|
|
|
5.4 |
|
|
|
5.5 |
|
Increase in air
traffic liability
|
|
|
26.9 |
|
|
|
109.1 |
|
Changes in other
assets and liabilities-net
|
|
|
(55.4 |
) |
|
|
(98.0 |
) |
Net cash provided by operating
activities
|
|
|
15.3 |
|
|
|
34.4 |
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Property and equipment
additions:
|
|
|
|
|
|
|
|
|
Aircraft and aircraft
purchase deposits
|
|
|
(199.5 |
) |
|
|
(117.4 |
) |
Other flight
equipment
|
|
|
(17.0 |
) |
|
|
(16.9 |
) |
Other property and
equipment
|
|
|
(9.7 |
) |
|
|
(9.8 |
) |
Total property and equipment
additions
|
|
|
(226.2 |
) |
|
|
(144.1 |
) |
Proceeds from disposition of
assets
|
|
|
2.3 |
|
|
|
5.4 |
|
Purchases of marketable
securities
|
|
|
(160.5 |
) |
|
|
(259.2 |
) |
Sales and maturities of marketable
securities
|
|
|
151.9 |
|
|
|
175.1 |
|
Restricted deposits and
other
|
|
|
(3.3 |
) |
|
|
1.2 |
|
Net cash used in investing
activities
|
|
|
(235.8 |
) |
|
|
(221.6 |
) |
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
64.0 |
|
|
|
291.6 |
|
Proceeds from sale-leaseback
transaction, net
|
|
|
230.0 |
|
|
|
- |
|
Long-term debt payments, including
line of credit
|
|
|
(121.5 |
) |
|
|
(57.1 |
) |
Purchase of treasury
stock
|
|
|
- |
|
|
|
(40.6 |
) |
Proceeds from issuance of common
stock
|
|
|
2.0 |
|
|
|
0.9 |
|
Net cash provided by financing
activities
|
|
|
174.5 |
|
|
|
194.8 |
|
Net change in cash and cash
equivalents
|
|
|
(46.0 |
) |
|
|
7.6 |
|
Cash and cash equivalents at
beginning of year
|
|
|
283.1 |
|
|
|
204.3 |
|
Cash and cash equivalents at end
of period
|
|
$ |
237.1 |
|
|
$ |
211.9 |
|
Supplemental disclosure of cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest (net of
amount capitalized)
|
|
$ |
28.7 |
|
|
$ |
14.3 |
|
Income
taxes
|
|
$ |
- |
|
|
$ |
3.9 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska
Air Group, Inc.
Note
1.
|
Basis
of Presentation and Significant Accounting
Policies
|
Organization
and Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of Alaska Air
Group, Inc. (Air Group or the Company) include the accounts of the parent
company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska
Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through
which the Company conducts substantially all of its operations. These interim
condensed consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the Company’s financial position as of March 31, 2009, as well as the results of
operations for the three months ended March 31, 2009 and 2008. The adjustments
made were of a normal recurring nature.
The
Company’s interim condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America (GAAP). In preparing these statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities, as well as the
reported amounts of revenues and expenses. Significant estimates made include
assumptions used to record liabilities; expenses and revenues associated with
the Company’s Mileage Plan; amounts paid to lessors upon aircraft lease
terminations; the fair market value of surplus or impaired aircraft, engines and
parts; assumptions used in the calculations of pension expense in the Company’s
defined-benefit plans; and the amounts of certain accrued liabilities. Actual
results may differ from the Company’s estimates.
New
and Proposed Accounting Pronouncements
In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Standards (SFAS) No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. SFAS 161 requires entities that use derivative
instruments to provide certain qualitative disclosures about their objectives
and strategies for using such instruments, amounts and location of the
derivatives in the financial statements, among other disclosures. SFAS 161
was adopted as of January 1, 2009. The required disclosures are
included in Note 3. The adoption of SFAS 161 did not have a material
impact on the disclosures historically provided.
1BIn
December 2008, the FASB issued Staff Position No. FAS 132(R)-1 amending SFAS
132(R), Employers’ Disclosures
about Pensions and Other Postretirement Benefits, which, among other
things, expands the disclosure regarding assets in an employer’s pension and
postretirement benefit plans. The primary change would be to add the
fair value hierarchy disclosures required by SFAS No. 157 as it relates to the
underlying assets of the pension and postretirement benefit
plans. The disclosures required by this position are effective in
annual financial statements for fiscal years ending after December 15,
2009. This position will impact the Company’s financial statement
disclosures, but will have no impact on its financial position or results of
operations.
2BIn April
2009, the FASB issued Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
clarifies the determination of fair value in SFAS 157 for assets and liabilities
that may be involved in transactions that would not be considered orderly as
defined in the position statement. In April 2009, the FASB also
issued FASB Staff Position No. FAS
115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This position statement provides
additional guidance in
determining whether a debt
3Bsecurity is other-than-temporarily
impaired and how entities should record the impairment in the financial
statements. The standard would require credit losses, as defined, to
be recorded through the statement of operations and the remaining impairment
loss to be recorded through accumulated other comprehensive
income. Both of these staff positions are effective for annual and
interim periods ending after June 15, 2009. Management does not expect these
positions will have a material impact on the Company’s financial position or
results of operations.
In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This position will require companies
to provide, on an interim basis, disclosures that are currently required in
annual statements for the fair value of financial instruments. This
position will be effective for interim periods ending after June 15,
2009. The position will impact the Company’s financial statement
disclosures, but will have no impact on its financial position or results of
operations.
Fair
Value Measurements
SFAS
No. 157, Fair Value
Measurements, defines fair value, establishes a framework for measuring
fair value and expands disclosure about fair-value measurements required under
other accounting pronouncements. The Company partially adopted this standard for
financial assets and liabilities as of January 1, 2008 and, in accordance
with FASB Staff Position No. 157-2, adopted the standard as it relates to
nonfinancial assets and liabilities as of January 1, 2009. The adoption of this
aspect of the standard had no impact on our financial position, statements of
operations, or cash flows.
SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
Cash,
Cash Equivalents and Marketable Securities
The
Company uses the “market approach” under SFAS 157 in determining the fair value
of its cash, cash equivalents and marketable securities. The securities held by
the Company are valued based on observable prices in active markets and
considered to be liquid and easily tradable. Amounts
measured at fair value as of March 31, 2009 are as follows (in
millions):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$ |
237.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
237.1 |
|
Marketable
securities
|
|
|
116.1 |
|
|
|
689.8 |
|
|
|
— |
|
|
|
805.9 |
|
Total
|
|
$ |
353.2 |
|
|
$ |
689.8 |
|
|
$ |
— |
|
|
$ |
1,043.0 |
|
4BThe
Company’s marketable securities portfolio consists of US government securities,
asset-backed obligations and other corporate obligations. As of March
31, 2009, the Company had net unrealized losses of $0.7 million in its $1.04
billion cash and marketable securities balance portfolio, which management
believes is not “other-than-temporarily” impaired as defined by FASB Staff
Position FAS 115-1 and FAS 124-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. Gross unrealized gains were
$13.4 million and gross unrealized losses were $14.1 million at March 31,
2009. Further details of the securities that composed the gross
unrealized losses are as follows (in millions):
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
Less
than 12 months
|
|
|
Greater
than 12 months
|
|
|
Total
|
|
|
Fair
Value of Securities with Unrealized Losses
|
U.S.
Government Securities
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Asset-backed
obligations
|
|
|
(1.3 |
) |
|
|
(8.0 |
) |
|
|
(9.3 |
) |
|
|
73.9 |
|
Other
corporate obligations
|
|
|
(3.4 |
) |
|
|
(1.4 |
) |
|
|
(4.8 |
) |
|
|
104.2 |
|
Total
|
|
$ |
(4.7 |
) |
|
$ |
(9.4 |
) |
|
$ |
(14.1 |
) |
|
$ |
178.1 |
|
5BNote
2.
Fleet
Transition
26BHorizon Transition to All-Q400
Fleet
Horizon
is in the process of transitioning to an all-Q400 fleet. As of March
31, 2009, Horizon had six Q200 aircraft remaining, none of which were in the
operational fleet. The total charge associated with removing these
aircraft from operation in the first quarter of 2009 was $4.8
million. This charge represents the estimated loss under potential
disposal transactions.
In the
first quarter of 2008, three of Horizon’s Q200 aircraft were subleased to a
third-party carrier under a sublease arrangement that ultimately covered 16 of
the Q200 aircraft. The charge associated with the sublease loss on
these three aircraft in the first quarter of 2008 was $5.8 million.
6BNote
3. Fuel Hedge
Contracts
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risks associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options, collar
structures and swap agreements for crude oil, among other
initiatives.
The
Company records derivative instruments, all of which are currently fuel hedge
contracts, on the balance sheet at their fair value. Changes in the
fair value of these fuel hedge contracts are recorded each period in aircraft
fuel expense as the Company has not designated these instruments as hedge
transactions under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities.
The
following table summarizes the components of aircraft fuel expense for the three
months ended March 31, 2009 and 2008 (in millions):
|
|
2009
|
|
|
2008
|
|
Raw or “into-plane” fuel
cost
|
|
$ |
141.9 |
|
|
$ |
311.9 |
|
(Gains)
or losses in value and settlement of fuel hedge contracts
|
|
|
15.8 |
|
|
|
(29.9 |
) |
Aircraft fuel
expense
|
|
$ |
157.7 |
|
|
$ |
282.0 |
|
The
Company realized losses of $25.8 million and gains of $29.2 million in the three
months ended March 31, 2009 and 2008, respectively, on fuel hedge contracts that
settled during the period.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedging contracts consist of over-the-counter
contracts, which are not traded on an exchange. The fair value of
these contracts is determined based on observable inputs that are readily
available in active markets or can be derived from information available in
active quoted markets. Therefore, the Company has categorized these
contracts as Level 2 in the fair value hierarchy described in SFAS
157.
Outstanding
future fuel hedge positions are as follows:
|
Approximate
% of Expected Fuel Requirements
|
Gallons
Hedged
(in
millions)
|
Approximate
Crude Oil Price per Barrel
|
Second
Quarter 2009
|
50%
|
44.8
|
$71
|
Third
Quarter 2009
|
50%
|
48.1
|
$76
|
Fourth
Quarter 2009
|
50%
|
43.5
|
$76
|
Remainder of 2009
|
50%
|
136.4
|
$74
|
First
Quarter 2010
|
47%
|
40.0
|
$68
|
Second
Quarter 2010
|
43%
|
38.7
|
$67
|
Third
Quarter 2010
|
29%
|
28.3
|
$67
|
Fourth
Quarter 2010
|
24%
|
20.5
|
$78
|
Full Year 2010
|
36%
|
127.5
|
$69
|
First
Quarter 2011
|
17%
|
14.9
|
$91
|
Second
Quarter 2011
|
15%
|
13.8
|
$73
|
Third
Quarter 2011
|
11%
|
11.3
|
$74
|
Fourth
Quarter 2011
|
5%
|
4.5
|
$67
|
Full Year 2011
|
12%
|
44.5
|
$78
|
As of
March 31, 2009 and December 31, 2008, the net fair values of the Company’s fuel
hedge positions were as follows (in millions):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Call
options or “caps”
|
|
$ |
40.9 |
|
|
$ |
52.4 |
|
Collar
contracts
|
|
|
(5.7 |
) |
|
|
(24.1 |
) |
Total
|
|
$ |
35.2 |
|
|
$ |
28.3 |
|
The
Company paid premiums of $85.9 million and $89.1 million, respectively, to
purchase the call options that were in the portfolio at March 31, 2009 and
December 31, 2008, respectively. The Company does have agreements
with its counterparties for the collar contracts requiring cash collateral if
certain liability levels are met. The Company did not have any cash
collateral held by these counterparties at March 31, 2009 or December 31,
2008.
7BNote
4. Restructuring
Charges
In the third quarter of 2008,
Alaska announced reductions in work force
among union and non-union employees. The Company recorded a $12.9
million charge in 2008 representing the severance payments and estimated medical
coverage obligation for the affected employees.
The
following table displays the activity and balance of the severance and related
cost components of the Company’s restructuring accrual as of and for the
three-months ended March 31, 2009 and 2008 (in millions):
Accrual for Severance and Related
Costs
|
|
2009
|
|
|
2008
|
|
Balance at December 31, 2008 and
2007
|
|
$ |
7.2 |
|
|
$ |
0.7 |
|
Cash
payments
|
|
|
(6.2 |
) |
|
|
(0.5 |
) |
Balance at March
31
|
|
$ |
1.0 |
|
|
$ |
0.2 |
|
The
Company will make the majority of the remaining cash payments in the second and
third quarters of 2009. The accrual for severance and related costs is included
in accrued wages, vacation and payroll taxes in the consolidated balance
sheets.
8BNote
5. Long-term Debt
Long-term
debt obligations were as follows (in millions):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Fixed-rate
notes payable due through 2024
|
|
$ |
1,489.7 |
|
|
$ |
1,458.9 |
|
Variable-rate
notes payable due through 2019
|
|
|
264.9 |
|
|
|
267.4 |
|
16BBank
line-of-credit facility expiring in 2010
|
|
|
17B-- |
|
|
|
18B75.0 |
|
19BPre-delivery
payment facility expiring in 2011
|
|
|
20B29.1 |
|
|
|
21B39.9 |
|
Long-term
debt
|
|
|
1,783.7 |
|
|
|
1,841.2 |
|
Less
current portion |
|
|
(164.4 |
) |
|
|
(244.9 |
) |
|
|
$ |
1,619.3 |
|
|
$ |
1,596.3 |
|
During
the first three months of 2009, Alaska borrowed $29.0 million using fixed-rate
debt secured by flight equipment and another $2.7 million from its pre-delivery
payment facility. Alaska made payments of $114.6 million, including
$13.5 million on its pre-delivery payment facility and $75 million on its bank
line-of-credit facility. Horizon financed two of its recently
delivered Q400 aircraft using fixed-rate debt arrangements with proceeds
totaling $32.3 million and made scheduled debt payments of $6.9
million.
9BNote
6. Employee Benefit
Plans
Pension
Plans - Qualified Defined Benefit
Net
pension expense for the three months ended March 31 included the following
components
(in
millions):
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
11.1 |
|
|
$ |
12.2 |
|
Interest
cost
|
|
|
16.7 |
|
|
|
15.7 |
|
Expected
return on assets
|
|
|
(12.8 |
) |
|
|
(17.9 |
) |
Amortization
of prior service cost
|
|
|
1.1 |
|
|
|
1.1 |
|
Actuarial
loss
|
|
|
7.2 |
|
|
|
1.4 |
|
Net
pension expense
|
|
$ |
23.3 |
|
|
$ |
12.5 |
|
25BAlthough
there is no required minimum funding in 2009, the Company contributed $10.6
million to its qualified defined-benefit plans during the three months ended
March 31, 2009, and expects to contribute an additional $37.2 million to these
plans during the remainder of 2009. The Company made $17.2 million in
contributions to its defined-benefit pension plans during the three months ended
March 31, 2008.
Pension
Plans - Nonqualified Defined Benefit
Net
pension expense for the unfunded, noncontributory defined-benefit plans was $0.8
million and $0.9 million for the three months ended March 31, 2009 and 2008,
respectively.
Postretirement
Medical Benefits
Net
periodic benefit cost for the post-retirement medical plans for the three months
ended March 31, 2009 and 2008 was $3.3 million and $2.8 million,
respectively.
10BNote
7. Other Assets
Other
assets consisted of the following (in millions):
|
|
March 31,
2009
|
|
|
December
31, 2008
|
|
Restricted
deposits (primarily restricted investments)
|
|
$ |
81.9 |
|
|
$ |
78.6 |
|
Deferred
costs and other*
|
|
|
76.5 |
|
|
|
44.5 |
|
|
|
$ |
158.4 |
|
|
$ |
123.1 |
|
*Deferred
costs and other includes deferred financing costs, long-term prepaid rent, lease
deposits and other items.
11BNote
8 Mileage Plan
Alaska’s
Mileage Plan deferrals and liabilities are included under the following balance
sheet captions
(in
millions):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Other
accrued liabilities
|
|
$ |
285.5 |
|
|
$ |
280.4 |
|
Other
Liabilities and Credits (non-current):
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
397.5 |
|
|
|
394.1 |
|
Other
liabilities
|
|
|
13.2 |
|
|
|
15.9 |
|
|
|
$ |
696.2 |
|
|
$ |
690.4 |
|
Alaska’s
Mileage Plan revenue is included under the following condensed consolidated
statements of operations captions for the three months ended March 31 (in
millions):
|
|
2009
|
|
|
2008
|
|
Passenger
revenues
|
|
$ |
38.8 |
|
|
$ |
25.3 |
|
Other
- net revenues
|
|
|
24.5 |
|
|
|
26.7 |
|
|
|
$ |
63.3 |
|
|
$ |
52.0 |
|
0BNote
9. Stock-Based Compensation
Plans
The
Company accounts for stock-based awards using Statement of Financial Accounting
Standards SFAS No. 123R, Share-Based Payment: An Amendment of
SFAS Nos. 123 and 95. All stock-based compensation expense is recorded in
wages and benefits in the condensed consolidated statements of
operations. See Note 11 for discussion of an error in prior periods
related to stock-based compensation.
The
Company has stock awards outstanding under a number of long-term incentive
equity plans, one of which continues to provide for the grant of stock awards to
directors, officers and employees of the Company and its
subsidiaries. Compensation expense is recorded over the shorter of
the vesting period between the grant date and the date the employee becomes
retirement-eligible as defined in the applicable plan.
Stock
Options
During
the three months ended March 31, 2009, the Company granted 384,268 options with
a weighted-average fair value of $14.00 per share. During the same
period in the prior year, the Company granted 302,854 options with a
weighted-average fair value of $12.05 per share.
12BThe
Company recorded stock-based compensation expense related to stock options of
$2.3 million ($1.4 million after tax) for the three months ended March 31, 2009
and 2008. As of March 31, 2009, $6.2 million of compensation cost
associated with unvested stock option awards attributable to future service had
not yet been recognized. This amount will be recognized as expense
over a weighted-average period of 2.7 years.
As of
March 31, 2009, options to purchase 2,893,038 shares of common stock were
outstanding with a weighted-average exercise price of $30.43. Of that
total, 1,956,213 were exercisable at a weighted-average exercise price of
$30.97.
13BRestricted Stock
Awards
During
the three months ended March 31, 2009, the Company awarded 241,489 restricted
stock units (RSUs) to certain employees, with a weighted-average grant date fair
value of $27.56. This amount reflects the value of the total RSU
awards at the grant date based on the closing price of the Company’s common
stock.
Compensation
cost for RSUs is recognized over three years from the date of grant as the
awards “cliff vest” after three years. The Company recorded
stock-based compensation expense related to RSUs of $2.8 million ($1.8 million
after tax) and $2.3 million ($1.4 million after tax) for the three-month ended
March 31, 2009 and 2008, respectively.
As of
March 31, 2009, $8.3 million of compensation cost associated with unvested
restricted stock awards attributable to future service had not yet been
recognized. This amount will be recognized as expense over a
weighted-average period of 2.3 years.
27BEmployee Stock Purchase
Plan
35BCompensation
expense recognized under the Employee Stock Purchase Plan was $0.3 million and
$0.7 million for the three months ended March 31, 2009 and 2008,
respectively.
28BSummary of Stock-Based
Compensation
The table
below summarizes the components of total stock-based compensation for the three
months ended March 31, 2009 and 2008 (in millions):
|
|
2009
|
|
|
2008
|
|
Stock
options
|
|
$ |
2.3 |
|
|
$ |
2.3 |
|
Restricted
stock units
|
|
|
2.8 |
|
|
|
2.3 |
|
Performance
share units
|
|
|
-- |
|
|
|
0.2 |
|
Employee
stock purchase plan
|
|
|
0.3 |
|
|
|
0.7 |
|
Total
stock-based compensation
|
|
$ |
5.4 |
|
|
$ |
5.5 |
|
Note
10. Operating
Segment Information
Operating
segment information for Alaska and Horizon for the three months ended March 31
was as follows (in millions):
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
revenues:
|
|
|
|
|
|
|
Alaska
– mainline (1)
|
|
$ |
591.3 |
|
|
$ |
663.0 |
|
Alaska
– purchased capacity (1)
|
|
|
U61.8 |
|
|
|
U70.4 |
|
Total
Alaska
|
|
|
653.1 |
|
|
|
733.4 |
|
Horizon
|
|
|
146.8 |
|
|
|
177.2 |
|
Other
(2)
|
|
|
0.3 |
|
|
|
0.3 |
|
Elimination
of intercompany revenues
|
|
|
(57.8 |
) |
|
|
(71.4 |
) |
29BConsolidated
|
|
$ |
30B742.4 |
|
|
$ |
31B
839.5 |
|
Loss
before income tax:
|
|
|
|
|
|
|
|
|
Alaska
– mainline
|
|
$ |
(17.4 |
) |
|
$ |
(33.5 |
) |
Alaska – purchased
capacity |
|
|
(0.9 |
) |
|
|
(6.3 |
) |
Total
Alaska
|
|
|
(18.3 |
) |
|
|
(39.8 |
) |
Horizon
|
|
|
(10.5 |
) |
|
|
(17.6 |
) |
Other (2) |
|
|
(0.8 |
) |
|
|
(1.0 |
) |
Consolidated |
|
$ |
(29.6 |
) |
|
$ |
(58.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Total
assets at end of period:
|
|
|
|
|
|
|
|
|
Alaska
|
|
$ |
4,370.6 |
|
|
$ |
4,428.6 |
|
Horizon
|
|
|
731.3 |
|
|
|
692.3 |
|
Other
(2)
|
|
|
815.1 |
|
|
|
820.3 |
|
Elimination
of intercompany accounts
|
|
|
(1,138.0 |
) |
|
|
(1,105.6 |
) |
Consolidated
|
|
$ |
4,779.0 |
|
|
$ |
4,835.6 |
|
(1)
Alaska mainline revenue represents revenue from passengers aboard Alaska jets,
freight and mail revenue, and all other revenue. Purchased capacity
revenue represents that revenue earned by Alaska on capacity purchased from and
provided by Horizon and a small third party under a capacity purchase
arrangement.
(2)
Includes the parent company, Alaska Air Group, Inc., including its investments
in Alaska and Horizon, which are eliminated in
consolidation.
14BNote
11. Adjustment to Prior-Period
Results
In the
third quarter of 2008, the Company discovered an error in its calculation of
stock-based compensation expense under SFAS No. 123R for certain awards granted
after January 1, 2006. The error related to the time period over
which compensation expense was recorded. The company had been
recording compensation expense over the vesting period, which was deemed to be
the service period. However, many employees that receive award grants
are eligible for retirement or will be eligible for retirement prior to the end
of the vesting period. The award plans allow for continued vesting
subsequent to retirement. As such, the related compensation expense
should have been recorded over the shorter of the vesting period or the period
from the date of grant to the date the employee is eligible for
retirement. The error resulted in a $2.3 million understatement of
wages and benefits expense in the first quarter of 2008. The Company
concluded that this item was not material, and in accordance with SAB 108,
adjusted wage and benefits expense for the three months ended March 31,
2008. There was no impact to the first quarter of
2009. See the tables below for further details.
Reconciliation
Between Amounts Previously Reported and Corrected Amounts
The
impact of the stock-based compensation expense correction on financial statement
line items is presented below (in millions):
UCCondensed Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
31, 2008
|
|
|
|
As Originally
Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
Wages
and benefits
|
|
$ |
242.4 |
|
|
$ |
2.3 |
|
|
$ |
244.7 |
|
Total
Operating Expenses
|
|
|
889.2 |
|
|
|
2.3 |
|
|
|
891.5 |
|
Operating
Loss
|
|
|
(49.7 |
) |
|
|
(2.3 |
) |
|
|
(52.0 |
) |
Loss
before income tax
|
|
|
(56.1 |
) |
|
|
(2.3 |
) |
|
|
(58.4 |
) |
Net
Loss
|
|
$ |
(35.9 |
) |
|
$ |
(1.4 |
) |
|
$ |
(37.3 |
) |
Basic
and Diluted Loss Per Share
|
|
$ |
(0.97 |
) |
|
$ |
(0.04 |
) |
|
$ |
(1.01 |
) |
15BNote
12. Contingencies
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska
violated the CBA by, among other things, subcontracting the ramp service
operation in Seattle. The dispute was referred to an arbitrator and
hearings on the grievance commenced in January 2007, with a final hearing date
in August 2007. In July 2008, the arbitrator issued a final decision
in the matter. In that decision, the arbitrator found that Alaska had
violated the CBA and instructed Alaska and the IAM to negotiate a
remedy. The parties have met, but the matter has not yet been
resolved. Another arbitration hearing has been set for June 2009,
with a preliminary hearing in May 2009. Management currently does not
believe that any final remedy will materially impact our financial position or
results of operations.
Other
items
The
Company is a party to routine litigation matters incidental to its business and
with respect to which no material liability is expected.
Management
believes the ultimate disposition of the matters discussed above is not likely
to materially affect the Company’s financial position or results of operations.
This forward-looking statement is based on management’s current understanding of
the relevant law and facts, and it is subject to various contingencies,
including the potential costs and risks associated with litigation and the
actions of arbitrators, judges and juries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations (MD&A) is
intended to help the reader understand the Company, our operations and our
present business environment. MD&A is provided as a supplement to
– and should be read in conjunction with – our condensed consolidated financial
statements and the accompanying notes. All statements in the
following discussion that are not statements of historical information or
descriptions of current accounting policy are forward-looking
statements. Please consider our forward-looking statements in light
of the risks referred to in this report’s introductory cautionary note and the
risks mentioned in the Company’s filings with the Securities and Exchange
Commission including those listed in Part I, “Item 1A. Risk Factors”
in our Annual Report on Form 10-K for the year ended December 31,
2008. This overview summarizes MD&A, which includes the following
sections:
|
·
|
First Quarter
in Review –
highlights from the first quarter of 2009 outlining some of the major
events that happened during the period and how they affected our financial
performance.
|
|
·
|
Results of
Operations – an
in-depth analysis of the results of operations of Alaska and Horizon for the three months
ended March 31, 2009. We believe this analysis will help the
reader better understand our condensed consolidated statements of
operations. This section also includes forward-looking
statements regarding our view of the remainder of
2009.
|
|
·
|
Liquidity and
Capital Resources –
an analysis of cash flows, sources and uses of cash, contractual
obligations, commitments and off-balance sheet arrangements, an overview
of financial position and the impact of inflation and changing
prices.
|
Air Group’s filings with the Securities
and Exchange Commission, including its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge at www.alaskaair.com. The information contained
on our website is not a part of this quarterly report on Form
10-Q.
FIRST QUARTER IN
REVIEW
Our consolidated pretax loss was $29.6 million for the
first quarter of 2009
compared to $58.4
million in the first
quarter of 2008. The improvement in our pretax earnings was primarily
due to a significant decline in aircraft fuel cost from the first quarter of
2008, offset by lower revenues.
|
·
|
Economic fuel averaged $1.91 per gallon in the first quarter of
2009, compared to $2.73 in 2008. This, along with a decline in
consumption, resulted in a $115 million reduction in our economic fuel expense for
the quarter.
|
|
·
|
Partially offsetting this decline
in fuel cost was the
11.6% reduction in
operating revenues driven by softening demand in the midst of the current
economic turmoil. In the first quarter, mainline Alaska traffic and Horizon traffic fell
by 7.7% and 20.4%,
respectively.
|
Other significant developments during
the first quarter of 2009 and through the filing of this Form 10-Q are described
below.
Mileage Plan Award
Our Mileage Plan program won the 2008 “Program of the
Year” award at the Freddie Awards held in April 2009. This is the
fifth time that we have won this highest award and the second year in a
row. We also won the top prizes for “Best Web Site,” “Best
Elite-Level Program,” and “Best Member Communications.”
Update on Labor
Negotiations
Alaska
recently reached a tentative agreement with the Air Line Pilots Association
(ALPA) on a new four-year contract representing Alaska’s pilots. The
financial terms of the agreement will not be disclosed until the vote has been
completed, which is expected in late May 2009. We would note, however, that our
objectives were to improve both wage rates and productivity, to close the
defined benefit pension plan to new entrants, and to move toward a common
profit-sharing program for all of our employees. We believe this
tentative agreement meets these objectives.
Alaska
and the Alaska flight attendants agreed on a two-year extension of the current
contract. The new contract will become amendable in April
2012. As part of the new contract, flight attendants will receive a
1.5% pay increase on May 1, 2010 and May 1, 2011 and will now participate in the
same performance-based incentive plan as Alaska’s non-union and dispatch
employees. The flight attendants received a bonus upon ratification
of the contract totaling $2.0 million in the aggregate. This has been
recorded in wages and benefits in the condensed consolidated statement of
operations for the three months ended March 31, 2009.
Horizon is in
negotiations with the following work groups – pilots, flight attendants,
technicians and dispatchers. Horizon’s aircraft technicians recently
voted to be represented by the International Brotherhood of
Teamsters. They were previously represented by the Aircraft Mechanics
Fraternal Association.
H1N1 Virus
The H1N1
influenza
virus, or
“swine flu,” is currently
impacting travel behavior, specifically travel to and from Mexico where
the virus originated. The
World Health Organization has stated
that this virus poses a Level 5 threat,
which indicates
that the outbreak is capable
of widespread
human infection. The Centers for Disease Control and Prevention has
advised that nonessential travel to and from Mexico be
delayed
or cancelled until further
notice. However,
recent media reports indicate that the virus is milder than originally reported
and that the situation appears to be
stabilizing.
In
response to the decline in passenger demand for travel in the affected markets,
we recently announced that we will be reducing our capacity to Mexico destinations
beginning July 2, 2009 by 37%, with some selective cancellations beginning
immediately. The capacity will be redeployed to other leisure
destination markets, primarily Hawaii. Flights to and from Mexico represented approximately 13% of
Alaska’s total passenger traffic in the first
quarter of 2009, generally the highest quarter of the year, and 8% of total
traffic in the full year of 2008. We
will be monitoring the situation closely and will make any
further changes
to our schedule if necessary.
Horizon
Fleet Transition
Horizon
is in the process of transitioning to an all-Q400 fleet. As of March
31, 2009, Horizon had six Q200 aircraft remaining, none of which were in the
operational fleet. The total charge associated with removing these
aircraft from operation in the first quarter of 2009 was $4.8
million. This charge represents the estimated loss under potential
disposal transactions and may change when the final transactions are
complete.
In the
first quarter of 2008, our Board of Directors approved the plan to remove
Horizon’s CRJ-700 fleet from operations, in addition to the Q200 transition
described above. We are currently evaluating various alternatives to
dispose of the remaining 18 CRJ-700 aircraft in the most economically feasible
way. The current economic conditions are hindering the remarketing
effort and could result in further delays of the timeline to transition
completely to an all-Q400 fleet. The nature, timing or amount of any
potential gain or loss associated with transactions on the remaining aircraft
cannot be reasonably estimated at this time.
New
Markets
In the first quarter, we announced that
Alaska would begin daily non-stop service between Seattle and Austin, Texas beginning August 3, 2009; between Portland, Ore. and Maui beginning July 3, 2009;
between Seattle and Houston beginning September 23, 2009; between
Seattle and Atlanta beginning October 23, 2009; and between
Bellingham, Wash. to Las Vegas beginning June 25, 2009. Alaska also announced new service between
Oakland, Calif. and Maui beginning November 9, 2009
four times a week and thrice-weekly service between Oakland and Kona beginning November 10,
2009.
First Bag Service
Charge
We recently announced that we will join nearly all major
domestic carriers in charging for a first checked bag. The $15
service charge is effective for tickets purchased beginning May 1, 2009 for
travel commencing July 7, 2009. This fee will not apply to our MVP or
MVP Gold Mileage Plan members, for those traveling solely within the state of
Alaska, and for certain other
passengers. We
believe this fee will generate at least $70 million of incremental revenue on an
annual basis and $30
million of incremental revenue for the remainder of 2009. Our desire is to keep our
base ticket prices competitive and to allow our customers to pay only for the
added services that they use.
New Luggage
Guarantee
We have also introduced a guarantee to compensate passengers if
their bags are not at the baggage claim within 25 minutes after their flight
parks at the gate. Passengers will have the choice of 2,500
Mileage Plan miles or a $25 voucher that can be used on a future
flight. This guarantee is for all passengers with luggage, including
those that were not subject to the service charge. We believe that we are the only airline
to offer this guarantee to customers.
On-Board Wi-Fi
Alaska began testing its in-flight Wi-Fi
service during the first quarter of 2009. The initial customer
feedback has been positive, and we expect to retrofit approximately half of
Alaska’s fleet in 2009 and the remaining half
in 2010. We are now evaluating pricing models for use of the
service.
Impact of Mt. Redoubt Eruptions
The eruptions of Mt. Redoubt in Alaska significantly impacted our operations
during the first quarter. As the safety of our passengers and
employees is our highest priority, we cancelled more than 300
flights in and out of the state of Alaska affecting more than 20,000
passengers. Most of those passengers were re-accommodated on other
flights. The overall financial impact of the operational disruption
was not material to our financial results.
Outlook
Looking ahead, advance bookings for May
and June 2009 are down at both Alaska and Horizon compared to the same period
of 2008. We believe the advance booking trends show signs of weakness
in demand, which will have a negative impact on ticket yields and unit
revenues. If demand continues to deteriorate, we are prepared to
reduce capacity further in the fall of 2009. We will continue to
focus on reducing and/or redeploying our capacity to optimize load factors and
revenue performance. We currently expect Alaska mainline capacity to decline 6% and
Horizon total system capacity to decline by 9% in 2009 compared to 2008.
RESULTS
OF OPERATIONS
COMPARISON OF QUARTER ENDED MARCH 31,
2009 TO QUARTER ENDED MARCH 31, 2008
Our consolidated net loss for the first
quarter of 2009 was $19.2
million, or $0.53 per share, compared to a net loss of $37.3 million, or $1.01 per share, in 2008. Both periods
include adjustments to reflect the timing of gain or loss recognition resulting
from mark-to-market accounting related to our fuel hedge
portfolio. In the first quarter of 2009, we recognized net
mark-to-market gains of $10.0 million ($6.2 million after tax,
or $0.17 per share),
compared to gains of $0.7 million ($0.4 million after tax, or $0.01 per share)
in the first quarter of 2008. These gains offset aircraft fuel
expense.
We
believe disclosure of the impact of these individual charges is useful
information to investors and other readers because:
|
•
|
it
is useful to monitor performance without these items as it improves a
reader’s ability to compare our results to the results of other airlines;
|
|
•
|
our
results excluding these adjustments related to fuel hedge accounting and
other items serve as the basis for our various employee incentive plans,
thus the information allows investors to better understand the changes in
variable incentive pay expense in our condensed consolidated statements of
operations;
|
|
•
|
our
results excluding these items is most often used in internal management
and board reporting and decision-making; and
|
|
•
|
we believe it is the basis by
which we are evaluated by industry
analysts.
|
Our
consolidated results are primarily driven by the results of our two operating
carriers. Alaska and Horizon reported pretax losses of $18.3 million and $10.5
million, respectively, in the first quarter of 2009. Financial and statistical
data for Alaska and Horizon are shown on pages 22 and 29, respectively. An
in-depth discussion of the results of Alaska and Horizon begins on pages 23 and
30, respectively.
Alaska Airlines Financial and
Statistical Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
31 |
|
Financial Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
539.8 |
|
|
$ |
607.3 |
|
|
|
(11.1 |
) |
Freight and
mail
|
|
|
18.3 |
|
|
|
21.3 |
|
|
|
(14.1 |
) |
Other - net
|
|
|
33.2 |
|
|
|
34.4 |
|
|
|
(3.5 |
) |
Total mainline operating
revenues
|
|
|
591.3 |
|
|
|
663.0 |
|
|
|
(10.8 |
) |
Passenger - purchased
capacity
|
|
|
61.8 |
|
|
|
70.4 |
|
|
|
(12.2 |
) |
Total Operating
Revenues
|
|
|
653.1 |
|
|
|
733.4 |
|
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
197.4 |
|
|
|
192.1 |
|
|
|
2.8 |
|
Variable incentive
pay
|
|
|
7.1 |
|
|
|
2.6 |
|
|
|
173.1 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
131.9 |
|
|
|
233.7 |
|
|
|
(43.6 |
) |
Aircraft
maintenance
|
|
|
46.3 |
|
|
|
42.1 |
|
|
|
10.0 |
|
Aircraft
rent
|
|
|
26.5 |
|
|
|
28.2 |
|
|
|
(6.0 |
) |
Landing fees and other
rentals
|
|
|
40.8 |
|
|
|
41.9 |
|
|
|
(2.6 |
) |
Contracted
services
|
|
|
30.5 |
|
|
|
34.7 |
|
|
|
(12.1 |
) |
Selling
expenses
|
|
|
19.1 |
|
|
|
26.5 |
|
|
|
(27.9 |
) |
Depreciation and
amortization
|
|
|
43.3 |
|
|
|
38.8 |
|
|
|
11.6 |
|
Food and beverage
service
|
|
|
11.0 |
|
|
|
11.7 |
|
|
|
(6.0 |
) |
Other
|
|
|
42.8 |
|
|
|
41.8 |
|
|
|
2.4 |
|
Total mainline operating
expenses
|
|
|
596.7 |
|
|
|
694.1 |
|
|
|
(14.0 |
) |
Purchased capacity
costs
|
|
|
62.7 |
|
|
|
76.7 |
|
|
|
(18.3 |
) |
Total Operating
Expenses
|
|
|
659.4 |
|
|
|
770.8 |
|
|
|
(14.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(6.3 |
) |
|
|
(37.4 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
10.1 |
|
|
|
13.1 |
|
|
|
|
|
Interest
expense
|
|
|
(23.0 |
) |
|
|
(21.8 |
) |
|
|
|
|
Interest
capitalized
|
|
|
2.5 |
|
|
|
5.9 |
|
|
|
|
|
Other - net
|
|
|
(1.6 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
(12.0 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income
Tax
|
|
$ |
(18.3 |
) |
|
$ |
(39.8 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
(000)
|
|
|
3,573 |
|
|
|
4,080 |
|
|
|
(12.4 |
) |
RPMs (000,000)
"traffic"
|
|
|
4,179 |
|
|
|
4,526 |
|
|
|
(7.7 |
) |
ASMs (000,000)
"capacity"
|
|
|
5,520 |
|
|
|
6,084 |
|
|
|
(9.3 |
) |
Passenger load
factor
|
|
|
75.7 |
% |
|
|
74.4 |
% |
|
1.3pts
|
|
Yield per passenger
mile
|
|
|
12.92 |
¢ |
|
|
13.42 |
¢ |
|
|
(3.7 |
) |
Operating revenue per
ASM
|
|
|
10.71 |
¢ |
|
|
10.90 |
¢ |
|
|
(1.7 |
) |
Passenger revenue per
ASM
|
|
|
9.78 |
¢ |
|
|
9.98 |
¢ |
|
|
(2.0 |
) |
Operating expenses per
ASM
|
|
|
10.81 |
¢ |
|
|
11.41 |
¢ |
|
|
(5.3 |
) |
Aircraft fuel cost per
ASM
|
|
|
2.39 |
¢ |
|
|
3.84 |
¢ |
|
|
(37.8 |
) |
Aircraft fuel cost per
gallon
|
|
$ |
1.80 |
|
|
$ |
2.72 |
|
|
|
(33.9 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.91 |
|
|
$ |
2.72 |
|
|
|
(29.8 |
) |
Fuel gallons
(000,000)
|
|
|
73.3 |
|
|
|
85.9 |
|
|
|
(14.7 |
) |
Average number of full-time
equivalent employees
|
|
|
9,021 |
|
|
|
9,881 |
|
|
|
(8.7 |
) |
Aircraft utilization (blk
hrs/day)
|
|
|
9.9 |
|
|
|
10.8 |
|
|
|
(8.3 |
) |
Average aircraft stage length
(miles)
|
|
|
1,016 |
|
|
|
969 |
|
|
|
4.9 |
|
Operating fleet at
period-end
|
|
|
112 |
|
|
|
115 |
|
|
|
(3 |
)
a/c |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Capacity Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
RPMs
(000,000)
|
|
|
215 |
|
|
|
267 |
|
|
|
(19.5 |
) |
ASMs
(000,000)
|
|
|
316 |
|
|
|
363 |
|
|
|
(12.9 |
) |
Passenger load
factor
|
|
|
68.0 |
% |
|
|
73.6 |
% |
|
(5.6) pts
|
|
Yield per passenger
mile
|
|
|
28.74 |
¢ |
|
|
26.37 |
¢ |
|
|
9.0 |
|
Operating revenue per
ASM
|
|
|
19.56 |
¢ |
|
|
19.39 |
¢ |
|
|
0.8 |
|
Operating expenses per
ASM
|
|
|
19.84 |
¢ |
|
|
21.13 |
¢ |
|
|
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
ALASKA
AIRLINES
Alaska
reported a loss before income taxes of $18.3 million during the first quarter of
2009 compared to a $39.8 million loss in the first quarter of 2008. The
improvement is primarily the result of the significant decline in fuel cost
between the periods and a $9.6 million decline in non-fuel operating expenses,
partially offset by an $80.3 million decline in total operating
revenue.
ALASKA REVENUES
Total operating revenues decreased
$80.3 million, or 10.9%,
during the first quarter of
2009 as compared to the same period in 2008. The components of
Alaska’s revenue are summarized in the
following table:
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
% Change
|
|
Passenger revenue -
mainline
|
|
$ |
539.8 |
|
|
$ |
607.3 |
|
|
|
(11.1 |
) |
Freight and
mail
|
|
|
18.3 |
|
|
|
21.3 |
|
|
|
(14.1 |
) |
Other - net
|
|
|
33.2 |
|
|
|
34.4 |
|
|
|
(3.5 |
) |
Total mainline operating
revenues
|
|
$ |
591.3 |
|
|
$ |
663.0 |
|
|
|
(10.8 |
) |
Passenger revenue - purchased
capacity
|
|
|
61.8 |
|
|
|
70.4 |
|
|
|
(12.2 |
) |
Total Operating
Revenues
|
|
$ |
653.1 |
|
|
$ |
733.4 |
|
|
|
(10.9 |
) |
Operating Revenue –
Mainline
Mainline passenger revenue declined
11.1% on a 9.3% decrease in capacity and a
2.0% decrease in passenger
revenue per available seat mile (PRASM). The decline in PRASM was
driven by a 3.7%
decrease in yields and
slightly higher load factor compared to the first quarter of
2008. The decline in yields reflects the overall economic climate and
the resulting discounting of fares and is also a result of longer average trip
lengths. Sequentially, PRASM improved by 5% in January, but declined
by 4% in February and just over 6% in March when compared to the prior-year
periods. The shift in the timing of Easter negatively impacted March
results. Regionally, we saw strength in the Hawaii and Alaska long-haul markets and weakness in the
Bay area and Southern
California
markets.
Our load factor in April 2009
was 78.9%, which is slightly higher than the 76.9% in April 2008, primarily due to the
shift of the Easter holiday from March in 2008 to April of this year. Our advance bookings
currently suggest that load factors will be down two points and four points in
May and June, respectively,
compared to the prior year.
We believe that the advances indicate further demand weakness, which will have a
negative impact on ticket yields.
Ancillary revenues included in passenger
revenue increased from $17.9 million in the first quarter of 2008 to $22.2
million in the first quarter of 2009. The increase is primarily due
to the implementation of a second checked bag fee in the third quarter of 2008
and an increase in other fees, partially offset by a decline in the number of
passengers. Ancillary revenues will increase when the first bag
service charges becomes effective.
Freight and mail revenue decreased
by $3.0 million, or 14.1%,
primarily as a result of
lower volumes and lower fuel surcharges.
Other – net revenues declined $1.2 million, or
3.5%. Mileage
Plan revenues declined by $2.2 million primarily as a result of a decline
in award redemptions on other airlines compared
to the first quarter of 2008.
Passenger Revenue – Purchased
Capacity
Passenger revenue – purchased capacity
decreased by $8.6 million
to $61.8 million because of a 19.5% decrease in passenger traffic, offset by a
slight increase in unit revenues compared to the prior
year. Unit revenues have increased as a result of a 9.0% increase in yields, largely
offset by a 5.6-point decline in load factors.
ALASKA EXPENSES
For the quarter, total operating
expenses declined $111.4
million compared to the
same period in 2008 mostly as a result of the significant decreases in fuel
expense. We believe it is useful to summarize operating expenses as follows,
which is consistent with the way expenses are reported internally and evaluated
by management:
Operating Expenses (in
millions)
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
% Change
|
|
Mainline operating
expenses
|
|
$ |
596.7 |
|
|
$ |
694.1 |
|
|
|
(14.0 |
) |
Purchased capacity
costs
|
|
|
62.7 |
|
|
|
76.7 |
|
|
|
(18.3 |
) |
Total Operating
Expenses
|
|
$ |
659.4 |
|
|
$ |
770.8 |
|
|
|
(14.5 |
) |
Mainline Operating
Expenses
Total mainline operating expenses
decreased $97.4 million
from the first quarter of
2008. The decline was primarily due to the $101.8 million
decrease in aircraft fuel
expense compared to the first quarter of 2008 and relatively flat non-fuel
operating expenses. Significant individual expense variances from the
first quarter of 2008 are described more fully below.
Wages and Benefits
Wages and benefits were up $5.3 million, or 2.8%,
compared to the first
quarter of 2008. The increase is primarily due to a $10.8 increase in
our defined-benefit pension cost and a $2.0 million signing bonus associated with the new
two-year extension to the current contract with Alaska’s flight attendants, offset by an 8.7%
reduction in Alaska's full-time equivalent employees.
Variable Incentive
Pay
Variable incentive pay increased from
$2.6 million in the first quarter of 2008 to $7.1 million in the first quarter of 2009. The increase
reflects higher year-over-year accruals for profit-based incentives that are
based on estimated full-year results. The increase can also be
attributed to the addition of flight attendants to the Air Group
performance-based incentive plan, which results in a larger expected payout for
2009 than the variable pay plan under which they were previously
covered. This change is a component of the newly ratified contract
with Alaska’s flight
attendants.
Aircraft Fuel
Aircraft
fuel expense includes both raw
fuel expense (as
defined below) plus the effect of mark-to-market adjustments to our fuel hedge
portfolio included in our income statement as the value of the portfolio
increases and decreases. By definition, our aircraft fuel expense is
very volatile, even between quarters, because it includes these gains or losses
in the value of underlying instrument as crude oil prices increase or
decrease. Raw fuel
expense is defined as the price that we generally pay at the airport, or
the “into-plane” price, including taxes and fees. Raw fuel prices are
impacted by world oil prices and refining costs, which can vary by region in the
U.S. Raw fuel
expense approximates cash paid to suppliers and does not reflect the
effect of our fuel hedges.
Aircraft
fuel expense decreased $101.8 million, or 43.6%, compared to the first quarter
of 2008. The elements of the change are illustrated in the following
table:
|
|
Three Months Ended March
31,
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
73.3 |
|
|
|
85.9 |
|
|
|
(14.7 |
) |
Raw price per
gallon
|
|
$ |
1.62 |
|
|
$ |
3.00 |
|
|
|
(46.0 |
) |
Total raw fuel
expense
|
|
$ |
118.8 |
|
|
$ |
257.7 |
|
|
|
(53.9 |
) |
Net impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
13.1 |
|
|
|
(24.0 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
131.9 |
|
|
$ |
233.7 |
|
|
|
(43.6 |
) |
NM
= Not Meaningful
Fuel gallons consumed decreased
by 14.7%
primarily as a result of
the 9.3%
decrease in capacity and
improved fuel efficiency of our fleet as we completed the fleet transition out
of the less-efficient MD-80 aircraft to newer, more-efficient B737-800 aircraft
in the second half of 2008.
The raw fuel price per gallon declined
by 46.0% as a result of lower West Coast jet fuel
prices that were due to a considerable decrease in crude oil costs and refinery
margins. Based on the current price of jet fuel, we expect that the
raw price per gallon in 2009 will be significantly lower than in
2008.
We also evaluate economic fuel
expense, which we define as
raw
fuel expense less the cash
we receive from hedge counterparties for hedges that settle during the period,
offset by the premium expense that we paid for those contracts. A key
difference between aircraft
fuel expense and economic fuel expense is the
timing of gain or loss recognition on our hedge portfolio. When we
refer to economic fuel
expense, we include gains and losses only when they are realized for
those contracts that were settled during the period based on their original
contract terms. The realized gains or losses include any cash
settlement paid to or received from the hedge counterparties and the recognition
of any premiums originally paid for the settled contracts. We believe this is the best measure of
the effect that fuel prices are currently having on our business because it most
closely approximates the net cash outflow associated with purchasing fuel for
our operations. Accordingly, many industry analysts evaluate our results using
this measure, and it is the basis for most internal management reporting and
incentive pay plans.
Our economic fuel
expense is calculated as
follows:
|
|
Three Months Ended March
31
|
|
(in millions, except per-gallon
amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
118.8 |
|
|
$ |
257.7 |
|
|
|
(53.9 |
) |
Plus or minus: net of cash
received from settled hedges and premium expense
recognized
|
|
|
21.4 |
|
|
|
(24.2 |
) |
|
NM
|
|
Economic fuel
expense
|
|
$ |
140.2 |
|
|
$ |
233.5 |
|
|
|
(40.0 |
) |
Fuel gallons
consumed
|
|
|
73.3 |
|
|
|
85.9 |
|
|
|
(14.7 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.91 |
|
|
$ |
2.72 |
|
|
|
(29.8 |
) |
NM = Not
meaningful
As noted in the table above, the total
net amount recognized for hedges that settled during the period
was $21.4 million in the first quarter of 2009, which represents the
premium expense recognized for those hedges net of any cash received or paid upon
settlement, compared to a net cash benefit of $24.2 million in 2008. The decrease is
primarily due to the significant decrease in crude oil prices over the past year
combined with the higher average exercise prices on hedge contracts that settled
this quarter compared to the first quarter of
2008.
We currently expect economic fuel
expense to be significantly
lower for the full year of 2009 than in 2008 because of lower jet fuel
prices.
Aircraft Maintenance
Aircraft maintenance increased
by $4.2 million, or 10.0%,
compared to the prior-year quarter because of
a higher average cost
of airframe maintenance
events and a new power-by-the-hour maintenance agreement on our B737-700
and B737-900 aircraft engines, partially offset by the benefits of our fleet
transition as we have replaced all of our aging MD-80s with newer B737-800s.
Our current expectation is
that aircraft maintenance
costs will be higher for the balance of 2009 compared to 2008 because of the
timing of certain required maintenance events and the power-by-the-hour
contract.
Contracted Services
Contracted services declined
by $4.2 million, or 12.1%,
compared to the first
quarter of 2008 as a result of the reduction in the number of flights operated
throughout our system where vendors are used.
Selling Expenses
Selling expenses declined by $7.4 million, or 27.9%,
compared to the first
quarter of 2008 as a result
of lower credit card and travel agency commissions and lower ticket distribution
costs resulting from the decline in passenger traffic. We expect selling expense to
be lower than 2008 levels for the next two quarters because of lower traffic
levels, partially offset by higher advertising expense supporting our North of
Expected campaign.
Depreciation and
Amortization
Depreciation and amortization
increased $4.5 million, or
11.6%, compared to the
first quarter of 2008. This is primarily due to the additional
B737-800 aircraft delivered in the last nine months of 2008 and the first
quarter of 2009.
Aircraft Rent
Aircraft rent declined $1.7 million, or
6.0%, compared to the first three months of 2008. The decline was
primarily due to the removal of all remaining MD-80 aircraft from our operating
fleet in 2008 and the
return of six B737-400 aircraft since the first quarter of
2008. These declines were partially offset by the sale-leaseback
transactions for six B737-800 aircraft that were completed in February and March
2009. We expect that rent expense will be higher in the second
quarter and the full year as compared to 2008 because of these sale-leaseback
transactions.
Mainline Unit Costs per Available Seat
Mile
Operating costs per ASM (CASM) is an
important metric in the industry, and we use it to gauge the effectiveness of
our cost-reduction efforts. Our effort to reduce unit
cost focuses primarily on reducing the actual dollars we spend to the maximum extent possible
with declines in capacity and, in a period of growth,
increasing our capacity without adding a commensurate amount of
cost.
Our mainline operating costs per
mainline ASM are summarized below:
|
|
Three Months Ended March
31
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total mainline operating expenses
per ASM (CASM)
|
|
|
10.81 |
¢ |
|
|
11.41 |
¢ |
|
|
(5.3 |
) |
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
2.39 |
¢ |
|
|
3.84 |
¢ |
|
|
(37.8 |
) |
We have separately listed in the above
table our fuel costs per ASM. These amounts are included in CASM, but
for internal purposes we consistently use unit cost metrics that exclude fuel
and certain special items to measure our cost-reduction progress. We
believe that such analysis may be important to investors and other readers of
these financial statements for the following reasons:
|
·
|
By eliminating fuel expense and
certain special items from our unit cost metrics, we believe that we have
better visibility into the results of our non-fuel cost-reduction
initiatives. Our industry is highly competitive and is
characterized by high fixed costs, so even a small reduction in non-fuel
operating costs can result in a significant improvement in operating
results. In addition, we believe that all domestic carriers are
similarly impacted by changes in jet fuel costs over the long run, so it
is important for management (and thus investors) to understand the impact
of (and trends in) company-specific cost drivers such as labor rates and
productivity, airport costs, maintenance costs, etc., which are more
controllable by management.
|
|
·
|
Mainline cost per ASM excluding
fuel and certain special items is one of the most important measures used
by managements of both Alaska and Horizon and by the Air Group
Board of Directors in assessing quarterly and annual cost
performance. For Alaska Airlines, these decision-makers
evaluate operating results of the “mainline” operation, which includes the
operation of the B737 fleet branded in Alaska Airlines
livery. The revenues and expenses associated with purchased
capacity are evaluated
separately.
|
|
·
|
Mainline cost per ASM excluding
fuel (and other items as specified in our plan documents) is an important
metric for the employee incentive plan that covers company management and
certain other employee
groups.
|
|
·
|
Mainline cost per ASM excluding
fuel and certain special items is a measure commonly used by industry
analysts, and we believe it is the basis by which they compare our
airlines to others in the industry. The measure is also the
subject of frequent questions from
investors.
|
|
·
|
Disclosure
of the individual impact of certain noted items provides investors the
ability to measure and monitor performance both with and without these
special items. We believe that disclosing the impact of certain items,
such as fleet transition costs and restructuring charges, is important
because it provides information on significant items that are not
necessarily indicative of future performance. Industry analysts and
investors consistently measure our performance without these items for
better comparability between periods and among other
airlines.
|
|
·
|
Although we disclose our
“mainline” passenger unit revenues for Alaska, we do not (nor are we able to)
evaluate mainline unit revenues excluding the impact that changes in fuel
costs have had on ticket prices. Fuel expense represents a
large percentage of
our total mainline
operating expenses. Fluctuations in fuel prices often
drive changes in unit revenues in the mid-to-long
term. Although we believe it is useful to evaluate non-fuel
unit costs for the reasons noted above, we would caution readers of these
financial statements not to place undue reliance on unit costs excluding
fuel as a measure or predictor of future profitability because of the
significant impact of fuel costs on our
business.
|
We currently forecast our mainline costs
per ASM excluding fuel and other special items for the second quarter and full
year of 2009 to be up 9%
and 8%, respectively,
compared to 2008. The full-year forecast includes an estimate of the
impact of the tentative agreement with Alaska’s pilots.
Purchased Capacity
Costs
Purchased capacity costs declined $14.0 million, or
18.3%, compared to the
first quarter of 2008 to $62.7 million in the first quarter of
2009. Of the total, $57.8 million was paid to Horizon under the CPA
for 299 million ASMs, a
capacity decline of 13.1% from the first quarter of 2008. This expense is eliminated in
consolidation.
Horizon Air Financial and
Statistical Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
31 |
|
Financial Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
Passenger - brand
flying
|
|
$ |
86.6 |
|
|
$ |
102.7 |
|
|
|
(15.7 |
) |
Passenger - Alaska capacity
purchase arrangement
|
|
|
57.8 |
|
|
|
71.4 |
|
|
|
(19.0 |
) |
Total passenger
revenue
|
|
|
144.4 |
|
|
|
174.1 |
|
|
|
(17.1 |
) |
Freight and
mail
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
16.7 |
|
Other - net
|
|
|
1.7 |
|
|
|
2.5 |
|
|
|
(32.0 |
) |
Total Operating
Revenues
|
|
|
146.8 |
|
|
|
177.2 |
|
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
46.4 |
|
|
|
50.7 |
|
|
|
(8.5 |
) |
Variable incentive
pay
|
|
|
2.2 |
|
|
|
1.0 |
|
|
|
120.0 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
25.8 |
|
|
|
48.3 |
|
|
|
(46.6 |
) |
Aircraft
maintenance
|
|
|
13.4 |
|
|
|
15.9 |
|
|
|
(15.7 |
) |
Aircraft
rent
|
|
|
11.5 |
|
|
|
15.4 |
|
|
|
(25.3 |
) |
Landing fees and other
rentals
|
|
|
13.7 |
|
|
|
14.4 |
|
|
|
(4.9 |
) |
Contracted
services
|
|
|
7.5 |
|
|
|
8.0 |
|
|
|
(6.3 |
) |
Selling
expenses
|
|
|
5.9 |
|
|
|
8.0 |
|
|
|
(26.3 |
) |
Depreciation and
amortization
|
|
|
9.2 |
|
|
|
10.2 |
|
|
|
(9.8 |
) |
Food and beverage
service
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
- |
|
Other
|
|
|
11.0 |
|
|
|
12.8 |
|
|
|
(14.1 |
) |
Fleet transition costs -
Q200
|
|
|
4.8 |
|
|
|
5.8 |
|
|
NM
|
|
Total Operating
Expenses
|
|
|
152.0 |
|
|
|
191.1 |
|
|
|
(20.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(5.2 |
) |
|
|
(13.9 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.4 |
|
|
|
1.4 |
|
|
|
|
|
Interest
expense
|
|
|
(5.9 |
) |
|
|
(5.7 |
) |
|
|
|
|
Interest
capitalized
|
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
|
Other - net
|
|
|
(0.1 |
) |
|
|
- |
|
|
|
|
|
|
|
|
(5.3 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income
Tax
|
|
$ |
(10.5 |
) |
|
$ |
(17.6 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
(000)
|
|
|
1,546 |
|
|
|
1,852 |
|
|
|
(16.5 |
) |
RPMs (000,000)
"traffic"
|
|
|
524 |
|
|
|
658 |
|
|
|
(20.4 |
) |
ASMs (000,000)
"capacity"
|
|
|
787 |
|
|
|
942 |
|
|
|
(16.5 |
) |
Passenger load
factor
|
|
|
66.6 |
% |
|
|
69.9 |
% |
|
(3.3)pts
|
|
Yield per passenger
mile
|
|
|
27.56 |
¢ |
|
|
26.46 |
¢ |
|
|
4.2 |
|
Operating revenue per
ASM
|
|
|
18.65 |
¢ |
|
|
18.81 |
¢ |
|
|
(0.8 |
) |
Passenger revenue per
ASM
|
|
|
18.35 |
¢ |
|
|
18.48 |
¢ |
|
|
(0.7 |
) |
Operating expenses per
ASM
|
|
|
19.31 |
¢ |
|
|
20.29 |
¢ |
|
|
(4.8 |
) |
Aircraft fuel cost per
ASM
|
|
|
3.27 |
¢ |
|
|
5.13 |
¢ |
|
|
(36.2 |
) |
Fleet transition costs per
ASM
|
|
|
0.61 |
¢ |
|
|
0.62 |
¢ |
|
NM
|
|
Aircraft fuel cost per
gallon
|
|
$ |
1.78 |
|
|
$ |
2.73 |
|
|
|
(34.8 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.90 |
|
|
$ |
2.78 |
|
|
|
(31.7 |
) |
Fuel gallons
(000,000)
|
|
|
14.5 |
|
|
|
17.7 |
|
|
|
(18.1 |
) |
Average number of full-time
equivalent employees
|
|
|
3,382 |
|
|
|
3,851 |
|
|
|
(12.2 |
) |
Aircraft utilization (blk
hrs/day)
|
|
|
8.3 |
|
|
|
8.3 |
|
|
|
0.0 |
|
Average aircraft stage length
(miles)
|
|
|
315 |
|
|
|
345 |
|
|
|
(8.7 |
) |
Operating fleet at
period-end
|
|
|
55 |
|
|
|
66 |
|
|
|
(11 a/c |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
HORIZON
AIR
Horizon reported a loss before income
taxes of $10.5 million
during the first quarter of
2009 compared to
$17.6 million in the same
period of 2008. The $7.1 million improvement is primarily due to lower aircraft fuel
and non-fuel operating expenses, partially offset by a 17.2% decline in operating revenues.
HORIZON
REVENUES
For the first quarter of 2009, operating
revenues decreased
$30.4 million, or
17.2%, compared to 2008. Horizon’s passenger
revenues are summarized in the table below:
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
Revenues (in
millions) and % of ASMs
|
|
Revenues
|
|
|
% ASMs
|
|
|
Revenues
|
|
|
% ASMs
|
|
Passenger revenue from Horizon
"brand" flying
|
|
$ |
86.6 |
|
|
|
62 |
|
|
$ |
102.7 |
|
|
|
63 |
|
Revenue from CPA with Alaska
|
|
|
57.8 |
|
|
|
38 |
|
|
|
71.4 |
|
|
|
37 |
|
Total passenger revenue and % of
ASMs
|
|
$ |
144.4 |
|
|
|
100 |
|
|
$ |
174.1 |
|
|
|
100 |
|
Line-of-business information is
presented in the table below. In the CPA arrangement with
Alaska, Horizon is insulated from market
revenue factors and is guaranteed contractual revenue amounts based on
operational capacity. As a result, yield and load factor information
for the CPA arrangement are not presented.
|
|
Three Months Ended March 31,
2009
|
|
|
|
Capacity and
Mix
|
|
|
Load Factor
|
|
Yield
|
|
|
RASM
|
|
|
|
2009 Actual
(in
millions)
|
|
|
2008 Actual
(in
millions)
|
|
|
Change
Y-O-Y
|
|
|
Current %
Total
|
|
|
Actual
|
|
|
Point Change
Y-O-Y
|
|
Actual
|
|
|
Change
Y-O-Y
|
|
|
Actual
(in
millions)
|
|
|
Change
Y-O-Y
|
|
Brand
Flying
|
|
|
488 |
|
|
|
598 |
|
|
|
(18.4 |
%) |
|
|
62 |
|
|
|
65.5 |
% |
|
|
(1.7 |
) |
pts
|
|
|
27.09 |
¢ |
|
|
6.0 |
% |
|
|
18.24 |
¢ |
|
|
3.0 |
% |
Alaska CPA
|
|
|
299 |
|
|
|
344 |
|
|
|
(13.1 |
%) |
|
|
38 |
|
|
NM
|
|
|
NM
|
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
System
Total
|
|
|
787 |
|
|
|
942 |
|
|
|
(16.5 |
%) |
|
|
100 |
|
|
|
66.6 |
% |
|
|
(3.3 |
) |
pts
|
|
|
27.56 |
¢ |
|
|
4.2 |
% |
|
|
18.65 |
¢ |
|
|
(0.8 |
%) |
NM = Not meaningful
System-wide, Horizon’s operating unit
revenues were down 0.8% compared to the first quarter of
2008. This was a result of a 4.2% increase in passenger yields offset by
a 3.3-point decline in load
factors.
Horizon brand flying includes those
routes in the Horizon system not covered by the Alaska CPA. Horizon has the
inventory and revenue risk
in those markets. Passenger revenue from
Horizon brand flying decreased $16.1 million or 15.7% on an 18.4%
decrease in brand capacity, offset by a 3.4% increase in passenger unit revenues. The increase
in unit revenues is primarily due to a 6.0% improvement in yield in those markets, partially
offset by lower load factors.
Revenue from the CPA with Alaska totaled $57.8 million during the first quarter of 2009
compared to $71.4 million in the first quarter of 2008. The decline is primarily
due to a 13.1%
decrease in capacity
provided under this arrangement and a significant decline in the associated fuel
cost. Under the CPA, the fee paid by Alaska is based on Horizon’s operating costs
plus a specified margin. This revenue is eliminated in
consolidation.
HORIZON EXPENSES
Total operating expenses decreased $39.1 million, or 20.5%, as
compared to the same period
in 2008. Fuel costs
declined substantially due to the steep drop in crude oil prices and lower
consumption. Station costs, landing fees and other variable
operational costs also declined because of the reduction in capacity from the
first quarter of 2008.
Other significant period-over-period
changes in the components of operating expenses are as
follows:
Wages and Benefits
Wages and benefits decreased
$4.3 million, or 8.5%, as a
result of a 12.2% decline in full-time equivalent employees, offset
by slightly higher wages per employee. The higher wages per employee
is due to a higher average employee seniority level as the recent furloughs have
impacted less senior employees. We expect that wages and benefits
will be lower for the full year when compared to 2008.
Aircraft Fuel
Aircraft fuel decreased $22.5 million, or 46.6%,
compared to the first
quarter of 2008. The elements of the change are illustrated in the
following table:
|
|
Three Months Ended March
31
|
|
(in millions, except per-gallon
amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
14.5 |
|
|
|
17.7 |
|
|
|
(18.1 |
) |
Raw price per
gallon
|
|
$ |
1.59 |
|
|
$ |
3.06 |
|
|
|
(48.0 |
) |
Total raw fuel
expense
|
|
$ |
23.1 |
|
|
$ |
54.2 |
|
|
|
(57.4 |
) |
Impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
2.7 |
|
|
|
(5.9 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
25.8 |
|
|
$ |
48.3 |
|
|
|
(46.6 |
) |
NM = Not
meaningful
The 18.1% decrease in gallons consumed is primarily a
function of the reduction in capacity.
The raw fuel price per gallon declined
by 48.0% as a result of lower West Coast jet fuel
prices that were due to a considerable decrease in crude oil costs and refinery
margins. Based on the current price of jet fuel, we expect that the
raw price per gallon in 2009 will be significantly lower than in
2008.
Our economic fuel
expense is calculated as
follows:
|
|
Three Months Ended March
31
|
|
(in millions, except per-gallon
amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
23.1 |
|
|
$ |
54.2 |
|
|
|
(57.4 |
) |
Plus or minus: net of cash
received from settled hedges and premium expense
recognized
|
|
|
4.4 |
|
|
|
(5.0 |
) |
|
NM
|
|
Economic fuel
expense
|
|
$ |
27.5 |
|
|
$ |
49.2 |
|
|
|
(44.1 |
) |
Fuel gallons
consumed
|
|
|
14.5 |
|
|
|
17.7 |
|
|
|
(18.1 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.90 |
|
|
$ |
2.78 |
|
|
|
(31.7 |
) |
NM = Not
meaningful
As noted in the table above, the total
net amount recognized for
hedges that settled during the period was $4.4 million in the first quarter of
2009, which represents the premium expense recognized for those hedges net
of any cash received or paid upon settlement, compared to a net cash benefit of
$5.0 million in 2008. The decrease is primarily due to the
significant decrease in crude oil prices over the past year combined with the
higher average contract prices on contracts that settled this quarter compared
to the first quarter of 2008.
We currently expect economic fuel
expense to be lower for the
full year of 2009 than in 2008 because of lower jet fuel
prices.
Aircraft Rent
Aircraft rent declined $3.9 million, or 25.3%,
as a result of the complete
transition out of the Q200 fleet, all of which were leased, and the sublease of
two CRJ-700 aircraft in late 2008.
Fleet Transition
Costs
Fleet transition costs associated with
the sublease of Q200 aircraft were $4.8 million during the first quarter of 2009, compared to
$5.8 million in the same period of 2008. The first quarter 2009
charge represents the estimated lease termination cost associated with the final
six Q200 aircraft that were completely removed from operation in the first
quarter. The amount recorded is an estimate based on potential
disposal transactions and may change when the final transactions are
complete.
Operating Costs per Available Seat Mile
(CASM)
Our operating costs per ASM are
summarized below:
|
|
Three Months Ended March
31
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total operating expenses per ASM
(CASM)
|
|
|
19.31 |
¢ |
|
|
20.29 |
¢ |
|
|
(4.8 |
) |
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
3.27 |
¢ |
|
|
5.13 |
¢ |
|
|
(36.2 |
) |
Fleet transition costs per
ASM
|
|
|
0.61 |
¢ |
|
|
0.62 |
¢ |
|
NM
|
|
NM
= Not meaningful
We currently forecast our costs per ASM
excluding fuel for the
second quarter and full year of 2009 to be up 4% to 5% and 5% to 6%,
respectively, compared to 2008. The increase is primarily attributable to
the capacity reductions and an expected increase in scheduled maintenance events
and related costs, offset by declines in other non-fuel operating
expenses.
Consolidated
Nonoperating Income (Expense)
Net nonoperating expense was $17.7 million in the first quarter of 2009 compared
to $6.4 million in the first quarter of
2008. Interest
income declined $2.0 million compared to the first quarter of 2008 as a result
of lower average portfolio returns, offset by a higher average cash and
marketable securities balance. Interest expense increased $3.4 million
primarily resulting from
new debt arrangements in 2008 and the first quarter of 2009, partially offset by
lower interest rates on our variable-rate debt. Capitalized interest was
$3.7 million lower than in the first quarter of 2008 because of lower advance
aircraft purchase deposits.
Consolidated Income Tax Expense
(Benefit)
We provide for income taxes each quarter
based on either our estimate of the effective tax rate for the full year or the
actual year-to-date effective tax rate if it is our best estimate of our annual
rate. For the
first quarter of 2009, we used the actual year-to-date effective tax rate, as we
believe it to be our best estimate of the full-year rate at this time because of
the difficulty in estimating the full-year pretax income or loss and our
resulting effective income tax rate. Our effective income tax benefit
rate on the pretax loss for the first quarter of 2009 was 35.1%, compared to 36.1% in the first quarter of 2008. In arriving
at this rate, we considered a variety of factors, including year-to-date pretax
results, the U.S. federal rate of 35%, estimated
year-to-date nondeductible expenses and estimated state income
taxes.
We evaluate our tax rate each quarter
and make adjustments when necessary. Our final effective tax rate for the full
year is highly dependent on the level of pretax income or loss and the magnitude
of any nondeductible expenses in relation to that pretax
amount.
Critical Accounting
Estimates
For information on our critical
accounting estimates, see Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2008.
LIQUIDITY AND CAPITAL
RESOURCES
Because
of the current economic recession, we continue to focus on preserving our
liquidity position. Our primary sources of liquidity
are:
|
·
|
Expected
cash from operations;
|
|
·
|
Aircraft
financing, such as the first quarter sale-leaseback transactions on six of
our B737-800 aircraft resulting in net proceeds of $230 million and the
financing of two B737-800 aircraft in early May 2009 resulting in proceeds
of $60 million.
|
|
·
|
Our
eight remaining unencumbered aircraft in our fleet that could be financed,
if necessary and if financing is available with terms that are acceptable
to us;
|
|
·
|
Our
$185 million bank line-of-credit
facility;
|
|
·
|
Our
$152 million pre-delivery payment
facility;
|
|
·
|
Other
sources such as the financing of aircraft parts or receivables or a
“forward sale” of mileage credits to our bank
partner.
|
We
believe that our current cash and marketable securities balance of $1.04 billion
combined with future cash flows from operations and other sources of liquidity
will fund our operations for the foreseeable future.
In our
cash and marketable securities portfolio, we invest only in U.S. government
securities, asset-backed obligations and corporate debt
securities. We do not invest in equities or auction-rate
securities. As of March 31, 2009, our net unrealized loss on our
$1.04 billion cash and marketable securities balance was $0.7
million.
The table
below presents the major indicators of financial condition and
liquidity.
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
Change
|
|
(in
millions, except per share and debt-to-capital amounts)
|
|
Cash
and marketable securities
|
|
$ |
1,043.0 |
|
|
$ |
1,077.4 |
|
|
$ |
(34.4 |
) |
Cash
and marketable securities as a percentage of last twelve months
revenue
|
|
|
29 |
% |
|
|
29 |
% |
|
|
-- |
|
Long-term
debt, net of current portion
|
|
|
1,619.3 |
|
|
|
1,596.3 |
|
|
|
23.0 |
|
Shareholders'
equity
|
|
|
657.3 |
|
|
|
661.9 |
|
|
|
(4.6 |
) |
Long-term
debt-to-capital assuming aircraft operating leases are capitalized at
seven times annualized rent
|
|
80%:
20%
|
|
|
81%:19%
|
|
|
NA
|
|
During the three months ended March 31,
2009, our cash and marketable securities decreased $34.4 million to $1.04
billion. The
following discussion summarizes the primary drivers of the increase and our
expectation of future cash requirements.
ANALYSIS OF OUR CASH
FLOWS
Cash Provided by Operating
Activities
During the first quarter of 2009, net
cash provided by
operating activities was
$15.3 million,
compared to a $34.4 million
generated in the first quarter of 2008. The decrease in operating cash flow was
primarily due to the decline of cash inflows for advance ticket sales as
compared to the 2008 first quarter. We expect to generate cash from
operations for the full year, but anticipate consuming substantially all of that
cash plus additional debt proceeds for capital expenditures and debt payments in
2009.
Cash Used in Investing
Activities
Cash used in investing activities was
$235.8 million during the first quarter of 2009,
compared to $221.6 million during the same period of
2008. Our capital expenditures were higher than the first quarter of
2008 as we purchased two Q400 aircraft and six B737-800 aircraft in the first
quarter of 2009 compared to none and three, respectively, in
2008.
We currently expect total capital
expenditures for 2009 to be as follows (in millions):
|
|
Aircraft-related
|
|
|
Non-aircraft
|
|
|
Total
|
|
Alaska
|
|
$ |
312 |
|
|
$ |
73 |
|
|
$ |
385 |
|
Horizon
|
|
|
73 |
|
|
|
6 |
|
|
|
79 |
|
Total Air
Group
|
|
$ |
385 |
|
|
$ |
79 |
|
|
$ |
464 |
|
The increase from prior guidance in
expected non-aircraft capital expenditures at Alaska is primarily due to projected costs
associated with our likely move to a different terminal at Los Angeles International Airport in early 2010. We have
estimated expenditures of
$20 million for 2009,
although total project costs through 2010 will likely be
higher. Details of the funding mechanism and cost-sharing
arrangements have not yet been worked out with the airport
authority. As a result, this estimate is subject to
change.
Cash Provided by Financing
Activities
Net cash provided by financing
activities was $174.5
million during the first
quarter of 2009 compared to $194.8 million during the same period of
2008. We completed sale-leaseback transactions on six B737-800
aircraft for net proceeds of $230 million and we obtained debt financing for two
of our recently purchased
Q400s and one new B737-800 aircraft. Offsetting this increase were normal
long-term debt payments of $33.0 million, $13.5 million of payments on our
pre-delivery payment facility, and a $75 million payment on our bank line-of-credit
facility.
Bank
Line-of-Credit Facility
Alaska
has a $185 million variable-rate credit facility that expires in March
2010. As of December 31, 2008, $75 million was outstanding on the
facility. The outstanding amount was repaid in the first quarter of
2009 resulting in no outstanding borrowings as of March 31, 2009.
Pre-delivery
Payment Facility
Alaska’s
$152 million variable-rate revolving loan facility is available to provide a
portion of the pre-delivery funding requirements of Alaska’s purchase of new
Boeing 737-800 aircraft under the current aircraft purchase agreement. The
facility expires on August 31, 2011. As of March 31, 2009, $29.1
million was outstanding.
Contractual Obligations, Commitments and
Off-Balance-Sheet Arrangements
Aircraft Purchase
Commitments
In April 2009, Alaska entered into an agreement with Boeing
to defer the delivery of a number of B737-800 aircraft
and exercised options for an additional four aircraft to be delivered in 2014 and
2015. Currently, we do not plan to take any B737-800 aircraft
deliveries in 2011. Horizon is
currently in discussions with Bombardier to defer all remaining 2009, 2010 and
2011 Q400 deliveries to later periods. A final agreement has not yet
been executed, so the delivery schedule below is based on the current
commitment. We expect to reach an agreement on a revised delivery
schedule later in the second quarter of this year.
Given the revised Boeing delivery
schedule noted above, we have firm orders to purchase 30 aircraft requiring
future aggregate payments of approximately $743 million, as set forth
below. Alaska has options to acquire 40 additional B737s and Horizon has
options to acquire 10 Q400s. Alaska and Horizon expect to finance the firm
orders and, to the extent exercised, the option aircraft through operating lease
arrangements, long-term
debt or internally generated cash.
The following table summarizes aircraft
purchase commitments as of March 31, 2009 (as amended in April 2009) and
payments by year:
|
|
Delivery Period - Firm
Orders
|
|
|
|
|
|
|
April 1 –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
Aircraft
|
|
December 31,
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
Total
|
|
Boeing
737-800
|
|
|
4 |
|
|
|
7 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
19 |
|
Bombardier
Q400
|
|
|
3 |
|
|
|
7 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
Total
|
|
|
7 |
|
|
|
14 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
30 |
|
Payments
(Millions)
|
|
$ |
183.3 |
|
|
$ |
262.0 |
|
|
$ |
61.1 |
|
|
$ |
71.2 |
|
|
$ |
76.0 |
|
|
$ |
89.2 |
|
|
$ |
742.8 |
|
The remaining 2009 deliveries of
B737-800 aircraft are all expected to occur in the second
quarter. The remaining Q400 deliveries are scheduled to occur in the
fourth quarter of 2009, although we expect that all of the Q400 deliveries will
be deferred as discussed above.
We had
also planned to sell up to four B737-700 aircraft in 2009, but the current
economic environment is hindering our remarketing efforts and we believe it will
likely be difficult to sell those aircraft this year.
Contractual
Obligations
The following table provides a summary
of our principal payments under current and long-term debt obligations,
operating lease commitments, aircraft purchase commitments and other obligations
as of March 31, 2009.
|
|
April
1 –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
(in
millions)
|
|
December 31,
2009 |
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
Total
|
|
Current and long-term
debt obligations
|
|
$ |
99.2 |
|
|
$ |
140.9 |
|
|
$ |
176.0 |
|
|
$ |
220.5 |
|
|
$ |
179.6 |
|
|
$ |
938.4 |
|
|
$ |
1,754.6 |
|
Current and long-term
portions of the pre-delivery payment facility
|
|
|
29.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
29.1 |
|
Operating lease commitments
(1)
|
|
|
122.5 |
|
|
|
235.2 |
|
|
|
202.1 |
|
|
|
201.2 |
|
|
|
154.2 |
|
|
|
573.6 |
|
|
|
1,488.8 |
|
Aircraft purchase
commitments
|
|
|
183.3 |
|
|
|
262.0 |
|
|
|
61.1 |
|
|
|
71.2 |
|
|
|
76.0 |
|
|
|
89.2 |
|
|
|
742.8 |
|
Interest obligations
(2)
|
|
|
71.3 |
|
|
|
101.4 |
|
|
|
90.3 |
|
|
|
77.5 |
|
|
|
63.1 |
|
|
|
203.1 |
|
|
|
606.7 |
|
Other purchase obligations
(3)(4)
|
|
|
44.8 |
|
|
|
65.3 |
|
|
|
51.9 |
|
|
|
52.2 |
|
|
|
42.2 |
|
|
|
54.3 |
|
|
|
310.7 |
|
Total
|
|
$ |
550.2 |
|
|
$ |
804.8 |
|
|
$ |
581.4 |
|
|
$ |
622.6 |
|
|
$ |
515.1 |
|
|
$ |
1,858.6 |
|
|
$ |
4,932.7 |
|
(1)
Operating lease commitments generally include aircraft operating leases, airport
property and hangar leases, office space, and other equipment
leases. The aircraft operating leases include lease obligations for
four leased MD-80 aircraft and six leased Q200 aircraft, all of which we retired
earlier than expected in connection with our fleet transition
plans. We have accrued these leases based on their discounted future
cash flows and we remain obligated under the existing lease contracts on these
aircraft.
(2)
For variable-rate debt, future obligations are shown above using interest rates
in effect as of March 31, 2009.
(3)
Includes minimum obligations under our long-term power-by-the-hour maintenance
agreements for all B737 engines other than the
B737-800.
(4)
Excludes $23.7 million of unrecognized tax benefits for which we cannot make a
reasonably reliable estimate of the amount and period of
payment.
Pension Obligations
The "Contractual Obligations" table
above excludes contributions to our various pension plans, which could be
approximately $45 million to $75 million per year based on our historical
funding practice, or
significantly higher if plan assets continue to decline with further market
deterioration. There is no minimum required contribution
in 2009, although if the
value of the pension plan assets does not improve by the end of 2009, there will
likely be a required contribution in 2010.
Effect of
Inflation
Inflation and price changes other than
for aircraft fuel and passenger fares do not have a significant effect on our
operating revenues, operating expenses and operating income.
ITEM
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in
market risk from the information provided in Item 7A “Quantitative and
Qualitative Disclosure About Market Risk” in our 2008 10-K except as
follows:
Market Risk – Aircraft
Fuel
Currently, our fuel-hedging portfolio
consists almost exclusively of crude oil call options. We utilize the
contracts in our portfolio as hedges to decrease our exposure to the volatility
of jet fuel prices. Call options are designed to effectively cap our
cost of the crude oil component of fuel prices, allowing us to limit our
exposure to increasing fuel prices. With these call option contracts,
we still benefit from the decline in crude oil prices, as there is no downward exposure other than
the premiums that we pay to enter into the contracts. Although to a
lesser extent, we also use collar structures for fuel hedging
purposes. We believe there is risk in not hedging against the
possibility of fuel price increases. We estimate that a 10% increase
or decrease in crude oil prices as of March 31, 2009 would increase or
decrease the fair value of
our $35.2 million
hedge portfolio by
approximately $14.3 million and $11.9 million,
respectively.
Our fuel-hedge portfolio at March 31,
2009 includes a $5.7
million liability
associated with collar structures that would require future cash outlays if oil
prices remained below the strike price. We do not have any
collateral held by counterparties to these agreements as of March 31,
2009.
We continue to believe that our fuel
hedge program is an important part of our strategy to reduce our exposure to
volatile fuel prices. We expect to continue to enter into these types
of contracts prospectively, although significant changes in market conditions
could affect our decisions. For more discussion, see Note 3 to
our consolidated financial
statements.
Financial Market
Risk
In this current economic environment,
significant volatility in market values and interest rates is
common. Credit markets have tightened and the availability of debt
financing has greatly diminished. We have exposure to market risk
associated with changes in interest rates related primarily to our debt
obligations and short-term investment portfolio. Our debt obligations
include variable-rate instruments, which have exposure to changes in interest
rates. This exposure is somewhat mitigated through our variable-rate
investment portfolio. We have investments in marketable securities,
which are exposed to market risk associated with changes in interest rates and
market values. We do not currently invest in equity securities or
auction-rate securities, only government and corporate bond
obligations. As of March 31, 2009, the net unrealized loss on
our $1.04
billion cash and marketable
securities balance was $0.7
million.
ITEM
4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of March 31, 2009, an evaluation was
performed under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer (collectively,
our “certifying officers”), of the effectiveness of the design and operation of
our disclosure controls and procedures. These disclosure controls and procedures
are designed to ensure that the information required to be disclosed by us in
our periodic reports filed with or submitted to the Securities and Exchange
Commission (the SEC) is recorded, processed, summarized and reported within the
time periods specified by the SEC’s rules and forms, and includes, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to our management, including our certifying
officers, as appropriate to allow timely decisions regarding required
disclosure. Our certifying officers concluded, based on their
evaluation, that disclosure controls and procedures were effective as of March
31, 2009.
Changes in Internal Control over
Financial Reporting
We made no changes in our internal
control over financial reporting during the quarter ended March 31, 2009, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska
violated the CBA by, among other things, subcontracting the ramp service
operation in Seattle. The dispute was referred to an arbitrator and hearings on
the grievance commenced in January 2007, with a final hearing date in August
2007. In July 2008, the arbitrator issued a ruling in the matter. In that
ruling, the arbitrator found that Alaska had violated the CBA and instructed
Alaska and the IAM to negotiate a remedy. The parties have met, but the matter
has not yet been resolved. Another arbitration hearing has been set
for June 2009, with a preliminary hearing in May 2009. Management
currently does not believe that any final remedy will materially impact our
financial position or results of operations.
We are a
party to routine litigation matters incidental to our business and with respect
to which no material liability is expected.
Management
believes the ultimate disposition of these matters is not likely to materially
affect our financial position or results of operations. This
forward-looking statement is based on management’s current understanding of the
relevant law and facts; and it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None during the three months ended March
31, 2009.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
None.
See Exhibit Index on page 40.
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ALASKA
AIR GROUP,
INC.
Registrant
Date: May 8,
2009
By: /s/ Brandon
S.
Pedersen
Brandon S. Pedersen
Vice President/Finance and Controller
(Principal Accounting Officer)
By: /s/ Glenn S.
Johnson
Glenn S. Johnson
Executive Vice President/Finance and
Chief Financial Officer (Principal Financial Officer)
Pursuant to Item 601(a)(2) of Regulation
S-K, this Exhibit Index immediately precedes the exhibits.
The following exhibits are numbered in
accordance with Item 601 of Regulation S-K.
Exhibits
32.1 and 32.2 are being furnished pursuant to 18 U.S.C. Section 1350 and shall
not deemed to be “filed” or purposes of Section 18 of the Securities Exchange
Act of 1934, as amended (“Exchange Act”,) or otherwise subject to the liability
of that section. Such exhibits shall not be deemed to be incorporated
by reference into any filing of the Company under the Securities Act of 1933, as
amended, or the Exchange Act, whether made before or after the date hereof,
regardless of any general incorporation language in such filing.