form10q.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 June 30, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ 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
35,117,308 common shares, par value $1.00, outstanding at July 31, 2009.
ALASKA AIR
GROUP, INC.
Quarterly Report on Form 10-Q for
the three months ended June 30, 2009
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;
|
|
·
|
our significant
indebtedness;
|
|
·
|
compliance with our financial
covenants;
|
|
·
|
potential downgrades of our credit
ratings and the availability of
financing;
|
|
·
|
our ability to meet our cost
reduction goals;
|
|
·
|
operational
disruptions;
|
|
·
|
the concentration of our revenue
from a few key markets;
|
|
·
|
actual or threatened terrorist
attacks, global instability and potential U.S. military actions or
activities;
|
|
·
|
our inability to achieve or
maintain profitability;
|
|
·
|
fluctuations in our quarterly
results;
|
|
·
|
an aircraft accident or
incident;
|
|
·
|
liability and other claims
asserted against us;
|
|
·
|
our reliance on automated systems
and the risks associated with changes made to those
systems;
|
|
·
|
our reliance on third-party
vendors and partners;
|
|
·
|
changes in laws and regulations;
and
|
|
·
|
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.
PART I. FINANCIAL
INFORMATION
|
|
|
|
|
|
|
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE
SHEETS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
(in
millions)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
163.3 |
|
|
$ |
283.1 |
|
Marketable
securities
|
|
|
958.5 |
|
|
|
794.3 |
|
Total cash and
marketable securities
|
|
|
1,121.8 |
|
|
|
1,077.4 |
|
Receivables -
net
|
|
|
156.5 |
|
|
|
116.7 |
|
Inventories and supplies -
net
|
|
|
43.6 |
|
|
|
51.9 |
|
Deferred income
taxes
|
|
|
158.2 |
|
|
|
164.4 |
|
Fuel hedge
contracts
|
|
|
39.4 |
|
|
|
16.5 |
|
Prepaid expenses and other current
assets
|
|
|
74.4 |
|
|
|
82.0 |
|
Total Current
Assets
|
|
|
1,593.9 |
|
|
|
1,508.9 |
|
|
|
|
|
|
|
|
|
|
Property and
Equipment
|
|
|
|
|
|
|
|
|
Aircraft and other flight
equipment
|
|
|
3,594.6 |
|
|
|
3,431.0 |
|
Other property and
equipment
|
|
|
627.1 |
|
|
|
608.6 |
|
Deposits for future flight
equipment
|
|
|
179.3 |
|
|
|
309.8 |
|
|
|
|
4,401.0 |
|
|
|
4,349.4 |
|
Less accumulated depreciation and
amortization
|
|
|
1,246.8 |
|
|
|
1,181.7 |
|
Total Property and Equipment -
Net
|
|
|
3,154.2 |
|
|
|
3,167.7 |
|
|
|
|
|
|
|
|
|
|
Fuel Hedge
Contracts
|
|
|
39.9 |
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
153.3 |
|
|
|
123.1 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
4,941.3 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE
SHEETS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
(in millions
except share amounts)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
52.5 |
|
|
$ |
59.6 |
|
Accrued aircraft
rent
|
|
|
61.6 |
|
|
|
64.4 |
|
Accrued wages, vacation and
payroll taxes
|
|
|
124.4 |
|
|
|
119.5 |
|
Other accrued
liabilities
|
|
|
509.0 |
|
|
|
475.4 |
|
Air traffic
liability
|
|
|
421.5 |
|
|
|
372.7 |
|
Fuel hedge contracts
liability
|
|
|
4.1 |
|
|
|
24.1 |
|
Current portion of long-term
debt
|
|
|
167.3 |
|
|
|
244.9 |
|
Total Current
Liabilities
|
|
|
1,340.4 |
|
|
|
1,360.6 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, Net of Current
Portion
|
|
|
1,669.7 |
|
|
|
1,596.3 |
|
|
|
|
|
|
|
|
|
|
Other Liabilities and
Credits
|
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
|
46.1 |
|
|
|
36.7 |
|
Deferred
revenue
|
|
|
454.3 |
|
|
|
421.3 |
|
Obligation for pension and
postretirement medical benefits
|
|
|
583.3 |
|
|
|
584.7 |
|
Other
liabilities
|
|
|
159.1 |
|
|
|
174.1 |
|
|
|
|
1,242.8 |
|
|
|
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
- 43,319,031 shares
|
|
|
|
|
|
|
|
|
2008
- 43,171,404 shares
|
|
|
43.3 |
|
|
|
43.2 |
|
Capital in excess of
par value
|
|
|
924.5 |
|
|
|
915.0 |
|
Treasury stock
(common), at cost: 2009 - 7,577,806 shares
|
|
|
|
|
|
|
|
|
2008
- 6,896,506 shares
|
|
|
(172.8 |
) |
|
|
(161.4 |
) |
Accumulated other comprehensive
loss
|
|
|
(309.9 |
) |
|
|
(328.3 |
) |
Retained
earnings
|
|
|
203.3 |
|
|
|
193.4 |
|
|
|
|
688.4 |
|
|
|
661.9 |
|
Total Liabilities and
Shareholders' Equity
|
|
$ |
4,941.3 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
30
|
|
|
Six Months Ended June
30
|
|
(in millions except per-share
amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
757.2 |
|
|
$ |
863.5 |
|
|
$ |
1,441.3 |
|
|
$ |
1,639.2 |
|
Freight and
mail
|
|
|
25.2 |
|
|
|
27.7 |
|
|
|
44.6 |
|
|
|
49.9 |
|
Other - net
|
|
|
61.5 |
|
|
|
39.6 |
|
|
|
100.4 |
|
|
|
81.2 |
|
Total Operating
Revenues
|
|
|
843.9 |
|
|
|
930.8 |
|
|
|
1,586.3 |
|
|
|
1,770.3 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
247.1 |
|
|
|
234.4 |
|
|
|
493.1 |
|
|
|
479.1 |
|
Variable incentive
pay
|
|
|
18.9 |
|
|
|
5.1 |
|
|
|
28.2 |
|
|
|
8.7 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
128.4 |
|
|
|
182.0 |
|
|
|
286.1 |
|
|
|
464.0 |
|
Aircraft
maintenance
|
|
|
59.6 |
|
|
|
54.2 |
|
|
|
119.3 |
|
|
|
112.2 |
|
Aircraft
rent
|
|
|
39.1 |
|
|
|
42.3 |
|
|
|
77.1 |
|
|
|
85.9 |
|
Landing fees and other
rentals
|
|
|
54.4 |
|
|
|
56.9 |
|
|
|
108.6 |
|
|
|
112.9 |
|
Contracted
services
|
|
|
36.8 |
|
|
|
43.6 |
|
|
|
75.2 |
|
|
|
88.1 |
|
Selling
expenses
|
|
|
35.3 |
|
|
|
44.1 |
|
|
|
60.3 |
|
|
|
78.6 |
|
Depreciation and
amortization
|
|
|
53.9 |
|
|
|
51.5 |
|
|
|
106.7 |
|
|
|
100.8 |
|
Food and beverage
service
|
|
|
12.4 |
|
|
|
13.4 |
|
|
|
24.0 |
|
|
|
25.7 |
|
Other
|
|
|
50.3 |
|
|
|
61.5 |
|
|
|
107.1 |
|
|
|
118.7 |
|
New pilot contract transition
costs
|
|
|
35.8 |
|
|
|
- |
|
|
|
35.8 |
|
|
|
- |
|
Fleet transition costs -
MD-80
|
|
|
- |
|
|
|
26.0 |
|
|
|
- |
|
|
|
26.0 |
|
Fleet transition costs -
CRJ-700
|
|
|
- |
|
|
|
6.1 |
|
|
|
- |
|
|
|
6.1 |
|
Fleet transition costs -
Q200
|
|
|
5.2 |
|
|
|
3.2 |
|
|
|
10.0 |
|
|
|
9.0 |
|
Total Operating
Expenses
|
|
|
777.2 |
|
|
|
824.3 |
|
|
|
1,531.5 |
|
|
|
1,715.8 |
|
Operating
Income
|
|
|
66.7 |
|
|
|
106.5 |
|
|
|
54.8 |
|
|
|
54.5 |
|
Nonoperating Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7.8 |
|
|
|
10.5 |
|
|
|
16.1 |
|
|
|
20.8 |
|
Interest
expense
|
|
|
(25.1 |
) |
|
|
(25.0 |
) |
|
|
(51.9 |
) |
|
|
(48.4 |
) |
Interest
capitalized
|
|
|
1.8 |
|
|
|
6.1 |
|
|
|
4.6 |
|
|
|
12.6 |
|
Other - net
|
|
|
(3.5 |
) |
|
|
0.1 |
|
|
|
(5.5 |
) |
|
|
0.3 |
|
|
|
|
(19.0 |
) |
|
|
(8.3 |
) |
|
|
(36.7 |
) |
|
|
(14.7 |
) |
Income before income
tax
|
|
|
47.7 |
|
|
|
98.2 |
|
|
|
18.1 |
|
|
|
39.8 |
|
Income tax
expense
|
|
|
18.6 |
|
|
|
35.1 |
|
|
|
8.2 |
|
|
|
14.0 |
|
Net Income
|
|
$ |
29.1 |
|
|
$ |
63.1 |
|
|
$ |
9.9 |
|
|
$ |
25.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per
Share:
|
|
$ |
0.80 |
|
|
$ |
1.75 |
|
|
$ |
0.27 |
|
|
$ |
0.71 |
|
Diluted Earnings Per
Share:
|
|
$ |
0.79 |
|
|
$ |
1.74 |
|
|
$ |
0.27 |
|
|
$ |
0.70 |
|
Shares used for
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36.354 |
|
|
|
36.059 |
|
|
|
36.340 |
|
|
|
36.542 |
|
Diluted
|
|
|
36.591 |
|
|
|
36.255 |
|
|
|
36.742 |
|
|
|
36.876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY (unaudited)
|
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Capital in
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess of
|
|
|
Stock,
|
|
|
|
|
|
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 income for the six months
ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
9.9 |
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
Reclassification to
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Income tax
effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7 |
|
|
|
|
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related to employee
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
Income tax
effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7 |
|
|
|
|
|
|
|
10.7 |
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury
stock
|
|
|
(0.700 |
) |
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.6 |
|
Common stock issued under stock
plans
|
|
|
0.051 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
Treasury stock issued under stock
plans
|
|
|
0.018 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Stock issued for employee stock
purchase plan
|
|
|
0.097 |
|
|
|
0.1 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
Balances at June 30,
2008
|
|
|
35.741 |
|
|
$ |
43.3 |
|
|
$ |
924.5 |
|
|
$ |
(172.8 |
) |
|
$ |
(309.9 |
) |
|
$ |
203.3 |
|
|
$ |
688.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS (unaudited)
|
|
|
|
|
|
|
Alaska Air Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June
30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
9.9 |
|
|
$ |
25.8 |
|
Adjustments to reconcile net
income to net cash
|
|
|
|
|
|
|
|
|
provided by operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash impact
of pilot contract transition costs
|
|
|
15.5 |
|
|
|
- |
|
Fleet transition
costs, including impairment charge
|
|
|
10.0 |
|
|
|
41.1 |
|
Depreciation and
amortization
|
|
|
106.7 |
|
|
|
100.8 |
|
Stock-based
compensation
|
|
|
7.6 |
|
|
|
8.0 |
|
Changes in fair
values of open fuel hedge contracts
|
|
|
(46.9 |
) |
|
|
(192.7 |
) |
Changes in
deferred income taxes
|
|
|
2.9 |
|
|
|
13.9 |
|
Increase in
receivables - net
|
|
|
(39.8 |
) |
|
|
(27.0 |
) |
Changes in
prepaid expenses and other current assets
|
|
|
14.6 |
|
|
|
(27.1 |
) |
Increase in air
traffic liability
|
|
|
48.8 |
|
|
|
167.7 |
|
Increase in
other current liabilities
|
|
|
18.3 |
|
|
|
5.9 |
|
Decrease in
deferred revenue and other-net
|
|
|
(21.6 |
) |
|
|
(12.3 |
) |
Net cash provided by operating
activities
|
|
|
126.0 |
|
|
|
104.1 |
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Property and equipment
additions:
|
|
|
|
|
|
|
|
|
Aircraft and aircraft
purchase deposits
|
|
|
(269.1 |
) |
|
|
(242.4 |
) |
Other flight
equipment
|
|
|
(19.6 |
) |
|
|
(20.5 |
) |
Other property and
equipment
|
|
|
(19.8 |
) |
|
|
(21.2 |
) |
Total property and equipment
additions
|
|
|
(308.5 |
) |
|
|
(284.1 |
) |
Proceeds from disposition of
assets
|
|
|
4.2 |
|
|
|
5.4 |
|
Purchases of marketable
securities
|
|
|
(515.0 |
) |
|
|
(474.1 |
) |
Sales and maturities of marketable
securities
|
|
|
361.0 |
|
|
|
262.6 |
|
Restricted deposits and
other
|
|
|
(4.3 |
) |
|
|
1.5 |
|
Net cash used in investing
activities
|
|
|
(462.6 |
) |
|
|
(488.7 |
) |
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
162.6 |
|
|
|
530.5 |
|
Proceeds from sale-leaseback
transactions, net
|
|
|
230.0 |
|
|
|
- |
|
Long-term debt
payments
|
|
|
(166.8 |
) |
|
|
(123.9 |
) |
Purchase of treasury
stock
|
|
|
(11.8 |
) |
|
|
(48.9 |
) |
Proceeds and tax benefit from
issuance of common stock
|
|
|
2.8 |
|
|
|
1.7 |
|
Net cash provided by financing
activities
|
|
|
216.8 |
|
|
|
359.4 |
|
Net change in cash and cash
equivalents
|
|
|
(119.8 |
) |
|
|
(25.2 |
) |
Cash and cash equivalents at
beginning of year
|
|
|
283.1 |
|
|
|
204.3 |
|
Cash and cash equivalents at end
of period
|
|
$ |
163.3 |
|
|
$ |
179.1 |
|
Supplemental disclosure of cash
paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest (net of
amount capitalized)
|
|
$ |
48.3 |
|
|
$ |
31.1 |
|
Income
taxes
|
|
|
(8.9 |
) |
|
|
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 June 30, 2009, as well as the results of
operations for the three months and six months ended June 30, 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 4. 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 debt3Bsecurity is other-than-temporarily
impaired and how
entities should record the impairment in
the financial statements. The standard requires 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 were effective for the Company
as of June 30, 2009. See Note 2 for a discussion of the impact of
these new positions to the Company’s financial statements.
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 requires companies to
provide, on an interim basis, disclosures that are currently required in annual
statements for the fair value of financial instruments. This staff position was effective for the Company as of June
30, 2009. See Note 2 for a discussion of the impact of this new position to the Company’s financial
statements.
In May
2009, the FASB issued statement No. 165, Subsequent Events (SFAS
165). SFAS 165 modifies the definition of what qualifies as a subsequent
event—those events or transactions that occur following the balance sheet date,
but before the financial statements are issued, or are available to be
issued—and requires companies to disclose the date through which it has
evaluated subsequent events and the basis for determining that
date. The Company adopted SFAS 165 as of June 30,
2009. The Company has
performed an evaluation of subsequent events through August 7, 2009, which is
the date these financial statements were issued.
In June
2009, the FASB issued statement No. 167, Amendments to FASB Interpretation
No. 46R (SFAS
167). Among other items, SFAS 167 revises the approach to determine
the primary beneficiary of a variable interest entity (VIE) and requires
companies to more frequently reassess whether they must consolidate
VIEs. SFAS 167 is effective for the Company beginning on January 1,
2010. The Company does not expect this standard will have a material
impact on its financial position, results of operations or cash
flows.
NOTE
2. FAIR
VALUE OF FINANCIAL INSTRUMENTS
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. 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 June 30, 2009 are as follows (in
millions):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$ |
163.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
163.3 |
|
Marketable
securities
|
|
|
107.1 |
|
|
|
851.4 |
|
|
|
— |
|
|
|
958.5 |
|
Total
|
|
$ |
270.4 |
|
|
$ |
851.4 |
|
|
$ |
— |
|
|
$ |
1,121.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of
the Company’s marketable securities are classified as
available-for-sale. The securities are carried at fair value, with
the unrealized gains and losses, excluding credit losses, reported in
shareholders’ equity under the caption “accumulated other comprehensive
loss.” Realized gains and losses are included in other nonoperating
income (expense) in the condensed consolidated statements of
operations.
The cost
of securities sold is based on the specific identification
method. Interest and dividends on marketable securities are included
in interest income in the condensed consolidated statements of
operations.
Marketable
securities consisted of the following (in millions):
|
|
June 30, 2009
|
|
|
December
31, 2008
|
|
Amortized
cost:
|
|
|
|
|
|
|
Government
securities/agencies
|
|
$ |
370.2 |
|
|
$ |
329.1 |
|
Asset-backed
obligations
|
|
|
234.3 |
|
|
|
198.0 |
|
Other
corporate obligations
|
|
|
345.6 |
|
|
|
263.7 |
|
|
|
$ |
950.1 |
|
|
$ |
790.8 |
|
Fair
value:
|
|
|
|
|
|
|
|
|
Government
securities/agencies
|
|
$ |
376.3 |
|
|
$ |
342.8 |
|
Asset-backed
obligations
|
|
|
230.7 |
|
|
|
187.7 |
|
Other
corporate obligations
|
|
|
351.5 |
|
|
|
263.8 |
|
|
|
$ |
958.5 |
|
|
$ |
794.3 |
|
As of
June 30, 2009, the Company had a net unrealized gain of $8.4 million in its cash
and marketable securities portfolio recorded in “accumulated other comprehensive
loss.” Gross unrealized gains were $15.3
million and gross unrealized losses, net of credit losses, were $6.9 million at June 30, 2009, which
management believes is not “other-than-temporarily” impaired as defined by FASB
Staff Positions FAS 115-2 and FAS
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments.
The
Company determined that credit losses, as defined in the Staff Position, existed
as of June 30, 2009 with respect to certain asset-backed
obligations. Based on a future cash flow analysis, the Company
determined that it does not expect to recover the full amortized cost basis of
the asset-backed obligations that were in an unrealized loss position as of June
30, 2009. This analysis estimated the expected future cash flows by
using a discount rate equal to the effective interest rate implicit in the
securities at the date of acquisition. The inputs used to estimate
future cash flows included the default, foreclosure, and bankruptcy rates on the
underlying mortgages and expected home pricing trends. The Company
also looked at the average credit scores of the individual mortgage holders and
the average loan-to-value percentage. Although management believes
the underlying securities are performing well considering the current market,
all of the factors mentioned result in expected future cash flows that are less
than the current amortized cost of the portfolio of
asset-backed
obligations. Therefore,
the Company recorded a credit loss in other nonoperating expense of $1.8 million
in the second quarter of 2009 to reflect the difference between the present
value of future cash flows and the amortized cost basis at June 30,
2009. Management does not believe the remaining $6.9 million
unrealized loss recorded in AOCI is other-than-temporary based on the current
facts and circumstances. Management currently does not intend to sell
these securities prior to their recovery nor does it believe that it will be
more-likely-than-not that the Company would need to sell these securities for
liquidity or other reasons.
Gross
unrealized gains and losses, including credit losses, at June 30, 2009 are
presented in the table below (in millions):
|
|
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains in AOCI
|
|
|
Less
than 12 months
|
|
|
Greater
than 12 months
|
|
|
Total
Unrealized Losses
|
|
|
Less:
Credit Loss Recorded in Earnings
|
|
|
Net
Unrealized Losses in AOCI
|
|
|
Net
Unrealized Gains/(Losses) in AOCI
|
|
|
Fair
Value of Securities with Unrealized Losses
|
|
|
Government
Securities/Agencies
|
|
$ |
6.4 |
|
|
$ |
(0.3 |
) |
|
$ |
-- |
|
|
$ |
(0.3 |
) |
|
$ |
-- |
|
|
$ |
(0.3 |
) |
|
$ |
6.1 |
|
|
$ |
93.7 |
|
Asset-backed
obligations
|
|
|
2.3 |
|
|
|
(0.3 |
) |
|
|
(7.4 |
) |
|
|
(7.7 |
) |
|
|
(1.8 |
) |
|
|
(5.9 |
) |
|
|
(3.6 |
) |
|
|
52.0 |
|
Other
corporate obligations
|
|
|
6.6 |
|
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
-- |
|
|
|
(0.7 |
) |
|
|
5.9 |
|
|
|
79.6 |
|
Total
|
|
$ |
15.3 |
|
|
$ |
(1.0 |
) |
|
$ |
(7.7 |
) |
|
$ |
(8.7 |
) |
|
$ |
(1.8 |
) |
|
|
(6.9 |
) |
|
$ |
8.4 |
|
|
$ |
225.3 |
|
Of the
marketable securities on hand at June 30, 2009, 11% mature in 2009, 27% in 2010,
and 62% thereafter. Gross realized gains and losses for the three and
six-month periods ended June 30, 2009 and 2008 were not material to the
condensed consolidated financial statements.
Fair
Value of Financial Instruments
The
majority of the Company’s financial instruments are carried at fair
value. These include cash and cash equivalents, marketable securities
(Note 2), restricted deposits (Note 9), and fuel hedge contracts (Note
4). The Company’s long-term fixed-rate debt is not carried at fair
value. The estimated fair value of the Company’s long-term debt was
as follows (in millions):
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Long-term
debt at June 30, 2009
|
|
$ |
1,837.0 |
|
|
$ |
1,775.1 |
|
Long-term
debt at December 31, 2008
|
|
$ |
1,841.2 |
|
|
$ |
2,006.8 |
|
The fair
value of cash and cash equivalents approximates carrying values due to the short
maturity of these instruments. The fair value of marketable
securities is based on market prices. The fair value of fuel hedge
contracts is based on commodity exchange prices. The fair value of
restricted deposits approximates the carrying amount. The fair value
of long-term debt is based on a discounted cash flow analysis using the
Company’s current borrowing rate.
NOTE
3. NEW
PILOT CONTRACT TRANSITION COSTS AND RESTRUCTURING CHARGES
On
May 19, 2009, Alaska announced that its pilots, represented by the Air Line
Pilots Association, ratified a new four-year contract. Among other
items, the contract has a provision that allows for pilots to receive, at
retirement, a cash payment equal to 25% of their accrued sick leave balance
multiplied by their hourly rate. The transition expense associated with
establishing this sick-leave payout program was $15.5 million. Pilots
also received a one-time cash bonus following ratification of the contract of
$20.3 million in the aggregate. These
items
have been combined and reported as “New pilot contract transition costs” in the
condensed consolidated statements of operations.
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 obligation of $7.2 million as of December 31, 2008
was relieved in the first
six months of 2009.
NOTE
4. FUEL
HEDGE CONTRACTS
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risk associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options, collar
structures and swap agreements for crude oil and, more recently, for jet fuel
refining margins, 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.
The
following table summarizes the components of aircraft fuel expense for the three
and six months ended June 30, 2009 and 2008 (in millions):
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Raw
or “into-plane” fuel cost
|
|
$ |
158.5 |
|
|
$ |
393.3 |
|
|
$ |
300.4 |
|
|
$ |
705.2 |
|
Impact
of hedging activity
|
|
|
(30.1 |
) |
|
|
(211.3 |
) |
|
|
(14.3 |
) |
|
|
(241.2 |
) |
Aircraft
fuel expense
|
|
$ |
128.4 |
|
|
$ |
182.0 |
|
|
$ |
286.1 |
|
|
$ |
464.0 |
|
The net
cash received (paid) for hedges that settled during the period was $0.3 million
and $(19.3) million during the three and six months ended June 30, 2009,
respectively. The net cash received for the three and six months
ended June 30, 2008 was $64.2 million and $100.9 million,
respectively.
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.
The
Company continually monitors its positions with, and the credit quality of, the
financial institutions that are counterparties to its fuel-hedging contracts and
does not anticipate nonperformance by the counterparties.
Outstanding
future fuel hedge positions are as follows:
|
Approximate
% of Expected Fuel
Requirements
|
Gallons
Hedged
(in
millions)
|
Approximate
Crude Oil Price
per
Barrel
|
Third
Quarter 2009
|
50%
|
48.0
|
$76
|
Fourth
Quarter 2009
|
50%
|
43.5
|
$76
|
Full
Year 2009
|
50%
|
91.5
|
$76
|
First
Quarter 2010
|
47%
|
40.0
|
$68
|
Second
Quarter 2010
|
48%
|
43.0
|
$68
|
Third
Quarter 2010
|
46%
|
44.4
|
$72
|
Fourth
Quarter 2010
|
34%
|
30.0
|
$78
|
Full
Year 2010
|
44%
|
157.4
|
$71
|
First
Quarter 2011
|
27%
|
23.7
|
$86
|
Second
Quarter 2011
|
20%
|
18.4
|
$76
|
Third
Quarter 2011
|
17%
|
16.4
|
$79
|
Fourth
Quarter 2011
|
10%
|
9.0
|
$78
|
Full
Year 2011
|
18%
|
67.5
|
$81
|
First
Quarter 2012
|
5%
|
4.6
|
$87
|
Full
Year 2012
|
1%
|
4.6
|
$87
|
The Company also uses fixed-price
physical contracts and financial swaps to fix the refining margin component for
approximately 47% and 29% of our third and fourth quarter 2009 jet
fuel purchases, respectively, at an average price per gallon of 22
cents per
gallon.
As of
June 30, 2009 and December 31, 2008, the net fair values of the Company’s fuel
hedge positions were as follows (in millions):
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Crude
oil call options or “caps”
|
|
$ |
79.3 |
|
|
$ |
52.4 |
|
Crude
oil collar contracts
|
|
|
(2.7 |
) |
|
|
(24.1 |
) |
Refining
margin swap contracts
|
|
|
(1.4 |
) |
|
|
--- |
|
Total
|
|
$ |
75.2 |
|
|
$ |
28.3 |
|
The
Company paid premiums of $86.1 million and $89.1 million to purchase the call
options that were in the portfolio at June 30, 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 June 30, 2009 or December 31,
2008.
NOTE
5. FLEET
TRANSITION
Horizon
Transition to All-Q400 Fleet
Horizon’s
long-term goal is to transition to an all-Q400 fleet. As of June 30,
2009, Horizon still had six Q200 aircraft remaining, none of which were in the
operational fleet. These aircraft were removed from operation in the
first quarter of 2009 and the Company recorded an associated charge of $4.8
million at that time. In the second quarter, the Company refined its
estimate of the total estimated loss on disposal of these aircraft based on more
recent market data and recorded an additional $5.2 million
charge. This charge represents the estimated loss under potential
disposal transactions.
During
the three months ended June 30, 2008, two of Horizon’s Q200s were subleased
to a third party under a sublease arrangement, resulting in a sublease loss of
$2.9 million. During the six months ended June 30, 2008, five of the
aircraft were subleased, resulting in an $8.7 million loss. One other
Q200 aircraft was removed from service during the second quarter of 2008 and the
associated lease was terminated resulting in a net $0.3 million charge to
Horizon.
In the
second quarter of 2008 and in connection with Horizon’s long-term fleet
transition plan, Horizon recorded an impairment charge on its two owned CRJ-700
aircraft and related spare parts as a result of the decision to exit from the
CRJ-700 fleet earlier than originally planned. The total charge
associated with this decision was $5.5 million.
As noted
above, Horizon’s long-term goal is to transition to an all-Q400
fleet. As market conditions have hindered the remarketing efforts on
the CRJ-700 aircraft and as Horizon has successfully deferred future Q400
deliveries, the fleet transition plan has been delayed until market conditions
improve. Depending on the ultimate disposition of the CRJ-700 aircraft, there
may be associated exit charges. The nature, timing or amount of any potential
gain or loss associated with these transactions cannot be reasonably estimated
at this time.
Alaska
Transition to All-Boeing 737 Fleet
In 2006,
the Company’s Board of Directors approved a plan to accelerate the retirement of
its MD-80 fleet and remove those aircraft from service by the end of 2008. All
of the MD-80s were removed from operation by the end of the third quarter of
2008. Two of the aircraft were retired during the second quarter of
2008 and placed in temporary storage at an aircraft storage facility. As a
result, the Company recorded a $26.0 million charge in the second quarter of
2008 reflecting the remaining discounted future lease payments and other
contract-related costs.
NOTE
6. LONG-TERM
DEBT
Long-term
debt obligations were as follows (in millions):
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Fixed-rate
notes payable due through 2024
|
|
$ |
1,497.2 |
|
|
$ |
1,458.9 |
|
Variable-rate
notes payable due through 2019
|
|
|
316.6 |
|
|
|
267.4 |
|
16BBank
line-of-credit facility expiring in 2010
|
|
|
-- |
|
|
|
75.0 |
|
19BPre-delivery
payment facility expiring in 2011
|
|
|
20B23.2 |
|
|
|
21B39.9 |
|
Long-term
debt
|
|
|
1,837.0 |
|
|
|
1,841.2 |
|
22BLess
current portion
|
|
|
(167.3 |
) |
|
|
(244.9 |
) |
|
|
$ |
1,669.7 |
|
|
$ |
1,596.3 |
|
During
the first six months of 2009, Alaska borrowed $119.9 million using fixed-rate
and variable-rate debt secured by flight equipment and another $10.4 million
from its pre-delivery payment facility. Alaska made payments of
$156.8 million, including $27.1 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 $10.0
million.
Alaska’s
$90.5 million pre-delivery payment facility expires on August 31,
2011. During the second quarter of 2009, the available amount on the
facility was reduced from $152 million to $90.5 million. The
reduction was primarily
driven by the decline in the remaining future obligations under the purchase
agreement with Boeing. The available amount is scheduled to be
further reduced to $80.0 million on August 31, 2009.
NOTE
7. COMMON
STOCK REPURCHASE
In June
2009, the Board of Directors authorized the Company to repurchase up to $50
million of its common stock. Through June 30, 2009, the Company had repurchased
700,000 shares of its common stock for approximately $11.8 million under this
program. Through August 6, 2009, the Company had repurchased
1,324,578 shares for approximately $23.8 million.
NOTE
8. EMPLOYEE
BENEFIT PLANS
Pension
Plans - Qualified Defined Benefit
Net
pension expense for the three and six months ended June 30, 2009 and 2008
included the following components (in millions):
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
11.1 |
|
|
$ |
11.1 |
|
|
$ |
22.2 |
|
|
$ |
23.3 |
|
Interest
cost
|
|
|
16.7 |
|
|
|
15.6 |
|
|
|
33.4 |
|
|
|
31.3 |
|
Expected
return on assets
|
|
|
(12.8 |
) |
|
|
(18.0 |
) |
|
|
(25.6 |
) |
|
|
(35.9 |
) |
Amortization
of prior service cost
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
2.2 |
|
|
|
2.2 |
|
Actuarial
loss
|
|
|
7.2 |
|
|
|
1.4 |
|
|
|
14.4 |
|
|
|
2.8 |
|
Net
pension expense
|
|
$ |
23.3 |
|
|
$ |
11.2 |
|
|
$ |
46.6 |
|
|
$ |
23.7 |
|
The
Company contributed $21.3 million and $31.9 million to its qualified
defined-benefit plans during the three and six months ended June 30, 2009,
respectively, and expects to contribute an additional $15.9 million to these
plans during the remainder of 2009. The Company made $17.2 million
and $34.4 million in contributions to its qualified defined-benefit pension
plans during the three and six months ended June 30, 2008,
respectively.
Pension
Plans - Nonqualified Defined Benefit
Net
pension expense for the unfunded, noncontributory defined-benefit plans was $0.7
million and $0.9 million for the three months ended June 30, 2009 and 2008 and
$1.5 million and $1.8 million for the six months ended June 30, 2009 and
2008.
Postretirement
Medical Benefits
Net
periodic benefit cost for the post-retirement medical plans for the three months
ended June 30, 2009 and 2008 was $5.6 million and $2.8 million,
respectively. The net periodic benefit cost for the six months ended
June 30, 2009 and 2008 was $8.9 million and $5.6 million,
respectively.
NOTE
9. OTHER
ASSETS
Other
assets consisted of the following (in millions):
|
|
June 30,
2009
|
|
|
December
31, 2008
|
|
Restricted
deposits (primarily restricted investments)
|
|
$ |
82.9 |
|
|
$ |
78.6 |
|
Deferred
costs and other*
|
|
|
70.4 |
|
|
|
44.5 |
|
|
|
$ |
153.3 |
|
|
$ |
123.1 |
|
*Deferred
costs and other includes deferred financing costs, long-term prepaid rent, lease
deposits and other items.
NOTE
10. MILEAGE
PLAN
Alaska’s
Mileage Plan deferrals and liabilities are included under the following balance
sheet captions (in
millions):
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Other
accrued liabilities
|
|
$ |
282.0 |
|
|
$ |
280.4 |
|
Other
Liabilities and Credits (non-current):
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
409.8 |
|
|
|
394.1 |
|
Other
liabilities
|
|
|
12.3 |
|
|
|
15.9 |
|
|
|
$ |
704.1 |
|
|
$ |
690.4 |
|
Alaska’s
Mileage Plan revenue is included under the following condensed consolidated
statement of operations captions for the three and six months ended June 30 (in
millions):
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Passenger
revenues
|
|
$ |
48.2 |
|
|
$ |
35.5 |
|
|
$ |
86.9 |
|
|
$ |
60.9 |
|
Other
- net revenues
|
|
|
45.8 |
|
|
|
24.4 |
|
|
|
70.3 |
|
|
|
51.1 |
|
|
|
$ |
94.0 |
|
|
$ |
59.9 |
|
|
$ |
157.2 |
|
|
$ |
112.0 |
|
NOTE
11. 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 13 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 or the period between the grant date and the date the
employee becomes retirement-eligible as defined in the applicable
plan.
Stock
Options
During
the six months ended June 30, 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 388,111 options with a
weighted-average fair value of $11.13 per share.
The
Company recorded stock-based compensation expense related to stock options of
$0.7 million and $1.0 million for the three months ended June 30, 2009 and 2008,
respectively. The Company recorded expense of $3.0 million and $3.3
million for the six months ended June 30, 2009 and 2008,
respectively. As of June 30, 2009, $5.5 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 2.5 years.
As of
June 30, 2009, options to purchase 2,630,943 shares of common stock were
outstanding with a weighted-average exercise price of $29.51. Of that
total, 1,721,939 were exercisable at a weighted-average exercise price of
$29.49.
Restricted
Stock Awards
During
the six months ended June 30, 2009, the Company awarded 246,037 restricted stock
units (RSUs) to certain employees, with a weighted-average grant date fair value
of $27.25. This amount reflects the value of the RSU awards at the
grant date based on the closing price of the Company’s common
stock. The Company recorded stock-based compensation expense related
to RSUs of $1.1 million and $1.5 million for the three months ended June 30,
2009 and 2008, respectively, and $3.8 million in each of the six-month periods
ended June 30, 2009 and 2008.
As of
June 30, 2009, $7.2 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 2.1 years.
Deferred
Stock Awards
In the
second quarter of 2008, the Company awarded 13,976 Deferred Stock Unit awards
(DSUs) to members of its Board of Directors as a portion of their
retainers. The underlying common shares are issued upon retirement
from the Board, but require no future service period. As a result,
the entire intrinsic value of the awards on the date of grant was expensed in
the second quarter of 2008. The total amount of compensation expense
recorded was $0.3 million.
Employee
Stock Purchase Plan
Compensation
expense recognized under the Employee Stock Purchase Plan was $0.5 million and
$0.4 million for the three months ended June 30, 2009 and 2008, respectively,
and $0.8 million and $1.1 million for the six months ended June 30, 2009 and
2008, respectively.
Summary
of Stock-Based Compensation
The table
below summarizes the components of total stock-based compensation for the three
and six months ended June 30 (in millions):
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock
options
|
|
$ |
0.7 |
|
|
$ |
1.0 |
|
|
$ |
3.0 |
|
|
$ |
3.3 |
|
Restricted
stock units
|
|
|
1.1 |
|
|
|
1.5 |
|
|
|
3.8 |
|
|
|
3.8 |
|
Performance
share units
|
|
|
--- |
|
|
|
(0.7 |
) |
|
|
--- |
|
|
|
(0.5 |
) |
Deferred
stock units
|
|
|
--- |
|
|
|
0.3 |
|
|
|
--- |
|
|
|
0.3 |
|
Employee
stock purchase plan
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
1.1 |
|
|
|
$ |
2.3 |
|
|
$ |
2.5 |
|
|
$ |
7.6 |
|
|
$ |
8.0 |
|
NOTE
12. OPERATING
SEGMENT INFORMATION
Operating
segment information for Alaska and Horizon for the three- and six-month periods
ended June 30 was as follows (in millions):
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
– mainline (1)
|
|
$ |
681.6 |
|
|
$ |
742.6 |
|
|
$ |
1,272.9 |
|
|
$ |
1,405.6 |
|
Alaska
– purchased capacity (1)
|
|
|
67.7 |
|
|
|
77.8 |
|
|
|
129.5 |
|
|
|
148.2 |
|
Total
Alaska
|
|
|
749.3 |
|
|
|
820.4 |
|
|
|
1,402.4 |
|
|
|
1,553.8 |
|
Horizon
|
|
|
157.9 |
|
|
|
188.9 |
|
|
|
304.7 |
|
|
|
366.1 |
|
Other
(2)
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Elimination
of intercompany revenues
|
|
|
(63.5 |
) |
|
|
(78.7 |
) |
|
|
(121.3 |
) |
|
|
(150.1 |
) |
Consolidated
|
|
$ |
843.9 |
|
|
$ |
930.8 |
|
|
$ |
1,586.3 |
|
|
$ |
1,770.3 |
|
Income
(loss) before income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
– mainline
|
|
$ |
43.3 |
|
|
$ |
94.0 |
|
|
$ |
25.9 |
|
|
$ |
60.5 |
|
Alaska
– purchased capacity
|
|
|
(1.2 |
) |
|
|
(6.7 |
) |
|
|
(2.1 |
) |
|
|
(13.0 |
) |
Total
Alaska
|
|
|
42.1 |
|
|
|
87.3 |
|
|
|
23.8 |
|
|
|
47.5 |
|
Horizon
|
|
|
6.5 |
|
|
|
12.6 |
|
|
|
(4.0 |
) |
|
|
(5.0 |
) |
Other
(2)
|
|
|
(0.9 |
) |
|
|
(1.7 |
) |
|
|
(1.7 |
) |
|
|
(2.7 |
) |
Consolidated
|
|
$ |
47.7 |
|
|
$ |
98.2 |
|
|
$ |
18.1 |
|
|
$ |
39.8 |
|
|
|
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Total
assets at end of period:
|
|
|
|
|
|
|
Alaska
|
|
$ |
4,537.6 |
|
|
$ |
4,428.6 |
|
Horizon
|
|
|
719.1 |
|
|
|
692.3 |
|
Other
(2)
|
|
|
857.8 |
|
|
|
820.3 |
|
Elimination
of intercompany accounts
|
|
|
(1,173.2 |
) |
|
|
(1,105.6 |
) |
Consolidated
|
|
$ |
4,941.3 |
|
|
$ |
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.
NOTE
13. 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 six months of 2008. The
Company concluded that this item was not material, and in accordance with SAB
108, adjusted wage and benefits expense for the six months ended June 30,
2008. There was no impact to the second quarter of
2008. 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June
30, 2008
|
|
|
|
As Originally
Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
Wages
and benefits
|
|
$ |
476.8 |
|
|
$ |
2.3 |
|
|
$ |
479.1 |
|
Total
Operating Expenses
|
|
|
1,713.5 |
|
|
|
2.3 |
|
|
|
1,715.8 |
|
Operating
Income
|
|
|
56.8 |
|
|
|
(2.3 |
) |
|
|
54.5 |
|
Income
before income tax
|
|
|
42.1 |
|
|
|
(2.3 |
) |
|
|
39.8 |
|
Net
Income
|
|
$ |
27.2 |
|
|
$ |
(1.4 |
) |
|
$ |
25.8 |
|
Basic
Earnings Per Share
|
|
$ |
.75 |
|
|
$ |
(0.04 |
) |
|
$ |
.71 |
|
Diluted
Earnings Per Share
|
|
$ |
.74 |
|
|
$ |
(0.04 |
) |
|
$ |
.70 |
|
NOTE
14. 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 ruling, the arbitrator found that Alaska had
violated the CBA and instructed Alaska and the IAM to attempt to negotiate a
remedy. In June 2009, another hearing was conducted, specifically related to the
parties' views on available remedies. Subsequent to that hearing,
there has been an executive session of the arbitration panel and another is
scheduled for August. 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.
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:
|
·
|
Second Quarter
in Review –
highlights from the second 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 and six
months ended June 30, 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, and an
overview of financial
position.
|
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.
SECOND QUARTER IN
REVIEW
Our consolidated pretax income
was $47.7 million during the second quarter of 2009
compared to $98.2
million in the second
quarter of 2008. The decline in our pretax earnings was
primarily due to the $86.9 million decline in operating revenues and a
$35.8 million charge in this year’s
quarter related to the new pilot contract, partially offset by a significant
decline in aircraft fuel cost and fleet transition costs from the second quarter
of 2008.
|
·
|
Operating revenues declined by
9.3% driven by the continued demand
weakness in the midst of the current economic recession. In
the second quarter, passenger traffic across the Air Group network
fell by 6.2% and consolidated unit
operating revenues declined by 2.5%. Although passenger unit
revenues were down 5.9% for mainline Alaska, 3.3% for purchased capacity
flying, and just under 1% for Horizon brand flying, this compares to a
domestic industry average decline of 14.5% compared to the second quarter
of 2008. We believe that we are making the right decisions with
respect to capacity reductions and redeployments into higher-demand
markets. We also have the flexibility to substitute smaller
Horizon aircraft in lower-demand markets that historically may have been
served by larger jets.
|
|
·
|
Alaska entered into a new four-year
agreement with pilots in the second quarter. Among other
contract items, the pilots received a one-time bonus of approximately
$20.3 million, including taxes, and transitioned to a new sick-leave
payment program resulting in a transition charge of $15.5
million.
|
|
·
|
Economic fuel averaged $1.84 per
gallon in the second quarter of 2009, compared to $3.26 in
2008. This, along with a decline in consumption, resulted in a
$169.1 million reduction in our economic fuel expense compared to the second quarter of
2008.
|
Other significant developments during
the second quarter of 2009 and through the filing of this Form 10-Q are
described below.
Highest
in Customer Satisfaction
For the
second year in a row, Alaska Airlines ranked “Highest in Customer Satisfaction
among Traditional Network Carriers” in 2009 by J.D. Power &
Associates.
Common
Stock Repurchase
On June 11, 2009, our Board of Directors
authorized the Company to repurchase up to $50 million of our common
stock. Through June 30, 2009, we had repurchased 700,000 shares of our common stock for
approximately $11.8 million
under this new
program. The repurchased shares have been recorded as treasury shares
in our condensed consolidated balance sheets.
New Markets
In the second quarter, we announced that
Alaska would begin daily non-stop service
between San
Jose and Austin, Texas on September 2,
2009. This is in addition to new service announced previously
to Houston and Atlanta beginning in September and October of
2009, respectively.
New Mileage Plan Affinity Card
Agreement
In June 2009, we revised our Mileage Plan affinity credit card agreement with Bank of
America. This revised agreement enhances the
economics of our Mileage
Plan program and provides
for, among other things, an increase in the rate at which we sell miles to the
bank. This revised agreement was retroactive to January 1, 2009 and
resulted in approximately $15 million of
incremental revenue for the
first six months of 2009. The agreement expires on December 31,
2014. We expect to record an additional $15 million in the second
half of 2009 as a result of this agreement.
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 began July 7, 2009. This fee does not apply to our MVP
or MVP Gold Mileage Plan members, for those traveling solely within the state of
Alaska, or 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 during the last half of 2009.
Labor Negotiations
New Pilot
Contract
On May 19, 2009, we announced that
Alaska’s pilots, represented by the Air Line
Pilots Association, ratified a new four-year contract. This
negotiated agreement replaces the contract that had been in place since May 1,
2005. The terms
of the 2005 contract
were the result
of an arbitrator’s decision
and included immediate wage reductions that approximated 26% across
the pilot group, work rule changes, and higher employee health care
contributions.
The significant terms of the new
contract are as follows:
|
·
|
Average pilot wages increased
approximately 14% effective April 1, 2009. The contract also
provides for step increases of 1.5% on the first two anniversary dates of
the contract and 1.8% on the third
anniversary.
|
|
·
|
Pilots now participate in Air
Group’s Performance Based Pay (PBP) Plan. PBP is an incentive program
that rewards participants a targeted percentage of their pay based on the
achievement of goals established annually by Air Group’s Board of
Directors. These goals include metrics around Air Group
profitability, non-fuel unit costs, safety, employee engagement, and
on-time performance. The PBP Plan also covers Alaska’s dispatchers, flight attendants,
and non-union employees and employees classified as
supervisors and above at Horizon.
|
|
·
|
The defined-benefit pension plan
for pilots is
now closed to new
entrants. Newly hired pilots will participate in a
defined-contribution plan that includes a contribution by Alaska equal to 13.5% of eligible
wages. Incumbents have the option of remaining in the
defined-benefit pension plan or moving to a new blended option with an
enhanced defined-contribution element. The election must be
made by January 1, 2010.
|
|
·
|
Upon retirement, pilots will be
allowed to receive a cash payment of an amount equivalent to 25% of their
accrued sick leave balance multiplied by their hourly
rate.
|
|
·
|
The new contract provides for
better productivity and flexibility. For example, there are
changes to reserve flying provisions that allow for improved scheduling
efficiency, language that allows for pilots to fly more than the current
85-hour monthly limit for pay, and exceptions that allow us to suspend
certain restrictions in irregular operations. We expect to
realize savings from these productivity enhancements when we resume
capacity growth.
|
The increase in wages and benefits
resulting from this contract is expected to be approximately $23 million in
2009, including $5 million of incremental cost associated with post-retirement
medical coverage.
Pilots received a one-time bonus of $20.3 million in the
aggregate following
ratification of the contract. The transition expense
associated with establishing the sick-leave payout program described above was
$15.5 million. These items have been combined and reported as
“New pilot contract
transition costs” in the
condensed consolidated
statements of operations.
Other Labor
Updates
In August 2009, Alaska's aircraft technicians ratified a
two-year extension of the current labor contract that includes, among other
things, a move from the current variable-pay incentive program to the PBP Plan
described above. With this new agreement, all employee groups at Alaska
Airlines, other than employees represented by the International Association of
Machinists (IAM), now participate in the PBP Plan. Alaska is in
discussions with the IAM and has offered a contract extension that includes
participation in the PBP Plan. To date, the offer has not been
accepted.
Horizon’s dispatchers, represented by
the Transportation Workers Union, ratified a new contract in July
2009, expiring in October
2010. This new
contract includes a transition from the former profit-sharing plan to the
PBP Plan for the dispatchers beginning in 2010.
Horizon Fleet
Transition
Horizon’s goal is to transition to an
all-Q400 fleet. In the first quarter, Horizon removed the final six
Q200 aircraft from operations. There was a charge of $4.8 million
associated with removing these aircraft from operation in the first quarter that
was based on market information available at that time. In the second
quarter, there was an additional charge of $5.2 million based on more recent market
information. There may be additional charges once any final
transactions have been executed.
Although
we have been actively pursuing various alternatives to dispose of our 18 CRJ-700
aircraft in the most economically feasible way, the current economic conditions
have hindered the remarketing efforts. As a result, the transition to
an all-Q400 fleet will be delayed and we will continue to hold the CRJ-700
aircraft in our operating fleet. We have deferred future Q400
deliveries to maintain our current fleet size and capacity plans.
Outlook
Looking ahead, year-over-year advance booked load factor for August is up about one point for Alaska mainline operations and down about one point for
Horizon brand flying. September advance
booked load
factor is down for both
mainline Alaska and Horizon brand flying, although the trend has been
for the year-over-year
comparison to improve as we get closer to the date of
travel. These
advance booked load factors are on expected capacity declines of 5% and
10%, respectively, at Alaska and Horizon for the third quarter
2009. We are continuing to see soft unit revenues and ticket yields due to
the current economic recession and resulting low-fare
environment. However, the impact of our new first bag fee and new
affinity card agreement, along with other revenue initiatives, is expected to help ease the impact of revenue declines
from low yields.
RESULTS OF
OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE
30, 2009 TO THREE MONTHS
ENDED JUNE 30, 2008
Our consolidated net income for the
second quarter of 2009 was $29.1 million, or $0.79 per diluted share, compared to net
income of $63.1 million, or
$1.74 per diluted share, in
the second quarter of 2008. Both periods include adjustments to reflect the
timing of net unrealized mark-to-market gains or losses related to our fuel
hedge positions. In the second quarter of 2009 we recognized net
mark-to-market gains of
$39.8 million ($24.9 million after tax, or $0.68 per share) compared to gains of $155.3
million ($97.3 million
after tax, or $2.69 per
share) in the second quarter of 2008. The second quarter of 2009 also included new pilot
contract transition charges of $35.8 million ($22.3 million after tax, or $0.61 per
share) The second quarter
of 2008 included fleet transition charges of $32.1 million ($20.1 million after
tax, or $0.56 per share) related to the planned transitions out of the MD-80 and
CRJ-700 fleets.
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 is
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 are 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 reported pretax income of $42.1 million in the second quarter
of 2009, while Horizon reported pretax income of $6.5 million. Financial and
statistical data for Alaska and Horizon are shown on pages 26 and 33,
respectively. An in-depth discussion of the results of Alaska and Horizon begins
on pages 27 and 34, respectively.
Alaska
Airlines Financial and Statistical Data
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
30
|
|
|
Six Months Ended June
30
|
|
Financial Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
602.5 |
|
|
$ |
682.7 |
|
|
|
(11.7 |
) |
|
$ |
1,142.3 |
|
|
$ |
1,290.0 |
|
|
|
(11.4 |
) |
Freight and
mail
|
|
|
24.2 |
|
|
|
26.6 |
|
|
|
(9.0 |
) |
|
|
42.5 |
|
|
|
47.9 |
|
|
|
(11.3 |
) |
Other - net
|
|
|
54.9 |
|
|
|
33.3 |
|
|
|
64.9 |
|
|
|
88.1 |
|
|
|
67.7 |
|
|
|
30.1 |
|
Total mainline operating
revenues
|
|
|
681.6 |
|
|
|
742.6 |
|
|
|
(8.2 |
) |
|
|
1,272.9 |
|
|
|
1,405.6 |
|
|
|
(9.4 |
) |
Passenger - purchased
capacity
|
|
|
67.7 |
|
|
|
77.8 |
|
|
|
(13.0 |
) |
|
|
129.5 |
|
|
|
148.2 |
|
|
|
(12.6 |
) |
Total Operating
Revenues
|
|
|
749.3 |
|
|
|
820.4 |
|
|
|
(8.7 |
) |
|
|
1,402.4 |
|
|
|
1,553.8 |
|
|
|
(9.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
198.4 |
|
|
|
184.3 |
|
|
|
7.7 |
|
|
|
395.8 |
|
|
|
376.4 |
|
|
|
5.2 |
|
Variable incentive
pay
|
|
|
16.1 |
|
|
|
3.3 |
|
|
|
387.9 |
|
|
|
23.2 |
|
|
|
5.9 |
|
|
|
293.2 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
107.4 |
|
|
|
151.2 |
|
|
|
(29.0 |
) |
|
|
239.3 |
|
|
|
384.9 |
|
|
|
(37.8 |
) |
Aircraft
maintenance
|
|
|
46.6 |
|
|
|
37.4 |
|
|
|
24.6 |
|
|
|
92.9 |
|
|
|
79.5 |
|
|
|
16.9 |
|
Aircraft
rent
|
|
|
28.1 |
|
|
|
27.9 |
|
|
|
0.7 |
|
|
|
54.6 |
|
|
|
56.1 |
|
|
|
(2.7 |
) |
Landing fees and other
rentals
|
|
|
40.6 |
|
|
|
42.7 |
|
|
|
(4.9 |
) |
|
|
81.4 |
|
|
|
84.6 |
|
|
|
(3.8 |
) |
Contracted
services
|
|
|
28.4 |
|
|
|
33.9 |
|
|
|
(16.2 |
) |
|
|
58.9 |
|
|
|
68.6 |
|
|
|
(14.1 |
) |
Selling
expenses
|
|
|
28.3 |
|
|
|
36.0 |
|
|
|
(21.4 |
) |
|
|
47.4 |
|
|
|
62.5 |
|
|
|
(24.2 |
) |
Depreciation and
amortization
|
|
|
44.2 |
|
|
|
41.6 |
|
|
|
6.3 |
|
|
|
87.5 |
|
|
|
80.4 |
|
|
|
8.8 |
|
Food and beverage
service
|
|
|
11.9 |
|
|
|
12.6 |
|
|
|
(5.6 |
) |
|
|
22.9 |
|
|
|
24.3 |
|
|
|
(5.8 |
) |
Other
|
|
|
38.5 |
|
|
|
47.4 |
|
|
|
(18.8 |
) |
|
|
81.3 |
|
|
|
89.2 |
|
|
|
(8.9 |
) |
New pilot contract transition
costs
|
|
|
35.8 |
|
|
|
- |
|
|
NM
|
|
|
|
35.8 |
|
|
|
- |
|
|
NM
|
|
Fleet transition costs -
MD-80
|
|
|
- |
|
|
|
26.0 |
|
|
NM
|
|
|
|
- |
|
|
|
26.0 |
|
|
NM
|
|
Total mainline operating
expenses
|
|
|
624.3 |
|
|
|
644.3 |
|
|
|
(3.1 |
) |
|
|
1,221.0 |
|
|
|
1,338.4 |
|
|
|
(8.8 |
) |
Purchased capacity
costs
|
|
|
68.9 |
|
|
|
84.5 |
|
|
|
(18.5 |
) |
|
|
131.6 |
|
|
|
161.2 |
|
|
|
(18.4 |
) |
Total Operating
Expenses
|
|
|
693.2 |
|
|
|
728.8 |
|
|
|
(4.9 |
) |
|
|
1,352.6 |
|
|
|
1,499.6 |
|
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
56.1 |
|
|
|
91.6 |
|
|
|
|
|
|
|
49.8 |
|
|
|
54.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
9.5 |
|
|
|
12.3 |
|
|
|
|
|
|
|
19.6 |
|
|
|
25.4 |
|
|
|
|
|
Interest
expense
|
|
|
(22.1 |
) |
|
|
(22.2 |
) |
|
|
|
|
|
|
(45.1 |
) |
|
|
(44.0 |
) |
|
|
|
|
Interest
capitalized
|
|
|
1.8 |
|
|
|
5.4 |
|
|
|
|
|
|
|
4.3 |
|
|
|
11.3 |
|
|
|
|
|
Other - net
|
|
|
(3.2 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
(4.8 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
|
(14.0 |
) |
|
|
(4.3 |
) |
|
|
|
|
|
|
(26.0 |
) |
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Tax
|
|
$ |
42.1 |
|
|
$ |
87.3 |
|
|
|
|
|
|
$ |
23.8 |
|
|
$ |
47.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
(000)
|
|
|
3,983 |
|
|
|
4,425 |
|
|
|
(10.0 |
) |
|
|
7,556 |
|
|
|
8,505 |
|
|
|
(11.2 |
) |
RPMs (000,000)
"traffic"
|
|
|
4,613 |
|
|
|
4,872 |
|
|
|
(5.3 |
) |
|
|
8,792 |
|
|
|
9,398 |
|
|
|
(6.4 |
) |
ASMs (000,000)
"capacity"
|
|
|
5,852 |
|
|
|
6,238 |
|
|
|
(6.2 |
) |
|
|
11,372 |
|
|
|
12,322 |
|
|
|
(7.7 |
) |
Passenger load
factor
|
|
|
78.8 |
% |
|
|
78.1 |
% |
|
0.7
|
pts |
|
|
77.3 |
% |
|
|
76.3 |
% |
|
1.0
|
pts |
Yield per passenger
mile
|
|
|
13.06 |
¢ |
|
|
14.01 |
¢ |
|
|
(6.8 |
) |
|
|
12.99 |
¢ |
|
|
13.73 |
¢ |
|
|
(5.3 |
) |
Operating revenue per ASM
(RASM)
|
|
|
11.65 |
¢ |
|
|
11.90 |
¢ |
|
|
(2.2 |
) |
|
|
11.19 |
¢ |
|
|
11.41 |
¢ |
|
|
(1.9 |
) |
Passenger revenue per
ASM
|
|
|
10.30 |
¢ |
|
|
10.94 |
¢ |
|
|
(5.9 |
) |
|
|
10.04 |
¢ |
|
|
10.47 |
¢ |
|
|
(4.1 |
) |
Operating expenses per
ASM
|
|
|
10.67 |
¢ |
|
|
10.33 |
¢ |
|
|
3.3 |
|
|
|
10.74 |
¢ |
|
|
10.86 |
¢ |
|
|
(1.1 |
) |
Aircraft fuel cost per
ASM
|
|
|
1.84 |
¢ |
|
|
2.42 |
¢ |
|
|
(24.0 |
) |
|
|
2.11 |
¢ |
|
|
3.13 |
¢ |
|
|
(32.6 |
) |
New pilot contract transition
costs per ASM
|
|
|
0.61 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
|
|
0.31 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
Fleet transition charges per
ASM
|
|
|
0.00 |
¢ |
|
|
0.42 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.21 |
¢ |
|
NM
|
|
Aircraft fuel cost per
gallon
|
|
$ |
1.41 |
|
|
$ |
1.75 |
|
|
|
(19.4 |
) |
|
$ |
1.60 |
|
|
$ |
2.23 |
|
|
|
(28.3 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.84 |
|
|
$ |
3.24 |
|
|
|
(43.2 |
) |
|
$ |
1.88 |
|
|
$ |
2.98 |
|
|
|
(36.9 |
) |
Fuel gallons
(000,000)
|
|
|
76.5 |
|
|
|
86.4 |
|
|
|
(11.5 |
) |
|
|
149.8 |
|
|
|
172.3 |
|
|
|
(13.1 |
) |
Average number of full-time
equivalent employees
|
|
|
8,937 |
|
|
|
9,880 |
|
|
|
(9.5 |
) |
|
|
8,979 |
|
|
|
9,881 |
|
|
|
(9.1 |
) |
Aircraft utilization (blk
hrs/day)
|
|
|
9.9 |
|
|
|
10.9 |
|
|
|
(9.2 |
) |
|
|
9.9 |
|
|
|
10.8 |
|
|
|
(8.3 |
) |
Average aircraft stage length
(miles)
|
|
|
1,020 |
|
|
|
974 |
|
|
|
4.7 |
|
|
|
1,018 |
|
|
|
971 |
|
|
|
4.8 |
|
Operating fleet at
period-end
|
|
|
116 |
|
|
|
115 |
|
|
|
1 a/c |
|
|
|
116 |
|
|
|
115 |
|
|
|
1 a/c |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Capacity Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPMs
(000,000)
|
|
|
264 |
|
|
|
302 |
|
|
|
(12.6 |
) |
|
|
479 |
|
|
|
569 |
|
|
|
(15.8 |
) |
ASMs
(000,000)
|
|
|
359 |
|
|
|
399 |
|
|
|
(10.0 |
) |
|
|
675 |
|
|
|
762 |
|
|
|
(11.4 |
) |
Passenger load
factor
|
|
|
73.5 |
% |
|
|
75.7 |
% |
|
(2.2
|
)pts |
|
|
71.0 |
% |
|
|
74.7 |
% |
|
(3.7
|
) pts |
Yield per passenger
mile
|
|
|
25.64 |
¢ |
|
|
25.76 |
¢ |
|
|
(0.5 |
) |
|
|
27.04 |
¢ |
|
|
26.05 |
¢ |
|
|
3.8 |
|
Operating revenue per
ASM
|
|
|
18.86 |
¢ |
|
|
19.50 |
¢ |
|
|
(3.3 |
) |
|
|
19.19 |
¢ |
|
|
19.45 |
¢ |
|
|
(1.4 |
) |
Operating expenses per
ASM
|
|
|
19.19 |
¢ |
|
|
21.18 |
¢ |
|
|
(9.4 |
) |
|
|
19.50 |
¢ |
|
|
21.15 |
¢ |
|
|
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALASKA
AIRLINES
Alaska
reported income before income taxes of $42.1 million during the second quarter
of 2009 compared to $87.3 million in the second quarter of 2008. The decline was
driven by a $71.1 million decrease in total operating revenues and the $35.8
million charge related to the new pilot contract, partially offset by the
significant decline in fuel cost compared to the prior year and the lack of
MD-80 fleet transition charges in the current period.
ALASKA REVENUES
Total
operating revenues decreased $71.1 million, or 8.7%, during the second quarter
of 2009 as compared to the same period in 2008. The changes are summarized in
the following table:
|
|
Three Months Ended June
30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Passenger revenue -
mainline
|
|
$ |
602.5 |
|
|
$ |
682.7 |
|
|
|
(11.7 |
) |
Freight and
mail
|
|
|
24.2 |
|
|
|
26.6 |
|
|
|
(9.0 |
) |
Other - net
|
|
|
54.9 |
|
|
|
33.3 |
|
|
|
64.9 |
|
Total mainline
revenues
|
|
$ |
681.6 |
|
|
$ |
742.6 |
|
|
|
(8.2 |
) |
Passenger revenue - purchased
capacity
|
|
|
67.7 |
|
|
|
77.8 |
|
|
|
(13.0 |
) |
Total operating
revenues
|
|
$ |
749.3 |
|
|
$ |
820.4 |
|
|
|
(8.7 |
) |
Operating Revenues –
Mainline
Mainline
passenger revenue fell 11.7% on a 6.2% reduction in capacity and a 5.9% decline
in passenger unit revenue. The decline in passenger unit revenue was
driven by a 6.8% drop in yield from the prior-year period, slightly offset by
the modest increase in passenger load factor. The decline in yield reflects the
overall economic climate and the resulting discounting of fares and is also a
result of longer average trip lengths. Passenger revenue per
available seat mile (PRASM) declined 2.0% in April, 7.4% in May, and 8.1% in
June. We believe the April results were favorably impacted by the timing of the
Easter holiday.
Our load
factor in July 2009 was 84.3%, compared to 79.7% in July 2008. Our advance
bookings currently suggest that load factors will be up just over one point in
August and down less than half a point in September compared to the prior
year.
Ancillary
revenue included in passenger revenue increased from $19.6 million in the second
quarter of 2008 to $21.9 million in the second quarter of 2009. The
increase is primarily due to the implementation of our 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 revenue will increase
further in the third quarter and beyond as the first bag service charge became
effective on July 7, 2009.
Freight
and mail revenue declined $2.4 million, or 9%, primarily as a result of lower
mail volumes and lower fuel surcharges, partially offset by higher freight
volumes and yield.
Other –
net revenue increased $21.6 million, or 64.9%, from the prior-year
quarter. Mileage Plan revenue increased by $21.4 million primarily as
a result of an increase in the commission recognized from the sale of Mileage
Plan miles. The increase in the commission component from the
prior-year period is driven by two primary factors – the slight decline in the
value assigned to miles as our award structure changed in 2008 and the
increase in the rate paid to us by our affinity credit card partner for miles
sold. The new affinity card agreement was effective January 1,
2009.
Passenger
Revenue – Purchased Capacity
Passenger revenue – purchased capacity
declined by $10.1 million
to $67.7 million because of a 12.6% drop in passenger traffic and a 3.3%
weakening in unit revenue compared to the prior year. Unit revenue
declined as a result of a 2.2-point decline in load factors and
slightly weaker yield compared to 2008.
ALASKA EXPENSES
For the quarter, total operating
expenses declined
$35.6 million compared to
the same period in 2008, mostly as a result of the significant
decline in fuel expense and the lack of fleet transition costs, partially offset by a $23.8 million increase in mainline
non-fuel operating costs.
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:
|
|
Three Months Ended June
30,
|
|
Operating Expenses (in millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Mainline
|
|
$ |
624.3 |
|
|
$ |
644.3 |
|
|
|
(3.1 |
) |
Purchased capacity
costs
|
|
|
68.9 |
|
|
|
84.5 |
|
|
|
(18.5 |
) |
Total operating
expenses
|
|
$ |
693.2 |
|
|
$ |
728.8 |
|
|
|
(4.9 |
) |
Mainline Operating
Expenses
Total mainline operating costs for the
second quarter of 2009 decreased $20.0 million, or 3.1%, to $624.3
million compared to $644.3 million in the same period of 2008. Significant individual expense variances
from the second quarter of
2008 are described more fully below.
Wages and Benefits
Wages and benefits were up $14.1 million, or 7.7%, compared to the second quarter of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Three Months Ended June
30,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Wages
|
|
$ |
133.8 |
|
|
$ |
135.9 |
|
|
|
(1.5 |
) |
Pension and defined-contribution
retirement benefits
|
|
|
29.2 |
|
|
|
16.7 |
|
|
|
74.9 |
|
Medical
benefits
|
|
|
21.4 |
|
|
|
18.1 |
|
|
|
18.2 |
|
Other benefits and payroll
taxes
|
|
|
14.0 |
|
|
|
13.6 |
|
|
|
2.9 |
|
Total wages and
benefits
|
|
$ |
198.4 |
|
|
$ |
184.3 |
|
|
|
7.7 |
|
Wages declined 1.5% on a 9.5% reduction
in full-time equivalent employees (FTE) compared to the second quarter of
2008. Wages have not declined in step with the FTE reduction because
of higher wage rates for the pilot group in connection with their new contract
and higher average wages for flight attendants stemming from higher average
seniority.
The nearly 75% increase in pension and
other retirement-related benefits is primarily due to a $12.1 million increase in our defined-benefit pension cost
driven by the significant decline in the market value of pension assets at the
end of 2008.
Medical benefits increased 18.2% from
the prior-year period primarily as a result of higher post-retirement medical
cost for the pilot group in connection with their new
contract.
We expect wages and benefits to be up in
the last half of 2009 compared to the last half of 2008 for reasons mentioned
above.
Variable Incentive
Pay
Variable incentive pay expense increased
from $3.3
million in the second
quarter of 2008 to
$16.1 million in the second 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 pilots and flight attendants to the Air Group
Performance Based Pay (PBP) incentive plan, which results in a larger expected
payout for 2009 than the incentive plans under which they were previously
covered.
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 condensed consolidated statement of operations as the value of
that portfolio increases and decreases. Our aircraft fuel expense is very
volatile, even between quarters, because it includes these gains or losses in
the value of the underlying instrument as crude oil prices and refining margins
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 $43.8 million, or 29%, compared to the second quarter of
2008. The elements of the change are illustrated in the following
table:
|
|
Three Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
76.5 |
|
|
|
86.4 |
|
|
|
(11.5 |
) |
Raw price per
gallon
|
|
$ |
1.73 |
|
|
$ |
3.78 |
|
|
|
(54.2 |
) |
Total raw fuel
expense
|
|
$ |
132.3 |
|
|
$ |
326.6 |
|
|
|
(59.5 |
) |
Net impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
(24.9 |
) |
|
|
(175.4 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
107.4 |
|
|
$ |
151.2 |
|
|
|
(29.0 |
) |
NM = Not
meaningful
Fuel gallons consumed decreased
by 11.5% primarily as a result of the 6.2% reduction 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 54.2% as a result of lower West Coast jet fuel
prices driven by a considerable drop in crude oil costs and refining
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 June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
132.3 |
|
|
$ |
326.6 |
|
|
|
(59.5 |
) |
Plus or minus: net of cash
received from settled hedges and premium expense
recognized
|
|
|
8.1 |
|
|
|
(46.5 |
) |
|
NM
|
|
Economic
fuel expense
|
|
$ |
140.4 |
|
|
$ |
280.1 |
|
|
|
(49.9 |
) |
Fuel gallons
consumed
|
|
|
76.5 |
|
|
|
86.4 |
|
|
|
(11.5 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.84 |
|
|
$ |
3.24 |
|
|
|
(43.2 |
) |
NM
= Not meaningful
As noted
in the above table, the total net amount recognized for hedges that settled
during the period was $8.1 million in the second quarter of 2009, compared to a
net cash benefit of $46.5 million in 2008. These amounts represent
the net of the premium expense recognized for those hedges and any cash received
or paid upon settlement. The decrease is primarily due to the significant
decline 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
second quarter of 2008.
We
currently expect economic fuel
expense to be lower for the remainder of 2009 than in 2008 because of
lower jet fuel prices.
Aircraft Maintenance
Aircraft maintenance increased
by $9.2 million, or 24.6%, 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 second half 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 $5.5 million, or 16.2%, compared to the second quarter of 2008 as a
result of the reduction in the number of flights operated throughout our system
where vendors are used. We expect this trend to continue during the
last half of 2009.
Selling Expenses
Selling
expenses declined by $7.7 million, or 21.4%, compared to the second 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 slightly higher for the last
six months of 2009 when compared
to 2008 because of higher advertising expenses, partially offset by declining
commissions driven by lower passenger traffic.
Depreciation and
Amortization
Depreciation and amortization
increased $2.6 million, or 6.3%,
compared to the second
quarter of 2008. This is primarily due to the additional B737-800
aircraft delivered in the last six months of 2008 and the first half of 2009,
offset by the sale-leaseback of six B737-800 aircraft in the first quarter of
2009 and the discontinuance of depreciation on MD-80 spare parts in
2008. We expect depreciation and amortization to be higher for all of
2009 as compared to 2008, although not to the same degree as the first six
months of the year due to the sale-leaseback
of the B737-800 aircraft at the end of the first quarter.
Other Operating
Expenses
Other operating expenses declined $8.9
million, or 18.8%, compared to the prior-year quarter. The decline is
primarily driven by a reduction in property taxes, professional services costs
and legal costs.
New Pilot Contract Transition
Costs
In connection with the new four-year
contract ratified by Alaska’s pilots in the second quarter, the
pilots received a one-time aggregate bonus of $20.3 million. The transition
expense associated with establishing the new sick-leave payout program
previously described was $15.5 million. These items have been combined and
reported as “New pilot
contract transition
costs” in the condensed consolidated
statements of operations.
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 not only on controlling the actual dollars we spend, but also on
the ability to increase our capacity without adding a commensurate amount of
cost.
Our
mainline operating costs per ASM are summarized below:
|
|
Three Months Ended June
30
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total mainline operating expenses
per ASM (CASM)
|
|
|
10.67 |
¢ |
|
|
10.33 |
¢ |
|
|
3.3 |
|
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
1.84 |
¢ |
|
|
2.42 |
¢ |
|
|
(24.0 |
) |
New pilot contract transition
costs per ASM
|
|
|
0.61 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
Fleet transition costs per
ASM
|
|
|
0.00 |
¢ |
|
|
0.42 |
¢ |
|
NM
|
|
NM = Not
Meaningful
CASM
increased from the prior-year period because of the 6.2% reduction in capacity,
partially offset by a 3.1% decline in mainline operating costs, which are
discussed above. We have listed separately in the above table our fuel costs,
fleet transition charges and new pilot contract transition 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.
|
|
|
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 revenue and expenses associated with purchased
capacity are evaluated
separately.
|
|
·
|
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.
|
|
·
|
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 new pilot contract transition costs, 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 revenue for Alaska, we do not (nor are we able to)
evaluate mainline unit revenue 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 revenue 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 third quarter and full
year of 2009 to be up 9% - 11% and 8%, respectively, compared to
2008.
Purchased Capacity
Costs
Purchased
capacity costs declined $15.6 million, or 18.5%, compared to the second quarter
of 2008 to $68.9 million in the second quarter of 2009. Of the total,
$63.5 million was paid to Horizon under the CPA for 340 million ASMs, a capacity
reduction of 9.1% from the second quarter of 2008. This expense is eliminated in
consolidation.
Horizon
Air Financial and Statistical Data
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
30
|
|
|
Six Months Ended June
30
|
|
Financial Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger - brand
flying
|
|
$ |
91.7 |
|
|
$ |
107.7 |
|
|
|
(14.9 |
) |
|
$ |
178.3 |
|
|
$ |
210.4 |
|
|
|
(15.3 |
) |
Passenger - Alaska capacity
purchase arrangement
|
|
|
63.5 |
|
|
|
78.7 |
|
|
|
(19.3 |
) |
|
|
121.3 |
|
|
|
150.1 |
|
|
|
(19.2 |
) |
Total passenger
revenue
|
|
|
155.2 |
|
|
|
186.4 |
|
|
|
(16.7 |
) |
|
|
299.6 |
|
|
|
360.5 |
|
|
|
(16.9 |
) |
Freight and
mail
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
(14.3 |
) |
|
|
1.3 |
|
|
|
1.3 |
|
|
|
- |
|
Other - net
|
|
|
2.1 |
|
|
|
1.8 |
|
|
|
16.7 |
|
|
|
3.8 |
|
|
|
4.3 |
|
|
|
(11.6 |
) |
Total Operating
Revenues
|
|
|
157.9 |
|
|
|
188.9 |
|
|
|
(16.4 |
) |
|
|
304.7 |
|
|
|
366.1 |
|
|
|
(16.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and
benefits
|
|
|
46.2 |
|
|
|
48.6 |
|
|
|
(4.9 |
) |
|
|
92.6 |
|
|
|
99.3 |
|
|
|
(6.7 |
) |
Variable incentive
pay
|
|
|
2.8 |
|
|
|
1.8 |
|
|
|
55.6 |
|
|
|
5.0 |
|
|
|
2.8 |
|
|
|
78.6 |
|
Aircraft fuel, including hedging
gains and losses
|
|
|
21.0 |
|
|
|
30.8 |
|
|
|
(31.8 |
) |
|
|
46.8 |
|
|
|
79.1 |
|
|
|
(40.8 |
) |
Aircraft
maintenance
|
|
|
13.0 |
|
|
|
16.8 |
|
|
|
(22.6 |
) |
|
|
26.4 |
|
|
|
32.7 |
|
|
|
(19.3 |
) |
Aircraft
rent
|
|
|
11.0 |
|
|
|
14.4 |
|
|
|
(23.6 |
) |
|
|
22.5 |
|
|
|
29.8 |
|
|
|
(24.5 |
) |
Landing fees and other
rentals
|
|
|
14.1 |
|
|
|
14.5 |
|
|
|
(2.8 |
) |
|
|
27.8 |
|
|
|
28.9 |
|
|
|
(3.8 |
) |
Contracted
services
|
|
|
7.9 |
|
|
|
6.9 |
|
|
|
14.5 |
|
|
|
15.4 |
|
|
|
14.9 |
|
|
|
3.4 |
|
Selling
expenses
|
|
|
7.0 |
|
|
|
8.1 |
|
|
|
(13.6 |
) |
|
|
12.9 |
|
|
|
16.1 |
|
|
|
(19.9 |
) |
Depreciation and
amortization
|
|
|
9.4 |
|
|
|
9.6 |
|
|
|
(2.1 |
) |
|
|
18.6 |
|
|
|
19.8 |
|
|
|
(6.1 |
) |
Food and beverage
service
|
|
|
0.5 |
|
|
|
0.8 |
|
|
|
(37.5 |
) |
|
|
1.1 |
|
|
|
1.4 |
|
|
|
(21.4 |
) |
Other
|
|
|
8.6 |
|
|
|
11.2 |
|
|
|
(23.2 |
) |
|
|
19.6 |
|
|
|
24.0 |
|
|
|
(18.3 |
) |
Fleet transition costs -
CRJ-700
|
|
|
- |
|
|
|
6.1 |
|
|
NM
|
|
|
|
- |
|
|
|
6.1 |
|
|
NM
|
|
Fleet transition costs -
Q200
|
|
|
5.2 |
|
|
|
3.2 |
|
|
NM
|
|
|
|
10.0 |
|
|
|
9.0 |
|
|
NM
|
|
Total Operating
Expenses
|
|
|
146.7 |
|
|
|
172.8 |
|
|
|
(15.1 |
) |
|
|
298.7 |
|
|
|
363.9 |
|
|
|
(17.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
11.2 |
|
|
|
16.1 |
|
|
|
|
|
|
|
6.0 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.6 |
|
|
|
1.3 |
|
|
|
|
|
|
|
1.0 |
|
|
|
2.7 |
|
|
|
|
|
Interest
expense
|
|
|
(5.2 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
(11.1 |
) |
|
|
(11.4 |
) |
|
|
|
|
Interest
capitalized
|
|
|
- |
|
|
|
0.7 |
|
|
|
|
|
|
|
0.3 |
|
|
|
1.3 |
|
|
|
|
|
Other - net
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
(0.2 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
(4.7 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
(10.0 |
) |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income
Tax
|
|
$ |
6.5 |
|
|
$ |
12.6 |
|
|
|
|
|
|
$ |
(4.0 |
) |
|
$ |
(5.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Operating Statistics:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
(000)
|
|
|
1,694 |
|
|
|
1,913 |
|
|
|
(11.4 |
) |
|
|
3,240 |
|
|
|
3,765 |
|
|
|
(13.9 |
) |
RPMs (000,000)
"traffic"
|
|
|
609 |
|
|
|
695 |
|
|
|
(12.4 |
) |
|
|
1,133 |
|
|
|
1,353 |
|
|
|
(16.3 |
) |
ASMs (000,000)
"capacity"
|
|
|
828 |
|
|
|
944 |
|
|
|
(12.3 |
) |
|
|
1,615 |
|
|
|
1,886 |
|
|
|
(14.4 |
) |
Passenger load
factor
|
|
|
73.6 |
% |
|
|
73.6 |
% |
|
0.0
|
pts |
|
|
70.2 |
% |
|
|
71.7 |
% |
|
(1.5
|
) pts |
Yield per passenger
mile
|
|
|
25.48 |
¢ |
|
|
26.82 |
¢ |
|
|
(5.0 |
) |
|
|
26.44 |
¢ |
|
|
26.64 |
¢ |
|
|
(0.8 |
) |
Operating revenue per ASM
(RASM)
|
|
|
19.07 |
¢ |
|
|
20.01 |
¢ |
|
|
(4.7 |
) |
|
|
18.87 |
¢ |
|
|
19.41 |
¢ |
|
|
(2.8 |
) |
Passenger revenue per
ASM
|
|
|
18.74 |
¢ |
|
|
19.75 |
¢ |
|
|
(5.1 |
) |
|
|
18.55 |
¢ |
|
|
19.11 |
¢ |
|
|
(2.9 |
) |
Operating expenses per
ASM
|
|
|
17.72 |
¢ |
|
|
18.31 |
¢ |
|
|
(3.2 |
) |
|
|
18.50 |
¢ |
|
|
19.29 |
¢ |
|
|
(4.1 |
) |
Aircraft fuel per
ASM
|
|
|
2.54 |
¢ |
|
|
3.26 |
¢ |
|
|
(22.1 |
) |
|
|
2.90 |
¢ |
|
|
4.19 |
¢ |
|
|
(30.8 |
) |
CRJ-700 fleet transition costs per
ASM
|
|
|
0.00 |
¢ |
|
|
0.65 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.32 |
¢ |
|
NM
|
|
Q200 fleet transition costs per
ASM
|
|
|
0.63 |
¢ |
|
|
0.34 |
¢ |
|
NM
|
|
|
|
0.62 |
¢ |
|
|
0.48 |
¢ |
|
NM
|
|
Aircraft fuel cost per
gallon
|
|
$ |
1.41 |
|
|
$ |
1.79 |
|
|
|
(21.2 |
) |
|
$ |
1.58 |
|
|
$ |
2.27 |
|
|
|
(30.4 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.86 |
|
|
$ |
3.33 |
|
|
|
(44.1 |
) |
|
$ |
1.87 |
|
|
$ |
3.05 |
|
|
|
(38.7 |
) |
Fuel gallons
(000,000)
|
|
|
15.0 |
|
|
|
17.2 |
|
|
|
(12.8 |
) |
|
|
29.5 |
|
|
|
34.9 |
|
|
|
(15.5 |
) |
Average number of full-time
equivalent employees
|
|
|
3,308 |
|
|
|
3,792 |
|
|
|
(12.8 |
) |
|
|
3,345 |
|
|
|
3,822 |
|
|
|
(12.5 |
) |
Aircraft utilization (blk
hrs/day)
|
|
|
8.3 |
|
|
|
8.5 |
|
|
|
(2.4 |
) |
|
|
8.3 |
|
|
|
8.4 |
|
|
|
(1.2 |
) |
Operating fleet at
period-end
|
|
|
55 |
|
|
|
65 |
|
|
|
(10 a/c |
) |
|
|
55 |
|
|
|
65 |
|
|
|
(10 a/c |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HORIZON AIR
Horizon reported income before income
taxes of $6.5 million
during the second quarter
of 2009 compared to income of $12.6 million in 2008. The $6.1 million decline is primarily due to a $31.0 million drop
in operating revenues, partially offset by lower aircraft fuel and non-fuel
operating expenses.
HORIZON REVENUES
For the second quarter of 2009,
operating revenues decreased $31.0 million, or 16.4%,
compared to
2008. Horizon’s passenger revenues are summarized in the table
below:
|
|
Three Months Ended June
30
|
|
|
|
2009
|
|
|
2008
|
|
(dollars in
millions)
|
|
Revenues
|
|
|
% ASMs
|
|
|
Revenues
|
|
|
% ASMs
|
|
Passenger revenue from Horizon
"brand" flying
|
|
$ |
91.7 |
|
|
|
59 |
|
|
$ |
107.7 |
|
|
|
60 |
|
Revenue from CPA with Alaska
|
|
|
63.5 |
|
|
|
41 |
|
|
|
78.7 |
|
|
|
40 |
|
Total passenger revenue and % of
ASMs
|
|
$ |
155.2 |
|
|
|
100 |
|
|
$ |
186.4 |
|
|
|
100 |
|
Line-of-business
information is presented in the table below. In the CPA arrangements, 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 arrangements are not presented.
|
|
Three Months Ended June 30,
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 |
|
|
|
570 |
|
|
|
(14.4 |
%) |
|
|
59 |
|
|
|
72.9 |
% |
|
|
1.6 |
|
pts
|
|
|
25.76 |
¢ |
|
|
(2.9 |
%) |
|
|
19.33 |
¢ |
|
|
(0.1 |
%) |
Alaska CPA
|
|
|
340 |
|
|
|
374 |
|
|
|
(9.1 |
%) |
|
|
41 |
|
|
NM
|
|
|
NM
|
|
NM
|
|
|
NM
|
|
|
|
18.69 |
¢ |
|
|
(11.1 |
%) |
System
Total
|
|
|
828 |
|
|
|
944 |
|
|
|
(12.3 |
%) |
|
|
100 |
|
|
|
73.6 |
% |
|
|
0.0 |
|
pts
|
|
|
25.48 |
¢ |
|
|
(5.0 |
%) |
|
|
19.07 |
¢ |
|
|
(4.7 |
%) |
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 $16.0 million or 14.9% on a 14.4% reduction in
brand capacity. Unit revenue was relatively flat due to a 2.9% yield
decline in those
markets, almost completely
offset by a 1.6-point improvement in load factor.
Revenue
from the CPA with Alaska totaled $63.5 million during the second quarter of 2009
compared to $78.7 million in the second quarter of 2008. The decline is
primarily due to a 9.1% reduction 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 actual operating costs plus a specified
margin. This revenue is eliminated in consolidation.
HORIZON EXPENSES
Total operating expenses
declined $26.1 million, or
15.1%, as compared to the
same period in 2008. The decrease is mainly due to the decline in
aircraft fuel expense. Maintenance, aircraft ownership. and
other variable operational costs also declined because of the reduction in
capacity.
Other significant period-over-period
changes in the components of operating expenses are as
follows:
Wages and Benefits
Wages and benefits declined $2.4 million, or 4.9%, compared to the second quarter of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Three Months Ended June
30,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Wages
|
|
$ |
34.0 |
|
|
$ |
36.9 |
|
|
|
(7.9 |
) |
Medical
benefits
|
|
|
5.4 |
|
|
|
4.9 |
|
|
|
10.2 |
|
Other benefits and payroll
taxes
|
|
|
6.8 |
|
|
|
6.8 |
|
|
|
-- |
|
Total wages and
benefits
|
|
$ |
46.2 |
|
|
$ |
48.6 |
|
|
|
(4.9 |
) |
Wages declined 7.9% primarily as a result of a 12.8% decline in the number
of full-time equivalent employees, partially offset by slightly higher wages per
employee. The higher wages per employee is due to a higher average
employee seniority level as recent furloughs have involved less senior
employees.
Medical benefits have increased 10.2%
primarily as a result of higher health care costs.
We expect to see further year-over-year
reductions in wages and benefits in the last six months of the
year.
Aircraft
Fuel
Aircraft
fuel decreased $9.8 million, or 31.8%, compared to the second quarter of 2008.
The elements of the change are illustrated in the following table:
|
|
Three Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
15.0 |
|
|
|
17.2 |
|
|
|
(12.8 |
) |
Raw price per
gallon
|
|
$ |
1.75 |
|
|
$ |
3.88 |
|
|
|
(54.9 |
) |
Total raw fuel
expense
|
|
$ |
26.2 |
|
|
$ |
66.7 |
|
|
|
(60.7 |
) |
Impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
(5.2 |
) |
|
|
(35.9 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
21.0 |
|
|
$ |
30.8 |
|
|
|
(31.8 |
) |
NM =
Not Meaningful
The raw fuel price per gallon declined
by 54.9% as a result of lower West Coast jet fuel
prices caused by a considerable decrease in crude oil costs and refining
margins. Based on the current price of jet fuel, we expect that the
raw price per gallon in 2009 will be lower than in 2008.
Our economic fuel
cost is calculated as
follows:
|
|
Three Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
26.2 |
|
|
$ |
66.7 |
|
|
|
(60.7 |
) |
Plus or minus: net of cash
received from settled hedges and premium expense
recognized
|
|
|
1.6 |
|
|
|
(9.5 |
) |
|
NM
|
|
Economic fuel
expense
|
|
$ |
27.8 |
|
|
$ |
57.2 |
|
|
|
(51.4 |
) |
Fuel gallons
consumed
|
|
|
15.0 |
|
|
|
17.2 |
|
|
|
(12.8 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.86 |
|
|
$ |
3.33 |
|
|
|
(44.1 |
) |
NM = Not
meaningful
As noted
in the table above, the total net amount recognized for hedges that settled
during the period was $1.6 million in the second quarter of 2009, compared to a
net cash benefit of $9.5 million in 2008. These amounts represent the
net of the premium expense recognized for those hedges and any cash received or
paid upon settlement. The decrease is primarily due to the
significant decline in crude oil prices over the past year combined with higher
average exercise prices on contracts that settled this quarter compared to the
second quarter of 2008.
We currently expect economic fuel
expense to be lower for the
full year of 2009 than for 2008 because of lower jet fuel
prices.
Aircraft
Maintenance
Aircraft
maintenance expense decreased $3.8 million, or 22.6%, primarily as a result of
fewer scheduled maintenance events and lower costs from process
improvements.
Aircraft Rent
Aircraft rent declined $3.4 million, or 23.6%,
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. All of our recently-acquired Q400
aircraft are owned.
Fleet Transition
Costs
Fleet transition costs associated with
the removal of Q200 aircraft from the operating fleet were $5.2 million during the second quarter of
2009 compared to $3.2 million in the same
period of 2008. We removed the final six Q200 aircraft
from operation in the first quarter of 2009 and recorded a $4.8 million charge in that period. The current
quarter charge takes into account more recent information that indicates the
market value for these aircraft has declined.
During the second quarter of 2008, as a
result of the Board’s decision to retire the CRJ-700 fleet earlier than
expected, we recorded a $5.5 million impairment charge associated with the two
owned CRJ-700 aircraft and related spare parts and a $0.6 million severance
charge related to a reduction in work force. We may have further charges in the future as we
continue toward our goal of
having an all-Q400 fleet at Horizon. At this time, however, we have
paused in our remarketing efforts for the CRJ-700 aircraft due to current market
conditions and our recent agreement with Bombardier to defer the Q400
deliveries.
Operating
Costs per Available Seat Mile (CASM)
Our
operating costs per ASM are summarized below:
|
|
Three Months Ended June
30
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total operating expenses per ASM
(CASM)
|
|
|
17.72 |
¢ |
|
|
18.31 |
¢ |
|
|
(3.2 |
) |
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
2.54 |
¢ |
|
|
3.26 |
¢ |
|
|
(22.1 |
) |
Fleet transition costs per
ASM
|
|
|
0.63 |
¢ |
|
|
0.99 |
¢ |
|
NM
|
|
NM = Not
Meaningful
We
currently forecast our cost per ASM excluding fuel and fleet transition costs
for the third quarter and full year of 2009 to be up about 6% - 7% and 5% - 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
$19.0 million in the second quarter of 2009 compared to
$8.3 million for the same period of
2008. Interest income declined $2.7 million compared to the second quarter of 2008
primarily as a result of lower average portfolio returns, partially offset by a
higher average balance of cash and marketable securities. Interest
expense was flat on a higher average debt balance, offset by lower interest
rates on our variable-rate debt. Capitalized interest was $4.3 million lower than in the second quarter of 2008 because
of lower advance aircraft purchase deposits and the deferral of future aircraft
deliveries. Other-net expense was $3.5 million in the second quarter
of 2009 compared to other-net income of $0.1 million in the prior-year
period. The change is primarily due to the $1.8 million write down of
certain of our marketable securities portfolio.
CONSOLIDATED INCOME TAX EXPENSE
(BENEFIT)
See discussion below under “Comparison
of Six Months Ended June 30, 2009 to Six Months Ended June 30,
2008.”
COMPARISON
OF SIX MONTHS ENDED JUNE 30, 2009 TO SIX MONTHS ENDED
JUNE
30, 2008
Our consolidated net income for the six months ended June 30, 2009 was
$9.9 million, or $0.27 per diluted share, compared to net
income of $25.8 million, or $0.70 per diluted share, for the first six months of 2008. Items that impact
the comparability between the periods are as follows:
|
·
|
Both periods include adjustments
to reflect timing of gain and loss recognition resulting from
mark-to-market fuel hedge accounting. For the first six months
of 2009, we recognized net mark-to-market gains of $49.8 million ($31.1 million
after tax, or $0.85 per share), compared to net gains of $156.0 million
($97.7 million after tax, or $2.66 per share) in the same period of
2008.
|
|
·
|
The first six months of 2009
include the new pilot contract transition costs of $35.8 million ($22.3
million after tax, or $0.61 per share) discussed
previously.
|
|
·
|
The first six months of 2008
include fleet transition costs of $32.1 million ($20.1 million after tax,
or $0.54 per share) related to the ongoing transitions out of the MD-80
and CRJ-700 fleets.
|
ALASKA AIRLINES
Alaska reported income before income taxes of
$23.8 million during the first six months of 2009
compared to $47.5 million in the first six months of 2008.
ALASKA REVENUES
Total operating revenues
declined $151.4 million, or
9.7%, during the first six months of 2009 as compared to the same period in
2008. The changes are summarized in the following
table:
|
|
Six Months Ended June
30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Passenger revenue -
mainline
|
|
$ |
1,142.3 |
|
|
$ |
1,290.0 |
|
|
|
(11.4 |
) |
Freight and
mail
|
|
|
42.5 |
|
|
|
47.9 |
|
|
|
(11.3 |
) |
Other - net
|
|
|
88.1 |
|
|
|
67.7 |
|
|
|
30.1 |
|
Total mainline
revenues
|
|
$ |
1,272.9 |
|
|
$ |
1,405.6 |
|
|
|
(9.4 |
) |
Passenger revenue - purchased
capacity
|
|
|
129.5 |
|
|
|
148.2 |
|
|
|
(12.6 |
) |
Total operating
revenues
|
|
$ |
1,402.4 |
|
|
$ |
1,553.8 |
|
|
|
(9.7 |
) |
Operating Revenues –
Mainline
Mainline passenger revenue for the first
six months fell by 11.4%
on a 7.7% reduction in capacity. There was a
4.1% decline in passenger
revenue per available seat mile (PRASM). The decline in PRASM was
driven by a 5.3% drop in ticket yield compared to the prior-year quarter, partially
offset by a 1-point increase in load factor.
Ancillary
revenue included in passenger revenue increased from $37.5 million in the first
six months of 2008 to $44.1 million in the current year. The increase
is primarily due to the implementation of our 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.
Freight
and mail revenue decreased $5.4 million, or 11.3%, primarily as a result of
lower volumes and lower fuel surcharges, partially offset by higher freight
yield.
Other –
net revenue increased $20.4 million, or 30.1%, from the prior-year
period. Mileage Plan revenue increased by $19.2 million primarily as
a result of an increase in the rate paid to us by our credit card partner for
miles sold.
Passenger Revenue – Purchased
Capacity
Passenger
revenue - purchased capacity flying fell by $18.7 million over the same period
last year because of a 15.8% decline in passenger traffic combined with a 1.4%
decrease in unit revenue compared to the prior year. Unit revenue dropped due to
a 3.7-point decrease, partially offset by a 3.8% improvement in ticket
yield.
ALASKA EXPENSES
For the six months ended June 30, 2009,
total operating expenses decreased $147.0 million or 9.8% compared to the same period in 2008 as
a result of a lower mainline operating costs, most notably aircraft fuel and
fleet transition charges, partially offset by higher wage expense and new pilot
contract transition costs.
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:
|
|
Six Months Ended June
30
|
|
Operating Expenses
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Mainline
|
|
$ |
1,221.0 |
|
|
$ |
1,338.4 |
|
|
|
(8.8 |
) |
Purchased capacity
costs
|
|
|
131.6 |
|
|
|
161.2 |
|
|
|
(18.4 |
) |
Total operating
expenses
|
|
$ |
1,352.6 |
|
|
$ |
1,499.6 |
|
|
|
(9.8 |
) |
NM
= Not Meaningful
Mainline Operating
Expenses
Total mainline operating expenses
declined $117.4 million or
8.8% during the first six months of 2009 compared to the same period last year.
The reduction was mostly
due to the
$145.6 million decrease in
aircraft fuel expense, partially offset by the new pilot contract transition
costs and increases in wages, variable incentive pay and
maintenance. Significant operating expense variances from the first
six months of 2008 are more fully described below.
Wages and Benefits
Wages and benefits were up $19.4 million, or 5.2%, compared to the first six months of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Six Months Ended June
30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Wages
|
|
$ |
268.5 |
|
|
$ |
275.2 |
|
|
|
(2.4 |
) |
Pension and defined-contribution
retirement benefits
|
|
|
58.4 |
|
|
|
34.3 |
|
|
|
70.3 |
|
Medical
benefits
|
|
|
40.3 |
|
|
|
37.8 |
|
|
|
6.6 |
|
Other benefits and payroll
taxes
|
|
|
28.6 |
|
|
|
29.1 |
|
|
|
(1.7 |
) |
Total wages and
benefits
|
|
$ |
395.8 |
|
|
$ |
376.4 |
|
|
|
5.2 |
|
Wages declined 2.4% on a 9.1% reduction
in FTEs compared to the first six months of 2008. Wages have not
declined in step with the FTE reduction because of higher wage rates for the
pilot group in connection with their new contract and higher average wages for
flight attendants stemming from higher average seniority.
The 70.3% increase in pension and other
retirement-related benefits is primarily due to a $22.9 million increase in our defined-benefit pension cost
driven by the significant decline in the market value of pension assets at the
end of 2008.
Medical benefits increased 6.6% from the
prior-year period primarily as a result of an increase in the post-retirement
medical cost for the pilot group in connection with their new
contract.
Variable Incentive
Pay
Variable incentive pay expense
increased from $5.9 million
in the first six months of 2008 to $23.2 million in the same period 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 pilots and flight attendants to the Air Group Performance-Based Pay
Plan, which results in a larger expected payout for 2009 than the incentive
plans under which they were previously covered.
Aircraft Fuel
Aircraft
fuel expense declined $145.6 million, or 37.8%, compared to the first six months
of 2008. The elements of the change are illustrated in the following table:
|
|
Six Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
149.8 |
|
|
|
172.3 |
|
|
|
(13.1 |
) |
Raw price per
gallon
|
|
$ |
1.68 |
|
|
$ |
3.39 |
|
|
|
(50.4 |
) |
Total raw fuel
expense
|
|
$ |
251.1 |
|
|
$ |
584.3 |
|
|
|
(57.0 |
) |
Net impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
(11.8 |
) |
|
|
(199.4 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
239.3 |
|
|
$ |
384.9 |
|
|
|
(37.8 |
) |
NM = Not
Meaningful
Fuel
gallons consumed declined 13.1%, primarily as a result of a 6.4% reduction in
capacity and the improved fuel efficiency of our fleet as we completed the
transition to newer, more fuel-efficient B737-800 aircraft in the second half of
2008.
The raw
fuel price per gallon declined 50.4% as a result of lower West Coast jet fuel
driven by lower crude oil costs and refining margins.
Our economic fuel expense is
calculated as follows:
|
|
Six Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
251.1 |
|
|
$ |
584.3 |
|
|
|
(57.0 |
) |
Plus or minus: net of cash
received from settled hedges and premium expense
recognized
|
|
|
29.5 |
|
|
|
(70.7 |
) |
|
NM
|
|
Economic fuel
expense
|
|
$ |
280.6 |
|
|
$ |
513.6 |
|
|
|
(45.4 |
) |
Fuel gallons
consumed
|
|
|
149.8 |
|
|
|
172.3 |
|
|
|
(13.1 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.88 |
|
|
$ |
2.98 |
|
|
|
(36.9 |
) |
NM = Not
meaningful
The total net amount recognized for
hedges that settled during the period was $29.5 million in the first six months, compared to a net
cash benefit of $70.7 million in the same period of 2008. These amounts represent the net of the premium expense recognized for those
hedges and any cash received or paid upon
settlement. The decrease is primarily
due to the significant drop 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 six months of 2008.
Aircraft Maintenance
Aircraft maintenance increased by $13.4 million, or 16.9%,
compared to the prior-year period because of the 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.
Contracted Services
Contracted services declined
by $9.7 million, or 14.1%, compared to the first six months of 2008 as a
result of the reduction in the number of flights operated throughout our system
where vendors are used and a reduction in project contracted
labor.
Selling Expenses
Selling
expenses declined by $15.1 million, or 24.2%, compared to the prior-year period
as a result of lower credit card and travel agency commissions and lower ticket
distribution costs due to the decline in passenger traffic.
Depreciation and
Amortization
Depreciation and amortization
increased $7.1 million, or 8.8%, compared to the first six months of
2008. This is primarily due to the additional B737-800 aircraft
delivered in the last six months of 2008 and the first half of
2009.
Other Operating
Expenses
Other operating expenses declined $7.9
million, or 8.9%, compared to the prior year. The decline is
primarily driven by a reduction in property taxes and outside professional
services costs.
New Pilot Contract Transition Costs
In connection with the new four-year
contract ratified by Alaska’s pilots in the second quarter, the
pilots received a one-time aggregate bonus of $20.3 million. The transition
expense associated with establishing the new sick-leave payout program previously described was $15.5 million. These items have been combined and
reported as “New pilot
contract transition
costs” in the condensed consolidated
statements of operations.
Fleet Transition
Charges
In the second quarter of 2008, we
retired two MD-80 aircraft and placed them in temporary storage at an aircraft
storage facility. These aircraft, along with two other MD-80s, are
under long-term lease arrangements. The $26.0 million charge in the
first six months of 2008 represents the remaining lease payments under the lease
contract and our estimate of maintenance costs that will be incurred in the
future to meet the minimum return conditions under the lease
requirements.
Mainline Unit Costs per Available Seat
Mile
Our mainline operating
costs per ASM are summarized below:
|
|
Six Months Ended June
30
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total mainline operating expenses
per ASM (CASM)
|
|
|
10.74 |
¢ |
|
|
10.86 |
¢ |
|
|
(1.1 |
) |
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
2.11 |
¢ |
|
|
3.13 |
¢ |
|
|
(32.6 |
) |
New pilot contract transition
costs per ASM
|
|
|
0.31 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
Fleet transition costs per
ASM
|
|
|
0.00 |
¢ |
|
|
0.21 |
¢ |
|
NM
|
|
NM
= Not Meaningful
Purchased Capacity
Costs
Purchased capacity costs
decreased $29.6 million,
from $161.2 million for the first six months of 2008 to $131.6 million for the
six months ended June 30, 2009. Of the total, $121.3 million was paid
to Horizon under the CPA for 639 million ASMs. This expense is
eliminated in
consolidation.
HORIZON AIR
Horizon reported a loss before income
taxes of $4.0 million
during the first six months
of 2009 compared to a loss of $5.0 million in 2008. The $1.0 million improvement is
primarily due to declines
in aircraft fuel costs and non-fuel operating expenses, mostly offset by a $61.4 million drop in
operating revenues.
HORIZON REVENUES
During the six months ended June 30,
2009, operating revenues decreased $61.4 million, or 16.8%, compared to
2008. Horizon’s passenger revenues are summarized in the table
below:
|
|
Six Months Ended June
30
|
|
|
|
2009
|
|
|
2008 |
|
(dollars in
millions)
|
|
Revenues
|
|
|
% ASMs
|
|
|
Revenues
|
|
|
% ASMs
|
|
Passenger revenue from Horizon
"brand" flying
|
|
$ |
178.3 |
|
|
|
60 |
|
|
$ |
210.4 |
|
|
|
62 |
|
Revenue from CPA with Alaska
|
|
|
121.3 |
|
|
|
40 |
|
|
|
150.1 |
|
|
|
38 |
|
Total Passenger revenue and % of
ASMs
|
|
$ |
299.6 |
|
|
|
100 |
|
|
$ |
360.5 |
|
|
|
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.
|
|
Six Months Ended June 30,
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
|
|
|
976 |
|
|
|
1,168 |
|
|
|
(16.4 |
%) |
|
|
60 |
|
|
|
69.2 |
% |
|
|
0.0 |
|
pts
|
|
|
26.39 |
¢ |
|
|
1.3 |
% |
|
|
18.79 |
¢ |
|
|
1.5 |
% |
Alaska CPA
|
|
|
639 |
|
|
|
718 |
|
|
|
(11.0 |
%) |
|
|
40 |
|
|
NM
|
|
|
NM
|
|
NM
|
|
|
NM
|
|
|
|
18.99 |
¢ |
|
|
(9.1 |
%) |
System
Total
|
|
|
1,615 |
|
|
|
1,886 |
|
|
|
(14.4 |
%) |
|
|
100 |
|
|
|
70.2 |
% |
|
|
(1.5 |
) |
pts
|
|
|
26.44 |
¢ |
|
|
(0.8 |
%) |
|
|
18.87 |
¢ |
|
|
(2.8 |
%) |
NM
= Not Meaningful
Passenger revenue from Horizon brand
flying fell $32.1 million,
or 15.3%, on a 16.4% reduction in brand capacity, partially offset by a 1.5%
improvement in unit revenue. The increase in unit revenue is due
to a 1.3% improvement in ticket yield on flat load factor.
Revenue
from the CPA with Alaska totaled $121.3 million during the first six months of
2009 compared to $150.1 during the same period in 2008. The decrease is
primarily due to an 11% reduction 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 actual operating costs plus a specified margin. This revenue
is eliminated in consolidation.
HORIZON EXPENSES
Total operating expenses decreased
$65.2 million, or 17.9%, as compared to the same period in
2008. The sharp decline in fuel costs was the primary driver of the
overall decrease. Significant period-over-period changes in the
components of operating expenses are as follows.
Wages and Benefits
Wages and benefits declined $6.7 million, or 6.7%, compared to the first six months of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Six Months Ended June
30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Wages
|
|
$ |
67.6 |
|
|
$ |
74.5 |
|
|
|
(9.3 |
) |
Medical
benefits
|
|
|
10.2 |
|
|
|
9.8 |
|
|
|
4.1 |
|
Other benefits and payroll
taxes
|
|
|
14.8 |
|
|
|
15.0 |
|
|
|
1.3 |
|
Total wages and
benefits
|
|
$ |
92.6 |
|
|
$ |
99.3 |
|
|
|
(6.7 |
) |
Wages declined 9.3% primarily as a result of a 12.5% decline in the number
of full-time equivalent employees, partially offset by slightly higher wages per
employee. The higher wages per employee is due to a higher average
employee seniority level as recent furloughs have involved less senior
employees.
Medical benefits have increased 4.1%
primarily as a result of higher health care costs.
Variable Incentive
Pay
Variable incentive pay expense increased
to $5.0 million in the first six months of 2009
from $2.8 million in the first six months of
2008. The increase reflects higher year-over-year accruals for
profit-based incentives that are based on estimated full-year
results.
Aircraft
Fuel
Aircraft
fuel declined $32.3 million, or 40.8%, compared to the same period in 2008. The
elements of the change are illustrated in the following table:
|
|
Six Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Fuel gallons
consumed
|
|
|
29.5 |
|
|
|
34.9 |
|
|
|
(15.5 |
) |
Raw price per
gallon
|
|
$ |
1.67 |
|
|
$ |
3.46 |
|
|
|
(51.7 |
) |
Total raw fuel
expense
|
|
$ |
49.3 |
|
|
$ |
120.9 |
|
|
|
(59.2 |
) |
Net impact on fuel expense from
(gains) and losses arising from fuel-hedging
activities
|
|
|
(2.5 |
) |
|
|
(41.8 |
) |
|
NM
|
|
Aircraft fuel
expense
|
|
$ |
46.8 |
|
|
$ |
79.1 |
|
|
|
(40.8 |
) |
NM = Not
Meaningful
The 15.5%
reduction in gallons consumed is primarily a function of the capacity decline in
the first six months of 2009 compared to the same period in the prior
year.
The raw
fuel price per gallon declined by 51.7% as a result of the drop in crude oil
prices and refining margins.
Our economic fuel expense is
calculated as follows:
|
|
Six Months Ended June
30
|
|
(in millions,
except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Raw fuel
expense
|
|
$ |
49.3 |
|
|
$ |
120.9 |
|
|
|
(59.2 |
) |
Plus or minus: net of cash
received from settled hedges
and premium expense
recognized
|
|
|
6.0 |
|
|
|
(14.5 |
) |
|
NM
|
|
Economic fuel
expense
|
|
$ |
55.3 |
|
|
$ |
106.4 |
|
|
|
(48.0 |
) |
Fuel gallons
consumed
|
|
|
29.5 |
|
|
|
34.9 |
|
|
|
(15.5 |
) |
Economic fuel cost per
gallon
|
|
$ |
1.87 |
|
|
$ |
3.05 |
|
|
|
(38.7 |
) |
NM = Not
meaningful
The total
net amount recognized for hedges that settled during the period was $6.0 million
in the first six months, compared to a net cash benefit of $14.5 million in
2008. These amounts represent the net of the premium expense
recognized for those hedges and any cash received or paid upon
settlement.
Aircraft Maintenance
Aircraft maintenance expense
decreased $6.3 million, or
19.3%, primarily as a result of fewer scheduled maintenance events and cost savings from process
improvements.
Aircraft Rent
Aircraft rent expense declined $7.3 million or 24.5% 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.
Selling Expenses
Selling
expenses declined $3.2 million, or 19.9%, compared to the prior-year period as a
result of lower credit card and travel agency commissions and lower ticket
distribution costs due to the decline in passenger traffic.
Other Operating
Expenses
Other operating expenses declined $4.4
million, or 18.3%, compared to the prior-year. The decline is
primarily driven by a reduction in passenger remuneration costs and non-wage
personnel costs such as crew costs.
Fleet Transition
Costs
Fleet transition costs associated with
the removal of Q200 aircraft from the operating fleet were $10.0 million during the first six months of 2009 compared to $9.0 million in the same period of
2008. The six remaining Q200 aircraft were removed from operation in
the first quarter of 2009.
During the first six months of 2008, as a result of the Board’s
decision to retire the CRJ-700 fleet earlier than expected, we recorded a $5.5
million impairment charge associated with the two owned CRJ-700 aircraft and
related spare parts and a $0.6 million severance charge related to a reduction
in work force.
Operating
Costs per Available Seat Mile (CASM)
|
|
Six Months Ended June
30
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Total mainline operating expenses
per ASM (CASM)
|
|
|
18.50 |
¢ |
|
|
19.29 |
¢ |
|
|
(4.1 |
) |
CASM includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel cost per
ASM
|
|
|
2.90 |
¢ |
|
|
4.19 |
¢ |
|
|
(30.8 |
) |
Fleet transition charges per
ASM
|
|
|
0.62 |
¢ |
|
|
0.80 |
¢ |
|
NM
|
|
NM
= Not Meaningful
CONSOLIDATED NONOPERATING INCOME
(EXPENSE)
Net nonoperating expense was $36.7 million in the first six months of 2009 compared to
$14.7 million in the same period of
2008. The reasons for the changes to the components of nonoperating
expense are consistent with those in the three-month
discussion.
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 six months of 2009, we used the actual
year-to-date effective tax rate. Our effective income tax rate on
pretax income for the first six months of 2009
was 45.3%,
compared to 35.2% for the first six months 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%, 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 of six B737-800
aircraft resulting in net proceeds of $230 million and the financing of
four B737-800 aircraft and two Q400 aircraft in 2009 resulting in proceeds
of approximately $163 million.
|
|
·
|
Our
five 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
$90.5 million pre-delivery payment facility, which will decline to $80.0
million on August 31, 2009;
|
|
·
|
Other
potential 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 $1.1 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 June 30, 2009, we had a net unrealized
gain on our $1.1 billion cash and marketable securities balance of $8.4
million.
The table
below presents the major indicators of financial condition and
liquidity.
(in millions, except per share and
debt-to-capital amounts)
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
Change
|
|
Cash
and marketable securities
|
|
$ |
1,121.8 |
|
|
$ |
1,077.4 |
|
|
$ |
44.4 |
|
Cash
and marketable securities as a percentage of last twelve months
revenue
|
|
|
32 |
% |
|
|
29 |
% |
|
3
pts
|
|
Long-term
debt, net of current portion
|
|
|
1,669.7 |
|
|
|
1,596.3 |
|
|
|
73.4 |
|
Shareholders'
equity
|
|
|
688.4 |
|
|
|
661.9 |
|
|
|
26.5 |
|
Long-term
debt-to-capital assuming aircraft operating leases are capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
at
seven times annualized rent
|
|
80%:
20%
|
|
|
81%:19%
|
|
|
NA
|
|
During the six months ended June 30,
2009 our cash and marketable securities increased $44.4 million to $1.1
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 six months of 2009, net
cash provided by operating activities was $126.0 million, compared to $104.1 million generated during the same
period of 2008. The increase in operating cash flow was
primarily due to the
significant decline in fuel costs compared to the prior-year period, partially
offset by lower revenues and cash inflows for advance ticket sales as compared
to the same period in 2008. We expect to generate cash from operations for the
full year, but we anticipate using all of that cash, plus additional debt
proceeds, to fund capital expenditures.
Cash Used in Investing
Activities
Cash used in investing activities was
$462.6 million during the first six months of 2009,
compared to $488.7 million during the same period of 2008.
Our capital expenditures
were higher than in
the same period
of 2008 as we purchased two Q400 aircraft
and ten B737-800 aircraft in the first six months of 2009 compared to one and six,
respectively, in 2008.
We currently expect gross capital
expenditures for 2009 to be as follows (in millions):
|
|
Aircraft-related
|
|
|
Non-aircraft
|
|
|
Total
|
|
Alaska
|
|
$ |
290 |
|
|
$ |
75 |
|
|
$ |
365 |
|
Horizon
|
|
|
75 |
|
|
|
5 |
|
|
|
80 |
|
Total Air
Group
|
|
$ |
365 |
|
|
$ |
80 |
|
|
$ |
445 |
|
Currently, we expect to have gross
aircraft capital expenditures of approximately $180 million and $50 million in
2010 and 2011, respectively, which is significantly less than the average over
the past several years. We believe this will allow us to apply more
of our operating cash flow to reduce our outstanding debt balance and decrease
our leverage.
Cash Provided by Financing
Activities
Net cash provided by financing
activities was $216.8
million during the first
six months of 2009 compared to $359.4 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 four new B737-800 aircraft. Offsetting this
increase were normal long-term debt payments of $64.7 million, $27.1 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 June 30, 2009. We
are currently in the process of renewing this facility.
Pre-delivery
Payment Facility
Alaska’s
$90.5 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. The available amount on the
facility was reduced in the second quarter from $152 million to $90.5 million
and will be reduced again to $80.0 million on August 31, 2009. The
reductions are primarily driven by the decline in the remaining future
obligations under the purchase agreement with Boeing. As of June 30,
2009, $23.2 million was outstanding.
Credit Card
Agreements
During the second quarter of 2009, we
amended one of our credit card processing agreements. Under this agreement, we are required to maintain a minimum
$500 million unrestricted cash and marketable securities balance (collectively
URC). If the URC balance falls below $500 million, there are
provisions that would require a holdback, including the requirement for a 50%
holdback if the URC balance falls below $350 million and a 100% holdback if the
URC balance falls below $250 million. We are not currently required to
maintain a reserve under this agreement.
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. In July
2009, Horizon entered into a similar agreement with Bombardier to defer all
remaining 2010 and 2011 Q400 deliveries to 2012 and 2013.
Given the revised delivery schedules
noted above, we have firm orders to purchase 26 aircraft requiring future aggregate
payments of approximately $700 million, as set forth
below. Alaska has options to acquire 40 additional B737s and Horizon has
options to acquire 10 additional 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 June 30, 2009, and payments by
year:
|
|
Delivery Period - Firm
Orders
|
|
|
|
|
|
|
July 1 –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Beyond 2013
|
|
|
Total
|
|
Boeing
737-800
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
15 |
|
Bombardier
Q400
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
- |
|
|
|
11 |
|
Total
|
|
|
3 |
|
|
|
7 |
|
|
|
- |
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
26 |
|
Payments
(millions)
|
|
$ |
99.7 |
|
|
$ |
177.8 |
|
|
$ |
49.7 |
|
|
$ |
142.7 |
|
|
$ |
141.2 |
|
|
$ |
89.1 |
|
|
$ |
700.2 |
|
The remaining Q400 deliveries are
scheduled to occur in the fourth quarter of 2009. We are continuing
to pursue options to dispose of three aircraft to coincide with these three Q400
deliveries. If we are unable to successfully remarket the three
aircraft, we will evaluate other alternatives such as temporary storage or
reduced utilization.
We had
also planned to sell four B737-700 aircraft in 2009, but the current economic
environment is hindering our remarketing efforts and we believe it is unlikely
that we will sell those aircraft this year. We are currently
evaluating other alternatives for those four aircraft, including temporary
storage, reduced utilization or other action to remain focused on capacity
discipline.
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 June 30, 2009.
|
|
July 1 – Dec.
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
(in
millions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
Total
|
|
Current and long-term
debt obligations
|
|
$ |
71.0 |
|
|
$ |
148.2 |
|
|
$ |
183.5 |
|
|
$ |
228.1 |
|
|
$ |
187.3 |
|
|
$ |
995.7 |
|
|
$ |
1,813.8 |
|
Current and long-term
portions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the pre-delivery
payment facility
|
|
|
23.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
23.2 |
|
Operating lease commitments
(1)
|
|
|
99.6 |
|
|
|
216.2 |
|
|
|
186.1 |
|
|
|
184.7 |
|
|
|
152.3 |
|
|
|
535.6 |
|
|
|
1,374.5 |
|
Aircraft purchase
commitments
|
|
|
99.7 |
|
|
|
177.8 |
|
|
|
49.7 |
|
|
|
142.7 |
|
|
|
141.2 |
|
|
|
89.1 |
|
|
|
700.2 |
|
Interest obligations
(2)
|
|
|
50.9 |
|
|
|
97.3 |
|
|
|
92.3 |
|
|
|
81.1 |
|
|
|
66.5 |
|
|
|
216.2 |
|
|
|
604.3 |
|
Other purchase obligations
(3)(4)
|
|
|
29.9 |
|
|
|
65.3 |
|
|
|
51.9 |
|
|
|
52.2 |
|
|
|
42.2 |
|
|
|
54.3 |
|
|
|
295.8 |
|
Total
|
|
$ |
374.3 |
|
|
$ |
704.8 |
|
|
$ |
563.5 |
|
|
$ |
688.8 |
|
|
$ |
589.5 |
|
|
$ |
1,890.9 |
|
|
$ |
4,811.8 |
|
(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 June 30,
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 $21.9 million of unrecognized tax benefits
for which we cannot make a reasonably reliable estimate of the amount and period
of payment.
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
We hedge our exposure to the volatility
of jet fuel prices using crude oil call options and, recently, jet fuel refining
margin swap contracts. 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. Our recent decision to enter into refining margin swap
contracts was to reduce future volatility for the refining margin component of
jet fuel prices. These swap contracts are limited to the third and
fourth quarters of 2009 and, as such, are not material to our condensed
consolidated balance sheet. 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 June 30, 2009 would increase or decrease
the fair value of our crude oil hedge portfolio by approximately $31.4 million and $26.0 million,
respectively.
Our fuel-hedge portfolio at June 30,
2009 includes a $2.7 million liability associated with crude oil collar
structures and a $1.4 million liability associated with jet fuel refining margin
contracts that would require future cash outlays if prices remained below the
contractual strike price. We do not have any collateral held by
counterparties to these agreements as of June 30, 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 4 to our condensed 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 June 30, 2009 the net unrealized gain on
our $1.1 billion cash and marketable securities balance
was $8.4 million.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
June 30, 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 June 30, 2009.
Changes in Internal Control over
Financial Reporting
We made no changes in our internal
control over financial reporting during the quarter ended June 30, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL
PROCEEDINGS
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 attempt to negotiate a remedy. In June 2009, another
hearing was conducted, specifically related to the parties' views on available
remedies. Subsequent to that hearing, there has been an executive
session of the arbitration panel and another is scheduled for
August. 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. 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
Issuer Purchases of Equity
Securities
|
|
Total
number of shares purchased
|
|
|
Average
price paid per share
|
|
|
Maximum
approximate remaining dollar value of shares that can be repurchased under
the plan (1)
|
|
June
11, 2009 – June 30, 2009 (1)
|
|
|
700,000 |
|
|
$ |
16.87 |
|
|
|
|
Total
|
|
|
700,000 |
|
|
$ |
16.87 |
|
|
$ |
38,171,740 |
|
(1)
|
Purchased
pursuant to a $50 million repurchase plan authorized by the Board of
Directors in June 2009. The plan expires after twelve
months.
|
ITEM
3. DEFAULTS UPON
SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
(a)
|
The
Company’s Annual Meeting of Stockholders was held on May 19,
2009.
|
(b)
|
At
the Annual Meeting, all nine directors were elected for one-year terms
expiring on the date of the Annual Meeting in
2010.
|
(c)
|
The
results of voting in the election of directors were as
follows:
|
|
Proposal 1. Election
of nominees for the Board of
Directors:
|
|
|
|
Board
Nominees
|
For
|
Against*
|
William
S. Ayer
|
31,327,621
|
1,058,365
|
Patricia
M. Bedient
|
31,640,220
|
745,766
|
Phyllis
J. Campbell
|
31,631,928
|
754,058
|
Mark
R. Hamilton
|
31,632,581
|
753,405
|
Jessie
J. Knight, Jr.
|
28,710,750
|
3,675,236
|
R.
Marc Langland
|
28,832,273
|
3,553,713
|
Dennis
F. Madsen
|
31,334,988
|
1,050,998
|
Byron
I. Mallott
|
28,832,742
|
3,553,244
|
J.
Kenneth Thompson
|
29,011,195
|
3,374,791
|
*
“Against” includes votes that were not cast “For” and votes that were cast
as
“Withhold”
|
d) The
results of voting on Proposals 2 through 4 were as follows:
|
Proposal 2. A board
proposal to ratify the appointment of KPMG LLP as the Company’s
independent auditor:
|
|
Number of Votes
|
% of Shares Outstanding
|
For
|
31,974,263
|
87.87%
|
Against
|
363,319
|
.99%
|
Abstain
|
48,404
|
.13%
|
Broker
Non-votes
|
0
|
|
Proposal
3. A board proposal seeking advisory
vote on the compensation of the Company’s named executive
officers.
|
|
Number of Votes
|
% of Shares Outstanding
|
For
|
31,312,098
|
86.06%
|
Against
|
956,396
|
2.63%
|
Abstain
|
117,492
|
.32%
|
Broker
Non-votes
|
0
|
|
Proposal
4.
|
A
stockholder-sponsored proposal regarding special shareowner
meetings.
|
|
Number of Votes
|
% of Shares Outstanding
|
For
|
19,101,875
|
52.50%
|
Against
|
9,605,573
|
26.40%
|
Abstain
|
106,417
|
.29%
|
Broker
Non-votes
|
3,572,121
|
9.81%
|
ITEM
5. OTHER INFORMATION
None.
See Exhibit Index on page 54.
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: August 7, 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.
* Filed
herewith