form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]
|
For the
fiscal year ended December 31, 2009
OR
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE
REQUIRED]
|
For the
transition period from
to
Commission
File Number 1-8957
ALASKA
AIR GROUP, INC.
A
Delaware Corporation
|
|
91-1292054
|
19300 International Boulevard, Seattle, Washington 98188
Telephone:
(206) 392-5040
|
(I.R.S.
Employer Identification No.)
|
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
Common
Stock, $1.00 Par Value
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” 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
As of
January 31, 2010, shares of common stock outstanding totaled 35,645,955.
The aggregate market value of the shares of common stock of Alaska Air Group,
Inc. held by nonaffiliates on June 30, 2009, was approximately $653.0
million (based on the closing price of $18.26 per share on the New York Stock
Exchange on that date).
DOCUMENTS
INCORPORATED BY REFERENCE
|
|
Title
of Document
|
Part
Hereof Into Which Document is to be Incorporated
|
Definitive
Proxy Statement Relating to
2010
Annual Meeting of Shareholders
|
Part
III
|
ALASKA
AIR GROUP, INC.
ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009
As used
in this Form 10-K, 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-K 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.
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 in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our
forward-looking statements in light of those risks as you read this
report.
We are a
Delaware corporation incorporated in 1985 and we have two principal
subsidiaries: Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc.
(Horizon). Through these subsidiaries, we provide passenger air service to more
than 22 million passengers per year to more than 90 destinations. We also
provide freight and mail services, primarily to and within the state of Alaska
and on the West Coast. Although Alaska and Horizon both operate as airlines,
their business plans, competition, and economic risks differ substantially.
Alaska is a major airline that operates an all-jet fleet with an average
passenger trip length in 2009 of 1,180 miles. Horizon is a regional airline,
operates turboprop and jet aircraft, and its average passenger trip length for
2009 was 356 miles. Individual financial information about Alaska and Horizon is
in Note 13 to the consolidated financial statements and throughout this report,
specifically in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Both of
our airlines continue to distinguish themselves from competitors by providing
award-winning customer service and differentiating amenities. Our outstanding
employees and excellent service in the form of advance seat assignments,
expedited check-in with Airport of the Future®, web check-in, flight alerts, an
award-winning frequent flyer program, well-maintained aircraft, a first-class
section aboard Alaska aircraft, and other amenities are regularly recognized by
independent studies, awards, and surveys of air travelers. For example, Alaska
has ranked “Highest in Customer Satisfaction among Traditional Network Carriers”
in both 2009 and 2008 by J.D. Power and Associates and won the “Program of the
Year” Freddie award for 2008 and 2007 for our Mileage Plan program. Horizon won
the 2007 “Regional Airline of the Year” from Air Transport World. We
are very proud of these awards and we continue to strive to have the best
customer service in the industry.
WHERE YOU CAN FIND MORE INFORMATION
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 available on our website at www.alaskaair.com, free of
charge, as soon as reasonably practicable after the electronic filing of these
reports with the Securities and Exchange Commission. The information contained
on our website is not a part of this annual report on Form 10-K.
ALASKA RANKED “HIGHEST IN CUSTOMER SATISFACTION AMONG
TRADITIONAL NETWORK CARRIERS” IN BOTH 2009 AND 2008 BY J.D. POWER AND
ASSOCIATES. HORIZON WON THE 2007 “REGIONAL AIRLINE OF THE
YEAR” FROM AIR TRANSPORT |
Alaska
Airlines is an Alaska corporation that was organized in 1932 and incorporated in
1937. We offer extensive north/south service within the western U.S., Canada and
Mexico, and passenger and dedicated cargo services to and within the state of
Alaska. We also provide long-haul east/west service to Hawaii and twelve cities
in the mid-continental and eastern U.S., primarily from Seattle, where we have
our largest concentration of departures; although we do offer long-haul
departures from other cities as well.
In 2009,
we carried 15.6 million revenue passengers in our mainline operations, and
we carry more passengers between Alaska and the U.S. mainland than any other
airline. Based on the number of passengers carried in 2009, Alaska’s leading
airports are Seattle, Los Angeles, Anchorage and Portland. Based on 2009
revenues, the leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles,
and Seattle-San Diego. At December 31, 2009, Alaska’s operating fleet
consisted of 115 jet aircraft, compared to 110 aircraft as of December 31,
2008.
Alaska’s passenger traffic by market is
presented below:
|
|
2009
|
|
|
2008
|
|
West
Coast
|
|
|
36 |
% |
|
|
41 |
% |
Within
Alaska and between Alaska and the U.S. mainland
|
|
|
21 |
% |
|
|
23 |
% |
Transcon/midcon
|
|
|
23 |
% |
|
|
20 |
% |
Mexico
|
|
|
9 |
% |
|
|
8 |
% |
Hawaii
|
|
|
9 |
% |
|
|
5 |
% |
Canada
|
|
|
2 |
% |
|
|
3 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
Horizon
Air Industries is a Washington corporation that first began service, was
incorporated in 1981 and was acquired by Air Group in 1986. It is the largest
regional airline in the Pacific Northwest, and serves a number of cities in
seven states, five cities in Canada, and two cities in Mexico.
In 2009,
Horizon carried 6.8 million revenue passengers. Approximately 90% of
Horizon’s revenue passenger miles in 2009 were flown domestically, primarily in
the states of Washington, Oregon, Idaho and California, compared to 91% in 2008.
The Canada markets accounted for 8% of revenue passenger miles in both 2009 and
2008. Flying to Mexico accounted for about 2% of total traffic in 2009 compared
to less than 1% in 2008.
Based on
2009 passenger enplanements, Horizon’s leading airports are Seattle, Portland,
Boise, and Spokane. Based on revenues in 2009, the leading nonstop routes are
Portland-Seattle, Spokane-Seattle, and Boise-Seattle. At December 31, 2009,
Horizon’s operating fleet consisted of 18 jets and 40 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code in airline
reservation systems.
Alaska
and Horizon integrate their flight schedules to provide convenient, competitive
connections between most points served by their systems. In 2009 and 2008,
approximately 22% and 23%, respectively, of Horizon’s passengers connected to
flights operated by Alaska.
GENERAL
The
airline industry is highly competitive and has historically been characterized
by low profit margins and high fixed costs, primarily for wages, aircraft fuel,
aircraft ownership, and facilities rents. Because expenses of a flight do not
vary significantly with the number of passengers carried, a relatively small
change in the number of passengers or in pricing has a disproportionate effect
on an airline’s operating and financial results. In other words, a minor
shortfall in expected revenue levels could cause a disproportionately negative
impact on our results of operations. Passenger demand and ticket prices are, to
a large measure, influenced by the general state of the economy, current global
economic and political events and total available airline seat
capacity.
2009
2009 was
a year plagued by economic woes and the worst recession the United States has
experienced since the Great Depression. The result was a steep
decline in the demand for air travel, causing a double-digit percentage decline
in unit revenue and passenger count across the industry. In response
to this decline and the high price of oil in 2008, airlines reduced domestic
capacity by approximately 7% in 2009 compared to 2008. The significant decline
in the average price of jet fuel from its 2008 high helped mitigate an otherwise
difficult year for the industry. In order to maximize revenue to help
offset the demand decline, airlines continued down the path of adding or
increasing ancillary fees for checked baggage, buy-on-board items, ticket fees,
etc. These fees helped to recover some of the lost revenue from the
decline in traffic, but certainly not all of it.
During
2009, our key initiative was to optimize revenue. We reduced and
redeployed capacity to better match demand, and the new markets we have entered
are performing well. Our revenue initiatives, combined with lower
fuel costs, our continued focus on customer service and our strong operational
performance resulted in financial results that significantly improved from 2008
and were among the best in the industry.
OUR
REVENUE INITIATIVES, COMBINED WITH LOWER FUEL COSTS, OUR CONTINUED FOCUS
ON CUSTOMER SERVICE AND OUR STRONG OPERATIONAL PERFORMANCE RESULTED IN
2009 FINANCIAL RESULTS THAT WERE AMONG THE BEST IN THE
INDUSTRY.
|
Our
business and financial results are highly affected by the price and,
potentially, the availability of jet fuel. Fuel prices have been extremely
volatile over the past few years. The price of crude oil averaged over $106 per
barrel in 2008, with a high of nearly $150 per barrel in July 2008. The average
price in 2009 was a more moderate $62 per barrel, although that price is still
historically high. For us, a $1 per barrel increase in the price of
oil equates to approximately $9 million of additional fuel cost
annually. A one-cent change in our fuel price per gallon will impact
our expected annual fuel cost by approximately $3.5 million per
year.
We refer
to the price we pay for fuel at the airport, including applicable taxes, as our
“raw” fuel price. Raw fuel prices are impacted by world oil prices and refining
costs, which can vary by region in the U.S. Generally, West Coast jet fuel
prices are somewhat higher and more volatile than prices in the Gulf Coast or on
the East Coast, putting our airlines at a slight competitive disadvantage.
Historically, fuel costs have generally represented 10% to 15% of an airline’s
operating costs, but due to volatility in prices over the past few years, fuel
costs have been in the range of 20% to 40% of total operating costs. Both the
crude oil and refining cost components of jet fuel are volatile and outside of
our control, and they can have a significant and immediate impact on our
operating results.
As
depicted in the charts below, our average raw fuel cost per gallon declined 43%
in 2009, and increased 42% and 8% in 2008 and 2007, respectively.
We use
crude oil call options and jet fuel refining margin swap contracts as hedges to
decrease our exposure to the volatility of jet fuel prices. Call options
effectively cap our pricing on the crude oil component of fuel prices, limiting
our exposure to increasing fuel prices for about half of our planned fuel
consumption. With these call option contracts, we still benefit from the decline
in crude oil prices, as there is no future cash exposure above the premiums we
pay to enter into the contracts.
OUR
AIRCRAFT ARE AMONG THE MOST FUEL-EFFICIENT IN THEIR RESPECTIVE
CLASSES.
|
We
believe that operating fuel-efficient aircraft also helps to mitigate the effect
of high fuel prices. Alaska operates an all-Boeing 737 fleet. At Horizon, the
long-term goal is to transition to an all-Q400 turboprop fleet. Because of these
changes, Alaska’s fuel burn expressed in available seat miles flown per gallon
(ASMs/g) improved from 65.9 ASMs/g in 2006 to 75.9 ASMs/g in 2009. Similarly,
Horizon’s fuel burn has improved from 51.7 ASMs/g in 2006 to 54.8 ASMs/g in
2009.
These
reductions have not only reduced our fuel cost, but also the amount of
greenhouse gases and other pollutants that our operations emit.
MARKETING AND COMPETITION
ALLIANCES WITH OTHER AIRLINES
We have
marketing alliances with several airlines that provide reciprocal frequent flyer
mileage credit and redemption privileges as well as code sharing on certain
flights as shown in the table below. Alliances are an important part of our
strategy and enhance our revenues by:
|
•
|
offering
our customers more travel destinations and better mileage
credit/redemption opportunities;
|
|
•
|
offering
our Mileage Plan program a competitive advantage because of our
partnership with carriers from two major global alliances (Oneworld and
Skyteam);
|
|
•
|
giving
us access to more connecting traffic from other airlines;
and
|
|
•
|
providing
members of our alliance partners’ frequent flyer programs an opportunity
to travel on Alaska and Horizon while earning mileage credit in our
partners’ programs.
|
Most of
our codeshare relationships are free-sell codeshares, where the marketing
carrier sells seats on the operating carrier’s flights from the operating
carrier’s inventory, but takes no inventory risk. Our marketing agreements have
various termination dates, and at any time, one or more may be in the process of
renegotiation.
Our marketing alliances with other
airlines as of December 31, 2009 are as follows:
|
Frequent
Flyer
Agreement
|
Codeshare—
Alaska
Flight
#
on
Flights
Operated
by
Other
Airline
|
Codeshare—
Other Airline
Flight
# On
Flights
Operated
by
Alaska/
Horizon
|
Major
U.S. or International
Airlines
|
American
Airlines/American
Eagle
|
Yes
|
Yes
|
Yes
|
Air
France
|
Yes
|
No
|
Yes
|
British
Airways
|
Yes
|
No
|
No
|
Cathay
Pacific Airways
|
Yes
|
No
|
No
|
Delta
Air Lines/Delta Connection
(2)
|
Yes
|
Yes
|
Yes
|
KLM
|
Yes
|
No
|
Yes
|
Korean
Air
|
Yes
|
No
|
Yes
|
Lan
S.A.
|
Yes
|
No
|
Yes
|
Air
Pacific (1)
|
Yes
|
No
|
Yes
|
Qantas
|
Yes
|
No
|
Yes
|
Regional
Airlines
|
|
|
|
Era
Alaska
|
Yes (1)
|
Yes
|
No
|
PenAir
|
Yes (1)
|
Yes
|
No
|
(1)
|
These
airlines do not have their own frequent flyer program. However, Alaska’s
Mileage Plan members can earn and redeem miles on these airlines’ route
systems.
|
(2)
|
Alaska
has codeshare agreements with the Delta Connection carriers Skywest and
ASA as part of its agreement with Delta. This agreement also
includes former Northwest Airlines
flights.
|
Competition
in the airline industry is intense. We believe the principal competitive factors
in the industry that are important to customers are:
|
•
|
safety
record and reputation,
|
|
•
|
frequent
flyer programs,
|
|
•
|
code-sharing
relationships.
|
Together,
Alaska and Horizon carry approximately 3.5% of all U.S. domestic passenger
traffic. We compete with one or more domestic or foreign airlines on most of our
routes, including Southwest Airlines, United Airlines, Delta Air Lines,
Continental Airlines, American Airlines, US Airways, JetBlue Airways, Virgin
America, Allegiant and regional affiliates associated with some of these
carriers.
Due to
its short-haul markets, Horizon also competes with ground transportation in many
markets, including train, bus and automobile transportation. Both
carriers, to some extent, also compete with technology such as video
conferencing and internet-based meeting tools that have resulted in a change in
business travel.
Airline
tickets are distributed through three primary channels:
|
•
|
Alaskaair.com. It is
less expensive for us to sell through this direct channel and, as a
result, we continue to take steps to drive more business to our website.
In addition, we believe this channel is preferable from a branding and
customer-relationship standpoint in that we can establish ongoing
communication with the customer and tailor offers
accordingly.
|
|
•
|
Traditional and online travel
agencies. Consumer reliance on traditional travel agencies
continues to shrink, giving way to online travel agencies. Both
traditional and online travel agencies typically use Global Distribution
Systems (GDS), such as Sabre, to obtain their fare and inventory data from
airlines. Bookings made through these agencies result in a fee that is
charged to the airline. Many of our large corporate customers require that
we use these agencies. Some of our competitors do not use this
distribution channel and, as a result, have lower ticket distribution
costs.
|
|
•
|
Reservation call
centers. These call centers are located in Phoenix, Ariz.; Kent,
Wash.; and Boise, Idaho. We generally charge a $15 fee for booking
reservations through these call
centers.
|
|
Our
sales by channel are as follows:
|
|
|
2009
|
|
|
2008
|
|
Alaskaair.com
|
|
|
48 |
% |
|
|
45 |
% |
Traditional
and online travel agencies
|
|
|
42 |
% |
|
|
43 |
% |
Reservation
call centers
|
|
|
9 |
% |
|
|
11 |
% |
All
other channels
|
|
|
1 |
% |
|
|
1 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
Labor
costs have historically made up 30% to 40% of an airline’s total operating
costs. Most major airlines, including ours, have employee groups that are
covered by collective
bargaining agreements. Airlines with unionized work forces have higher labor
costs than carriers without unionized work forces, and they may not have the
ability to adjust labor costs downward quickly enough to respond to new
competition. New entrants into the U.S. airline industry generally do not have
unionized work forces, which can be a competitive advantage for those
airlines.
We had
12,440 (9,046 at Alaska and 3,394 at Horizon) active full-time and part-time
employees at December 31, 2009, compared to 14,143 (10,250 at Alaska and
3,893 at Horizon) as of December 31, 2008. Wages, salaries and benefits
(including variable incentive pay) represented approximately 43% and 40% of our
total non-fuel operating expenses in 2009 and 2008, respectively.
At
December 31, 2009, labor unions represented 82% of Alaska’s and 46% of
Horizon’s employees. Our relations with our labor organizations are governed by
the Railway Labor Act (RLA). Under this act, collective bargaining agreements do
not expire but instead become amendable as of a stated date. If either party
wishes to modify the terms of any such agreement, it must notify the other party
in the manner prescribed by the RLA and/or described in the agreement. After
receipt of such notice, the parties must meet for direct negotiations, and if no
agreement is reached, either party may request the National Mediation Board
(NMB) to initiate a process including mediation, arbitration, and a potential
“cooling off” period that must be followed before either party may engage in
self-help.
Alaska’s
union contracts at December 31, 2009 were as follows:
Union
|
Employee Group
|
Number of
Active
Employees
|
Contract Status
|
Air
Line Pilots Association International
(ALPA)
|
Pilots
|
1,253
|
Amendable
4/1/2013
|
|
|
|
|
Association of Flight Attendants (AFA)
|
Flight
attendants
|
2,268
|
Amendable 4/27/2012
|
|
|
|
|
International
Association of Machinists and Aerospace Workers
(IAM)
|
Ramp service and stock
clerks
|
733
|
Amendable
7/17/2012
|
|
|
|
|
IAM
|
Clerk,
office and passenger service
|
2,387
|
Amendable
7/17/2010
|
|
|
|
|
Aircraft
Mechanics Fraternal Association
(AMFA)
|
Mechanics,
inspectors and cleaners
|
634
|
Amendable 10/17/2011
|
|
|
|
|
Mexico
Workers Association of Air Transport
|
Mexico airport personnel
|
70
|
Amendable
9/29/2010
|
|
|
|
|
Transport Workers Union
of America (TWU)
|
Dispatchers
|
35
|
Amendable
7/01/2010*
|
*
|
Collective
bargaining agreement contains interest arbitration
provision.
|
|
Horizon’s
union contracts at December 31, 2009 were as
follows:
|
Union
|
Employee
Group
|
Number
of
Active
Employees
|
Contract
Status
|
International
Brotherhood of Teamsters (IBT)
|
Pilots
|
531
|
In Negotiations
|
|
|
|
|
AFA
|
Flight
attendants
|
519
|
Amendable
12/21/2011
|
|
|
|
|
IBT
|
Mechanics
and related classifications
|
450
|
In
Negotiations
|
|
|
|
|
TWU
|
Dispatchers
|
16
|
Amendable
10/06/2010
|
|
|
|
|
National
Automobile, Aerospace, Transportation and General Workers
|
Station personnel in Vancouver
and Victoria, BC, Canada
|
60
|
Expires 2/14/2010
|
The
executive officers of Alaska Air Group, Inc. and executive officers of Alaska
and Horizon who have significant decision-making responsibilities, their
positions and their respective ages (as of February 1, 2010) are as
follows:
Name
|
Position
|
Age
|
Air
Group
or Subsidiary
Officer
Since
|
William
S. Ayer
|
Chairman,
President and Chief Executive Officer of Alaska Air Group, Inc. and
Chairman and Chief Executive Officer of Alaska Airlines,
Inc.
|
55
|
1985
|
|
|
|
|
Glenn
S. Johnson
|
Executive
Vice President/Finance and Chief Financial Officer of Alaska Air Group,
Inc. and Alaska Airlines, Inc.
|
51
|
1991
|
|
|
|
|
Keith
Loveless
|
Vice
President/Legal and Corporate Affairs, General Counsel and Corporate
Secretary of Alaska Air Group, Inc. and Alaska Airlines,
Inc.
|
53
|
1996
|
|
|
|
|
Bradley
D. Tilden
|
President
of Alaska Airlines, Inc.
|
49
|
1994
|
|
|
|
|
Jeffrey
D. Pinneo
|
President
and Chief Executive Officer of Horizon Air Industries,
Inc.
|
53
|
1990
|
|
|
|
|
Benito
Minicucci
|
Executive
Vice President/Operations and Chief Operating Officer of Alaska Airlines,
Inc.
|
43
|
2004
|
|
|
|
|
Kelley
Dobbs
|
Vice
President/Human Resources and Labor Relations of Alaska Airlines,
Inc.
|
43
|
2004
|
|
|
|
|
Brandon S. Pedersen
|
Vice
President/Finance and Controller of Alaska Air Group, Inc. and Alaska
Airlines, Inc. (Principal Accounting Officer)
|
43
|
2003
|
Mr. Ayer has been
President since February 2003 and became Chairman and Chief Executive Officer in
May 2003. Mr. Ayer is also Chairman and Chief Executive Officer of Alaska
Airlines. He has served as Alaska Airlines’ Chairman since February 2003, as
Chief Executive Officer since January 2002 and as President from November 1997
to December 2008. Prior to that, he was Sr. Vice President/Customer Service,
Marketing and Planning of Alaska Airlines from January 1997, and Vice
President/Marketing and Planning from August 1995. Prior thereto, he served as
Sr. Vice President/Operations of Horizon Air from January 1995. Mr. Ayer
serves on the boards of Alaska Airlines, Puget Energy, Inc., the Alaska Airlines
Foundation, Angel Flight West, Inc., and the Museum of Flight. He also serves on
the University of Washington Business School Advisory Board, and as a director
of the Seattle branch of the Federal Reserve Board.
Mr. Johnson joined
Alaska Airlines in 1982, became Vice President/Controller and Treasurer of
Horizon Air Industries in 1991 and Vice President/Customer Services in 2002. He
returned to Alaska Airlines in 2003 where he has served in several roles,
including Vice President/Finance and Controller and Vice President/Finance and
Treasurer. He served as Senior Vice President/Customer Service – Airports from
January 2006 through April 2007 and in April 2007, he was elected Executive Vice
President/Airports and Maintenance and Engineering. He was elected Executive
Vice President/Finance and Chief Financial Officer of Alaska Air Group and
Alaska Airlines in December 2008. He is a member of Air Group’s Management
Executive Committee.
Mr. Loveless became
Corporate Secretary and Assistant General Counsel of Alaska Air Group and Alaska
Airlines in 1996. In 1999, he was named Vice President/Legal and Corporate
Affairs, General Counsel and Corporate Secretary of Alaska Air Group and Alaska
Airlines. He is a member of Air Group’s Management Executive
Committee.
Mr. Tilden joined Alaska
Airlines in 1991, became controller of Alaska Airlines and Alaska Air Group in
1994, Chief Financial Officer in February 2000, Executive Vice President/Finance
in January 2002, Executive Vice President/Finance and Planning in 2007, and
President of Alaska Airlines in December 2008. He is a member of Air Group’s
Management Executive Committee.
Mr. Pinneo became Vice
President/Passenger Service of Horizon Air Industries in 1990 following nine
years at Alaska Airlines in various marketing roles. In January 2002, he was
named President and CEO of Horizon Air. He is a member of Air Group’s Management
Executive Committee.
Mr. Minicucci joined
Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering
and was promoted to Vice President of Seattle Operations in June 2008. In
December 2008 he was elected Executive Vice President/Operations and Chief
Operating Officer of Alaska Airlines. He is a member of Air Group’s Management
Executive Committee.
Ms. Dobbs joined Alaska
Airlines in 1987, became Staff Vice President/Human Resources – Staffing and
Development in 2004, Vice President/Human Resources – Strategy, Culture and
Inclusion in June 2007, and Vice President/Human Resources and Labor Relations
in 2009. She is a member of Air Group’s Management Executive
Committee.
Mr. Pedersen joined
Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska
Air Group and Alaska Airlines and was elected Vice President/Finance and
Controller for both entities in 2006.
The
airline industry is highly regulated.
The
Department of Transportation (DOT) and the Federal Aviation Administration (FAA)
exercise significant regulatory authority over air carriers.
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DOT: In order to provide passenger
and cargo air transportation in the U.S., a domestic airline is required
to hold a certificate of public convenience and necessity issued by the
DOT. Subject to certain individual airport capacity, noise and other
restrictions, this certificate permits an air carrier to operate between
any two points in the U.S. Certificates do not expire, but may be revoked
for failure to comply with federal aviation statutes, regulations, orders
or the terms of the certificates. In addition, the DOT has jurisdiction over the
approval of international codeshare agreements, alliance agreements
between domestic major airlines, international route authorities and
certain consumer protection matters, such as advertising, denied boarding
compensation and baggage liability. International treaties may also
contain restrictions or requirements for flying outside of the
U.S.
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FAA: The FAA, through
Federal Aviation Regulations (FARs), generally regulates all aspects of
airline operations, including establishing personnel, maintenance and
flight operation standards. Domestic airlines are required to hold a valid
air carrier operating certificate issued by the FAA. Pursuant to these
regulations we have established, and the FAA has approved, our operations
specifications and a maintenance program for each type of aircraft we
operate. The maintenance program provides for the ongoing maintenance of
such aircraft, ranging from frequent routine inspections to major
overhauls. From time to time the FAA issues airworthiness directives (ADs)
that must be incorporated into our aircraft maintenance program and
operations. All airlines are subject to enforcement actions that are
brought by the FAA from time to time for alleged violations of FARs or
ADs. At this time, we are not aware of any enforcement proceedings that
could either materially affect our financial position or impact our
authority to operate.
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The
Aviation and Transportation Security Act (the Security Act) generally provides
for enhanced aviation security measures. Pursuant to the Security Act, the
Transportation Security Administration (TSA) is responsible for aviation
security. The Security Act imposes a $2.50 per enplanement security
service fee (maximum $5.00 one-way fee), which is collected by the air carriers
and submitted to the government to pay for these enhanced security measures. In
addition, carriers are required to pay an amount to the TSA to cover the cost of
providing security measures equal to the amount the air carriers paid for
screening passengers and property in 2000. We paid $12.6 million each year to
the TSA for this security charge in 2009, 2008 and 2007.
The
Department of Justice has jurisdiction over airline antitrust matters. The U.S.
Postal Service has jurisdiction over certain aspects of the transportation of
mail and related services. Labor relations in the air transportation industry
are regulated under the Railway Labor Act. To the extent we continue to fly to
foreign countries and pursue alliances with international carriers, we may be
subject to certain regulations of foreign agencies.
Airlines
are permitted to establish their own domestic fares without governmental
regulation, and the industry is characterized by vigorous price competition. The
DOT maintains authority over international (generally outside of North America)
fares, rates and charges. International fares and rates are also subject to the
jurisdiction of the governments of the foreign countries we serve. Although air
carriers are required to file and adhere to international fare and rate tariffs,
substantial commissions, overrides and discounts given to travel agents, brokers
and wholesalers characterize many international markets.
We are
subject to various laws and government regulations concerning environmental
matters and employee safety and health in the U.S. and other countries. U.S.
federal laws that have a particular effect on us include the Airport Noise and
Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery
Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive
Environmental Response, Compensation and Liability Act, or Superfund Act. We are
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency, OSHA, and other federal agencies have been
authorized to create and enforce regulations that have an impact on our
operations. In addition to these federal activities, various states have been
delegated certain authorities under these federal statutes. Many state and local
governments have adopted environmental and employee safety and health laws and
regulations. We maintain our safety, health and environmental programs in order
to meet or exceed these requirements.
It is
expected that the current federal administration will likely move forward with
legislation to reduce carbon and other
greenhouse gas emissions. We do not believe legislation is necessary to motivate
airlines to reduce fuel burn and, in turn, reduce emissions. For example, Alaska
and Horizon have transitioned or are transitioning to more fuel-efficient
aircraft fleets, thereby greatly reducing our total
emissions.
The
Airport Noise and Capacity Act recognizes the rights of airport operators with
noise problems to implement local noise abatement programs so long as they do
not interfere unreasonably with interstate or foreign commerce or the national
air transportation system. Authorities in several cities have established
aircraft noise reduction programs, including the imposition of nighttime
curfews. We believe we have sufficient scheduling flexibility to accommodate
local noise restrictions.
Although
we do not currently anticipate that these regulatory matters, individually or
collectively, will have a material effect on our financial condition, results of
operations or cash flows, new regulations or compliance issues that we do not
currently anticipate could have the potential to harm our financial condition,
results of operations or cash flows in future periods.
Along
with other domestic airlines, we have implemented a customer service commitment
plan to address a number of service goals, including, but not limited to, goals
relating to lowest fare availability, delays, cancellations and diversions,
baggage delivery and liability, guaranteed fares and ticket refunds. All of our
employees are required to periodically attend our Customer Experience Workshop
to enhance our customer service focus and ultimately improve the experience our
customers have when traveling with us.
In
December 2009, the DOT adopted new rules effective in April 2010 that set fines
of as much as $27,500 per passenger when airlines leave passengers on the
aircraft for more than three hours while on the ground. These new
rules are in response to recent incidents involving other airlines that resulted
in lengthy tarmac delays. Bills have been introduced in several
states, including the state of Washington, which propose to regulate airlines
when operating in those specific states. However, we believe these bills would
be preempted by federal law. We do not believe these bills are
necessary.
All major
airlines have developed frequent flyer programs as a way of increasing passenger
loyalty. Alaska’s Mileage Plan allows members to earn mileage by flying on
Alaska, Horizon and other participating airlines and by using the services of
non-airline partners, which include a credit card partner, a grocery store
chain, a telephone company, hotels, car rental agencies, and other businesses.
Alaska is paid by non-airline partners for the miles it credits to member
accounts. With advance notice, Alaska has the ability to change the Mileage Plan
terms, conditions, partners, mileage credits, and award levels or to terminate
the program.
Mileage
can be redeemed for free or discounted travel and for various other awards. Upon
accumulating the necessary mileage, members notify Alaska of their award
selection. Mileage Plan accounts are generally deleted after two years of
inactivity in a member’s account. Over 80% of the free flight awards on Alaska
and Horizon in 2009 were subject to capacity-controlled seating.
As of
December 31, 2009 and 2008, approximately 3.0 million and
3.4 million, respectively, round-trip flight awards were eligible for
redemption by Mileage Plan members. Of those eligible awards, we estimate that
approximately 88% will ultimately be redeemed. For the years 2009, 2008 and
2007, approximately 1,190,000, 685,000 and 600,000 round-trip awards and
260,000, 410,000 and 250,000 one-way flight awards were redeemed and flown on
Alaska and Horizon. These awards represent approximately 15.0%, 9.3%, and 7.0%
for 2009, 2008, and 2007, respectively, of the total passenger miles flown on
Alaska and Horizon. For the years 2009, 2008, and 2007, approximately 181,000,
214,000, and 243,000, respectively, round-trip flight awards were redeemed and
flown on airline partners. In November 2008, we began charging a $25 fee for
awards redeemed on our airline partners.
We also
have awards that allow for redemption of one-half the mileage redemption rate
plus 50% of the fare for eligible award travel. Our members redeemed
approximately 730,000, 620,000, and 560,000 one-way equivalent awards under this
program in 2009, 2008, and 2007, respectively.
We sell
mileage credits to our non-airline partners. We defer a majority of the sales
proceeds and recognize revenue when award transportation is
provided.
SEASONALITY AND OTHER FACTORS
Our
results of operations for any interim period are not necessarily indicative of
those for the entire year because our business is subject to seasonal
fluctuations. Our profitability is generally lowest during the first and fourth
quarters due principally to lower traffic. It typically increases in the second
quarter and then reaches its highest level during the third quarter as a result
of vacation travel, including increased activity in the state of
Alaska.
In
addition to passenger loads, factors that could cause our quarterly operating
results to vary include:
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general
economic conditions and resulting changes in passenger
demand,
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initiatives by us and our competitors,
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the
timing and amount of maintenance expenditures (both planned and
unplanned),
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increases
or decreases in passenger and volume-driven variable costs,
and
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In
addition to those factors listed above, seasonal variations in traffic, the
timing of various expenditures and adverse weather conditions may affect our
operating results from quarter to quarter. Many of the markets we serve
experience inclement weather conditions in the winter, causing increased costs
associated with deicing aircraft, canceled flights and reaccommodation of
displaced passengers. Due to our geographic area of operations, we can be more
susceptible to adverse weather conditions (particularly in the state of Alaska
and the Pacific Northwest) than some of our competitors, who may be better able
to spread weather-related risks over larger route systems.
No
material part of our business or that of our subsidiaries is dependent upon a
single customer, or upon a few high-volume customers.
We carry
Airline Hull, Spares and Comprehensive Legal Liability Insurance in amounts and
of the type generally consistent with industry practice to cover damage to
aircraft, spare parts and spare engines, as well as bodily injury and property
damage to passengers and third parties. Since the September 11, 2001
attacks, this insurance program excludes coverage for War and Allied Perils,
including hijacking, terrorism, malicious acts, strikes, riots, civil commotion
and other identified perils. So, like other airlines, the company has purchased
war risk coverage for such events through the U.S. government.
We
believe that our emphasis on safety and our state-of-the-art flight deck safety
technology help to control the cost of aviation insurance.
If any of
the following occurs, our business, financial condition and results of
operations could suffer. In such case, the trading price of our common stock
could also decline. We operate in a continually changing business
environment. In this environment, new risks may emerge and already
identified risks may vary significantly in terms of impact and likelihood of
occurrence. Management cannot predict such developments, nor can it assess the
impact, if any, on our business of such new risk factors or of events described
in any forward-looking statements.
ECONOMY
AND FINANCE
The
current economic climate has impacted demand for our product and could harm our
financial condition and results of operations if the environment does not
improve.
The
recent economic recession resulted in a decline in demand for air travel. If the
economic climate does not improve and traffic does not improve as we expect, we
will likely need to adjust our capacity plans, which could harm our business,
financial condition and results of operations.
Our
business, financial condition, and results of operations are substantially
exposed to the volatility of jet fuel prices. Increases in jet fuel costs would
harm our business.
Fuel
costs constitute a significant portion of our total operating expenses,
accounting for 21% and 36% of total operating expenses for the years ended
December 31, 2009 and 2008, respectively. Significant increases in average
fuel costs during the past several years have negatively affected our results of
operations.
Future
increases in the price of jet fuel will harm our financial condition and results
of operations, unless we are able to increase fares or add additional ancillary
fees to attempt to recover increasing fuel costs.
Our
indebtedness and other fixed obligations could increase the volatility of
earnings and otherwise restrict our activities and potentially lead to liquidity
constraints.
We have,
and will continue to have for the foreseeable future, a significant amount of
debt. Due to our high fixed costs, including aircraft lease commitments and debt
service, a decrease in revenues results in a disproportionately greater decrease
in earnings.
Our
outstanding long-term debt and other fixed obligations could have important
consequences. For example, they could:
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limit
our ability to obtain additional financing to fund our future capital
expenditures, acquisitions, working capital or other
purposes;
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require
us to dedicate a material portion of our operating cash flow to fund lease
payments and interest payments on indebtedness, thereby reducing funds
available for other purposes; and
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limit
our ability to withstand competitive pressures and reduce our flexibility
in responding to changing business and economic conditions, including
reacting to the current economic
slowdown.
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Although
we have historically been able to generate sufficient cash flow from our
operations to pay our debt and other fixed obligations as they become due, we
cannot ensure we will be able to do so in the future. If we fail to do so, our
business could be harmed.
Alaska is
required to comply with specific financial covenants in certain agreements. We
cannot be certain that Alaska will be able to comply with these covenants or
provisions or that these requirements will not limit our ability to finance our
future operations or capital needs.
See
“Liquidity and Capital Resources” on page 44 for more detailed information about
our obligations and commitments.
Our
continuing obligation to fund our traditional defined-benefit pension plans
could negatively affect our ability to compete in the marketplace.
Our
defined-benefit pension plan assets are subject to market risk. If market
returns are poor in the future, as they were in 2008, any future obligation to
make additional cash contributions in accordance with the Pension Protection Act
of 2006 could increase and harm our liquidity. Poor market returns also lead to
higher pension expense in our statement of operations. The calculation of
pension expense is dependent on many assumptions that are more fully described
in “Critical Accounting Estimates” on page 42 and Note 8 to our
consolidated financial statements.
Increases
in insurance costs or reductions in insurance coverage would harm our business,
financial condition and results of operations.
Aviation
insurers could increase their premiums in the event of additional terrorist
attacks, hijackings, airline accidents or other events adversely affecting the
airline industry. Furthermore, the full hull and liability war risk insurance
provided by the government is currently mandated through August 31, 2010.
Although the government may again extend the deadline for providing such
coverage, we cannot be certain that any extension will occur, or if it does, for
how long the extension will last. It is expected that, should the government
stop providing such coverage to the airline industry, the premiums charged by
aviation insurers for this coverage will be substantially higher than the
premiums currently charged by the government and the coverage will be much more
limited, including smaller aggregate limits and shorter cancellation periods.
Significant increases in insurance premiums would adversely affect our business,
financial condition and results of operations.
SAFETY,
COMPLIANCE AND OPERATIONAL EXCELLENCE
Our
reputation and financial results could be harmed in the event of an airline
accident or incident.
An
accident or incident involving one of our aircraft could involve a significant
loss of life and result in a loss of confidence in our airlines by the flying
public. We could experience significant potential claims from injured passengers
and surviving relatives, as well as costs for the repair or replacement of a
damaged aircraft and its consequential temporary or permanent loss from service.
We maintain liability insurance in amounts and of the type generally consistent
with industry practice. However, the amount of such coverage may not be adequate
to fully cover all claims and we may be forced to bear substantial losses from
an accident. Substantial claims resulting from an accident in excess of our
related insurance coverage would harm our business and financial results.
Moreover, any aircraft accident or incident, even if fully insured and even if
it does not involve one of our airlines, could cause a public perception that
our airlines or the equipment they fly is less safe or reliable than other
transportation alternatives, which would harm our business.
Changes
in government regulation imposing additional requirements and restrictions on
our operations or on the airports at which we operate could increase our
operating costs and result in service delays and disruptions.
Airlines
are subject to extensive regulatory and legal requirements, both domestically
and internationally, that involve significant compliance costs. In the last
several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA
have issued regulations that have required significant expenditures relating to
the maintenance and operation of airlines. Similarly, many aspects of an
airline’s operations are subject to increasingly stringent federal, state and
local laws protecting the environment.
Because
of significantly higher security and other costs incurred by airports since
September 11, 2001, many airports have increased their rates and charges to
air carriers. Additional laws, regulations, taxes, and airport rates and charges
have been proposed from time to time that could significantly increase the cost
of airline operations or reduce the demand for air travel. Although lawmakers
may impose these additional fees and view them as “pass-through” costs, we
believe that a higher total ticket price will influence consumer purchase and
travel decisions and may result in an overall decline in passenger traffic,
which would harm our business.
If
we do not maintain the privacy and security of customer-related information, we
could damage our reputation, incur substantial additional costs and become
subject to litigation.
We
receive, retain, and transmit certain personal information about our
customers. In addition, our online operations at alaskaair.com depend
on the secure transmission of confidential information over public networks,
including credit card information. A compromise of our security
systems or those of other business partners that results in our customers’
personal information being obtained by unauthorized persons could adversely
affect our reputation with our customers and others, as well as our operations,
results of operations, financial position and liquidity, and could result in
litigation against us or the imposition of penalties. In addition, a
security breach could require that we expend significant additional resources
related to the security of information systems and could result in a disruption
of our operations, particularly our online sales operations.
Additionally,
the use of individually identifiable data by our business and our business
partners is regulated at the international, federal and state
levels. Privacy and information security laws and regulations change,
and compliance with them may result in cost increases due to necessary systems
changes and the development of new administrative processes.
The
airline industry continues to face potential security concerns and related
costs.
The
terrorist attacks of September 11, 2001 and their aftermath negatively
affected the airline industry, including our company. Additional terrorist
attacks, the fear of such attacks or other hostilities involving the U.S. could
have a further significant negative effect on the airline industry, including
us, and could:
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significantly
reduce passenger traffic and yields as a result of a potentially dramatic
drop in demand for air travel;
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significantly
increase security and insurance
costs;
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make
war risk or other insurance unavailable or extremely
expensive;
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increase
fuel costs and the volatility of fuel
prices;
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increase
costs from airport shutdowns, flight cancellations and delays resulting
from security breaches and perceived safety threats;
and
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result
in a grounding of commercial air traffic by the
FAA.
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The
occurrence of any of these events would harm our business, financial condition
and results of operations.
Our
operations are often affected by factors beyond our control, including delays,
cancellations, and other conditions, which could harm our financial condition
and results of operations.
Like
other airlines, our operations often are affected by delays, cancellations and
other conditions caused by factors largely beyond our control.
A local
dam in the Kent Valley near the 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.
Other
conditions that might impact our operations include:
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air
traffic congestion at airports or other air traffic control
problems;
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adverse
weather conditions;
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increased
security measures or breaches in
security;
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international
or domestic conflicts or terrorist activity;
and
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other
changes in business conditions.
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Due to
our geographic area of operations, we believe a large portion of our operation
is more susceptible to adverse weather conditions than that of many of our
competitors. A general reduction in airline passenger traffic as a result of any
of the above-mentioned factors could harm our business, financial condition and
results of operations.
STRATEGY
We
depend on a few key markets to be successful.
Our
strategy is to focus on serving a few key markets, including Seattle, Portland,
Los Angeles and Anchorage. A significant portion of our flights occurs to and
from our Seattle hub. In 2009, passengers to and from Seattle accounted for 64%
of our total passengers.
We
believe that concentrating our service offerings in this way allows us to
maximize our investment in personnel, aircraft, and ground facilities, as well
as to gain greater advantage from sales and marketing efforts in those regions.
As a result, we remain highly dependent on our key markets. Our business could
be harmed by any circumstances causing a reduction in demand for air
transportation in our key markets. An increase in competition in our key markets
could also cause us to reduce fares or take other competitive measures that
could
harm our business, financial condition and results of
operations.
Our
failure to successfully meet cost reduction goals at both Alaska and Horizon
could harm our business.
We
continue to strive toward aggressive cost-reduction goals that are an important
part of our business strategy of offering the best value to passengers through
competitive fares while achieving acceptable profit margins and return on
capital. However, with our capacity reductions in 2009 and increased costs in
areas such as wages and benefits, we experienced a 10% increase in non-fuel unit
cost at Alaska and a 6% increase at Horizon. If we are unable to reduce our
non-fuel unit costs over the long-term and achieve targeted profitability, we
will likely not be able to grow our business in the future and therefore our
financial results may suffer.
We
rely on third-party vendors for certain critical activities.
We have
historically relied on outside vendors for a variety of services and functions
critical to our business, including airframe and engine maintenance, ground
handling, fueling, computer reservation system hosting and software maintenance.
As part of our cost-reduction efforts, our reliance on outside vendors has
increased and may continue to do so in the future. In recent years, Alaska has
subcontracted its heavy aircraft maintenance, fleet service, facilities
maintenance, and ground handling services at certain airports, including
Seattle-Tacoma International Airport, to outside vendors.
Our use
of outside vendors increases our exposure to several risks. In the event that
one or more vendors goes into bankruptcy, ceases operation or fails to perform
as promised, replacement services may not be readily available at competitive
rates, or at all. Although we believe that our vendor oversight and quality
control is among the best in the industry, if one of our vendors fails to
perform adequately we may experience increased costs, delays, maintenance
issues, safety issues or negative public perception of our airline. Vendor
bankruptcies, unionization, regulatory compliance issues or significant changes
in the competitive marketplace among suppliers could adversely affect vendor
services or force Alaska to renegotiate existing agreements on less favorable
terms. These events could result in disruptions in Alaska’s operations or
increases in its cost structure.
We
are dependent on a limited number of suppliers for aircraft and
parts.
Alaska is
dependent on Boeing as its sole supplier for aircraft and many of its aircraft
parts. Horizon is similarly dependent on Bombardier. Additionally, each carrier
is dependent on sole suppliers for aircraft engines. As a result, we are more
vulnerable to any problems associated with the supply of those aircraft and
parts, including design defects, mechanical problems, contractual performance by
the manufacturers, or adverse perception by the public that would result in
customer avoidance or in actions by the FAA resulting in an inability to operate
our aircraft.
INFORMATION
TECHNOLOGY
We
rely heavily on automated systems to operate our business, and a failure of
these systems or by their operators could harm our business.
We depend
on automated systems to operate our business, including our airline reservation
system, our telecommunication systems, our website, our maintenance systems, our
kiosk check-in terminals, and other systems. Substantially all of our tickets
are issued to passengers as electronic tickets and the majority of our customers
check in using our website or our airport kiosks. We depend on our reservation
system to be able to issue, track and accept these electronic tickets. In order
for our operations to work efficiently, our website, reservation system, and
check-in systems must be able to accommodate a high volume of traffic, maintain
secure information, and deliver important flight information. Substantial or
repeated website, reservations system or telecommunication systems failures
could reduce the attractiveness of our services and cause our customers to
purchase tickets from another airline. In addition, we rely on other automated
systems for crew scheduling, flight dispatch, and other operational needs.
Disruption in, changes to, or a breach of these systems could result in the loss
of important data, an increase of our expenses and a possible temporary
cessation of our operations.
BRAND
AND REPUTATION
A
significant increase in labor costs or change in key personnel could adversely
affect our business and results of operations.
We
compete against the major U.S. airlines and other businesses for labor in many
highly skilled positions. If we are unable to hire, train and retain qualified
employees at a reasonable cost, or if we lose the services of key personnel, we
may be unable to grow or sustain our business. In such case, our operating
results and business prospects could be harmed. We may also have difficulty
replacing management or other key personnel who leave and, therefore, the loss
of any of these individuals could harm our business.
Labor
costs are a significant component of our total expenses, accounting for
approximately 34% and 25% of our total operating expenses in 2009 and 2008,
respectively. As of December 31, 2009, labor unions represented
approximately 82% of Alaska’s and 46% of Horizon’s employees. Each of our
represented employee groups has a separate collective bargaining agreement, and
could make demands that would increase our operating expenses and adversely
affect our financial performance if we agree to them. Although we have been
successful in negotiating new contracts or extending existing
contracts with a number of workgroups recently, future uncertainty around open
contracts could be a distraction to many employees, reduce employee engagement
in our business and divert management’s attention from other projects and
issues.
Horizon
is currently in negotiations with the IBT on a new pilot agreement and has been
since the contract first became amendable in September 2006. In January 2010,
Horizon and the IBT filed separate requests for assistance from the NMB in our
ongoing negotiations. Factoring in pay rates and productivity
measures, we believe our pilot unit costs at Horizon are among the highest in
the industry for the size of aircraft we operate.
We
rely on partner airlines for codeshare and frequent flyer marketing
arrangements.
Alaska
and Horizon are parties to marketing agreements with a number of domestic and
international air carriers, or “partners,” including, but not limited to,
American Airlines and Delta Air Lines. These agreements provide that certain
flight segments operated by us are held out as partner “codeshare” flights and
that certain partner flights are held out for sale as Alaska codeshare flights.
In addition, the agreements generally provide that members of Alaska’s Mileage
Plan program can earn miles on or redeem miles for partner flights and vice
versa. We receive a significant amount of revenue from flights sold under
codeshare arrangements. In addition, we believe that the frequent flyer
arrangements are an important part of our Mileage Plan program. The loss of a
significant partner or certain partner flights could have a negative effect on
our revenues or the attractiveness of our Mileage Plan, which we believe is a
source of competitive advantage.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
|
None
The
following tables describe the aircraft we operate and their average age at
December 31, 2009:
Aircraft
Type
|
|
Passenger
Capacity
|
|
|
Owned
|
|
|
Leased
|
|
|
Total
|
|
|
Average
Age
in
Years
|
|
Alaska Airlines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boeing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737-400
|
|
|
144 |
|
|
|
3 |
|
|
|
24 |
|
|
|
27 |
|
|
|
14.1 |
|
|
737-400C* |
|
|
72 |
|
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
17.3 |
|
|
737-400F* |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
10.8 |
|
|
737-700 |
|
|
124 |
|
|
|
17 |
|
|
|
2 |
|
|
|
19 |
|
|
|
9.1 |
|
|
737-800 |
|
|
157 |
|
|
|
41 |
|
|
|
10 |
|
|
|
51 |
|
|
|
2.3 |
|
|
737-900 |
|
|
172 |
|
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
|
|
7.4 |
|
Total
|
|
|
|
|
|
|
79 |
|
|
|
36 |
|
|
|
115 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon
Air
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bombardier: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q400
|
|
|
76 |
|
|
|
25 |
|
|
|
15 |
|
|
|
40 |
|
|
|
5.1 |
|
CRJ-700 |
|
|
70 |
|
|
|
2 |
|
|
|
16 |
|
|
|
18 |
|
|
|
7.3 |
|
Total
|
|
|
|
|
|
|
27 |
|
|
|
31 |
|
|
|
58 |
|
|
|
5.8 |
|
*
|
C=Combination
freighter/passenger; F=Freighter
|
Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” discusses future orders and options for additional
aircraft.
Most of
our owned aircraft secure long-term debt arrangements or collateralize our
revolving credit facility. See further discussion in “Liquidity and
Capital Resouces” on page 44.
Alaska’s
leased 737-400, 737-700, and 737-800 aircraft have lease expiration dates
between 2010 and 2016, in 2010, and between 2015 and 2021, respectively. Alaska
has four MD-80 aircraft, one owned and three under long-term lease arrangements
through 2012, currently in temporary storage. Horizon’s leased Q400 and CRJ-700
aircraft have expiration dates in 2018 and between 2018 and 2020, respectively.
Horizon also has 16 leased Q200 aircraft and two leased CRJ-700 aircraft that
are subleased to third-party carriers. Alaska and Horizon have the
option to extend most of the leases for additional periods, or the right to
purchase the aircraft at the end of the lease term, usually at the
then-fair-market value of the aircraft.
Alaska
completed its transition to an all-Boeing operating fleet during 2008. Horizon’s
long-term goal is to transition to an all-Q400 operating 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.
The
following table displays the currently anticipated fleet counts for Alaska and
Horizon as of the end of each quarter in 2010. This plan assumes that
we are able to remarket three CRJ-700 aircraft in the first half of
2010. Given current market conditions, there is no assurance that we
will be successful in doing so.
|
|
31-Mar-10
|
|
|
30-Jun-10
|
|
|
30-Sep-10
|
|
|
31-Dec-10
|
|
Alaska Airlines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737-400 |
|
|
24 |
|
|
|
24 |
|
|
|
24 |
|
|
|
23 |
|
|
737-400C* |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
737-400F* |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
737-700 |
|
|
19 |
|
|
|
19 |
|
|
|
18 |
|
|
|
17 |
|
|
737-800 |
|
|
51 |
|
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
|
737-900 |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
Totals
|
|
|
112 |
|
|
|
116 |
|
|
|
115 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon
Air
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q400 |
|
|
40 |
|
|
|
40 |
|
|
|
40 |
|
|
|
40 |
|
CRJ-700
|
|
|
18 |
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
Totals
|
|
|
58 |
|
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
*
|
C=Combination
freighter/passenger; F=Freighter
|
GROUND FACILITIES AND SERVICES
Alaska
and Horizon lease ticket counters, gates, cargo and baggage space, office space,
and other support areas at the majority of the airports they serve. Alaska also
owns terminal buildings in various cities in the state of Alaska.
Alaska
has centralized operations in several buildings located at or near
Seattle-Tacoma International Airport (Sea-Tac) near Seattle, Wash. These include
a five-bay hangar and shops complex (used primarily for line maintenance), a
flight operations and training center, an air cargo facility, an information
technology office and datacenter, an office building, and corporate headquarters
complex. Alaska also leases a stores warehouse, and office space for a customer
service and reservation facility in Kent, Wash. Alaska’s major facilities
outside of Seattle include a regional headquarters building, an air cargo
facility and a hangar/office facility in Anchorage, as well as leased
reservations facilities in Phoenix, Ariz. and Boise, Idaho. Alaska uses its own
employees for ground handling services at most of our airports in the state of
Alaska. At other airports throughout our system, those services are contracted
to various third-party vendors.
Horizon
owns its Seattle corporate headquarters building. It leases an operations,
training, and aircraft maintenance facility in Portland as well as line
maintenance stations in Boise, Spokane, Pasco, Eugene, Los Angeles and
Seattle.
ITEM 3. LEGAL
PROCEEDINGS
|
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 February
2010, the arbitrator issued a final decision. The decision does not
require Alaska to alter the existing subcontracting arrangements for ramp
service in Seattle. The award sustains the right to subcontract other
operations in the future so long as the requirements of the CBA are
met. The award imposes monetary remedies which have not been fully
calculated, but are not expected to be material.
Other
items
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.
|
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
|
ITEM 5. MARKET FOR THE
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
As of
December 31, 2009, there were 35,591,008 shares of common stock of Alaska
Air Group, Inc. issued and outstanding and 3,406 shareholders of record. We also
held 252,084 treasury shares at a cost of $5.7 million. We have not paid
dividends on the common stock since 1992 and have no plans to do so in the
foreseeable future. Our common stock is listed on the New York Stock Exchange
(symbol: ALK).
The
following table shows the trading range of Alaska Air Group, Inc. common stock
on the New York Stock Exchange.
|
|
2009
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
30.95 |
|
|
$ |
13.61 |
|
|
$ |
28.56 |
|
|
$ |
17.44 |
|
Second
Quarter
|
|
|
22.08 |
|
|
|
14.53 |
|
|
|
23.00 |
|
|
|
15.34 |
|
Third
Quarter
|
|
|
27.99 |
|
|
|
17.93 |
|
|
|
24.68 |
|
|
|
10.10 |
|
Fourth
Quarter
|
|
|
36.48 |
|
|
|
24.91 |
|
|
|
29.74 |
|
|
|
12.89 |
|
SALES OF NON-REGISTERED SECURITIES
None
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid
per
Share
|
|
|
Maximum remaining
dollar
value of shares
that
can be purchased
under the
plan
|
|
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 were no purchases under this plan subsequent to
July 2009 through the end of 2009. However, we have resumed
purchases subsequent to December 31,
2009.
|
In
October 2009, Air Group delisted 7,900,000 common shares that had been held in
treasury stock on the consolidated balance sheet in prior
periods. The action did not impact the total number of common shares
outstanding.
The
following graph compares our cumulative total stockholder return since
December 31, 2004 with the S&P 500 Index and the Dow Jones U.S.
Airlines Index. The graph assumes that the value of the investment in our common
stock and each index (including reinvestment of dividends) was $100 on
December 31, 2004.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
CONSOLIDATED OPERATING RESULTS
(audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$ |
3,399.8 |
|
|
$ |
3,662.6 |
|
|
$ |
3,506.0 |
|
|
$ |
3,334.4 |
|
|
$ |
2,975.3 |
|
Operating
Expenses
|
|
|
3,132.4 |
|
|
|
3,834.8 |
|
|
|
3,295.1 |
|
|
|
3,424.6 |
|
|
|
2,808.8 |
|
Operating
Income (Loss)
|
|
|
267.4 |
|
|
|
(172.2 |
) |
|
|
210.9 |
|
|
|
(90.2 |
) |
|
|
166.5 |
|
Nonoperating
income (expense), net of interest capitalized (a)
|
|
|
(64.5 |
) |
|
|
(41.0 |
) |
|
|
(10.4 |
) |
|
|
(0.5 |
) |
|
|
(29.3 |
) |
Income
(loss) before income tax and accounting change
|
|
|
202.9 |
|
|
|
(213.2 |
) |
|
|
200.5 |
|
|
|
(90.7 |
) |
|
|
137.2 |
|
Income
(loss) before accounting change
|
|
|
202.9 |
|
|
|
(135.9 |
) |
|
|
124.3 |
|
|
|
(54.5 |
) |
|
|
84.5 |
|
Net
Income (Loss)
|
|
$ |
121.6 |
|
|
$ |
(135.9 |
) |
|
$ |
124.3 |
|
|
$ |
(54.5 |
) |
|
$ |
(5.9 |
) |
Average
basic shares outstanding
|
|
|
35.815 |
|
|
|
36.343 |
|
|
|
40.125 |
|
|
|
37.939 |
|
|
|
27.609 |
|
Average
diluted shares outstanding
|
|
|
36.154 |
|
|
|
36.343 |
|
|
|
40.424 |
|
|
|
37.939 |
|
|
|
33.917 |
|
Basic
earnings (loss) per share before accounting change
|
|
$ |
3.39 |
|
|
$ |
(3.74 |
) |
|
$ |
3.10 |
|
|
$ |
(1.44 |
) |
|
$ |
3.06 |
|
Basic
earnings (loss) per share
|
|
|
3.39 |
|
|
|
(3.74 |
) |
|
|
3.10 |
|
|
|
(1.44 |
) |
|
|
(0.21 |
) |
Diluted
earnings (loss) per share before accounting change
|
|
|
3.36 |
|
|
|
(3.74 |
) |
|
|
3.07 |
|
|
|
(1.44 |
) |
|
|
2.65 |
|
Diluted
earnings (loss) per share
|
|
|
3.36 |
|
|
|
(3.74 |
) |
|
|
3.07 |
|
|
|
(1.44 |
) |
|
|
(0.01 |
) |
CONSOLIDATED FINANCIAL POSITION
(audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
End of Period (in millions, except ratio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
4,985.0 |
|
|
$ |
4,835.6 |
|
|
$ |
4,490.9 |
|
|
$ |
4,077.1 |
|
|
$ |
3,792.0 |
|
Long-term
debt and capital lease obligations, net of current portion
|
|
|
1,699.2 |
|
|
|
1,596.3 |
|
|
|
1,124.6 |
|
|
|
1,031.7 |
|
|
|
969.1 |
|
Shareholders'
equity
|
|
|
872.1 |
|
|
|
661.9 |
|
|
|
1,025.4 |
|
|
|
886.5 |
|
|
|
827.6 |
|
Ratio
of earnings to fixed charges (b) (unaudited)
|
|
|
1.92 |
|
|
|
(0.10 |
) |
|
|
1.83 |
|
|
|
0.40 |
|
|
|
1.72 |
|
STATISTICS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
Airlines Mainline Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
15,561 |
|
|
|
16,809 |
|
|
|
17,558 |
|
|
|
17,165 |
|
|
|
16,759 |
|
Revenue
passenger miles (RPM) (000,000)
|
|
|
18,362 |
|
|
|
18,712 |
|
|
|
18,451 |
|
|
|
17,822 |
|
|
|
16,915 |
|
Available
seat miles (ASM) (000,000)
|
|
|
23,144 |
|
|
|
24,218 |
|
|
|
24,208 |
|
|
|
23,278 |
|
|
|
22,292 |
|
Revenue
passenger load factor
|
|
|
79.3 |
% |
|
|
77.3 |
% |
|
|
76.2 |
% |
|
|
76.6 |
% |
|
|
75.9 |
% |
Yield
per passenger mile
|
|
|
13.28 |
¢ |
|
|
14.13 |
¢ |
|
|
13.81 |
¢ |
|
|
13.76 |
¢ |
|
|
12.91 |
¢ |
Operating
revenues per ASM
|
|
|
11.74 |
¢ |
|
|
12.06 |
¢ |
|
|
11.52 |
¢ |
|
|
11.50 |
¢ |
|
|
10.76 |
¢ |
Operating
expenses per ASM
|
|
|
10.78 |
¢ |
|
|
12.54 |
¢ |
|
|
10.55 |
¢ |
|
|
11.93 |
¢ |
|
|
10.14 |
¢ |
Operating
expenses per ASM, excluding fuel and noted items (d)
|
|
|
8.26 |
¢ |
|
|
7.49 |
¢ |
|
|
7.50 |
¢ |
|
|
7.76 |
¢ |
|
|
7.90 |
¢ |
Average
number of full-time equivalent employees
|
|
|
8,915 |
|
|
|
9,628 |
|
|
|
9,679 |
|
|
|
9,322 |
|
|
|
9,065 |
|
Operating
fleet at period-end
|
|
|
115 |
|
|
|
110 |
|
|
|
115 |
|
|
|
114 |
|
|
|
110 |
|
Horizon
Air Combined Operating Data (c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
6,759 |
|
|
|
7,390 |
|
|
|
7,552 |
|
|
|
6,860 |
|
|
|
6,481 |
|
Revenue
passenger miles (RPM) (000,000)
|
|
|
2,408 |
|
|
|
2,635 |
|
|
|
2,918 |
|
|
|
2,691 |
|
|
|
2,475 |
|
Available
seat miles (ASM) (000,000)
|
|
|
3,292 |
|
|
|
3,617 |
|
|
|
3,978 |
|
|
|
3,632 |
|
|
|
3,400 |
|
Revenue
passenger load factor
|
|
|
73.1 |
% |
|
|
72.9 |
% |
|
|
73.4 |
% |
|
|
74.1 |
% |
|
|
72.8 |
% |
Yield
per passenger mile
|
|
|
26.73 |
¢ |
|
|
27.43 |
¢ |
|
|
24.30 |
¢ |
|
|
23.53 |
¢ |
|
|
21.98 |
¢ |
Operating
revenues per ASM
|
|
|
19.88 |
¢ |
|
|
20.29 |
¢ |
|
|
18.06 |
¢ |
|
|
17.73 |
¢ |
|
|
16.36 |
¢ |
Operating
expenses per ASM
|
|
|
18.64 |
¢ |
|
|
21.42 |
¢ |
|
|
18.07 |
¢ |
|
|
17.41 |
¢ |
|
|
15.50 |
¢ |
Operating
expenses per ASM, excluding fuel and noted items (d)
|
|
|
15.33 |
¢ |
|
|
14.52 |
¢ |
|
|
14.58 |
¢ |
|
|
14.20 |
¢ |
|
|
13.36 |
¢ |
Average
number of full-time equivalent employees
|
|
|
3,308 |
|
|
|
3,699 |
|
|
|
3,897 |
|
|
|
3,611 |
|
|
|
3,456 |
|
Operating
fleet at period-end
|
|
|
58 |
|
|
|
59 |
|
|
|
70 |
|
|
|
69 |
|
|
|
65 |
|
(a) Includes
capitalized interest of $7.6 million, $23.2 million, $27.8 million, $24.7
million, $8.9 million, $1.7 million, $2.3 million, $2.7 million, $10.6 million,
$17.7 million, and $12.6 million for 2009, 2008, 2007, 2006, 2005, 2004, 2003,
2002, 2001, 2000, and 1999, respectively.
(b) For
2008, 2006, 2004, 2002, 2001, and 2000 earnings are inadequate to cover fixed
charges by $236.4 million, $115.4 million, $17.4 million, $99.5 million, $69.1
million, and $44.6 million, respectively. See Exhibit 12.1 to
this Form 10-K.
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA - (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
CONSOLIDATED OPERATING RESULTS
(audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$ |
2,723.8 |
|
|
$ |
2,444.8 |
|
|
$ |
2,224.1 |
|
|
$ |
2,152.8 |
|
|
$ |
2,194.0 |
|
|
$ |
2,091.5 |
|
Operating
Expenses
|
|
|
2,718.1 |
|
|
|
2,455.9 |
|
|
|
2,317.3 |
|
|
|
2,279.1 |
|
|
|
2,227.1 |
|
|
|
1,901.7 |
|
Operating
Income (Loss)
|
|
|
5.7 |
|
|
|
(17.511.1 |
) |
|
|
(93.2 |
) |
|
|
(126.3 |
) |
|
|
(33.1 |
) |
|
|
189.8 |
|
Nonoperating
income (expense), net of interest capitalized (a)
|
|
|
(26.3 |
) |
|
|
46.540.1 |
|
|
|
(8.6 |
) |
|
|
62.8 |
|
|
|
6.2 |
|
|
|
23.2 |
|
Income
(loss) before income tax and accounting change
|
|
|
(20.6 |
) |
|
|
29.0 |
|
|
|
(101.8 |
) |
|
|
(63.5 |
) |
|
|
(26.9 |
) |
|
|
213.0 |
|
Income
(loss) before accounting change
|
|
|
(15.3 |
) |
|
|
13.5 |
|
|
|
(67.2 |
) |
|
|
(43.4 |
) |
|
|
(20.4 |
) |
|
|
129.4 |
|
Net
Income (Loss)
|
|
$ |
(15.3 |
) |
|
$ |
13.5 |
|
|
$ |
(118.6 |
) |
|
$ |
(43.4 |
) |
|
$ |
(67.2 |
) |
|
$ |
129.4 |
|
Average
basic shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
26.859 |
|
|
|
26.648 |
|
|
|
26.546 |
|
|
|
26.499 |
|
|
|
26.440 |
|
|
|
26.372 |
|
Basic
earnings (loss) per share before accounting change
|
|
|
26.859 |
|
|
|
26.730 |
|
|
|
26.546 |
|
|
|
26.499 |
|
|
|
26.440 |
|
|
|
26.507 |
|
Basic
earnings (loss) per share
|
|
$ |
(0.57 |
) |
|
$ |
0.51 |
|
|
$ |
(2.53 |
) |
|
$ |
(1.64 |
) |
|
$ |
(0.77 |
) |
|
$ |
4.91 |
|
Diluted
earnings (loss) per share before accounting change
|
|
|
(0.57 |
) |
|
|
0.51 |
|
|
|
(4.47 |
) |
|
|
(1.64 |
) |
|
|
(2.54 |
) |
|
|
4.91 |
|
Diluted
earnings (loss) per share
|
|
|
(0.57 |
) |
|
|
0.51 |
|
|
|
(2.53 |
) |
|
|
(1.64 |
) |
|
|
(0.77 |
) |
|
|
4.88 |
|
CONSOLIDATED FINANCIAL POSITION
(audited)
|
|
|
(0.57 |
) |
|
|
0.51 |
|
|
|
(4.47 |
) |
|
|
(1.64 |
) |
|
|
(2.54 |
) |
|
|
4.88 |
|
At
End of Period (in millions, except ratio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,335.0 |
|
|
$ |
3,259.2 |
|
|
$ |
2,880.7 |
|
|
$ |
2,950.5 |
|
|
$ |
2,528.1 |
|
|
$ |
2,196.0 |
|
Long-term
debt and capital lease obligations, net of current portion
|
|
|
989.6 |
|
|
|
906.9 |
|
|
|
856.7 |
|
|
|
852.2 |
|
|
|
509.2 |
|
|
|
337.0 |
|
Shareholders'
equity
|
|
|
664.8 |
|
|
|
674.2 |
|
|
|
655.7 |
|
|
|
851.3 |
|
|
|
895.1 |
|
|
|
959.2 |
|
Ratio
of earnings to fixed charges (b) (unaudited)
|
|
|
0.89 |
|
|
|
1.22 |
|
|
|
0.28 |
|
|
|
0.48 |
|
|
|
0.66 |
|
|
|
3.07 |
|
STATISTICS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
Airlines Mainline Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
16,295 |
|
|
|
15,047 |
|
|
|
14,154 |
|
|
|
13,668 |
|
|
|
13,525 |
|
|
|
13,620 |
|
Revenue
passenger miles (RPM) (000,000)
|
|
|
16,231 |
|
|
|
14,554 |
|
|
|
13,186 |
|
|
|
12,249 |
|
|
|
11,986 |
|
|
|
11,777 |
|
Available
seat miles (ASM) (000,000)
|
|
|
22,276 |
|
|
|
20,804 |
|
|
|
19,360 |
|
|
|
17,919 |
|
|
|
17,315 |
|
|
|
17,341 |
|
Revenue
passenger load factor
|
|
|
72.9 |
% |
|
|
70.0 |
% |
|
|
68.1 |
% |
|
|
68.4 |
% |
|
|
69.2 |
% |
|
|
67.9 |
% |
Yield
per passenger mile
|
|
|
12.47 |
¢ |
|
|
12.65 |
¢ |
|
|
12.65 |
¢ |
|
|
13.12 |
¢ |
|
|
13.56 |
¢ |
|
|
12.86 |
¢ |
Operating
revenues per ASM
|
|
|
10.02 |
¢ |
|
|
9.74 |
¢ |
|
|
9.47 |
¢ |
|
|
9.84 |
¢ |
|
|
10.20 |
¢ |
|
|
9.75 |
¢ |
Operating
expenses per ASM
|
|
|
10.07 |
¢ |
|
|
9.81 |
¢ |
|
|
9.87 |
¢ |
|
|
10.24 |
¢ |
|
|
10.35 |
¢ |
|
|
9.81 |
¢ |
Operating
expenses per ASM, excluding fuel and noted items (d)
|
|
|
7.92 |
¢ |
|
|
8.34 |
¢ |
|
|
8.52 |
¢ |
|
|
8.73 |
¢ |
|
|
8.54 |
¢ |
|
|
8.63 |
¢ |
Average
number of full-time equivalent employees
|
|
|
9,968 |
|
|
|
10,040 |
|
|
|
10,142 |
|
|
|
10,115 |
|
|
|
9,611 |
|
|
|
9,183 |
|
Operating
fleet at period-end
|
|
|
108 |
|
|
|
109 |
|
|
|
102 |
|
|
|
101 |
|
|
|
95 |
|
|
|
89 |
|
Horizon
Air Combined Operating Data (c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
5,930 |
|
|
|
4,934 |
|
|
|
4,815 |
|
|
|
4,668 |
|
|
|
5,044 |
|
|
|
4,984 |
|
Revenue
passenger miles (RPM) (000,000)
|
|
|
2,155 |
|
|
|
1,640 |
|
|
|
1,514 |
|
|
|
1,350 |
|
|
|
1,428 |
|
|
|
1,379 |
|
Available
seat miles (ASM) (000,000)
|
|
|
3,107 |
|
|
|
2,569 |
|
|
|
2,428 |
|
|
|
2,148 |
|
|
|
2,299 |
|
|
|
2,194 |
|
Revenue
passenger load factor
|
|
|
69.3 |
% |
|
|
63.9 |
% |
|
|
62.4 |
% |
|
|
62.8 |
% |
|
|
62.1 |
% |
|
|
62.9 |
% |
Yield
per passenger mile
|
|
|
22.61 |
¢ |
|
|
26.96 |
¢ |
|
|
26.02 |
¢ |
|
|
28.15 |
¢ |
|
|
29.82 |
¢ |
|
|
28.77 |
¢ |
Operating
revenues per ASM
|
|
|
16.20 |
¢ |
|
|
18.06 |
¢ |
|
|
17.29 |
¢ |
|
|
19.02 |
¢ |
|
|
19.27 |
¢ |
|
|
18.96 |
¢ |
Operating
expenses per ASM
|
|
|
15.57 |
¢ |
|
|
17.79 |
¢ |
|
|
17.87 |
¢ |
|
|
21.02 |
¢ |
|
|
19.53 |
¢ |
|
|
17.74 |
¢ |
Operating
expenses per ASM, excluding fuel and noted items (d)
|
|
|
13.58 |
¢ |
|
|
15.80 |
¢ |
|
|
15.99 |
¢ |
|
|
18.48 |
¢ |
|
|
16.48 |
¢ |
|
|
15.79 |
¢ |
Average
number of full-time equivalent employees
|
|
|
3,423 |
|
|
|
3,361 |
|
|
|
3,476 |
|
|
|
3,764 |
|
|
|
3,795 |
|
|
|
3,603 |
|
Operating
fleet at period-end
|
|
|
65 |
|
|
|
62 |
|
|
|
63 |
|
|
|
60 |
|
|
|
62 |
|
|
|
62 |
|
(c)
Includes Horizon services operated as Frontier JetExpress in 2004 through 2007
and flights operated under the Capacity Purchase Agreement with Alaska in 2007
through 2009.
(d) See
reconciliation of this measure to the most directly related GAAP measure in the
"Results of Operations" section for both Alaska and Horizon.
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand the
Company, our operations and our present business environment. MD&A is
provided as a supplement to – and should be read in conjunction with – our
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 Part I,
“Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes
the following sections:
|
•
|
Year in
Review—highlights from 2009 outlining some of the major events that
happened during the year 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 years presented in our consolidated
financial statements. We believe this analysis will help the reader better
understand our consolidated statements of operations. Financial and
statistical data for Alaska and Horizon are also included here. This
section includes forward-looking statements regarding our view of
2010.
|
|
•
|
Critical Accounting
Estimates—a discussion of our accounting estimates that involve
significant judgment and
uncertainties.
|
|
•
|
Liquidity and Capital
Resources—an analysis of cash flows, sources and uses of cash,
contractual obligations, commitments and off-balance sheet arrangements,
an overview of financial position and the impact of inflation and changing
prices.
|
Our 2009
consolidated pretax income was $202.9 million compared to a pretax loss of
$213.2 million in 2008. The $416.1 million improvement in our pretax earnings
was primarily due to the $702.4 million decline in aircraft fuel costs and other
non-fuel operating costs, partially offset by a $262.8 million decline in
operating revenues. The decline in fuel cost was substantially driven
by the 43% reduction in the raw cost of fuel per gallon. The 7.2%
decline in operating revenues can be attributed to the following:
|
•
|
a
7.9% decline in passenger revenue because of demand weakness stemming from
the economic recession; and
|
|
•
|
a
one-time benefit of $42.3 million recorded in 2008 associated with a
change in our Mileage Plan terms.
|
These
declines were offset by:
|
•
|
our
new $15 first bag service charge, which went into effect on July 7,
2009. In 2009, the fee generated $47.4 million of incremental
revenue.
|
|
•
|
a
$39.7 million improvement in Mileage Plan commission revenues included in
“Other-net.”
|
See
“Results of Operations” below for further discussion of changes in revenues and
operating expenses for both Alaska and Horizon.
Accomplishments
and Highlights
Accomplishments
and highlights from 2009 include:
|
•
|
Alaska
and Horizon both improved their operational performance again in 2009 as
measured by on-time arrivals and completion rate as reported to the
Department of Transportation (DOT). At Alaska, we led the ten largest
carriers in on-time performance for eight months of the
year. If Horizon were a DOT reporting entity, they would have
led reporting mainland US carriers for the year with their 86.1% on-time
performance in 2009.
|
|
•
|
For
the second year in a row, Alaska Airlines ranked “Highest in Customer
Satisfaction among Traditional Network Carriers” in 2009 by J.D. Power and
Associates.
|
|
•
|
Alaska
won the 2008 “Program of the Year” Freddie award for our Mileage Plan
program in 2009. This is the fifth time that we have won this
highest award and the second year in a row. We also won top
honors for “Best Web Site,” “Best Elite-Level Program,” and “Best Member
Communications.”
|
|
•
|
During
the year, we reached agreements with several of our labor groups that
provide for improved productivity and a common gain-sharing
formula. See “Update on Labor Negotiations” below for further
discussion.
|
|
•
|
For
the year, our employees earned $76 million in incentive pay for meeting
certain operational and financial goals. We also contributed nearly $150
million to Alaska’s defined benefit pension
plans.
|
Update
on Labor Negotiations
Both
Alaska and Horizon have had success recently with new bargaining agreements or
contract extensions with a number of represented employees. All of
the new agreements or extensions ratified in 2009 include participation by the
represented employees in Air Group’s Performance-Based Pay (PBP) incentive plan
as approved by the Compensation Committee of the Board of
Directors. PBP is described in Note 8 to the consolidated financial
statements. Our ultimate goal is to include all Air Group employees in PBP in
order to have common goals and targets that everyone is working together to
achieve.
New Alaska Pilot
Contract
On May
19, 2009, Alaska’s pilots, represented by the Air Line Pilots Association,
ratified a new four-year contract. This negotiated agreement replaces
the contract that had been in place since May 1, 2005. The terms of
the 2005 contract were the result of an arbitrator’s decision and included
immediate wage reductions that averaged approximately 26% across the pilot
group, work rule changes, and higher employee health care
contributions.
The
significant terms of the new contract are as follows:
•
|
Average
pilot wages increased approximately 14% effective April 1,
2009. The contract also provides for step increases of 1.5% on
the first two anniversary dates of the contract and 1.8% on the third
anniversary.
|
•
|
The
defined-benefit pension plan for pilots is now closed to new
entrants. Newly hired pilots will participate in a
defined-contribution plan that includes a contribution by Alaska equal to
13.5% of eligible wages. Incumbents had the option of (1)
remaining in the defined-benefit pension plan, (2) moving to a new blended
option with lower service credit under the defined benefit plan and higher
401(k) contribution or (3) voluntarily freezing service credit in the
existing defined benefit plan in exchange for a higher 401(k)
contribution.
|
•
|
Upon
retirement, pilots are now allowed to receive a cash payment of an amount
equivalent to 25% of their accrued sick leave balance multiplied by their
hourly rate.
|
•
|
The
new contract provides for better productivity and flexibility. We
expect to realize savings from these productivity enhancements when we
resume capacity growth.
|
Pilots
received a one-time bonus of $20.3 million in the aggregate following
ratification of the contract. The transition expense associated with
establishing the sick-leave payout program described above was $15.5
million. These items have been combined and reported in 2009 as “New
pilot contract transition costs” in the consolidated statements of
operations.
Contract Extensions at
Alaska
In March
2009, Alaska’s flight attendants, represented by the AFA, ratified a two-year
contract extension. The contract will become amendable in April
2012. As part of the contract, flight attendants will receive a 1.5%
pay increase on May 1, 2010 and May 1, 2011 and will participate in
PBP. The flight attendants received a bonus upon ratification of the
contract totaling $2.0 million in the aggregate.
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 1.5% pay scale increases in October
2009 and 2010. Technicians now also participate in PBP. The technicians received
a bonus upon ratification of the contract totaling $1.3 million in the
aggregate.
In
December 2009, Alaska’s ramp service and stores agents, represented by the IAM,
ratified a two-year extension of their collective bargaining agreement, which
will now become amendable on July 19, 2012. This agreement includes
participation in PBP, a 1.5% pay increase in June 2010 and 2011, and a signing
bonus of approximately $0.5 million in the aggregate.
Alaska’s
clerical, office and passenger service employees (COPS), also represented by the
IAM, rejected a two-year extension proposal nearly identical to the terms of the
proposal ratified by the ramp service employees and stores agents. As
a result, COPS employees are the only remaining work group at Alaska, besides
station personnel in Mexico, that participate in a profit-sharing plan other
than PBP.
Horizon Labor
Contracts
Horizon’s
dispatchers, represented by the TWU, ratified a new contract in July 2009,
expiring in October 2010. This contract includes a transition from
the former profit-sharing plan to PBP.
In
December 2009, Horizon’s flight attendants, represented by the AFA, ratified a
new two-year contract. The agreement includes participation in PBP in
2009 and beyond, at least a 3% pay increase over the life of the contract, and a
signing bonus of $0.3 million in the aggregate.
Historically,
only a small percentage of non-represented employees at Horizon participated in
the PBP plan. To better align the incentive plans for this group with
other Horizon and Alaska employees, Horizon has also added all remaining
non-represented employees (approximately 1,400 people) to the PBP plan in
2009.
Horizon
is currently in negotiations with its pilots and aircraft
technicians. Horizon and the IBT recently filed separate requests for
assistance for the NMB in the ongoing pilot contract
negotiations. Horizon’s aircraft technicians voted in 2009 to be
represented by the IBT. They were previously represented by the
Aircraft Mechanics Fraternal Association. Horizon’s pilots and
mechanics remain in a profit-sharing plan program other than PBP.
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. These aircraft were disposed of in the last six months of
2009 and the related lease agreements were terminated. We recorded
charges of $8.8 million in 2009 associated with removing these aircraft from
operation.
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 have successfully deferred 2010
and 2011 Q400 deliveries into future years to better manage our fleet size and
capacity plans.
New
Mileage Plan Affinity Card Agreement
In June
2009, we revised our Mileage Plan affinity credit card agreement with Bank of
America. This revised agreement enhances the economics of our Mileage
Plan program and provides for, among other things, an increase in the rate at
which we sell miles to the bank. This revised agreement was effective
January 1, 2009 and expires on December 31, 2014.
First
Bag Service Charge
In 2009,
we joined nearly all major domestic carriers in charging for a first checked
bag. The $15 service charge began July 7, 2009. This fee
does not apply to our MVP or MVP Gold Mileage Plan members, for those traveling
solely with the state of Alaska, or for certain other
passengers. This service charge generated $47.4 million of
incremental revenue in the last six months of 2009.
New
Baggage Service Guarantee
Concurrent
with the first bag service charge, we introduced a guarantee to compensate
passengers if their bags are not at the baggage claim within 25 minutes after
their flight parks at the gate. Passengers have the choice of 2,500
Mileage Plan miles or a $25 voucher that can be used on a future
flight. This guarantee is for all passengers with luggage, including
those not subject to the bag service charge. We believe that we are
the only airline that offers this guarantee to customers. To date, the cost of
providing this guarantee has been minimal as our baggage performance has been
excellent.
New
Markets
In 2009,
Alaska added several new cities and non-stop routes to our overall
network. Those new routes are:
New
Non-Stop Routes
|
Frequency
|
Start
Date
|
Between
Bellingham, Wash. and Las Vegas
|
4 x
weekly
|
6/25/2009
|
Between
Portland, Ore. and Maui
|
Daily
|
7/3/2009
|
Between
Seattle and Austin, Tex.
|
Daily
|
8/3/2009
|
Between
San Jose and Austin
|
Daily
|
9/2/2009
|
Between
Seattle and Houston
|
Daily
|
9/23/2009
|
Between
Seattle and Atlanta
|
Daily
|
10/23/2009
|
Between
Oakland, Calif. and Maui
|
4 x
weekly
|
11/9/2009
|
Between
Oakland and Kona
|
3 x
weekly
|
11/10/2009
|
Service
between Portland and Chicago
|
Daily
|
11/16/2009
|
Horizon
also announced expanded seasonal service to Mammoth Lakes, Calif. from San Jose,
Reno, Seattle and Portland. The flights will operate from December
17, 2009 to April 11, 2010.
Stock
Repurchase
In June
2009, our Board of Directors authorized the Company to repurchase up to $50
million of our common stock, at which time the stock price was
$15.60. Through December 31, 2009, we had repurchased 1,324,578
shares of common stock for approximately $23.8 million under this program. This
program expires in June 2010.
Outlook
Our
primary focus every year is to run safe, compliant and reliable operations at
our airlines. In addition to our primary objective, in 2010 our key
initiative is to maintain our focus on optimizing revenue. Our
specific focus will be on the way we merchandise fares and ancillary products
and services, as well as broader employee involvement in our marketing
efforts. In addition to the focus on revenue, both of our airlines
have initiatives under way designed to reduce costs. Alaska is focused on
improving productivity and controlling overhead. Horizon aims to reduce
maintenance costs and pilot labor costs.
Our
fourth quarter 2009 revenue performance marked the first quarter-over-quarter
improvement in the top line in 2009, providing a solid outlook as we move into
2010.
For the
first quarter, our advance booked load factors are up significantly at both
Alaska and Horizon, although we expect the higher load factors, which were
driven by deep price discounting, will be offset by a decline in yields, resulting
in only modest unit revenue increases in the first quarter.
Our
consolidated net income for 2009 was $121.6 million, or $3.36 per diluted share,
compared to a net loss of $135.9 million, or $3.74 per share, in
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 2009, we recognized net mark-to-market gains of
$88.8 million ($55.2 million after tax, or $1.53 per share), compared to
net losses of $142.3 million ($89.2 million after tax, or $2.46 per share)
in 2008.
|
|
•
|
2009 included the new pilot contract transition
costs of $35.8 million ($22.3 million after tax, or $0.62 per
share).
|
|
•
|
2008 included fleet transition costs of $61.0
million ($38.2 million after tax, or $1.05 per share) related to the
ongoing transitions out of the MD-80 and CRJ-700
fleets.
|
|
•
|
2008 included realized losses on the early
termination of fuel-hedge contracts originally scheduled to settle in 2009
and 2010 of $50 million ($31.3 million after tax, or $0.86 per
share).
|
|
•
|
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.
|
|
•
|
2008 included restructuring charges of $12.9
million ($8.1 million after tax, or $0.22 per share) related to the
reduction in work force at
Alaska.
|
ADJUSTED
(NON-GAAP) RESULTS AND PER-SHARE
AMOUNTS
We
believe disclosure of earnings excluding the impact of these individual charges
is useful information to investors because:
|
•
|
It
is consistent with how we present information in our quarterly earnings
press releases;
|
|
•
|
We
believe it is the basis by which we are evaluated by industry
analysts;
|
|
•
|
Our
results excluding these items are most often used in internal management
and board reporting and
decision-making;
|
|
•
|
Our
results excluding these adjustments serve as the basis for our various
employee incentive plans, thus the information allows investors to better
understand the changes in variable incentive pay expense in our
consolidated statements of operations;
and
|
|
•
|
It
is useful to monitor performance without these items as it improves a
reader’s ability to compare our results to those of other
airlines.
|
Although
we are presenting these non-GAAP amounts for the reasons above, investors and
other readers should not necessarily conclude that these amounts are
non-recurring, infrequent, or unusual in nature.
Excluding
the items noted above, and as shown in the following table, our consolidated net
income for 2009 was $88.7 million, or $2.45 per diluted share, compared to $4.4
million, or $0.12 per diluted share, in 2008.
|
|
Years Ended December 31
|
|
|
2009
|
|
|
2008
|
(in
millions except per share amounts)
|
|
Dollars
|
|
|
Diluted
EPS
|
|
|
Dollars
|
|
|
Diluted
EPS
|
Net
income and diluted EPS, excluding noted items
|
|
$ |
88.7 |
|
|
$ |
2.45 |
|
|
$ |
4.4 |
|
|
$ |
0.12 |
|
Change
in Mileage Plan terms, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
26.5 |
|
|
|
0.73 |
|
New
pilot contract transition costs, net of tax
|
|
|
(22.3 |
) |
|
|
(0.62 |
) |
|
|
-- |
|
|
|
-- |
|
Restructuring
charges, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
(8.1 |
) |
|
|
(0.22 |
) |
Fleet
transition costs – MD-80, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
(29.8 |
) |
|
|
(0.82 |
) |
Fleet
transition costs – CRJ-700, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
(8.4 |
) |
|
|
(0.23 |
) |
Mark-to-market
fuel hedge adjustments, net of tax
|
|
|
55.2 |
|
|
|
1.53 |
|
|
|
(89.2 |
) |
|
|
(2.46 |
) |
Realized
losses on hedge portfolio restructuring, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
(31.3 |
) |
|
|
(0.86 |
) |
Net
income and diluted EPS as reported
|
|
$ |
121.6 |
|
|
$ |
3.36 |
|
|
$ |
(135.9 |
) |
|
$ |
(3.74 |
) |
INDIVIDUAL
SUBSIDIARY RESULTS
Our
consolidated results are primarily driven by the results of our two operating
carriers. Alaska and Horizon reported pretax income of $183.8 million and $22.8
million, respectively, in 2009. Financial and statistical data and an in -depth
discussion of the results of Alaska and Horizon are on the following
pages. For a reconciliation of these subsidiary results to the
consolidated results of Air Group, see Note 13 in the consolidated financial
statements.
|
|
Three Months Ended December
31
|
|
|
Year Ended December 31
|
|
Financial
Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
594.5 |
|
|
$ |
602.5 |
|
|
|
(1.3 |
) |
|
$ |
2,438.8 |
|
|
$ |
2,643.7 |
|
|
|
(7.8 |
) |
|
$ |
2,547.2 |
|
|
|
3.8 |
|
Freight
and mail
|
|
|
22.5 |
|
|
|
22.2 |
|
|
|
1.4 |
|
|
|
91.5 |
|
|
|
99.3 |
|
|
|
(7.9 |
) |
|
|
94.2 |
|
|
|
5.4 |
|
Other
- net
|
|
|
50.8 |
|
|
|
34.0 |
|
|
|
49.4 |
|
|
|
187.3 |
|
|
|
135.2 |
|
|
|
38.5 |
|
|
|
147.1 |
|
|
|
(8.1 |
) |
Change
in Mileage Plan terms
|
|
|
- |
|
|
|
- |
|
|
NM
|
|
|
|
- |
|
|
|
42.3 |
|
|
NM
|
|
|
|
- |
|
|
NM
|
|
Total
mainline operating revenues
|
|
|
667.8 |
|
|
|
658.7 |
|
|
|
1.4 |
|
|
|
2,717.6 |
|
|
|
2,920.5 |
|
|
|
(6.9 |
) |
|
|
2,788.5 |
|
|
|
4.7 |
|
Passenger
- purchased capacity
|
|
|
77.0 |
|
|
|
66.9 |
|
|
|
15.1 |
|
|
|
288.4 |
|
|
|
300.8 |
|
|
|
(4.1 |
) |
|
|
281.4 |
|
|
|
6.9 |
|
Total
Operating Revenues
|
|
|
744.8 |
|
|
|
725.6 |
|
|
|
2.6 |
|
|
|
3,006.0 |
|
|
|
3,221.3 |
|
|
|
(6.7 |
) |
|
|
3,069.9 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
197.7 |
|
|
|
183.8 |
|
|
|
7.6 |
|
|
|
792.6 |
|
|
|
742.7 |
|
|
|
6.7 |
|
|
|
753.9 |
|
|
|
(1.5 |
) |
Variable
incentive pay
|
|
|
17.6 |
|
|
|
5.0 |
|
|
|
252.0 |
|
|
|
61.6 |
|
|
|
15.8 |
|
|
|
289.9 |
|
|
|
13.5 |
|
|
|
17.0 |
|
Aircraft
fuel, including hedging gains and losses
|
|
|
143.1 |
|
|
|
298.4 |
|
|
|
(52.0 |
) |
|
|
549.0 |
|
|
|
1,162.4 |
|
|
|
(52.8 |
) |
|
|
737.5 |
|
|
|
57.6 |
|
Aircraft
maintenance
|
|
|
40.5 |
|
|
|
38.5 |
|
|
|
5.2 |
|
|
|
169.9 |
|
|
|
150.6 |
|
|
|
12.8 |
|
|
|
149.8 |
|
|
|
0.5 |
|
Aircraft
rent
|
|
|
27.2 |
|
|
|
23.8 |
|
|
|
14.3 |
|
|
|
109.0 |
|
|
|
106.2 |
|
|
|
2.6 |
|
|
|
112.8 |
|
|
|
(5.9 |
) |
Landing
fees and other rentals
|
|
|
42.4 |
|
|
|
40.8 |
|
|
|
3.9 |
|
|
|
166.8 |
|
|
|
167.7 |
|
|
|
(0.5 |
) |
|
|
170.1 |
|
|
|
(1.4 |
) |
Contracted
services
|
|
|
30.3 |
|
|
|
29.7 |
|
|
|
2.0 |
|
|
|
118.9 |
|
|
|
130.2 |
|
|
|
(8.7 |
) |
|
|
124.1 |
|
|
|
4.9 |
|
Selling
expenses
|
|
|
27.9 |
|
|
|
20.4 |
|
|
|
36.8 |
|
|
|
104.7 |
|
|
|
116.0 |
|
|
|
(9.7 |
) |
|
|
129.3 |
|
|
|
(10.3 |
) |
Depreciation
and amortization
|
|
|
45.9 |
|
|
|
42.7 |
|
|
|
7.5 |
|
|
|
178.5 |
|
|
|
165.9 |
|
|
|
7.6 |
|
|
|
142.3 |
|
|
|
16.6 |
|
Food
and beverage service
|
|
|
12.8 |
|
|
|
11.2 |
|
|
|
14.3 |
|
|
|
47.7 |
|
|
|
48.3 |
|
|
|
(1.2 |
) |
|
|
46.9 |
|
|
|
3.0 |
|
Other
|
|
|
41.9 |
|
|
|
40.1 |
|
|
|
4.5 |
|
|
|
161.2 |
|
|
|
170.3 |
|
|
|
(5.3 |
) |
|
|
173.1 |
|
|
|
(1.6 |
) |
New
pilot contract transition costs
|
|
|
- |
|
|
|
- |
|
|
NM
|
|
|
|
35.8 |
|
|
|
- |
|
|
NM
|
|
|
|
- |
|
|
NM
|
|
Restructuring
charges
|
|
|
- |
|
|
|
9.2 |
|
|
NM
|
|
|
|
- |
|
|
|
12.9 |
|
|
NM
|
|
|
|
- |
|
|
NM
|
|
Fleet
transition costs - MD-80
|
|
|
- |
|
|
|
- |
|
|
NM
|
|
|
|
- |
|
|
|
47.5 |
|
|
NM
|
|
|
|
- |
|
|
NM
|
|
Total
mainline operating expenses
|
|
|
627.3 |
|
|
|
743.6 |
|
|
|
(15.6 |
) |
|
|
2,495.7 |
|
|
|
3,036.5 |
|
|
|
(17.8 |
) |
|
|
2,553.3 |
|
|
|
18.9 |
|
Purchased
capacity costs
|
|
|
75.2 |
|
|
|
66.9 |
|
|
|
12.4 |
|
|
|
281.5 |
|
|
|
313.7 |
|
|
|
(10.3 |
) |
|
|
302.8 |
|
|
|
3.6 |
|
Total
Operating Expenses
|
|
|
702.5 |
|
|
|
810.5 |
|
|
|
(13.3 |
) |
|
|
2,777.2 |
|
|
|
3,350.2 |
|
|
|
(17.1 |
) |
|
|
2,856.1 |
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
42.3 |
|
|
|
(84.9 |
) |
|
NM
|
|
|
|
228.8 |
|
|
|
(128.9 |
) |
|
NM
|
|
|
|
213.8 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
9.4 |
|
|
|
13.1 |
|
|
|
|
|
|
|
38.6 |
|
|
|
51.3 |
|
|
|
|
|
|
|
64.8 |
|
|
|
|
|
Interest
expense
|
|
|
(20.6 |
) |
|
|
(25.0 |
) |
|
|
|
|
|
|
(88.1 |
) |
|
|
(92.5 |
) |
|
|
|
|
|
|
(86.2 |
) |
|
|
|
|
Interest
capitalized
|
|
|
1.6 |
|
|
|
4.1 |
|
|
|
|
|
|
|
7.3 |
|
|
|
20.2 |
|
|
|
|
|
|
|
25.7 |
|
|
|
|
|
Other
- net
|
|
|
2.5 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
(2.8 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
(7.1 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
(45.0 |
) |
|
|
(24.4 |
) |
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Tax
|
|
$ |
35.2 |
|
|
$ |
(93.4 |
) |
|
NM
|
|
|
$ |
183.8 |
|
|
$ |
(153.3 |
) |
|
NM
|
|
|
$ |
215.0 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
3,765 |
|
|
|
3,772 |
|
|
|
(0.2 |
) |
|
|
15,561 |
|
|
|
16,809 |
|
|
|
(7.4 |
) |
|
|
17,558 |
|
|
|
(4.3 |
) |
RPMs
(000,000) "traffic"
|
|
|
4,550 |
|
|
|
4,302 |
|
|
|
5.8 |
|
|
|
18,362 |
|
|
|
18,712 |
|
|
|
(1.9 |
) |
|
|
18,451 |
|
|
|
1.4 |
|
ASMs
(000,000) "capacity"
|
|
|
5,675 |
|
|
|
5,590 |
|
|
|
1.5 |
|
|
|
23,144 |
|
|
|
24,218 |
|
|
|
(4.4 |
) |
|
|
24,208 |
|
|
|
0.0 |
|
Passenger
load factor
|
|
|
80.2 |
% |
|
|
77.0 |
% |
|
3.2
|
pts |
|
|
79.3 |
% |
|
|
77.3 |
% |
|
2.0
|
pts |
|
|
76.2 |
% |
|
1.1
|
pts |
Yield
per passenger mile
|
|
|
13.07 |
¢ |
|
|
14.01 |
¢ |
|
|
(6.7 |
) |
|
|
13.28 |
¢ |
|
|
14.13 |
¢ |
|
|
(6.0 |
) |
|
|
13.81 |
¢ |
|
|
2.3 |
|
Operating
revenues per ASM "RASM"
|
|
|
11.77 |
¢ |
|
|
11.78 |
¢ |
|
|
(0.1 |
) |
|
|
11.74 |
¢ |
|
|
12.06 |
¢ |
|
|
(2.7 |
) |
|
|
11.52 |
¢ |
|
|
4.7 |
|
Change
in Mileage Plan terms per ASM
|
|
|
- |
|
|
|
- |
|
|
NM
|
|
|
|
- |
|
|
|
0.17 |
¢ |
|
NM
|
|
|
|
- |
|
|
NM
|
|
Passenger
revenue per ASM “PRASM”
|
|
|
10.48 |
¢ |
|
|
10.78 |
¢ |
|
|
(2.8 |
) |
|
|
10.54 |
¢ |
|
|
10.92 |
¢ |
|
|
(3.5 |
) |
|
|
10.52 |
¢ |
|
|
3.7 |
|
Operating
expenses per ASM
|
|
|
11.05 |
¢ |
|
|
13.30 |
¢ |
|
|
(16.9 |
) |
|
|
10.78 |
¢ |
|
|
12.54 |
¢ |
|
|
(14.0 |
) |
|
|
10.55 |
¢ |
|
|
18.9 |
|
Operating
expenses per ASM, excluding fuel, new pilot contract transition costs,
restructuring charges and fleet transition costs
|
|
|
8.53 |
¢ |
|
|
7.80 |
¢ |
|
|
9.4 |
|
|
|
8.26 |
¢ |
|
|
7.49 |
¢ |
|
|
10.2 |
|
|
|
7.50 |
¢ |
|
|
(0.1 |
) |
Aircraft
fuel cost per gallon
|
|
$ |
1.91 |
|
|
$ |
3.95 |
|
|
|
(51.6 |
) |
|
$ |
1.81 |
|
|
$ |
3.48 |
|
|
|
(48.0 |
) |
|
$ |
2.08 |
|
|
|
67.3 |
|
Economic
fuel cost per gallon
|
|
$ |
2.26 |
|
|
$ |
2.52 |
|
|
|
(10.3 |
) |
|
$ |
2.05 |
|
|
$ |
3.00 |
|
|
|
(31.7 |
) |
|
$ |
2.20 |
|
|
|
36.4 |
|
Fuel
gallons (000,000)
|
|
|
75.0 |
|
|
|
75.5 |
|
|
|
(0.7 |
) |
|
|
304.9 |
|
|
|
333.8 |
|
|
|
(8.7 |
) |
|
|
354.3 |
|
|
|
(5.8 |
) |
Average
number of full-time equivalent employees
|
|
|
8,701 |
|
|
|
9,156 |
|
|
|
(5.0 |
) |
|
|
8,915 |
|
|
|
9,628 |
|
|
|
(7.4 |
) |
|
|
9,679 |
|
|
|
(0.5 |
) |
Aircraft
utilization (blk hrs/day)
|
|
|
9.3 |
|
|
|
10.0 |
|
|
|
(7.0 |
) |
|
|
9.8 |
|
|
|
10.6 |
|
|
|
(7.5 |
) |
|
|
10.9 |
|
|
|
(2.8 |
) |
Average
aircraft stage length (miles)
|
|
|
1,058 |
|
|
|
995 |
|
|
|
6.3 |
|
|
|
1,034 |
|
|
|
979 |
|
|
|
5.6 |
|
|
|
926 |
|
|
|
5.7 |
|
Operating
fleet at period-end
|
|
|
115 |
|
|
|
110 |
|
|
|
5
a/c |
|
|
|
115 |
|
|
|
110 |
|
|
|
5
a/c |
|
|
|
115 |
|
|
|
(5 |
)
a/c |
Purchased
Capacity Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPMs
(000,000)
|
|
|
276 |
|
|
|
227 |
|
|
|
21.6 |
|
|
|
1,053 |
|
|
|
1,100 |
|
|
|
(4.3 |
) |
|
|
1,099 |
|
|
|
0.1 |
|
ASMs
(000,000)
|
|
|
373 |
|
|
|
316 |
|
|
|
18.0 |
|
|
|
1,431 |
|
|
|
1,469 |
|
|
|
(2.6 |
) |
|
|
1,453 |
|
|
|
1.1 |
|
Passenger
load factor
|
|
|
74.0 |
% |
|
|
71.8 |
% |
|
2.2
|
pts |
|
|
73.6 |
% |
|
|
74.9 |
% |
|
(1.3)
|
pts |
|
|
75.6 |
% |
|
(0.7)
|
pts |
Yield
per passenger mile
|
|
|
27.90 |
¢ |
|
|
29.47 |
¢ |
|
|
(5.3 |
) |
|
|
27.39 |
¢ |
|
|
27.35 |
¢ |
|
|
0.1 |
|
|
|
25.61 |
¢ |
|
|
6.8 |
|
RASM
|
|
|
20.64 |
¢ |
|
|
21.17 |
¢ |
|
|
(2.5 |
) |
|
|
20.15 |
¢ |
|
|
20.48 |
¢ |
|
|
(1.6 |
) |
|
|
19.37 |
¢ |
|
|
5.7 |
|
Operating
expenses per ASM
|
|
|
20.16 |
¢ |
|
|
21.17 |
¢ |
|
|
(4.8 |
) |
|
|
19.67 |
¢ |
|
|
21.35 |
¢ |
|
|
(7.9 |
) |
|
|
20.84 |
¢ |
|
|
2.4 |
|
NM = Not
Meaningful
ALASKA
AIRLINES
Alaska
reported income before income taxes of $183.8 million in 2009 compared to a loss
before income taxes of $153.3 million in 2008.
Excluding
certain items as noted in the table below, Alaska would have reported income
before income taxes of $145.9 million in 2009, compared to $25.2 million in
2008. See the previous discussion under “Adjusted Non-GAAP Earnings
and Per-Share Amounts” for additional information about these non-GAAP
measures.
|
|
Years
Ended December 31
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
Income
before income taxes, excluding items below
|
|
$ |
145.9 |
|
|
$ |
25.2 |
|
Change
in Mileage Plan terms
|
|
|
-- |
|
|
|
42.3 |
|
New
pilot contract transition costs
|
|
|
(35.8 |
) |
|
|
-- |
|
Restructuring
charges
|
|
|
-- |
|
|
|
(12.9 |
) |
Fleet
transition costs – MD-80
|
|
|
-- |
|
|
|
(47.5 |
) |
Mark-to-market
fuel hedge adjustments
|
|
|
73.7 |
|
|
|
(118.9 |
) |
Realized
losses on hedge portfolio restructuring
|
|
|
-- |
|
|
|
(41.5 |
) |
Income
(loss) before income taxes as reported
|
|
$ |
183.8 |
|
|
$ |
(153.3 |
) |
The
discussion below outlines significant variances between the two
periods.
ALASKA
REVENUES
Total
operating revenues declined $215.3 million, or 6.7%, during 2009 compared to
2008. The changes are summarized in the following table:
|
|
Years Ended December 31
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Passenger
revenue—mainline
|
|
$ |
2,438.8 |
|
|
$ |
2,643.7 |
|
|
|
(7.8 |
) |
Freight
and mail
|
|
|
91.5 |
|
|
|
99.3 |
|
|
|
(7.9 |
) |
Other—net
|
|
|
187.3 |
|
|
|
135.2 |
|
|
|
38.5 |
|
Change
in Mileage Plan terms
|
|
|
---- |
|
|
|
42.3 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mainline operating revenues
|
|
$ |
2,717.6 |
|
|
$ |
2,920.5 |
|
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue—purchased capacity
|
|
|
288.4 |
|
|
|
300.8 |
|
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$ |
3,006.0 |
|
|
$ |
3,221.3 |
|
|
|
(6.7 |
) |
Operating
Revenues – Mainline
Mainline
passenger revenue in 2009 fell by 7.8% on a 4.4% reduction in capacity. There
was a 3.5% decline in PRASM, which was driven by a 6.0% drop in ticket yield
compared to 2008, partially offset by a two-point increase in load
factor.
Passenger
revenues were also bolstered by the implementation of our first-checked-bag fee
in the third quarter of 2009 ($34.5 million) and the full-year impact of our
second-checked-bag fee implemented in the third quarter of 2008, partially
offset by a decline in other fees that resulted from fewer
passengers.
Freight
and mail revenue decreased $7.8 million, or 7.9%, primarily as a result of lower
mail volumes and yield and lower freight fuel surcharges because of the decline
in fuel prices in 2009, partially offset by higher freight volumes and better
freight pricing.
Other--net
revenue increased $52.1 million, or 38.5%, from 2008. Mileage Plan
revenue increased by $50.0 million primarily because of an increase in the rate
paid to us by our credit card partner under the affinity card agreement and an
increase in the number of miles needed to redeem a travel award. This change
reduces our estimate of the fair value of a mile and results in a lower amount
deferred as a liability for future travel and increases the amount of commission
revenue we record when miles are sold.
Passenger
Revenue– Purchased Capacity
Passenger
revenue--purchased capacity flying fell by $12.4 million over the same period of
last year because of a 2.6% decline in capacity combined with a 1.6% decrease in
unit revenue compared to the prior year. Unit revenue dropped as a result of a
1.3-point decline in load factor on flat ticket yield.
ALASKA
EXPENSES
For 2009,
total operating expenses decreased $573.0 million or 17.1% compared to 2008 as a
result of lower mainline operating costs, most notably aircraft fuel and fleet
transition charges, partially offset by higher wages and benefits 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:
|
|
Years Ended
December 31
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Mainline
fuel expense
|
|
$ |
549.0 |
|
|
$ |
1,162.4 |
|
|
|
(52.8 |
) |
Mainline
non-fuel expenses
|
|
|
1,946.7 |
|
|
|
1,874.1 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
operating expenses
|
|
$ |
2,495.7 |
|
|
$ |
3,036.5 |
|
|
|
(17.8 |
) |
Purchased
capacity costs
|
|
|
281.5 |
|
|
|
313.7 |
|
|
|
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$ |
2,777.2 |
|
|
$ |
3,350.2 |
|
|
|
(17.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
Operating Expenses
Total
mainline operating expenses declined $540.8 million or 17.8% during 2009
compared to the prior year. Significant operating expense variances from
2008 are more fully described below.
Wages
and Benefits
Wages and
benefits were up $49.9 million, or 6.7%, compared to 2008. The
primary components of wages and benefits are shown in the following
table:
|
|
Years Ended
December 31
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
540.4 |
|
|
$ |
547.1 |
|
|
|
(1.2 |
) |
Pension
and defined-contribution retirement benefits
|
|
|
114.8 |
|
|
|
68.7 |
|
|
|
67.1 |
|
Medical
benefits
|
|
|
83.3 |
|
|
|
72.3 |
|
|
|
15.2 |
|
Other
benefits and payroll taxes
|
|
|
54.1 |
|
|
|
54.6 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
wages and benefits
|
|
$ |
792.6 |
|
|
$ |
742.7 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
declined 1.2% on a 7.4% reduction in FTEs compared to 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 67.1%
increase in pension and other retirement-related benefits is primarily due to a
$45.0 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 15.2% from the prior year primarily as a result of an
increase in the post-retirement medical expense for the pilot group in
connection with their new contract and an increase in overall medical
costs.
We expect
wages and benefits to decline in 2010 as compared to 2009 because of a
significant decline in our defined-benefit pension cost, and productivity and
overhead reduction initiatives that should reduce the average number of
full-time equivalent employees. These declines will likely be
partially offset by increased pilot wage rates stemming from the full year
impact of the 2009 contract, normal step and scale wage increases in other
represented employee groups, and higher employee and retiree medical
costs.
Variable
Incentive Pay
Variable
incentive pay expense increased from $15.8 million in 2008 to $61.6 million in
2009. The increase is partially due to the fact that in 2009, our financial and
operational results exceeded targets established by our Board. In 2008, our
performance fell short of targets. The increase can also be
attributed to the addition of pilots, flight attendants and mechanics to the PBP
incentive plan.
Over the
long term, our plan is designed to pay at target, although we may or may not
meet those targets in any single year. At target, we estimate the PBP expense
would be $30 million and aggregate incentive pay for all plans would be
approximately $40 million to $45 million for 2010, which would be lower than in
2009.
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 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 declined $613.4 million, or 52.8%, compared to 2008. The elements
of the change are illustrated in the following table:
|
|
Years Ended
December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
304.9 |
|
|
|
333.8 |
|
|
|
(8.7) |
|
Raw
price per gallon
|
|
$ |
1.88 |
|
|
$ |
3.31 |
|
|
|
(43.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
raw fuel expense
|
|
$ |
572.3 |
|
|
$ |
1,103.8 |
|
|
|
(48.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
impact on fuel expense from (gains) and losses arising from fuel-hedging
activities
|
|
|
(23.3 |
) |
|
|
58.6 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel expense
|
|
$ |
549.0 |
|
|
$ |
1,162.4 |
|
|
|
(52.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed declined 8.7%, primarily as a result of a 6.6% 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 43.2% as a result of lower West Coast jet fuel
prices driven by lower crude oil costs and refining margins.
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:
|
|
Years Ended
December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
572.3 |
|
|
$ |
1,103.8 |
|
|
|
(48.2 |
) |
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
|
|
50.4 |
|
|
|
(101.8 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel expense
|
|
$ |
622.7 |
|
|
$ |
1,002.0 |
|
|
|
(37.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed
|
|
|
304.9 |
|
|
|
333.8 |
|
|
|
(8.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel cost per gallon
|
|
$ |
2.05 |
|
|
$ |
3.00 |
|
|
|
(31.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted
above, the total net expense recognized for hedges that settled during the
period was $50.4 million in 2009, compared to a net cash benefit of $101.8
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 drop in crude oil
prices over the past year.
We
currently expect our raw and economic fuel price per gallon to be approximately
$2.24 in the first quarter of 2010. As oil prices are volatile, we
are unable to forecast the full year cost with any certainty.
Aircraft
Maintenance
Aircraft
maintenance increased by $19.3 million, or 12.8%, compared to the prior year
primarily because of a higher average cost of airframe maintenance events and a
new power-by-the-hour (PBH) 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, and lower PBH
costs associated with our 747-400 aircraft engines that resulted from a decline
in flight hours.
We expect
aircraft maintenance to be relatively flat in 2010.
Contracted
Services
Contracted
services declined by $11.3 million, or 8.7%, compared to 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.
We expect
contracted services to increase in 2010 as we provide a full year of service to
some of our new destinations requiring vendor support.
Selling
Expenses
Selling
expenses declined by $11.3 million, or 9.7%, compared to 2008 as a result of
lower revenue-related expenses such as credit card costs, travel agency
commissions and ticket distribution costs that resulted from the decline in
passenger traffic. Mileage Plan expenses were also lower because the estimated
incremental cost of providing free travel was lower because of the decline in
fuel costs. These declines were partially offset by higher advertising
costs.
We expect
selling expenses will be slightly higher in 2010 as compared to 2009, primarily
due to higher revenue-related expenses.
Depreciation
and Amortization
Depreciation
and amortization increased $12.6 million, or 7.6%, compared to
2008. This is primarily due to the ten B737-800 aircraft delivered in
2009, partially offset by the sale-leaseback of six B737-800 aircraft in the
first quarter of 2009.
We expect
depreciation and amortization to be higher in 2010 due to the full-year impact
of aircraft that were delivered in 2009 and are expected to be delivered in
2010.
Other
Operating Expenses
Other
operating expenses declined $9.1 million, or 5.3%, compared to the prior
year. The decline is primarily driven by a reduction in outside
professional services costs and flight crew-related costs such as hotels and
per-diems.
New
Pilot Contract Transition Costs
As
mentioned previously, we recorded $35.8 million in connection with the new
four-year contract ratified by Alaska’s pilots in the second
quarter.
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 an $11.3 million charge in 2008.
During
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. The $47.5 million charge in 2008 represented the remaining discounted
lease payments under the lease contracts and our estimate of maintenance costs
that will be incurred in the future to meet the minimum return conditions under
the lease requirements.
Mainline
Operating Costs per Available Seat Mile (CASM)
Our mainline operating costs per
mainline ASM are summarized below:
|
|
Years Ended
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
mainline operating expenses per ASM (CASM)
|
|
|
10.78 |
¢ |
|
|
12.54 |
¢ |
|
|
(14.0 |
) |
Less
the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel costs per ASM
|
|
|
2.37 |
¢ |
|
|
4.80 |
¢ |
|
|
(50.6 |
) |
New
pilot contract transition costs per ASM
|
|
|
0.15 |
¢ |
|
|
--- |
|
|
NM
|
|
Restructuring
costs per ASM
|
|
|
--- |
|
|
|
0.05 |
¢ |
|
NM
|
|
Fleet
transition charges per ASM
|
|
|
--- |
|
|
|
0.20 |
¢ |
|
NM
|
|
CASM,
excluding fuel and noted items
|
|
|
8.26 |
¢ |
|
|
7.49 |
¢ |
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASM,
excluding fuel and noted items increased from the prior-year period because of
the increase in wages and benefits and other expenses as discussed above,
partially offset by a 4.4% reduction in capacity.
We have
listed separately in the above table our fuel costs, new pilot contract
transition costs, fleet transition charges and restructuring charges per ASM and
our unit cost excluding these items. 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 first quarter and full year of
2010 to be flat and down 3%, respectively, compared to 2009. The expected
decline in unit cost stems from lower pension costs and lower projected
incentive payments offset by modest increases in other expense
areas. Historical cost per ASM excluding fuel and other special items
can be found in Item 6. “Selected Consolidated Financial and Operating
Data.”
Purchased
Capacity Costs
Purchased
capacity costs decreased $32.2 million compared to 2008. Of the
total, $261.7 million was paid to Horizon under the CPA for 1.4 billion ASMs.
This expense is eliminated in consolidation.
|
|
Three Months Ended December
31
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Data (in
millions):
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- brand flying
|
|
$ |
98.2 |
|
|
$ |
98.5 |
|
|
|
(0.3 |
) |
|
$ |
381.9 |
|
|
$ |
429.2 |
|
|
|
(11.0 |
) |
|
$ |
391.3 |
|
|
|
9.7 |
|
Passenger
- capacity purchase arrangements
(a)
|
|
|
70.5 |
|
|
|
62.5 |
|
|
|
12.8 |
|
|
|
261.7 |
|
|
|
293.7 |
|
|
|
(10.9 |
) |
|
|
317.9 |
|
|
|
(7.6 |
) |
Total
passenger revenue
|
|
|
168.7 |
|
|
|
161.0 |
|
|
|
4.8 |
|
|
|
643.6 |
|
|
|
722.9 |
|
|
|
(11.0 |
) |
|
|
709.2 |
|
|
|
1.9 |
|
Freight
and mail
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
16.7 |
|
|
|
2.7 |
|
|
|
2.7 |
|
|
|
- |
|
|
|
2.3 |
|
|
|
17.4 |
|
Other
- net
|
|
|
2.1 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
8.1 |
|
|
|
8.3 |
|
|
|
(2.4 |
) |
|
|
6.9 |
|
|
|
20.3 |
|
Total
Operating Revenues
|
|
|
171.5 |
|
|
|
163.7 |
|
|
|
4.8 |
|
|
|
654.4 |
|
|
|
733.9 |
|
|
|
(10.8 |
) |
|
|
718.4 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
48.2 |
|
|
|
46.9 |
|
|
|
2.8 |
|
|
|
185.2 |
|
|
|
194.1 |
|
|
|
(4.6 |
) |
|
|
201.3 |
|
|
|
(3.6 |
) |
Variable
incentive pay
|
|
|
6.2 |
|
|
|
1.4 |
|
|
|
342.9 |
|
|
|
14.4 |
|
|
|
5.6 |
|
|
|
157.1 |
|
|
|
7.3 |
|
|
|
(23.3 |
) |
Aircraft
fuel, including hedging gains and losses
|
|
|
29.4 |
|
|
|
60.4 |
|
|
|
(51.3 |
) |
|
|
109.1 |
|
|
|
236.0 |
|
|
|
(53.8 |
) |
|
|
138.8 |
|
|
|
70.0 |
|
Aircraft
maintenance
|
|
|
13.6 |
|
|
|
10.7 |
|
|
|
27.1 |
|
|
|
53.2 |
|
|
|
58.2 |
|
|
|
(8.6 |
) |
|
|
92.0 |
|
|
|
(36.7 |
) |
Aircraft
rent
|
|
|
11.1 |
|
|
|
13.2 |
|
|
|
(15.9 |
) |
|
|
44.7 |
|
|
|
56.9 |
|
|
|
(21.4 |
) |
|
|
65.6 |
|
|
|
(13.3 |
) |
Landing
fees and other rentals
|
|
|
15.3 |
|
|
|
13.6 |
|
|
|
12.5 |
|
|
|
57.7 |
|
|
|
57.2 |
|
|
|
0.9 |
|
|
|
56.9 |
|
|
|
0.5 |
|
Contracted
services
|
|
|
8.3 |
|
|
|
7.1 |
|
|
|
16.9 |
|
|
|
32.1 |
|
|
|
29.1 |
|
|
|
10.3 |
|
|
|
27.1 |
|
|
|
7.4 |
|
Selling
expenses
|
|
|
6.6 |
|
|
|
6.4 |
|
|
|
3.1 |
|
|
|
27.1 |
|
|
|
31.1 |
|
|
|
(12.9 |
) |
|
|
31.2 |
|
|
|
(0.3 |
) |
Depreciation
and amortization
|
|
|
10.7 |
|
|
|
8.7 |
|
|
|
23.0 |
|
|
|
39.5 |
|
|
|
37.5 |
|
|
|
5.3 |
|
|
|
33.9 |
|
|
|
10.6 |
|
Food
and beverage service
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
20.0 |
|
|
|
2.4 |
|
|
|
2.6 |
|
|
|
(7.7 |
) |
|
|
2.8 |
|
|
|
(7.1 |
) |
Other
|
|
|
10.4 |
|
|
|
9.0 |
|
|
|
15.6 |
|
|
|
39.4 |
|
|
|
42.7 |
|
|
|
(7.7 |
) |
|
|
48.0 |
|
|
|
(11.0 |
) |
Fleet
transition costs - CRJ-700
|
|
|
- |
|
|
|
6.7 |
|
|
NM
|
|
|
|
- |
|
|
|
13.5 |
|
|
NM
|
|
|
|
- |
|
|
NM
|
|
Fleet
transition costs - Q200
|
|
|
- |
|
|
|
0.5 |
|
|
NM
|
|
|
|
8.8 |
|
|
|
10.2 |
|
|
NM
|
|
|
|
14.1 |
|
|
NM
|
|
Total
Operating Expenses
|
|
|
160.4 |
|
|
|
185.1 |
|
|
|
(13.3 |
) |
|
|
613.6 |
|
|
|
774.7 |
|
|
|
(20.8 |
) |
|
|
719.0 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
11.1 |
|
|
|
(21.4 |
) |
|
NM
|
|
|
|
40.8 |
|
|
|
(40.8 |
) |
|
NM
|
|
|
|
(0.6 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.5 |
|
|
|
1.6 |
|
|
|
|
|
|
|
2.0 |
|
|
|
5.4 |
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
Interest
expense
|
|
|
(3.7 |
) |
|
|
(6.7 |
) |
|
|
|
|
|
|
(19.9 |
) |
|
|
(23.6 |
) |
|
|
|
|
|
|
(16.6 |
) |
|
|
|
|
Interest
capitalized
|
|
|
0.0 |
|
|
|
0.7 |
|
|
|
|
|
|
|
0.3 |
|
|
|
3.0 |
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
Other
- net
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
(3.4 |
) |
|
|
(4.3 |
) |
|
|
|
|
|
|
(18.0 |
) |
|
|
(15.0 |
) |
|
|
|
|
|
|
(10.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Tax
|
|
$ |
7.7 |
|
|
$ |
(25.7 |
) |
|
NM
|
|
|
$ |
22.8 |
|
|
$ |
(55.8 |
) |
|
NM
|
|
|
$ |
(10.7 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers (000)
|
|
|
1,704 |
|
|
|
1,636 |
|
|
|
4.2 |
|
|
|
6,759 |
|
|
|
7,390 |
|
|
|
(8.5 |
) |
|
|
7,552 |
|
|
|
(2.1 |
) |
RPMs
(000,000) "traffic"
|
|
|
609 |
|
|
|
561 |
|
|
|
8.6 |
|
|
|
2,408 |
|
|
|
2,635 |
|
|
|
(8.6 |
) |
|
|
2,918 |
|
|
|
(9.7 |
) |
ASMs
(000,000) "capacity"
|
|
|
822 |
|
|
|
786 |
|
|
|
4.6 |
|
|
|
3,292 |
|
|
|
3,617 |
|
|
|
(9.0 |
) |
|
|
3,978 |
|
|
|
(9.1 |
) |
Passenger
load factor
|
|
|
74.1 |
% |
|
|
71.4 |
% |
|
2.7
|
pts |
|
|
73.1 |
% |
|
|
72.9 |
% |
|
0.2
|
pts |
|
|
73.4 |
% |
|
(0.5
|
) pts |
Yield
per passenger mile
|
|
|
27.70 |
¢ |
|
|
28.70 |
¢ |
|
|
(3.5 |
) |
|
|
26.73 |
¢ |
|
|
27.43 |
¢ |
|
|
(2.6 |
) |
|
|
24.30 |
¢ |
|
|
12.9 |
|
RASM
|
|
|
20.86 |
¢ |
|
|
20.83 |
¢ |
|
|
0.1 |
|
|
|
19.88 |
¢ |
|
|
20.29 |
¢ |
|
|
(2.0 |
) |
|
|
18.06 |
¢ |
|
|
12.3 |
|
PRASM
|
|
|
20.52 |
¢ |
|
|
20.48 |
¢ |
|
|
0.2 |
|
|
|
19.55 |
¢ |
|
|
19.99 |
¢ |
|
|
(2.2 |
) |
|
|
17.83 |
¢ |
|
|
12.1 |
|
Operating
expenses per ASM
|
|
|
19.51 |
¢ |
|
|
23.55 |
¢ |
|
|
(17.2 |
) |
|
|
18.64 |
¢ |
|
|
21.42 |
¢ |
|
|
(13.0 |
) |
|
|
18.07 |
¢ |
|
|
18.5 |
|
Aircraft
fuel cost per ASM
|
|
|
3.57 |
¢ |
|
|
7.69 |
¢ |
|
|
(53.6 |
) |
|
|
3.31 |
¢ |
|
|
6.53 |
¢ |
|
|
(49.3 |
) |
|
|
3.49 |
¢ |
|
|
87.1 |
|
CRJ-700
fleet transition costs per ASM
|
|
|
0.00 |
¢ |
|
|
0.85 |
¢ |
|
NM
|
|
|
|
0.00 |
¢ |
|
|
0.37 |
¢ |
|
NM
|
|
|
|
- |
|
|
NM
|
|
Operating
expenses per ASM, excluding fuel and CRJ-700 fleet transition
costs
|
|
|
15.94 |
¢ |
|
|
15.01 |
¢ |
|
|
6.2 |
|
|
|
15.33 |
¢ |
|
|
14.52 |
¢ |
|
|
5.5 |
|
|
|
14.58 |
¢ |
|
|
(0.4 |
) |
Q200
fleet transition costs per ASM
|
|
|
0.00 |
¢ |
|
|
0.06 |
¢ |
|
NM
|
|
|
|
0.27 |
¢ |
|
|
0.28 |
¢ |
|
NM
|
|
|
|
0.35 |
¢ |
|
NM
|
|
Aircraft
fuel cost per gallon
|
|
$ |
1.96 |
|
|
$ |
4.08 |
|
|
|
(52.0 |
) |
|
$ |
1.82 |
|
|
$ |
3.53 |
|
|
|
(48.4 |
) |
|
$ |
2.14 |
|
|
|
65.0 |
|
Economic
fuel cost per gallon
|
|
$ |
2.32 |
|
|
$ |
2.58 |
|
|
|
(10.1 |
) |
|
$ |
2.07 |
|
|
$ |
3.05 |
|
|
|
(32.1 |
) |
|
$ |
2.28 |
|
|
|
33.8 |
|
Fuel
gallons (000,000)
|
|
|
15.0 |
|
|
|
14.8 |
|
|
|
1.4 |
|
|
|
60.1 |
|
|
|
66.9 |
|
|
|
(10.2 |
) |
|
|
64.8 |
|
|
|
3.2 |
|
Average
number of full-time equivalent employees
|
|
|
3,275 |
|
|
|
3,466 |
|
|
|
(5.5 |
) |
|
|
3,308 |
|
|
|
3,699 |
|
|
|
(10.6 |
) |
|
|
3,897 |
|
|
|
(5.1 |
) |
Aircraft
utilization (blk hrs/day)
|
|
|
8.1 |
|
|
|
8.0 |
|
|
|
1.3 |
|
|
|
8.3 |
|
|
|
8.3 |
|
|
|
- |
|
|
|
8.6 |
|
|
|
(3.5 |
) |
Average
aircraft stage length (miles)
|
|
|
330 |
|
|
|
315 |
|
|
|
4.8 |
|
|
|
327 |
|
|
|
322 |
|
|
|
1.6 |
|
|
|
351 |
|
|
|
(8.3 |
) |
Operating
fleet at period-end
|
|
|
58 |
|
|
|
59 |
|
|
|
(1 |
)
a/c |
|
|
58 |
|
|
|
59 |
|
|
|
(1 |
)
a/c |
|
|
70 |
|
|
|
(11 |
)
a/c |
NM = Not Meaningful
HORIZON
AIR
Horizon
reported income before income taxes of $22.8 million in 2009 compared to a loss
of $55.8 million in 2008. The improvement is primarily due to
declines in aircraft fuel costs and non-fuel operating expenses, partially
offset by a $79.5 million decline in operating revenues.
Excluding
the items noted in the table below, Horizon would have reported income before
income taxes of $7.7 million in 2009 compared to a loss before income taxes of
$10.4 million in 2008. See the previous discussion under “Adjusted
Non-GAAP Earnings and Per-Share Amounts” for additional information about these
non-GAAP measures.
|
|
Year
Ended December 31
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
Income
(loss) before income taxes, excluding items below
|
|
$ |
7.7 |
|
|
$ |
(10.4 |
) |
Fleet
transition costs – CRJ-700
|
|
|
-- |
|
|
|
(13.5 |
) |
Mark-to-market
fuel hedge adjustments
|
|
|
15.1 |
|
|
|
(23.4 |
) |
Realized
losses on hedge portfolio restructuring
|
|
|
-- |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes as reported
|
|
$ |
22.8 |
|
|
$ |
(55.8 |
) |
|
|
|
|
|
|
|
|
|
HORIZON
REVENUES
During
2009, operating revenues decreased 10.8% compared to 2008. Horizon’s
passenger revenues are summarized in the following table:
(dollars
in millions)
|
Years Ended
December 31
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
% ASMs
|
|
|
Revenues
|
|
|
% ASMs
|
|
Passenger
revenue from Horizon “brand” flying
|
$ |
381.9 |
|
|
|
59 |
|
|
$ |
429.2 |
|
|
|
61 |
|
Revenue
from capacity purchase arrangements (CPA) with Alaska
|
|
261.7 |
|
|
|
41 |
|
|
|
293.7 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
passenger revenue and % of ASMs |
$ |
643.6 |
|
|
|
100 |
% |
|
$
|
722.9 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line-of-business
information is presented in the table below. In the CPA, 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.
|
|
Year Ended
December 31, 2009
|
|
|
|
Capacity and
Mix
|
|
|
Load
Factor
|
|
|
Yield
|
|
|
RASM
|
|
|
|
Actual
(in
millions)
|
|
|
%
Change
Y-O-Y
|
|
|
Current
%
Total
|
|
|
Actual
|
|
|
Point
Change
Y-O-Y
|
|
|
Actual
|
|
|
%
Change
Y-O-Y
|
|
|
Actual
|
|
|
%
Change
Y-O-Y
|
|
Brand
Flying
|
|
|
1,927 |
|
|
|
(13.2 |
) |
|
|
59 |
|
|
|
72.4 |
% |
|
|
1.3 |
|
|
|
27.36 |
¢ |
|
|
0.6 |
|
|
|
20.38 |
¢ |
|
|
2.8 |
|
Alaska
CPA
|
|
|
1,365 |
|
|
|
(2.2 |
) |
|
|
41 |
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
|
19.17 |
¢ |
|
|
(8.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
Total
|
|
|
3,292 |
|
|
|
(9.0 |
) |
|
|
100 |
|
|
|
73.1 |
% |
|
|
0.2 |
|
|
|
26.73 |
¢ |
|
|
(2.6 |
) |
|
|
19.88 |
¢ |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue from Horizon brand flying fell $47.3 million, or 11.0%, on a 13.2%
reduction in brand capacity, partially offset by a 2.8% improvement in unit
revenue. The increase in unit revenue is due to the slight improvements in both
load factor and ticket yield.
Revenue
from CPA flying performed on behalf of Alaska totaled $261.7 million during 2009
compared to $293.7 million during 2008. The decrease is primarily due to a 2.2%
reduction in capacity provided under this arrangement and a significant decline
in the associated fuel cost, which is reimbursed by Alaska. This revenue is
eliminated in consolidation.
HORIZON
EXPENSES
Total
operating expenses decreased $161.1 million, or 20.8%, as compared to
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 $8.9
million, or 4.6%, compared to 2008. The primary components of wages
and benefits are shown in the following table:
|
|
Years Ended
December 31
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Wages
|
|
$ |
132.3 |
|
|
$ |
142.2 |
|
|
|
(7.0 |
) |
Medical
benefits
|
|
|
20.6 |
|
|
|
19.5 |
|
|
|
5.6 |
|
Other
benefits and payroll taxes
|
|
|
32.3 |
|
|
|
32.4 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
wages and benefits
|
|
$ |
185.2 |
|
|
$ |
194.1 |
|
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
declined 7% primarily as a result of a 10.6% 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.
We expect
wages and benefits will be lower in 2010 than in 2009, due to fewer FTEs as we
see the full-year impact of 2009 furloughs and transitions of employees to
Alaska as part of the shared services effort. We also have a number
of productivity enhancement goals for 2010.
Variable
Incentive Pay
Variable
incentive pay expense increased to $14.4 million during 2009 from $5.6 million
in 2008, of which $8.6 million and $1 million was related to PBP in 2009 and
2008, respectively. Variable pay increased for the same performance
reasons cited in the Alaska discussion and the addition of Horizon’s flight
attendants and non-represented employees into Air Group’s PBP plan.
If we
achieve targets set by the board and assuming no change in the participating
employee groups, PBP expense in 2010 will be approximately $5 million and
aggregate incentive pay for all plans will be approximately $10 million,
compared to $14.4 million in 2009.
Aircraft
Fuel
Aircraft
fuel declined $126.9 million, or 53.8%, compared to the same period in 2008. The
elements of the change are illustrated in the following table:
|
|
Years Ended
December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
60.1 |
|
|
|
66.9 |
|
|
|
(10.2 |
) |
Raw
price per gallon
|
|
$ |
1.90 |
|
|
$ |
3.36 |
|
|
|
(43.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
raw fuel expense
|
|
$ |
113.9 |
|
|
$ |
225.0 |
|
|
|
(49.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
impact on fuel expense from (gains)
and losses arising from fuel-hedging activities
|
|
|
(4.8 |
) |
|
|
11.0 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel expense
|
|
$ |
109.1 |
|
|
$ |
236.0 |
|
|
|
(53.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The 10.2%
reduction in gallons consumed is primarily a function of the capacity reductions
in 2009 compared to the prior year.
The raw
fuel price per gallon declined by 43.5% as a result of the drop in crude oil
prices and refining margins.
Our economic fuel expense is
calculated as follows:
|
|
Years
Ended December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
113.9 |
|
|
$ |
225.0 |
|
|
|
(49.4 |
) |
Plus
or minus: net of cash received from settled hedges and premium expense
recognized
|
|
|
10.3 |
|
|
|
(20.9 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel expense
|
|
$ |
124.2 |
|
|
$ |
204.1 |
|
|
|
(39.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed
|
|
|
60.1 |
|
|
|
66.9 |
|
|
|
(10.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel cost per gallon
|
|
$ |
2.07 |
|
|
$ |
3.05 |
|
|
|
(32.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
net expense recognized for hedges that settled during the period was $10.3
million in 2009, compared to a net cash benefit of $20.9 million in
2008. These amounts represent the net of the premium expense
recognized for those hedges and any cash received or paid upon
settlement.
We
currently expect our economic fuel price per gallon will be about $2.29 in the
first quarter of 2010.
Aircraft
Maintenance
Aircraft
maintenance expense decreased $5.0 million, or 8.6%, primarily as a result of
fewer scheduled maintenance events and cost savings from process improvement
initiatives.
We expect
maintenance costs will increase in 2010 primarily due to the timing of
maintenance events. We are working on certain initiatives designed to
mitigate these increases over the long-term while maintaining our focus on a
safe, compliant and reliable operation.
Aircraft
Rent
Aircraft
rent expense declined $12.2 million, or 21.4%, 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.
We expect
aircraft rent will be flat in 2010 as compared to 2009 unless we are able to
remarket CRJ aircraft.
Selling
Expenses
Selling
expenses declined $4.0 million, or 12.9%, compared
to the prior year as a result of lower credit card and travel agency commissions
and lower ticket distribution costs due to the decline in passenger
traffic.
We expect
selling expenses to be flat in 2010 compared to 2009 on our expectation of flat
capacity for the year.
Other
Operating Expenses
Other
operating expenses declined $3.3 million, or 7.7%, compared to
2008. The decline is primarily driven by a reduction in non-wage
passenger remuneration costs and flight crew-related costs such as hotels and
per-diems.
Fleet
Transition Costs
Fleet
transition costs associated with the removal of Q200 aircraft from the operating
fleet were $8.8 million during 2009 compared to $10.2 million in
2008. All Q200 aircraft have been removed from the operating
fleet. Should we decide to restructure the sublease for the 16 Q200
currently subleased to a third-party carrier, we will likely have future charges
associated with any transaction. At this time, we are unable to
estimate the timing or the amount of any future charges.
During
2008, as a result of our 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, $6.7 million associated with a
net loss on the sublease arrangement for two leased CRJ-700 aircraft, and a $1.3
million severance charge associated with the fleet reduction.
Operating
Costs per Available Seat Mile (CASM)
Our
operating costs per ASM are summarized below:
|
Years Ended
December 31
|
|
|
2009
|
|
2008
|
|
%Change
|
|
Total
operating expenses per ASM (CASM)
|
|
18.64 |
¢ |
|
21.42 |
¢ |
|
(13.0 |
) |
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
Fuel
costs per ASM
|
|
3.31 |
¢ |
|
6.53 |
¢ |
|
(49.3 |
) |
CRJ-700
fleet transition costs per ASM
|
|
--- |
|
|
0.37 |
¢ |
NM
|
|
CASM,
excluding fuel and noted items
|
|
15.33 |
¢ |
|
14.52 |
¢ |
|
5.5 |
|
Q200
fleet transition costs per ASM
|
|
0.27 |
¢ |
|
0.28 |
¢ |
NM
|
|
|
|
|
|
|
|
|
|
|
We
currently forecast our costs per ASM excluding
fuel and other special items for the first quarter and full year of 2010 to be
down 1% and 3%, respectively, compared to 2009. Historical
cost per ASM excluding fuel and other special items can be found in Item 6.
“Selected Consolidated Financial and Operating Data.”
CONSOLIDATED NONOPERATING INCOME (EXPENSE)
Net
nonoperating expense was $64.5 million in 2009 compared to $41.0 million in
2008. Interest income declined $9.8 million compared to 2008
primarily as a result of lower average portfolio returns, partially offset by a
higher average balance of cash and marketable securities. Interest
expense declined $1.8 million on lower average interest rates on our
variable-rate debt on a relatively stable average debt balance.
Capitalized interest was $15.6 million lower than in 2008 because of lower
advance aircraft purchase deposits and the deferred future aircraft
deliveries.
Our
consolidated effective income tax rate on pretax income or loss for 2009 was
40.1%, compared to 36.3% for 2008. The difference between the effective
tax rates for both periods and our marginal tax rate of approximately 37.8% is
primarily the magnitude of nondeductible expenses, such as employee per-diem
costs and stock-based compensation expense recorded for certain stock
awards.
Our
effective tax rate can vary significantly between quarters and for the full
year, depending on the magnitude of non-deductible expenses in proportion to
pretax results.
Our
consolidated net loss for 2008 was $135.9 million, or $3.74 per share, compared
to net income of $124.3 million, or $3.07 per diluted share, in 2007. Both
periods include gains and losses arising from fuel-hedging activities. In 2008,
there were several other items, as noted below, that affect the comparability
between the two years:
|
•
|
restructuring
charges of $12.9 million ($8.1 million after tax, or $0.22 per share)
related to the reduction in work force at
Alaska;
|
|
•
|
fleet
transition charges of $61.0 million ($38.2 million after tax, or $1.05 per
share) related to the ongoing transitions out of the MD-80 and CRJ-700
fleets; and
|
|
•
|
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.
|
As shown
in the table below, excluding these items, our consolidated net income for 2008
was $4.4 million, or $0.12 per diluted share, compared to $91.6 million, or
$2.26 per diluted share, in 2007. See
previous discussion under “Adjusted Non-GAAP Earnings and Per-Share Amounts” for
additional information about these non-GAAP measures.
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
(in
millions except per share amounts)
|
|
Dollars
|
|
|
Diluted
EPS
|
|
|
Dollars
|
|
|
Diluted
EPS
|
|
Net
income and diluted EPS, excluding items below
|
|
$ |
4.4 |
|
|
$ |
0.12 |
|
|
$ |
91.6 |
|
|
$ |
2.26 |
|
Change
in Mileage Plan terms, net of tax
|
|
|
26.5 |
|
|
|
0.73 |
|
|
|
-- |
|
|
|
-- |
|
Restructuring
charges, net of tax
|
|
|
(8.1 |
) |
|
|
(0.22 |
) |
|
|
-- |
|
|
|
-- |
|
Fleet
transition costs – MD-80, net of tax
|
|
|
(29.8 |
) |
|
|
(0.82 |
) |
|
|
-- |
|
|
|
-- |
|
Fleet
transition costs – CRJ-700, net of tax
|
|
|
(8.4 |
) |
|
|
(0.23 |
) |
|
|
-- |
|
|
|
-- |
|
Mark-to-market
fuel hedge adjustments, net of tax
|
|
|
(89.2 |
) |
|
|
(2.46 |
) |
|
|
32.7 |
|
|
|
0.81 |
|
Realized
losses on hedge portfolio restructuring, net of tax
|
|
|
(31.3 |
) |
|
|
(0.86 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income and diluted EPS as reported
|
|
$ |
(135.9 |
) |
|
$ |
(3.74 |
) |
|
$ |
124.3 |
|
|
$ |
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
reported a loss before income taxes of $153.3 million during 2008 compared to
income before income taxes of $215.0 million in 2007. The $368.3 million
difference between the periods is primarily due to the $424.9 million increase
in aircraft fuel expense (including hedging gains and losses) compared to the
prior period, $47.5 million of fleet transition costs, and $12.9 million of
restructuring charges partially offset by a $151.4 million increase in operating
revenues.
ALASKA
REVENUES
Total
operating revenues increased $151.4 million, or 4.9%, in 2008 as compared to
2007. The components of Alaska’s revenue are summarized in the following
table:
|
|
Years Ended December 31
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Passenger
revenue—mainline
|
|
$ |
2,643.7 |
|
|
$ |
2,547.2 |
|
|
|
3.8 |
|
Freight
and mail
|
|
|
99.3 |
|
|
|
94.2 |
|
|
|
5.4 |
|
Other—net
|
|
|
135.2 |
|
|
|
147.1 |
|
|
|
(8.1 |
) |
Change
in Mileage Plan terms
|
|
|
42.3 |
|
|
|
— |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mainline operating revenues
|
|
$ |
2,920.5 |
|
|
$ |
2,788.5 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenue—purchased capacity
|
|
|
300.8 |
|
|
|
281.4 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$ |
3,221.3 |
|
|
$ |
3,069.9 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue—Mainline
Mainline
passenger revenue increased 3.8% on flat capacity and a 3.7% increase in
passenger revenues per available seat mile (PRASM). The increase in mainline
PRASM was the result of a 2.3% increase in yields and a 1.1-point increase in
load factor compared to the prior-year period. An increase in Mileage Plan
redemption revenue and higher ancillary fee revenue contributed significantly to
the increase in yields compared to 2007.
Freight
and mail revenues increased $5.1 million, or 5.4%, over 2007. The increase is
due to increased yields for freight and mail and freight fuel surcharges,
partially offset by a decline in freight volumes compared to the prior
year.
Other—net
revenues declined $11.9 million, or 8.1%, primarily as a result of lower
commission revenue on the sale of Mileage Plan miles to our non-airline
partners.
Change
in Mileage Plan Terms
Beginning
in August 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. This benefit is recorded separately in operating revenues as “Change in
Mileage Plan terms.”
Passenger
Revenue—Purchased Capacity
Passenger
revenue—purchased capacity increased by $19.4 million over the same period in
2007 because of a 5.7% increase in unit revenues on relatively flat capacity.
Unit revenues increased due to a 6.8% increase in yields, offset by a 0.7-point
decline in load factors compared to 2007.
ALASKA
EXPENSES
For the
year, total operating expenses increased $494.1 million, or 17.3%, compared to
2007 as a result of higher mainline operating costs, most notably aircraft fuel
expense (including hedging gains and losses), fleet transition charges and
restructuring charges. 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.
|
|
Years Ended
December 31
|
|
Operating
Expenses
(in millions)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Mainline
operating expenses
|
|
$ |
3,036.5 |
|
|
$ |
2,553.3 |
|
|
|
18.9 |
|
Purchased
capacity costs
|
|
|
313.7 |
|
|
|
302.8 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$ |
3,350.2 |
|
|
$ |
2,856.1 |
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
Operating Expenses
Significant
mainline operating expense variances are described below.
Wages
and Benefits
Wages and
benefits decreased during the full year of 2008 by $11.2 million, or 1.5%,
primarily as a result of lower defined-benefit pension costs, reduced overtime,
and a 0.5% decrease in full-time equivalent employees compared to
2007.
Variable
Incentive Pay
Variable
incentive pay for 2008 increased $2.3 million or 17.0%, compared to 2007. The
increase is primarily due to higher payouts under our Operational Performance
Reward program, offset by lower overall payouts in our profit-sharing plans due
to the decline in profitability from 2007.
Aircraft
Fuel
Aircraft
fuel expense increased $424.9 million, or 57.6%, compared to 2007. The elements
of the change are illustrated in the following table:
|
|
Years Ended
December 31
|
|
(in millions, except per-gallon amounts)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
333.8 |
|
|
|
354.3 |
|
|
|
(5.8) |
|
Raw
price per gallon
|
|
$ |
3.31 |
|
|
$ |
2.33 |
|
|
|
42.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
raw fuel expense
|
|
$ |
1,103.8 |
|
|
$ |
825.7 |
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
impact on fuel expense from (gains) and losses arising from fuel-hedging
activities
|
|
|
58.6 |
|
|
|
(88.2 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel expense
|
|
$ |
1,162.4 |
|
|
$ |
737.5 |
|
|
|
57.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed decreased 5.8% due to the decrease in capacity and the 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 on
relatively flat capacity for the year. Because the B737-800 aircraft are larger
than the MD-80s, the flat capacity came on a 2.6% decline in revenue block
hours.
The raw
fuel price per gallon increased by 42.1% as a result of higher West Coast jet
fuel prices driven by higher crude oil costs for much of the year.
During
2008, we recorded significant mark-to-market losses, reflecting a steep decline
in the value of our fuel hedge portfolio as fuel prices declined sharply late in
the year. During 2007, we recorded mark-to-market gains, reflecting an increase
in the value of our fuel hedge portfolio between December 31, 2006 and
December 31, 2007.
Our economic fuel expense is
calculated as follows:
|
|
Years Ended
December 31
|
|
(in millions, except per-gallon amounts)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
1,103.8 |
|
|
$ |
825.7 |
|
|
|
33.7 |
|
Less:
cash received from
settled hedges, net of premium expense recognized
|
|
|
(101.8 |
) |
|
|
(44.9 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel expense
|
|
$ |
1,002.0 |
|
|
$ |
780.8 |
|
|
|
28.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed
|
|
|
333.8 |
|
|
|
354.3 |
|
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel cost per gallon
|
|
$ |
3.00 |
|
|
$ |
2.20 |
|
|
|
36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
net cash benefit from hedges that settled during 2008, excluding hedges that
were terminated early, increased by $56.9 million to $101.8 million compared to
2007. This increase was primarily due to the record high crude oil prices during
2008.
As part
of our effort to restructure our fuel-hedge portfolio in 2008, we terminated a
number of contracts originally scheduled to settle in 2009 and 2010 and replaced
them with new positions having lower average strike prices. As a result, we
realized losses of approximately $41.5 million, representing the difference
between the original premiums paid for those contracts when purchased and the
amount of cash received from the counterparty on termination of the
contracts.
Aircraft
Rent
Aircraft
rent declined by $6.6 million, or 5.9% during 2008, because of the retirement of
all remaining leased MD-80 aircraft, offset by one additional leased B737-800
aircraft since 2007.
Landing
Fees and Other Rents
Landing
fees and other rents declined by $2.4 million, or 1.4%, compared to 2007. The
decline is primarily attributable to the decline in departures resulting in
lower landing fees across the system.
Contracted
Services
During
2008, contracted services increased by $6.1 million, or 4.9%, compared to 2007.
This is primarily due to efforts to improve our operational performance and the
introduction of new stations in our route system where we contract airport
services.
Selling
Expenses
Selling
expenses declined $13.3 million, or 10.3%, compared to 2007. The decline is
driven by lower ticket distribution fees and lower expenses associated with our
Mileage Plan program.
Depreciation
and Amortization
Depreciation
and amortization increased $23.6 million, or 16.6%, compared to 2007 as a result
of the delivery of 11 B737-800 aircraft in 2008.
Other
Operating Expenses
Other
operating expenses increased primarily because of higher personnel and crew
costs, property taxes, and legal fees, partially offset by a decline in
passenger remuneration costs stemming from our improved operational
performance.
Restructuring
Charges and Fleet Transition Costs
In the
third quarter of 2008, we announced reductions in work force among union and
non-union employees, resulting in a $12.9 million charge associated with
severance payments and continued medical coverage
During
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. The $47.5 million charge in the period represented the remaining lease
payments under the lease contract at that time and our estimate of maintenance
costs that will be incurred in the future to meet the minimum return conditions
under the lease requirements.
Mainline
Operating Costs per Available Seat Mile (CASM)
Our
mainline operating costs per mainline ASM are summarized below:
|
|
Years Ended
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Total
mainline operating expenses per ASM (CASM)
|
|
|
12.54 |
¢ |
|
|
10.55 |
¢ |
|
|
18.9 |
|
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel costs per ASM
|
|
|
4.80 |
¢ |
|
|
3.05 |
¢ |
|
|
57.4 |
|
Restructuring
costs per ASM
|
|
|
0.05 |
¢ |
|
|
—
|
|
|
NM
|
|
Fleet
transition charges per
ASM
|
|
|
0.20 |
¢ |
|
|
— |
|
|
NM
|
|
CASM,
excluding fuel and noted items
|
|
|
7.49 |
¢ |
|
|
7.50 |
¢ |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Capacity Costs
Purchased
capacity costs increased $10.9 million to $313.7 million during 2008 compared to
$302.8 million in 2007. Of the total, $293.7 million was paid to Horizon under
the capacity purchase arrangement (CPA) for 1.4 billion ASMs. This expense is
eliminated in consolidation.
Horizon
reported a loss before income taxes of $55.8 million during 2008 compared to
$10.7 million in 2007. The $45.1 million decline in profitability is primarily
due to higher fuel costs and fleet transition costs, partially offset by lower
non-fuel operating costs and higher operating revenues.
HORIZON
REVENUES
In 2008,
operating revenues increased $15.5 million, or 2.2%, compared to 2007. Horizon’s
passenger revenues are summarized in the following table:
|
|
Years Ended
December 31
|
|
|
|
2008
|
|
|
2007
|
|
(dollars in
millions) |
|
Revenues
|
|
|
% ASMs
|
|
|
Revenues
|
|
|
% ASMs
|
|
Passenger
revenue from Horizon “brand” flying
|
|
$ |
429.2 |
|
|
|
61 |
|
|
$ |
391.3 |
|
|
|
52 |
|
Revenue
from CPA with Alaska
|
|
|
293.7 |
|
|
|
39 |
|
|
|
283.4 |
|
|
|
35 |
|
Revenue
from CPA with Frontier JetExpress
|
|
|
— |
|
|
|
— |
|
|
|
34.5 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
passenger revenue and % of ASMs
|
|
$ |
722.9 |
|
|
|
100 |
% |
|
$ |
709.2 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line-of-business
information is presented in the table below. In the CPAs, Horizon is insulated
from market revenue factors and is guaranteed contractual revenue amounts based
on operational capacity. As a result, yield and load factor information for the
CPA arrangements are not presented.
|
|
Year Ended
December 31, 2008
|
|
|
|
Capacity and
Mix
|
|
|
Load
Factor
|
|
|
Yield
|
|
|
RASM
|
|
|
|
2008
Actual
(000,000)
|
|
|
2007
Actual
(000,000)
|
|
|
Change
Y-O-Y
|
|
|
Actual
|
|
|
Point
Change
Y-O-Y
|
|
|
Actual
|
|
|
Change
Y-O-Y
|
|
|
2008
Actual
|
|
|
2007
Actual
|
|
|
Change
Y-O-Y
|
|
Brand
Flying
|
|
|
2,221 |
|
|
|
2,086 |
|
|
|
6.5 |
% |
|
|
71.1 |
% |
|
|
(0.7 |
) |
|
|
27.20 |
¢ |
|
|
4.1 |
% |
|
|
19.82 |
¢ |
|
|
19.20 |
¢ |
|
|
3.2 |
% |
Alaska
CPA
|
|
|
1,396 |
|
|
|
1,383 |
|
|
|
0.9 |
% |
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
|
21.04 |
¢ |
|
|
20.49 |
¢ |
|
|
2.7 |
% |
Frontier
CPA
|
|
|
— |
|
|
|
509 |
|
|
|
(100.0 |
)% |
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
|
6.77 |
¢ |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
Total
|
|
|
3,617 |
|
|
|
3,978 |
|
|
|
(9.1 |
)% |
|
|
72.9 |
% |
|
|
(0.5 |
) |
|
|
27.43 |
¢ |
|
|
12.9 |
% |
|
|
20.29 |
¢ |
|
|
18.06 |
¢ |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System-wide,
Horizon’s operating unit revenues increased 12.4% compared to 2007. However, the
increase was largely due to the shift in capacity out of Frontier JetExpress
flying (which produced relatively low RASM because of the nature of the
contract) to higher RASM brand and Alaska CPA flying. The Frontier JetExpress
operation ceased in November 2007.
Horizon
brand flying includes routes in the Horizon system not covered by the Alaska
CPA. Horizon has the inventory and revenue risk in these markets. Passenger
revenue from Horizon brand flying increased $37.9 million, or 9.7%, on a 6.5%
increase in brand capacity and a 3.2% increase in unit revenues. The increase in
unit revenues was due to a 4.1% increase in yields in those markets, partially
offset by a 0.7-point decline in load factor.
Revenue
from the CPA with Alaska totaled $293.7 million during 2008 compared to $283.4
million in 2007. The increase is primarily driven by the 2.7% increase in unit
revenues on relatively flat capacity. This revenue is eliminated in
consolidation.
HORIZON
EXPENSES
Total
operating expenses increased $55.7 million, or 7.7%, as compared to
2007. Significant period-over-period changes in the components of
operating expenses are described below.
Wages
and Benefits
Wages and
benefits decreased $7.2 million, or 3.6%, primarily as a result of a 5.1%
decrease in FTEs.
Aircraft
Fuel
Aircraft
fuel expense increased $97.2 million, or 70.0%, compared to 2007. The elements
of the change are illustrated in the following table:
|
|
Years Ended
December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Fuel
gallons consumed
|
|
|
66.9 |
|
|
|
64.8 |
|
|
|
3.2 |
|
Raw
price per gallon
|
|
$ |
3.36 |
|
|
$ |
2.41 |
|
|
|
39.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
raw fuel expense
|
|
$ |
225.0 |
|
|
$ |
156.2 |
|
|
|
44.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
on fuel expense from
(gains) and losses arising
from fuel- hedging
activities
|
|
|
11.0 |
|
|
|
(17.4 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel expense
|
|
$ |
236.0 |
|
|
$ |
138.8 |
|
|
|
70.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 3.2%
increase in consumption was driven by the elimination of Frontier JetExpress
flying in 2007. As those aircraft were redeployed into the Horizon fleet,
Horizon began purchasing the fuel, whereas under the JetExpress arrangement,
fuel was purchased by Frontier. Offsetting these increases in fuel consumption
was the decline in system capacity, which led to lower fuel consumption.
Additionally, we have had improved fuel efficiency of our fleet resulting from
new Q400 aircraft deliveries as they replaced outgoing Q200
aircraft.
The raw
fuel price per gallon increased by 39.4% as a result of higher West Coast jet
fuel prices driven by higher average crude oil costs and refinery
margins.
As at
Alaska, we recorded significant mark-to-market losses in 2008 reflecting a steep
decline in the value of our fuel hedge portfolio as fuel prices declined sharply
throughout the year. During 2007, we recorded mark-to-market gains reflecting an
increase in the value of our fuel hedge portfolio between December 31, 2006
and December 31, 2007.
Our economic fuel expense is
calculated as follows:
|
|
Years
Ended December 31
|
|
(in
millions, except per-gallon amounts)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Raw
fuel expense
|
|
$ |
225.0 |
|
|
$ |
156.2 |
|
|
|
44.0
|
|
Less:
cash received from settled hedges, net of premium expense
recognized
|
|
|
(20.9 |
) |
|
|
(8.5 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel expense
|
|
$ |
204.1 |
|
|
$ |
147.7 |
|
|
|
38.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
gallons consumed
|
|
|
66.9 |
|
|
|
64.8 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
fuel cost per gallon
|
|
$ |
3.05 |
|
|
$ |
2.28 |
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
net cash benefit from hedges that settled during 2008, excluding hedges that
were terminated early, increased by $12.4 million to $20.9 million compared to
2007. This increase was primarily due to the record-high crude oil prices during
the year.
Like
Alaska, as part of the effort to restructure our fuel-hedge portfolio, we
terminated a number of contracts originally scheduled to settle in 2009 and 2010
and replaced them with new positions with lower average strike prices. As a
result, we realized losses of approximately $8.5 million representing the
difference between the original premiums paid for those contracts when purchased
and the amount of cash received from the counterparty on termination of the
contracts.
Aircraft
Maintenance
Aircraft
maintenance expense decreased $33.8 million, or 36.7%, primarily as a result of
fewer maintenance events and cost savings from process
improvements.
Aircraft
Rent
Aircraft
rent decreased $8.7 million, or 13.3%, from 2007 due to the lease termination of
a number of Q200 aircraft along with the sublease of additional Q200 aircraft
and two CRJ-700 aircraft to third parties.
Depreciation
and Amortization
Depreciation
and amortization increased $3.6 million, or 10.6%, as a result of the two new
Q400s that were delivered in 2008 and the full-year depreciation on 13 Q400s
delivered in 2007. We own all of these new aircraft.
Fleet
Transition Costs
Fleet
transition costs associated with the sublease of Q200 aircraft were $8.7 million
during 2008 compared to $14.1 million in 2007. All 16 of the Q200 aircraft under
the existing sublease arrangement have been delivered. We also recorded a $1.5
million charge associated with six additional Q200s that were removed from
operating service in 2008 and returned to the lessor.
As noted
earlier, we recorded a $13.5 million charge in 2008 associated with the decision
to retire the CRJ-700 fleet earlier than expected.
Operating
Costs per Available Seat Mile (CASM)
Our
operating costs per ASM are summarized below:
|
|
Years Ended
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Total
operating expenses per ASM (CASM)
|
|
|
21.42 |
¢ |
|
|
18.07 |
¢ |
|
|
18.5 |
|
CASM
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
costs per ASM
|
|
|
6.53 |
¢ |
|
|
3.49 |
¢ |
|
|
87.1 |
|
CRJ-700
fleet transition costs per ASM
|
|
|
0.37 |
¢ |
|
|
— |
|
|
NM
|
|
CASM,
excluding fuel and noted items
|
|
|
14.52 |
¢ |
|
|
14.58 |
¢ |
|
|
(0.4 |
) |
Q200
fleet transition costs per ASM
|
|
|
0.28 |
¢ |
|
|
0.35 |
¢ |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED NONOPERATING INCOME
(EXPENSE)
Net nonoperating expense was $41.0 million in 2008 compared to $10.4
million in 2007. Interest income declined by $11.5 million compared to 2007,
primarily as a result of lower average portfolio returns, partially offset by a
higher average cash and marketable securities balance. Interest expense
increased $14.3 million because of new debt arrangements in 2007 and 2008,
partially offset by lower interest rates on our variable-rate debt. Capitalized
interest declined $4.6 million from 2007, resulting from a decrease in
pre-delivery deposits in connection with our orders for B737-800 and Bombardier
Q400 aircraft.
CONSOLIDATED INCOME TAX EXPENSE (BENEFIT)
Our
consolidated effective income tax rate on income (loss) before income taxes for
2008 was 36.3% compared to an effective income tax rate of 38.0% in 2007. The
effective rate for 2007 was positively impacted by $2.1 million in credits
resulting from a favorable outcome of the state income tax matters referred to
in Note 11. Excluding this benefit, our effective tax rate would have been
39.0%. The difference between the effective tax rates for both periods and our
marginal tax rate in 2008 of approximately 37.5% is primarily the magnitude of
nondeductible expenses, such as employee per-diem costs and stock-based
compensation expense recorded for certain stock awards.
The
discussion and analysis of our financial position and results of operations in
this MD&A is based upon our consolidated financial statements. The
preparation of these financial statements requires us to make estimates and
judgments that affect our financial position and results of operations. See Note
1 to the consolidated financial statements for a description of our significant
accounting policies.
Critical
accounting estimates are defined as those that are reflective of significant
judgment and uncertainties and that potentially may result in materially
different results under varying assumptions and conditions. Management has
identified the following critical accounting estimates and has discussed the
development, selection and disclosure of these policies with our audit
committee.
MILEAGE
PLAN
Our
Mileage Plan loyalty program awards miles to member passengers who fly on Alaska
or Horizon and our many travel partners. Additionally, we sell miles to third
parties, such as our bank partner, for cash. In either case, the outstanding
miles may be redeemed for travel on Alaska, Horizon or any of our alliance
partners. As long as the Mileage Plan is in existence, we have an obligation to
provide this future travel.
For
awards earned by passengers who fly on Alaska, Horizon or our travel partners,
we recognize a liability and the corresponding selling expense for this future
obligation. For miles sold to third parties, the majority of the sales proceeds
are recorded as deferred revenue and recognized when the award transportation is
provided. The commission component of these sales proceeds (defined as the
proceeds we receive from the sale of mileage credits minus the amount we defer)
is recorded as other-net revenue when the cash is received. The deferred revenue
is recognized as passenger revenue when awards are issued and flown on Alaska or
Horizon, and as other-net revenue for awards issued and flown on partner
airlines.
At
December 31, 2009, we had approximately 116 billion miles outstanding,
resulting in an aggregate liability and deferred revenue balance of $691.7
million. Both the liability and the deferred revenue are determined based on
several assumptions that require significant management judgment to estimate and
formulate. There are uncertainties inherent in estimates; therefore, an
incorrect assumption could greatly affect the amount and/or timing of revenue
recognition or Mileage Plan expenses. The most significant assumptions in
accounting for the Mileage Plan are described below.
1.
The rate at which we defer sales proceeds from sold miles:
We defer
an amount that represents our estimate of the fair value of a free travel award
by looking to the sales prices of comparable paid travel. As fare levels change,
our deferral rate changes, resulting in the recognition of a higher or lower
portion of the cash proceeds from the sale of miles as commission revenue in any
given quarter Because of the change in our award structure in 2008
whereby more miles are required to redeem an award, the estimated fair value of
each mile sold is lower. This results in a lower amount deferred for future
travel and a higher amount recorded as commission income
currently.
|
2.
The number of miles that will not be redeemed for travel
(breakage):
|
Members
may not reach the mileage threshold necessary for a free ticket, and outstanding
miles may not always be redeemed for travel. Therefore, based on the number of
Mileage Plan accounts and the miles in the accounts, we estimate how many miles
will never be used (“breakage”), and reduce the liability associated with those
miles. Our estimates of breakage consider activity in our members’ accounts,
account balances, and other factors. We believe our breakage assumptions are
reasonable in light of historical experience and future expectations. A
hypothetical 1.0% change in our estimate of breakage (currently 12% in the
aggregate) has approximately a $7.2 million effect on the liability. Actual
breakage could differ significantly from our estimates.
3.
The number of miles used per award (i.e., free ticket):
We
estimate how many miles will be used per award. For example, our members may
redeem credit for free travel to various locations or choose between a highly
restricted award and an unrestricted award. If actual miles used are more or
less than estimated, we may need to adjust the liability and corresponding
expense. Our estimates are based on the current requirements in our Mileage Plan
program and historical redemptions on Alaska, Horizon or other
airlines.
|
4.
The number of awards redeemed for travel on Alaska or Horizon versus other
airlines:
|
The cost
for Alaska or Horizon to carry an award passenger is typically lower than the
cost we will pay to other airlines. We estimate the number of awards that will
be redeemed on Alaska or Horizon versus on other airlines and accrue the
estimated costs based on historical redemption patterns. If the number of awards
redeemed on other airlines is higher or lower than estimated, we may need to
adjust our liability and corresponding expense.
|
5.
The costs that will be incurred to provide award
travel:
|
When a
frequent flyer travels on his or her award ticket on Alaska or Horizon,
incremental costs such as food, fuel and insurance are incurred to carry that
passenger. We estimate what these costs will be (excluding any contribution to
overhead and profit) and accrue a liability. If the passenger travels on another
airline on an award ticket, we often must pay the other airline for carrying the
passenger. The other airline costs are based on negotiated agreements and are
often substantially higher than the costs we would incur to carry that
passenger. We estimate how much we will pay to other airlines for future travel
awards based on historical redemptions and settlements with other carriers and
accrue a liability accordingly. The costs actually incurred by us or paid to
other airlines may be higher or lower than the costs that were estimated and
accrued, and therefore we may need to adjust our liability and recognize a
corresponding expense.
We
regularly review significant Mileage Plan assumptions and change our assumptions
if facts and circumstances indicate that a change is necessary. Any such change
in assumptions could have a significant effect on our financial position and
results of operations.
PENSION
PLANS
Accounting
rules require recognition of the overfunded or underfunded status of an entity’s
defined-benefit pension and other postretirement plans as an asset or liability
in the financial statements and requires recognition of the funded status in
other comprehensive income. Pension expense is recognized on an accrual basis
over employees’ approximate service periods and is generally independent of
funding decisions or requirements. We recognized expense for our qualified
defined-benefit pension plans of $93.0 million, $48.0 million, and $62.6 million
in 2009, 2008, and 2007, respectively. We expect the 2010 expense to be
approximately $51 million, which is significantly lower than the amount
recognized in 2009. The decline is primarily due to the improvement
in the market values of the pension assets in 2009, nearly $150 million of
funding in 2009, and the movement of disability retirement from the pilot
pension plan to a separate long-term disability plan.
The
calculation of pension expense and the corresponding liability requires the use
of a number of important assumptions, including the expected long-term rate of
return on plan assets and the assumed discount rate. Changes in these
assumptions can result in different expense and liability amounts, and future
actual experience can differ from these assumptions.
Pension
expense increases as the expected rate of return on pension plan assets
decreases. As of December 31, 2009, we estimate that the pension plan
assets will generate a long-term rate of return of 7.75%. This rate was
developed using historical data, the current value of the underlying assets, as
well as long-term inflation assumptions. We regularly review the actual asset
allocation and periodically rebalance investments as appropriate. This expected
long-term rate of return on plan assets at December 31, 2009 is based on an
allocation of U.S. and non-U.S. equities and U.S. fixed-income securities.
Decreasing the expected long-term rate of return by 0.5% (from 7.75% to 7.25%)
would increase our estimated 2010 pension expense by approximately $4.5
million.
Pension
liability and future pension expense increase as the discount rate is reduced.
We discounted future pension obligations using a rate of 5.85% and 6.20% at
December 31, 2009 and 2008, respectively. The discount rate at
December 31, 2009 was determined using current rates earned on high-quality
long-term bonds with maturities that correspond with the estimated cash
distributions from the pension plans. Decreasing the discount rate by 0.5% (from
5.85% to 5.35%) would increase our projected benefit obligation at
December 31, 2009 by approximately $89.1 million and increase estimated
2010 pension expense by approximately $8.3 million.
All of
our defined-benefit pension plans are now closed to new entrants with the
ratification of the new Alaska pilot collective bargaining agreement in
2009.
Future
changes in plan asset returns, assumed discount rates and various other factors
related to the participants in our pension plans will impact our future pension
expense and liabilities. We cannot predict what these factors will be in the
future.
LONG-LIVED
ASSETS
As of
December 31, 2009, we had approximately $3.2 billion of property and
equipment and related assets, net of accumulated depreciation. In accounting for
these long-lived assets, we make estimates about the expected useful lives of
the assets, changes in fleet plans, the expected residual values of the assets,
and the potential for impairment based on the fair value of the assets and the
cash flows they generate. Factors indicating potential impairment include, but
are not limited to, significant decreases in the market value of the long-lived
assets, management decisions regarding the future use of the assets, a
significant change in the long-lived assets condition, and operating cash flow
losses associated with the use of the long-lived asset.
In 2007,
Horizon announced plans to phase out its remaining leased Q200 aircraft. All of
these aircraft were leased under operating lease agreements. As a result of this
decision, we reassessed the depreciable lives and salvage values of the related
rotable and repairable Q200 parts and, as such, have depreciated these parts
down to their estimated salvage value. We are in the process of disposing of
these parts.
In 2008,
Horizon announced plans to ultimately exit its CRJ-700 fleet and transition to
an all-Q400 fleet, dependent on the ability to remarket the CRJ-700 aircraft. As
a result of the decision, we determined that the two owned CRJ-700s were
impaired and recorded an impairment charge on the aircraft and their related
spare parts of $5.5 million in 2008 to reduce the carrying value of these assets
to their estimated fair value. We have reassessed the depreciable lives and
salvage values of the two owned aircraft and the related spare parts and are
depreciating those assets over their remaining estimated useful
lives.
There is
inherent risk in estimating the fair value of our aircraft and related parts and
their salvage values at the time of impairment. Actual proceeds upon disposition
of the aircraft or related parts could be materially less than expected,
resulting in additional loss. Our estimate of salvage value at the time of
disposal could also change, requiring us to increase the depreciation expense on
the affected aircraft.
PROSPECTIVE ACCOUNTING
PRONOUNCEMENTS
New
accounting standards on “Revenue Arrangements with Multiple Deliverables” were
issued in September 2009 and update the current guidance pertaining to
multiple-element revenue arrangements. This new guidance will be
effective for our annual reporting period beginning January 1,
2011. We are currently evaluating the impact of this new standard on
our financial position, results of operations, cash flows, and
disclosures.
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.
|
Because
of the severe economic uncertainty in the early part of 2009 and the volatility
of fuel prices in recent years, we intentionally increased our balance of cash
and marketable securities to current levels. As the economic climate stabilizes,
we will likely seek to reduce our cash and marketable securities to 25% to 30%
of revenues over the next 24 months, either through debt repayment, further
share repurchases, or pension funding. We will continue to focus on preserving a
strong liquidity position and evaluate our cash needs as conditions
change.
We
believe that our current cash and marketable securities balance of $1.2 billion
combined with future cash flows from operations and other sources of liquidity
will be sufficient to fund our operations for at least the next 12 months and
would continue to be sufficient if we reduce our cash balance as described
above.
In our
cash and marketable securities portfolio, we invest only in U.S. government
securities, asset-backed obligations and corporate debt securities. We do not
invest in equities or auction-rate securities. As of December 31, 2009, we
had a $14.0 million net unrealized gain on our $1.2 billion cash and marketable
securities balance.
Our
overall investment strategy for our marketable securities portfolio has a
primary goal of maintaining and securing its investment principal. Our
investment portfolio is managed by reputable financial institutions and
continually reviewed to ensure that the investments are aligned with our
strategy.
The table
below presents the major indicators of financial condition and
liquidity.
(in millions, except per-share and debt-to-capital
amounts)
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
Change
|
|
Cash
and marketable securities
|
|
$ |
1,192.1 |
|
|
$ |
1,077.4 |
|
|
$ |
114.7 |
|
Cash
and marketable securities as a percentage of last twelve months
revenue
|
|
|
35 |
% |
|
|
29 |
% |
|
6
pts
|
|
Long-term
debt, net of current portion
|
|
|
1,699.2 |
|
|
|
1,596.3 |
|
|
|
102.9 |
|
Shareholders’
equity
|
|
|
872.1 |
|
|
|
661.9 |
|
|
|
210.2 |
|
Long-term
debt-to-capital assuming aircraft operating leases are capitalized at
seven times annualized rent
|
|
76%:24%
|
|
|
81%:19%
|
|
|
(5) pts
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion summarizes the primary drivers
of the increase in our cash and marketable securities balance and our
expectation of future cash requirements.
ANALYSIS OF OUR CASH FLOWS
Cash
Provided by Operating Activities
During
2009, net cash provided by operating activities was $305.3 million, compared to
$164.3 million during 2008. The $141.0 million increase was primarily driven by
the significant decline in fuel costs compared to the prior year, partially
offset by lower revenues and a supplementary $100 million contribution to our
pension plans in December 2009.
We
typically generate positive cash flows from operations, but historically have
consumed substantially all of that cash plus additional debt proceeds for
capital expenditures and debt payments. In 2010, however, we
anticipate much lower capital expenditures than in the past few years and may
choose to use our operating cash flow to pay down debt, provide more funding to
our pension plans, repurchase our common stock, or a combination
thereof.
Cash
Used in Investing Activities
Our
investing activities are primarily made up of capital expenditures associated
with our fleet transitions and, to a lesser extent, purchases and sales of
marketable securities. Cash used in investing activities was $657.4 million
during 2009, compared to $581.3 million in 2008. Our capital expenditures
increased by $25.6 million as a result of the purchase of ten B737-800s and five
Q400s in 2009, versus the purchase of 11 B737-800s and two Q400s in
2008.
We
currently expect capital expenditures to be approximately $207 million (of which
$122 million is expected to be aircraft-related) during 2010 as we take delivery
of four new B737-800s and begin work on an airport terminal move at Los Angeles
International airport.
Cash
Provided by Financing Activities
We
finance a large portion of our capital spending with debt financing. Net cash
provided by financing activities was $233.2 million during 2009 compared to
$495.8 million during 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 $264.6
million for five new Q400 aircraft and six new B737-800
aircraft. Offsetting these proceeds were long-term debt payments of
$135.7 million, $50.3 million of payments on our pre-delivery payment facility,
and a $75 million payment on our bank line-of-credit
facility. Additionally, we repurchased $23.8 million of our common
stock in 2009, compared to a $48.9 million repurchase in 2008.
We plan
to meet our capital and operating commitments through internally generated funds
from operations and cash and marketable securities on hand, along with
additional debt financing if necessary.
Bank
Line-of-Credit Facility
Alaska
has a $185 million variable-rate credit facility that expires in March 2010. The
facility has a requirement for us to maintain a minimum unrestricted cash and
marketable securities balance of $500 million. There is no outstanding balance
on this facility at December 31, 2009. We are working to renew this facility and
believe we can do so at terms that will be acceptable to us. See Note
6 in the consolidated financial statements for further discussion.
Pre-delivery
Payment Facility
Alaska’s
$80 million variable-rate revolving loan facility expiring in August 2011 is
available to provide a portion of the pre-delivery funding requirements of
Alaska’s purchase of Boeing 737-800 aircraft under the current aircraft purchase
agreement. As of December 31, 2009, there were no outstanding borrowings
under this facility. See Note 6 in the consolidated financial statements for
further discussion.
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 agreed to purchase 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, at December 31, 2009, we had firm
orders to purchase 23 aircraft requiring future aggregate payments of
approximately $588.8 million, as set forth below. Alaska has options to acquire
40 additional B737s and Horizon has options to acquire 10 Q400s.
The
following table summarizes aircraft purchase commitments and payments by year,
as of December 31, 2009:
Aircraft
|
|
Delivery
Period - Firm Orders
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Beyond
2013
|
|
|
Total
|
|
Boeing
737-800
|
|
|
4 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
15 |
|
Bombardier
Q400
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
- |
|
|
|
8 |
|
Total
|
|
|
4 |
|
|
|
3 |
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
(millions)*
|
|
$ |
121.0 |
|
|
$ |
91.0 |
|
|
$ |
144.7 |
|
|
$ |
143.0 |
|
|
$ |
89.1 |
|
|
$ |
588.8 |
|
*
|
Includes
pre-delivery payments to Boeing and Bombardier as well as final aircraft
payments.
|
We expect to pay for the four 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 internally
generated cash, long-term debt, or operating lease
arrangements.
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 December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
(in millions)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2014
|
|
|
Total
|
|
Current
and long-term debt obligations (excluding the pre-
delivery payment facility)
|
|
$ |
156.0 |
|
|
$ |
191.5 |
|
|
$ |
236.3 |
|
|
$ |
195.8 |
|
|
$ |
162.6 |
|
|
$ |
913.0 |
|
|
$ |
1,855.2 |
|
Operating
lease commitments (1)
|
|
|
234.2 |
|
|
|
200.9 |
|
|
|
199.9 |
|
|
|
156.6 |
|
|
|
139.3 |
|
|
|
425.4 |
|
|
|
1,356.3 |
|
Aircraft
purchase commitments
|
|
|
121.0 |
|
|
|
91.0 |
|
|
|
144.7 |
|
|
|
143.0 |
|
|
|
56.2 |
|
|
|
32.9 |
|
|
|
588.8 |
|
Interest
obligations (2)
|
|
|
100.6 |
|
|
|
99.4 |
|
|
|
88.6 |
|
|
|
73.3 |
|
|
|
61.8 |
|
|
|
184.0 |
|
|
|
607.7 |
|
Other
obligations (3)
|
|
|
65.3 |
|
|
|
51.9 |
|
|
|
52.2 |
|
|
|
42.2 |
|
|
|
54.3 |
|
|
|
-- |
|
|
|
265.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
677.1 |
|
|
$ |
634.7 |
|
|
$ |
721.7 |
|
|
$ |
610.9 |
|
|
$ |
474.2 |
|
|
$ |
1,555.3 |
|
|
$ |
4,673.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 three 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.
|
(2)
|
For
variable-rate debt, future obligations are shown above using interest
rates in effect as of December 31,
2009.
|
(3)
|
Includes
minimum obligations under our long-term power-by-the-hour maintenance
agreements for all B737 engines other than the
B737-800.
|
Pension
Obligations
The table
above excludes contributions to our various pension plans, which could be
approximately $45 million to $75 million per year based on our historical
funding practice, although there is no minimum required contribution in 2010.
With the recent volatility in market values, the fair value of plan assets has
fluctuated significantly in the past two years. In 2009, our plan
assets recovered some of the value lost with the market declines in
2008. As a result of the partial value recovery and a supplemental
$100 million contribution to the plan in December 2009, the unfunded liability
for our qualified defined-benefit pension plans was $272.9 million at December
31, 2009 compared to $444.9 million at December 31, 2008. This results in a
76.9% funded status on a projected benefit obligation basis compared to 59.4%
funded as of December 31, 2008.
Credit
Card Agreements
We have
agreements with a number of credit card companies to process the sale of tickets
and other services. Under these agreements, there are material adverse change
clauses that, if triggered, could result in the credit card companies holding
back a reserve from our credit card receivables. Under one such agreement, we
could be required to maintain a reserve if our credit rating is downgraded to or
below a rating specified by the agreement. Under another such agreement, we
would be obligated to maintain a reserve if our cash balance fell below $350
million. We are not currently required to maintain any reserve under these
agreements, but if we were, our financial position and liquidity could be
materially harmed.
EFFECT OF INFLATION AND PRICE CHANGES
Inflation
and price changes other than for aircraft fuel do not have a significant effect
on our operating revenues, operating expenses and operating income.
We strive
to provide a return to our investors that exceeds the cost of the capital
employed in our business. Our target return on invested capital (ROIC) is 10%.
We have not historically reached this threshold, nor did we in the periods
presented in this report. However, our strategic plan is built on the premise of
providing an appropriate return to all capital providers.
|
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
|
We have
interest-rate risk on our variable-rate debt obligations and our
available-for-sale marketable investment portfolio, and commodity-price risk in
jet fuel required to operate our aircraft fleet. We purchase the majority of our
jet fuel at prevailing market prices and seek to manage market risk through
execution of our hedging strategy and other means. We have market-sensitive
instruments in the form of fixed-rate debt instruments, and financial derivative
instruments used to hedge our exposure to jet-fuel price increases and
interest-rate increases. We do not purchase or hold any derivative financial
instruments for trading purposes.
Market Risk – Aircraft Fuel
Currently,
our fuel-hedging portfolio consists of crude oil call options and jet fuel
refining margin swap contracts. We utilize the contracts in our portfolio as
hedges to decrease our exposure to the volatility of jet fuel prices. Call
options are designed to effectively cap our cost of the crude oil component of
fuel prices, allowing us to limit our exposure to increasing fuel prices. With
these call option contracts, we still benefit from the decline in crude oil
prices, as there is no downward exposure other than the premiums that we pay to
enter into the contracts. 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 December 31, 2009 would increase or decrease the
fair value of our crude oil hedge portfolio by approximately $40.6 million and
$35.6 million, respectively.
Our
portfolio of fuel hedge contracts was worth $115.9 million at December 31,
2009, for which we have paid $88.9 million of premiums to counterparties,
compared to a portfolio value of $28.3 million at December 31, 2008. We do
not have any collateral held by counterparties to these agreements as of
December 31, 2009.
We
continue to believe that our fuel hedge program is an important part of our
strategy to reduce our exposure to volatile fuel prices. We expect to continue
to enter into these types of contracts prospectively, although significant
changes in market conditions could affect our decisions. For more discussion,
see Note 3 to our consolidated financial statements.
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. A hypothetical 10% change in the average interest rates
incurred on variable-rate debt during 2009 would correspondingly change our net
earnings and cash flows associated with these items by approximately $1.1
million. In order to help mitigate the risk of interest rate fluctuations, we
have fixed the interest rates on certain existing variable-rate debt agreements
over the past several years. Our variable-rate debt is approximately 22% of our
total long-term debt at December 31, 2009 compared to 21% at
December 31, 2008.
We also
have investments in marketable securities, which are exposed to market risk
associated with changes in interest rates. If short-term interest rates were to
average 1% more than they did in 2009, interest income would increase by
approximately $11.4 million.
ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
SELECTED QUARTERLY CONSOLIDATED
FINANCIAL INFORMATION (unaudited)
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
(in
millions, except per share)
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
revenues
|
|
$ |
742.4 |
|
|
$ |
839.5 |
|
|
$ |
843.9 |
|
|
$ |
930.8 |
|
|
$ |
967.4 |
|
|
$ |
1,065.2 |
|
|
$ |
846.1 |
|
|
$ |
827.1 |
|
Operating
income (loss)
|
|
|
(11.9 |
) |
|
|
(52.0 |
) |
|
|
66.7 |
|
|
|
106.5 |
|
|
|
159.8 |
|
|
|
(120.0 |
) |
|
|
52.8 |
|
|
|
(106.7 |
) |
Net
income (loss)
|
|
|
(19.2 |
) |
|
|
(37.3 |
) |
|
|
29.1 |
|
|
|
63.1 |
|
|
|
87.6 |
|
|
|
(86.5 |
) |
|
|
24.1 |
|
|
|
(75.2 |
) |
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)*
|
|
|
(0.53 |
) |
|
|
(1.01 |
) |
|
|
0.80 |
|
|
|
1.75 |
|
|
|
2.48 |
|
|
|
(2.40 |
) |
|
|
0.68 |
|
|
|
(2.08 |
) |
Diluted
earnings (loss) pershare:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)*
|
|
|
(0.53 |
) |
|
|
(1.01 |
) |
|
|
0.79 |
|
|
|
1.74 |
|
|
|
2.46 |
|
|
|
(2.40 |
) |
|
|
0.67 |
|
|
|
(2.08 |
) |
*
|
For
earnings per share, the sum of the quarters will not equal the total for
the full year.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board
of Directors and Shareholders
Alaska
Air Group, Inc.:
We have
audited the accompanying consolidated balance sheets of Alaska Air Group, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2009. In
connection with our audits of the consolidated financial statements, we also
have audited financial statement schedule II. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Alaska Air Group, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth thereon.
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(included in FASB ASC Topic 320, Investments-Debt and Equity
Securities) and the measurement date
provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (included in FASB ASC Topic 960, Plan Accounting – Defined
Benefit Pension Plans), effective
January 1, 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Alaska Air Group, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 18, 2010,
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
|
|
|
|
|
|
|
ALASKA
AIR GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 (in
millions)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
164.2 |
|
|
$ |
283.1 |
|
Marketable
securities
|
|
|
1,027.9 |
|
|
|
794.3 |
|
Total
cash and marketable securities
|
|
|
1,192.1 |
|
|
|
1,077.4 |
|
Receivables
- less allowance for doubtful accounts of $1.5
|
|
|
111.8 |
|
|
|
116.7 |
|
Inventories
and supplies - net
|
|
|
45.8 |
|
|
|
51.9 |
|
Deferred
income taxes
|
|
|
120.3 |
|
|
|
164.4 |
|
Fuel
hedge contracts
|
|
|
65.1 |
|
|
|
16.5 |
|
Prepaid
expenses and other current assets
|
|
|
99.2 |
|
|
|
82.0 |
|
Total
Current Assets
|
|
|
1,634.3 |
|
|
|
1,508.9 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
Aircraft
and other flight equipment
|
|
|
3,660.1 |
|
|
|
3,431.0 |
|
Other
property and equipment
|
|
|
631.3 |
|
|
|
608.6 |
|
Deposits
for future flight equipment
|
|
|
215.5 |
|
|
|
309.8 |
|
|
|
|
4,506.9 |
|
|
|
4,349.4 |
|
Less
accumulated depreciation and amortization
|
|
|
1,339.0 |
|
|
|
1,181.7 |
|
Total
Property and Equipment - Net
|
|
|
3,167.9 |
|
|
|
3,167.7 |
|
|
|
|
|
|
|
|
|
|
Fuel
Hedge Contracts
|
|
|
50.8 |
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
132.0 |
|
|
|
123.1 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
4,985.0 |
|
|
$ |
4,835.6 |
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
BALANCE SHEETS – (continued)
As of December 31 (in millions except share
amounts)
|
|
2009
|
|
|
2008
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
63.3 |
|
|
$ |
59.6 |
|
Accrued
aircraft rent
|
|
|
54.0 |
|
|
|
64.4 |
|
Accrued
wages, vacation and payroll taxes
|
|
|
155.4 |
|
|
|
119.5 |
|
Other
accrued liabilities
|
|
|
463.3 |
|
|
|
475.4 |
|
Air
traffic liability
|
|
|
366.3 |
|
|
|
372.7 |
|
Fuel
hedge contracts liability
|
|
|
- |
|
|
|
24.1 |
|
Current
portion of long-term debt
|
|
|
156.0 |
|
|
|
244.9 |
|
Total
Current Liabilities
|
|
|
1,258.3 |
|
|
|
1,360.6 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, Net of Current Portion
|
|
|
1,699.2 |
|
|
|
1,596.3 |
|
Other
Liabilities and Credits
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
151.1 |
|
|
|
36.7 |
|
Deferred
revenue
|
|
|
438.1 |
|
|
|
421.3 |
|
Obligation
for pension and postretirement medical benefits
|
|
|
421.0 |
|
|
|
584.7 |
|
Other
liabilities
|
|
|
145.2 |
|
|
|
174.1 |
|
|
|
|
1,155.4 |
|
|
|
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
- 35,843,092 shares
|
|
|
|
|
|
|
|
|
2008
- 43,171,404 shares
|
|
|
35.8 |
|
|
|
43.2 |
|
Capital
in excess of par value
|
|
|
767.0 |
|
|
|
915.0 |
|
Treasury
stock (common), at cost: 2009 - 252,084 shares
|
|
|
|
|
|
|
|
|
2008
- 6,896,506 shares
|
|
|
(5.7 |
) |
|
|
(161.4 |
) |
Accumulated
other comprehensive loss
|
|
|
(240.0 |
) |
|
|
(328.3 |
) |
Retained
earnings
|
|
|
315.0 |
|
|
|
193.4 |
|
|
|
|
872.1 |
|
|
|
661.9 |
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
4,985.0 |
|
|
$ |
4,835.6 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
ALASKA
AIR GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(in millions
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
3,092.1 |
|
|
$ |
3,355.8 |
|
|
$ |
3,236.5 |
|
Freight
and mail
|
|
|
95.9 |
|
|
|
103.6 |
|
|
|
97.8 |
|
Other
- net
|
|
|
211.8 |
|
|
|
160.9 |
|
|
|
171.7 |
|
Change
in Mileage Plan terms
|
|
|
- |
|
|
|
42.3 |
|
|
|
- |
|
Total
Operating Revenues
|
|
|
3,399.8 |
|
|
|
3,662.6 |
|
|
|
3,506.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
and benefits
|
|
|
988.1 |
|
|
|
943.7 |
|
|
|
959.0 |
|
Variable
incentive pay
|
|
|
76.0 |
|
|
|
21.4 |
|
|
|
20.8 |
|
Aircraft
fuel, including hedging gains and losses
|
|
|
658.1 |
|
|
|
1,398.4 |
|
|
|
876.3 |
|
Aircraft
maintenance
|
|
|
223.1 |
|
|
|
208.8 |
|
|
|
241.8 |
|
Aircraft
rent
|
|
|
153.7 |
|
|
|
163.1 |
|
|
|
178.4 |
|
Landing
fees and other rentals
|
|
|
223.2 |
|
|
|
223.7 |
|
|
|
226.0 |
|
Contracted
services
|
|
|
150.6 |
|
|
|
166.1 |
|
|
|
160.6 |
|
Selling
expenses
|
|
|
131.8 |
|
|
|
147.1 |
|
|
|
160.5 |
|
Depreciation
and amortization
|
|
|
219.2 |
|
|
|
204.6 |
|
|
|
177.4 |
|
Food
and beverage service
|
|
|
50.1 |
|
|
|
50.9 |
|
|
|
49.7 |
|
Other
|
|
|
213.9 |
|
|
|
222.9 |
|
|
|
230.5 |
|
New
pilot contract transition costs
|
|
|
35.8 |
|
|
|
- |
|
|
|
- |
|
Restructuring
charges
|
|
|
- |
|
|
|
12.9 |
|
|
|
- |
|
Fleet
transition costs - MD-80
|
|
|
- |
|
|
|
47.5 |
|
|
|
- |
|
Fleet
transition costs - CRJ-700
|
|
|
- |
|
|
|
13.5 |
|
|
|
- |
|
Fleet
transition costs - Q200
|
|
|
8.8 |
|
|
|
10.2 |
|
|
|
14.1 |
|
Total
Operating Expenses
|
|
|
3,132.4 |
|
|
|
3,834.8 |
|
|
|
3,295.1 |
|
Operating
Income (Loss)
|
|
|
267.4 |
|
|
|
(172.2 |
) |
|
|
210.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
32.6 |
|
|
|
42.4 |
|
|
|
53.9 |
|
Interest
expense
|
|
|
(100.5 |
) |
|
|
(102.3 |
) |
|
|
(88.0 |
) |
Interest
capitalized
|
|
|
7.6 |
|
|
|
23.2 |
|
|
|
27.8 |
|
Other
- net
|
|
|
(4.2 |
) |
|
|
(4.3 |
) |
|
|
(4.1 |
) |
|
|
|
(64.5 |
) |
|
|
(41.0 |
) |
|
|
(10.4 |
) |
Income
(loss) before income tax
|
|
|
202.9 |
|
|
|
(213.2 |
) |
|
|
200.5 |
|
Income
tax expense (benefit)
|
|
|
81.3 |
|
|
|
(77.3 |
) |
|
|
76.2 |
|
Net
Income (Loss)
|
|
$ |
121.6 |
|
|
$ |
(135.9 |
) |
|
$ |
124.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings
(Loss) Per Share:
|
|
$ |
3.39 |
|
|
$ |
(3.74 |
) |
|
$ |
3.10 |
|
Diluted
Earnings (Loss) Per Share:
|
|
$ |
3.36 |
|
|
$ |
(3.74 |
) |
|
$ |
3.07 |
|
Shares
used for computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35.815 |
|
|
|
36.343 |
|
|
|
40.125 |
|
Diluted
|
|
|
36.154 |
|
|
|
36.343 |
|
|
|
40.424 |
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Capital
in
|
|
|
Treasury
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess
of
|
|
|
Stock,
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
(in millions)
|
|
Outstanding
|
|
|
Stock
|
|
|
Par
Value
|
|
|
at
Cost
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balances
at December 31, 2006
|
|
|
40.294 |
|
|
$ |
42.5 |
|
|
$ |
880.8 |
|
|
$ |
(50.4 |
) |
|
$ |
(191.4 |
) |
|
$ |
205.0 |
|
|
$ |
886.5 |
|
2007
net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124.3 |
|
|
|
124.3 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
Reclassification
to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
3.3 |
|
Related
to employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment, net of $29.6 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.8 |
|
|
|
|
|
|
|
49.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
medical liability adjustment, net of $2.5 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
supplemental retirement plan, net of $0.5 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
(2.593 |
) |
|
|
- |
|
|
|
- |
|
|
|
(62.8 |
) |
|
|
|
|
|
|
|
|
|
|
(62.8 |
) |
Stock-based
compensation
|
|
|
-- |
|
|
|
- |
|
|
|
12.3 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
12.3 |
|
Treasury
stock issued under stock plans
|
|
|
0.029 |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Stock
issued for employee stock purchase plan
|
|
|
0.127 |
|
|
|
0.1 |
|
|
|
2.9 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
3.0 |
|
Stock
issued under stock plans, including $0.4 tax benefit
|
|
|
0.194 |
|
|
|
0.2 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Balances
at December 31, 2007
|
|
|
38.051 |
|
|
$ |
42.8 |
|
|
$ |
899.1 |
|
|
$ |
(112.5 |
) |
|
$ |
(133.3 |
) |
|
$ |
329.3 |
|
|
$ |
1,025.4 |
|
2008
net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135.9 |
) |
|
|
(135.9 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.7 |
) |
|
|
|
|
|
|
|
|
Reclassification
to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.6 |
) |
|
|
|
|
|
|
(5.6 |
) |
Related
to employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment, net of $113.5 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188.9 |
) |
|
|
|
|
|
|
(188.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
medical liability adjustment, net of $0.5 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
supplemental retirement plan, net of $0.1 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
(2.126 |
) |
|
|
- |
|
|
|
- |
|
|
|
(48.9 |
) |
|
|
|
|
|
|
|
|
|
|
(48.9 |
) |
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
13.4 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
13.4 |
|
Treasury
stock issued under stock plans
|
|
|
0.001 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Stock
issued for employee stock purchase plan
|
|
|
0.169 |
|
|
|
0.2 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
Stock
issued under stock plans
|
|
|
0.180 |
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
Balances
at December 31, 2008
|
|
|
36.275 |
|
|
$ |
43.2 |
|
|
$ |
915.0 |
|
|
$ |
(161.4 |
) |
|
$ |
(328.3 |
) |
|
$ |
193.4 |
|
|
$ |
661.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY - (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2009
net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.6 |
|
|
|
121.6 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
Reclassification
to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
|
|
|
|
|
|
11.2 |
|
Related
to employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment, net of $42.3 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.9 |
|
|
|
|
|
|
|
71.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
medical liability adjustment, net of $2.3 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
supplemental retirement plan, net of $0.2 tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to interest rate derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
Income
tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
1.5 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209.9 |
|
Purchase
of treasury stock
|
|
|
(1.325 |
) |
|
|
|
|
|
|
|
|
|
|
(23.8 |
) |
|
|
|
|
|
|
|
|
|
|
(23.8 |
) |
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.9 |
|
Treasury
stock issued under stock plans
|
|
|
0.069 |
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
Delisting
of treasury shares
|
|
|
|
|
|
|
(7.9 |
) |
|
|
(170.1 |
) |
|
|
178.0 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Stock
issued for employee stock purchase plan
|
|
|
0.185 |
|
|
|
0.2 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Stock
issued under stock plans, including $0.3 million tax
benefit
|
|
|
0.387 |
|
|
|
0.3 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.6 |
|
Balances
at December 31, 2009
|
|
|
35.591 |
|
|
$ |
35.8 |
|
|
$ |
767.0 |
|
|
$ |
(5.7 |
) |
|
$ |
(240.0 |
) |
|
$ |
315.0 |
|
|
$ |
872.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31 (in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
121.6 |
|
|
$ |
(135.9 |
) |
|
$ |
124.3 |
|
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
|
|
|
- |
|
|
|
12.9 |
|
|
|
- |
|
Fleet
transition costs, including impairment charge
|
|
|
8.8 |
|
|
|
71.2 |
|
|
|
14.1 |
|
Depreciation
and amortization
|
|
|
219.2 |
|
|
|
204.6 |
|
|
|
177.4 |
|
Stock-based
compensation
|
|
|
11.9 |
|
|
|
13.4 |
|
|
|
12.3 |
|
Changes
in fair values of open fuel hedge contracts
|
|
|
(87.6 |
) |
|
|
84.2 |
|
|
|
(43.9 |
) |
Changes
in deferred income taxes
|
|
|
84.1 |
|
|
|
(61.0 |
) |
|
|
60.7 |
|
(Increase)
decrease in receivables - net
|
|
|
4.9 |
|
|
|
21.3 |
|
|
|
(3.8 |
) |
Increase
in prepaid expenses and other current assets
|
|
|
(11.4 |
) |
|
|
(8.6 |
) |
|
|
(4.6 |
) |
Increase
(decrease) in air traffic liability
|
|
|
(6.4 |
) |
|
|
8.2 |
|
|
|
52.4 |
|
Increase
(decrease) in other current liabilities
|
|
|
8.1 |
|
|
|
(40.7 |
) |
|
|
26.0 |
|
Increase
(decrease) in deferred revenue and other-net
|
|
|
(63.4 |
) |
|
|
(5.3 |
) |
|
|
67.1 |
|
Net
cash provided by operating activities
|
|
|
305.3 |
|
|
|
164.3 |
|
|
|
482.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
and aircraft purchase deposits
|
|
|
(367.2 |
) |
|
|
(317.1 |
) |
|
|
(737.6 |
) |
Other
flight equipment
|
|
|
(30.6 |
) |
|
|
(56.5 |
) |
|
|
(46.0 |
) |
Other
property and equipment
|
|
|
(40.6 |
) |
|
|
(39.2 |
) |
|
|
(50.8 |
) |
Total
property and equipment additions
|
|
|
(438.4 |
) |
|
|
(412.8 |
) |
|
|
(834.4 |
) |
Proceeds
from disposition of assets
|
|
|
6.7 |
|
|
|
9.6 |
|
|
|
63.4 |
|
Purchases
of marketable securities
|
|
|
(942.6 |
) |
|
|
(766.0 |
) |
|
|
(1,149.3 |
) |
Sales
and maturities of marketable securities
|
|
|
725.0 |
|
|
|
579.6 |
|
|
|
1,321.1 |
|
Restricted
deposits and other
|
|
|
(8.1 |
) |
|
|
8.3 |
|
|
|
(2.6 |
) |
Net
cash used in investing activities
|
|
|
(657.4 |
) |
|
|
(581.3 |
) |
|
|
(601.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
275.0 |
|
|
|
883.9 |
|
|
|
281.9 |
|
Proceeds
from sale-leaseback transactions, net
|
|
|
230.0 |
|
|
|
- |
|
|
|
- |
|
Long-term
debt payments
|
|
|
(261.0 |
) |
|
|
(343.2 |
) |
|
|
(132.2 |
) |
Purchase
of treasury stock
|
|
|
(23.8 |
) |
|
|
(48.9 |
) |
|
|
(62.8 |
) |
Proceeds
and tax benefit from issuance of common stock
|
|
|
13.0 |
|
|
|
4.0 |
|
|
|
6.5 |
|
Net
cash provided by financing activities
|
|
|
233.2 |
|
|
|
495.8 |
|
|
|
93.4 |
|
Net
change in cash and cash equivalents
|
|
|
(118.9 |
) |
|
|
78.8 |
|
|
|
(26.4 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
283.1 |
|
|
|
204.3 |
|
|
|
230.7 |
|
Cash
and cash equivalents at end of year
|
|
$ |
164.2 |
|
|
$ |
283.1 |
|
|
$ |
204.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid (refunded) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$ |
94.6 |
|
|
$ |
71.0 |
|
|
$ |
58.6 |
|
Income
taxes
|
|
|
(8.8 |
) |
|
|
(0.6 |
) |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
The
consolidated financial statements include the accounts of Alaska Air Group, Inc.
(Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska)
and Horizon Air Industries, Inc. (Horizon), through which the Company conducts
substantially all of its operations. All significant intercompany balances and
transactions have been eliminated. These financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America and their preparation requires the use of management’s estimates.
Actual results may differ from these estimates.
Nature
of Operations
Alaska
and Horizon operate as airlines. However, their business plans, competition, and
economic risks differ substantially. For more detailed information about the
Company’s operations, see Item 1. “Our Business” in this Form 10-K.
The
Company’s operations and financial results are subject to various uncertainties,
such as general economic conditions, volatile fuel prices, industry instability,
intense competition, a largely unionized work force, the need to finance large
capital expenditures and the related availability of capital, government
regulation, and potential aircraft incidents.
Approximately
72% of Air Group’s employees are covered by collective bargaining agreements,
including approximately 29% that are covered under agreements that are currently
in negotiations or become amendable prior to December 31,
2010.
The
airline industry is characterized by high fixed costs. Small fluctuations in
load factors and yield (a measure of ticket prices) can have a significant
impact on operating results. The Company has been and continues working to
reduce unit costs to better compete with carriers that have lower cost
structures.
Substantially
all sales occur in the United States. See Note 13 for operating segment
information and geographic concentrations.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with original maturities of
three months or less. They are carried at cost, which approximates market value.
The Company reduces cash balances when checks are disbursed. Due to the time
delay in checks clearing the banks, the Company normally maintains a negative
balance in its cash disbursement accounts, which is reported as a current
liability. The amount of the negative cash balance was $26.9 million and $14.1
million at December 31, 2009 and 2008, respectively, and is included in
accounts payable.
Receivables
Receivables
consist primarily of airline traffic (including credit card) receivables,
amounts from customers, Mileage Plan partners, government tax authorities, and
other miscellaneous amounts due to the Company, and are net of an allowance for
doubtful accounts. Management determines the allowance for doubtful accounts
based on known troubled accounts and historical experience applied to an aging
of accounts.
Inventories
and Supplies—net
Expendable
aircraft parts, materials and supplies are stated at average cost and are
included in inventories and supplies-net. An obsolescence allowance for
expendable parts is accrued based on estimated lives of the corresponding fleet
type and salvage values. Surplus inventories are carried at their net realizable
value. The allowance for all non-surplus expendable inventories was $26.0
million and $21.4 million at December 31, 2009 and 2008, respectively.
Inventory and supplies-net also includes fuel inventory of $14.0 million and
$15.9 million at December 31, 2009 and 2008, respectively. Repairable and
rotable aircraft parts inventories are included in flight
equipment.
Property,
Equipment and Depreciation
Property
and equipment are recorded at cost and depreciated using the straight-line
method over their estimated useful lives, which are as follows:
Aircraft
and related flight equipment:
|
|
Boeing
737-400/700/800/900
|
20
years
|
Bombardier
Q400
|
15
years
|
Buildings
|
25-30
years
|
Minor
building and land improvements
|
10
years
|
Capitalized
leases and leasehold improvements
|
Shorter of lease term or
estimated
useful life
|
Computer
hardware and software
|
3-5
years
|
Other
furniture and equipment
|
5-10
years
|
As a
result of the early retirement of the MD-80 and Q200 fleets, all remaining
flight equipment of those fleets have been depreciated to their expected salvage
values. The estimated useful lives are aligned with the fleet’s average expected
retirement date.
“Related
flight equipment” includes rotable and repairable spare inventories, which are
depreciated over the associated fleet life unless otherwise noted.
Maintenance
and repairs, other than engine maintenance on B737-400, -700 and -900 engines,
are expensed when incurred. Major modifications that extend the life or improve
the usefulness of aircraft are capitalized and depreciated over their estimated
period of use. Maintenance on B737-400, -700 and -900 engines is covered under
power-by-the-hour agreements with third parties, whereby the Company pays a
determinable amount, and transfers risk, to a third party. The
Company expenses the contract amounts based on engine usage.
The
Company evaluates long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the total carrying amount of an
asset or asset group may not be recoverable. The Company groups assets for
purposes of such reviews at the lowest level for which identifiable cash flows
of the asset group are largely independent of the cash flows of other groups of
assets and liabilities. An impairment loss is considered when estimated future
undiscounted cash flows expected to result from the use of the asset or asset
group and its eventual disposition are less than its carrying amount. If the
asset or asset group is not considered recoverable, a write- down equal to the
excess of the carrying amount over the fair value will be recorded. The Company
determined that its two owned CRJ-700 aircraft and the fleet’s related spare
parts were impaired during 2008. See Note 2 for further discussion of this
impairment and other fleet transition costs.
Internally
Used Software Costs
The
Company capitalizes costs to develop internal-use software that are incurred in
the application development stage. Amortization commences when the software is
ready for its intended use and the amortization period is the estimated useful
life of the software, generally three to five years. Capitalized costs primarily
include contract labor and payroll costs of the individuals dedicated to the
development of internal-use software. The Company capitalized software
development costs of $0.7 million, $1.0 million, and $3.0 million during the
years ended December 31, 2009, 2008, and 2007, respectively.
Workers
Compensation and Employee Health-Care Accruals
The
Company uses a combination of self-insurance and insurance programs to provide
for workers compensation claims and employee health care benefits. Liabilities
associated with the risks that are retained by the Company are not discounted
and are estimated, in part, by considering historical claims experience,
severity factors and other actuarial assumptions. The estimated accruals for
these liabilities could be significantly affected if future occurrences and
claims differ from these assumptions and historical trends.
Deferred
Revenue
Deferred
revenue results primarily from the sale of mileage credits. This revenue is
recognized when award transportation is provided or over the term of the
applicable agreement.
Operating
Leases
The
Company leases aircraft, airport and terminal facilities, office space, and
other equipment under operating leases. Some of these lease agreements contain
rent escalation clauses or rent holidays. For scheduled rent escalation clauses
during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy, the Company records minimum rental expenses on a
straight-line basis over the terms of the leases in the consolidated statements
of operations.
Leased
Aircraft Return Costs
Cash
payments associated with returning leased aircraft are accrued when it is
probable that a cash payment will be made and that amount is reasonably
estimable. Any accrual is based on the time remaining on the lease,
planned aircraft usage and the provisions included in the lease agreement,
although the actual amount due to any lessor
upon return will not be known with certainty until lease
termination.
As leased
aircraft are returned, any payments are charged against the established accrual.
The accrual is part of other current and long-term liabilities, and was $9.2
million and $14.2 million as of December 31, 2009 and December 31,
2008, respectively.
Revenue
Recognition
Passenger
revenue is recognized when the passenger travels. Tickets sold but not yet used
are reported as air traffic liability until travel or date of expiration.
Passenger traffic commissions and related fees are expensed when the related
revenue is recognized. Passenger traffic commissions and related fees not yet
recognized are included as a prepaid expense. Due to complex pricing structures,
refund and exchange policies, and interline agreements with other airlines,
certain amounts are recognized as revenue using estimates regarding both the
timing of the revenue recognition and the amount of revenue to be recognized.
These estimates are generally based on the Company’s historical
data.
Passenger
revenue also includes certain “ancillary” or non-ticket revenue such as
reservations fees, ticket change fees, and baggage service
charges. These fees are recognized as revenue when the related
services are provided.
Freight
and mail revenues are recognized when service is provided.
Other--net
revenues are primarily related to the Mileage Plan and they are recognized as
described in the “Mileage Plan” paragraph below. Other—net also includes certain
ancillary revenues such as on-board food and beverage sales, commissions from
car and hotel vendors, travel insurance commissions. These items are
recognized as revenue when the services are provided. Boardroom
(airport lounges) memberships are recognized as revenue over the membership
period.
Mileage
Plan
Alaska
operates a frequent flyer program (“Mileage Plan”) that provides travel awards
to members based on accumulated mileage. For miles earned by flying on Alaska or
Horizon and through airline partners, the estimated cost of providing free
travel awards is recognized as a selling expense and accrued as a liability as
miles are earned and accumulated.
Alaska
also sells mileage credits to non-airline partners such as hotels, car rental
agencies, a grocery store chain, and a major bank that offers Alaska Airlines
affinity credit cards. The Company defers the portion of the sales proceeds that
represents the estimated fair value of the award transportation and recognizes
that amount as revenue when the award transportation is provided. The deferred
proceeds are recognized as passenger revenue for awards redeemed and flown on
Alaska or Horizon, and as other-net revenue for awards redeemed and flown on
other airlines (less the cost paid to the other airline). The portion of the
sales proceeds not deferred is recognized as commission income and included in
other revenue-net in the consolidated statements of operations.
Alaska’s
Mileage Plan deferred revenue and liabilities are included under the following
consolidated balance sheet captions at December 31 (in
millions):
Balance
Sheet Captions
|
|
2009
|
|
|
2008
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Other
accrued liabilities
|
|
$ |
267.9 |
|
|
$ |
280.4 |
|
Other
Liabilities and Credits:
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
410.6 |
|
|
|
394.1 |
|
Other
liabilities
|
|
|
13.2 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
691.7 |
|
|
$ |
690.4 |
|
|
|
|
|
|
|
|
|
|
The
amounts recorded in other accrued liabilities relate primarily to deferred
revenue expected to be realized within one year, including $41.6 million and
$43.4 million at December 31, 2009 and 2008, respectively, associated with
Mileage Plan awards issued but not yet flown.
Alaska’s
Mileage Plan revenue is included under the following consolidated statements of
operations captions for the years ended December 31 (in
millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Passenger
revenues
|
|
$ |
182.1 |
|
|
$ |
144.2 |
|
|
$ |
115.6 |
|
Other-net
revenues
|
|
|
151.5 |
|
|
|
101.5 |
|
|
|
112.0 |
|
Change
in Mileage Plan
terms
|
|
|
— |
|
|
|
42.3 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Mileage Plan revenues
|
|
$ |
333.6 |
|
|
$ |
288.0 |
|
|
$ |
227.6 |
|
During
2008, the Company changed the terms of its Mileage Plan program regarding the
expiration of award miles. Beginning in the third quarter, Mileage Plan accounts
with no activity for two years are deleted. As a result of the deletion of a
number of accounts, the Company reduced its liability for future travel awards
by $42.3 million, which has been recorded in the consolidated statements of
operations as “Change in Mileage Plan terms.”
Aircraft
Fuel
Aircraft
fuel includes raw jet fuel and associated “into-plane” costs, fuel taxes, oil,
and all of the gains and losses associated with fuel hedge
contracts.
Contracted Services
Contracted
services includes expenses for ground handling, security, navigation fees,
temporary employees, data processing fees, and other similar
services.
Selling
Expenses
Selling
expenses include credit card fees, global distribution systems charges, the
estimated cost of Mileage Plan free travel awards, advertising, promotional
costs, commissions, and incentives. Advertising production costs are expensed
the first time the advertising takes place. Advertising expense was $16.8
million, $14.0 million, and $13.7 million during the years ended
December 31, 2009, 2008, and 2007, respectively.
Capitalized Interest
Interest
is capitalized on flight equipment purchase deposits as a cost of the related
asset, and is depreciated over the estimated useful life of the asset. The
capitalized interest is based on the Company’s weighted-average borrowing
rate.
Derivative
Financial Instruments
The
Company accounts for financial derivative instruments as prescribed under the
accounting standards for derivatives and hedging activity. See Note 3 and Note
12 for further discussion.
Income Taxes
The
Company uses the asset and liability approach for accounting and reporting
income taxes. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. A valuation allowance would be established, if necessary, for the amount
of any tax benefits that, based on available evidence, are not expected to be
realized. The Company accounts for unrecognized tax benefits in accordance with
the accounting standards. See Note 11 for further discussion.
Taxes
Collected from Passengers
Taxes
collected from passengers, including sales taxes, airport and security fees and
other fees, are recorded on a net basis within passenger revenue in the
consolidated statements of operations.
Stock-Based
Compensation
Accounting
standards require companies to recognize as expense the fair value of stock
options and other equity-based compensation issued to employees as of the grant
date. These standards apply to all stock awards that the Company grants to
employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which
features a look-back provision and allows employees to purchase stock at a 15%
discount. All stock-based compensation expense is recorded in wages and benefits
in the consolidated statements of operations.
Accounting
Pronouncements Adopted in 2009
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 consolidated
financial statements have been changed to eliminate references to previous
standards.
In March
2008, the FASB issued new standards regarding disclosures about derivatives
instruments and hedging. These new standards require 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. This standard was adopted as of January 1,
2009. The required disclosures are included in Note 3 and Note
12. The adoption of this standard did not have a material impact on
the disclosures historically provided.
In April
2009, the FASB issued a new standard that 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. In
April 2009, the FASB also issued new accounting standards that provide
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 standards were effective for the Company as of
June 30, 2009. See Note 5 and Note 12 for a discussion of the impact
of these new positions to the Company’s financial statements.
In April
2009, the FASB issued new accounting standards that require companies to
provide, on an interim basis, disclosures that were previously only required in
annual statements for the fair value of financial instruments. This
new standard was effective for the Company as of June 30, 2009. The
required disclosures impacted the Company’s Form 10Q filings for the second and
third quarters in 2009. The new standards did not have an impact on
annual financial statements.
In
December 2008, the FASB issued new accounting standards regarding disclosure
about pension 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 the accounting standards as
it relates to the investments of the pension and postretirement benefit plans. This
statement is effective for annual financial statements for fiscal years ending
after December 15, 2009. See Note 8 for the disclosures required by
this standard. This position had no impact on the Company’s financial
position or results of operations.
Fourth
Quarter Adjustments
There
were no significant adjustments in the fourth quarters of 2009, 2008 and
2007.
NOTE
2. FLEET TRANSITION AND IMPAIRMENT
Horizon
Transition to All-Q400 Fleet
Horizon’s
long-term goal is to transition to an all-Q400 fleet. As of December
31, 2009, Horizon had either terminated leases or subleased all of its Q200
aircraft. The last Q200 revenue flight was in the first quarter of
2009. The Company recorded charges of $8.8 million in 2009 associated
with the disposal and lease termination of six of these Q200 aircraft. During
2008, Horizon recorded fleet transition costs of $10.2 million associated with
the removal of Q200 aircraft from operations.
Horizon
has 16 Q200 aircraft that are subleased to a third-party carrier. An
accrual has been established for the estimated sublease loss over the remaining
lease terms of the aircraft and is recorded in the consolidated balance sheets
in both other accrued liabilities and other long-term
liabilities. Should management
decide to restructure the sublease for the 16 Q200 currently subleased to a
third-party carrier, the Company will likely have future charges associated with
any transaction. At this time, management is unable to estimate the
timing or the amount of any future charges.
In 2008,
the Company’s Board of Directors approved the plan to remove the CRJ-700 fleet
from operations. As a result of that decision, Horizon recorded an impairment
charge on its two owned CRJ-700 aircraft and related spare parts of $5.5
million. In 2008, the Company also recorded a sublease loss of $6.7 million on
the sublease of two leased CRJ-700 aircraft to a third-party carrier and
employee severance charges related to the fleet transition of $1.3
million.
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 further 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 March
2006, the Company’s Board of Directors approved a plan to accelerate the
retirement of its MD-80 fleet (15 owned and 11 leased aircraft at the time) and
remove those aircraft from service by the end of 2008. As a result,
the Company recorded a $47.5 million charge in 2008 reflecting the remaining
discounted future lease payments and other contract-related costs associated
with the removal of the remaining MD-80 aircraft from operations. The actual
remaining future cash payments are included in the lease commitment table in
Note 7.
NOTE
3. FUEL HEDGE CONTRACTS
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risks associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options 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 years
ended December 31, 2009, 2008 and 2007 (in millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Raw
or “into-plane” fuel cost
|
|
$ |
686.2 |
|
|
$ |
1,328.8 |
|
|
$ |
981.9 |
|
(Gains)
or losses in value and settlements of fuel hedge contracts
|
|
|
(28.1 |
) |
|
|
69.6 |
|
|
|
(105.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel expense
|
|
$ |
658.1 |
|
|
$ |
1,398.4 |
|
|
$ |
876.3 |
|
The
premiums expensed, net of any cash received, for hedges that settled during 2009
totaled $60.7 million. The cash received, net of premiums expensed,
in 2008 and 2007 was $122.7 million and $53.4 million, respectively, for fuel
hedge contracts that settled during the period based on their originally
scheduled settlement date. The Company also realized losses of $50 million on
fuel hedge contracts terminated in the fourth quarter of 2008 that had scheduled
settlement dates in 2009 and 2010. These amounts represent the difference
between the cash paid or received at settlement and the amount of premiums paid
for the contracts at origination.
As of
December 31, 2009 and 2008, the fair values of the Company’s fuel hedge
positions were $115.9 million and $28.3 million, respectively, including
capitalized premiums paid to enter into the contracts of $88.9 million and $89.1
million, respectively.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedging
contracts consist of over-the-counter contracts, which are not traded on an
exchange. The fair value of these contracts is determined based on observable
inputs that are readily available in active markets or can be derived from
information available in active, quoted markets. Therefore, the Company has
categorized these contracts as Level 2 in the fair value hierarchy described in
Note 12.
Outstanding fuel hedge positions as of
December 31, 2009 are as follows:
|
Approximate
%
of
Expected
Fuel
Requirements
|
Gallons
Hedged
(in millions)
|
Approximate
Crude
Oil
Price
per Barrel
|
First
Quarter 2010
|
50%
|
43.6
|
$69
|
Second
Quarter 2010
|
50%
|
45.9
|
$69
|
Third
Quarter 2010
|
50%
|
48.3
|
$74
|
Fourth
Quarter 2010
|
50%
|
44.5
|
$83
|
Full Year 2010
|
50%
|
182.3
|
$74
|
|
|
|
|
First Quarter
2011
|
50%
|
44.9
|
$87
|
Second
Quarter 2011
|
41%
|
39.2
|
$83
|
Third
Quarter 2011
|
36%
|
35.6
|
$86
|
Fourth
Quarter 2011
|
22%
|
19.9
|
$84
|
Full
Year 2011
|
37%
|
139.6
|
$85
|
|
|
|
|
First
Quarter 2012
|
23%
|
21.6
|
$87
|
Second Quarter 2012
|
7%
|
7.0
|
$86
|
Third Quarter 2012
|
6%
|
6.4
|
$97
|
Fourth Quarter 2012
|
6%
|
5.2
|
$93
|
Full Year 2012
|
10%
|
40.2
|
$89
|
NOTE
4. 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 consolidated statements of operations.
Restructuring
Charges
In 2008,
Alaska announced reductions in work force among union and non-union employees
and recorded a $12.9 million charge representing the severance payments and
estimated medical coverage obligation for the affected employees.
The
following table displays the activity and balance of the severance and related
cost components of the Company’s restructuring accrual as of and for the years
ended December 31, 2009, 2008 and 2007 (in millions):
Accrual
for Severance and Related
Costs
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
$ |
7.2 |
|
|
$ |
0.7 |
|
|
$ |
19.9 |
|
Restructuring
charges and adjustments
|
|
|
— |
|
|
|
12.9 |
|
|
|
— |
|
Cash
payments
|
|
|
(7.2 |
) |
|
|
(6.4 |
) |
|
|
(19.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
— |
|
|
$ |
7.2 |
|
|
$ |
0.7 |
|
NOTE 5.
MARKETABLE SECURITIES
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
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 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
consolidated statements of operations.
The
Company’s overall investment strategy has a primary goal of maintaining and
securing its investment principal. The Company’s investment portfolio is managed
by well-known financial institutions and continually reviewed to ensure that the
investments are aligned with the Company’s documented strategy.
Marketable
securities consisted of the following at December 31 (in millions):
|
|
2009
|
|
|
2008
|
|
Cost:
|
|
|
|
|
|
|
U.S.
government securities
|
|
$ |
376.7 |
|
|
$ |
329.1 |
|
Asset-backed
obligations
|
|
|
215.4 |
|
|
|
198.0 |
|
Other
corporate obligations
|
|
|
421.8 |
|
|
|
263.7 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,013.9 |
|
|
$ |
790.8 |
|
|
|
|
|
|
|
|
|
|
Fair
value:
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$ |
381.2 |
|
|
$ |
342.8 |
|
Asset-backed
obligations
|
|
|
214.7 |
|
|
|
187.7 |
|
Other
corporate obligations
|
|
|
432.0 |
|
|
|
263.8 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,027.9 |
|
|
$ |
794.3 |
|
Activity
for marketable securities for the years ended December 31, 2009, 2008 and
2007 is as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Proceeds
from sales and maturities
|
|
$ |
725.0 |
|
|
$ |
579.6 |
|
|
$ |
1,321.1 |
|
Gross
realized gains
|
|
|
7.0 |
|
|
|
7.2 |
|
|
|
4.8 |
|
Gross
realized losses
|
|
|
2.3 |
|
|
|
3.8 |
|
|
|
2.9 |
|
Of the
marketable securities on hand at December 31, 2009, 35% mature in 2010, 24%
in 2011, and 41% thereafter.
Some of
the Company’s asset-backed securities held at December 31, 2009 had credit
losses, as defined in the accounting standards. 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. The majority of the credit
losses were recorded in the second quarter of 2009.
The
aggregate credit losses recorded in other nonoperating expense totaled $2.2
million in 2009 representing 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 $3.5 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.
During
2008, the Company determined that certain corporate debt securities were
other-than-temporarily impaired. As such, the Company recorded a $3.5 million
loss in other--net nonoperating expense in 2008 representing the difference
between the estimated fair market value and the amortized cost of the
securities.
Gross
unrealized gains and losses at December 31, 2009 are presented in the table
below (in millions):
|
|
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains
|
|
|
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
|
|
U.S.
Government Securities
|
|
$ |
4.7 |
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
4.5 |
|
|
$ |
76.8 |
|
Asset-backed
obligations
|
|
|
2.4 |
|
|
|
(0.2 |
) |
|
|
(5.1 |
) |
|
|
(5.3 |
) |
|
|
(2.2 |
) |
|
|
(3.1 |
) |
|
|
(0.7 |
) |
|
|
61.2 |
|
Other
corporate obligations
|
|
|
10.4 |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
10.2 |
|
|
|
37.7 |
|
Total
|
|
$ |
17.5 |
|
|
$ |
(0.6 |
) |
|
$ |
(5.1 |
) |
|
$ |
(5.7 |
) |
|
$ |
(2.2 |
) |
|
$ |
(3.5 |
) |
|
$ |
14.0 |
|
|
$ |
175.7 |
|
Gross
unrealized gains and losses at December 31, 2008 are presented in the table
below (in millions):
|
|
|
|
|
Unrealized
Losses
|
|
|
Net
Unrealized
Losses/Gains
in
AOCI
|
|
|
Fair Value of
Securities with
Unrealized
Losses
|
|
|
|
Unrealized
Gains
|
|
|
Less than
12 months
|
|
|
Greater than
12
months
|
|
|
Total
|
|
U.S.
Government Securities
|
|
$ |
10.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10.5 |
|
|
$ |
— |
|
Asset-backed
obligations
|
|
|
0.7 |
|
|
|
(9.3 |
) |
|
|
(2.4 |
) |
|
|
(11.7 |
) |
|
|
(11.0 |
) |
|
|
138.6 |
|
Other
corporate obligations
|
|
|
1.8 |
|
|
|
(4.3 |
) |
|
|
(1.0 |
) |
|
|
(5.3 |
) |
|
|
(3.5 |
) |
|
|
154.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
13.0 |
|
|
$ |
(13.6 |
) |
|
$ |
(3.4 |
) |
|
$ |
(17.0 |
) |
|
$ |
(4.0 |
) |
|
$ |
293.4 |
|
NOTE
6. LONG-TERM DEBT
At
December 31, 2009 and 2008, long-term debt obligations were as follows (in
millions):
|
|
2009
|
|
|
2008
|
|
Fixed-rate
notes payable due through 2024*
|
|
$ |
1,440.2 |
|
|
$ |
1,458.9 |
|
Variable-rate
notes payable due through 2024*
|
|
|
415.0 |
|
|
|
267.4 |
|
Bank
line-of-credit facility expiring in 2010*
|
|
|
-- |
|
|
|
75.0 |
|
Pre-delivery
payment facility expiring in 2011*
|
|
|
-- |
|
|
|
39.9 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,855.2 |
|
|
|
1,841.2 |
|
Less
current portion
|
|
|
(156.0 |
) |
|
|
(244.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,699.2 |
|
|
$ |
1,596.3 |
|
*
|
The
weighted-average fixed-interest rate was 6.0% and 6.1% as of
December 31, 2009 and 2008, respectively. The weighted-average
variable-interest rate, including the interest rate on the pre-delivery
payment and bank line-of-credit facilities, was 2.5% and 4.0% as of
December 31, 2009 and 2008,
respectively.
|
At
December 31, 2009, all of the Company’s borrowings were secured by flight
equipment.
Alaska
has an $80 million variable-rate revolving pre-delivery payment (PDP) facility
to provide a portion of the pre-delivery funding requirements for the purchase
of new Boeing 737-800 aircraft. The interest rate is based on the one-month
LIBOR plus a specified margin. Borrowings are secured by the Company’s rights
under the Boeing purchase agreement. The principal amounts outstanding on the
PDP facility relate to specified aircraft and are repaid at the time the Company
takes delivery of the aircraft, if not before. 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. The facility expires on August 31, 2011.
During
2009, the Company borrowed $264.6 million using fixed-rate and variable-rate
debt secured by flight equipment and another $10.4 million from the PDP
facility. Of the borrowings, Alaska and Horizon borrowed $188.9
million and $86.1 million, respectively. The Company made payments of $261.0
million, including $50.3 million on the PDP facility and $75 million on the bank
line-of-credit facility.
At
December 31, 2009, long-term debt principal payments for the next five
years are as follows (in millions):
|
|
Total
|
|
2010
|
|
$ |
156.0 |
|
2011
|
|
|
191.5 |
|
2012
|
|
|
236.3 |
|
2013
|
|
|
195.8 |
|
2014
|
|
|
162.6 |
|
Thereafter
|
|
|
913.0 |
|
|
|
|
|
|
Total
principal payments
|
|
$ |
1,855.2 |
|
Bank
Line of Credit
The
Company has a $185 million credit facility with a syndicate of financial
institutions. The interest rate on the credit facility varies depending on
certain financial ratios specified in the agreement with a minimum interest rate
of LIBOR plus a specified margin. The agreement provides that any borrowings
will be secured by either aircraft or cash collateral. The facility expires on
March 31, 2010. The facility has a requirement to maintain a minimum
unrestricted cash and marketable securities balance of $500 million. The Company
is in compliance with this covenant at December 31, 2009. As of
December 31, 2009, there were no borrowings outstanding under this credit
facility. Management is currently in the process
of renewing this facility and believes it will be able to do so at terms
that are acceptable to the Company.
Lease
Commitments
At
December 31, 2009, the Company had lease contracts for 88 aircraft, 21 of
which are non-operating aircraft, which have remaining noncancelable lease terms
of less than one year to over eleven years. The majority of airport and terminal
facilities are also leased. Total rent expense was $303.1 million, $313.5
million, and $333.5 million, in 2009, 2008, and 2007, respectively.
Future
minimum lease payments with noncancelable terms in excess of one year as of
December 31, 2009 are shown below (in millions):
|
|
Operating
Leases
|
|
|
|
Aircraft
|
|
|
Facilities
|
|
2010
|
|
|
172.7 |
|
|
|
61.5 |
|
2011
|
|
|
154.2 |
|
|
|
46.7 |
|
2012
|
|
|
157.4 |
|
|
|
42.5 |
|
2013
|
|
|
147.3 |
|
|
|
9.3 |
|
2014
|
|
|
133.5 |
|
|
|
5.8 |
|
Thereafter
|
|
|
331.0 |
|
|
|
94.4 |
|
|
|
|
|
|
|
|
|
|
Total
lease payments
|
|
$ |
1,096.1 |
|
|
$ |
260.2 |
|
Aircraft
Commitments
In 2005,
Alaska entered into an aircraft purchase agreement to acquire B737-800 aircraft
with deliveries beginning in January 2006 and continuing through April 2011. In
April 2009, Alaska entered into an agreement with Boeing to defer the delivery
of a number of B737-800 aircraft and committed to purchase an additional four
aircraft to be delivered in 2014 and 2015. As of December 31,
2009, Alaska was committed to purchasing 15 B737-800 aircraft, four of which
will be delivered in 2010. The company also has options to purchase an
additional 40 B737-800 aircraft.
Horizon
entered into an aircraft purchase agreement in 2007 for 15 Q400 aircraft.
Horizon entered into an agreement with Bombardier in 2009 to defer 2010 and 2011
deliveries into 2012 and 2013. As a result, Horizon does not expect
any aircraft deliveries in each of the next two years. As of
December 31, 2009, Horizon was committed to purchasing eight Q400s with
deliveries in 2012 and 2013. Horizon has options to purchase an additional ten
Q400 aircraft.
At
December 31, 2009, the Company had firm purchase commitments for 23 total
aircraft requiring remaining aggregate payments of approximately $588.8
million.
The
Company expects to pay for the 2010 deliveries with cash on
hand. Alaska and Horizon expect to pay for firm orders beyond 2010
and the option aircraft, if exercised, through internally generated cash,
long-term debt, or operating lease arrangements.
NOTE 8.
EMPLOYEE BENEFIT PLANS
Four
defined-benefit and five defined-contribution retirement plans cover various
employee groups of Alaska and Horizon. The defined-benefit plans provide
benefits based on an employee’s term of service and average compensation for a
specified period of time before retirement. With the ratification of the pilot
collective bargaining agreement in 2009, the qualified defined-benefit pension
plans are no longer open to new entrants.
Alaska
also maintains an unfunded, noncontributory defined-benefit plan for certain
elected officers and an unfunded, non-contributory defined-contribution plan for
other elected officers.
Accounting
standards require recognition of the overfunded or underfunded status of an
entity’s defined-benefit pension and other postretirement plan as an asset or
liability in the financial statements and requires recognition of the funded
status in other comprehensive income.
Qualified
Defined-Benefit Pension Plans
The
Company’s pension plans are funded as required by the Employee Retirement Income
Security Act of 1974 (ERISA).
The
defined-benefit plan assets consist primarily of marketable equity and
fixed-income securities. The Company uses a December 31 measurement date
for these plans.
Weighted
average assumptions used to determine benefit obligations as of
December 31:
Discount
rates of 5.85% and 6.20% were used as of December 31, 2009 and 2008,
respectively. For 2009, the rate of compensation increase used varied from 3.21%
to 4.53%, depending on the related workgroup. For 2008, the range of
compensation increases was 3.52% to 4.53%.
Weighted
average assumptions used to determine net periodic benefit cost for the years
ended December 31:
Discount
rates of 6.20%, 6.00%, and 5.75% were used for the years ended December 31,
2009, 2008, and 2007, respectively. For all three years, the expected return on
plan assets used was 7.75%, and the rate of compensation increase used varied
from 3.52% to 4.53%, depending on the plan and the related
workgroup.
In
determining the discount rate used, the Company’s policy is to use the rates at
or near the end of the year on high-quality long-term bonds with maturities that
closely match the expected timing of future cash distributions from the plan. In
determining the expected return on plan assets, the Company assesses the current
level of expected returns on risk-free investments (primarily government bonds),
the historical level of the risk premium associated with the other asset classes
in which the portfolio is invested and the expectations for future returns of
each asset class. The expected return for each asset class is then weighted
based on the target asset allocation to develop the expected long-term rate of
return on assets assumption for the portfolio.
Plan
assets are invested in common comingled trust funds invested in equity and fixed
income securities. The asset allocation of the funds in the qualified
defined-benefit plans, by asset category, is as follows as of the end of 2009
and 2008:
|
|
2009
|
|
2008
|
Asset
category:
|
|
|
|
|
|
|
Money
market fund
|
|
|
10 |
% |
|
|
-- |
% |
Domestic
equity securities
|
|
|
45 |
|
|
|
49 |
|
Non-U.S.
equity securities
|
|
|
18 |
|
|
|
21 |
|
Fixed
income securities
|
|
|
27 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
Plan
assets
|
|
|
100 |
% |
|
|
100 |
% |
The
Company’s investment policy focuses on achieving maximum returns at a reasonable
risk for pension assets over a full market cycle. The Company uses a fund
manager and invests in various asset classes to diversify risk. Target
allocations for the primary asset classes are approximately:
Domestic
equities:
|
50%
|
Non-U.S.
equities:
|
20%
|
Fixed
income:
|
30%
|
Pension
assets are rebalanced periodically to maintain these target asset allocations.
An individual equity investment will not exceed 10% of the entire equity
portfolio. Fixed-income securities carry a minimum “A” rating by Moody’s and/or
Standard and Poor’s and the average life of the bond portfolio may not exceed
ten years. The Company does not currently intend to invest plan assets in the
Company’s common stock.
The
Company made a $100 million contribution to the plan on December 30,
2009. The majority of that contribution was invested in a money
market account at year-end and will be distributed to the other investment
categories throughout 2010 in accordance with the target asset
allocations.
As of
December 31, 2009, other than the money market fund, all assets were invested in
common comingled trust funds. The Company uses the net asset values
of these funds to determine fair value as allowed using the practical expediency
method outlined in the accounting standards. The fund categories
included in plan assets as of December 31, 2009 and 2008, their amounts, and
their fair value hierarchy level are as follows (dollars in
millions):
|
|
2009
|
|
|
2008
|
|
|
Level
|
|
Fund
type:
|
|
|
|
|
|
|
|
|
|
Money
market fund
|
|
$ |
90.6 |
|
|
$ |
--- |
|
|
|
1 |
|
U.S.
equity market fund
|
|
|
408.0 |
|
|
|
316.3 |
|
|
|
2 |
|
Non-U.S.
equity fund
|
|
|
164.4 |
|
|
|
136.7 |
|
|
|
2 |
|
U.S.
debt index fund
|
|
|
147.6 |
|
|
|
153.6 |
|
|
|
2 |
|
Government/credit
bond index fund
|
|
|
96.3 |
|
|
|
43.4 |
|
|
|
2 |
|
Plan
assets
|
|
$ |
906.9 |
|
|
$ |
650.0 |
|
|
|
|
|
Nonqualified
Defined-Benefit Pension Plan
Alaska
also maintains an unfunded, noncontributory defined-benefit plan for certain
elected officers. This plan uses a December 31 measurement
date.
Weighted
average assumptions used to determine benefit obligations as of
December 31:
Discount
rates of 5.85% and 6.20% were used as of December 31, 2009 and 2008
respectively. The rate of compensation increase used was 5.00% as of
December 31, 2009 and 2008.
Weighted
average assumptions used to determine net periodic benefit cost for the years
ended December 31:
Discount
rates of 6.20%, 6.00%, and 5.75% were used for the years ended December 31,
2009, 2008, and 2007, respectively. The rate of compensation increase used was
5.00% for all three years presented.
Combined
Disclosures for Defined-Benefit Pension Plans
The
following table sets forth the status of the plans for 2009 and 2008 (in
millions):
|
|
Qualified
|
|
|
Nonqualified
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Projected
benefit obligation (PBO)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$ |
1,094.9 |
|
|
$ |
1,056.9 |
|
|
$ |
36.0 |
|
|
$ |
34.9 |
|
Service
cost
|
|
|
44.2 |
|
|
|
46.6 |
|
|
|
0.7 |
|
|
|
0.9 |
|
Interest
cost
|
|
|
66.9 |
|
|
|
62.7 |
|
|
|
2.2 |
|
|
|
2.1 |
|
Plan
amendments
|
|
|
(29.6 |
) |
|
|
(0.5 |
) |
|
|
— |
|
|
|
— |
|
Curtailment
(gain) loss
|
|
|
— |
|
|
|
(2.9 |
) |
|
|
— |
|
|
|
— |
|
Actuarial
(gain) loss
|
|
|
47.3 |
|
|
|
(31.1 |
) |
|
|
0.6 |
|
|
|
(0.1 |
) |
Transfer
to pilot long-term disability plan
|
|
|
(3.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Benefits
paid
|
|
|
(40.9 |
) |
|
|
(36.8 |
) |
|
|
(2.2 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$ |
1,179.8 |
|
|
$ |
1,094.9 |
|
|
$ |
37.3 |
|
|
$ |
36.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
assets at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$ |
650.0 |
|
|
$ |
910.6 |
|
|
$ |
— |
|
|
$ |
— |
|
Actual
return on plan assets
|
|
|
150.0 |
|
|
|
(275.5 |
) |
|
|
— |
|
|
|
— |
|
Employer
contributions
|
|
|
147.8 |
|
|
|
51.7 |
|
|
|
2.2 |
|
|
|
1.8 |
|
Benefits
paid
|
|
|
(40.9 |
) |
|
|
(36.8 |
) |
|
|
(2.2 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$ |
906.9 |
|
|
$ |
650.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status (unfunded)
|
|
$ |
(272.9 |
) |
|
$ |
(444.9 |
) |
|
$ |
(37.3 |
) |
|
$ |
(36.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
funded
|
|
|
76.9 |
% |
|
|
59.4 |
% |
|
|
— |
|
|
|
— |
|
Of the
total $1.2 billion PBO for the qualified plans, approximately 57% represents the
obligation of the plan covering Alaska’s pilots. The accumulated benefit
obligation for the combined qualified defined-benefit pension plans was $1,102.5
million and $1,017.9 million at December 31, 2009 and 2008, respectively.
The accumulated benefit obligation for the nonqualified defined-benefit plan was
$36.9 million and $35.8 million at December 31, 2009 and 2008,
respectively.
The plan
amendment and the transfer to the pilot long-term disability plan in 2009 were
the result of plan changes in the new pilot collective bargaining agreement
ratified during the year. See further discussion under “Pilot
Long-term Disability Benefits” below.
As of
December 31, 2009 and 2008, the amounts recognized in the consolidated
balance sheets were as follows (in millions):
|
|
2009
|
|
|
2008
|
|
|
|
Qualified
|
|
|
Nonqualified
|
|
|
Qualified
|
|
|
Nonqualified
|
|
Accrued
benefit liability-current
|
|
$ |
— |
|
|
$ |
2.5 |
|
|
$ |
— |
|
|
$ |
2.5 |
|
Accrued
benefit liability-long term
|
|
|
272.9 |
|
|
|
34.8 |
|
|
|
444.9 |
|
|
|
33.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liability recognized
|
|
$ |
272.9 |
|
|
$ |
37.3 |
|
|
$ |
444.9 |
|
|
$ |
36.0 |
|
AMOUNTS
NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN ACCUMULATED OTHER
COMPREHENSIVE INCOME OR LOSS (AOCI):
|
|
2009
|
|
|
2008
|
|
|
|
Qualified
|
|
|
Nonqualified
|
|
|
Qualified
|
|
|
Nonqualified
|
|
Prior
service cost (credit)
|
|
$ |
(17.5 |
) |
|
$ |
0.1 |
|
|
$ |
16.3 |
|
|
$ |
0.2 |
|
Net
loss
|
|
|
395.0 |
|
|
|
4.8 |
|
|
|
475.4 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
recognized in AOCI (pretax)
|
|
$ |
377.5 |
|
|
$ |
4.9 |
|
|
$ |
491.7 |
|
|
$ |
4.5 |
|
The
expected amortization of prior service credit and net loss from AOCI in 2010 is
$(0.9) million and $22.2 million, respectively, for the qualified
defined-benefit pension plans. For the nonqualified defined-benefit pension
plans, the expected combined amortization of prior service cost and net loss
from AOCI in 2010 is $0.2 million.
Net
pension expense for the defined-benefit plans included the following components
for 2009, 2008, and 2007 (in millions):
|
|
Qualified
|
|
|
Nonqualified
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
44.2 |
|
|
$ |
46.6 |
|
|
$ |
49.7 |
|
|
$ |
0.7 |
|
|
$ |
0.9 |
|
|
$ |
1.1 |
|
Interest
cost
|
|
|
66.9 |
|
|
|
62.7 |
|
|
|
60.9 |
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
1.9 |
|
Expected
return on assets
|
|
|
(51.3 |
) |
|
|
(71.8 |
) |
|
|
(66.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization
of prior service cost
|
|
|
4.3 |
|
|
|
4.4 |
|
|
|
4.9 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Curtailment
loss
|
|
|
— |
|
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Recognized
actuarial loss
|
|
|
28.9 |
|
|
|
5.6 |
|
|
|
13.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension expense
|
|
$ |
93.0 |
|
|
$ |
48.0 |
|
|
$ |
62.6 |
|
|
$ |
3.1 |
|
|
$ |
3.3 |
|
|
$ |
3.4 |
|
Historically,
the Company’s practice has been to contribute to the qualified defined-benefit
pension plans in an amount equal to the greater of 1) the minimum required by
law, 2) the PPA target liability, or 3) the service cost as actuarially
calculated. There are no current funding requirements for the Company’s plans in
2010. However, the Company anticipates that it will continue with its historical
funding practice in 2010, which would result in funding of approximately $50
million. The Company expects to contribute approximately $2.5 million to the
nonqualified defined-benefit pension plans during 2010.
Future
benefits expected to be paid over the next ten years under the defined-benefit
pension plans from the assets of those plans as of December 31, 2009 are as
follows (in millions):
|
|
Qualified
|
|
|
Nonqualified
|
|
2010
|
|
$ |
36.4 |
|
|
$ |
2.5 |
|
2011
|
|
|
48.8 |
|
|
|
2.2 |
|
2012
|
|
|
50.0 |
|
|
|
2.4 |
|
2013
|
|
|
57.2 |
|
|
|
2.5 |
|
2014
|
|
|
64.7 |
|
|
|
2.7 |
|
2015–
2019
|
|
$ |
394.9 |
|
|
$ |
17.3 |
|
Postretirement
Medical Benefits
The
Company allows retirees to continue their medical, dental, and vision benefits
by paying all or a portion of the active employee plan premium until eligible
for Medicare, currently age 65. This results in a subsidy to retirees, because
the premiums received by the Company are less than the actual cost of the
retirees’ claims. The accumulated postretirement benefit obligation (APBO) for
this subsidy is unfunded. This liability was determined using an assumed
discount rate of 5.85% and 6.20% at December 31, 2009 and 2008,
respectively.
|
|
2009
|
|
|
2008
|
|
Accumulated
postretirement benefit obligation
|
|
|
|
|
|
|
Beginning
of year
|
|
$ |
109.9 |
|
|
$ |
101.7 |
|
Service
cost
|
|
|
5.6 |
|
|
|
4.2 |
|
Interest
cost
|
|
|
7.8 |
|
|
|
5.6 |
|
Plan
amendments
|
|
|
4.1 |
|
|
|
— |
|
Curtailments
|
|
|
— |
|
|
|
(0.5 |
) |
Actuarial
(gain) loss
|
|
|
(6.7 |
) |
|
|
1.9 |
|
Transfer
to pilot long-term disability plan
|
|
|
(0.6 |
) |
|
|
— |
|
Benefits
paid
|
|
|
(2.8 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
End
of year
|
|
$ |
117.3 |
|
|
$ |
109.9 |
|
|
|
|
|
|
|
|
|
|
Plan
assets at fair value
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$ |
— |
|
|
$ |
— |
|
Employer
contributions
|
|
|
2.8 |
|
|
|
3.0 |
|
Benefits
paid
|
|
|
(2.8 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
End
of year
|
|
$ |
— |
|
|
$ |
— |
|
Funded
status (unfunded) |
|
$ |
(117.3 |
) |
|
$ |
(109.9 |
) |
The plan
amendment and the transfer to the pilot long-term disability plan in 2009 were
the result of plan changes in the new pilot collective bargaining agreement
ratified during the year. See further discussion under “Pilot
Long-term Disability Benefits” below.
As of
December 31, 2009 and 2008, the amounts recognized in the consolidated
balance sheets were as follows (in millions):
|
|
2009
|
|
|
2008
|
|
Accrued
benefit liability-current
|
|
$ |
4.2 |
|
|
$ |
4.4 |
|
Accrued
benefit liability-long term
|
|
|
113.1 |
|
|
|
105.5 |
|
|
|
|
|
|
|
|
|
|
Total
liability recognized
|
|
$ |
117.3 |
|
|
$ |
109.9 |
|
AMOUNTS
NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN
AOCI:
|
|
2009
|
|
|
2008
|
|
Prior
service cost
|
|
$ |
2.6 |
|
|
$ |
1.4 |
|
Net
loss
|
|
|
15.7 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
Amount
recognized in AOCI (pretax)
|
|
$ |
18.3 |
|
|
$ |
24.5 |
|
The
expected combined amortization of prior service cost and net loss from AOCI in
2010 is $0.3 million.
The
Company uses a December 31 measurement date to assess obligations
associated with the subsidy of retiree medical costs. Net periodic benefit cost
for the postretirement medical plans included the following components for 2009,
2008 and 2007 (in millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
5.6 |
|
|
$ |
4.2 |
|
|
$ |
4.6 |
|
Interest
cost
|
|
|
7.8 |
|
|
|
5.6 |
|
|
|
6.3 |
|
Amortization
of prior service cost
|
|
|
2.9 |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Recognized
actuarial loss
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
17.1 |
|
|
$ |
10.0 |
|
|
$ |
13.0 |
|
This is
an unfunded plan. The Company expects to contribute approximately $4.2 million
to the postretirement medical benefits plan in 2010, which is equal to the
expected benefit payments.
Future
benefits expected to be paid over the next ten years under the postretirement
medical benefits plan as of December 31, 2009 are as follows (in
millions):
2010
|
|
|
$ |
4.2 |
|
2011
|
|
|
|
4.8 |
|
2012
|
|
|
|
5.2 |
|
2013
|
|
|
|
5.9 |
|
2014
|
|
|
|
6.6 |
|
2015
- 2019 |
|
|
|
44.2 |
|
The
assumed health care cost trend rates to determine the expected 2010 benefits
cost are 9.2%, 9.2%, 5% and 4% for medical, prescription drugs, dental and
vision costs, respectively. The assumed trend rate declines steadily through
2028 where the ultimate assumed trend rates are 4.7% for medical, prescription
drugs and dental, and 4% for vision.
A 1%
higher or lower trend rate in health care costs has the following effect on the
Company’s postretirement medical plans during 2009, 2008 and 2007 (in millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Change
in service and interest cost
|
|
|
|
|
|
|
|
|
|
1%
higher trend rate
|
|
$ |
2.1 |
|
|
$ |
1.4 |
|
|
$ |
1.6 |
|
1%
lower trend rate
|
|
|
(1.7 |
) |
|
|
(1.2 |
) |
|
|
(1.4 |
) |
Change
in year-end postretirement benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
1%
higher trend rate
|
|
$ |
14.4 |
|
|
$ |
13.3 |
|
|
$ |
12.2 |
|
1%
lower trend rate
|
|
|
(12.4 |
) |
|
|
(11.5 |
) |
|
|
(10.6 |
) |
Defined-Contribution
Plans
The
defined-contribution plans are deferred compensation plans under section 401(k)
of the Internal Revenue Code. All of these plans require Company contributions.
Total expense for the defined-contribution plans was $28.6 million, $27.5
million, and $26.4 million in 2009, 2008, and 2007,
respectively. Management expects that Company contributions
will increase in 2010 as pilots that elected to freeze or reduce their service
credits in the defined-benefit pension plan will receive a higher Company
contribution under the new collective bargaining agreement.
The
Company also has a noncontributory, unfunded defined-contribution plan for
certain elected officers of the Company who are ineligible for the nonqualified
defined-benefit pension plan. Amounts recorded as liabilities under the plan are
not material to the consolidated balance sheet at December 31, 2009 and
2008.
Pilot
Long-term Disability Benefits
The
collective bargaining agreement with Alaska’s pilots calls for the removal of
long-term disability benefits from the defined-benefit plan for any pilot that
was not already receiving long-term disability payments prior to January 1,
2010. As a result of this plan change, the PBO of $32.6 million
associated with assumed future disability payments was removed from the overall
defined-benefit pension plan liability, $29.6 million of which was recorded
through AOCI . Furthermore, the removal of the plan from the
defined-benefit pension plan reduced the accumulated postretirement benefit
obligation for medical costs as the new plan no longer considers long-term
disability to be “retirement” from the Company.
The new
long-term disability plan removes the service requirement that was in place
under the former defined-benefit plan. Therefore, the liability is
calculated based on estimated future benefit payments associated with pilots
that were assumed to be disabled on a long-term basis as of December 31, 2009
and does not include any assumptions for future disability. The liability
includes the discounted expected future benefit payments and medical
costs. The total liability at December 31, 2009 is $3.1 million,
which is recorded net of a prefunded trust account of $0.5 million, and is
included in long-term other liabilities on the consolidated balance
sheets.
Employee
Incentive-Pay Plans
Alaska
and Horizon have three separate plans that pay employees based on certain
financial and operational metrics. The aggregate expense under these plans in
2009, 2008 and 2007 was $76.0 million, $21.4 million, $20.8 million,
respectively. The plans are summarized below:
|
•
|
Performance-Based Pay
(PBP) is a program that rewards all Alaska employees other than clerical,
office and passenger service employees (COPS) and station employees in
Mexico, and Horizon employees other than pilots, mechanics, and
represented station personnel in Canada. The program is based
on four separate metrics related to: (1) Air Group profitability,
(2) safety, (3) achievement of unit-cost goals, and
(4) employee engagement.
|
|
•
|
The
Profit Sharing
Plan is based on Air Group profitability and includes the employees
that don’t participate in PBP.
|
|
•
|
The
Operational Performance
Rewards Program entitles all Air Group employees to quarterly
payouts of up to $300 per person if certain operational and customer
service objectives are met.
|
NOTE
9. DETAIL OF OTHER FINANCIAL STATEMENT CAPTIONS
Receivables
Receivables
consisted of the following at December 31 (in millions):
|
|
|
2009 |
|
|
|
2008 |
|
Airline
traffic receivables
|
|
$ |
55.2 |
|
|
$ |
46.7 |
|
Mileage
Plan receivables
|
|
|
31.9 |
|
|
|
29.6 |
|
Receivables
from fuel-hedging counterparties
|
|
|
1.1 |
|
|
|
— |
|
Other
receivables
|
|
|
25.1 |
|
|
|
41.9 |
|
Allowance
for doubtful accounts
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111.8 |
|
|
$ |
116.7 |
|
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following at December 31
(in millions):
|
|
2009
|
|
|
2008
|
|
Prepaid
aircraft rent
|
|
$ |
47.9 |
|
|
$ |
48.0 |
|
Prepaid
fuel
|
|
|
10.8 |
|
|
|
10.3 |
|
Prepaid
engine maintenance
|
|
|
13.3 |
|
|
|
— |
|
Other
|
|
|
27.2 |
|
|
|
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99.2 |
|
|
$ |
82.0 |
|
Other
Assets
Other
assets consisted of the following at December 31 (in
millions):
|
|
2009
|
|
|
2008
|
|
Restricted deposits
(primarily
restricted
investments)
|
|
$ |
86.7 |
|
|
$ |
78.6 |
|
Deferred
costs and other*
|
|
|
45.3 |
|
|
|
44.5 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
132.0 |
|
|
$ |
123.1 |
|
*
|
Deferred
costs and other includes deferred financing costs, long-term prepaid rent,
lease deposits and other items.
|
At
December 31, 2009, the Company’s restricted deposits were primarily
restricted investments used to guarantee various letters of credit and workers
compensation self-insurance programs. The restricted investments consist of
highly liquid securities with original maturities of three months or less. They
are carried at cost, which approximates fair value.
Other
Accrued Liabilities (current)
Other
accrued liabilities consisted of the following at December 31 (in
millions):
|
|
2009
|
|
|
2008
|
|
Mileage Plan
current liabilities
|
|
$ |
267.9 |
|
|
$ |
280.4 |
|
Pension
liability (nonqualified plans)
|
|
|
2.5 |
|
|
|
2.5 |
|
Postretirement
medical benefits liability
|
|
|
4.2 |
|
|
|
4.4 |
|
Other*
|
|
|
188.7 |
|
|
|
188.1 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
463.3 |
|
|
$ |
475.4 |
|
*
|
Other
consists of property and transportation taxes and accruals for ground
operations, facilities rent, maintenance, and fuel, among other
items.
|
Other
Liabilities (noncurrent)
Other
liabilities consisted of the following at December 31 (in
millions):
|
|
2009
|
|
|
2008
|
|
Mileage
Plan liability
|
|
|
13.2 |
|
|
|
15.9 |
|
Uncertain
tax position liability (see Note 11)
|
|
|
1.3 |
|
|
|
23.7 |
|
Aircraft
rent-related
|
|
|
61.1 |
|
|
|
80.4 |
|
Other*
|
|
|
69.6 |
|
|
|
54.1 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145.2 |
|
|
$ |
174.1 |
|
* Other consists of accrued workers' compensation and deferred
credits on aircraft purchases, among other items.
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss consisted of the following at December 31 (in
millions, net of tax):
|
|
2009
|
|
|
2008
|
|
Unrealized
loss (gain) on marketable securities considered
available-for-sale
|
|
$ |
(8.7 |
) |
|
$ |
2.5 |
|
Related
to pension plans
|
|
|
238.8 |
|
|
|
310.4 |
|
Related
to postretirement medical benefits
|
|
|
11.4 |
|
|
|
15.4 |
|
Related
to interest rate derivatives
|
|
|
(1.5 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
240.0 |
|
|
$ |
328.3 |
|
NOTE
10. STOCK-BASED COMPENSATION PLANS
The
Company has stock awards outstanding under a number of long-term incentive
equity plans, one of which (the 2008 Long-Term Incentive Equity Plan) continues
to provide for the granting 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 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 consolidated statements of operations.
Stock
Options
Under the
various plans, options for 8,299,258 shares have been granted and, at
December 31, 2009, 1,406,393 shares were available for future grant of
either options or stock awards. Under all plans, the stock options granted have
terms of up to ten years. For all plans except the 1997 Long-term Incentive
Equity Plan (1997 Plan), when options are exercised, new common shares are
issued. When options granted under the 1997 Plan are exercised, shares are
issued from the Company’s treasury shares. The total number of outstanding
options from the 1997 Plan as of December 31, 2009 is 203,100.
Substantially all grantees are 25% vested after one year, 50% after two years,
75% after three years, and 100% after four years.
The
tables below summarize stock option activity for the year ended
December 31, 2009:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Weighted-
Average
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Outstanding,
December 31, 2008
|
|
|
2,605,627 |
|
|
$ |
30.77 |
|
|
|
|
|
|
|
Granted
|
|
|
389,652 |
|
|
|
27.54 |
|
|
|
|
|
|
|
Exercised
|
|
|
(354,801 |
) |
|
|
27.90 |
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(321,655 |
) |
|
|
38.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2009
|
|
|
2,318,823 |
|
|
$ |
29.54 |
|
|
|
5.2 |
|
|
$ |
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
1,521,456 |
|
|
$ |
29.97 |
|
|
|
3.6 |
|
|
$ |
8.2 |
|
The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2009, 2008, and 2007:
|
2009
|
2008
|
2007
|
Expected
volatility
|
52%
|
42%
|
43%
|
Expected
term
|
6 years
|
5.8 years
|
6 years
|
Risk-free
interest rate
|
2.01%
|
2.96%
|
4.79%
|
Expected
dividend yield
|
—
|
—
|
—
|
Weighted-average
fair value of options granted
|
$14.00
|
$11.12
|
$19.51
|
The
expected market price volatility of the common stock is based on the historical
volatility over a time period commensurate with the expected term of the awards.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect
for the term nearest the expected term of the option at the time of grant. The
dividend yield is zero as the Company does not pay dividends and has no plans to
do so in the immediate future. The expected term of the options and the expected
forfeiture rates are based on historical experience for various homogenous
employee groups.
The
Company recorded stock-based compensation expense related to stock options of
$4.3 million, $5.1 million, and $4.7 million in 2009, 2008, and 2007,
respectively. The total intrinsic value of options exercised during 2009 was
$1.6 million. Cash received by the Company from option exercises during 2009
totaled $8.3 million. A total of 295,399 options vested during 2009 with an
aggregate fair value of $4.4 million. As of December 31, 2009, $4.4 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 2.2 years.
The
following table summarizes stock options outstanding and exercisable at
December 31, 2009 with their weighted-average exercise prices and remaining
contractual lives:
Range
of Exercise
prices
|
Remaining
Life
(years)
|
Shares
|
Price
Per
Share
|
Outstanding:
|
|
|
|
$10
to $20
|
5.0
|
210,739
|
$18.86
|
$21
to $28
|
6.1
|
1,160,629
|
26.99
|
$29
to $34
|
2.9
|
584,175
|
31.98
|
$35
to $45
|
5.7
|
363,280
|
39.96
|
|
|
|
|
Options
outstanding
|
5.2
|
2,318,823
|
$29.54
|
|
|
|
|
Range
of Exercise prices
|
Shares
|
Price
Per
Share
|
Exercisable:
|
|
|
$10
to $20
|
143,700
|
$18.70
|
$21
to $28
|
550,553
|
26.51
|
$29
to $34
|
582,256
|
31.98
|
$35
to $45
|
244,947
|
39.57
|
|
|
|
Options
exercisable
|
1,521,456
|
$29.97
|
Restricted
Stock Awards
The
Company has restricted stock units (RSUs) outstanding under the 2004 and 2008
Long-term Incentive Equity Plans. As of December 31, 2009, 1,125,791 total
RSUs have been granted under these plans. The RSUs are non-voting and are not
eligible for dividends. The fair value of the RSU awards is based on the closing
price of the Company’s common stock on the date of grant. Compensation cost for
RSUs is generally recognized over the shorter of three years from the date of
grant as the awards “cliff vest” after three years, or the period from the date
of grant to the employee’s retirement eligibility. The Company recorded
stock-based compensation expense related to RSUs of $5.8 million, $6.8 million,
and $5.6 million in 2009, 2008, and 2007, respectively. These amounts are
included in wages and benefits in the consolidated statements of
operations.
The
following table summarizes information about outstanding RSUs:
|
|
Number
of
Units
|
|
|
Weighted-
Average
Grant
Date
Fair
Value
|
|
Non-vested
at December 31, 2008
|
|
|
501,658 |
|
|
$ |
28.14 |
|
Granted
|
|
|
253,293 |
|
|
|
27.19 |
|
Vested
|
|
|
(132,415 |
) |
|
|
35.17 |
|
Forfeited
|
|
|
(19,842 |
) |
|
|
27.72 |
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2009
|
|
|
602,694 |
|
|
$ |
26.21 |
|
As of
December 31, 2009, $5.3 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 1.8 years.
Performance
Stock Awards
During
the first quarters of 2008 and 2007, the Company awarded Performance Share Unit
awards (PSUs) to certain executives. PSUs are similar to RSUs, but vesting is
based on a performance condition tied to the Company achieving a specified
pretax margin over a three-year period. The PSU plan allows a portion of the
PSUs to vest even if the specified pretax margin falls below the target but
above the minimum threshold, and additional shares to be granted if the margin
target is exceeded, subject to a maximum. The Company intends to regularly
review its assumptions about meeting the performance goal and expected vesting,
and to adjust the related compensation expense accordingly. Based on
expectations of the number of PSUs that will ultimately vest, the Company did
not record any expense in 2009, recorded a credit of $0.4 million in 2008, and
recorded compensation expense of $0.4 million during 2007.
Deferred
Stock Awards
In 2009,
the Company awarded 12,704 Deferred Stock Unit awards (DSUs) to members of its
Board of Directors as part of their retainers. The underlying common shares are
issued upon retirement from the Board, but require no future service period. As
a result, the entire intrinsic value of the awards on the date of grant was
expensed in 2009. The total amount of compensation expense recorded in both 2009
and 2008 was $0.3 million.
Employee
Stock Purchase Plan
The
Company sponsors an ESPP, which qualifies under Section 423 of the Internal
Revenue Code. Under the terms of the ESPP, employees can purchase Company common
stock at 85% of the closing market price on the first day of the offering period
or the quarterly purchase date, whichever is lower. Because of these attributes,
the ESPP is considered compensatory under accounting standards and as such,
compensation cost is recognized. Compensation cost for the Company’s ESPP was
$1.5 million in 2009 and $1.6 million in both 2008 and 2007. The grant date fair
value is calculated using the Black-Scholes model in the same manner as the
Company’s option awards for 85% of the share award plus the intrinsic value of
the 15% discount. Proceeds received from the issuance of shares are credited to
stockholders’ equity in the period in which the shares are issued. In 2009 and
2008, 184,488 shares and 169,242 shares, respectively, were purchased by Company
employees under the ESPP, resulting in cash proceeds of $3.1 million and $3.2
million, respectively.
Summary
of Stock-Based Compensation
The table
below summarizes the components of total stock-based compensation for the years
ended December 31, 2009, 2008 and 2007:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Stock
options
|
|
$ |
4.3 |
|
|
$ |
5.1 |
|
|
$ |
4.7 |
|
Restricted
stock units
|
|
|
5.8 |
|
|
|
6.8 |
|
|
|
5.6 |
|
Performance
share units
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
0.4 |
|
Deferred
stock awards
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
— |
|
Employee
stock purchase plan
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation
|
|
$ |
11.9 |
|
|
$ |
13.4 |
|
|
$ |
12.3 |
|
Deferred
Income Taxes
Deferred
income taxes reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and such
amounts for tax purposes.
Deferred
tax (assets) and liabilities comprise the following at December 31 (in
millions):
|
|
|
2009 |
|
|
|
2008 |
|
Excess
of tax over book depreciation
|
|
$ |
603.9 |
|
|
$ |
526.9 |
|
Fuel
hedge contracts
|
|
|
10.8 |
|
|
|
— |
|
Other—net
|
|
|
11.3 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities
|
|
|
626.0 |
|
|
|
532.2 |
|
|
|
|
|
|
|
|
|
|
|
Mileage
Plan
|
|
|
(252.6 |
) |
|
|
(255.3 |
) |
Fuel
hedge contracts
|
|
|
— |
|
|
|
(23.2 |
) |
AMT
and other tax credits
|
|
|
(56.8 |
) |
|
|
(62.3 |
) |
Leased
aircraft return provision
|
|
|
(1.8 |
) |
|
|
(5.2 |
) |
Inventory
obsolescence
|
|
|
(16.9 |
) |
|
|
(13.8 |
) |
Deferred
gains
|
|
|
(17.8 |
) |
|
|
(18.5 |
) |
Employee
benefits
|
|
|
(197.7 |
) |
|
|
(250.4 |
) |
Loss
carryforwards*
|
|
|
(30.2 |
) |
|
|
(3.3 |
) |
Other—net
|
|
|
(21.4 |
) |
|
|
(27.9 |
) |
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets
|
|
|
(595.2 |
) |
|
|
(659.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net
deferred tax (assets) liabilities
|
|
$ |
30.8 |
|
|
$ |
(127.7 |
) |
|
|
|
|
|
|
|
|
|
|
Current
deferred tax asset
|
|
$ |
(120.3 |
) |
|
$ |
(164.4 |
) |
Noncurrent
deferred tax liability
|
|
|
151.1 |
|
|
|
36.7 |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax (asset) liability
|
|
$ |
30.8 |
|
|
$ |
(127.7 |
) |
*
|
Federal
loss carryforwards of $73.0 million ($25.6 million tax effected) expire
beginning in 2029. State loss carryforwards of $97.5 million
($4.6 million tax effected) expire beginning in 2010 and ending in
2029.
|
In 2009,
a new federal law liberalized rules for certain net operating losses (NOLs),
increasing the carryback period for 2008 or 2009 NOLs from two years to up to
five years at the taxpayer’s election. In addition, the new law
suspended the 90-percent limitation on the utilization of NOLs for Alternative
Minimum Tax (AMT) NOLs attributed to the extended carryback
election. Because of these law changes, the Company recorded $5.0
million in federal and state income tax receivables and a corresponding decrease
in federal and state AMT credit carryforwards.
The
Company has concluded that it is more likely than not that its deferred tax
assets will be realizable and thus no valuation allowance has been recorded as
of December 31, 2009. This conclusion is based on the expected future
reversals of existing taxable temporary differences, anticipated future taxable
income, and the potential for future tax planning strategies to generate taxable
income, if needed. The Company will continue to reassess the need for a
valuation allowance during each future reporting period.
Components
of Income Tax Expense (Benefit)
The
components of income tax expense (benefit) were as follows (in
millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(3.4 |
) |
|
$ |
(13.4 |
) |
|
$ |
12.8 |
|
State
|
|
|
(1.3 |
) |
|
|
— |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
|
|
|
(4.7 |
) |
|
|
(13.4 |
) |
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
76.7 |
|
|
|
(56.1 |
) |
|
|
55.1 |
|
State
|
|
|
9.3 |
|
|
|
(7.8 |
) |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred
|
|
|
86.0 |
|
|
|
(63.9 |
) |
|
|
58.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax expense (benefit) related to income
(loss)
|
|
$ |
81.3 |
|
|
$ |
(77.3 |
) |
|
$ |
76.2 |
|
Income
Tax Rate Reconciliation
Income
tax expense (benefit) reconciles to the amount computed by applying the U.S.
federal rate of 35% to income (loss) before income tax and accounting change as
follows (in millions):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
(loss) before income tax
|
|
$ |
202.9 |
|
|
$ |
(213.2 |
) |
|
$ |
200.5 |
|
Expected
tax expense (benefit)
|
|
|
71.0 |
|
|
|
(74.6 |
) |
|
|
70.2 |
|
Nondeductible
expenses
|
|
|
3.1 |
|
|
|
3.4 |
|
|
|
3.4 |
|
State
income taxes
|
|
|
5.5 |
|
|
|
(5.1 |
) |
|
|
4.9 |
|
Other—net*
|
|
|
1.7 |
|
|
|
(1.0 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
tax expense (benefit)
|
|
$ |
81.3 |
|
|
$ |
(77.3 |
) |
|
$ |
76.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
40.1 |
% |
|
|
36.3 |
% |
|
|
38.0 |
% |
*
|
In
2007, other-net includes $1.0 million of tax benefits due to a favorable
decision in a matter with the State of California and $1.0 million of tax
benefits related to the recognition of California income tax credit
carryforwards.
|
Uncertain
Tax Positions
The
Company has identified its federal tax return and its state tax returns in
Alaska, Oregon, and California as “major” tax jurisdictions. The
periods subject to examination for the Company’s federal and Alaska income tax
returns are the 2003 through 2008 tax years; however, the 2003 to 2005 tax
returns are subject to examination only to a limited extent due to net operating
losses carried forward from and carried back to those periods. In
California, the income tax years 2000 through 2008 remain
open to examination. The 2000 to 2004 California tax returns are subject to
examination only to the extent of the net operating loss carryforwards from
those years that were utilized in 2005 and 2006. In Oregon, the
income tax years 2001 to 2008 remain open to examination. The 2001 to
2004 Oregon tax returns are subject to examination only to the extent of net
operating loss carryforwards from those years that were utilized in 2006 and
later years.
Because
of the resolution of uncertain tax positions in the fourth quarter of 2009, the
Company reevaluated its tax position. As a result, the Company
recorded a $20.5 million reduction of the liability. The Company also
reversed $2.0 million of previously accrued interest on these tax positions
through interest expense in the consolidated statements of
operations. At December 31, 2009, the total amount of unrecognized
tax benefits of $1.3 million is recorded as a liability, all of which would
impact the effective tax rate.
No
interest or penalties related to these tax positions were accrued as of December
31, 2009.
Changes
in the liability for unrecognized tax benefits during 2008 and 2009 are as
follows (in millions):
Balance
at December 31, 2007
|
|
$ |
27.9 |
|
Gross
increases—tax positions in prior period
|
|
|
1.4 |
|
Gross
decreases—tax positions in prior period
|
|
|
(11.2 |
) |
Gross
increases—current-period tax positions
|
|
|
5.6 |
|
Settlements
|
|
|
— |
|
Lapse
of statute of limitations
|
|
|
— |
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
23.7 |
|
|
|
|
|
|
Gross
increases—tax positions in prior period
|
|
|
— |
|
Gross
decreases—tax positions in prior period
|
|
|
(22.5 |
) |
Gross
increases—current-period tax positions
|
|
|
0.1 |
|
Settlements
|
|
|
— |
|
Lapse
of statute of limitations
|
|
|
— |
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
1.3 |
|
NOTE
12. 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” 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.
Amounts
measured at fair value as of December 31, 2009 are as follows (in
millions):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$ |
164.2 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
164.2 |
|
Marketable
securities
|
|
|
108.9 |
|
|
|
919.0 |
|
|
|
— |
|
|
|
1,027.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
273.1 |
|
|
$ |
919.0 |
|
|
$ |
— |
|
|
$ |
1,192.1 |
|
Amounts
measured at fair value as of December 31, 2008 are as follows (in
millions):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$ |
257.2 |
|
|
$ |
25.9 |
|
|
$ |
— |
|
|
$ |
283.1 |
|
Marketable
securities
|
|
|
68.3 |
|
|
|
726.0 |
|
|
|
— |
|
|
|
794.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
325.5 |
|
|
$ |
751.9 |
|
|
$ |
— |
|
|
$ |
1,077.4 |
|
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 (every six
months), termination dates and underlying notional values. The
agreements expire beginning in February 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 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 consolidated balance
sheets.
At
December 31, 2009, the Company had an asset of $2.4 million associated with
these contracts, all of which is expected to be reclassified into earnings
within the next twelve months and is recorded in prepaid expenses and other
current assets in the 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. Those
include cash, cash equivalents and marketable securities (Note 5), restricted
deposits (Note 9), fuel hedge contracts (Note 3), and interest rate swap
agreements (Note 12). 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 December 31, 2009
|
|
$ |
1,855.2 |
|
|
$ |
1,821.3 |
|
Long-term
debt at December 31, 2008
|
|
$ |
1,841.2 |
|
|
$ |
2,006.8 |
|
The fair
value of 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.
Concentrations
of Credit
The
Company continually monitors its positions with, and the credit quality of, the
financial institutions that are counterparties to its fuel-hedging contracts and
interest rate swap agreements and does not anticipate nonperformance by the
counterparties.
The
Company could realize a loss in the event of nonperformance by any single
counterparty to these contracts. However, the Company enters into transactions
only with large, well-known financial institution counterparties that have
strong credit ratings. In addition, the Company limits the amount of investment
credit exposure with any one institution.
The Company’s trade receivables do not
represent a significant concentration of credit risk at December 31, 2009
due to the frequency that settlement takes place and the dispersion across many
industry and government segments.
NOTE
13. OPERATING SEGMENT INFORMATION
Accounting
standards require that a public company report annual and interim financial and
descriptive information about its reportable operating segments. Operating
segments, as defined, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. The Company has two primary operating and reporting segments,
consisting of Alaska and Horizon, for which financial information is presented
below. These segments are more fully described in Note 1.
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Alaska—mainline
(1)
|
|
$ |
2,717.6 |
|
|
$ |
2,920.5 |
|
|
$ |
2,788.5 |
|
Alaska—purchased
capacity (1)
|
|
|
288.4 |
|
|
|
300.8 |
|
|
|
281.4 |
|
Total
Alaska
|
|
$ |
3,006.0 |
|
|
$ |
3,221.3 |
|
|
$ |
3,069.9 |
|
Horizon
– brand flying
|
|
|
392.7 |
|
|
|
440.2 |
|
|
|
400.5 |
|
Horizon
–capacity purchase arrangement with Alaska
|
|
|
261.7 |
|
|
|
293.7 |
|
|
|
317.9 |
|
Total
Horizon
|
|
$ |
654.4 |
|
|
$ |
733.9 |
|
|
$ |
718.4 |
|
Other
(2)
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.1 |
|
Elimination
of inter-company revenues
|
|
|
(261.7 |
) |
|
|
(293.7 |
) |
|
|
(283.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
3,399.8 |
|
|
|
3,662.6 |
|
|
|
3,506.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
(3)
|
|
|
178.5 |
|
|
|
165.9 |
|
|
|
142.3 |
|
Horizon
|
|
|
39.5 |
|
|
|
37.5 |
|
|
|
33.9 |
|
Other
(2)
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
219.2 |
|
|
|
204.6 |
|
|
|
177.4 |
|
Interest
income:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Alaska
(3)
|
|
|
38.6 |
|
|
|
51.3 |
|
|
|
64.8 |
|
Horizon
|
|
|
2.0 |
|
|
|
5.4 |
|
|
|
4.5 |
|
Other
(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Elimination
of inter-company accounts
|
|
|
(8.0 |
) |
|
|
(14.3 |
) |
|
|
(15.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
32.6 |
|
|
|
42.4 |
|
|
|
53.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
(3)
|
|
|
88.1 |
|
|
|
92.5 |
|
|
|
86.2 |
|
Horizon
|
|
|
19.9 |
|
|
|
23.6 |
|
|
|
16.6 |
|
Other
(2)
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.6 |
|
Elimination
of inter-company accounts
|
|
|
(8.0 |
) |
|
|
(14.3 |
) |
|
|
(15.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
100.5 |
|
|
|
102.3 |
|
|
|
88.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax and accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska—mainline
|
|
|
176.9 |
|
|
|
(140.4 |
) |
|
|
236.4 |
|
Alaska—purchased
capacity
|
|
|
6.9 |
|
|
|
(12.9 |
) |
|
|
(21.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Alaska
|
|
|
183.8 |
|
|
|
(153.3 |
) |
|
|
215.0 |
|
Horizon
|
|
|
22.8 |
|
|
|
(55.8 |
) |
|
|
(10.7 |
) |
Other
(2)
|
|
|
(3.7 |
) |
|
|
(4.1 |
) |
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
202.9 |
|
|
|
(213.2 |
) |
|
|
200.5 |
|
Capital
expenditures (4):
|
|
|
|
|
|
|
|
|
|
Alaska
(3)
|
|
|
357.5 |
|
|
|
323.8 |
|
|
|
606.5 |
|
Horizon
|
|
|
80.9 |
|
|
|
89.0 |
|
|
|
227.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
438.4 |
|
|
|
412.8 |
|
|
|
834.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
(3)
|
|
|
4,541.3 |
|
|
|
4,428.6 |
|
|
|
|
|
Horizon
|
|
|
724.1 |
|
|
|
692.3 |
|
|
|
|
|
Other
(2)
|
|
|
1,052.4 |
|
|
|
820.3 |
|
|
|
|
|
Elimination
of inter-company accounts
|
|
|
(1,332.8 |
) |
|
|
(1,105.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
4,985.0 |
|
|
$ |
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 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.
|
(3)
|
There
are no interest or depreciation expenses associated with purchased
capacity flying at Alaska, nor are there any associated assets or capital
expenditures.
|
(4)
|
Capital expenditures include
aircraft deposits, net of deposits
returned.
|
NOTE
14. SHAREHOLDER’S EQUITY
Common
Stock Repurchase
In 2007,
the Board of Directors authorized the Company to repurchase up to $100 million
of its common stock. The Company completed the $100 million common stock
repurchase program in February 2008. Under that program, the Company
repurchased 4,113,782 shares, or 10% of the outstanding stock at the start of
the program, at an average price of $24.31 per share. In March 2008,
the Company announced a subsequent $50 million common stock repurchase program
that expired in March 2009. During 2008, the Company repurchased 605,700 shares
of its common stock for approximately $11.7 million under this program. No
further repurchases were made under this program.
On June
11, 2009, the Board of Directors authorized the Company to repurchase up to $50
million of its common stock under a new buyback program, at which time the
Company’s stock price was $15.60. Through December 31, 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. This action did not impact the total number of common
shares outstanding.
NOTE
15. EARNINGS (LOSS) PER SHARE (EPS)
Diluted
EPS is calculated by dividing net income (loss) by the average common shares
outstanding plus additional common shares that would have been outstanding
assuming the exercise of in-the-money stock options and restricted stock units,
using the treasury-stock method. In 2009 and 2007, 2.1 million and
1.7 million stock options, respectively, were excluded from the calculation
of diluted EPS because they were antidilutive. As the Company reported a net
loss in 2008, no outstanding stock options or restricted stock units were used
in the calculation of diluted weighted average shares as the effect would have
been antidilutive.
NOTE
16. CONTINGENCIES
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska
violated the CBA by, among other things, subcontracting the ramp service
operation in Seattle. The dispute was referred to an arbitrator and hearings on
the grievance commenced in January 2007, with a final hearing date in August
2007. In July 2008, the arbitrator issued a final decision 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 negotiate a remedy. In
February 2010, the arbitrator issued a final decision. The decision
does not require Alaska to alter the existing subcontracting arrangements for
ramp service in Seattle. The award sustains the right to subcontract
other operations in the future so long as the requirements of the CBA are
met. The award imposes monetary remedies which have not been fully
calculated, but are not expected to be material.
Other
items
The
Company is a party to routine litigation matters incidental to its business and
with respect to which no material liability is expected.
Management
believes the ultimate disposition of the matters discussed above is not likely
to materially affect the Company’s financial position or results of operations.
This forward-looking statement is based on management’s current understanding of
the relevant law and facts, and it is subject to various contingencies,
including the potential costs and risks associated with litigation and the
actions of arbitrators, judges and juries.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM 9A. CONTROLS AND
PROCEDURES
|
EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
As of
December 31, 2009, an evaluation was performed under the supervision and
with the participation of our management, including our chief executive officer
and chief financial officer (collectively, our “certifying officers”), of the
effectiveness of the design and operation of our disclosure controls and
procedures. These disclosure controls and procedures are designed to ensure that
the information required to be disclosed by us in our current and 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 that the information is accumulated
and communicated to our management, including our certifying officers, on a
timely basis. Our certifying officers concluded, based on their evaluation, that
disclosure controls and procedures were effective as of December 31,
2009.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
There
were no changes to the Company’s internal control over financial reporting
identified in management’s evaluation during the year ended December 31,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO Framework). Based on our evaluation, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
We intend
to regularly review and evaluate the design and effectiveness of our disclosure
controls and procedures and internal control over financial reporting on an
ongoing basis and to improve these controls and procedures over time and to
correct any deficiencies that we may discover in the future. While we believe
the present design of our disclosure controls and procedures and internal
control over financial reporting are effective, future events affecting our
business may cause us to modify our controls and procedures.
The
Company’s independent registered public accounting firm has issued an
attestation report regarding its assessment of the Company’s internal control
over financial reporting as of December 31, 2009, which report appears on
page 77.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The
Board of Directors and Shareholders
|
We have
audited Alaska Air Group, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Alaska Air Group, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting (included in Item 9A). Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Alaska Air Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Alaska Air
Group, Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2009, and our report
dated February 18, 2010 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG
LLP
Seattle,
Washington
February 18,
2010
ITEM 9B. OTHER
INFORMATION
|
None
|
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
See
“Executive Officers of the Registrant” under Item 1, “Our Business,” in
Part I of this Form 10-K for information on the executive officers of Air Group
and its subsidiaries. Except as provided herein, the remainder of the
information required by this item is incorporated herein by reference from the
definitive Proxy Statement for Air Group’s 2010 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the end of the fiscal year ended December 31, 2009 (hereinafter referred to
as our “2010 Proxy Statement”).
The
information required by this item is incorporated herein by reference from our
2010 Proxy Statement.
|
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this item is incorporated herein by reference from our
2010 Proxy Statement.
|
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item is incorporated herein by reference from our
2010 Proxy Statement.
|
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
|
The
information required by this item is incorporated herein by reference from our
2010 Proxy Statement.
|
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL
STATEMENT SCHEDULES
|
The
following documents are filed as part of this report:
1.
|
Financial
Statement Schedules: Financial Statement Schedule II, Valuation
and Qualifying Accounts, for the years ended December 31, 2009, 2008
and 2007 on page 83.
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
By:
|
/s/ WILLIAM S. AYER
|
|
Date:
February 19, 2010
|
|
William
S. Ayer,
|
|
|
|
|
Chairman
and Chief Executive Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on February 19, 2010 on behalf of the
registrant and in the capacities indicated.
|
|
|
|
/S/ WILLIAM S. AYER
William
S. Ayer
|
Chairman,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
|
|
/S/ GLENN S. JOHNSON
Glenn
S. Johnson
|
Executive
Vice President/Finance and Chief Financial Officer (Principal Financial
Officer)
|
|
|
/S/ BRANDON S. PEDERSEN
Brandon
S. Pedersen
|
Vice
President/Finance and Controller
(Principal
Accounting Officer)
|
|
|
/S/ PATRICIA M. BEDIENT
Patricia
M. Bedient
|
Director
|
|
|
/S/ PHYLLIS J. CAMPBELL
Phyllis
J. Campbell
|
Director
|
|
|
/S/ MARK R. HAMILTON
Mark
R. Hamilton
|
Director
|
|
|
/S/ JESSIE J. KNIGHT, JR.
Jessie
J. Knight, Jr.
|
Director
|
|
|
/S/ R.
MARC LANGLAND
R.
Marc Langland
|
Director
|
|
|
/S/ DENNIS F. MADSEN
Dennis
F. Madsen
|
Director
|
|
|
/S/ BYRON I. MALLOTT
Byron
I. Mallott
|
Director
|
|
|
/S/ J.
KENNETH THOMPSON
J.
Kenneth Thompson
|
Director
|
Certain
of the following exhibits have heretofore been filed with the Securities and
Exchange Commission and are incorporated by reference from the documents
described in parentheses. Certain others are filed herewith. The exhibits are
numbered in accordance with Item 601 of Regulation S-K.
|
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Registrant (Filed as Exhibit
3(i) to Registrants Quarterly Report on Form 10-Q for the period ended
June 30, 2006, filed on August 8, 2006 and incorporated herein
by reference.)
|
|
|
3.2
|
Bylaws
of Registrant, as amended December 14, 2007 (Filed as Exhibit 3(ii) to
Registrant’s Current Report on Form 8-K, filed on December 20, 2007
and incorporated herein by reference.)
|
|
|
10.1#
|
Credit
Agreement, dated March 25, 2005, among Alaska Airlines, Inc., as borrower,
Bank of America, N.A. as administrative agent, Citicorp USA, Inc. as
syndication agent, U.S. Bank National Association as documentation agent,
and other lenders (Filed as Exhibit 10.1 to Registrant’s Quarterly Report
on Form 10-Q for the period ended March 31, 2005, filed on May
6, 2005 and incorporated herein by reference.)
|
|
|
10.1.1
|
First
Amendment to March 25, 2005 Credit Agreement, dated September 29, 2005
(Filed as Exhibit 10.1.1 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed on February 20, 2008 and
incorporated herein by reference)
|
|
|
10.1.2#
|
Second
Amendment to March 25, 2005 Credit Agreement, dated April 25, 2007 (Filed
as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the
period ended March 31, 2007, filed on May 8, 2007 and incorporated herein
by reference.)
|
|
|
10.1.3
|
Third
Amendment to March 25, 2005 Credit Agreement, dated July 30, 2007 (Filed
as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the
period ended September 30, 2007, filed on November 7, 2007 and
incorporated herein by reference.)
|
|
|
10.1.4#
|
Fourth
Amendment to March 25, 2005 Credit Agreement, dated September 24, 2008
(Filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for
the period ended September 30, 2008, filed on November 7, 2008 and
incorporated herein by reference.)
|
|
|
10.2#
|
Credit
Agreement, dated October 19, 2005, among Alaska Airlines, Inc., as
borrower, HSH Nordbank AG New York Branch, as security agent, and other
loan participants (Filed as Exhibit 10.2 to Registrant’s Quarterly Report
on Form 10-Q for the period ended September 30, 2005, filed on
November 9, 2005 and incorporated herein by reference.)
|
|
|
10.2.1#
|
First
Amendment to October 19, 2005 Credit Agreement, dated March 27, 2007
(Filed as Exhibit 10.2.1 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed on February 20, 2008 and
incorporated herein by reference.)
|
|
|
10.2.2#
|
Second
Amendment to October 19, 2005 Credit Agreement, dated November 26, 2007
(Filed as Exhibit 10.2.2 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed on February 20, 2008 and
incorporated herein by reference.)
|
|
|
10.2.3#
|
Third
Amendment to October 19, 2005 Credit Agreement, dated May 29, 2009 (Filed
as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the
period ended September 30, 2009, filed on November 6, 2009 and
incorporated herein by reference.)
|
|
|
10.3#
|
Aircraft
General Terms Agreement, dated June 15, 2005, between the Boeing Company
and Alaska Airlines, Inc. (Filed as Exhibit 10.1 to Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2005, filed on
August 5, 2005 and incorporated herein by reference.)
|
|
|
10.4#
|
Purchase
Agreement No. 2497, dated June 15, 2005, between the Boeing Company
and Alaska Airlines, Inc. (Filed as Exhibit 10.2 to Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2005, filed on
August 5, 2005 and incorporated herein by
reference.)
|
10.5#
|
Supplement
to Master Purchase Agreement, dated October 18, 2005, between Horizon Air
Industries, Inc. and Bombardier Inc. (Filed as Exhibit 10.1 to
Registrant’s Quarterly Report on Form 10-Q for the period ended
September 30, 2005, filed on November 9, 2005 and incorporated herein by
reference.)
|
|
|
10.6#
|
Lease
Agreement, dated January 22, 1990, between International Lease Finance
Corporation and Alaska Airlines, Inc., summaries of 19 substantially
identical lease agreements and Letter Agreement #1, dated January 22, 1990
(Filed as Exhibit 10-14 to Registrant’s Annual Report on Form 10-K
for the year ended December 31, 1990, filed on April 11, 1991 and
incorporated herein by reference.)
|
|
|
|
|
|
|
10.8*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan (Filed as Exhibit 10.1 to
Registrant’s Current Report on Form 8-K, filed on May 22, 2008 and
incorporated herein by reference.)
|
|
|
10.8.1*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Nonqualified Stock
Option Agreement (Filed as Exhibit 10.2 to Registrant’s Current Report on
Form 8-K, filed on May 22, 2008 and incorporated herein by
reference.)
|
|
|
10.8.2*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Stock Unit Award
Agreement (Filed as Exhibit 10.3 to Registrant’s Current Report on Form
8-K, filed on May 22, 2008 and incorporated herein by
reference.)
|
|
|
10.8.3*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Director Deferred
Stock Unit Award Agreement (Filed as Exhibit 10.4 to Registrant’s Current
Report on Form 8-K, filed on May 22, 2008 and incorporated herein by
reference.)
|
|
|
10.8.4*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option
Agreement—Incentive Award (Filed as Exhibit 10.1 to Registrant’s Current
Report on Form 8-K, filed on February 2, 2009 and incorporated herein
by reference.)
|
|
|
10.8.5*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award
Agreement—Incentive Award (Filed as Exhibit 10.2 to Registrant’s Current
Report on Form 8-K, filed on February 2, 2009 and incorporated herein by
reference.)
|
|
|
10.8.6*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award Agreement
(Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed
on February 5, 2010 and incorporated herein by
reference.)
|
|
|
10.8.7*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option
Agreement (Filed as Exhibit 10.2 to Registrant’s Current Report on Form
8-K, filed on February 5, 2010 and incorporated herein by
reference.)
|
|
|
10.9*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan and original form of stock
option and restricted stock unit agreements (Filed as Exhibit 10.2 to
Registrant’s Annual Report on Form 10-K for the year ended December
31, 2004, filed on February 25, 2005 and incorporated herein by
reference.)
|
|
|
10.9.1*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Nonqualified Stock Option
Agreement (Filed as Exhibit 10.8.1 to Registrant’s Annual Report on Form
10-K for the year ended December 31, 2007, filed on February 20, 2008 and
incorporated herein by reference.)
|
|
|
10.9.2*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Stock Unit Award Agreement
(Filed as Exhibit 10.8.2 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed on February 20, 2008 and
incorporated herein by reference.)
|
|
|
10.9.3*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Performance Stock Unit Award
Agreement (Filed as Exhibit 10.3 to Registrant’s Current Report on Form
8-K, filed on February 14, 2008 and incorporated herein by
reference.)
|
|
|
10.10*
|
Alaska
Air Group, Inc. 1999 Long-Term Incentive Equity Plan (Filed as
Exhibit 99.1 to Registrant’s Registration Statement on Form S-8,
Registration No. 333-87563, filed on September 22, 1999 and incorporated
herein by reference.)
|
|
|
10.11*
|
Alaska
Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity Plan (Filed as
Exhibit 99.2 to Registrant’s Registration Statement on Form S-8,
Registration No. 333-39889, filed on November 10, 1997 and incorporated
herein by reference.)
|
|
|
10.12*
|
Alaska
Air Group, Inc. 1996 Long-Term Incentive Equity Plan (Filed as
Exhibit 99.1 to Registrant’s Registration Statement on Form S-8,
Registration No. 333-09547, filed on August 5, 1996 and incorporated
herein by reference.)
|
|
|
10.13*
|
Alaska
Air Group, Inc. Non Employee Director Stock Plan (Filed as
Exhibit 99.1 to Registrant’s Registration Statement on Form S-8,
Registration No. 333-33727, filed on August 15, 1997 and incorporated
herein by reference.)
|
|
|
10.14*
|
Alaska
Airlines, Inc. and Alaska Air Group, Inc. Supplementary Retirement Plan
for Elected Officers, as amended November 7, 1994 (Filed as Exhibit 10.15
to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 1997, filed on February 10, 1998 and incorporated herein by
reference.)
|
|
|
10.15*
|
Alaska
Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan, as
amended by First Amendment to the Alaska Air Group, Inc. 1995 Elected
Officers Supplementary Retirement Plan and Second Amendment to the Alaska
Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan (Filed
as Exhibit 10.13 to Amendment No. 1 to Registrant’s Registration Statement
on Form S-1, Registration No. 333-107177, filed on September 23, 2003
and incorporated herein by reference.)
|
|
|
10.16*
|
Form
of Alaska Air Group, Inc. Change of Control Agreement for named executive
officers, as amended and restated November 28, 2007 (Filed as Exhibit
10.16 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2007, filed on February 20, 2008 and incorporated herein by
reference.)
|
|
|
10.17*
|
Alaska
Air Group, Inc. Nonqualified Deferred Compensation Plan, as amended and
restated on December 1, 2005 (Filed as Exhibit 10.17 to Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2007, filed on
February 20, 2008 and incorporated herein by
reference.)
|
|
|
10.18*
|
Separation
Agreement between Gregg Saretsky and Alaska Airlines, Inc. dated December
10, 2008 (Filed as Exhibit 10.1 to Registrant’s Current Report on
Form 8-K, filed on December 10, 2008 and incorporated herein by
reference.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Indicates
management contract or compensatory plan or
arrangement.
|
#
|
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.
|
ALASKA
AIR GROUP, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Beginning
Balance
|
|
|
Additions
Charged
to Expense
|
|
|
Deductions
|
|
|
Ending
Balance
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
deducted from asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
2.9 |
|
|
$ |
1.6 |
|
|
$ |
(2.9 |
) |
|
$ |
1.6 |
|
Obsolescence
allowance for flight equipment spare parts
|
|
$ |
20.5 |
|
|
$ |
5.5 |
|
|
$ |
(1.4 |
) |
|
$ |
24.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
deducted from asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1.6 |
|
|
$ |
1.5 |
|
|
$ |
(1.6 |
) |
|
$ |
1.5 |
|
Obsolescence
allowance for flight equipment spare parts
|
|
$ |
24.6 |
|
|
$ |
5.8 |
|
|
$ |
(9.0 |
) |
|
$ |
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
deducted from asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1.5 |
|
|
$ |
1.4 |
|
|
$ |
(1.4 |
) |
|
$ |
1.5 |
|
Obsolescence
allowance for flight equipment spare parts (a)
|
|
$ |
21.4 |
|
|
$ |
4.8 |
|
|
$ |
(0.2 |
) |
|
$ |
26.0 |
|
(a)
|
Deductions
in 2008 are primarily related to the write off of the MD-80 and B737-200
parts allowances against their respective costs
bases.
|