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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
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.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 431-7040
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
Rights to Purchase Series A Participating
Preferred Stock New York Stock Exchange
7-3/4%Convertible Subordinated Debentures
Due 2010 Unlisted
6-7/8%Convertible Subordinated Debentures
Due 2014 New York Stock Exchange
7-1/4%Convertible Subordinated Notes
Due 2006 New York Stock Exchange
10.21%Series B Cumulative Redeemable
Preferred Stock Due 1997 Unlisted
As of December 31, 1993, common shares outstanding totaled
13,341,621. The aggregate market value of the common shares of
Alaska Air Group, Inc. held by nonaffiliates, 13,228,830 shares, was
approximately $187 million (based on the closing price of these
shares, $14.125, on the New York Stock Exchange on such date).
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 ]
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement
Relating 1994 Annual Meeting
of Shareholders Part III
Exhibit Index begins on page 40.
PART I
ITEM 1. BUSINESS
General
Alaska Air Group, Inc. (Air Group or the Company) is a holding
company incorporated in Delaware in 1985. Its two principal
subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon). Both subsidiaries operate as airlines.
However, each subsidiary's business plan, competition and economic
risks differ substantially due to the passenger capacity and range
of aircraft operated. Alaska is a national airline, operates an all
jet fleet, and its average passenger trip is 860 miles. Horizon is
a regional airline, primarily operates a turboprop fleet, and its
average passenger trip is 200 miles. Business segment information is
reported in Note 10 of the Notes to Consolidated Financial
Statements. The Company's executive offices are located at
19300 Pacific Highway South, Seattle, Washington 98188.
The business of the Company is somewhat seasonal. Quarterly
operating income tends to peak during the third quarter.
Alaska
Alaska Airlines is an Alaska corporation, organized in 1937. Alaska
serves 37 airports in six states (Alaska, Washington, Oregon,
California, Nevada and Arizona), five cities in Mexico and three
cities in Russia. Over half of the U.S. airports served by Alaska
are located in the state of Alaska. In each year since 1973, Alaska
has carried more passengers between Alaska and the U.S. mainland
than any other airline. Alaska Airlines also serves almost 60 small
communities in Alaska through subcontracts with five local carriers.
In 1993, Alaska carried 6.4 million passengers. Passenger traffic
within Alaska and between Alaska and the U.S. mainland accounted for
29% of Alaska's total revenue passenger miles, while West Coast
traffic accounted for 59% and the Mexico markets 12%. Based on
passenger enplanements, Alaska's leading airports are Seattle,
Portland, Anchorage and Los Angeles. Based on revenues, its leading
nonstop routes were Seattle-Anchorage, Seattle-Los Angeles and
Seattle-San Francisco.
Alaska's operating fleet at December 31, 1993 consisted of 66 jet
aircraft.
Horizon
Horizon, a Washington corporation, began service in 1981 and was
acquired by Air Group in 1986. It is the largest regional airline
in the Pacific Northwest, and serves 33 airports in six states
(Washington, Oregon, Montana, Idaho, Utah and California) and two
cities in Canada. In 1993, Horizon carried 2.8 million passengers.
Based on passenger enplanements, Horizon's leading airports are
Seattle, Portland, Spokane and Boise. Based on revenues, its
leading nonstop routes were Seattle-Portland, Seattle-Spokane,
Seattle-Boise, Seattle-Vancouver, B.C. and Portland-Boise. At
December 31, 1993, Horizon's operating fleet consisted of five jet
and 51 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code
in airline computer reservation systems. Certain Horizon flights
are dual-designated in these reservation systems as Northwest
Airlines and Alaska Airlines. Currently, 31% of Horizon's
passengers connect to either Alaska or Northwest.
Airline Regulation
United States Department of Transportation (DOT) - The DOT has the
authority to regulate certain airline economic functions including
financial and statistical reporting, consumer protection,
computerized reservations systems and essential air transportation.
The DOT is also charged with determining which U.S. carriers will
receive the authority to provide service to international
destinations. International operating authority is subject to
bilateral agreements between the United States and the respective
countries. The countries establish the number of carriers to
provide service, approve the carriers which are selected to provide
such service and the size of aircraft to be used. The DOT reviews
the carriers authorized under bilateral agreements every five years.
Horizon's authority to operate the Seattle-Vancouver route, the
Seattle-Victoria route and the Portland-Vancouver route is to be
reviewed in August 1997, May 1994 and January 1995, respectively.
Alaska's authority to serve its various Mexico destinations are to
be reviewed during 1994, 1995 and 1996. The bilateral agreement
with Russia will be reviewed in April 1995. The Company expects to
be granted authority to continue to operate its international
routes.
Federal Aviation Administration (FAA) - The FAA, an agency within
the DOT, has jurisdiction to regulate aviation safety generally,
including: the licensing of pilots and maintenance personnel; the
establishment of minimum standards for training and maintenance; and
technical standards of flight, communications and ground equipment.
All aircraft must have and maintain certificates of airworthiness
issued by the FAA. Alaska and Horizon aircraft, maintenance
facilities and procedures are subject to inspection by the FAA. The
FAA has the authority to suspend temporarily or revoke permanently
the authority of an air carrier or its licensed personnel for
failure to comply with Federal Aviation Regulations and to levy
civil penalties for such failure.
Labor Relations - The air transportation industry is regulated under
the Railway Labor Act, which vests in the National Mediation Board
certain regulatory powers with respect to disputes between airlines
and labor unions arising under collective bargaining agreements.
Environmental - Special noise ordinances or agreements restrict the
type of aircraft, the timing and the number of flights operated by
Alaska and other air carriers at five Los Angeles area airports plus
San Diego, Palm Springs, San Francisco, and Seattle.
In late 1990, Congress passed the Airport Noise and Capacity Act of
1990 (Act). The Act addressed the need to establish a national
aviation noise policy and limit the ability of airports and local
communities to implement procedures that would interfere with
interstate commerce or the national air transportation system. The
Act also called for the phase out of Stage II airplanes (generally
older aircraft not meeting certain noise emission standards) in the
contiguous 48 states by December 31, 1999. The Stage II phase-out
provisions of the Act do not apply to aircraft operated solely
within the state of Alaska. To implement the phase out within the
contiguous 48 states, the FAA has proposed regulations and a
timetable. Alaska believes that its current fleet plan will enable
it to comply with the FAA's proposed regulations.
Competition
Competition within the air transportation industry is intense.
Currently, any domestic air carrier deemed fit by the U.S.
Department of Transportation (DOT) is allowed to operate scheduled
passenger service in the United States. Together, Alaska and
Horizon carry less than 2% of all U.S. passenger traffic.
Alaska and Horizon compete in the West Coast and Arizona markets
with both established carriers (such as United, United Express,
Delta, American, MarkAir, and America West) and new low-cost
carriers (such as Morris Air and Reno Air). In December 1993,
Southwest Airlines purchased Morris Air. Alaska also competes
primarily with United, Northwest, Delta and MarkAir in the Lower 48-
to-Alaska market. Some of these competitors are substantially
larger than Alaska and Horizon, have greater financial resources and
have more extensive route systems. Due to its shorthaul markets,
Horizon is subject to competition from surface transportation,
particularly the private automobile.
Alaska and Horizon provide numerous departures from smaller cities
to larger "hub" cities and, where possible, connecting flights to a
passenger's final West Coast destination. Both airlines distinguish
themselves from competitors by providing a higher level of customer
service. The airlines' excellent service in the form of attention
to customer needs, high-quality food and beverage service, more
legroom, well-maintained aircraft and other amenities has been
recognized by independent studies and surveys of air travelers.
Alaska and Horizon maintain competitive fares, offering discount or
promotional fares to the extent necessary to maintain market share.
Most large U.S. carriers have developed, independently or in
partnership with others, large computerized reservation systems
(CRS). Since the deregulation of fares and schedules, travel agents
have contracted to use these systems in selling tickets. Airlines,
including Alaska and Horizon, are charged industry-set fees to have
their flight schedules included in the various CRS displays. These
systems have become the predominant means of distributing airline
tickets. Due to their competitive importance, DOT rules require the
vendors of such systems to provide unbiased displays of all airline
schedules and fares. In 1992, the DOT adopted new rules in this
area to reduce anti-competitive practices.
Frequent Flyer Program
All major airlines have established frequent flyer programs offering
incentives to maximize travel on that particular carrier. Alaska
has a Mileage Plan (MP) that allows customers to earn mileage
credits while flying on Alaska, Horizon and other participating
airlines, and by using the services of participating banks, hotels
and car rental firms. Alaska reserves the right to change the MP
terms, conditions, partners, mileage credits and/or award levels.
Mileage credits can be redeemed for free or discounted travel and
for other travel industry awards. Upon accumulating the necessary
mileage credit, MP members notify Alaska of their award selection.
Once selected, modifications to such awards are limited. Over 90%
of the flight awards selected are subject to blackout dates and
capacity-controlled seating. Currently, credits earned must be
redeemed within three years, otherwise they expire.
As of the year end 1993 and 1992, Alaska estimates that 698,000 and
585,000 roundtrip flight awards could have been redeemed by MP
members who have mileage credits exceeding the 15,000 mile free
ticket threshold. However, at December 31, 1993, fewer than 14% of
these flight awards were actually issued and outstanding.
Alaska accrues the incremental cost associated with flight awards
above the 15,000 mile level. In addition, a proportion of the
incremental cost of a flight award is accrued for 21% of the
accumulated mileage credits of MP members whose account balances are
less than 15,000 miles. The resulting accrued liability covers 65%
of the total accumulated mileage credit. At December 31, 1993 and
1992, the accrued liability was $5.9 million and $8.4 million,
respectively.
The incremental cost to transport a passenger on a free trip
includes the cost of fuel, meals, and insurance. The incremental
cost does not include any contribution to overhead, aircraft cost or
profit.
The number of roundtrip flight awards used on Alaska were 188,000,
174,000 and 119,000 for the years 1993, 1992 and 1991, respectively.
These awards represent approximately 5% of the total passenger miles
flown for each period. Given this low usage, seat availability and
seat restrictions on popular flights, Alaska believes that
displacement of revenue passengers by those using flight awards is
minimal.
Selected Quarterly Consolidated Financial Information (Unaudited)
Selected financial data for each quarter of 1993 and 1992 is as
follows (in thousands, except per share):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1993 1992 1993 1992 1993 1992 1993 1992
Operating revenues $250,242 $258,208 $277,483 $277,145 $323,386 $321,087 $277,218 $258,938
Operating
income (loss) (16,846) (20,113) 2,082 (19,051) 20,687 3,793 (22,696) (59,470)
Income (loss) before
accounting change (15,033) (15,682) (3,589) (17,774) 8,028 (2,215) (20,324) (44,599)
Accounting change - (4,567) - - - - - -
Net income (loss) (15,033) (20,249) (3,589) (17,774) 8,028 (2,215) (20,324) (44,599)
Primary earnings
(loss) per share:
Income (loss) before
accounting change (1.25) (1.31) (.33) (1.46) .60 (.29) (1.52) (3.47)
Accounting change - (.34) - - - - - -
Net income (loss) (1.25) (1.65) (.33) (1.46) .60 (.29) (1.52) (3.47)
Fully diluted
earnings per share * * * * .47 * * *
* Anti-dilutive
The amounts shown for the first quarter 1992 differ from that
previously reported due to the January 1, 1992 adoption of
Financial Accounting Standards No. 106, "Accounting for
Postretirement Benefits Other than Pensions." The cumulative effect
of the change in accounting is reported in the first quarter of
1992. The effect of the accounting change on subsequent quarters of
1992 is immaterial.
The total of the amounts shown as quarterly earnings per share may
differ from the amount shown on the Consolidated Statement of Income
because the annual computation is made separately and is based upon
average number of shares and equivalent shares outstanding for the
year. (See Note 1 of the Notes to Consolidated Financial
Statements.)
A discussion of the fourth quarter 1993 results is included in
Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Employees
Alaska had 6,243 active full-time and part-time employees at
December 31, 1993, of which approximately 85% are represented by
labor unions.
The unions and the number of Alaska employees represented by each as
of December 31, 1993 and the amendable dates of existing contracts
are outlined below:
Number of
Union Employee Group Employees Contract Status
International Mechanic, 1,493 Amendable 9/1/97
Association of Rampservice and
Machinists and related
Aerospace Workers classifications
Clerical, Office 1,843 Amendable
and Passenger 9/30/92
Service (In negotiation)
Air Line Pilots Pilots 888 Amendable
Association 12/1/97
International
Association of Flight Attendants 1,011 Amendable
Flight Attendants 10/1/90
(In negotiation)
Mexico Workers Mexico Airport 66 Amendable 4/1/94
Association of Air Personnel
Transport
Transport Workers Dispatchers 16 Amendable
4/24/96
Horizon had 2,490 active full-time and part-time employees at
December 31, 1993, of which approximately 20% are represented by
labor unions.
The unions and the number of Horizon employees represented by each
as of December 31, 1993 and the amendable dates of existing
contracts are outlined below:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 234 Amendable 1/1/95
Union of America related
classifications
Dispatchers 26 In negotiation
Association of Flight 189 Amendable 4/20/94
Flight Attendants Attendants
Canadian Brotherhood Station 58 Amendable 7/10/95
of Railway, personnel in
Transport and British Columbia
General Workers
The Company's labor contracts currently in negotiation are not
expected, when finalized, to have a material adverse impact on
results of operations.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their
average age at December 31, 1993.
Average
Passenger Age
Aircraft Type Capacity Owned Leased Total in Years
Alaska Airlines
Boeing 727-100 12/92 1 - 1 27
Boeing 727-200 12/131 - 4 4 14
Boeing 737-200C 0/111 3 4 7 14
Boeing 737-400 10/126 2 14 16 1
McDonnell Douglas MD-80 10/128 12 26 38 6
18 48 66 6
Horizon
Fairchild Metroliner III 18 5 23 28 8
de Havilland Dash 8 37 - 23 23 5
Fokker F-28 65 - 5 5 22
5 51 56 8
Total 23 99 122
Part II, Item 7., "Management's Discussion and Analysis of Results
of Operations and Financial Condition," discusses future orders and
options for additional aircraft.
Twelve of the 18 aircraft owned by Alaska as of December 31, 1993
are subject to liens securing long-term debt. Alaska's leased
Boeing 727-200s will all be retired by May 1994. The leased
McDonnell Douglas MD-80 aircraft have expiration dates of 1994 to
2013. The B737-400 leases expire in 2000-2001. In late 1993,
Horizon took delivery of two Dornier 328 aircraft, which will be
placed in service in early 1994. Horizon's leased Fairchild
Metroliner III, de Havilland Dash 8, Fokker F-28 and Dornier 328
aircraft have base-term expiration dates of 1994 to 2001, 1995 to
2006, 1996 to 1997, and 2008, respectively. 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. The Company
has the right to terminate each of the B737-400 leases on the third
anniversary of an aircraft's delivery date for an average fee of
$260,000. For information regarding obligations under capital
leases and long-term operating leases, see Note 5 to the
Consolidated Financial Statements.
Ground Facilities and Services
Alaska and Horizon lease ticket counters, gates, cargo and baggage,
office space and other support areas at the majority of the airports
they serve. Alaska also owns terminal buildings at various Alaska
cities and Horizon owns its terminal at the Portland International
Airport.
Alaska has centralized operations in several buildings located at or
near Seattle-Tacoma International Airport (Sea-Tac) in Seattle,
Washington. The owned buildings, including land unless located on
leased airport property, include: a three-bay hangar facility with
maintenance shops; a flight operations and training center; an air
cargo facility; a reservation and office facility; a four-story
office building; its corporate headquarters; and two storage
warehouses. Alaska also leases a two-bay hangar/office facility at
Sea-Tac.
Alaska's other major facilities include: its Anchorage regional
headquarters building and Phoenix reservations center; a leased two-
bay maintenance facility in Oakland; and a leased hangar/office
facility in Anchorage.
Horizon owns its Seattle corporate headquarters building and leases
a maintenance facility at the Portland airport.
ITEM 3. LEGAL PROCEEDINGS
In October 1991, Alaska gave notice of termination of its code
sharing and frequent flyer relationship with MarkAir, an airline
based in the state of Alaska. Both companies have filed suit
against one another in connection with that termination alleging
breach of contract and other causes of action under state law. In
addition, MarkAir claimed that the termination was in violation of
Federal Antitrust Laws. MarkAir filed for protection under Chapter
11 of the U.S. Bankruptcy Code in June 1992. In December 1993,
MarkAir agreed to dismiss all antitrust claims against the Company.
That agreement is awaiting final approval by the U.S. District Court
which has jurisdiction over the case. MarkAir and Alaska will be
free to pursue the breach of contract and other state law claims
after dismissal of the antitrust suit.
In December 1992, the U.S. Department of Justice filed suit against
most major domestic airlines, including the Company, alleging that
they have violated the antitrust laws by conspiring to fix prices
for domestic airline tickets in violation of Section 1 of the
Sherman Act. Two airlines have entered into consent decrees with
the U.S. Department of Justice.
The Company believes the ultimate resolution of the above legal
proceedings will not result in a material adverse impact on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Alaska Air Group, Inc., their positions
and their respective ages (as of March 1, 1994) are as follows:
Officer
Continuously
Name Position Age Since
Raymond J. Vecci Chairman, President and Chief 51 1979
Executive Officer of Alaska Air
Group, Inc. and Alaska Airlines,
Inc.
Marjorie E. Laws Vice President/Corporate Affairs 53 1983
and Corporate Secretary of
Alaska Air Group, Inc. and
Alaska Airlines, Inc.
J. Ray Vingo Vice President/Finance & Chief 55 1983
Financial Officer of Alaska Air
Group, Inc. and Alaska Airlines,
Inc.; Treasurer of Alaska Air
Group, Inc.
Steven G. Vice President/Legal and General 54 1988
Hamilton Counsel of Alaska Air Group,
Inc. and Alaska Airlines, Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
As of December 31, 1993, there were 13,341,621 shares of common
stock issued and outstanding and 6,524 shareholders of record. The
Company also held 3,153,589 treasury shares at a cost of $71.8
million. Cash dividends totaling $.15 per share were declared in
1992. In December 1992, the Company suspended the quarterly
dividend on the common stock due to the 1992 net loss and the
difficult economic environment. Air Group's common stock is listed
on the New York Stock Exchange (symbol: ALK).
The following table shows the trading range of Alaska Air Group
common stock on the New York Stock Exchange for 1993 and 1992.
1993 1992
High Low High Low
First Quarter 18 15-5/8 23-7/8 18-1/4
Second Quarter 17-7/8 14-1/4 22 17-1/8
Third Quarter 15 12-1/4 19-1/2 17-1/4
Fourth Quarter 17-3/8 12-1/2 17-5/8 14-3/4
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Year Ended December 31 1993 1992 1991 1990 1989
FINANCIAL DATA (a) (In Thousands, Except Per Share)
Operating Revenues
Passenger $1,001,975 $1,000,618 $999,859 $953,247 $833,847
Freight, mail and other 126,354 114,760 104,172 93,718 82,690
Total Operating Revenues 1,128,329 1,115,378 1,104,031 1,046,965 916,537
Operating Expenses 1,145,102 1,210,219 1,069,405 1,018,546 846,576
Operating Income (Loss) (16,773) (94,841) 34,626 28,419 69,961
Interest expense, net of
interest capitalized (37,178) (37,121) (31,879) (11,242) (15,664)
Interest income 7,088 7,374 11,698 7,312 12,661
Other - net 1,051 (1,118) 1,762 3,429 2,409
Income (loss) before
income tax expense
and accounting change $(45,812) $(125,706) $16,207 $27,918 $69,367
Income (loss) before
accounting change $(30,918) $(80,270) $10,338 $17,167 $42,935
Net Income (Loss) $(30,918) $(84,837) $10,338 $17,167 $42,935
Per Common Share Data:
Average shares outstanding-
primary (000) 13,340 13,309 13,413 13,675 15,851
Primary earnings per share
before accounting change $(2.51) $(6.53) $.27 $.82 $2.71
Primary earnings per share(a) $(2.51) $(6.87) $.27 $.82 $2.71
Fully diluted earnings
per share(a) (b) (b) (b) (b) $2.51
Cash dividends per share - $.15 $.20 $.20 $.20
Book value per share $12.51 $14.76 $21.50 $21.23 $22.08
Working capital (deficit) $(61,317) $(85,233) $(10,868) $(128,265) $9,468
Property and equipment,net $690,606 $790,910 $819,787 $700,378 $536,503
Total assets $1,134,954 $1,208,358 $1,225,455 $1,021,404 $874,075
Long-term debt and
capital lease obligations $525,418 $487,847 $499,971 $281,759 $227,044
Redeemable preferred stock - $61,235 $60,947 $60,665 -
Shareholders' equity $166,833 $196,724 $284,447 $279,833 $341,872
Return on average
shareholders' equity(c) (18.4%) (38.0%) 1.3% 3.6% 13.2%
Ratio of earnings to
fixed charges(d) .51 (.37) .97 1.13 2.30
AIRLINE OPERATING DATA
Revenue passengers (000) 9,189 8,629 7,889 7,274 6,604
Revenue passenger
miles (000,000) 6,074 6,023 5,353 4,851 4,376
Avialable seat
miles (000,000) 10,412 10,522 9,575 9,099 7,926
Revenue passenger
load factor 58.3% 57.2% 55.9% 53.3% 55.2%
Breakeven passenger
load factor 60.3% 63.7% 55.1% 51.8% 50.5%
Yield per passenger
mile (cents) 16.5 16.6 18.7 19.6 19.1
Operating expenses per
available seat mile (cents) 11.0 11.5 11.2 11.2 10.7
Average number of employees(e) 8,458 8,666 8,081 7,653 6,661
(a) For 1992, primary earnings per share includes ($.34) for the $4.6
million cumulative effect of the postretirement benefits
accounting change as of January 1, 1992.
(b) Anti-dilutive.
(c) For the 1990-1993 calculations, net income (loss) was reduced
for preferred stock dividends and shareholders' equity excluded
redeemable preferred stock.
(d) For 1993, 1992 and 1991, earnings are inadequate to cover fixed
charges by $50 million, $142.1 million and $2.4 million, respectively.
(e) Full-time equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Industry Conditions
The Company's operating results improved in 1993, yet the Company
continued to post a net loss. The Company and the entire airline
industry have been negatively impacted by a weak economy, over
capacity of aircraft, continued operation of bankrupt carriers and
low-cost, new entrants.
These factors were particularly evident on the West Coast due to the
economic recession in California and the growth of new entrant
carriers. The result has been a significant decrease in air fares.
The Company has responded to the changing industry environment by
cutting costs, retiring older aircraft, and reducing capital
spending. In 1993, the Company implemented a comprehensive cost-
reduction program, which resulted in more than $80 million of annual
cost savings.
Results of Operations
FOURTH QUARTER 1993 AND 1992 The consolidated net loss for the
fourth quarter 1993 was $20.3 million, or $1.52 per share, compared
to a loss of $44.6 million, or $3.47 per share, for fourth quarter
1992. Results for 1993 and 1992 include after-tax special charges
of $9.8 million and $16.6 million, respectively. Before these
charges, the fourth quarter 1993 net loss was $10.5 million, or $.79
per share, compared to a loss of $28.0 million, or $2.23 per share,
for the fourth quarter 1992. The special charges are to recognize
the lower value of the Boeing 727 fleet and the acceleration of its
retirement.
Fourth quarter 1993 operating revenues were $277.2 million, up 7%
from the $258.9 million reported for the prior-year quarter.
Passenger traffic was up 28%, but passenger yield (revenue per
passenger mile) was down 17% from 17.9 cents in 1992 to 14.8 cents
in 1993.
Fourth quarter 1993 operating expenses decreased 6% (3% excluding
the special charges) to $299.9 million from $318.4 million for
fourth quarter 1992.
Wages and benefits decreased $2.9 million (3%) due to a 4% decrease
in employees offset by higher average wage rates. Maintenance
expense decreased $6.7 million due to the replacement of old
aircraft during the past year. Aircraft rent and depreciation
expense increased $6.3 million (13%) with the addition of six new
aircraft to the fleet over the past year. Excluding special
charges, all other expenses decreased $4.3 million (3%). Increased
flying combined with cost savings caused operating cost per
available seat mile to decline from 12.2 cents to 10.6 cents, or 13%
(excluding the special charges).
Fourth quarter 1993 nonoperating net expense decreased $2.3 million
primarily due to lower interest rates on debt.
1993 COMPARED WITH 1992 The consolidated net loss for 1993 was
$30.9 million, or $2.51 per share, compared with $84.8 million net
loss, or $6.87 per share, for 1992. The results include an after-
tax charge of $9.8 million in 1993 and $16.6 million in 1992 to
recognize the lower value of the Boeing 727 fleet and the
acceleration of its retirement. In addition, 1992 includes a $4.6
million charge related to a change in accounting for postretirement
benefits. Without such charges, the 1993 net loss would have been
$21.1 million, or $1.77 per share, compared with $63.6 million net
loss, or $5.28 per share, for 1992.
The operating loss for 1993 was $16.8 million compared to an
operating loss of $94.8 million for 1992. The improved operating
results reflect lower operating expenses.
Operating revenues increased 1% in 1993 to $1.128 billion.
Passenger revenues, which accounted for 89% of total operating
revenues, increased slightly to $1.002 billion, while freight and
mail revenues increased 9% to $84.0 million, and other revenues
increased by 13% to $42.3 million.
Passenger revenues were negatively impacted in 1993 by aggressive
fare discounting. Passenger yields were up 11% during the first
half of 1993 but dropped significantly during the last half of 1993.
For all of 1993, yields declined .1 cent from 16.6 cents in 1992 to
16.5 cents in 1993. A 1 cent change in yields affects annual
revenues by approximately $60 million. Passenger traffic was down
12% during the first half of 1993 but lower fares stimulated traffic
during the last half of 1993. For all of 1993, passenger traffic
increased 1%.
Freight and mail revenues increased $6.7 million (9%) in 1993 due to
increased freight and mail rates and increased service in Alaska.
Other-net revenues were up $4.9 million (13%) in 1993 due to
increased revenues from Alaska's frequent flyer program.
Operating Expenses Operating expenses decreased 5% to $1.145
billion from $1.210 billion in 1992. The $65 million reduction in
expenses was primarily due to a cost reduction program initiated
during the first quarter 1993. Operating expenses per ASM declined
4%, from 11.5 cents to 11.0 cents. The table below shows the major
operating expense elements on a unit-cost basis for 1993 and 1992:
Operating Expenses Per ASM (In Cents)
Increase %
1993 1992 (Decrease) Change
Wages and benefits 3.53 3.51 .02 1
Aircraft fuel 1.37 1.55 (.18) (12)
Aircraft maintenance .65 .83 (.18) (22)
Aircraft rent 1.49 1.18 .31 26
Commissions .77 .82 (.05) (6)
Depreciation & amortization .56 .54 .02 4
Special charges .14 .25 (.11) NM
Other 2.49 2.83 (.34) (12)
Total 11.00 11.51 (.51) (4)
Fuel expense per ASM decreased 12% due to the use of more fuel
efficient aircraft and a 3% decrease in the cost of fuel. The
average cost per gallon during 1993 was 67.6 cents, down from 69.6
cents in 1992. Currently, a 1 cent change in fuel prices affects
annual fuel costs by approximately $2.1 million.
Maintenance expense per ASM declined 22% due to the replacement of
old aircraft with new aircraft. With an average age of six years at
year-end 1993, Alaska's fleet is the youngest among all U.S. jet
airlines.
Aircraft rent and depreciation expense increased 18% in 1993
primarily due to the addition of new aircraft.
As of December 31, 1993, essentially all of Alaska's Boeing 727-200
aircraft had been retired. The last two will be retired in May
1994. This is an acceleration of the retirement schedule announced
previously. This action resulted in a pretax special charge of $15
million in 1993 to recognize the lower value of the Boeing 727-200
fleet. It includes a provision for future excess lease costs and
the write-down of capitalized overhauls and spare parts to net
realizable value. 1992 results include a similar charge of $26
million, which resulted from the Company's decision to accelerate
the retirement of the Boeing 727-200 from 1996 to the end of 1994.
Other expense per ASM decreased 12% due to lower expenditures for
food, advertising, promotion, supplies and personnel expenses.
Other Income (Expense) Nonoperating expense was $29.0 million in
1993, down from $30.9 million in 1992. Interest expense was $5.6
million lower in 1993 due to lower interest rates. There was only
$446,000 interest capitalized in 1993, compared to $6.1 million in
1992. Because of the two-year delay in expected delivery of the MD-
90 aircraft, interest capitalization on the associated aircraft
purchase deposits was discontinued in the fourth quarter 1992.
1992 COMPARED WITH 1991 Consolidated net loss for 1992 was $84.8
million, or $6.87 per share, compared with $10.3 million net profit,
or $.27 per share, for 1991. 1992 results include an after-tax
charge of $16.6 million to recognize the lower value of the Boeing
727 fleet and a $4.6 million charge related to a change in
accounting for postretirement benefits. Operating loss was $94.8
million, compared to an operating profit of $34.6 million for 1991.
The large operating loss was primarily due to a 13% increase in
operating expenses but only a 1% increase in operating revenues.
Operating revenues were $1.115 billion, 1% greater than the $1.104
billion posted a year earlier. Passenger traffic was up 13%, but
was mostly offset by lower yields. Passenger yield for 1992 was
16.6 cents, down 11% from 1991's 18.7 cents. Freight and mail
revenues increased $7.7 million (11%) in 1992 primarily due to
increased service in Alaska.
Nonoperating expense was $30.9 million in 1992 compared to $18.4
million in 1991. The increase was primarily due to higher interest
expense and less interest income.
Operating expenses increased 13% (11% excluding the special charges)
to $1.210 billion from $1.069 billion in 1991. The primary factor
contributing to the increase was the 10% increase in available seat
miles resulting from the net addition of 12 aircraft during 1992.
Wages and benefits rose 11% in 1992 resulting from a 7% increase in
employees and a 4% increase in wages and benefits per employee.
Fuel expense rose 4% primarily due to a 6% increase in fuel
consumed, offset by a 2% decrease in average cost per gallon. Fuel
expense per ASM was down 5% due to the addition of 16 fuel-
efficient, two-engine jet aircraft and retirement of eight three-
engine jet aircraft during 1992. Aircraft rent and depreciation
expense rose 17% due to the addition of new aircraft. Other
operating expenses increased 14% primarily due to higher costs for
food, landing fees, terminal rents and outside services.
LIQUIDITY AND CAPITAL RESOURCES
The table below shows the major indicators of financial condition
and liquidity and the changes during 1993.
December 31, December 31,
1993 1992 Change
(In millions, except ratios and per share)
Cash and marketable securities $101.1 $83.4 $17.7
Working capital (deficit) (61.3) (85.2) 23.9
Total assets 1,135.0 1,208.4 (73.4)
Long-term debt 525.4 487.8 37.6
Redeemable preferred stock - 61.2 (61.2)
Shareholders' equity 166.8 196.7 (29.9)
Book value per common share $12.51 $14.76 $(2.25)
Debt/equity ratio 76%:24% 74%:26% N/A
1993 FINANCIAL CHANGES The Company's cash and marketable securities
portfolio increased by $17.7 million during 1993. Operating
activities provided $48.5 million of cash in 1993. Additional cash
was provided by $83.7 million from aircraft refinancing and $20
million in short-term borrowings. Cash was used for debt payments
($79.4 million), repurchase of preferred stock ($33.4 million), and
capital expenditures ($30.4 million).
Like many airlines, the Company has a working capital deficit. The
existence of such a deficit has not in the past impaired the
Company's ability to meet its obligations as they become due and is
not expected to do so in the future.
Financing Arrangements During May 1993, the Company repurchased all
of its outstanding 10.21% redeemable preferred stock for $60.4
million, saving the Company more than $4 million annually after
taxes. The seller provided a $27 million loan carrying a 7%
interest rate to assist with the stock repurchase.
In November 1993, Alaska entered into a financing agreement to
refinance $47.2 million in borrowings with a six-year term loan.
The $47.2 million of borrowings had been classified as a current
obligation at December 31, 1992.
Alaska has $70 million in lines of credit. Credit advances carry
variable interest rates based upon LIBOR. At December 31, 1993,
there were no borrowings outstanding under these lines of credit.
Commitments During 1993, Alaska took delivery of six new B737-400
aircraft under eight-year operating leases. In addition, two MD-80s
were sold and leased back under operating leases of 6-1/2 and 10
years, respectively. During 1993, Alaska subleased or terminated
leases on 11 B727-200 aircraft.
During 1993, Horizon restructured the Dornier 328 order and the
number of firm orders of the aircraft has been reduced from 35
aircraft valued at $260 million to 20 aircraft valued at $150
million. The number of aircraft under option increased from 25 to
40 aircraft. Delivery of the firm orders began in late 1993 and
will continue through 1998. The option aircraft would be delivered
during the years 1998 to 2003. Dornier has also agreed to provide
Horizon with lease financing for the aircraft. The new aircraft are
intended to replace Horizon's 18-seat Fairchild Metroliner III
aircraft and should be sufficient to meet growth needs for the next
decade. In addition, in 1993 Horizon took delivery of three used
aircraft under operating leases ranging from one to three years.
At December 31, 1993, the Company had firm orders for 40 aircraft
with a total value of approximately $1.1 billion as set forth below.
Delivery Period - Firm Orders
Aircraft 1994 1995 1996 1997 1998 Total
Boeing B737-400 6 6
Dornier 328 5 2 3 2 6 18
McDonnell Douglas MD-80 4 2 6
McDonnell Douglas MD-90 1 9 10
Total 15 4 4 11 6 40
Value (Millions) $388 $85 $73 $465 $45 $1,056
Operating leases have been completed for the B737-400 and Dornier
328 orders. The Company expects to finance the other aircraft
through new long-term debt, leases and internally generated cash.
The Company accrues the costs associated with returning leased
aircraft over the lease period. At December 31, 1993, $30.7 million
was reserved for leased aircraft returns. This reserve should be
sufficient to cover the costs related to the phase-out of the Boeing
727 fleet and the obligations due at the end of the contractual rent
period for other aircraft.
Deferred Taxes At December 31, 1993, net deferred tax liabilities
were $9 million, which includes $69 million of net temporary
differences offset by $44 million net operating loss (NOL)
carryforwards and $16 million related to Alternative Minimum Tax
(AMT) credit carryforwards. The Company believes all of the
deferred tax assets, including the NOL and AMT credit carryforwards
will be realized through reversal of existing temporary differences
or tax planning strategies, such as the sale of aircraft.
1992 FINANCIAL CHANGES Despite the $84.8 million net loss,
operating activities provided $20.2 million of cash in 1992. During
1992, capital spending totaled $277.9 million for six MD-80 and two
B737-400 aircraft, other equipment and deposits for future flight
equipment. These capital expenditures were financed through debt
($47.2 million), sale/leasebacks ($214.6 million) and internally
generated cash.
1991 FINANCIAL CHANGES Operations generated $82.5 million and net
proceeds from the sale of convertible subordinated notes added $115
million. The $82.5 million generated by operations was lower than
the $103.2 million for 1990 due to the smaller profit in 1991 and
discount fares, which resulted in a high level of advance ticket
sales in 1990.
Liquidity was also improved by obtaining long-term financing for $48
million of short-term borrowings. The borrowings had been used to
acquire two aircraft in late 1990. In 1991, long-term debt
financing of $27.6 million was obtained for one aircraft, and the
other aircraft was sold for $30.0 million and leased back for 19
years under an operating lease.
During 1991, the Company expended approximately $213.4 million for
four MD-80 aircraft, other equipment and deposits for future flight
equipment. Long-term debt financing of $102.4 million was obtained
for these aircraft.
EFFECT OF INFLATION Inflation and specific price changes do not
have a significant effect on the Company's operating revenues,
operating expenses and operating income, because such revenues and
expenses generally reflect current price levels.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements and
supplementary data appearing on the pages of this report set forth
below.
Page(s)
Selected Quarterly Consolidated Financial Information 4
(Unaudited)
Consolidated Balance Sheet as of December 31, 1993 and 1992 21-22
Consolidated Statement of Income for the years ended
December 31, 1993, 1992 and 1991 23
Consolidated Statement of Shareholders' Equity for
the years ended December 31, 1993, 1992 and 1991 24
Consolidated Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991 25
Notes to Consolidated Financial Statements 26-33
Report of Independent Public Accountants 20
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
See "Election of Directors," incorporated herein by reference from
the definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 17, 1994. See "Executive Officers of
the Registrant" in Part I following Item 4 for information relating
to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation," incorporated herein by reference from
the definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 17, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
See "Security Ownership of Certain Beneficial Owners and
Management," incorporated herein by reference from the definitive
Proxy Statement for Air Group's Annual Meeting of Shareholders to be
held on May 17, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Transactions with Management and Others," incorporated herein
by reference from the definitive Proxy Statement for Air Group's
Annual Meeting of Shareholders to be held on May 17, 1994.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
See Item 8.
(2) Consolidated Financial Statement Schedules for the years
ended December 31, 1993, 1992 and 1991
Page(s)
Schedule III - Condensed Financial Information 34-36
Schedule V - Property and Equipment 37
Schedule VI - Accumulated Depreciation and
Amortization 38
Schedule VIII - Valuation and Qualifying Accounts 39
Schedule IX - Short-Term Borrowings 35
Schedule X - Supplementary Income Statement
Information 38
All other schedules have been omitted, since the required
information is included in the consolidated financial
statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
(3) Exhibits
See Exhibit Index on page 40.
(b) Alaska Air Group did not file any reports on Form 8-K during
the fourth quarter of 1993.
SIGNATURES
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/ Raymond J. Vecci Date: January 31, 1994
Raymond J. Vecci, Chairman, Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
January 31, 1994 on behalf of the registrant and in the capacities
indicated.
/s/ Raymond J. Vecci Chairman, Chief Executive Officer,
Raymond J. Vecci President and Director
/s/ J. Ray Vingo Vice President/Finance, Treasurer,
J. Ray Vingo Chief Financial Officer and
Director
/s/ Kathleen H. Iskra Controller (Principal Accounting Officer)
Kathleen H. Iskra
/s/ William H. Clapp Director
William H. Clapp
/s/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
Mary Jane Fate
/s/ John F. Kelly Director
John F. Kelly
Director
Bruce R. Kennedy
/s/ R. Marc Langland Director
R. Marc Langland
/s/ Byron I. Mallott Director
Byron I. Mallott
/s/ Robert L. Parker, Jr. Director
Robert L. Parker, Jr.
/s/ Richard A. Wien Director
Richard A. Wien
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Alaska
Air Group, Inc.:
We have audited the accompanying consolidated balance sheet of
Alaska Air Group, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated
statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 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, 1993 and 1992,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, effective
January 1, 1992, the Company changed its method of accounting for
postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed
in Item 14(a)(2) are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to
the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Seattle, Washington
January 25, 1994
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
As of December 31 (In Thousands) 1993 1992
Current Assets
Cash and cash equivalents (Note 1) $27,179 $6,880
Marketable securities (Note 2) 73,970 76,551
Receivables - less allowance for doubtful
accounts (1993-$2,621,000; 1992-$3,214,000) 75,274 84,409
Inventories and supplies (Note 1) 41,269 42,099
Prepaid expenses and other assets 56,498 40,546
Total Current Assets 274,190 250,485
Property and Equipment (Notes 1 and 3)
Flight equipment 614,717 692,345
Other property and equipment 217,967 217,162
Deposits for future flight equipment 79,765 81,686
912,449 991,193
Less accumulated depreciation
and amortization 247,145 227,693
665,304 763,500
Capital leases (Note 5)
Flight and other equipment 44,381 44,381
Less accumulated amortization 19,079 16,971
25,302 27,410
Total Property and Equipment - Net 690,606 790,910
Intangible Assets-Subsidiaries (Note 1) 67,711 69,751
Other Assets (Note 2) 102,447 97,212
Total Assets $1,134,954 $1,208,358
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND CAPITAL
As of December 31 (In Thousands) 1993 1992
Current Liabilities
Accounts payable $ 45,582 $ 47,503
Accrued aircraft rent 39,119 38,189
Other accrued liabilities 46,679 48,370
Accrued wages, vacation pay and payroll taxes 40,192 36,425
Short-term borrowings 20,000 -
Air traffic liability 108,360 96,791
Current portion of long-term debt and
capital lease obligations 35,575 68,440
Total Current Liabilities 335,507 335,718
Long-Term Debt and Capital Lease
Obligations (Notes 3 and 5) 525,418 487,847
Other Liabilities and Credits
Deferred income taxes (Note 9) 20,998 29,111
Deferred income (Note 1) 25,827 36,423
Other liabilities 60,371 61,300
107,196 126,834
Commitments (Note 5)
Redeemable Preferred Stock (Note 4) - 61,235
Shareholders' Equity (Notes 4 and 6)
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1993 - 16,495,210 shares
1992 - 16,482,610 shares 16,495 16,483
Capital in excess of par value 152,017 151,845
Treasury stock, at cost:
1993 - 3,153,589 shares
1992 - 3,153,576 shares (71,807) (71,807)
Deferred compensation (Note 7) (5,813) (10,181)
Retained earnings 75,941 110,384
166,833 196,724
Total Liabilities and Capital $1,134,954 $1,208,358
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Year Ended December 31 (In Thousands) 1993 1992 1991
Operating Revenues
Passenger $1,001,975 $1,000,618 $999,859
Freight and mail 84,048 77,311 69,590
Other - net 42,306 37,449 34,582
Total Operating Revenues 1,128,329 1,115,378 1,104,031
Operating Expenses
Wages and benefits 368,152 370,567 332,041
Aircraft fuel 142,572 162,768 156,491
Aircraft maintenance 67,438 87,687 82,983
Aircraft rent 154,879 123,732 102,279
Commissions 80,108 86,335 84,345
Depreciation and amortization 58,407 56,757 51,767
Special charges (Note 8) 15,000 26,000 -
Other 258,546 296,373 259,499
Total Operating Expenses 1,145,102 1,210,219 1,069,405
Operating Income (Loss) (16,773) (94,841) 34,626
Other Income (Expense)
Interest income 7,088 7,374 11,698
Interest expense (37,624) (43,223) (40,180)
Interest capitalized 446 6,102 8,301
Loss on sale of assets (649) (2,339) (1,148)
Other - net 1,700 1,221 2,910
(29,039) (30,865) (18,419)
Income (loss) before income tax expense
(credit) and accounting change (45,812) (125,706) 16,207
Income tax expense (credit) (Note 9) (14,894) (45,436) 5,869
Income (loss) before accounting change (30,918) (80,270) 10,338
Cumulative effect of accounting
change (Note 7) - (4,567) -
Net Income (Loss) $(30,918) $(84,837) $10,338
Earnings (Loss) Per Common Share: (Note 1)
Primary -
Income (loss) before accounting change $(30,918) $(80,270) $10,338
Preferred stock dividends (2,525) (6,688) (6,671)
Income (loss) before accounting change
applicable to common shares (33,443) (86,958) 3,667
Cumulative effect of accounting change - (4,567) -
Net income (loss) applicable
to common shares $(33,443) $(91,525) $3,667
Average shares outstanding (000) 13,340 13,309 13,413
Earnings (loss) per common share:
Income before accounting change $(2.51) $(6.53) $0.27
Cumulative effect of accounting change - (0.34) -
Net income (loss) per share $(2.51) $(6.87) $0.27
The dilutive effect of the Company's common stock equivalents and
convertible securities was anti-dilutive for 1993, 1992 and 1991.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Common Stock
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Thousands) Value Par Value at Cost sation Earnings
Balances at December 31, 1990 $16,323 $149,697 $(71,601) $(17,469) $202,883
Net income for 1991 10,338
Cash dividends on common
stock ($.20 per share) (2,643)
Preferred stock dividends
and accretion (6,671)
Stock issued under stock plans 61 781
Treasury stock purchase (206)
Employee Stock Ownership
Plans shares allocated 2,954
Balances at December 31, 1991 16,384 150,478 (71,807) (14,515) 203,907
Net loss for 1992 (84,837)
Cash dividends on common
stock ($.15 per share) (1,998)
Preferred stock dividends
and accretion (6,688)
Stock issued under stock plans 99 1,367
Employee Stock Ownership
Plans shares allocated 4,334
Balances at December 31, 1992 16,483 151,845 (71,807) (10,181) 110,384
Net loss for 1993 (30,918)
Preferred stock
Preferred stock dividends
early redemption premium (3,525)
Stock issued under stock plans 12 172
Employee Stock Ownership
Plans shares allocated 4,368
Balances at December 31, 1993 $16,495 $152,017 $(71,807) $(5,813) $75,941
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Year Ended December 31 (In Thousands) 1993 1992 1991
Cash and cash equivalents at beginning of year $6,880 $19,086 $28,865
Cash flows from operating activities:
Income (loss) before accounting change (30,918) (80,270) 10,338
Adjustments to reconcile income to cash:
Depreciation and amortization 58,407 56,757 51,767
Amortization of airframe and engine overhauls 29,402 34,265 33,759
Special charges 15,000 26,000 -
Loss (gain) on disposition of assets
and debt retirement (315) 2,339 (504)
Increase (decrease) in deferred income taxes (8,113) (25,797) 725
Decrease (increase) in accounts receivable 9,135 (23,118) 4,098
Decrease (increase) in other current assets (15,122) (7,370) (11,470)
Increase (decrease) in air traffic liabliity 11,569 19,500 (16,368)
Increase in other current liabilities 1,085 19,826 9,704
Interest on zero coupon notes 9,881 9,203 6,125
Leased aircraft return payments and other-net (31,554) (11,101) (5,631)
Net cash provided by operating activities 48,457 20,234 82,543
Cash flows from investing activities:
Proceeds from disposition of assets 7,193 793 1,331
Purchases of marketable securities (552,175) (564,787) (389,583)
Sales and maturities of marketable securities 554,756 571,985 329,318
Restricted deposits (4,045) (3,007) (19,095)
Future flight equipment deposits returned 2,685 3,321 -
Additions to future flight equipment deposits (764) (16,873) (69,302)
Additions to property and equipment (29,605) (261,073) (144,109)
Payments received on loans to ESOPs 4,128 4,747 3,402
Net cash used in investing activities (17,827) (264,894) (288,038)
Cash flows from financing activities:
Proceeds from short-term borrowings 20,000 96,303 15,000
Repayment of short-term borrowings - (96,303) (62,953)
Proceeds from sale and leaseback transactions 36,500 214,590 29,970
Proceeds from issuance of long-term debt 47,200 84,700 245,030
Long-term debt and capital lease payments (79,375) (59,904) (27,841)
Proceeds from issuance of common stock 184 1,466 842
Repurchase of preferred stock (33,375) - -
Cash dividends (2,429) (8,398) (9,026)
Gain on debt retirement 964 - 1,652
Other - - 3,042
Net cash provided by (used in)
financing activities (10,331) 232,454 195,716
Net increase in cash and cash equivalents 20,299 (12,206) (9,779)
Cash and cash equivalents at end of year $27,179 $6,880 $19,086
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $33,622 $38,952 $28,983
Income taxes - 1,369 10,338
Noncash investing and financing activities:
1993 - The preferred stock was repurchased in exchange for a $27
million note payable and a $33.4 million cash payment.
1992 and 1991 - None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 1993
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Alaska
Air Group, Inc. (Company or Air Group) and its subsidiaries, the
principal subsidiaries being Alaska Airlines, Inc. (Alaska) and
Horizon Air Industries, Inc. (Horizon). All significant
intercompany transactions are eliminated.
Both subsidiaries operate as airlines. However, each subsidiary's
business plan, competition and economic risks differ substantially
due to the passenger capacity and range of aircraft operated.
Alaska is a national airline, operates an all jet fleet and its
average passenger trip is 860 miles. Horizon is a regional airline,
primarily operates a turboprop fleet and its average passenger trip
is 200 miles. See Note 10 for business segment information.
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.
Inventories and Supplies
Expendable and repairable parts, materials and supplies relating to
flight equipment are stated at average cost. Except for the B727
fleet, an allowance for obsolescence of flight equipment repairable
parts is accrued on a straight-line basis over the estimated useful
lives of the aircraft. For the B727 fleet, which is being retired,
the inventory cost less the allowance for obsolescence is stated at
net realizable value. The allowance at December 31, 1993 and 1992
was $8.3 million and $6.3 million, respectively.
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:
Buildings 10-30 years
Capitalized leases and leasehold improvements Term of lease
Flight equipment 10-20 years
Other equipment 3-15 years
Assets and related obligations for equipment under capital leases
are initially recorded at an amount equal to the present value of
the future minimum lease payments using interest rates implicit
within the leases. Interest expense is accrued on the outstanding
balance of capital lease obligations.
Costs of airframe and engine overhauls are capitalized when incurred
and amortized over their estimated period of use. Costs of ordinary
maintenance and repairs are expensed as incurred.
Capitalized Interest
Construction period interest is capitalized on flight equipment
purchase deposits and ground facilities progress payments as an
additional cost of the related asset and is depreciated over the
estimated useful life of the asset. Interest capitalization is
suspended during periods of substantial delay in aircraft
deliveries.
Intangible Assets-Subsidiaries
The excess of purchase price over fair value of net assets related
to previous acquisitions is recorded as an intangible asset and is
being amortized over 40 years. Accumulated amortization at December
31, 1993 and 1992 was $15 million and $12.9 million, respectively.
Deferred Income
Deferred income results from the sale and leaseback of aircraft,
manufacturer or vendor credits related to aircraft, and sale of
foreign tax benefits. Income is reported on the Statement of Income
over the term of the applicable agreements or asset useful life.
Passenger Revenues
Passenger revenues are considered earned at the time transportation
service is provided. Tickets sold but not yet used are included in
air traffic liability.
Frequent Flyer Awards
Alaska operates a frequent flyer award program that provides travel
awards to members based on accumulated mileage. The estimated
incremental cost of providing free travel is recognized as a
liability and reported as expense as miles are accumulated. Alaska
also defers recognition of income on a portion of the payments it
receives from travel partners associated with its frequent flyer
program. The incremental cost liability and deferred partner
revenues are relieved as travel awards are used.
Income Taxes
In January 1992, Statement of Financial Accounting Standards No. 109
(FAS 109), "Accounting for Income Taxes," was adopted. FAS 109
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Earnings Per Share
Primary earnings per share is calculated by dividing net income
after reduction for preferred stock dividends by the average number
of common shares and dilutive common equivalent shares outstanding,
net of treasury shares. Common equivalent shares result from the
assumed exercise of stock options. Fully diluted earnings per share
gives effect to the conversion of convertible debentures and notes
(after elimination of related interest expense, net of income tax
effect) and redeemable preferred stock.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to the 1993 presentation.
Note 2. Marketable Securities and Other Assets
Marketable securities are investments that are readily convertible
to cash, but whose original maturity dates exceed three months. The
securities are carried at cost, which approximates fair value.
Marketable securities consisted of the following at December 31 (in
thousands):
1993 1992
U.S. government securities $66,744 $72,658
Other 7,226 3,893
$73,970 $76,551
Other assets consisted of the following at December 31 (in thousands):
1993 1992
Restricted deposits $60,903 $56,858
Leasehold rights 16,923 24,195
Deferred costs 16,938 16,159
Interest receivable 7,683 -
$102,447 $97,212
At December 31, 1993 and 1992, the fair value of restricted deposits
was approximately $75 million and $63 million, respectively, based
on market prices of similar investments.
At December 31, 1993, the fair value of interest receivable from a
financial institution under an interest rate swap agreement was
approximately $7 million.
Purchased leasehold rights and deferred costs are amortized over the
term of the related lease or contract. Deferred costs include
capitalized training costs associated with the B737-400 aircraft.
These costs are amortized over a five-year period beginning April
1992.
Note 3. Long-Term Debt and Capital Lease Obligations
At December 31, 1993 and 1992, long-term debt and capital lease
obligations were as follows (in thousands):
1993 1992
7.1%* notes payable due through 2009 $308,700 $305,692
7-3/4% convertible subordinated debentures
due 2005-2010 14,638 14,638
6-7/8% convertible subordinated debentures
due 2002-2014 60,181 66,614
7-1/4% zero coupon, convertible subordinated
notes due 2006 143,754 133,873
Long-term debt 527,273 520,817
Capital lease obligations 33,720 35,470
Less current portion (35,575) (68,440)
$525,418 $487,847
* Weighted average for 1993
Borrowings of $286.2 million are secured by flight equipment and
real property.
The 7-3/4% and 6-7/8% debentures are convertible into common stock
at $28.25 and $33.60 per share, respectively, subject to adjustments
in certain events. Each of the 7-1/4% notes can be converted into
12.4 shares of common stock. The holder of these notes has a put
option to require the Company to purchase each note on April 18,
1996 for $490.58. The Company may elect to pay in cash or shares of
common stock or in any combination thereof.
Alaska has $70 million in lines of credit with commercial banks
including a new $20 million line obtained in June 1993. Credit
advances carry variable interest rates based on LIBOR. At December
31, 1993, there were no borrowings under these lines of credit.
Certain Alaska loan agreements contain provisions that require
maintenance of specific levels of net worth, leverage and fixed
charge coverage, and limit dividends, investments, lease
obligations, sales of assets and additional indebtedness. At
December 31, 1993, under the most restrictive loan provisions,
Alaska had $27.3 million of excess net worth and its cash dividend
payments to Air Group were limited to $19 million.
During 1993, the Company entered into an interest rate swap
agreement to reduce the interest expense on its 7-1/4% zero-coupon
notes. The agreement, which expires in 1996, effectively changes
the Company's interest rate on the notes from a fixed 7-1/4% to a
floating rate based on LIBOR.
At December 31, 1993, long-term debt obligations for the next five
years were (in thousands):
1994 $33,734
1995 $33,104
1996* $29,615
1997 $26,321
1998 $27,282
* Excludes the effect of a put option on the 7-1/4% notes.
At December 31, 1993 and 1992, the fair value of long-term debt was
approximately $521 million and $494 million, respectively, based on
quoted market prices for the same or similar debt or on the current
rates offered to the Company for debt of comparable remaining
maturities.
Note 4. Redeemable Preferred Stock
Air Group has 5,000,000 shares of preferred stock authorized.
During 1990, the Company sold 1,187,500 shares of voting,
convertible Series B Cumulative Redeemable Preferred Stock
(preferred stock) to International Lease Finance Corporation (ILFC),
which paid $50 per share and received the dividend and voting
rights. A management group purchased nontransferable investment
options for $2.63 per share and received the rights to purchase and
convert the preferred stock to common stock.
In May 1993, the Company repurchased the preferred stock from ILFC
for $60.4 million, which included a $1.0 million early redemption
premium. At December 31, 1993, the 1,187,500 shares of preferred
stock are held in treasury and remain subject to the investment
options. The investment options of $3.1 million remain outstanding,
are subject to mandatory redemption in January 1997 and are included
with other liabilities on the Balance Sheet. Each share of
preferred stock is convertible into common stock at $27 per share,
subject to adjustments in certain events. A total of 2,314,815
shares of common stock has been reserved for such conversion.
In the event of a change in control of the Company, all outstanding
investment options become exercisable. The holders of the preferred
stock have the right to require the Company to redeem such shares.
Note 5. Commitments
Lease Commitments
Lease contracts for 101 aircraft have remaining lease terms of one
to 19 years. The majority of airport and terminal facilities are
also leased. Total rent expense was $180.4 million, $149.7 million
and $124 million, in 1993, 1992 and 1991, respectively.
Future minimum lease payments under capital leases and long-term
operating leases as of December 31, 1993 are shown below (in
thousands):
Capital Leases Operating Leases Total
Real
Property
Aircraft & Other
1994 $ 4,145 $ 163,830 $ 14,745 $ 182,720
1995 4,143 152,090 13,069 169,302
1996 4,146 141,502 11,150 156,798
1997 4,140 128,217 9,987 142,344
1998 4,138 121,969 9,611 135,718
Thereafter 23,203 581,209 47,421 651,833
Total lease payments 43,915 $1,288,817 $105,983 $1,438,715
Less amount representing
interest 10,195
Present value of capital
lease payments $33,720
Aircraft Commitments
The Company has firm orders for 40 aircraft. The aircraft on order
consist of: six B737-400s to be delivered during 1994; 18 Dornier
328s to be delivered between 1994 and 1998; six MD-80s to be
delivered during 1994 and 1995; and ten MD90-30s to be delivered
during 1996 and 1997. The total amount of these commitments is
approximately $1.1 billion.
As of December 31, 1993, deposits related to the future equipment
deliveries were $66.3 million. Operating lease agreements are
completed for six B737-400s being delivered during 1994 and Dornier
has agreed to provide lease financing for all of the Dornier 328s.
In addition to the ordered aircraft, the Company holds purchase
options on 20 MD90-30s, 40 Dornier 328s, and lease options on four
B737-400s.
Note 6. Stock Option Plans
Air Group has three stock option plans, which provide for the
purchase of Air Group common stock at its market price on the date
of grant by certain officers and key employees of Air Group and its
subsidiaries.
Under the plans, the incentive and nonqualified stock options
granted have terms of up to approximately ten years. Up to half of
the options provide for stock appreciation rights.
Changes in the number of shares subject to option are summarized as
follows:
1993 1992 1991
Outstanding, beginning of year 770,420 885,720 923,816
Granted(a) 172,200 43,100 54,100
Exercised (12,600) (98,400) (61,353)
Surrendered - - (6,593)
Canceled (68,658) (60,000) (24,250)
Outstanding, end of year 861,362 770,420 885,720
Exercisable, end of year(b) 542,012 450,845 395,143
Available for granting
in future periods 701,867 805,409 138,509
Average price of options:
Exercised during the year $14.65 $14.89 $13.72
Outstanding at year-end $17.06 $17.32 $17.02
(a) The average price of the options granted in 1993 was $16.34.
(b) Options exercisable at year end 1993 expire between July 1994
and December 2002.
Note 7. Employee Benefit Plans
Four defined benefit and six defined contribution retirement plans
cover various employee groups of Air Group and its subsidiaries.
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. Contributions for the defined contribution
plans are based on a percentage of participants' earnings. Pension
costs are funded as required by the Employee Retirement Income
Security Act of 1974 (ERISA). Alaska and Horizon also maintain an
unfunded, noncontributory benefit plan for certain elected officers.
The present value of unfunded benefits for these plans was accrued
as of December 31, 1993.
Net pension expense for the defined benefit plans included the
following components for 1993, 1992 and 1991 (in thousands):
1993 1992 1991
Service cost (benefits earned during the period) $10,041 $8,395 $7,333
Interest cost on projected benefit obligation 10,449 8,883 7,984
Actual return on assets (14,123) (9,079) (17,501)
Net amortization and deferral 2,244 (2,171) 9,779
Net pension expense $8,611 $6,028 $7,595
The actuarial present value of the projected benefit obligation for
1993, 1992 and 1991 was calculated using weighted average discount
rates of 7.9%, 8.75% and 9.0%, respectively. The calculation
assumed a 10% long-term rate of return on assets in 1993 and 1992
and a 9.5% rate in 1991. The calculation also assumed a 5.2%
weighted average rate of increase for future compensation levels for
1993 and 1992 and 7.7% for 1991.
The defined benefit plan assets are primarily invested in common
stocks and fixed income securities. Plan assets exceeded
liabilities for accumulated plan benefits at December 31, 1993 and
1992. The following table sets forth the funded status of the plans
at December 31, 1993 and 1992 (in thousands):
1993 1992
Benefit obligation -
Vested $126,341 $92,846
Nonvested 12,687 9,539
Accumulated benefit obligation $139,028 $102,385
Plan assets at fair value $145,974 $116,380
Projected benefit obligation 159,529 117,556
Plan assets less projected benefit obligation (13,555) (1,176)
Unrecognized net assets at year-end
amortized over 13 years (1,658) (1,941)
Unrecognized prior service cost 1,576 988
Unrecognized loss 26,684 5,702
Prepaid pension cost $13,047 $3,573
Total expense for all retirement plans, including the defined
contribution plans, officer benefit plans and Company 401(k)
matching contributions, was $19.8 million, $18.8 million and $16.3
million, respectively, in 1993, 1992 and 1991.
Alaska and Horizon have employee profit sharing plans.
Distributions for 1993, 1992 and 1991 were $2.3 million, $1.6
million and $1.6 million, respectively.
Certain employee benefit plans (Plans) have an Employee Stock
Ownership Plan (ESOP) feature. The ESOPs own Air Group common
shares which are held in trust for eligible employees. The Company
has recorded deferred compensation to reflect the value of the
shares not yet allocated to eligible employees' accounts. As these
shares are allocated to employees, compensation expense is recorded
and deferred compensation is reduced.
The Company allows retirees to continue their medical, dental and
vision benefits by paying the respective active employee plan
premium until age 65. This results in a subsidy to retirees because
the premiums paid are less than the actual cost of the retirees'
claims.
Effective January 1, 1992, Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," was adopted. The cumulative effect
of the accounting change for years prior to January 1, 1992 was an
after-tax charge of $4.6 million.
The new accounting standard requires the cost of postretirement
employee benefits other than pensions be recognized during
employees' active service period. Prior to 1992, the cost of these
benefits was expensed as claims were incurred.
The following table sets forth the status of the postretirement
benefit obligation at December 31, 1993 and 1992 (in thousands):
1993 1992
Accumulated postretirement benefit obligation (APBO):
Retirees $309 $259
Active plan participants eligible for retirement 2,193 1,943
Active plan participants not eligible for retirement 6,391 6,402
Unrecognized prior service cost (381) -
Unrecognized actuarial gain 980 -
Accrued postretirement benefit cost $9,492 $8,604
The Company's APBO is unfunded. Net annual postretirement benefit
costs for 1993 and 1992 include the following components (in thousands):
1993 1992
Service cost - benefits attributed
to service during the period $655 $855
Interest on APBO 591 643
Net amortization and deferral (38) _
Net postretirement benefit cost $1,208 $1,498
A 12.5% health care cost trend rate was assumed for 1994; the rate
was assumed to decrease by 1% annually to 6% for 2001 and remain at
that level thereafter. Increasing the rate by 1 percentage point in
each year would increase the APBO as of December 31, 1993 by $1.1
million and the net periodic postretirement benefit cost for 1993 by
$222,000. The weighted-average discount rates used in determining
the APBO for 1993 and 1992 were 7.9% and 9%, respectively.
Note 8. Special Charges
Results for 1993 and 1992 include special charges of $15 million and
$26 million, respectively, to recognize an impairment of the value
of the Boeing B727 fleet. The special charges include reserves for
future excess lease costs and the write-down of capitalized
overhauls and spare parts to net realizable value. The 1993 charge
reflects the Company's intent, at the end of 1993, to retire this
aircraft type by May 1994. The 1992 charge reflected the Company's
intent, at the end of 1992, to retire this aircraft type by the
end of 1994 rather than 1996.
Note 9. Income Taxes
The components of income tax expense (credit) were as follows (in
thousands):
1993 1992 1991
Current tax expense (credit):
Federal $(4,907) $(21,057) $4,637
State (253) (1,714) 507
Total current (5,160) (22,771) 5,144
Deferred tax expense (credit):
Federal (8,164) (19,451) 561
State (1,570) (3,214) 164
Total deferred (9,734) (22,665) 725
Total before accounting change (14,894) (45,436) 5,869
Deferred income tax credit cumulative
effect of FAS 106 - (2,613) -
Total tax expense (credit) $(14,894) $(48,049) $5,869
The actual income tax expense (credit) reported differs from the
"expected" tax expense (credit) (computed by applying the federal
corporate tax rate of 35% for 1993 and 34% for 1992 and 1991) as
follows (in thousands):
1993 1992 1991
Income (loss) before income tax $(45,812) $(125,706) $16,207
Computed "expected" tax expense (credit) $(16,035) $(42,740) $5,510
Nondeductible expense 1,210 1,068 1,116
Federal rate change 1,016 - -
Tax-exempt interest income - (170) (327)
State income tax (1,185) (3,252) 568
Other - net 100 (342) (998)
Actual tax expense (credit) $(14,894) $(45,436) $5,869
Effective tax rate 33% 36% 36%
Deferred income taxes result from temporary differences in the
recognition of revenue and expense for tax and financial reporting
purposes. The major sources of deferred tax liabilities (assets)
are comprised of the following at December 31 (in thousands):
1993 1992 1991
Excess of tax over book depreciation $88,203 $94,835 $75,374
Training expense 3,167 1,953 (59)
Capitalized leases 3,681 2,943 2,274
Other - net 358 2,212 613
Gross deferred tax liabilities 95,409 101,943 78,202
Loss carryforward (43,798) (24,573) -
Alternative minimum tax (16,346) (22,931) (11,925)
Pricing adjustment (1,083) (3,018) (1,002)
Travel awards (5,576) (5,872) (4,361)
Employee benefits (9,567) (8,761) (9,700)
Aircraft maintenance (8,231) (8,282) 79
Gain on sale of assets (2,125) (10,090) (7,599)
Gross deferred tax assets (86,726) (83,527) (34,508)
Net deferred tax liabilities $8,683 $18,416 $43,694
The 1993 tax net operating loss (NOL) benefit of $21 million will be
carried forward to offset taxes in future years. $7 million of
alternative minimum tax was carried back to recover taxes paid in
prior years.
Note 10. Business Segment Information
Financial information for the Company's national airline (Alaska)
and regional airline (Horizon) follows (in thousands):
1993 1992 1991
Operating revenues from unaffiliated customers:
Alaska $906,806 $908,286 $921,519
Horizon $223,333 $208,149 $183,142
Operating income (loss):
Alaska $(24,313) $(101,013) $28,283
Horizon $8,757 $7,305 $7,897
Total assets:
Alaska $1,037,546 $1,088,090 $1,103,289
Horizon $141,940 $147,076 $149,286
Depreciation and amortization expense:
Alaska $48,953 $47,140 $41,917
Horizon $9,276 $9,564 $9,840
Capital expenditures:
Alaska $21,116 $258,556 $186,857
Horizon $8,800 $16,389 $26,554
Note 11. Fuel Hedge Agreement
The Company has a jet fuel hedge agreement that establishes a high-
end fuel price and a low-end fuel price through December 1994. The
agreement covers 30 million gallons per quarter which is less than
each quarter's expected fuel requirement. The Company will record
income or loss quarterly if the average cost of fuel, as determined
by an index, exceeds the high-end fuel price or falls below the low-
end price, respectively.
CONDENSED FINANCIAL INFORMATION
Alaska Air Group, Inc. (Parent Company Only) Schedule III
BALANCE SHEET
As of December 31 (In Thousands) 1993 1992
ASSETS
Current Assets
Cash $38 $98
Receivables from subsidiaries 77,390 90,847
Income tax receivable 7,623 20,283
Other current assets 1,205 187
Total Current Assets 86,256 111,415
Other Assets
Investment in subsidiaries 353,707 378,496
Interest receivable 7,683 -
Other 5,118 4,614
366,508 383,110
Total Assets $452,764 $494,525
LIABILITIES AND CAPITAL
Current Liabilities
Accounts payable and accrued liabilities $2,002 $687
Payable to subsidiaries 47,025 24,663
Current portion of long-term debt 9,000 -
Total Current Liabilities 58,027 25,350
Long-Term Debt
7-3/4% convertible subordinated debentures
due 2005-2010 14,638 14,638
6-7/8% convertible subordinated debentures
due 2002-2014 60,181 66,614
7-1/4% zero coupon, convertible
subordinated notes due 2006 143,754 133,873
7% term note; $2,250,000 payable quarterly
beginning August 1993 13,500 -
232,073 215,125
Deferred Income Taxes (7,236) (3,909)
Other Liabilities 3,067 -
Redeemable Preferred Stock - 61,235
Shareholders' Equity
Common stock, par value $1 per share
Authorized: 30,000,000 shares
Issued: 1993 - 16,495,210 shares;
1992 - 16,482,610 shares 16,495 16,483
Capital in excess of par value 152,017 151,845
Treasury stock, at cost
(1993 - 3,153,589 shares;
1992 - 3,153,576 shares) (71,807) (71,807)
Deferred compensation (5,813) (10,181)
Retained earnings 75,941 110,384
166,833 196,724
Total Liabilities and Capital $452,764 $494,525
This schedule should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
CONDENSED FINANCIAL INFORMATION
Alaska Air Group, Inc. (Parent Company Only) Schedule III
STATEMENT OF INCOME
Year Ended December 31 (In Thousands) 1993 1992 1991
Operating Revenues $ - $ - $ -
Operating Expenses 1,391 1,442 1,613
Operating Loss (1,391) (1,442) (1,613)
Other Income (Expense)
Interest income from subsidiaries 5,435 5,714 5,355
Other interest income - - 1,015
Interest expense to subsidiaries - - (140)
Other interest expense (14,024) (14,917) (12,518)
Other - net 451 (321) 1,399
(8,138) (9,524) (4,889)
Loss before income tax credit
and subsidiaries' earnings (9,529) (10,966) (6,502)
Income tax credit (3,400) (3,613) (2,444)
(6,129) (7,353) (4,058)
Earnings (Loss) - Subsidiaries (24,789) (77,484) 14,396
Net Income (Loss) $(30,918) $(84,837) $10,338
This schedule should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
CONSOLIDATED SHORT-TERM BORROWINGS Schedule IX
Alaska Air Group, Inc.
Maximum Average Weighted
Category Weighted Amount Amount Average
of Aggregate Balance Average Outstanding Outstanding Interest Rate
Short-Term at End Interest During the During the During the
Borrowings of Year Rate Year Year (1) Year (2)
(Dollars in Thousands)
Notes Payable:
1993 $20,000 4.25% $20,000 $ 1,538 4.25%
1992 $ - - $46,303 $ 7,408 4.6%
1991 $ - - $62,954 $24,517 7.3%
(1) Computed by dividing the sum of the beginning of the year balance
and the 12 month-end balances by 13.
(2) Computed by dividing annual interest expense by the weighted
average amount outstanding during the year.
CONDENSED FINANCIAL INFORMATION
Alaska Air Group, Inc. (Parent Company Only) Schedule III
STATEMENT OF CASH FLOWS
Year Ended December 31 (In Thousands) 1993 1992 1991
Cash at beginning of year $98 $3 $27,432
Cash flows from operating activities:
Net income (loss) (30,918) (84,837) 10,338
Adjustment to reconcile net income to cash:
Undistributed loss (earnings) of subsidiaries 24,789 77,484 (14,396)
Gain on retirement of debt (964) - (1,652)
Decrease in deferred income taxes (3,327) (3,639) (549)
Decrease (increase) in receivables 26,117 (7,817) (77,013)
Decrease (increase) in other current assets (1,018) 174 (2,450)
Increase in current liabilities 23,677 11,728 7,385
Interest on zero coupon notes 9,881 9,203 6,125
Other-net (6,836) (16) (72)
Net cash provided by (used in)
operating activities 41,401 2,280 (72,284)
Cash flows from investing activities:
Purchases of marketable securities - - (162,326)
Sales and maturities of marketable securities - - 182,257
Restricted deposits - - 4,298
Payments received on loans to ESOPs 4,128 4,747 3,402
Net cash provided by investing activities 4,128 4,747 27,631
Cash flows from financing activities:
Loan payments from subsidiaries - - 9,000
Proceeds from issuance of long-term debt - - 114,742
Long-term debt payments (10,933) - (11,436)
Proceeds from issuance of common stock 184 1,466 842
Repurchase of preferred stock (33,375) - -
Acquisition of treasury stock - - (206)
Cash dividends (2,429) (8,398) (9,026)
Gain on retirement of debt 964 - 1,652
Investment in subsidiary - - (88,344)
Net cash provided by (used in)
financing activities (45,589) (6,932) 17,224
Net increase (decrease) in cash (60) 95 (27,429)
Cash at end of year $38 $98 $3
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $10,237 $14,880 $12,727
Income taxes - 1,119 9,325
Noncash investing and financing activities:
1993 - The preferred stock was repurchased in exchange for a
$27 million note payable and a $33.4 million cash payment.
1992 and 1991 - None
This schedule should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
CONSOLIDATED PROPERTY AND EQUIPMENT
Alaska Air Group, Inc. Schedule V
Balance at Balance
Beginning Additions at End
(In Thousands) of Period at Cost Retirements Transfers Other of Period
Year Ended
December 31, 1991
Flight equipment $567,603 $121,523 $(37,254) $19,968 $(19,498)(A) $652,342
Other property
and equipment 179,851 22,586 (1,282) - - 201,155
Deposits for future
flight equipment 76,207 69,302 - (19,968) - 125,541
823,661 213,411 (38,536) - (19,498) 979,038
Capital leases 44,381 - - - - 44,381
$868,042 $213,411 $(38,536) $ - $(19,498) $1,023,419
Year Ended
December 31, 1992
Flight equipment $652,342 $243,755 $(204,631) $25,959 $(19,228)(A) $692,345
(5,852)(B)
Other property
and equipment 201,155 17,318 (2,847) 1,536 - 217,162
Deposits for future
flight equipment 125,541 16,873 - (27,495) (33,233)(C) 81,686
979,038 277,946 (207,478) - (58,313) 991,193
Capital leases 44,381 - - - - 44,381
$1,023,419 $277,946 $(207,478) $ - $(58,313) $1,035,574
Year Ended
December 31, 1993
Flight equipment $692,345 $22,164 $(84,213) $(15,579)(A) $614,717
Other property
and equipment 217,162 7,441 (6,636) - 217,967
Deposits for future
flight equipment 81,686 764 - (2,685)(C) 79,765
991,193 30,369 (90,849) (18,264) 912,449
Capital leases 44,381 - - - 44,381
$1,035,374 $30,369 $(90,849) $(18,264) $956,830
(A) Amortization of airframe and engine overhauls charged to maintenance expense.
(B) Transfers to other assets.
(C) Deposits returned.
ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY AND EQUIPMENT
Alaska Air Group, Inc. Schedule VI
Additions
Balance at Charged to Transfers Balance
Beginning Costs and to Other at End
(In Thousands) of Period Expenses Retirements Assets of Period
Year Ended
December 31, 1991
Flight equipment $100,814 $30,279 $(8,156) $122,937
Other property
and equipment 54,095 12,162 (425) 65,832
154,909 42,441 (8,581) 188,769
Capital leases 12,755 2,108 - 14,863
$167,664 $44,549 $(8,581) $203,632
Year Ended
December 31, 1992
Flight equipment $122,937 $37,378 $(5,831) $(3,836) $150,648
Other property
and equipment 65,832 13,107 (1,894) - 77,045
188,769 50,485 (7,725) (3,836) 227,693
Capital leases 14,863 2,108 - - 16,971
$203,632 $52,593 $(7,725) $(3,836) $244,664
Year Ended
December 31, 1993
Flight equipment $150,648 $39,165 $(30,429) $159,384
Other property
and equipment 77,045 14,027 (3,311) 87,761
227,693 53,192 (33,740) 247,145
Capital leases 16,971 2,108 - 19,079
$244,664 $55,300 $(33,740) $266,224
CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION Schedule X
Alaska Air Group, Inc.
Charged to costs and expenses
Year Ended December 31 (In Thousands) 1993 1992 1991
Aircraft maintenance $67,438 $87,687 $82,983
Depreciation and amortization of
intangible assets, preoperating costs
and similiar deferrals * * *
Taxes, other than payroll and income taxes $13,417 $12,881 $10,101
Royalties * * *
Advertising and promotion $17,046 $34,179 $32,021
* Less than 1% of total revenues.
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc. Schedule VIII
Additions
Balance at Charged to Balance
Beginning Costs and at end of
(In Thousands) of Period Expenses Deductions(A) Period
Year Ended December 31, 1991
(a) Reserve deducted from asset to
which it applies:
Allowance for doubtful accounts $2,365 $725 $(534) $2,556
Obsolescence allowance for
flight equipment spare parts $2,971 $794 $ - $3,765
(b) Reserve recorded as other long-
term liabilities:
Leased aircraft return provision $8,785 $14,533 $(1,789) $21,529
Year Ended December 31, 1992
(a) Reserve deducted from asset to
which it applies:
Allowance for doubtful accounts $2,556 $1,237 $(579) $3,214
Obsolescence allowance for
flight equipment spare parts $3,765 $2,578 $ - $6,343
(b) Reserve recorded as other long-
term liabilities:
Leased aircraft return provision $21,529 $32,230 $(13,956) $39,803
Year Ended December 31, 1993
(a) Reserve deducted from asset to
which it applies:
Allowance for doubtful accounts $3,214 $912 $(1,505) $2,621
Obsolescence allowance for
flight equipment spare parts $6,343 $1,994 $ - $8,337
(b) Reserve recorded as other long-
term liabilities:
Leased aircraft return provision $39,803 $22,324 $(31,394) $30,733
(A) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX
Certain of the following exhibits are filed herewith. Certain other
of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference from the
document described in parenthesis.
3.(i) Certificate of Incorporation of Alaska Air Group, Inc. as
amended through May 20, 1987 (Exhibit 3-01 to 1987 10-K).
*3.(ii) Bylaws of Alaska Air Group, Inc., as amended through
September 14, 1993.
4.1 Indenture dated June 15, 1985, between Alaska Airlines,
Inc. and Bankamerica Trust Company of New York, including
form of Debenture (Exhibit 4-02 to Registration Statement
No. 2-98555).
4.2 Rights Agreement dated as of December 2, 1986 between
Alaska Air Group, Inc. and The First National Bank of
Boston, as Rights Agent (Exhibit No. 1 to Form 8A filed
December 12, 1986).
10.1 Lease and Assignment of Sublease Agreement dated February
1, 1979 between Alaska Airlines, Inc. and the Alaska
Industrial Development Authority (Exhibit 10-15 to
Registration Statement No. 2-70742).
10.2 Lease and Assignment and Sublease Agreement dated April 1,
1978 between Alaska Airlines, Inc. and the Alaska
Industrial Development Authority (Exhibit 10-16 to
Registration Statement No. 2-70742).
10.3 Alaska Air Group, Inc. 1975 Stock Option Plan, as amended
through May 7, 1991.
10.4 Management Incentive Plan (1992 Alaska Air Group, Inc.
Proxy Statement).
10.5 Loan Agreement dated as of December 1, 1984, between
Alaska Airlines, Inc. and the Industrial Development
Corporation of the Port of Seattle (Exhibit 10-38 to 1984
10-K).
10.6 Amended and Restated Credit Agreement dated as of April 1,
1986 between Alaska Airlines, Inc. and The Long Term
Credit Bank of Japan (Exhibit 10-28 to 1986 10-K).
10.7 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended
through May 7, 1992.
10.8 Supplemental retirement plan arrangement between Horizon
Air Industries, Inc. and John F. Kelly (1992 Alaska Air
Group, Inc. Proxy Statement).
10.9 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended
through May 19, 1992 (Registration Statement No. 33-
523242).
10.10 Purchase Agreement between McDonnell Douglas Corporation
and Alaska Airlines, Inc. DAC 88-36-D, dated October 14,
1988 (Exhibit 10-17 to 1988 10-K).
10.11 Capital Performance Plan (Exhibit 4.3 to Registration
Statement 33-33087).
#10.12 Purchase Agreement dated March 30, 1990 between McDonnell
Douglas Corporation and Alaska Airlines, Inc. for the
purchase of up to 40 MD90-30 aircraft (Exhibit 10-13 to
1990 10-K)
#10.13 Lease Agreement dated January 22, 1990 between
International Lease Finance Corporation and Alaska
Airlines, Inc. for the lease of a B737-400 aircraft,
summaries of 19 substantially identical lease agreements
for 19 additional B737-400 aircraft and Letter Agreement
#1 dated January 22, 1990 (Exhibit 10-14 to 1990 10-K)
#10.16 Purchase Agreement dated as of May 15, 1991, between
Horizon Air Industries, Inc. and Dornier Luftfahrt GmbH
for the purchase of up to 60 Dornier 328 aircraft (Exhibit
10-19 to May 30, 1991 8-K).
#10.17 Amendment dated as of June 25, 1993 to the Purchase
Agreement dated as of May 15, 1991, between Horizon Air
Industries, Inc. and Dornier Luftfahrt GmbH for the
purchase of up to 60 Dornier 328 aircraft (Exhibit 10-19a
to Second Quarter 1993 10-Q).
*11 Computation of Earnings Per Common Share.
*12 Calculation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-
K).
*23 Consent of Arthur Andersen & Co.
* Filed herewith.
# Confidential treatment was granted as to a portion of this
document.