form10-q.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 September 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
35,255,503 common shares, par value $1.00, outstanding at October 31, 2009.
ALASKA
AIR GROUP, INC.
Quarterly
Report on Form 10-Q for the three months ended September 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 current economic
environment on customer travel
behavior;
|
· changes
in our operating costs, including fuel, which can be volatile;
· the
competitive environment in our industry;
|
·
|
our
ability to meet our cost reduction
goals;
|
|
·
|
our
significant indebtedness;
|
|
·
|
an
aircraft accident or incident;
|
|
·
|
our
ability to achieve or maintain
profitability;
|
|
·
|
labor
disputes and our ability to attract and retain qualified
personnel;
|
|
·
|
potential
downgrades of our credit ratings and the availability of
financing;
|
|
·
|
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;
|
|
·
|
fluctuations
in our quarterly results;
|
|
·
|
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;
|
|
·
|
compliance
with our financial covenants;
|
|
·
|
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.
|
|
|
|
|
|
|
ITEM 1. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
|
|
|
|
|
Alaska
Air Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
170.0 |
|
|
$ |
283.1 |
|
Marketable
securities
|
|
|
1,059.6 |
|
|
|
794.3 |
|
Total
cash and marketable securities
|
|
|
1,229.6 |
|
|
|
1,077.4 |
|
Receivables
- net
|
|
|
128.3 |
|
|
|
116.7 |
|
Inventories
and supplies - net
|
|
|
47.4 |
|
|
|
51.9 |
|
Deferred
income taxes
|
|
|
138.7 |
|
|
|
164.4 |
|
Fuel
hedge contracts
|
|
|
43.6 |
|
|
|
16.5 |
|
Prepaid
expenses and other current assets
|
|
|
98.2 |
|
|
|
82.0 |
|
Total
Current Assets
|
|
|
1,685.8 |
|
|
|
1,508.9 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
Aircraft
and other flight equipment
|
|
|
3,598.9 |
|
|
|
3,431.0 |
|
Other
property and equipment
|
|
|
620.2 |
|
|
|
608.6 |
|
Deposits
for future flight equipment
|
|
|
204.0 |
|
|
|
309.8 |
|
|
|
|
4,423.1 |
|
|
|
4,349.4 |
|
Less
accumulated depreciation and amortization
|
|
|
1,286.8 |
|
|
|
1,181.7 |
|
|
|
|
|
|
|
|
|
|
Total
Property and Equipment - Net
|
|
|
3,136.3 |
|
|
|
3,167.7 |
|
|
|
|
|
|
|
|
|
|
Fuel
Hedge Contracts
|
|
|
35.3 |
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
148.6 |
|
|
|
123.1 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
5,006.0 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
|
|
|
|
|
Alaska
Air Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
(in
millions except share amounts)
|
|
2009
|
|
|
2008
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
55.1 |
|
|
$ |
59.6 |
|
Accrued
aircraft rent
|
|
|
61.1 |
|
|
|
64.4 |
|
Accrued
wages, vacation and payroll taxes
|
|
|
136.3 |
|
|
|
119.5 |
|
Other
accrued liabilities
|
|
|
482.7 |
|
|
|
475.4 |
|
Air
traffic liability
|
|
|
397.1 |
|
|
|
372.7 |
|
Fuel
hedge contracts liability
|
|
|
1.7 |
|
|
|
24.1 |
|
Current
portion of long-term debt
|
|
|
148.5 |
|
|
|
244.9 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,282.5 |
|
|
|
1,360.6 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, Net of Current Portion
|
|
|
1,657.5 |
|
|
|
1,596.3 |
|
|
|
|
|
|
|
|
|
|
Other
Liabilities and Credits
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
93.3 |
|
|
|
36.7 |
|
Deferred
revenue
|
|
|
454.0 |
|
|
|
421.3 |
|
Obligation
for pension and postretirement medical benefits
|
|
|
582.7 |
|
|
|
584.7 |
|
Other
liabilities
|
|
|
162.2 |
|
|
|
174.1 |
|
|
|
|
1,292.2 |
|
|
|
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
- 43,453,355 shares
|
|
|
|
|
|
|
|
|
2008
- 43,171,404 shares
|
|
|
43.5 |
|
|
|
43.2 |
|
Capital
in excess of par value
|
|
|
927.2 |
|
|
|
915.0 |
|
Treasury
stock (common), at cost: 2009 - 8,202,384 shares
|
|
|
|
|
|
|
|
|
2008
- 6,896,506 shares
|
|
|
(184.8 |
) |
|
|
(161.4 |
) |
Accumulated
other comprehensive loss
|
|
|
(303.0 |
) |
|
|
(328.3 |
) |
Retained
earnings
|
|
|
290.9 |
|
|
|
193.4 |
|
|
|
|
773.8 |
|
|
|
661.9 |
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
5,006.0 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
Alaska
Air Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(in
millions except per-share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
884.8 |
|
|
$ |
952.8 |
|
|
$ |
2,326.1 |
|
|
$ |
2,592.0 |
|
Freight
and mail
|
|
|
27.7 |
|
|
|
30.5 |
|
|
|
72.3 |
|
|
|
80.4 |
|
Other
- net
|
|
|
54.9 |
|
|
|
39.6 |
|
|
|
155.3 |
|
|
|
120.8 |
|
Change
in Mileage Plan terms
|
|
|
- |
|
|
|
42.3 |
|
|
|
- |
|
|
|
42.3 |
|
Total
Operating Revenues
|
|
|
967.4 |
|
|
|
1,065.2 |
|
|
|
2,553.7 |
|
|
|
2,835.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
246.2 |
|
|
|
232.1 |
|
|
|
739.3 |
|
|
|
711.2 |
|
Variable
incentive pay
|
|
|
24.0 |
|
|
|
6.3 |
|
|
|
52.2 |
|
|
|
15.0 |
|
Aircraft
fuel, including hedging gains and losses
|
|
|
199.5 |
|
|
|
575.6 |
|
|
|
485.6 |
|
|
|
1,039.6 |
|
Aircraft
maintenance
|
|
|
49.7 |
|
|
|
47.4 |
|
|
|
169.0 |
|
|
|
159.6 |
|
Aircraft
rent
|
|
|
38.3 |
|
|
|
40.2 |
|
|
|
115.4 |
|
|
|
126.1 |
|
Landing
fees and other rentals
|
|
|
57.3 |
|
|
|
56.8 |
|
|
|
165.9 |
|
|
|
169.7 |
|
Contracted
services
|
|
|
37.4 |
|
|
|
40.2 |
|
|
|
112.6 |
|
|
|
128.3 |
|
Selling
expenses
|
|
|
37.0 |
|
|
|
41.7 |
|
|
|
97.3 |
|
|
|
120.3 |
|
Depreciation
and amortization
|
|
|
55.6 |
|
|
|
52.1 |
|
|
|
162.3 |
|
|
|
152.9 |
|
Food
and beverage service
|
|
|
12.7 |
|
|
|
13.5 |
|
|
|
36.7 |
|
|
|
39.2 |
|
Other
|
|
|
51.1 |
|
|
|
52.7 |
|
|
|
158.2 |
|
|
|
171.4 |
|
New
pilot contract transition costs
|
|
|
- |
|
|
|
- |
|
|
|
35.8 |
|
|
|
- |
|
Restructuring
charges
|
|
|
- |
|
|
|
3.7 |
|
|
|
- |
|
|
|
3.7 |
|
Fleet
transition costs - MD-80
|
|
|
- |
|
|
|
21.5 |
|
|
|
- |
|
|
|
47.5 |
|
Fleet
transition costs - CRJ-700
|
|
|
- |
|
|
|
0.7 |
|
|
|
- |
|
|
|
6.8 |
|
Fleet
transition costs - Q200
|
|
|
(1.2 |
) |
|
|
0.7 |
|
|
|
8.8 |
|
|
|
9.7 |
|
Total
Operating Expenses
|
|
|
807.6 |
|
|
|
1,185.2 |
|
|
|
2,339.1 |
|
|
|
2,901.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
159.8 |
|
|
|
(120.0 |
) |
|
|
214.6 |
|
|
|
(65.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8.3 |
|
|
|
10.7 |
|
|
|
24.4 |
|
|
|
31.5 |
|
Interest
expense
|
|
|
(25.9 |
) |
|
|
(25.9 |
) |
|
|
(77.8 |
) |
|
|
(74.3 |
) |
Interest
capitalized
|
|
|
1.4 |
|
|
|
5.9 |
|
|
|
6.0 |
|
|
|
18.5 |
|
Other
- net
|
|
|
(0.8 |
) |
|
|
(3.7 |
) |
|
|
(6.3 |
) |
|
|
(3.4 |
) |
|
|
|
(17.0 |
) |
|
|
(13.0 |
) |
|
|
(53.7 |
) |
|
|
(27.7 |
) |
Income
(loss) before income tax
|
|
|
142.8 |
|
|
|
(133.0 |
) |
|
|
160.9 |
|
|
|
(93.2 |
) |
Income
tax expense (benefit)
|
|
|
55.2 |
|
|
|
(46.5 |
) |
|
|
63.4 |
|
|
|
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
87.6 |
|
|
$ |
(86.5 |
) |
|
$ |
97.5 |
|
|
$ |
(60.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) Per Share:
|
|
$ |
2.48 |
|
|
$ |
(2.40 |
) |
|
$ |
2.71 |
|
|
$ |
(1.67 |
) |
Diluted
Earnings (Loss) Per Share:
|
|
$ |
2.46 |
|
|
$ |
(2.40 |
) |
|
$ |
2.69 |
|
|
$ |
(1.67 |
) |
Shares
used for computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35.275 |
|
|
|
36.069 |
|
|
|
35.981 |
|
|
|
36.383 |
|
Diluted
|
|
|
35.681 |
|
|
|
36.069 |
|
|
|
36.292 |
|
|
|
36.383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Alaska
Air Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Capital
in
|
|
|
Treasury
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess
of
|
|
|
Stock,
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
(in
millions)
|
|
Outstanding
|
|
|
Stock
|
|
|
Par
Value
|
|
|
at
Cost
|
|
|
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 nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97.5 |
|
|
|
97.5 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.3 |
|
|
|
|
|
|
|
|
|
Reclassification
to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.2 |
|
|
|
|
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
related to employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.6 |
|
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.0 |
|
|
|
|
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to interest rate derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
(3.9 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
(1.325 |
) |
|
|
|
|
|
|
|
|
|
|
(23.8 |
) |
|
|
|
|
|
|
|
|
|
|
(23.8 |
) |
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
Common
stock issued under stock plans
|
|
|
0.139 |
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Treasury
stock issued under stock plans
|
|
|
0.019 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Stock
issued for employee stock purchase plan
|
|
|
0.143 |
|
|
|
0.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
Balances
at September 30, 2009
|
|
|
35.251 |
|
|
$ |
43.5 |
|
|
$ |
927.2 |
|
|
$ |
(184.8 |
) |
|
$ |
(303.0 |
) |
|
$ |
290.9 |
|
|
$ |
773.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
|
|
|
|
Alaska
Air Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, |
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
97.5 |
|
|
$ |
(60.7 |
) |
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Non-cash
impact of pilot contract transition costs
|
|
|
15.5 |
|
|
|
- |
|
Restructuring
charges
|
|
|
- |
|
|
|
3.7 |
|
Fleet
transition costs, including impairment charge
|
|
|
8.8 |
|
|
|
64.0 |
|
Depreciation
and amortization
|
|
|
162.3 |
|
|
|
152.9 |
|
Stock-based
compensation
|
|
|
10.2 |
|
|
|
10.8 |
|
Changes
in fair values of open fuel hedge contracts
|
|
|
(48.9 |
) |
|
|
13.8 |
|
Changes
in deferred income taxes
|
|
|
64.0 |
|
|
|
(26.4 |
) |
Increase
in receivables - net
|
|
|
(11.6 |
) |
|
|
(5.0 |
) |
Increase
in prepaid expenses and other current assets
|
|
|
(13.6 |
) |
|
|
(42.1 |
) |
Increase
in air traffic liability
|
|
|
24.4 |
|
|
|
96.7 |
|
Increase
(decrease) in other current liabilities
|
|
|
7.1 |
|
|
|
(19.8 |
) |
Decrease
in deferred revenue and other-net
|
|
|
(10.1 |
) |
|
|
(46.9 |
) |
Net
cash provided by operating activities
|
|
|
305.6 |
|
|
|
141.0 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
|
Aircraft
and aircraft purchase deposits
|
|
|
(295.0 |
) |
|
|
(347.3 |
) |
Other
flight equipment
|
|
|
(25.1 |
) |
|
|
(29.1 |
) |
Other
property and equipment
|
|
|
(27.2 |
) |
|
|
(34.1 |
) |
Total
property and equipment additions
|
|
|
(347.3 |
) |
|
|
(410.5 |
) |
Proceeds
from disposition of assets
|
|
|
5.1 |
|
|
|
6.3 |
|
Purchases
of marketable securities
|
|
|
(767.8 |
) |
|
|
(608.4 |
) |
Sales
and maturities of marketable securities
|
|
|
521.8 |
|
|
|
398.7 |
|
Restricted
deposits and other
|
|
|
(5.1 |
) |
|
|
7.1 |
|
Net
cash used in investing activities
|
|
|
(593.3 |
) |
|
|
(606.8 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
191.6 |
|
|
|
786.0 |
|
Proceeds
from sale-leaseback transactions, net
|
|
|
230.0 |
|
|
|
- |
|
Long-term
debt payments
|
|
|
(226.8 |
) |
|
|
(218.9 |
) |
Purchase
of treasury stock
|
|
|
(23.8 |
) |
|
|
(48.9 |
) |
Proceeds
and tax benefit from issuance of common stock
|
|
|
3.6 |
|
|
|
2.6 |
|
Net
cash provided by financing activities
|
|
|
174.6 |
|
|
|
520.8 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(113.1 |
) |
|
|
55.0 |
|
Cash
and cash equivalents at beginning of year
|
|
|
283.1 |
|
|
|
204.3 |
|
Cash
and cash equivalents at end of period
|
|
$ |
170.0 |
|
|
$ |
259.3 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$ |
77.6 |
|
|
$ |
52.3 |
|
Income
taxes
|
|
|
(8.9 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
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 September 30, 2009, as well as the
results of operations for the three months and nine months ended September 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
Effective
July 2, 2009, the Accounting Standards Codification (ASC) of the Financial
Accounting Standards Board (FASB) became the single official source of
authoritative, nongovernmental GAAP in the United States. Although
the Company’s accounting policies were not affected by the conversion to ASC,
references to specific accounting standards in these notes to the condensed
consolidated financial statements have been changed to reference the appropriate
section of the ASC.
In March
2008, the 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 and was incorporated into ASC 815, Derivatives and
Hedging. The required disclosures are included in Note 2 and
Note 4. The adoption of this standard did not have a material impact
on the disclosures historically provided.
In 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 for assets and liabilities that may be
involved in transactions that would not be considered orderly as defined in the
position statement. This position was incorporated into ASC 820,
Fair Value Measurements and
Disclosures. 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, as incorporated into ASC 320, Investments – Debt and Equity
Securities. This position statement provides additional guidance in
determining whether a debt security 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 was incorporated into
ASC 825, Financial
Instruments, and requires companies to provide, on an interim basis,
disclosures that were previously only 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 these required
disclosures.
In May
2009, the FASB issued statement No. 165, Subsequent Events (SFAS
165), which was incorporated into ASC 855, Subsequent Events. The
standard modified 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—and requires companies to disclose the date
through which it has evaluated subsequent events and the basis for determining
that date. The Company adopted the provisions as of June 30,
2009. The Company has performed an evaluation of subsequent events
through November 6, 2009, which is the date these financial statements were
issued.
In
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 standard requires the Company to
add the fair value hierarchy disclosures required by ASC 820 as it relates to
the underlying assets of the pension and postretirement benefit
plans. This position has been incorporated into ASC 715, Compensation – Retirement Benefits,
and is effective for 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.
NOTE
2. FAIR VALUE OF FINANCIAL
INSTRUMENTS
Fair
Value Measurements
Accounting
standards define 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. The standards also establish 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.
There are 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” as defined in the accounting standards 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 September 30, 2009 are as follows (in
millions):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$ |
170.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
170.0 |
|
Marketable
securities
|
|
|
72.3 |
|
|
|
987.3 |
|
|
|
— |
|
|
|
1,059.6 |
|
Total
|
|
$ |
242.3 |
|
|
$ |
987.3 |
|
|
$ |
— |
|
|
$ |
1,229.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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”
(AOCL). 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):
|
|
September 30, 2009
|
|
|
December
31, 2008
|
|
Amortized
cost:
|
|
|
|
|
|
|
Government
securities/agencies
|
|
$ |
386.1 |
|
|
$ |
329.1 |
|
Asset-backed
obligations
|
|
|
236.3 |
|
|
|
198.0 |
|
Other
corporate obligations
|
|
|
420.0 |
|
|
|
263.7 |
|
|
|
$ |
1,042.4 |
|
|
$ |
790.8 |
|
Fair
value:
|
|
|
|
|
|
|
|
|
Government
securities/agencies
|
|
$ |
392.9 |
|
|
$ |
342.8 |
|
Asset-backed
obligations
|
|
|
235.6 |
|
|
|
187.7 |
|
Other
corporate obligations
|
|
|
431.1 |
|
|
|
263.8 |
|
|
|
$ |
1,059.6 |
|
|
$ |
794.3 |
|
Of the
marketable securities on hand at September 30, 2009, 8% mature in 2009, 29% in
2010, and 63% thereafter. Gross realized gains and losses for the
three and nine-month periods ended September 30, 2009 and 2008 were not material
to the condensed consolidated financial statements.
The
Company determined that credit losses, as defined in the accounting standards,
existed as of September 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
certain asset-backed obligations. 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 an aggregate credit loss in other nonoperating expense of $1.7
million in the first nine months 2009 to reflect the difference between the
present value of future cash flows and the amortized cost basis of the affected
securities. Management does not believe the securities associated
with the remaining $3.9 million unrealized loss recorded in AOCL are
“other-than-temporarily” impaired, as defined in the accounting standards, 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 September 30, 2009 are
presented in the table below (in millions):
|
|
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains in AOCL
|
|
|
Less
than 12 months
|
|
|
Greater
than 12 months
|
|
|
Total
Unrealized Losses
|
|
|
Less:
Credit Loss Recorded in Earnings
|
|
|
Net
Unrealized Losses in AOCL
|
|
|
Net
Unrealized Gains/(Losses) in AOCL
|
|
|
Fair
Value of Securities with Unrealized Losses
|
|
Government
Securities/Agencies
|
|
$ |
6.8 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
6.8 |
|
|
$ |
35.1 |
|
Asset-backed
obligations
|
|
|
3.1 |
|
|
|
-- |
|
|
|
(5.5 |
) |
|
|
(5.5 |
) |
|
|
(1.7 |
) |
|
|
(3.8 |
) |
|
|
(0.7 |
) |
|
|
25.0 |
|
Other
corporate obligations
|
|
|
11.2 |
|
|
|
(0.1 |
) |
|
|
-- |
|
|
|
(0.1 |
) |
|
|
-- |
|
|
|
(0.1 |
) |
|
|
11.1 |
|
|
|
35.7 |
|
Total
|
|
$ |
21.1 |
|
|
$ |
(0.1 |
) |
|
$ |
(5.5 |
) |
|
$ |
(5.6 |
) |
|
$ |
(1.7 |
) |
|
|
(3.9 |
) |
|
$ |
17.2 |
|
|
$ |
95.8 |
|
Interest
Rate Swap Agreements
In the
third quarter of 2009, the Company entered into interest rate swap agreements
with a third party designed to hedge the volatility of the underlying variable
interest rate in the Company’s aircraft lease agreements for six B737-800
aircraft. The agreements stipulate that the Company pay a fixed
interest rate over the term of the contract and receive a floating interest
rate. All significant terms of the swap agreement match the terms of
the lease agreements, including interest-rate index, rate reset dates,
termination dates and underlying notional values. The agreements
expire beginning in June 2020 through March 2021 to coincide with the lease
termination dates.
The
Company has formally designated these swap agreements as hedging instruments and
will record the effective portion of the hedge as an adjustment to aircraft rent
in the condensed consolidated statement of operations in the period of contract
settlement. The effective portion of the changes in fair value for
instruments that settle in the future are recorded in AOCL in the condensed
consolidated balance sheets.
At
September 30, 2009, the Company had a liability of $6.2 million associated with
these contracts, $5.6 million of which is expected to be reclassified into
earnings within the next twelve months and is recorded in other accrued
liabilities in the condensed consolidated balance sheets. The fair
value of these contracts is determined based on the difference between the fixed
interest rate in the agreements and the observable LIBOR-based interest forward
rates at period end, multiplied by the total notional value. As such,
the Company places these contracts in Level 2 of the fair value
hierarchy.
Fair
Value of Financial Instruments
The
majority of the Company’s financial instruments are carried at fair
value. These include cash, cash equivalents and marketable securities
(Note 2); restricted deposits (Note 9); fuel hedge contracts (Note 4); and
interest rate swap agreements (Note 2). 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 September 30, 2009
|
|
$ |
1,806.0 |
|
|
$ |
1,767.5 |
|
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 interest rate swap agreements is based on quoted market swap
rates. 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
New
Pilot Contract Transition Costs
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.
Restructuring
Charges
In the
third quarter of 2008, Alaska announced reductions in work force among union and
non-union employees. The Company recorded a $3.7 million charge in
the third quarter of 2008 representing the severance payments and estimated
medical coverage obligation for the affected employees.
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 for crude oil and
swap agreements for jet fuel refining margins, among other initiatives. The
Company records these instruments 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 nine months ended September 30, 2009 and 2008 (in millions):
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Raw
or “into-plane” fuel cost
|
|
$ |
190.9 |
|
|
$ |
401.4 |
|
|
$ |
491.3 |
|
|
$ |
1,106.7 |
|
Impact
of hedging activity
|
|
|
8.6 |
|
|
|
174.2 |
|
|
|
(5.7 |
) |
|
|
(67.1 |
) |
Aircraft
fuel expense
|
|
$ |
199.5 |
|
|
$ |
575.6 |
|
|
$ |
485.6 |
|
|
$ |
1,039.6 |
|
The net
cash paid for hedges that settled during the period was $3.6 million and $22.9
million during the three and nine months ended September 30, 2009,
respectively. The net cash received for the three and nine months
ended September 30, 2008 was $53.7 million and $154.6 million,
respectively.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedge 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 Note
2.
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)
|
Weighted-Average
Crude
Oil
Price per Barrel
|
Fourth
Quarter 2009
|
50%
|
43.5
|
$76
|
Remainder
2009
|
50%
|
43.5
|
$76
|
First
Quarter 2010
|
46%
|
40.0
|
$68
|
Second
Quarter 2010
|
47%
|
43.0
|
$68
|
Third
Quarter 2010
|
46%
|
44.4
|
$72
|
Fourth
Quarter 2010
|
34%
|
30.0
|
$78
|
Full
Year 2010
|
43%
|
157.4
|
$71
|
First
Quarter 2011
|
26%
|
23.7
|
$86
|
Second
Quarter 2011
|
24%
|
23.0
|
$79
|
Third
Quarter 2011
|
22%
|
21.5
|
$80
|
Fourth
Quarter 2011
|
15%
|
13.5
|
$81
|
Full
Year 2011
|
22%
|
81.7
|
$82
|
First
Quarter 2012
|
10%
|
9.2
|
$87
|
Second
Quarter 2012
|
7%
|
7.0
|
$86
|
Full
Year 2012
|
4%
|
16.2
|
$86
|
The
Company also uses fixed-price physical contracts and financial swaps to fix the
refining margin component for approximately 47% and 27% of expected fourth
quarter 2009 and first quarter 2010 jet fuel purchases, respectively, at an
average price per gallon of 22 cents per gallon and 25 cents per gallon,
respectively.
As of
September 30, 2009 and December 31, 2008, the net fair values of the Company’s
fuel hedge positions were as follows (in millions):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Crude
oil call options or “caps”
|
|
$ |
78.9 |
|
|
$ |
52.4 |
|
Crude
oil collar contracts
|
|
|
--- |
|
|
|
(24.1 |
) |
Refining
margin swap contracts
|
|
|
(1.7 |
) |
|
|
--- |
|
Total
|
|
$ |
77.2 |
|
|
$ |
28.3 |
|
The
Company paid premiums of $81.0 million and $89.1 million to purchase the call
options that were in the portfolio at September 30, 2009 and December 31, 2008,
respectively. The Company does have agreements with its
counterparties for the refining margin swap contracts requiring cash collateral
if certain liability levels are met. The
Company did not have any cash collateral held by these counterparties at
September 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 September
30, 2009, Horizon had five 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 $10.0
million in the first six months of 2009. In the third quarter, the
Company reduced the total expected loss on the disposal of these aircraft by
$1.2 million based on recent transactions. The lease agreements on
the five remaining Q200 aircraft were terminated subsequent to September 30,
2009.
During
the three months and nine months ended September 30, 2008, Horizon recorded
fleet transition costs of $0.7 million and $9.7 million, respectively,
associated with the removal of Q200 aircraft from operations.
In the
first nine months of 2008, Horizon recorded an impairment charge on its two
owned CRJ-700 aircraft and related spare parts as a result of the decision at
that time to exit from the CRJ-700 fleet earlier than originally
planned. The total impairment charge in the first nine months of 2008
associated with this decision was $5.5 million. Horizon also recorded
severance charges related to this fleet transition of $0.7 million and $1.3
million in the third quarter and nine-month period of 2008,
respectively.
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 and four of the aircraft were retired during the third
quarter and first nine months of 2008, respectively, and placed in temporary
storage at an aircraft storage facility. As a result, the Company recorded a
$21.5 million and $47.5 million charge in the third quarter and first nine
months of 2008, respectively, reflecting the remaining discounted future lease
payments and other contract-related costs to be incurred through the remaining
lease terms ending in 2012.
NOTE
6. LONG-TERM
DEBT
Long-term
debt obligations were as follows (in millions):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Fixed-rate
notes payable due through 2024
|
|
$ |
1,464.3 |
|
|
$ |
1,458.9 |
|
Variable-rate
notes payable due through 2019
|
|
|
341.7 |
|
|
|
267.4 |
|
16BBank
line-of-credit facility expiring in 2010
|
|
|
17B-- |
|
|
|
18B75.0 |
|
19BPre-delivery
payment facility expiring in 2011
|
|
|
20B-- |
|
|
|
21B39.9 |
|
Long-term
debt
|
|
|
1,806.0 |
|
|
|
1,841.2 |
|
Less
current portion |
|
|
(148.5 |
) |
|
|
(244.9 |
) |
|
|
$ |
1,657.5 |
|
|
$ |
1,596.3 |
|
During
the first nine months of 2009, the Company borrowed $181.2 million using
fixed-rate and variable-rate debt secured by flight equipment and another $10.4
million from its pre-delivery payment facility. Of the $181.2 million
borrowings, Alaska and Horizon borrowed $148.9 million and $32.3 million,
respectively. The Company made payments of $226.8 million, including
$50.3 million on its pre-delivery payment facility and $75 million on its bank
line-of-credit facility.
Alaska’s
$80 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 and then again to $80
million on August 31, 2009. The reduction was primarily driven by the
decline in the remaining future obligations under the purchase agreement with
Boeing.
NOTE
7. SHAREHOLDERS’
EQUITY
Common
Stock Repurchase
On June
11, 2009, the Board of Directors authorized the Company to repurchase up to $50
million of its common stock, at which time the Company’s stock price was $15.60.
Through September 30, 2009, the Company had repurchased 1,324,578 shares of its
common stock for approximately $23.8 million under this program.
Delisting
of Common Shares
In
October 2009, the Company delisted 7,900,000 common shares that had been held in
treasury stock on the condensed consolidated balance sheet as of September 30,
2009. This action did not impact the total number of common shares
outstanding.
NOTE
8. EMPLOYEE BENEFIT
PLANS
Pension
Plans - Qualified Defined Benefit
Net
pension expense for the three and nine months ended September 30, 2009 and 2008
included the following components (in millions):
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
11.0 |
|
|
$ |
11.7 |
|
|
$ |
33.2 |
|
|
$ |
35.0 |
|
Interest
cost
|
|
|
16.7 |
|
|
|
15.7 |
|
|
|
50.1 |
|
|
|
47.0 |
|
Expected
return on assets
|
|
|
(12.8 |
) |
|
|
(18.0 |
) |
|
|
(38.4 |
) |
|
|
(53.9 |
) |
Amortization
of prior service cost
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
3.3 |
|
|
|
3.3 |
|
Actuarial
loss
|
|
|
7.2 |
|
|
|
1.4 |
|
|
|
21.6 |
|
|
|
4.2 |
|
Net
pension expense
|
|
$ |
23.2 |
|
|
$ |
11.9 |
|
|
$ |
69.8 |
|
|
$ |
35.6 |
|
The
Company contributed $15.9 million and $47.8 million to its qualified
defined-benefit plans during the three and nine months ended September 30, 2009,
respectively. Management is currently evaluating the amount of
additional funding for 2009, if any. The Company made $17.3 million
and $51.7 million in contributions to its qualified defined-benefit pension
plans during the three and nine months ended September 30, 2008,
respectively.
Pension
Plans - Nonqualified Defined Benefit
Net
pension expense for the unfunded, noncontributory defined-benefit plans was $0.8
million and $0.9 million for the three months ended September 30, 2009 and 2008,
respectively, and $2.3 million and $2.7 million for the nine months ended
September 30, 2009 and 2008, respectively.
Postretirement
Medical Benefits
Net
periodic benefit cost for the post-retirement medical plans for the three months
ended September 30, 2009 and 2008 was $4.0 million and $2.8 million,
respectively. The net periodic benefit cost for the nine months ended
September 30, 2009 and 2008 was $12.9 million and $8.4 million,
respectively.
NOTE
9. OTHER
ASSETS
Other
assets consisted of the following (in millions):
|
|
September 30,
2009
|
|
|
December
31, 2008
|
|
Restricted
deposits (primarily restricted investments)
|
|
$ |
83.7 |
|
|
$ |
78.6 |
|
Deferred
costs and other*
|
|
|
64.9 |
|
|
|
44.5 |
|
|
|
$ |
148.6 |
|
|
$ |
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):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Other
accrued liabilities
|
|
$ |
268.6 |
|
|
$ |
280.4 |
|
Other
Liabilities and Credits (non-current):
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
409.7 |
|
|
|
394.1 |
|
Other
liabilities
|
|
|
12.8 |
|
|
|
15.9 |
|
|
|
$ |
691.1 |
|
|
$ |
690.4 |
|
Alaska’s
Mileage Plan revenue is included under the following condensed consolidated
statement of operations captions for the three and nine months ended September
30 (in millions):
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Passenger
revenues
|
|
$ |
54.0 |
|
|
$ |
39.8 |
|
|
$ |
140.9 |
|
|
$ |
100.6 |
|
Other
- net revenues
|
|
|
39.5 |
|
|
|
25.5 |
|
|
|
109.8 |
|
|
|
76.6 |
|
Change
in Mileage Plan terms
|
|
|
-- |
|
|
|
42.3 |
|
|
|
-- |
|
|
|
42.3 |
|
|
|
$ |
93.5 |
|
|
$ |
107.6 |
|
|
$ |
250.7 |
|
|
$ |
219.5 |
|
In the
third quarter of 2008, the Company changed the terms of its Mileage Plan program
regarding the expiration of award miles. Beginning in the third
quarter of 2008, Mileage Plan accounts with no activity for two years are
deleted. Under the previous policy, accounts with no activity for
three years were deleted. As a result of the deletion of a number of
accounts at that time, the Company reduced its liability for future awards by
$42.3 million, which was recorded in the condensed consolidated statements of
operations as “Change in Mileage Plan terms.”
NOTE
11. STOCK-BASED COMPENSATION
PLANS
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. All
stock-based compensation expense is recorded in wages and benefits in the
condensed consolidated statements of operations.
Stock
Options
During
the nine months ended September 30, 2009, the Company granted 389,652 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
$0.8 million and $0.7 million for the three months ended September 30, 2009 and
2008, respectively. The Company recorded expense of $3.8 million and
$4.0 million for the nine months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009, $5.0 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 2.4 years.
As of
September 30, 2009, options to purchase 2,630,721 shares of common stock were
outstanding with a weighted-average exercise price of $29.51. Of that
total, 1,827,761 were exercisable at a weighted-average exercise price of
$29.85.
Restricted
Stock Awards
During
the nine months ended September 30, 2009, the Company awarded 253,619 restricted
stock units (RSUs) to certain employees, with a weighted-average grant date fair
value of $27.03. 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 $1.8 million for the three months ended September
30, 2009 and 2008, respectively, and $4.9 million and $5.5 million for the
nine-month periods ended September 30, 2009 and 2008, respectively.
As of
September 30, 2009, $6.3 million of compensation cost associated with unvested
restricted stock awards attributable to future service had not yet been
recognized. This amount will be recognized as expense over a
weighted-average period of two years.
Deferred
Stock Awards
In the
first nine months of 2009, the Company awarded 12,704 Deferred Stock Unit awards
(DSUs) to members of its Board of Directors as a portion of their
retainers. In the first nine months of 2008, the Company awarded
13,976 DSUs to members. 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 period of grant. The total amount of compensation
expense recorded was $0.3 million in each of the nine-month periods ended
September 30, 2009 and 2008.
Employee
Stock Purchase Plan
Compensation
expense recognized under the Employee Stock Purchase Plan was $0.4 million and
$0.3 million for the three months ended September 30, 2009 and 2008,
respectively, and $1.2 million and $1.4 million for the nine months ended
September 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 nine months ended September 30 (in millions):
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock
options
|
|
$ |
0.8 |
|
|
$ |
0.7 |
|
|
$ |
3.8 |
|
|
$ |
4.0 |
|
Restricted
stock units
|
|
|
1.1 |
|
|
|
1.8 |
|
|
|
4.9 |
|
|
|
5.5 |
|
Performance
share units
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
(0.4 |
) |
Deferred
stock units
|
|
|
0.3 |
|
|
|
--- |
|
|
|
0.3 |
|
|
|
0.3 |
|
Employee
stock purchase plan
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
$ |
2.6 |
|
|
$ |
2.8 |
|
|
$ |
10.2 |
|
|
$ |
10.8 |
|
NOTE
12. OPERATING SEGMENT
INFORMATION
Operating
segment information for Alaska and Horizon for the three and nine months ended
September 30 was as follows (in millions):
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
– mainline (1)
|
|
$ |
776.9 |
|
|
$ |
856.2 |
|
|
$ |
2,049.8 |
|
|
$ |
2,261.8 |
|
Alaska
– purchased capacity (1)
|
|
|
81.9 |
|
|
|
85.7 |
|
|
|
211.4 |
|
|
|
233.9 |
|
Total
Alaska
|
|
|
858.8 |
|
|
|
941.9 |
|
|
|
2,261.2 |
|
|
|
2,495.7 |
|
Horizon
– brand flying
|
|
|
108.3 |
|
|
|
123.0 |
|
|
|
291.7 |
|
|
|
339.0 |
|
Horizon
– Alaska capacity purchase arrangement
|
|
|
69.9 |
|
|
|
81.1 |
|
|
|
191.2 |
|
|
|
231.2 |
|
Total
Horizon
|
|
|
178.2 |
|
|
|
204.1 |
|
|
|
482.9 |
|
|
|
570.2 |
|
Other
(2)
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.8 |
|
Elimination
of intercompany revenues
|
|
|
(69.9 |
) |
|
|
(81.1 |
) |
|
|
(191.2 |
) |
|
|
(231.2 |
) |
Consolidated
|
|
$ |
967.4 |
|
|
$ |
1,065.2 |
|
|
$ |
2,553.7 |
|
|
$ |
2,835.5 |
|
Income
(loss) before income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
|
|
|
124.8 |
|
|
|
(107.4 |
) |
|
|
148.6 |
|
|
|
(59.9 |
) |
Horizon
|
|
|
19.1 |
|
|
|
(25.1 |
) |
|
|
15.1 |
|
|
|
(30.1 |
) |
Other
(2)
|
|
|
(1.1 |
) |
|
|
(0.5 |
) |
|
|
(2.8 |
) |
|
|
(3.2 |
) |
Consolidated
|
|
$ |
142.8 |
|
|
$ |
(133.0 |
) |
|
$ |
160.9 |
|
|
$ |
(93.2 |
) |
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Total
assets at end of period:
|
|
|
|
|
|
|
Alaska
|
|
$ |
4,605.6 |
|
|
$ |
4,428.6 |
|
Horizon
|
|
|
714.6 |
|
|
|
692.3 |
|
Other
(2)
|
|
|
956.0 |
|
|
|
820.3 |
|
Elimination
of intercompany accounts
|
|
|
(1,270.2 |
) |
|
|
(1,105.6 |
) |
Consolidated
|
|
$ |
5,006.0 |
|
|
$ |
4,835.6 |
|
(1)
Alaska mainline revenue represents revenue from passengers aboard Alaska jets,
freight and mail revenue, and all other revenue. Purchased capacity
revenue represents that revenue earned by Alaska on capacity purchased from and
provided by Horizon and a small third party under a capacity purchase
arrangement.
(2)
Includes the parent company, Alaska Air Group, Inc., including its investments
in Alaska and Horizon, which are eliminated in consolidation.
NOTE
13. 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) 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 regarding
basic liability 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 have been additional executive sessions of the arbitration
panel. Further hearings regarding the nature and scope of available
remedies are scheduled to commence in December 2009. Management
currently does not believe that any final remedy will materially impact our
financial position or results of operations.
Other
items
The
Company is a party to routine litigation matters incidental to its business and
with respect to which no material liability is expected.
Management
believes the ultimate disposition of the matters discussed above is not likely
to materially affect the Company’s financial position or results of operations.
This forward-looking statement is based on management’s current understanding of
the relevant law and facts, and it is subject to various contingencies,
including the potential costs and risks associated with litigation and the
actions of arbitrators, judges and juries.
OVERVIEW
The
following Management’s Discussion
and Analysis of Financial Condition and Results of Operations (MD&A) is
intended to help the reader understand our 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:
|
·
|
Third Quarter in Review
– highlights from the third 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 nine months ended September 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.
|
Our
filings with the Securities and Exchange Commission, including our 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.
THIRD
QUARTER IN REVIEW
Our
consolidated pretax income was $142.8 million during the third quarter of 2009
compared to a pretax loss of $133.0 million in the third quarter of
2008. The increase in our pretax earnings was primarily due to the
$376.1 million decline in aircraft fuel costs and the decline in fleet
transition costs from the third quarter of 2008, partially offset by a $97.8
million decline in operating revenues. The decline in fuel cost is
primarily due to a 49% reduction in the cost per gallon of raw fuel and a $165.6
million reduction in net losses associated with our fuel-hedging
portfolio. The 9.2% decline in operating revenues is more fully
described below.
|
·
|
Passenger
revenue declined 7.1% because of continued demand weakness as compared to
the prior year. In the third quarter, capacity across the Air
Group network was reduced by just over 4% and consolidated unit
operating revenue, excluding the change in Mileage Plan terms, declined by
1.4%. This compares with a 2.5% year-over-year decline in the
second quarter of 2009. We believe that demand deterioration is
moderating compared with the prior-year periods as evidenced by a
year-over-year increase in passenger traffic at Alaska in the
quarter. However, ticket yield continues to be under
significant pressure.
|
· As
previously announced, we began charging a $15 first bag service charge on 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. For the third quarter, the fee generated $23.5 million of
incremental revenue. As previously disclosed, we believe this fee
will generate at least $70 million of incremental revenue on an annual basis,
and we expect to meet or exceed our estimate of at least $30 million of
incremental revenue during the last half of 2009.
|
·
|
Mileage
Plan revenue increased by $14.2 million primarily as a result of an
increase in the commission revenue recognized from the sale of Mileage
Plan miles. See further discussion in the Alaska Airlines
segment beginning on page 25.
|
|
·
|
We
recorded $42.3 million in the prior-year quarter associated with a change
in our Mileage Plan program terms.
|
Other
significant developments during the third quarter of 2009 and through the filing
of this Form 10-Q are described below.
New
Markets
In the
third quarter, we announced that Alaska would begin daily non-stop service
between Portland and Chicago on November 16, 2009. We launched
previously announced service from Seattle to two new cities in Texas - Houston
and Austin during the quarter, and our previously announced non-stop service
between Seattle and Atlanta began in October.
Horizon
also announced expanded seasonal service to Mammoth Lakes from San Jose, Reno,
Seattle and Portland. The flights will operate from December 17, 2009
to April 11, 2010.
Labor
Agreements
As
previously disclosed, in August 2009, Alaska and its aircraft technicians
reached an agreement on a two-year contract extension. The extended
contract, which becomes amendable on October 17, 2011, provides technicians with
a 1.5-percent pay scale increase in October 2009 and 2010. In addition,
technicians will no longer participate in the company’s Variable Pay Plan.
Instead, they will participate in the Performance-Based Pay (PBP)
Plan.
In
October 2009, the International Association of Machinists presented its
membership with two-year contract extension proposals for Alaska’s clerical,
office and passenger service employees, and its ramp service and stores
agents. The proposed extension includes participation in the PBP
incentive plan and a 1.5-percent pay scale increase in June 2010 and
2011. The vote by the covered employees is expected to be completed
in December 2009.
Horizon
Fleet Transition
Horizon’s
long-term goal is to transition to an all-Q400 fleet. In the first
quarter of 2009, Horizon removed the final six Q200 aircraft from
operations. We recorded a charge of $10.0 million in the first six
months of 2009 associated with removing these aircraft from
operation. In the third quarter, we reduced the total expected loss
on the disposal of these aircraft by $1.2 million based on recent
transactions. Subsequent to September 30, 2009, we successfully
disposed of the remaining Q200 aircraft and, as such, have terminated the
associated lease agreements.
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 operate the CRJ-700
aircraft in our operating fleet. We expect to have three Q400
aircraft delivered in the fourth quarter of 2009, but we have successfully
deferred 2010 and 2011 Q400 deliveries into future years to better manage our
fleet size and capacity plans.
Outlook
Looking
ahead, year-over-year advance booked load factor for November is up about 3.5
points for Alaska mainline flying and about 1.5 points for Horizon brand
flying. December advance booked load factor is up about 1.5 points
and down about one point for mainline Alaska and Horizon brand flying,
respectively, although the trend has been for the year-over-year comparison to
improve as the date of travel approaches. These advance booked load
factors are on relatively flat expected capacity at Alaska and an expected
decline of about 3% at Horizon brand flying for the fourth quarter.
We are
continuing to see lower year-over-year unit revenues and ticket yields due to
the current economic conditions and need to stimulate traffic with low fares and
sale activity. We expect to continue to see year-over-year declines
in unit revenue through the fourth quarter based on current bookings and fare
sales. The impacts of our new first bag fee and new affinity card
agreement, along with other revenue initiatives such as increases in on-board
products, have helped to ease the impact of revenue declines from low ticket
yields.
RESULTS
OF OPERATIONS
COMPARISON
OF THREE MONTHS ENDED SEPTEMBER 30, 2009 TO THREE MONTHS ENDED
SEPTEMBER 30, 2008
Our
consolidated net income for the third quarter of 2009 was $87.6 million, or
$2.46 per diluted share, compared to a net loss of $86.5 million, or $2.40 per
diluted share, in the third quarter of 2008. Significant items impacting the
comparability between the periods are as follows:
|
·
|
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 third quarter of 2009 we recognized net
mark-to-market gains of $7.3 million ($4.6 million after tax, or $0.13 per
share) compared to losses of $218.2 million ($136.7 million after tax, or
$3.79 per share) in the third quarter of
2008.
|
|
·
|
The
third quarter of 2008 included fleet transition charges of $22.2 million
($13.9 million after tax, or $0.38 per share) related to the planned
transitions out of the MD-80 and CRJ-700
fleets.
|
|
·
|
The
third quarter of 2008 included restructuring charges of $3.7 million ($2.3
million after tax, or $0.06 per share) related to the reduction in work
force at Alaska.
|
|
·
|
The
third quarter of 2008 also included a $42.3 million benefit ($26.5 million
after tax, or $0.73 per share) related to a change in terms of our Mileage
Plan program.
|
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 items are 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 $124.8 million in the
third quarter of 2009, while Horizon reported pretax income of $19.1
million. Financial and statistical data for Alaska and Horizon are shown on
pages 25 and 32, respectively. An in-depth discussion of the results of Alaska
and Horizon begins on pages 26 and 33, respectively.
Alaska
Airlines Financial and Statistical Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
Financial
Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
702.0 |
|
|
$ |
751.2 |
|
|
|
(6.5 |
) |
|
$ |
1,844.3 |
|
|
$ |
2,041.2 |
|
|
|
(9.6 |
) |
Freight
and mail
|
|
|
26.5 |
|
|
|
29.2 |
|
|
|
(9.2 |
) |
|
|
69.0 |
|
|
|
77.1 |
|
|
|
(10.5 |
) |
Other
- net
|
|
|
48.4 |
|
|
|
33.5 |
|
|
|
44.5 |
|
|
|
136.5 |
|
|
|
101.2 |
|
|
|
34.9 |
|
Change
in Mileage Plan terms
|
|
|
- |
|
|
|
42.3 |
|
|
NM
|
|
|
|
- |
|
|
|
42.3 |
|
|
NM
|
|
Total
mainline operating revenues
|
|
|
776.9 |
|
|
|
856.2 |
|
|
|
(9.3 |
) |
|
|
2,049.8 |
|
|
|
2,261.8 |
|
|
|
(9.4 |
) |
Passenger
- purchased capacity
|
|
|
81.9 |
|
|
|
85.7 |
|
|
|
(4.4 |
) |
|
|
211.4 |
|
|
|
233.9 |
|
|
|
(9.6 |
) |
Total
Operating Revenues
|
|
|
858.8 |
|
|
|
941.9 |
|
|
|
(8.8 |
) |
|
|
2,261.2 |
|
|
|
2,495.7 |
|
|
|
(9.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
199.1 |
|
|
|
182.5 |
|
|
|
9.1 |
|
|
|
594.9 |
|
|
|
558.9 |
|
|
|
6.4 |
|
Variable
incentive pay
|
|
|
20.8 |
|
|
|
4.9 |
|
|
|
324.5 |
|
|
|
44.0 |
|
|
|
10.8 |
|
|
|
307.4 |
|
Aircraft
fuel, including hedging gains and losses
|
|
|
166.6 |
|
|
|
479.1 |
|
|
|
(65.2 |
) |
|
|
405.9 |
|
|
|
864.0 |
|
|
|
(53.0 |
) |
Aircraft
maintenance
|
|
|
36.5 |
|
|
|
32.6 |
|
|
|
12.0 |
|
|
|
129.4 |
|
|
|
112.1 |
|
|
|
15.4 |
|
Aircraft
rent
|
|
|
27.2 |
|
|
|
26.3 |
|
|
|
3.4 |
|
|
|
81.8 |
|
|
|
82.4 |
|
|
|
(0.7 |
) |
Landing
fees and other rentals
|
|
|
43.0 |
|
|
|
42.3 |
|
|
|
1.7 |
|
|
|
124.4 |
|
|
|
126.9 |
|
|
|
(2.0 |
) |
Contracted
services
|
|
|
29.7 |
|
|
|
31.9 |
|
|
|
(6.9 |
) |
|
|
88.6 |
|
|
|
100.5 |
|
|
|
(11.8 |
) |
Selling
expenses
|
|
|
29.4 |
|
|
|
33.1 |
|
|
|
(11.2 |
) |
|
|
76.8 |
|
|
|
95.6 |
|
|
|
(19.7 |
) |
Depreciation
and amortization
|
|
|
45.1 |
|
|
|
42.8 |
|
|
|
5.4 |
|
|
|
132.6 |
|
|
|
123.2 |
|
|
|
7.6 |
|
Food
and beverage service
|
|
|
12.0 |
|
|
|
12.8 |
|
|
|
(6.3 |
) |
|
|
34.9 |
|
|
|
37.1 |
|
|
|
(5.9 |
) |
Other
|
|
|
38.0 |
|
|
|
41.0 |
|
|
|
(7.3 |
) |
|
|
119.3 |
|
|
|
130.2 |
|
|
|
(8.4 |
) |
New
pilot contract transition costs
|
|
|
- |
|
|
|
- |
|
|
NM
|
|
|
|
35.8 |
|
|
|
- |
|
|
NM
|
|
Restructuring
charges
|
|
|
- |
|
|
|
3.7 |
|
|
NM
|
|
|
|
- |
|
|
|
3.7 |
|
|
NM
|
|
Fleet
transition costs - MD-80
|
|
|
- |
|
|
|
21.5 |
|
|
NM
|
|
|
|
- |
|
|
|
47.5 |
|
|
NM
|
|
Total
mainline operating expenses
|
|
|
647.4 |
|
|
|
954.5 |
|
|
|
(32.2 |
) |
|
|
1,868.4 |
|
|
|
2,292.9 |
|
|
|
(18.5 |
) |
Purchased
capacity costs
|
|
|
74.7 |
|
|
|
85.6 |
|
|
|
(12.7 |
) |
|
|
206.3 |
|
|
|
246.8 |
|
|
|
(16.4 |
) |
Total
Operating Expenses
|
|
|
722.1 |
|
|
|
1,040.1 |
|
|
|
(30.6 |
) |
|
|
2,074.7 |
|
|
|
2,539.7 |
|
|
|
(18.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
136.7 |
|
|
|
(98.2 |
) |
|
|
|
|
|
|
186.5 |
|
|
|
(44.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
9.6 |
|
|
|
12.8 |
|
|
|
|
|
|
|
29.2 |
|
|
|
38.2 |
|
|
|
|
|
Interest
expense
|
|
|
(22.4 |
) |
|
|
(23.5 |
) |
|
|
|
|
|
|
(67.5 |
) |
|
|
(67.5 |
) |
|
|
|
|
Interest
capitalized
|
|
|
1.4 |
|
|
|
4.8 |
|
|
|
|
|
|
|
5.7 |
|
|
|
16.1 |
|
|
|
|
|
Other
- net
|
|
|
(0.5 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
(5.3 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
(11.9 |
) |
|
|
(9.2 |
) |
|
|
|
|
|
|
(37.9 |
) |
|
|
(15.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Tax
|
|
$ |
124.8 |
|
|
$ |
(107.4 |
) |
|
|
|
|
|
$ |
148.6 |
|
|
$ |
(59.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
4,240 |
|
|
|
4,532 |
|
|
|
(6.4 |
) |
|
|
11,796 |
|
|
|
13,037 |
|
|
|
(9.5 |
) |
RPMs
(000,000) "traffic"
|
|
|
5,020 |
|
|
|
5,012 |
|
|
|
0.2 |
|
|
|
13,812 |
|
|
|
14,410 |
|
|
|
(4.1 |
) |
ASMs
(000,000) "capacity"
|
|
|
6,097 |
|
|
|
6,306 |
|
|
|
(3.3 |
) |
|
|
17,469 |
|
|
|
18,628 |
|
|
|
(6.2 |
) |
Passenger
load factor
|
|
|
82.3 |
% |
|
|
79.5 |
% |
|
2.8
|
pts |
|
|
79.1 |
% |
|
|
77.4 |
% |
|
1.7
|
pts |
Yield
per passenger mile
|
|
|
13.98 |
¢ |
|
|
14.99 |
¢ |
|
|
(6.7 |
) |
|
|
13.35 |
¢ |
|
|
14.17 |
¢ |
|
|
(5.8 |
) |
Operating
revenue per ASM (RASM)
|
|
|
12.74 |
¢ |
|
|
13.58 |
¢ |
|
|
(6.2 |
) |
|
|
11.73 |
¢ |
|
|
12.14 |
¢ |
|
|
(3.4 |
) |
Change
in Mileage Plan terms per ASM
|
|
|
0.00 |
¢ |
|
|
0.67 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.23 |
¢ |
|
NM
|
|
Passenger
revenue per ASM
|
|
|
11.51 |
¢ |
|
|
11.91 |
¢ |
|
|
(3.4 |
) |
|
|
10.56 |
¢ |
|
|
10.96 |
¢ |
|
|
(3.6 |
) |
Operating
expenses per ASM
|
|
|
10.62 |
¢ |
|
|
15.14 |
¢ |
|
|
(29.9 |
) |
|
|
10.70 |
¢ |
|
|
12.31 |
¢ |
|
|
(13.1 |
) |
Aircraft
fuel cost per ASM
|
|
|
2.73 |
¢ |
|
|
7.60 |
¢ |
|
|
(64.1 |
) |
|
|
2.32 |
¢ |
|
|
4.64 |
¢ |
|
|
(50.0 |
) |
New
pilot contract transition costs per ASM
|
|
|
0.00 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
|
|
0.21 |
¢ |
|
|
0.00 |
¢ |
|
NM
|
|
Restructuring
charges per ASM
|
|
|
0.00 |
¢ |
|
|
0.06 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.02 |
¢ |
|
NM
|
|
Fleet
transition costs per ASM
|
|
|
0.00 |
¢ |
|
|
0.34 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.25 |
¢ |
|
NM
|
|
Aircraft
fuel cost per gallon
|
|
$ |
2.07 |
|
|
$ |
5.57 |
|
|
|
(62.8 |
) |
|
$ |
1.77 |
|
|
$ |
3.34 |
|
|
|
(47.0 |
) |
Economic
fuel cost per gallon
|
|
$ |
2.15 |
|
|
$ |
3.47 |
|
|
|
(38.0 |
) |
|
$ |
1.98 |
|
|
$ |
3.14 |
|
|
|
(36.9 |
) |
Fuel
gallons (000,000)
|
|
|
80.1 |
|
|
|
86.0 |
|
|
|
(6.9 |
) |
|
|
229.9 |
|
|
|
258.3 |
|
|
|
(11.0 |
) |
Average
number of full-time equivalent employees
|
|
|
9,002 |
|
|
|
9,594 |
|
|
|
(6.2 |
) |
|
|
8,987 |
|
|
|
9,785 |
|
|
|
(8.2 |
) |
Aircraft
utilization (blk hrs/day)
|
|
|
9.9 |
|
|
|
10.8 |
|
|
|
(8.3 |
) |
|
|
9.9 |
|
|
|
10.8 |
|
|
|
(8.3 |
) |
Average
aircraft stage length (miles)
|
|
|
1,044 |
|
|
|
981 |
|
|
|
6.4 |
|
|
|
1,027 |
|
|
|
975 |
|
|
|
5.3 |
|
Operating
fleet at period-end
|
|
|
116 |
|
|
|
110 |
|
|
|
6
a/c |
|
|
|
116 |
|
|
|
110 |
|
|
|
6
a/c |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPMs
(000,000)
|
|
|
298 |
|
|
|
304 |
|
|
|
(2.0 |
) |
|
|
777 |
|
|
|
873 |
|
|
|
(11.0 |
) |
ASMs
(000,000)
|
|
|
383 |
|
|
|
391 |
|
|
|
(2.0 |
) |
|
|
1,058 |
|
|
|
1,153 |
|
|
|
(8.2 |
) |
Passenger
load factor
|
|
|
77.8 |
% |
|
|
77.7 |
% |
|
0.1
|
pts |
|
|
73.4 |
% |
|
|
75.7 |
% |
|
(2.3
|
)pts |
Yield
per passenger mile
|
|
|
27.48 |
¢ |
|
|
28.19 |
¢ |
|
|
(2.5 |
) |
|
|
27.21 |
¢ |
|
|
26.79 |
¢ |
|
|
1.6 |
|
Operating
revenue per ASM
|
|
|
21.38 |
¢ |
|
|
21.92 |
¢ |
|
|
(2.5 |
) |
|
|
19.98 |
¢ |
|
|
20.29 |
¢ |
|
|
(1.5 |
) |
Operating
expenses per ASM
|
|
|
19.50 |
¢ |
|
|
21.89 |
¢ |
|
|
(10.9 |
) |
|
|
19.50 |
¢ |
|
|
21.41 |
¢ |
|
|
(8.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
= Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALASKA
AIRLINES
Alaska
reported income before income taxes of $124.8 million during the third quarter
of 2009 compared to a loss of $107.4 million in the third quarter of 2008. The
improvement was driven by a $312.5 million decrease in fuel cost compared to the
prior year and the lack of MD-80 fleet transition charges and restructuring
charges in the current period, partially offset by an $83.1 decline in total
operating revenues.
ALASKA
REVENUES
Total
operating revenues decreased $83.1 million, or 8.8%, during the third quarter of
2009 as compared to the same period in 2008. The changes are summarized in the
following table:
|
|
Three
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Passenger
revenue - mainline
|
|
$ |
702.0 |
|
|
$ |
751.2 |
|
|
|
(6.5 |
) |
Freight
and mail
|
|
|
26.5 |
|
|
|
29.2 |
|
|
|
(9.2 |
) |
Other
- net
|
|
|
48.4 |
|
|
|
33.5 |
|
|
|
44.5 |
|
Change
in Mileage Plan terms
|
|
|
- |
|
|
|
42.3 |
|
|
NM
|
|
Total
mainline revenues
|
|
$ |
776.9 |
|
|
$ |
856.2 |
|
|
|
(9.3 |
) |
Passenger
revenue - purchased capacity
|
|
|
81.9 |
|
|
|
85.7 |
|
|
|
(4.4 |
) |
Total
operating revenues
|
|
$ |
858.8 |
|
|
$ |
941.9 |
|
|
|
(8.8 |
) |
NM = Not
Meaningful
Operating
Revenues – Mainline
Mainline
passenger revenue fell 6.5% on a 3.3% reduction in capacity and a 3.4% decline
in passenger unit revenue. The decline in passenger unit revenue was
driven by a 6.7% drop in yield from the prior-year period, partially offset by
the 2.8-point 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 1.3% in July, 3.5% in August, and 5.5% in
September.
Our load
factor in October 2009 was 77.0%,
compared to 73.6% in October 2008. Our advance bookings currently suggest that
load factors will be up about 3.5 points in November and 1.5 points in December
compared to the prior year.
Ancillary
revenue included in passenger revenue increased from $30.3 million in the third
quarter of 2008 to $41.9 million in the third quarter of 2009. The
increase is primarily due to the implementation of our first checked bag service
charge in the current quarter, which generated $17.3 million.
Freight
and mail revenue declined $2.7 million, or 9.2%, primarily as a result of lower
mail volumes and yields, and lower freight fuel surcharges, partially offset by
higher freight volumes and yield coming from strong seafood volumes in the third
quarter.
Other –
net revenue increased $14.9 million, or 44.5%, from the prior-year
quarter. Mileage Plan revenue increased by $14.2 million primarily as
a result of an increase in the commission revenue 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 – 1) the decline in the fair
value assigned to sold miles as our award structure changed in the
fourth quarter of 2008 and 2) 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.
In the
third quarter of 2008, we reduced the length of time that a Mileage Plan account
could be inactive from three years to two years before the account is
deleted. As a result of this change in terms, our Mileage Plan
liability was reduced by $42.3 million in the prior-year period.
Passenger
Revenue – Purchased Capacity
Passenger
revenue – purchased capacity declined by $3.8 million to $81.9 million because
of a 2.0% drop in capacity and a 2.5% decline in unit revenue compared to the
prior year. Unit revenue declined as a result of a 2.5% decline in
yield from the prior-year period on relatively flat load factor.
ALASKA
EXPENSES
For the
third quarter, total operating expenses declined $318.0 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 and restructuring charges,
partially offset by a $32.5 million increase in wages and benefits and variable
incentive pay. 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 September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Mainline
fuel expense
|
|
$ |
166.6 |
|
|
$ |
479.1 |
|
|
|
(65.2 |
) |
Mainline
non-fuel operating expenses
|
|
|
480.8 |
|
|
|
475.4 |
|
|
|
1.1 |
|
Mainline
operating expenses
|
|
|
647.4 |
|
|
|
954.5 |
|
|
|
(32.2 |
) |
Purchased
capacity costs
|
|
|
74.7 |
|
|
|
85.6 |
|
|
|
(12.7 |
) |
Total
Operating Expenses
|
|
$ |
722.1 |
|
|
$ |
1,040.1 |
|
|
|
(30.6 |
) |
Mainline
Operating Expenses
Total
mainline operating costs for the third quarter of 2009 decreased $307.1 million,
or 32.2%, compared to the same period of 2008. Significant individual expense
variances from the third quarter of 2008 are described more fully
below.
Wages
and Benefits
Wages and
benefits were up $16.6 million, or 9.1%, compared to the third quarter of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Three
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
137.5 |
|
|
$ |
135.5 |
|
|
|
1.5 |
|
Pension
and defined-contribution retirement benefits
|
|
|
29.4 |
|
|
|
16.7 |
|
|
|
76.0 |
|
Medical
benefits
|
|
|
19.8 |
|
|
|
17.3 |
|
|
|
14.5 |
|
Other
benefits and payroll taxes
|
|
|
12.4 |
|
|
|
13.0 |
|
|
|
(4.6 |
) |
Total
wages and benefits
|
|
$ |
199.1 |
|
|
$ |
182.5 |
|
|
|
9.1 |
|
Wages
increased 1.5% on a 6.2% reduction in full-time equivalent employees (FTE)
compared to the third 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 increased average wages for certain other
employees stemming from higher average seniority following recent furloughs,
which are generally seniority-based.
The
nearly 76% increase in pension and other retirement-related benefits is
primarily due to a $12.2 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 14.5% 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 fourth quarter of 2009 compared to the fourth
quarter of 2008 for the same reasons mentioned above.
Variable
Incentive Pay
Variable
incentive pay expense increased from $4.9 million in the third quarter of 2008
to $20.8 million in the third quarter of 2009. The increase reflects
higher year-over-year expense for the Air Group Performance Based Pay (PBP)
incentive plan based on estimated full-year Air Group results and those
estimated results compared to our original 2009 plan. The increase
can also be attributed to the addition of pilots, flight attendants and
mechanics to the PBP incentive plan, which results in a larger expected payout
for 2009 than the incentive plans under which they were previously
covered. We expect fourth quarter 2009 incentive pay will be higher
than in the same period of 2008.
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 $312.5
million, or 65.2%, compared to the third quarter of 2008. The elements of the
change are illustrated in the following table:
|
|
Three
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
80.1 |
|
|
|
86.0 |
|
|
|
(6.9 |
) |
Raw
price per gallon
|
|
$ |
1.99 |
|
|
$ |
3.89 |
|
|
|
(48.8 |
) |
Total
raw fuel expense
|
|
$ |
159.5 |
|
|
$ |
334.5 |
|
|
|
(52.3 |
) |
Net
impact on fuel expense from changes in value of the fuel hedge portfolio
|
|
|
7.1 |
|
|
|
144.6 |
|
|
NM
|
|
Aircraft
fuel expense, as reported
|
|
$ |
166.6 |
|
|
$ |
479.1 |
|
|
|
(65.2 |
) |
NM = Not
Meaningful
Fuel
gallons consumed decreased by 6.9% primarily as a result of a 5.5% reduction in
aircraft flight hours 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 third quarter of 2008.
The raw
fuel price per gallon declined by 48.8% 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 the fourth quarter of 2009 will be lower than in 2008,
although not to the same extent as in the first nine months of the
year.
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. 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 September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
159.5 |
|
|
$ |
334.5 |
|
|
|
(52.3 |
) |
Plus
or minus: net of cash settlement for settled hedges and premium
expense recognized
|
|
|
13.2 |
|
|
|
(36.5 |
) |
|
NM
|
|
Economic
fuel expense
|
|
$ |
172.7 |
|
|
$ |
298.0 |
|
|
|
(42.0 |
) |
Fuel
gallons consumed
|
|
|
80.1 |
|
|
|
86.0 |
|
|
|
(6.9 |
) |
Economic
fuel cost per gallon
|
|
$ |
2.15 |
|
|
$ |
3.47 |
|
|
|
(38.0 |
) |
NM = Not
meaningful
As noted
in the above table, the total net expense recognized for hedges that settled
during the period was $13.2 million in the third quarter of 2009, compared to a
net cash benefit of $36.5 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.
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 $3.9 million, or 12.0%, compared to the prior-year
quarter because of a higher number of airframe maintenance events and a new
power-by-the-hour maintenance agreement on our B737-700 and B737-900 aircraft
engines. Our current expectation is that aircraft maintenance costs will be
relatively flat in the fourth quarter of 2009 compared to 2008.
Selling
Expenses
Selling
expenses declined by $3.7 million, or 11.2%, compared to the third 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 fourth quarter 2009 selling expenses to be higher
compared to the fourth quarter of 2008 due to higher expected advertising
costs.
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 September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
mainline operating expenses per ASM (CASM)
|
|
|
10.62 |
¢ |
|
|
15.14 |
¢ |
|
|
(29.9 |
) |
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel cost per ASM
|
|
|
2.73 |
¢ |
|
|
7.60 |
¢ |
|
|
(64.1 |
) |
Restructuring
charges per ASM
|
|
|
- |
|
|
|
0.06 |
¢ |
|
NM
|
|
Fleet
transition costs per ASM
|
|
|
- |
|
|
|
0.34 |
¢ |
|
NM
|
|
NM = Not
Meaningful
CASM
decreased from the prior-year period because of the 32.2% decline in mainline
operating costs, which is discussed above, partially offset by a 3.3% reduction
in capacity. We have listed separately in the above table our fuel costs, fleet
transition charges and restructuring charges 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
our 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 PBP incentive plan that covers
the majority of our employees.
|
|
·
|
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, new pilot contract transition costs, and
restructuring charges is important because it provides information on
significant items that are not necessarily indicative of future
performance. Industry analysts and investors consistently measure our
performance without these items for better comparability between periods
and among other airlines.
|
|
·
|
Although
we disclose our “mainline” passenger unit 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 fourth quarter and full year of 2009 to be up 6% and 10%,
respectively, compared to 2008.
Purchased
Capacity Costs
Purchased
capacity costs declined $10.9 million, or 12.7%, compared to the third quarter
of 2008 to $74.7 million in the third quarter of 2009. Of the total,
$69.9 million was paid to Horizon under the CPA for 368 million ASMs, a capacity
reduction of 2.4% from the third quarter of 2008. This expense is eliminated in
consolidation.
Horizon
Air Financial and Statistical Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
Financial
Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- brand flying
|
|
$ |
105.4 |
|
|
$ |
120.3 |
|
|
|
(12.4 |
) |
|
$ |
283.7 |
|
|
$ |
330.7 |
|
|
|
(14.2 |
) |
Passenger
- Alaska capacity purchase arrangement
|
|
|
69.9 |
|
|
|
81.1 |
|
|
|
(13.8 |
) |
|
|
191.2 |
|
|
|
231.2 |
|
|
|
(17.3 |
) |
Total
passenger revenue
|
|
$ |
175.3 |
|
|
$ |
201.4 |
|
|
|
(13.0 |
) |
|
$ |
474.9 |
|
|
$ |
561.9 |
|
|
|
(15.5 |
) |
Freight
and mail
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
(12.5 |
) |
|
|
2.0 |
|
|
|
2.1 |
|
|
|
(4.8 |
) |
Other
- net
|
|
|
2.2 |
|
|
|
1.9 |
|
|
|
15.8 |
|
|
|
6.0 |
|
|
|
6.2 |
|
|
|
(3.2 |
) |
Total
Operating Revenues
|
|
|
178.2 |
|
|
|
204.1 |
|
|
|
(12.7 |
) |
|
|
482.9 |
|
|
|
570.2 |
|
|
|
(15.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
44.4 |
|
|
|
47.9 |
|
|
|
(7.3 |
) |
|
|
137.0 |
|
|
|
147.2 |
|
|
|
(6.9 |
) |
Variable
incentive pay
|
|
|
3.2 |
|
|
|
1.4 |
|
|
|
128.6 |
|
|
|
8.2 |
|
|
|
4.2 |
|
|
|
95.2 |
|
Aircraft
fuel, including hedging gains and losses
|
|
|
32.9 |
|
|
|
96.5 |
|
|
|
(65.9 |
) |
|
|
79.7 |
|
|
|
175.6 |
|
|
|
(54.6 |
) |
Aircraft
maintenance
|
|
|
13.2 |
|
|
|
14.8 |
|
|
|
(10.8 |
) |
|
|
39.6 |
|
|
|
47.5 |
|
|
|
(16.6 |
) |
Aircraft
rent
|
|
|
11.1 |
|
|
|
13.9 |
|
|
|
(20.1 |
) |
|
|
33.6 |
|
|
|
43.7 |
|
|
|
(23.1 |
) |
Landing
fees and other rentals
|
|
|
14.6 |
|
|
|
14.7 |
|
|
|
(0.7 |
) |
|
|
42.4 |
|
|
|
43.6 |
|
|
|
(2.8 |
) |
Contracted
services
|
|
|
8.4 |
|
|
|
7.1 |
|
|
|
18.3 |
|
|
|
23.8 |
|
|
|
22.0 |
|
|
|
8.2 |
|
Selling
expenses
|
|
|
7.6 |
|
|
|
8.6 |
|
|
|
(11.6 |
) |
|
|
20.5 |
|
|
|
24.7 |
|
|
|
(17.0 |
) |
Depreciation
and amortization
|
|
|
10.2 |
|
|
|
9.0 |
|
|
|
13.3 |
|
|
|
28.8 |
|
|
|
28.8 |
|
|
|
- |
|
Food
and beverage service
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
1.8 |
|
|
|
2.1 |
|
|
|
(14.3 |
) |
Other
|
|
|
9.4 |
|
|
|
9.7 |
|
|
|
(3.1 |
) |
|
|
29.0 |
|
|
|
33.7 |
|
|
|
(13.9 |
) |
Fleet
transition costs - CRJ-700
|
|
|
- |
|
|
|
0.7 |
|
|
NM
|
|
|
|
- |
|
|
|
6.8 |
|
|
NM
|
|
Fleet
transition costs - Q200
|
|
|
(1.2 |
) |
|
|
0.7 |
|
|
NM
|
|
|
|
8.8 |
|
|
|
9.7 |
|
|
NM
|
|
Total
Operating Expenses
|
|
|
154.5 |
|
|
|
225.7 |
|
|
|
(31.5 |
) |
|
|
453.2 |
|
|
|
589.6 |
|
|
|
(23.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
23.7 |
|
|
|
(21.6 |
) |
|
|
|
|
|
|
29.7 |
|
|
|
(19.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.5 |
|
|
|
1.1 |
|
|
|
|
|
|
|
1.5 |
|
|
|
3.8 |
|
|
|
|
|
Interest
expense
|
|
|
(5.1 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
(16.2 |
) |
|
|
(16.9 |
) |
|
|
|
|
Interest
capitalized
|
|
|
0.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
0.3 |
|
|
|
2.3 |
|
|
|
|
|
Other
- net
|
|
|
0.0 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
(4.6 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
(14.6 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Tax
|
|
$ |
19.1 |
|
|
$ |
(25.1 |
) |
|
|
|
|
|
$ |
15.1 |
|
|
$ |
(30.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
1,815 |
|
|
|
1,989 |
|
|
|
(8.7 |
) |
|
|
5,055 |
|
|
|
5,754 |
|
|
|
(12.1 |
) |
RPMs
(000,000) "traffic"
|
|
|
666 |
|
|
|
721 |
|
|
|
(7.6 |
) |
|
|
1,799 |
|
|
|
2,074 |
|
|
|
(13.3 |
) |
ASMs
(000,000) "capacity"
|
|
|
855 |
|
|
|
945 |
|
|
|
(9.5 |
) |
|
|
2,470 |
|
|
|
2,831 |
|
|
|
(12.8 |
) |
Passenger
load factor
|
|
|
77.9 |
% |
|
|
76.3 |
% |
|
1.6
|
pts |
|
|
72.8 |
% |
|
|
73.3 |
% |
|
(0.5
|
)pts |
Yield
per passenger mile
|
|
|
26.32 |
¢ |
|
|
27.93 |
¢ |
|
|
(5.8 |
) |
|
|
26.40 |
¢ |
|
|
27.09 |
¢ |
|
|
(2.5 |
) |
Operating
revenue per ASM (RASM)
|
|
|
20.84 |
¢ |
|
|
21.60 |
¢ |
|
|
(3.5 |
) |
|
|
19.55 |
¢ |
|
|
20.14 |
¢ |
|
|
(2.9 |
) |
Passenger
revenue per ASM
|
|
|
20.50 |
¢ |
|
|
21.31 |
¢ |
|
|
(3.8 |
) |
|
|
19.23 |
¢ |
|
|
19.85 |
¢ |
|
|
(3.1 |
) |
Operating
expenses per ASM
|
|
|
18.07 |
¢ |
|
|
23.88 |
¢ |
|
|
(24.3 |
) |
|
|
18.35 |
¢ |
|
|
20.83 |
¢ |
|
|
(11.9 |
) |
Aircraft
fuel cost per ASM
|
|
|
3.85 |
¢ |
|
|
10.20 |
¢ |
|
|
(62.3 |
) |
|
|
3.23 |
¢ |
|
|
6.21 |
¢ |
|
|
(48.0 |
) |
CRJ-700
fleet transition costs per ASM
|
|
|
0.00 |
¢ |
|
|
0.07 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.24 |
¢ |
|
NM
|
|
Q200
fleet transition costs per ASM
|
|
|
(0.14 |
)¢ |
|
|
0.07 |
¢ |
|
NM
|
|
|
|
0.35 |
¢ |
|
|
0.34 |
¢ |
|
NM
|
|
Aircraft
fuel cost per gallon
|
|
$ |
2.11 |
|
|
$ |
5.61 |
|
|
|
(62.4 |
) |
|
$ |
1.76 |
|
|
$ |
3.37 |
|
|
|
(47.8 |
) |
Economic
fuel cost per gallon
|
|
$ |
2.19 |
|
|
$ |
3.45 |
|
|
|
(36.5 |
) |
|
$ |
1.98 |
|
|
$ |
3.18 |
|
|
|
(37.7 |
) |
Fuel
gallons (000,000)
|
|
|
15.6 |
|
|
|
17.2 |
|
|
|
(9.3 |
) |
|
|
45.1 |
|
|
|
52.1 |
|
|
|
(13.4 |
) |
Average
number of full-time equivalent employees
|
|
|
3,269 |
|
|
|
3,687 |
|
|
|
(11.3 |
) |
|
|
3,320 |
|
|
|
3,777 |
|
|
|
(12.1 |
) |
Aircraft
utilization (blk hrs/day)
|
|
|
8.4 |
|
|
|
8.5 |
|
|
|
(1.2 |
) |
|
|
8.3 |
|
|
|
8.4 |
|
|
|
(1.2 |
) |
Average
aircraft stage length (miles)
|
|
|
334 |
|
|
|
325 |
|
|
|
2.8 |
|
|
|
326 |
|
|
|
324 |
|
|
|
0.6 |
|
Operating
fleet at period-end
|
|
|
55 |
|
|
|
63 |
|
|
|
(8 |
)a/c |
|
|
55 |
|
|
|
63 |
|
|
|
(8
|
)a/c |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
= Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HORIZON
AIR
Horizon
reported income before income taxes of $19.1 million during the third quarter of
2009 compared to a pretax loss of $25.1 million in the third quarter of
2008. The $44.2 million improvement is primarily due to lower
aircraft fuel and non-fuel operating expenses, partially offset by a 12.7%
decline in operating revenues.
HORIZON
REVENUES
For the
third quarter of 2009, operating revenues declined $25.9 million, or 12.7%,
compared to 2008. Horizon’s passenger revenues are summarized in the
table below:
|
|
Three
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Passenger
revenue from Horizon "brand" flying
|
|
$ |
105.4 |
|
|
$ |
120.3 |
|
|
|
(12.4 |
) |
Revenue
from capacity purchase arrangement (CPA) with Alaska
|
|
|
69.9 |
|
|
|
81.1 |
|
|
|
(13.8 |
) |
Total
passenger revenue
|
|
$ |
175.3 |
|
|
$ |
201.4 |
|
|
|
(13.0 |
) |
Line-of-business
information is presented in the table below. In the CPA arrangement with Alaska,
Horizon is insulated from market revenue factors and is guaranteed contractual
revenue amounts based on operational capacity. As a result, yield and load
factor information for the CPA arrangement are not presented.
|
Three
Months Ended September 30, 2009
|
|
Capacity
and Mix
|
|
Load
Factor
|
|
Yield
|
|
RASM
|
|
2009
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
|
487
|
(14.3)
|
57
|
|
77.9%
|
2.9
pts
|
|
27.81¢
|
(1.5)
|
|
22.26¢
|
2.9
|
Alaska
CPA
|
368
|
(2.4)
|
43
|
|
NM
|
NM
|
|
NM
|
NM
|
|
18.97¢
|
(11.8)
|
System
Total
|
855
|
(9.5)
|
100
|
|
77.9%
|
1.6
pts
|
|
26.32¢
|
(5.8)
|
|
20.84¢
|
(3.5)
|
NM = Not
Meaningful
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 $14.9
million, or 12.4%, on a 14.3% reduction in brand capacity. Unit revenue was 2.9%
higher than the third quarter of 2008, primarily due to a 2.9-point improvement
in load factor, partially offset by a 1.5% yield decline in those
markets.
Revenue
from the CPA with Alaska totaled $69.9 million during the third quarter of 2009
compared to $81.1 million in the third quarter of 2008. The decline is primarily
due to a 2.4% reduction in capacity provided under this arrangement and a
significant decline in the associated fuel costs. Under the CPA, the fee paid by
Alaska is based on Horizon’s operating costs plus a specified margin. This
revenue is eliminated in consolidation.
HORIZON
EXPENSES
Total
operating expenses declined $71.2 million, or 31.5%, as compared to the same
period in 2008. The decrease is primarily due to the $63.6 million
decline in aircraft fuel expense. Other significant
period-over-period changes in the components of operating expenses are explained
below.
Wages
and Benefits
Wages and
benefits declined $3.5 million, or 7.3%, compared to the third quarter of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Three
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
34.2 |
|
|
$ |
37.3 |
|
|
|
(8.3 |
) |
Medical
benefits
|
|
|
4.5 |
|
|
|
4.8 |
|
|
|
(6.3 |
) |
Other
benefits and payroll taxes
|
|
|
5.7 |
|
|
|
5.8 |
|
|
|
(1.7 |
) |
Total
wages and benefits
|
|
$ |
44.4 |
|
|
$ |
47.9 |
|
|
|
(7.3 |
) |
Wages
declined 8.3% primarily as a result of an 11.3% 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.
We expect
to see further year-over-year reductions in wages and benefits in the fourth
quarter of 2009 as compared to 2008.
Aircraft
Fuel
Aircraft
fuel decreased $63.6 million, or 65.9%, compared to the third quarter of 2008.
The elements of the change are illustrated in the following table:
|
|
Three
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
15.6 |
|
|
|
17.2 |
|
|
|
(9.3 |
) |
Raw
price per gallon
|
|
$ |
2.01 |
|
|
$ |
3.89 |
|
|
|
(48.3 |
) |
Total
raw fuel expense
|
|
$ |
31.4 |
|
|
$ |
66.9 |
|
|
|
(53.1 |
) |
Impact
on fuel expense from value changes in
the fuel hedge portfolio
|
|
|
1.5 |
|
|
|
29.6 |
|
|
NM
|
|
Aircraft
fuel expense
|
|
$ |
32.9 |
|
|
$ |
96.5 |
|
|
|
(65.9 |
) |
NM = Not
Meaningful
The raw
fuel price per gallon declined by 48.3% 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 the fourth quarter of 2009 will be lower than in the
same period of 2008, although not to the same extent as in the first nine months
of the year.
Our economic fuel cost is
calculated as follows:
|
|
Three
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
31.4 |
|
|
$ |
66.9 |
|
|
|
(53.1 |
) |
Plus
or minus: net of cash settlement for settled hedges and premium expense
recognized
|
|
|
2.7 |
|
|
|
(7.5 |
) |
|
NM
|
|
Economic
fuel expense
|
|
$ |
34.1 |
|
|
$ |
59.4 |
|
|
|
(42.6 |
) |
Fuel
gallons consumed
|
|
|
15.6 |
|
|
|
17.2 |
|
|
|
(9.3 |
) |
Economic
fuel cost per gallon
|
|
$ |
2.19 |
|
|
$ |
3.45 |
|
|
|
(36.5 |
) |
NM = Not
meaningful
As noted
in the table above, the total net expense recognized for hedges that settled
during the period was $2.7 million in the third quarter of 2009, compared to a
net cash benefit of $7.5 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.
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
Rent
Aircraft
rent declined $2.8 million, or 20.1%, 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 – Q200
In the
third quarter of 2009, we recorded a favorable $1.2 million adjustment to the
Q200 fleet transition costs to reflect the economics of recent
transactions. This adjustment compares to a $0.7 million charge in
the same period of 2008. We removed the final six Q200 aircraft from
operation in the first quarter of 2009 and recorded a $10.0 million associated
charge in the first six months of 2009 for the then-estimated loss on potential
disposal transactions.
Operating
Costs per Available Seat Mile (CASM)
Our
operating costs per ASM are summarized below:
|
|
Three
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
operating expenses per ASM (CASM)
|
|
|
18.07 |
¢ |
|
|
23.88 |
¢ |
|
|
(24.3 |
) |
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel cost per ASM
|
|
|
3.85 |
¢ |
|
|
10.20 |
¢ |
|
|
(62.3 |
) |
Fleet
transition costs per ASM
|
|
|
(0.14 |
)¢ |
|
|
0.14 |
¢ |
|
NM
|
|
NM = Not
Meaningful
We
currently forecast our cost per ASM excluding fuel and fleet transition costs
for the fourth quarter and full year of 2009 to be up about 3% and 5%,
respectively, compared to 2008.
CONSOLIDATED NONOPERATING INCOME
(EXPENSE)
Net
nonoperating expense was $17.0 million in the third quarter of 2009 compared to
$13.0 million for the same period of 2008. Interest income declined
$2.4 million compared to the third 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 $4.5 million lower than in the third
quarter of 2008 because of lower advance aircraft purchase deposits and the
deferral of future aircraft deliveries.
CONSOLIDATED
INCOME TAX EXPENSE (BENEFIT)
See
discussion below under “Comparison of Nine Months Ended September 30, 2009 to
Nine Months Ended September 30, 2008.”
COMPARISON
OF NINE MONTHS ENDED SEPTEMBER 30, 2009 TO NINE MONTHS ENDED SEPTEMBER 30,
2008
Our
consolidated net income for the nine months ended September 30, 2009 was $97.5
million, or $2.69 per diluted share, compared to a net loss of $60.7 million, or
$1.67 per diluted share, for the first nine 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 nine months of 2009, we recognized net mark-to-market gains of $57.1
million ($35.7 million after tax, or $0.98 per share), compared to net
losses of $62.1 million ($38.9 million after tax, or $1.07 per share) in
the same period of 2008.
|
|
·
|
The
first nine months of 2009 include the new pilot contract transition costs
of $35.8 million ($22.3 million after tax, or $0.61 per
share).
|
|
·
|
The
first nine months of 2008 include fleet transition costs of $54.3 million
($34.0 million after tax, or $0.94 per share) related to the ongoing
transitions out of the MD-80 and CRJ-700
fleets.
|
|
·
|
The
first nine months of 2008 included a $42.3 million benefit ($26.5 million
after tax, or $0.73 per share) related to a change in the terms of our
Mileage Plan program.
|
|
·
|
The
first nine months of 2008 included restructuring charges of $3.7 million
($2.3 million after tax, or $0.06 per share) related to the reduction in
work force at Alaska.
|
ALASKA
AIRLINES
Alaska
reported income before income taxes of $148.6 million during the first nine
months of 2009 compared to a loss before income taxes of $59.9 million in the
first nine months of 2008. The discussion below outlines significant
variances between the two periods.
ALASKA
REVENUES
Total
operating revenues declined $234.5 million, or 9.4%, during the first nine
months of 2009 as compared to the same period in 2008. The changes
are summarized in the following table:
|
|
Nine
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Passenger
revenue - mainline
|
|
$ |
1,844.3 |
|
|
$ |
2,041.2 |
|
|
|
(9.6 |
) |
Freight
and mail
|
|
|
69.0 |
|
|
|
77.1 |
|
|
|
(10.5 |
) |
Other
- net
|
|
|
136.5 |
|
|
|
101.2 |
|
|
|
34.9 |
|
Change
in Mileage Plan Terms
|
|
|
- |
|
|
|
42.3 |
|
|
NM
|
|
Total
mainline revenues
|
|
$ |
2,049.8 |
|
|
$ |
2,261.8 |
|
|
|
(9.4 |
) |
Passenger
revenue - purchased capacity
|
|
|
211.4 |
|
|
|
233.9 |
|
|
|
(9.6 |
) |
Total
operating revenues
|
|
$ |
2,261.2 |
|
|
$ |
2,495.7 |
|
|
|
(9.4 |
) |
NM = Not
Meaningful
Operating
Revenues – Mainline
Mainline
passenger revenue for the first nine months fell by 9.6% on a 6.2% reduction in
capacity. There was a 3.6% decline in PRASM, which was driven by a 5.8% drop in
ticket yield compared to the prior-year period, partially offset by a 1.7-point
increase in load factor.
Ancillary
revenue included in passenger revenue increased from $71.4 million in the first
nine months of 2008 to $88.4 million in the current year. The
increase is primarily due to the implementation of our first checked bag fee in
the third quarter of 2009 ($17.3 million) and our second checked bag fee in the
third quarter of 2008, resulting in a year-over-year increase of $7.1 million,
partially offset by a decline in other fees. The decline in other
fees is the result of fewer passengers.
Freight
and mail revenue decreased $8.1 million, or 10.5%, primarily as a result of
lower mail volumes and yield and lower freight fuel surcharges, partially offset
by higher freight volumes and yield.
Other –
net revenue increased $35.3 million, or 34.9%, from the prior-year
quarter. Mileage Plan revenue increased by $33.2 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 $22.5 million over the same period
of last year because of an 8.2% decline in capacity combined with a 1.5%
decrease in unit revenue compared to the prior year. Unit revenue dropped as a
result of a 2.3-point decline in load factor, partially offset by a 1.6%
improvement in ticket yield.
ALASKA
EXPENSES
For the
nine months ended September 30, 2009, total operating expenses decreased $465.0
million or 18.3% 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:
|
|
Nine
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Mainline
fuel expense
|
|
$ |
405.9 |
|
|
$ |
864.0 |
|
|
|
(53.0 |
) |
Mainline
non-fuel operating expenses
|
|
|
1,462.5 |
|
|
|
1,428.9 |
|
|
|
2.4 |
|
Mainline
operating expenses
|
|
|
1,868.4 |
|
|
|
2,292.9 |
|
|
|
(18.5 |
) |
Purchased
capacity costs
|
|
|
206.3 |
|
|
|
246.8 |
|
|
|
(16.4 |
) |
Total
operating expenses
|
|
$ |
2,074.7 |
|
|
$ |
2,539.7 |
|
|
|
(18.3 |
) |
NM = Not
Meaningful
Mainline
Operating Expenses
Total
mainline operating expenses declined $424.5 million or 18.5% during the first
nine months of 2009 compared to the same period last year. The reduction was
mostly due to the $458.1 million decline 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 nine months of 2008 are more fully described
below.
Wages
and Benefits
Wages and
benefits were up $36.0 million, or 6.4%, compared to the first nine months of
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Nine
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
405.9 |
|
|
$ |
410.7 |
|
|
|
(1.2 |
) |
Pension
and defined-contribution retirement benefits
|
|
|
87.6 |
|
|
|
50.9 |
|
|
|
72.1 |
|
Medical
benefits
|
|
|
60.1 |
|
|
|
55.1 |
|
|
|
9.1 |
|
Other
benefits and payroll taxes
|
|
|
41.3 |
|
|
|
42.2 |
|
|
|
(2.1 |
) |
Total
wages and benefits
|
|
$ |
594.9 |
|
|
$ |
558.9 |
|
|
|
6.4 |
|
Wages
declined 1.2% on an 8.2% reduction in FTEs compared to the first nine 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 increased average wages for certain other employees stemming from higher
average seniority.
The 72.1%
increase in pension and other retirement-related benefits is primarily due to a
$36.0 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 9.1% from the prior-year period primarily as a result of a
rise 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 $10.8 million in the first nine months of
2008 to $44.0 million in the same period of 2009. The increase reflects higher
year-over-year expense for the PBP incentive plan based on estimated full-year
Air Group results and those estimated results compared to our original 2009
plan. The increase can also be attributed to the addition of pilots,
flight attendants and mechanics to the 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 declined $458.1 million, or 53.0%, compared to the first nine
months of 2008. The elements of the change are illustrated in the following
table:
|
|
Nine
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
229.9 |
|
|
|
258.3 |
|
|
|
(11.0 |
) |
Raw
price per gallon
|
|
$ |
1.79 |
|
|
$ |
3.56 |
|
|
|
(49.7 |
) |
Total
raw fuel expense
|
|
$ |
410.6 |
|
|
$ |
918.8 |
|
|
|
(55.3 |
) |
Net
impact on fuel expense from (gains) and losses arising from
fuel-hedging activities
|
|
|
(4.7 |
) |
|
|
(54.8 |
) |
|
NM
|
|
Aircraft
fuel expense
|
|
$ |
405.9 |
|
|
$ |
864.0 |
|
|
|
(53.0 |
) |
NM = Not
Meaningful
Fuel
gallons consumed declined 11.0%, primarily as a result of an 8.2% reduction in
aircraft flight hours 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 49.7% 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:
|
|
Nine
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
410.6 |
|
|
$ |
918.8 |
|
|
|
(55.3 |
) |
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
|
|
42.7 |
|
|
|
(107.2 |
) |
|
NM
|
|
Economic
fuel expense
|
|
$ |
453.3 |
|
|
$ |
811.6 |
|
|
|
(44.1 |
) |
Fuel
gallons consumed
|
|
|
229.9 |
|
|
|
258.3 |
|
|
|
(11.0 |
) |
Economic
fuel cost per gallon
|
|
$ |
1.98 |
|
|
$ |
3.14 |
|
|
|
(36.9 |
) |
NM = Not
meaningful
As noted
above, the total net expense recognized for hedges that settled during the
period was $42.7 million in the first nine months of 2009, compared to a net
cash benefit of $107.2 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.
Aircraft
Maintenance
Aircraft
maintenance increased by $17.3 million, or 15.4%, compared to the prior-year
period primarily 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.
Contracted
Services
Contracted
services declined by $11.9 million, or 11.8%, compared to the first nine months
of 2008 as a result of the reduction in the number of flights operated
throughout our system to ports where vendors are used and a reduction in project
contract labor.
Selling
Expenses
Selling
expenses declined by $18.8 million, or 19.7%, 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 and lower Mileage
Plan expenses.
Depreciation
and Amortization
Depreciation
and amortization increased $9.4 million, or 7.6%, compared to the first nine
months of 2008. This is primarily due to the additional B737-800
aircraft delivered in the last quarter of 2008 and the first nine months of
2009, partially offset by the sale-leaseback of six B737-800 aircraft in the
first quarter of 2009.
Other
Operating Expenses
Other
operating expenses declined $10.9 million, or 8.4%, compared to the prior
year. The decline is primarily driven by a reduction in outside
professional services costs and personnel 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.
Restructuring
Charges and Fleet Transition Costs
In the
third quarter of 2008, we announced work force reductions among union and
non-union employees. The affected non-union employees were terminated
in the third quarter, resulting in a $1.6 million severance
charge. For union personnel, we recorded a $2.1 million charge in the
third quarter of 2008.
In the
first nine months of 2008, we retired four MD-80 aircraft that were under
long-term lease arrangements and placed them in temporary storage at an aircraft
storage facility. These aircraft are under long-term lease arrangements. The
$47.5 million charge in the period represents the remaining discounted 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:
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
mainline operating expenses per ASM (CASM)
|
|
|
10.70 |
¢ |
|
|
12.31 |
¢ |
|
|
(13.1 |
) |
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel cost per ASM
|
|
|
2.32 |
¢ |
|
|
4.64 |
¢ |
|
|
(50.0 |
) |
New
pilot contract transition costs per ASM
|
|
|
0.21 |
¢ |
|
|
- |
|
|
NM
|
|
Restructuring
charges per ASM
|
|
|
- |
|
|
|
0.02 |
¢ |
|
NM
|
|
Fleet
transition costs per ASM
|
|
|
- |
|
|
|
0.25 |
¢ |
|
NM
|
|
NM = Not
Meaningful
Purchased
Capacity Costs
Purchased
capacity costs decreased $40.5 million compared to the nine months ended
September 30, 2009. Of the total, $191.2 million was paid to Horizon
under the CPA for 1.0 billion ASMs. This expense is eliminated in
consolidation.
HORIZON
AIR
Horizon
reported income before income taxes of $15.1 million during the first nine
months of 2009 compared to a loss of $30.1 million in 2008. The
improvement is primarily due to declines in aircraft fuel costs and non-fuel
operating expenses, partially offset by an $87.3 million drop in operating
revenues.
HORIZON
REVENUES
During
the nine months ended September 30, 2009, operating revenues decreased $87.3
million, or 15.3%, compared to 2008. Horizon’s passenger revenues are
summarized in the table below:
|
|
Nine
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Passenger
revenue from Horizon "brand" flying
|
|
$ |
283.7 |
|
|
$ |
330.7 |
|
|
|
(14.2 |
) |
Revenue
from CPA with Alaska
|
|
|
191.2 |
|
|
|
231.2 |
|
|
|
(17.3 |
) |
Total
passenger revenue
|
|
$ |
474.9 |
|
|
$ |
561.9 |
|
|
|
(15.5 |
) |
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.
|
Nine Months
Ended September 30, 2009
|
|
Capacity
and Mix
|
|
Load
Factor
|
|
Yield
|
|
RASM
|
|
2009
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
|
1,463
|
(15.7)
|
59
|
|
72.1%
|
1.0 pts
|
|
26.90¢
|
0.4
|
|
19.94¢
|
2.1
|
Alaska
CPA
|
1,007
|
(8.0)
|
41
|
|
NM
|
NM
|
|
NM
|
NM
|
|
18.98¢
|
(10.1)
|
System
Total
|
2,470
|
(12.8)
|
100
|
|
72.8%
|
(0.5) pts
|
|
26.40¢
|
(2.5)
|
|
19.55¢
|
(2.9)
|
NM = Not
Meaningful
Passenger
revenue from Horizon brand flying fell $47.0 million, or 14.2%, on a 15.7%
reduction in brand capacity, partially offset by a 2.1% improvement in unit
revenue. The increase in unit revenue is due to a one-point improvement in load
factor on relatively flat ticket yield.
Revenue
from the CPA with Alaska totaled $191.2 million during the first nine months of
2009 compared to $231.2 million during the same period in 2008. The decrease is
primarily due to an 8% reduction in capacity provided under this arrangement and
a significant decline in the associated fuel cost. This revenue is eliminated in
consolidation.
HORIZON
EXPENSES
Total
operating expenses decreased $136.4 million, or 23.1%, 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 $10.2 million, or 6.9%, compared to the same period in
2008. The primary components of wages and benefits are shown in the
following table:
|
|
Nine
Months Ended September 30
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
102.8 |
|
|
$ |
113.1 |
|
|
|
(9.1 |
) |
Medical
benefits
|
|
|
14.7 |
|
|
|
14.6 |
|
|
|
0.7 |
|
Other
benefits and payroll taxes
|
|
|
19.5 |
|
|
|
19.5 |
|
|
|
0.0 |
|
Total
wages and benefits
|
|
$ |
137.0 |
|
|
$ |
147.2 |
|
|
|
(6.9 |
) |
Wages
declined 9.1% primarily as a result of a 12.1% decline in the number of
full-time equivalent employees, partially offset by slightly higher wages per
employee. The increase in average wages per employee is due to a
higher average employee seniority level as recent furloughs have involved less
senior employees.
Variable
Incentive Pay
Variable
incentive pay expense increased to $8.2 million during the first nine months of
2009 from $4.2 million in the first nine months of 2008. The increase
reflects higher year-over-year accruals for profit-based incentives that are
based on estimated full-year Air Group results.
Aircraft
Fuel
Aircraft fuel declined $95.9 million,
or 54.6%, compared to the same period in 2008. The elements of the change are
illustrated in the following table:
|
|
Nine
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
45.1 |
|
|
|
52.1 |
|
|
|
(13.4 |
) |
Raw
price per gallon
|
|
$ |
1.79 |
|
|
$ |
3.61 |
|
|
|
(50.4 |
) |
Total
raw fuel expense
|
|
$ |
80.7 |
|
|
$ |
187.9 |
|
|
|
(57.1 |
) |
Net
impact on fuel expense from (gains) and losses arising from
fuel-hedging activities
|
|
|
(1.0 |
) |
|
|
(12.3 |
) |
|
NM
|
|
Aircraft
fuel expense
|
|
$ |
79.7 |
|
|
$ |
175.6 |
|
|
|
(54.6 |
) |
NM = Not
Meaningful
The 13.4%
reduction in gallons consumed is primarily a function of the capacity decline in
the first nine months of 2009 compared to the same period in the prior
year.
The raw
fuel price per gallon declined by 50.4% as a result of the drop in crude oil
prices and refining margins.
Our economic fuel expense is
calculated as follows:
|
|
Nine
Months Ended September 30
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
80.7 |
|
|
$ |
187.9 |
|
|
|
(57.1 |
) |
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
|
|
8.7 |
|
|
|
(22.0 |
) |
|
NM
|
|
Economic
fuel expense
|
|
$ |
89.4 |
|
|
$ |
165.9 |
|
|
|
(46.1 |
) |
Fuel
gallons consumed
|
|
|
45.1 |
|
|
|
52.1 |
|
|
|
(13.4 |
) |
Economic
fuel cost per gallon
|
|
$ |
1.98 |
|
|
$ |
3.18 |
|
|
|
(37.7 |
) |
NM = Not
meaningful
The total
net expense recognized for hedges that settled during the period was $8.7
million in the first nine months, compared to a net cash benefit of $22.0
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.
Aircraft
Maintenance
Aircraft
maintenance expense decreased $7.9 million, or 16.6%, primarily as a result of
fewer scheduled maintenance events and cost savings from process
improvements.
Aircraft
Rent
Aircraft
rent expense declined $10.1 million, or 23.1%, 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 $4.2 million, or 17%, 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 $4.7 million, or 13.9%, compared to the prior-year
period. The decline is primarily driven by a reduction in non-wage
personnel costs and passenger remuneration costs.
Fleet
Transition Costs
Fleet
transition costs associated with the removal of Q200 aircraft from the operating
fleet were $8.8 million during the first nine months of 2009 compared to $9.7
million in the same period of 2008. All Q200 aircraft have been
removed from the operating fleet.
During
the first nine 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 $1.3 million associated severance charge.
Operating Costs per
Available Seat Mile (CASM)
|
|
Nine
Months Ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
operating expenses per ASM (CASM)
|
|
|
18.35 |
¢ |
|
|
20.83 |
¢ |
|
|
(11.9 |
) |
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel cost per ASM
|
|
|
3.23 |
¢ |
|
|
6.21 |
¢ |
|
|
(48.0 |
) |
Fleet
transition costs per ASM
|
|
|
0.35 |
¢ |
|
|
0.58 |
¢ |
|
NM
|
|
NM = Not
Meaningful
CONSOLIDATED
NONOPERATING INCOME (EXPENSE)
Net
nonoperating expense was $53.7 million in the first nine months of 2009 compared
to $27.7 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
nine months of 2009, we used the estimated income tax rate based on our current
full-year estimate of pretax earnings. Our effective income tax rate
on pretax income or loss for the first nine months of 2009 was 39.4%, compared
to 34.9% for the first nine months of 2008. In arriving at this rate,
we considered a variety of factors, including our full-year forecasted 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 environment and the volatility of fuel prices, we
continue to focus on preserving a strong liquidity position. Our
primary sources of liquidity are:
|
·
|
Expected
cash from operations;
|
|
·
|
Aircraft
financing – the nine unencumbered aircraft in our operating 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
$80 million pre-delivery payment
facility;
|
|
·
|
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 over $1.2
billion combined with future cash flows from operations and other sources of
liquidity will be sufficient to fund our operations for the foreseeable
future.
In our
cash and marketable securities portfolio, we invest only in U.S. government
securities, certain asset-backed obligations and corporate debt
securities. We do not invest in equities or auction-rate
securities. As of September 30, 2009, we had a $17.2 million net
unrealized gain on our $1.2 billion cash and marketable securities
balance.
The table
below presents the major indicators of financial condition and
liquidity.
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Change
|
|
(in
millions, except debt-to-capital amounts)
|
|
Cash
and marketable securities
|
|
$ |
1,229.6 |
|
|
$ |
1,077.4 |
|
|
$ |
152.2 |
|
Cash
and marketable securities as a percentage of last twelve months
revenue
|
|
|
36 |
% |
|
|
29 |
% |
|
7
pts
|
|
Long-term
debt, net of current portion
|
|
$ |
1,657.5 |
|
|
$ |
1,596.3 |
|
|
$ |
61.2 |
|
Shareholders'
equity
|
|
$ |
773.8 |
|
|
$ |
661.9 |
|
|
$ |
111.9 |
|
Long-term
debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent
|
|
|
78%:22% |
|
|
|
81%:19% |
|
|
|
NA |
|
During
the nine months ended September 30, 2009, our cash and marketable securities
increased $152.2 million to over $1.2 billion. As the economic
environment stabilizes, we may seek to reduce our cash balance and improve our
debt-to-capital ratio by paying cash for all of our 2010 aircraft deliveries
and/or repay a portion of our long-term debt over and above normal debt
payments. 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 nine months of 2009, net cash provided by operating activities was
$305.6 million, compared to $141.0 million 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 lower 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.
Cash
Used in Investing Activities
Cash used
in investing activities was $593.3 million during the first nine months of 2009,
compared to $606.8 million during the same period of 2008. Our capital
expenditures were lower than in the same period of 2008 primarily as a result of
fewer pre-delivery payments made for future aircraft.
We
currently expect gross capital expenditures for 2009 to be as follows (in
millions):
|
|
Aircraft-related
|
|
|
Non-aircraft
|
|
|
Total
|
|
Alaska
|
|
$ |
290 |
|
|
$ |
64 |
|
|
$ |
354 |
|
Horizon
|
|
|
80 |
|
|
|
6 |
|
|
|
86 |
|
Total
Air Group
|
|
$ |
370 |
|
|
$ |
70 |
|
|
$ |
440 |
|
Currently,
we expect to have gross aircraft capital expenditures of approximately $165
million and $65 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 debt
balance and leverage.
Cash
Provided by Financing Activities
Net cash
provided by financing activities was $174.6 million during the first nine months
of 2009 compared to $520.8 million during the same period of 2008. We
completed sale-leaseback transactions on six B737-800 aircraft for net proceeds
of $230 million, and we received debt proceeds of $10.4 million from our
pre-delivery payment facility and $181.2 million for two of our recently
purchased Q400s and five new B737-800 aircraft. Offsetting these proceeds were
normal long-term debt payments of $101.5 million, $50.3 million of payments on
our pre-delivery payment facility, and a $75 million payment on our bank
line-of-credit facility. Subsequent to September 30, 2009, we
financed one recent B737-800 delivery and we expect to finance the three
fourth-quarter Q400 deliveries, resulting in total debt financing of
approximately $75 million in the fourth quarter of 2009.
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 September 30,
2009. We are currently in the process of renewing, and possibly
upsizing, this facility and believe we will be able to do so at terms that
are acceptable to us.
Pre-delivery
Payment Facility
Alaska’s
$80 million variable-rate revolving loan facility is available to provide a
portion of the pre-delivery funding requirements of Alaska’s purchase of new
Boeing 737-800 aircraft under the current aircraft purchase agreement. The
facility expires on August 31, 2011. As of September 30, 2009, there were
no outstanding borrowings under this facility.
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 the $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. In July 2009,
Horizon entered into an 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 $686 million, as
set forth below. Alaska has options to acquire 40 additional B737s
and Horizon has options to acquire 10 additional Q400s. We expect to
pay for the six B737-800 aircraft deliveries in 2010 with cash on
hand. We expect to pay for firm orders beyond 2010 and the option
aircraft, if exercised, through long-term debt, internally generated cash, or
operating lease arrangements.
The
following table summarizes aircraft purchase commitments as of September 30,
2009, and payments by year:
|
Delivery
Period - Firm Orders
|
|
|
Oct.
1 – Dec. 31,
|
|
|
|
|
Beyond
|
|
Aircraft:
|
2009
|
2010
|
2011
|
2012
|
2013
|
2013
|
Total
|
Boeing
737-800
|
-
|
6
|
1
|
2
|
2
|
4
|
15
|
Bombardier
Q400
|
3
|
-
|
-
|
4
|
4
|
-
|
11
|
Total
|
3
|
6
|
1
|
6
|
6
|
4
|
26
|
Payments
(Millions)
|
$80.9
|
$164.2
|
$64.5
|
$144.7
|
$143.0
|
$89.1
|
$686.4
|
Two of
the remaining 2009 Q400 deliveries were delivered in October and the final
delivery is scheduled to occur in December. 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 reduce the utilization of our Horizon fleet in order to
maintain our current capacity plans.
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 September 30, 2009.
|
|
Oct.
1 –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
(in
millions)
|
|
Dec.
31, 2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2013
|
|
|
Total
|
|
Long-term
debt obligations
|
|
$ |
34.2 |
|
|
$ |
150.5 |
|
|
$ |
185.9 |
|
|
$ |
230.6 |
|
|
$ |
189.9 |
|
|
$ |
1,014.9 |
|
|
$ |
1,806.0 |
|
Operating
lease commitments (1)
|
|
|
33.2 |
|
|
|
230.8 |
|
|
|
197.4 |
|
|
|
196.4 |
|
|
|
156.3 |
|
|
|
563.5 |
|
|
|
1,377.6 |
|
Aircraft
purchase commitments
|
|
|
80.9 |
|
|
|
164.2 |
|
|
|
64.5 |
|
|
|
144.7 |
|
|
|
143.0 |
|
|
|
89.1 |
|
|
|
686.4 |
|
Interest
obligations (2)
|
|
|
20.5 |
|
|
|
99.3 |
|
|
|
95.0 |
|
|
|
83.8 |
|
|
|
68.9 |
|
|
|
223.2 |
|
|
|
590.7 |
|
Other
purchase obligations (3)(4)
|
|
|
14.6 |
|
|
|
65.3 |
|
|
|
51.9 |
|
|
|
52.2 |
|
|
|
42.2 |
|
|
|
54.3 |
|
|
|
280.5 |
|
Total
|
|
$ |
183.4 |
|
|
$ |
710.1 |
|
|
$ |
594.7 |
|
|
$ |
707.7 |
|
|
$ |
600.3 |
|
|
$ |
1,945.0 |
|
|
$ |
4,741.2 |
|
(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 16 leased Q200 aircraft, all of which are no
longer in our operating fleets. We have accrued for these leases
commitments based on their discounted future cash flows as we remain obligated
under the existing lease contracts on these aircraft. We have
terminated lease agreements for five Q200s subsequent to September 30,
2009. This table does not include any future payments for those five
aircraft.
(2) For
variable-rate debt, future obligations are shown above using interest rates in
effect as of September 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 $20.5 million of unrecognized tax benefits for which we cannot make a
reasonably reliable estimate of the amount and period of payment.
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 volatility for the
refining margin component of jet fuel prices. These swap contracts
are limited to the fourth quarter of 2009 and the first quarter of
2010. As such, they 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 September 30, 2009 would increase or decrease the fair
value of our crude oil hedge portfolio by approximately $28.9 million and $23.9
million, respectively.
Our
fuel-hedge portfolio at September 30, 2009 includes a $1.7 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 September 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. 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. As of September 30, 2009 the net unrealized
gain on our $1.2 billion cash and marketable securities balance was $17.2
million.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
September 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
September 30, 2009.
Changes
in Internal Control over Financial Reporting
We made
no changes in our internal control over financial reporting during the quarter
ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) 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 regarding basic liability 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 have been
additional executive sessions of the arbitration panel. Further
hearings regarding the nature and scope of available remedies are scheduled to
commence in December 2009. Management currently does not believe that
any final remedy will materially impact our financial position or results of
operations.
We are a
party to routine litigation matters incidental to our business and with respect
to which no material liability is expected.
Management
believes the ultimate disposition of these matters is not likely to materially
affect our financial position or results of operations. This
forward-looking statement is based on management’s current understanding of the
relevant law and facts, and it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.
Area
flooding could significantly disrupt our operations
A dam in
the Kent Valley, near Seattle-Tacoma International Airport, is partly
compromised. Many of the services necessary for the operation of our
airlines are located in the valley, e.g., fuel supply, power, catering,
reservations call centers, etc. If the area experiences heavy rains,
flooding could occur and our operations could be disrupted. The Army
Corps of Engineers estimates that the dam will be repaired within three to five
years. We have contingency plans in place and are continuing to
monitor the situation. Any significant disruption would harm our
business, financial condition and results of operations.
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 |
|
|
$ |
16.89 |
|
|
|
|
July
1, 2009 – July 31, 2009 (1)
|
|
|
624,578 |
|
|
|
19.12 |
|
|
|
|
Total
|
|
|
1,324,578 |
|
|
$ |
17.94 |
|
|
$ |
26,234,104 |
|
(1)
|
Purchased
pursuant to a $50 million repurchase plan authorized by the Board of
Directors in June 2009. The plan expires after twelve
months. There have been no purchases under this plan subsequent
to July 2009.
|
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
None.
See
Exhibit Index on page 52.
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: November
6, 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” for 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, or
the Exchange Act, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
* Filed
herewith
#
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and
filed separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the Commission.