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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 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
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 or organization) (I.R.S. Employer
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
6-1/2% Convertible Senior Debentures Due 2005 New York Stock Exchange
6-7/8% Conv. Subordinated Debentures Due 2014 New York Stock Exchange
As of December 31, 1997, common shares outstanding totaled 18,282,732.
The aggregate market value of the common shares of Alaska Air Group, Inc.
held by nonaffiliates, 18,223,488 shares, was approximately $706 million
(based on the closing price of these shares, $38.75, 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. ( )
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement Relating to Part III
1998 Annual Meeting of Shareholders
Exhibit Index begins on page 35.
PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
Alaska Air Group, Inc. (Air Group or the Company) is a holding company
which was 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,
although their business plans, competition and economic risks differ
substantially. Alaska is a major airline, operates an all jet fleet,
and its average passenger trip length is 846 miles. Horizon is a
regional airline, operates jet and turboprop aircraft, and its average
passenger trip is 241 miles. Business segment information is reported in
the Notes to Consolidated Financial Statements. Air Group's executive
offices are located at 19300 Pacific Highway South, Seattle, Washington
98188. The business of the Company is somewhat seasonal, and quarterly
operating income tends to peak during the third quarter.
Alaska
Alaska Airlines is an Alaska corporation that was organized in 1932 and
incorporated in 1937. Alaska serves 35 cities in six states (Alaska,
Washington, Oregon, California, Nevada and Arizona), one city in Canada,
four cities in Mexico and five cities in Russia. In each year since
1973, Alaska has carried more passengers between Alaska and the U.S.
mainland than any other airline. In 1997, Alaska carried 12.3 million
passengers. Passenger traffic within Alaska and between Alaska and the
U.S. mainland accounted for 26% of Alaska's 1997 revenue passenger
miles, West Coast traffic accounted for 66%, the Mexico markets 8% and
Russia less than 1%. Based on passenger enplanements, Alaska's leading
airports are Seattle, Portland, Anchorage and Los Angeles. Based on
revenues, its leading nonstop routes are Seattle-Anchorage, Seattle-Los
Angeles and Seattle-San Diego. At December 31, 1997, Alaska's operating
fleet consisted of 78 jet aircraft. The majority of Alaska flights, and
certain Northwest Airlines flights, are dual-designated in airline
computer reservation systems as Alaska Airlines and Northwest Airlines
in order to facilitate feed traffic between the two airlines. Alaska
Airlines also serves three smaller cities in California, three in
Washington, and many small communities in Alaska through code share
marketing agreements with local carriers.
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 cities in five states (Washington,
Oregon, Montana, Idaho, and California) and four cities in Canada. In
1997, Horizon carried 3.7 million passengers. Based on passenger
enplanements, Horizon's leading airports are Seattle, Portland, Spokane
and Boise. Based on revenues, its leading nonstop routes are Seattle-
Portland, Seattle-Spokane and Seattle-Boise. At December 31, 1997,
Horizon's operating fleet consisted of 15 jet and 47 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code in
airline computer reservation systems. Most Horizon flights are also
dual-designated in these reservation systems as Northwest Airlines and
Alaska Airlines. Currently, 32% of Horizon's passengers connect to
either Alaska or Northwest.
Alaska and Horizon integrate their flight schedules to provide the best
possible service between any two points served by their systems. Both
airlines distinguish themselves from competitors by providing a higher
level of customer service. The airlines' excellent service in the form
of advance seat assignments, a first class section, attention to
customer needs, high-quality food and beverage service, well-maintained
aircraft and other amenities has been recognized by independent studies
and surveys of air travelers. Alaska and Horizon offer competitive
fares.
BUSINESS RISKS
The Company's operations and financial results are subject to various
uncertainties such as intense competition, volatile fuel prices, a
largely unionized labor force, the need to finance large capital
expenditures, government regulation, potential aircraft incidents and
general economic conditions.
Competition
Competition in the air transportation industry is intense. Any domestic
air carrier deemed fit by the DOT is allowed to operate scheduled
passenger service in the United States. Together, Alaska and Horizon
carry 2.3% of all U.S. domestic passenger traffic. Alaska and Horizon
compete with one or more domestic or foreign airlines on most of their
routes. 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 also subject to
competition from surface transportation, particularly the automobile.
Most major U.S. carriers have developed, independently or in partnership
with others, large computerized reservation systems (CRS). Airlines,
including Alaska, and Horizon, are charged industry-set fees to have
their flight schedules included in the various CRS displays used by
travel agents and airlines. These systems are currently the predominant
means of distributing airline tickets. In order to reduce anti-
competitive practices, the DOT regulates the display of all airline
schedules and fares. Alaska is exploring alternatives to existing
distribution methods.
Fuel
Fuel costs represented 14.5% of the Company's total operating expenses
in 1997. Fuel prices, which can be volatile and are largely outside of
the Company's control, can have a significant impact on the Company's
operating results. Currently, a one cent change in the fuel price per
gallon affects annual fuel costs by approximately $3.2 million. The
Company has in the past hedged against its exposure to fluctuations in
the price of jet fuel, but does not currently do so. The Company
evaluates hedging strategies on an ongoing basis.
Unionized Labor Force
Labor costs represented 33% of the Company's total operating expenses in
1997. Wage rates can have a significant impact on the Company's
operating results. At December 31, 1997, labor unions represented 88%
of Alaska's and 43% of Horizon's employees. 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. The Company cannot predict
the outcome of union contract negotiations nor control actions (e.g.
work stoppage or slowdown) unions might take to try to influence those
negotiations.
Leverage and Future Capital Requirements
The Company, like many airlines, is highly leveraged, which increases
the volatility of its earnings. Due to high fixed costs, including
aircraft lease commitments, a decrease in revenues could result in a
disproportionately greater decrease in earnings. In addition, the
Company has an ongoing need to finance new aircraft deliveries and there
is no assurance that such financing will be available in sufficient
amounts or on acceptable terms. See Item 7 for management's discussion
of liquidity and capital resources.
Government Regulation; International Routes
The Company, like other airlines, is subject to regulation by the
Federal Aviation Administration (FAA) and the United States Department
of Transportation (DOT). The FAA, under its mandate to ensure aviation
safety, has the authority to ground aircraft and 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. The DOT has the authority to
regulate certain airline economic functions including financial and
statistical reporting, consumer protection, computerized reservations
systems, essential air transportation and international route authority.
The Company is subject to bilateral agreements between the United States
and the foreign countries to which the Company provides service. There
can be no assurance that existing bilateral agreements between the
United States and the foreign governments will continue or that the
Company's designation to operate such routes will continue.
Risk of Loss and Liability; Weather
The Company, like other airlines, is exposed to potential catastrophic
losses in the event of aircraft accidents or terrorist incidents.
Consistent with industry standards, the Company maintains insurance
against such losses. However, any aircraft accident, even if fully
insured, could cause a negative public perception of the Company with
adverse financial consequences. Unusually adverse weather, as occurred
during December 1996 in the Pacific Northwest, can significantly reduce
flight operations, resulting in lost revenues and added expenses.
OTHER INFORMATION
Frequent Flyer Program
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, telephone companies, hotels and car
rental agencies. Alaska is paid by non-airline partners for the miles
it credits to member accounts. Alaska has the ability to change the
Mileage Plan terms, conditions, partners, mileage credits and award
levels.
Mileage can be redeemed for free or discounted travel and for other
travel industry awards. Upon accumulating the necessary mileage,
members notify Alaska of their award selection Over 70% of the flight
awards selected are subject to blackout dates and capacity-controlled
seating. Effective in January 1996, miles have no expiration. As of
the year end 1996 and 1997, Alaska estimates that 504,000 and 652,000
round trip flight awards could have been redeemed by Mileage Plan
members who have mileage credits exceeding the 20,000 mile free round
trip domestic ticket award threshold. At December 31, 1997, fewer than
4% of these flight awards were issued and outstanding. For the years
1995, 1996 and 1997, approximately 242,000, 173,000 and 185,000 round
trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 7% for 1995, 4% for 1996, and 3% for
1997, of the total passenger miles flown for each period.
Alaska maintains a liability for its Mileage Plan obligation which is
based on its total miles outstanding, less an estimate for miles that
will never be redeemed. The net miles outstanding are allocated between
those credited for travel on Alaska, Horizon or other airline partners
and those credited for using the services of non-airline partners.
Miles credited for travel on Alaska, Horizon or other airline partners
are accrued at Alaska's incremental cost of providing the air travel.
The incremental cost includes the cost of meals, fuel, reservations and
insurance. The incremental cost does not include a contribution to
overhead, aircraft cost or profit. A portion of the proceeds received
from non-airline partners is also deferred. At December 31, 1996 and
1997, the total liability for miles outstanding was $17.3 million and
$22.3 million, respectively.
Employees
Alaska had 8,578 active full-time and part-time employees at December
31, 1997. The following is a summary of Alaska's union contracts as of
December 31, 1997:
Number of
Union Employee Group Employees Contract Status
International Mechanic, Rampservice 1,786 Amendable 8/31/97
Association of and Related Crafts In negotiation
Machinists and
Aerospace Workers
Clerical, Office and 3,094 Amendable 5/20/99
Passenger Service
Air Line Pilots Pilots 1,085 Amendable 4/30/03
Association International
Association of Flight Attendants 1,491 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 61 Amendable 4/1/98
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 2/9/02
Union of America
Horizon had 2,851 active full-time and part-time employees at December
31, 1997. The following is a summary of Horizon's union contracts as of
December 31, 1997:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 403 Amendable 4/24/98
Union of America related classifications
Dispatchers 26 Amendable 5/10/02
Association of Flight Attendants 281 Amendable 1/28/03
Flight Attendants
National Automobile, Station personnel 33 Amendable 1/17/01
Aerospace, Transportation in Canada
and General Workers
International Brotherhood Pilots 495 Initial contract
of Teamsters negotiations in 1998
Selected Quarterly Consolidated Financial Information (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1996 1997 1996 1997 1996 1997 1996 1997
(in millions, except per share)
Operating revenues $351.4 $380.4 $416.7 $435.0 $464.9 $501.2 $359.2 $422.8
Operating income
(loss) (5.2) (5.4) 39.6 40.9 63.0 76.3 (8.4) 27.2
Net income (loss) (7.2) (5.7) 18.0 20.8 32.8 42.2 (5.6) 15.1
Earnings (loss) per share:
Basic (0.52) (0.39) 1.26 1.43 2.27 2.88 (0.38) 0.98
Diluted (0.52) (0.39) 0.88 1.01 1.53 1.96 (0.38) 0.73
The total of the amounts shown as quarterly earnings per share (EPS) 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 for diluted EPS)
outstanding for the year.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their average
age at December 31, 1997.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Alaska Airlines
Boeing 737-200C 111 7 1 8 17.4
Boeing 737-400 140 3 25 28 3.9
McDonnell Douglas MD-80 140 16 26 42 8.2
26 52 78 7.6
Horizon
Fairchild Metroliner III 18 -- 11 11 10.7
de Havilland Dash 8 37 -- 36 36 6.3
Fokker F-28 62-69 3 12 15 14.6
3 59 62 9.0
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 26 aircraft owned by Alaska as of December 31, 1997 are
subject to liens securing long-term debt. Alaska's leased B737-200C,
B737-400 and MD-80 aircraft have lease expiration dates in 1999, between
2002 and 2015, and between 1998 and 2013, respectively. Horizon's
leased Fairchild Metroliner III, de Havilland Dash 8 and Fokker F-28
aircraft have expiration dates between 1998 and 2000, 1999 and 2013 and
2000 and 2002, respectively. However, as part of its fleet
standardization plan, Horizon expects to return to the lessors or
otherwise dispose of all of the Metroliners during 1998. 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. For
information regarding obligations under capital leases and long-term
operating leases, see Notes to Consolidated Financial Statements.
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 four Los Angeles area airports plus San Diego, Palm Springs,
San Francisco and Seattle. At December 31, 1997, all of Alaska's
aircraft meet the Stage 3 noise requirements under the Airport Noise and
Capacity Act of 1990.
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.
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 reservations 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: a regional headquarters
building, an air cargo facility (completed in 1997) and a leased
hangar/office facility in Anchorage; a Phoenix reservations center; and
a leased two-bay maintenance facility in Oakland.
Horizon owns its Seattle corporate headquarters building and leases
maintenance facilities at the Portland and Boise airports. A new $17
million operations, training and aircraft maintenance facility is under
construction in Portland and is expected to be completed in the second
quarter of 1998.
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 asserting breach of contract and other
claims under state law. In June 1992, MarkAir filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. In June 1997, MarkAir
claimed damages of $57 million (later revised to $70 million) in
connection with Alaska's actions. In January 1998, MarkAir's counsel
notified the Company that, after application of attorneys' fees and
prejudgement interest, its total claim was between $104 and $140
million. If MarkAir were to prevail at the $140 million amount, the
after-tax effect would be to reduce shareholders' equity by
approximately $82 million or 17%. However, the Company believes that it
has valid defenses and is vigorously defending itself against the
lawsuit. Trial is scheduled to begin in July 1998.
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, 1998) are as follows:
Name Position Age Officer Since
John F. Kelly Chairman, President and Chief 53 1981
Executive Officer of Alaska
Air Group, Inc. and Chairman
and CEO of Alaska Airlines, Inc.
Harry G. Lehr Senior Vice President/Finance 57 1986
of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Steven G. Hamilton Vice President/Legal and General 58 1988
Counsel of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Keith Loveless Corporate Secretary and Associate 41 1996
General Counsel of Alaska Air
Group, Inc. and Alaska Airlines, Inc.
The above officers have been employed as officers of Air Group or its
subsidiary, Alaska Airlines, for more than five years except for Keith
Loveless, who was elected as Corporate Secretary in 1996. Mr. Loveless
joined the Alaska Airlines legal department in 1986 and continues to
hold his current position as associate general counsel of Alaska
Airlines, a post he has held since 1993.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1997, there were 18,282,732 shares of common stock
issued and outstanding and 4,876 shareholders of record. The Company
also held 2,748,030 treasury shares at a cost of $62.6 million. The
Company has not paid dividends on the common stock since 1992. 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 1996 and 1997.
1996 1997
High Low High Low
First Quarter 27-3/4 15-7/8 27-5/8 20-3/4
Second Quarter 30-3/4 24-1/4 26-1/4 23
Third Quarter 28-1/8 19-1/8 33-5/16 25-1/16
Fourth Quarter 25-1/8 20-5/8 40-1/8 30-3/16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
1993 1994 1995 1996 1997
Consolidated Financial Data:
Year Ended December 31 (in millions, except per share amounts):
Operating Revenues $1,128.3 $1,315.6 $1,417.5 $1,592.2 $1,739.4
Operating Expenses 1,145.1 1,241.6 1,341.8 1,503.2 1,600.4
Operating Income (Loss) (16.8) 74.0 75.7 89.0 139.0
Nonoperating expense, net (a) (29.0) (33.0) (41.7) (24.7) (15.4)
Income (loss) before income tax (45.8) 41.0 34.0 64.3 123.6
Net Income (Loss) $(30.9) $22.5 $17.3 $38.0 $72.4
Average shares outstanding 13.340 13.367 13.485 14.241 14.785
Basic earnings (loss) per share $(2.51) $1.69 $1.28 $2.67 $4.90
Diluted earnings (loss) per share (2.51) 1.62 1.26 2.05 3.53
At End of Period (in millions, except ratio):
Total assets $1,135.0 $1,315.8 $1,313.4 $1,311.4 $1,533.1
Long-term debt and capital lease obligations 525.4 589.9 522.4 404.1 401.4
Shareholders' equity 166.8 191.3 212.5 272.5 475.3
Ratio of earnings to fixed charges (b) 1.36 1.28 1.57 2.10
Alaska Airlines Operating Data:
Revenue passengers (000) 6,438 8,958 10,140 11,805 12,284
Revenue passenger miles (RPM) (000,000) 5,514 7,587 8,584 9,831 10,386
Available seat miles (ASM) (000,000) 9,426 12,082 13,885 14,904 15,436
Revenue passenger load factor 58.5% 62.8% 61.8% 66.0% 67.3%
Yield per passenger mile 14.32c 12.20c 11.59c 11.67c 12.49c
Operating revenues per ASM 9.62c 8.79c 8.23c 8.70c 9.38c
Operating expenses per ASM 9.88c 8.27c 7.71c 8.10c 8.51c
Average full-time equivalent employees 6,191 6,486 6,993 7,652 8,236
Horizon Air Operating Data:
Revenue passengers (000) 2,752 3,482 3,796 3,753 3,686
Revenue passenger miles (RPM) (000,000) 560 733 841 867 889
Available seat miles (ASM) (000,000) 986 1,165 1,414 1,462 1,446
Revenue passenger load factor 56.8% 62.9% 59.5% 59.3% 61.5%
Yield per passenger mile 37.93c 33.35c 31.48c 33.14c 32.56c
Operating revenues per ASM 22.65c 22.06c 19.77c 20.61c 21.00c
Operating expenses per ASM 21.76c 20.95c 19.47c 20.60c 20.60c
Average full-time equivalent employees 2,267 2,557 2,864 2,891 2,756
c=cents
(a) Includes capitalized interest of $.4 million, $.4 million, $.2 million, $1.0 million and $5.3 million
for 1993, 1994, 1995, 1996, and 1997, respectively.
(b) For 1993, earnings are inadequate to cover fixed charges by $50.0 million.
Alaska Airlines Financial and Statistical Data
Quarter Ended December 31 Year Ended December 31
Financial Data (in millions): 1996 1997 % Change 1996 1997 % Change
Operating Revenues:
Passenger $254.8 $313.0 22.8 $1,146.8 $1,297.0 13.1
Freight and mail 19.3 20.7 7.3 82.7 82.9 0.2
Other - net 18.4 16.2 (12.0) 67.8 68.0 0.3
Total Operating Revenues 292.5 349.9 19.6 1,297.3 1,447.9 11.6
Operating Expenses:
Wages and benefits 96.8 106.1 9.6 383.6 423.8 10.5
Employee profit sharing (6.7) 2.4 NM 0.9 12.1 NM
Contracted services 10.3 11.6 12.6 36.9 42.5 15.2
Aircraft fuel 51.5 49.3 (4.3) 200.5 199.7 (0.4)
Aircraft maintenance 16.3 18.6 14.1 57.1 67.4 18.0
Aircraft rent 37.6 38.2 1.6 146.0 148.5 1.7
Food and beverage service 10.6 11.8 11.3 44.2 46.7 5.7
Commissions 19.7 22.9 16.2 88.7 100.8 13.6
Other selling expenses 14.5 11.7 (19.3) 64.3 63.9 (0.6)
Depreciation and amortization 13.6 14.9 9.6 55.9 56.9 1.8
Gain on sale of assets (5.7) (0.9) NM (9.3) (1.2) NM
Landing fees and other rentals 12.4 12.7 2.4 49.9 53.1 6.4
Other 22.6 26.2 15.9 88.6 99.4 12.2
Total Operating Expenses 293.5 325.5 10.9 1,207.3 1,313.6 8.8
Operating Income (Loss) (1.0) 24.4 NM 90.0 134.3 49.2
Interest income 3.1 3.9 11.5 12.2
Interest expense (6.1) (5.9) (29.7) (25.0)
Interest capitalized 0.6 1.1 0.6 3.4
Other - net 1.3 0.1 2.1 2.5
(1.1) (0.8) (15.5) (6.9)
Income (Loss) Before Income Tax $(2.1) $23.6 $74.5 $127.4
Operating Statistics:
Revenue passengers (000) 2,804 2,958 5.5 11,805 12,284 4.1
RPMs (000,000) 2,307 2,490 7.9 9,831 10,386 5.6
ASMs (000,000) 3,495 3,847 10.1 14,904 15,436 3.6
Passenger load factor 66.0% 64.7% (1.3)pts 66.0% 67.3% 1.3 pts
Breakeven load factor 69.3% 60.2% (9.1)pts 62.4% 60.5% (1.9)pts
Yield per passenger mile 11.04c 12.57c 13.8 11.67c 12.49c 7.1
Operating revenue per ASM 8.37c 9.10c 8.7 8.70c 9.38c 7.8
Operating expenses per ASM 8.40c 8.46c 0.8 8.10c 8.51c 5.1
Fuel cost per gallon 80.7c 71.7c (11.0) 75.2c 72.6c (3.5)
Fuel gallons (000,000) 63.9 68.8 7.7 266.6 275.2 3.2
Average number of employees 7,923 8,223 3.8 7,652 8,236 7.6
Aircraft utilization (block hours) 10.8 11.2 3.7 11.3 11.4 0.9
Operating fleet at period-end 74 78 5.4 74 78 5.4
NM = Not Meaningful
c=cents
Horizon Air Financial and Statistical Data
Quarter Ended December 31 Year Ended December 31
Financial Data (in millions): 1996 1997 % Change 1996 1997 % Change
Operating Revenues:
Passenger $64.7 $72.7 12.4 $287.3 $289.5 0.8
Freight and mail 2.8 2.7 (3.6) 11.2 11.2 0.0
Other - net 0.7 1.0 42.9 2.8 2.9 3.6
Total Operating Revenues 68.2 76.4 12.0 301.3 303.6 0.8
Operating Expenses:
Wages and benefits 23.3 23.9 2.6 92.5 94.4 2.1
Employee profit sharing (0.7) 0.8 NM 0.0 1.4 NM
Contracted services 1.6 1.7 6.2 5.8 6.3 8.6
Aircraft fuel 9.3 8.4 (9.7) 33.7 32.8 (2.7)
Aircraft maintenance 10.8 8.0 (25.9) 41.7 41.4 (0.7)
Aircraft rent 9.0 9.4 4.4 35.3 35.5 0.6
Food and beverage service 0.7 0.5 (28.6) 2.5 1.9 (24.0)
Commissions 4.4 4.1 (6.8) 19.2 17.9 (6.8)
Other selling expenses 4.3 3.6 (16.3) 17.5 16.5 (5.7)
Depreciation and amortization 2.9 2.7 (6.9) 11.4 11.2 (1.8)
Loss (gain) on sale of assets (0.6) (0.1) NM 0.2 (0.7) NM
Landing fees and other rentals 3.2 3.5 9.4 12.9 13.5 4.7
Other 7.1 6.7 (5.6) 28.5 25.7 (9.8)
Total Operating Expenses 75.3 73.2 (2.8) 301.2 297.8 (1.1)
Operating Income (Loss) (7.1) 3.2 NM 0.1 5.8 NM
Interest income 0.2 0.0 0.3 0.1
Interest expense (0.3) (0.3) (0.9) (1.8)
Interest capitalized 0.3 0.6 0.4 1.8
Other - net 0.1 0.1 0.4 0.4
0.3 0.4 0.2 0.5
Income (Loss) Before Income Tax $(6.8) $3.6 $0.3 $6.3
Operating Statistics:
Revenue passengers (000) 903 938 3.9 3,753 3,686 (1.8)
RPMs (000,000) 211 231 9.6 867 889 2.6
ASMs (000,000) 365 376 2.9 1,462 1,446 (1.1)
Passenger load factor 57.8% 61.5% 3.7 pts 59.3% 61.5% 2.2 pts
Breakeven load factor 65.4% 58.3% (7.1)pts 59.3% 60.2% 0.9 pts
Yield per passenger mile 30.71c 31.48c 2.5 33.14c 32.56c (1.8)
Operating revenue per ASM 18.70c 20.32c 8.7 20.61c 21.00c 1.9
Operating expenses per ASM 20.64c 19.47c (5.7) 20.60c 20.60c (0.0)
Fuel cost per gallon 84.4c 76.3c (9.6) 78.9c 77.5c (1.7)
Fuel gallons (000,000) 11.0 11.0 0.0 42.7 42.4 (0.7)
Average number of employees 2,947 2,774 (5.8) 2,891 2,756 (4.7)
Aircraft utilization (block hours) 7.3 7.1 (2.7) 7.7 7.1 (7.8)
Operating fleet at period-end 62 62 0.0 62 62 0.0
NM = Not Meaningful
c=cents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Industry Conditions
During 1997, as part of the Taxpayer Relief Act, the 10% passenger
ticket tax was replaced with a new system that combines a percentage tax
with a per passenger segment fee. Effective October 1, 1997, the ticket
tax is 9% plus $1 per segment. The percentage tax is scheduled to
decrease over time and the segment fee is scheduled to increase. The $6
international departure tax has increased to $12 and a new $12
international arrival tax has been added. However, the Act retains the
$6 rate for travel between Alaska and the U.S. mainland. This tax and
the international taxes will be indexed to the CPI beginning January 1,
1999. The Taxpayer Relief Act also included these items that will
affect the Company and the airline industry: (a) a new tax of 7.5% on
payments to air carriers for the sale of miles in frequent flyer
programs; (b) a phased-in increase from 50% to 80% for the deductible
percentage of per diems paid to flight crews; and (c) faster cost
recovery for alternative minimum tax purposes of aircraft purchased in
1999 and later years.
During 1996, fuel prices increased significantly for the Company and
most of its competitors (approximately 20% or 12 cents per gallon over
1995 levels for Alaska Airlines). During 1997, fuel prices decreased
approximately 3.5% from 1996 levels.
RESULTS OF OPERATIONS
1997 Compared with 1996 Consolidated net income in 1997 was $72.4
million, or $4.90 per share (basic) and $3.53 per share (diluted),
compared with net income of $38.0 million, or $2.67 per share (basic)
and $2.05 per share (diluted) in 1996. Consolidated operating income
was $139.0 million in 1997 compared with $89.0 million in 1996. Of the
$50.0 million improvement, $35.6 million occurred in the fourth quarter.
Severe winter storms, high fuel prices and matching of competitors'
lower fares adversely affected the 1996 fourth quarter. Alaska's annual
operating income improved by $44.3 million, while Horizon's improved by
$5.7 million. A discussion of operating results for the two airlines
follows.
Alaska Airlines Operating income increased 49.2% to $134.3 million,
resulting in a 9.3% operating margin as compared to a 6.9% margin in
1996. 1997 operating revenue per available seat mile (ASM) increased
7.8% to 9.38 cents while operating expenses per available seat mile
increased 5.1% to 8.51 cents.
The increase in revenue per ASM was due to a 7.1% increase in system
passenger yield combined with a 1.3 point improvement in passenger load
factor. Most markets, including the three largest (Pacific Northwest -
Southern California, Seattle - Anchorage and Pacific Northwest -
Northern California), experienced increases in yields. Most markets
also experienced increases in load factor including the Seattle-
Anchorage market, which had a 4.9 point improvement. The higher yields
and load factors reflect a more stabilized competitive environment in
1997.
Freight and mail revenues decreased 3.6% in the first half of 1997 due
to more competition and increased 4.1% in the second half due to
increased cargo capacity and higher mail rates.
Other-net revenues were essentially unchanged because an additional $5
million of proceeds from partners in Alaska's frequent flyer program
were offset by a similar increase in the frequent flyer award liability.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis in 1996 and 1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 2.57 2.74 .17 7
Employee profit sharing .01 .08 .07 NM
Contracted services .25 .28 .03 12
Aircraft fuel 1.35 1.29 (.06) (4)
Aircraft maintenance .38 .44 .06 16
Aircraft rent .98 .96 (.02) (2)
Food and beverage service .30 .30 -- --
Commissions .59 .65 .06 10
Other selling expenses .43 .41 (.02) (5)
Depreciation and amortization .38 .37 (.01) (3)
Gain on sale of assets (.06) (.01) .05 NM
Landing fees and other rentals .33 .34 .01 3
Other .59 .66 .07 12
Alaska Airlines Total 8.10 8.51 .41 5
NM = Not Meaningful
Alaska's higher unit costs were primarily due to increased labor costs.
Significant unit cost changes are discussed below.
Employees increased 7.6% (primarily in reservations and customer service
positions) to service the 4.1% increase in passengers and also to
improve on-time within 15 minutes flight departure performance, which
improved from 77% on-time in 1996 to 82% on-time in 1997. Excluding
profit sharing, average wages and benefits per employee were up 2.7%,
primarily due to higher pilot wage rates and higher health insurance
costs. The net effect was that wages and benefits expense increased
more than the ASM growth, resulting in a 7% increase in cost per ASM.
Profit sharing expense increased the cost per ASM by .07 cents.
Effective for 1997, Alaska changed its profit sharing program so that
eligible employees will receive their pro rata share of 10% of Alaska's
adjusted pre-tax profits starting with the first dollar of pre-tax
profits.
Fuel expense per ASM decreased 4%, primarily due to a 3.5% decrease in
the price of fuel.
Maintenance expense per ASM increased 16% because significantly more
engine repair expense was incurred in 1997 and a smaller proportion of
airframe maintenance costs were capitalized.
Commission expense per ASM increased 10%, less than the 13% increase in
passenger revenues because a lower percentage of sales were made by
travel agents. In addition, the commission rate paid to travel agents
decreased from 10% to 8% for sales made after September 30, 1997.
The gain on sale of assets in 1996 is primarily due to the sale of three
jet aircraft.
Other expense per ASM increased 12%, primarily due to higher costs
related to property and other taxes, flight crew hotels, employee hiring
and communications.
Horizon Air Operating income increased from $0.1 million to $5.8
million, resulting in a 1.9% operating margin as compared to a zero
margin in 1996. For 1997, operating revenue per ASM increased 1.9% to
21.00 cents while operating expenses per available seat mile remained
even at 20.60 cents.
The increase in revenue per ASM was due to a 2.2 point increase in
system passenger load factor, partially offset by a 1.8% decrease in
passenger yield. The Seattle-to-Canada, Seattle-to-Montana and the
Seattle-Boise markets experienced significant increases in load factors.
The decrease in yields is believed to be due to a longer average
passenger trip length in 1997 and to the presence of the passenger
transportation tax for 10 months in 1997 versus 4 months in 1996.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon in 1996 and 1997.
Horizon Air Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 6.33 6.53 .20 3
Employee profit sharing -- .09 .09 NM
Contracted services .39 .43 .04 10
Aircraft fuel 2.30 2.27 (.03) (1)
Aircraft maintenance 2.85 2.86 .01 --
Aircraft rent 2.41 2.45 .04 2
Food and beverage service .17 .13 (.04) (24)
Commissions 1.31 1.24 (.07) (5)
Other selling expenses 1.20 1.14 (.06) (5)
Depreciation and amortization .78 .77 (.01) (1)
Loss (gain) on sale of assets .01 (.05) (.06) NM
Landing fees and other rentals .88 .93 .05 6
Other 1.97 1.81 (.16) (8)
Horizon Air Total 20.60 20.60 -- --
NM = Not Meaningful
Wages and benefits per ASM increased, primarily due to higher wage
rates, payroll taxes and more 401(k) plan employer matching costs.
Profit sharing expense increased due to profitable operations.
Contracted services increased due to higher security screening and
hiring costs. Food and beverage decreased due to a conscious effort to
reduce costs and improve efficiency. Other expense decreased due to
less flight crew training and personnel costs, lower insurance rates and
decreased supplies expense.
Consolidated Nonoperating Income (Expense) Nonoperating expense
decreased $9.3 million to $15.4 million, primarily due to smaller
average debt balances, lower interest rates on variable interest rate
debt and more interest capitalized.
1996 Compared with 1995 Consolidated net income in 1996 was $38.0
million, or $2.67 per share (basic) and $2.05 per share (diluted),
compared with net income of $17.3 million, or $1.28 per share (basic)
and $1.26 per share (diluted) in 1995. Consolidated operating income
was $89.0 million compared with $75.7 million in 1995. Alaska's
operating income improved by $17.7 million, but it was offset by lower
operating results at Horizon.
Alaska Airlines Operating income increased 24.5% to $90.0 million,
resulting in a 6.9% operating margin as compared with a 6.3% margin in
1995. Operating revenue per available seat mile (ASM) increased 5.8% to
8.70 cents while operating expenses per ASM decreased 5.1% to 8.10
cents. The increase in revenue per ASM was primarily due to a 4.2 point
improvement in system passenger load factor. Higher unit costs were
largely due to higher fuel prices and heavier passenger loads.
Horizon Air Operating income decreased 98% to $0.1 million primarily
due to the fourth quarter, which was negatively impacted by adverse
weather, increased competition, higher than normal maintenance expense
and costs associated with transitioning to a simplified fleet.
Consolidated Nonoperating Income (Expense) Nonoperating expense
decreased from $41.7 million to $24.7 million primarily due to lower
interest rates on variable debt and smaller average debt balances. In
addition, 1995 included a $2.2 million write-off of capitalized debt
issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
Dec. 31, 1996 Dec. 31, 1997 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $101.8 $212.7 $110.9
Working capital (deficit) (185.6) (48.7) 136.9
Long-term debt and
capital lease obligations 404.1 401.4 (2.7)
Shareholders' equity 272.5 475.3 202.8
Book value per common share $18.83 $26.00 $7.17
Debt-to-equity 60%:40% 46%:54% NA
1997 Financial Changes The Company's cash and marketable securities
portfolio increased by $111 million during 1997. Operating activities
provided $205 million of cash in 1997. Additional cash was provided by
the sale and leaseback of four B737-400 aircraft and 13 Dash 8-200
aircraft ($247 million), issuance of common stock ($129 million) and
issuance of long-term debt ($28 million). Cash was used for $439
million of capital expenditures including the purchase of two new MD-83
aircraft, three new B737-400 aircraft, a previously leased B737-400
aircraft, 13 new Dash 8-200 aircraft, flight equipment deposits and
airframe and engine overhauls, net repayment of short-term borrowings
($47 million) and the repayment of debt ($26 million).
Like most airlines, the Company has a working capital deficit. The
existence of a working capital deficit has not in the past impaired the
Company's ability to meet its obligations as they become due and it is
not expected to do so in the future.
Shareholders' equity increased by $203 million due to the sale of 3.45
million shares of common stock and net income of $72 million. These
factors increased equity to 54% of capital, an improvement of 14
percentage points.
Financing Activities During 1997, Alaska sold four B737-400 aircraft
and leased them back for 18 years; Horizon sold 13 Dash 8-200 aircraft
and leased them back for 15 years.
In November 1997, Standard & Poors raised its corporate credit rating on
Air Group and Alaska to double B minus from single B plus, citing a
stabilized competitive position and improving financial profile.
In January 1998, the Company called its 6-7/8% convertible subordinated
debentures and, based on recent stock prices, expects that substantially
all of them will be converted into 1.608 million shares of common stock.
Commitments During 1997, Alaska's lease commitments increased
approximately $194 million due to the sale and leaseback of four B737-
400 aircraft. In addition, Alaska ordered 15 Boeing 737 aircraft along
with an option to acquire 10 more. The value of the orders is
approximately $510 million. Horizon's lease commitments increased
approximately $156 million due to the acquisition of 13 new Dash 8-200
aircraft. In addition, Horizon ordered 10 new Dash 8-200 aircraft,
valued at approximately $100 million. At December 31, 1997, the Company
had firm orders for 46 aircraft with a total cost of approximately
$1,015 million as set forth below. In addition, Alaska has options to
acquire 22 more B737s and Horizon has options to acquire 25 more Dash 8-
200s. Alaska and Horizon expect to finance the new planes with either
leases, long-term debt or internally generated cash.
Delivery Period - Firm Orders
Aircraft 1998 1999 2000 2001 2002 2003-05 Total
Boeing B737-400 9 2 -- -- -- -- 11
Boeing B737-700 -- 3 -- -- -- -- 3
Boeing B737-900 -- -- -- 5 5 -- 10
de Havilland Dash 8-200 11 1 3 -- -- 7 22
Total 20 6 3 5 5 7 46
Cost (Millions) $398 $167 $30 $175 $175 $70 $1,015
The Company accrues the costs associated with returning leased aircraft
over the lease period. As leased aircraft are retired, the costs are
charged against the established reserve. At December 31, 1997, $43
million was reserved for leased aircraft returns.
Deferred Taxes At December 31, 1997, net deferred tax liabilities were
$62 million, which includes $112 million of net temporary differences
offset by $50 million of Alternative Minimum Tax (AMT) credits. The
Company believes that all of its deferred tax assets, including its AMT
credits, will be realized through profitable operations.
Year 2000 Computer Issue During the past eight years, the Company has
been engaged in a number of projects to improve its information
technology infrastructure. The Company expects to complete these
projects during 1998 and 1999 at an estimated cost of $5 to $10 million.
As a result of these activities, the Company's systems will be Year 2000
compliant. The direct cost of projects solely intended to correct Year
2000 problems is expected to be less than $1 million.
1996 Financial Changes The Company's cash and marketable securities
portfolio decreased by $33 million during 1996. Operating activities
provided $223 million of cash in 1996. Additional cash was provided by
the sale and leaseback of three B737-400 aircraft ($86 million), the
sale of three MD-80 aircraft ($52 million) and proceeds received from
the issuance of common stock ($21 million). Cash was used for the
purchase of two new MD-83 aircraft, two used B737-400 aircraft, two
previously leased B737-200Cs, airframe and engine overhauls and other
capital expenditures ($209 million), and aircraft purchase deposits ($61
million). Cash was also used to repay net short-term borrowings ($19
million), and $134 million of long-term debt (including $100 million
repaid early). During 1996, Alaska replaced its $75 million credit
facility with a $125 million credit facility with substantially the same
terms and conditions.
1995 Financial Changes The Company's cash and marketable securities
portfolio increased by $30 million during 1995. Operating activities
provided $126 million of cash in 1995. Additional cash was provided by
flight equipment deposits returned ($11 million), net short-term
borrowings ($41 million), the sale and leaseback of two B737-400
aircraft ($56 million) and new long-term debt proceeds ($129 million).
Cash was used for the purchase of one previously leased B737-400
aircraft, airframe and engine overhauls and other capital expenditures
($103 million) and the repayment of debt and capital lease obligations
($237 million). Included in the above numbers are the June 1995
issuance of $132.3 million of 6-1/2% convertible senior debentures due
2005, and the August 1995 redemption of the 7-1/4% zero coupon,
convertible subordinated notes for $127.7 million
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
See Item 14.
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 20, 1997. 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 20, 1997.
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 19, 1997.
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 20, 1997.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Consolidated Financial Statements: Page(s)
Selected Quarterly Consolidated Financial Information (Unaudited) 5
Consolidated Balance Sheet as of December 31, 1996 and 1997 20-21
Consolidated Statement of Income for the years ended
December 31, 1995, 1996 and 1997 22
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 24
Notes to Consolidated Financial Statements 25-32
Report of Independent Public Accountants 33
Consolidated Financial Statement Schedule II,
Valuation and Qualifying Accounts,
for the years ended December 31, 1995, 1996 and 1997 34
See Exhibit Index on page 35.
(b) A report on Form 8-K announcing orders for 15 Boeing 737 series
aircraft was filed on November 20, 1997
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/ John F. Kelly Date: February 10,
1998
John F. Kelly, 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 February
10, 1998 on behalf of the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman, Chief Executive Officer, President and Director
John F. Kelly
/s/ Harry G. Lehr Senior Vice President/Finance
Harry G. Lehr (Principal Financial Officer)
/s/ Bradley D. Tilden Controller
Bradley D. Tilden (Principal Accounting Officer)
/s/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
Mary Jane Fate
/s/ Bruce R. Kennedy 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/ John V. Rindlaub. Director
John V. Rindlaub.
/s/ Richard A. Wien Director
Richard A. Wien
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
As of December 31 (In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.4 $102.6
Marketable securities 52.4 110.1
Receivables - less allowance for doubtful
accounts (1996 - $1.3; 1997 - $1.2) 69.7 72.6
Inventories and supplies 47.8 47.2
Prepaid expenses and other assets 80.9 92.1
Total Current Assets 300.2 424.6
Property and Equipment
Flight equipment 851.6 950.1
Other property and equipment 234.8 258.5
Deposits for future flight equipment 84.4 108.9
1,170.8 1,317.5
Less accumulated depreciation and amortization 326.3 373.8
844.5 943.7
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.5 27.5
18.9 16.9
Total Property and Equipment - Net 863.4 960.6
Intangible Assets - Subsidiaries 61.6 59.6
Other Assets 86.2 88.3
Total Assets $1,311.4 $1,533.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
As of December 31 (In Millions) 1996 1997
Current Liabilities
Accounts payable $65.4 $73.9
Accrued aircraft rent 52.8 60.7
Accrued wages, vacation and payroll taxes 51.5 70.1
Other accrued liabilities 82.0 73.5
Short-term borrowings
(Interest rate: 1996 - 5.6%) 47.0 -
Air traffic liability 163.0 166.4
Current portion of long-term debt and
capital lease obligations 24.1 28.7
Total Current Liabilities 485.8 473.3
Long-Term Debt and Capital Lease Obligations 404.1 401.4
Other Liabilities and Credits
Deferred income taxes 49.5 72.3
Deferred income 18.1 19.5
Other liabilities 81.4 91.3
149.0 183.1
Commitments
Shareholders' Equity
Preferred stock, $1 par value
Authorized: 5,000,000 shares - -
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1996 - 17,223,281 shares
1997 - 21,030,762 shares 17.2 21.0
Capital in excess of par value 166.8 292.5
Treasury stock, at cost: 1996 - 2,748,550 shares
1997 - 2,748,030 shares (62.6) (62.6)
Deferred compensation (2.7) (1.8)
Retained earnings 153.8 226.2
272.5 475.3
Total Liabilities and Shareholders' Equity $1,311.4 $1,533.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Year Ended December 31
(In Millions Except Per Share Amounts) 1995 1996 1997
Operating Revenues
Passenger $1,258.2 $1,427.7 $1,574.5
Freight and mail 95.2 93.9 94.1
Other - net 64.1 70.6 70.8
Total Operating Revenues 1,417.5 1,592.2 1,739.4
Operating Expenses
Wages and benefits 427.8 477.0 531.7
Contracted services 36.8 42.7 48.8
Aircraft fuel 181.2 234.2 232.6
Aircraft maintenance 79.2 98.7 108.7
Aircraft rent 172.1 181.2 183.9
Food and beverage service 44.7 46.6 48.5
Commissions 93.1 101.5 106.6
Other selling expenses 72.8 81.8 80.4
Depreciation and amortization 68.3 67.5 68.3
Loss (gain) on sale of assets 0.2 (9.1) (1.9)
Landing fees and other rentals 57.7 62.4 66.2
Other 107.9 118.7 126.6
Total Operating Expenses 1,341.8 1,503.2 1,600.4
Operating Income 75.7 89.0 139.0
Nonoperating Income (Expense)
Interest income 10.4 11.1 10.6
Interest expense (51.5) (38.4) (33.6)
Interest capitalized 0.2 1.0 5.3
Other - net (0.8) 1.6 2.3
(41.7) (24.7) (15.4)
Income before income tax 34.0 64.3 123.6
Income tax expense 16.7 26.3 51.2
Net Income $17.3 $38.0 $72.4
Basic Earnings Per Share $1.28 $2.67 $4.90
Diluted Earnings Per Share $1.26 $2.05 $3.53
Shares used for computation:
Basic 13.471 14.241 14.785
Diluted 20.765 22.458 22.689
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Capital in Treasury Deferred
Common Excess of Stock Compen- Retained
(In Millions) Stock Par Value at Cost sation Earnings Total
Balances at December 31, 1994 $16.6 $152.8 $(71.8) $(4.8) $98.5 $191.3
1995 net income 17.3 17.3
Stock issued under stock plans 0.1 2.6 2.7
Treasury stock purchase
Employee Stock Ownership Plan
shares allocated 1.2 1.2
Balances at December 31, 1995 16.7 155.4 (71.8) (3.6) 115.8 212.5
1996 net income 38.0 38.0
Stock issued under stock plans 0.5 9.7 10.2
Treasury stock activity:
Purchase (4,466 shares) (0.1) (0.1)
Sale (409,524 shares) 1.7 9.3 11.0
Employee Stock Ownership Plan
shares allocated 0.9 0.9
Balances at December 31, 1996 17.2 166.8 (62.6) (2.7) 153.8 272.5
1997 net income 72.4 72.4
Issuance of 3,450,000 shares
of common stock 3.5 118.4 121.9
Stock issued under stock plans 0.3 7.1 7.4
Stock issued for convertible
subordinated debentures 0.0 0.2 0.2
Treasury stock activity:
Purchase (2,094 shares) (0.1) (0.1)
Sale (2,614 shares) 0.1 0.1
Employee Stock Ownership Plan 0.0
shares allocated 0.9 0.9
Balances at December 31, 1997 $21.0 $292.5 $(62.6) $(1.8) $226.2 $475.3
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Year Ended December 31 (In Millions) 1995 1996 1997
Cash flows from operating activities:
Net income $17.3 $38.0 $72.4
Adjustments to reconcile net income to cash:
Depreciation and amortization 68.3 67.5 68.3
Amortization of airframe and engine overhau 24.3 34.6 35.1
Loss (gain) on disposition of assets and de 1.9 (9.1) (1.9)
Increase in deferred income taxes 12.4 8.5 22.8
Decrease (increase) in accounts receivable (18.5) 18.8 (2.9)
Increase in other current assets (17.2) (13.9) (10.6)
Increase in air traffic liability 1.0 38.6 3.4
Increase in other current liabilities 15.5 36.9 26.5
Other-net 20.5 3.0 (7.9)
Net cash provided by operating activities 125.5 222.9 205.2
Cash flows from investing activities:
Proceeds from disposition of assets 3.8 58.1 6.9
Purchases of marketable securities (169.4) (53.5) (443.6)
Sales and maturities of marketable securities 153.5 110.4 385.9
Flight equipment deposits returned 10.8 1.1 8.7
Additions to flight equipment deposits (0.5) (60.5) (68.4)
Additions to property and equipment (102.8) (209.3) (370.6)
Restricted deposits and other 3.9 0.5 (2.0)
Net cash used in investing activities (100.7) (153.2) (483.1)
Cash flows from financing activities:
Proceeds from short-term borrowings 69.9 47.0 56.4
Repayment of short-term borrowings (29.0) (65.9) (103.4)
Proceeds from sale and leaseback transactions 56.0 85.6 246.7
Proceeds from issuance of long-term debt 128.8 - 28.0
Long-term debt and capital lease payments (237.4) (133.9) (25.9)
Proceeds from issuance of common stock 2.8 10.2 129.3
Proceeds from sale of treasury stock - 10.9 -
Gain (loss) on debt retirement (1.7) - -
Net cash provided by (used in)
financing activities (10.6) (46.1) 331.1
Net increase in cash and cash equivalents 14.2 23.6 53.2
Cash and cash equivalents at beginning of year 11.6 25.8 49.4
Cash and cash equivalents at end of year $25.8 $49.4 $102.6
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $52.6 $43.5 $28.7
Income taxes 5.0 20.6 22.1
Noncash investing and financing activities: None None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 1997
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. Preparation of financial statements requires the use of
management's estimates. Actual results could differ from those
estimates. Certain reclassifications have been made in prior years'
financial statements to conform to the 1997 presentation.
Alaska and Horizon operate as airlines. However, their business plans,
competition and economic risks differ substantially. Alaska is a major
airline serving Alaska, the West Coast, Mexico and Eastern Russia. It
operates an all jet fleet and its average passenger trip is 846 miles.
Horizon is a regional airline serving the Pacific Northwest, Northern
California and Western Canada. It operates both jet and turboprop
aircraft, and its average passenger trip is 241 miles. Substantially
all of Alaska's and Horizon's sales occur in the United States. See
Note 11 for operating 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. The Company reduces its cash balance when checks
are disbursed. Due to the time delay in checks clearing the banks, the
Company normally maintains a negative cash balance on its books which is
reported as a current liability. The amount of the negative cash
balance was $12.5 million and $10.1 million at December 31, 1996 and
1997, respectively.
Inventories and Supplies
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence is
accrued on a straight-line basis over the estimated useful lives of the
aircraft. Inventories related to the retired B727 fleet and other
surplus items are carried at their net realizable value. The allowance
at December 31, 1996 and 1997 for all inventories was $16.1 million and
$18.0 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:
Aircraft and other
flight equipment 8-20 years
Buildings 10-30 years
Capitalized leases and
leasehold improvements Term of lease
Other equipment 3-15 years
Assets and related obligations for items financed under capital leases
are initially recorded at an amount equal to the present value of the
future minimum lease payments. The cost of major airframe overhauls,
engine overhauls, and other modifications which extend the life or
improve the usefulness of aircraft are capitalized and amortized over
their estimated period of use. Other repair and maintenance costs are
expensed when incurred. The Company periodically reviews long-lived
assets for impairment.
Capitalized Interest
Interest is capitalized on flight equipment purchase deposits and ground
facilities progress payments as a cost of the related asset and is
depreciated over the estimated useful life of the asset.
Intangible Assets-Subsidiaries
The excess of the purchase price over the fair value of net assets
acquired is recorded as an intangible asset and is amortized over 40
years. Accumulated amortization at December 31, 1996 and 1997 was $21.1
million and $23.1 million, respectively.
Deferred Income
Deferred income results from the sale and leaseback of aircraft, the
receipt of manufacturer or vendor credits, and from the sale of foreign
tax benefits. This income is recognized over the term of the applicable
agreements.
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 an expense
and accrued as a liability 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
frequent flyer award liability is relieved as travel awards are issued.
Passenger Revenues
Passenger revenues are considered earned at the time service is
provided. Tickets sold but not yet used are reported as air traffic
liability.
Contracted Services
Contracted services includes the expenses for aircraft ground handling,
security, temporary employees and other similar services.
Other Selling Expenses
Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, advertising and promotional costs.
The costs of advertising are expensed the first time the advertising
takes place. Advertising expense was $15.2 million, $15.6 million, and
$11.0 million, respectively, in 1995, 1996 and 1997.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, which 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.
Stock Options
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock options. See Note 6 for more information.
Derivative Financial Instruments
The Company periodically enters into interest rate swap agreements to
hedge interest rate risk. The differential to be paid or received from
these agreements is accrued as interest rates change and is recognized
currently in the income statement. The Company periodically enters into
hedge agreements to reduce its exposure to fluctuations in the price of
jet fuel. A gain or loss is recorded quarterly if the fuel index
average exceeds the ceiling price or falls below the floor price.
Note 2. Marketable Securities
Marketable securities are investments that are readily convertible to
cash and have original maturities that exceed three months. They are
classified as available for sale and consisted of the following at
December 31 (in millions):
1996 1997
Cost:
U.S. government securities $48.4 $75.1
Asset backed obligations 4.0 35.0
$52.4 $110.1
Fair value:
U.S. government securities $48.2 $75.2
Asset backed obligations 4.0 35.0
$52.2 $110.2
There were no material unrealized holding gains or losses at December
31, 1996 or 1997.
Of the marketable securities on hand at December 31, 1997, 54% will
mature during 1998 and the remainder will mature during 1999. Based on
specific identification of securities sold, the following occurred in
1996 and 1997 (in millions):
1996 1997
Proceeds from sales $110.4 $385.9
Gross realized gains 0.3 0.1
Gross realized losses 0.1 0.1
Realized gains and losses are reported as a component of interest
income.
Note 3. Other Assets
Other assets consisted of the following at December 31 (in millions):
1996 1997
Restricted deposits $64.6 $67.5
Leasehold rights 8.4 5.5
Deferred costs and other 13.2 15.3
$86.2 $88.3
Leasehold rights and deferred costs are amortized over the term of the
related lease or contract.
Note 4. Long-term Debt and Capital Lease Obligations
At December 31, 1996 and 1997, long-term debt and capital lease
obligations were as follows (in millions):
1996 1997
8.7%* fixed rate notes payable
due through 2004 $115.5 $103.5
6.4%* variable rate notes payable
due through 2009 98.6 114.9
6-1/2% convertible senior
debentures due 2005 132.3 132.1
6-7/8% convertible subordinated
debentures due 2004-2014 54.0 54.0
Long-term debt 400.4 404.5
Capital lease obligations 27.8 25.6
Less current portion (24.1) (28.7)
$404.1 $401.4
* weighted average for 1997
At December 31, 1997, borrowings of $218.4 million are secured by flight
equipment and real property. The 6-1/2% and 6-7/8% debentures are
convertible into common stock at $21.50 and $33.60 per share,
respectively, subject to adjustments in certain events. The 6-1/2%
debentures are redeemable at the Company's option on or after June 15,
1998, initially at a redemption price of 104.33% of the principal
amount, declining ratably to 100% over six years. The 6-7/8% debentures
are redeemable at the Company's option at a redemption price of 101.38%
of the principal amount at December 31, 1997, declining ratably to 100%
on June 15, 1999.
At December 31, 1997, Alaska had a $125 million credit facility with
commercial banks. Advances under this facility may be for up to a
maximum maturity of four years. Borrowings may be used for aircraft
acquisitions or other corporate purposes, and they bear interest at a
rate which varies based on LIBOR. At December 31, 1997, no borrowings
were outstanding under this credit facility.
Certain Alaska loan agreements contain provisions that require
maintenance of specific levels of net worth, leverage and fixed charge
coverage, and limit investments, lease obligations, sales of assets and
additional indebtedness. At December 31, 1997, the Company was in
compliance with all loan provisions, and under the most restrictive loan
provisions, Alaska had $140 million of net worth above the minimum.
At December 31, 1997, long-term debt principal payments for the next
five years were (in millions):
1998 $26.3
1999 $26.3
2000 $57.3
2001 $47.6
2002 $14.5
Note 5. Commitments
Lease Commitments
Lease contracts for 113 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased.
Total rent expense was $201.9 million, $214.7 million and $218.7
million, in 1995, 1996 and 1997, respectively. Future minimum lease
payments under long-term operating leases and capital leases as of
December 31, 1997 are shown below (in millions):
Operating Leases Capital
Aircraft Facilities Leases
1998 $178.2 $16.9 $ 4.1
1999 165.6 16.7 4.1
2000 156.3 14.9 4.1
2001 140.3 9.8 4.1
2002 137.5 5.2 4.1
Thereafter 804.9 71.0 6.8
Total lease payments $1,582.8 $134.5 27.3
Less amount representing interest (1.7)
Present value of capital lease payments $25.6
Aircraft Commitments
The Company has firm orders for 24 Boeing 737 series aircraft to be
delivered between 1998 and 2002 and 22 Dash 8-200s to be delivered
between 1998 and 2005. The total amount of these commitments is
approximately $1.015 billion. As of December 31, 1997, deposits related
to the future equipment deliveries were $100.6 million. In addition to
the ordered aircraft, the Company holds purchase options on 22 Boeing
737s and 25 Dash 8-200s.
Note 6. Stock Plans
Air Group has three stock option plans, which provide for the purchase
of Air Group common stock at a stipulated price on the date of grant by
certain officers and key employees of Air Group and its subsidiaries.
Under the 1988 Plan, options for 1,720,700 shares were granted. Under
the 1996 and 1997 Plans, options for 519,900 shares have been granted
and, at December 31, 1997, 401,975 shares were available for grant.
Under all plans, the incentive and nonqualified stock options granted
have terms of up to approximately ten years. Grantees are 25% vested
after one year, 50% after two years, 75% after three years and 100%
after four years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995, 1996 and 1997, respectively:
dividend yield of 0%, 0% and 0%; volatility of 37%, 36% and 34%; risk-
free interest rates of 6.46%, 6.33% and 5.69%; and expected lives of 5,
5 and 5 years. Using these assumptions, the weighted average fair value
of options granted was $6.69, $9.58 and $14.04 in 1995, 1996 and 1997,
respectively.
Air Group follows APB Opinion 25 and related Interpretations in
accounting for stock options. Accordingly, no compensation cost has
been recognized for these plans. Had compensation cost for the
Company's stock options been determined in accordance with Financial
Accounting Standard 123, net income and earnings per share (EPS) would
have been reduced to the pro forma amounts indicated below. The
reductions in future years are likely to be larger than shown below
because options vest over four years and new grants are typically made
each year.
1995 1996 1997
Net income (in millions):
As reported $17.3 $38.0 $72.4
Pro forma 17.1 37.4 71.4
Basic EPS:
As reported $1.28 $2.67 $4.90
Pro forma 1.27 2.63 4.83
Diluted EPS:
As reported $1.26 $2.05 $3.53
Pro forma 1.25 2.03 3.48
Changes in the number of shares subject to option, with their weighted
average exercise prices, are summarized below:
Shares Price
Outstanding, Dec. 31, 1994 1,044,143 $17.15
Granted 425,500 15.37
Exercised (165,005) 16.11
Canceled (143,050) 17.80
Outstanding, Dec. 31, 1995 1,161,588 $16.56
Granted 379,900 22.51
Exercised (504,138) 17.05
Canceled (45,525) 17.13
Outstanding, Dec. 31, 1996 991,825 $18.57
Granted 245,800 35.25
Exercised (349,575) 17.36
Canceled (8,125) 17.03
Outstanding, Dec. 31, 1997 879,925 $23.72
At December 31, 1997, 245,800 of the outstanding options (none of which
are currently exercisable) had an exercise price of $35.25 and a
remaining contractual life of 10.0 years. The other 634,125 outstanding
options had a weighted average exercise price of $19.24 (ranging from
$15.00 to $24.00), and a weighted average remaining contractual life of
7.9 years. The number of shares exercisable at year-end with their
weighted average exercise prices, are summarized below:
Shares Price
December 31, 1995 596,338 $17.24
December 31, 1996 243,675 16.70
December 31, 1997 161,775 19.08
Note 7. Employee Benefit Plans
Pension 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. Pension plans are funded as required by the Employee
Retirement Income Security Act of 1974 (ERISA).
The defined benefit plan assets are primarily common stocks and fixed
income securities. Plan assets exceeded the accumulated benefit
obligation at December 31, 1996 and 1997. The following table sets
forth the funded status of the plans at December 31, 1996 and 1997 (in
millions):
1996 1997
Benefit obligation -
Vested $180.9 $211.5
Nonvested 22.1 38.4
Accumulated benefit
obligation $203.0 $249.9
Plan assets at fair value $223.7 $289.2
Projected benefit obligation 230.7 307.4
Plan assets less projected
benefit obligation (7.0) (18.2)
Unrecognized transition asset (0.8) (0.5)
Unrecognized prior service cost 2.6 60.1
Unrecognized loss 32.6 (0.8)
Prepaid pension cost $ 27.4 $ 40.6
The weighted average discount rate used to determine the projected
benefit obligation was 7.5% and 7.25% as of December 31, 1996 and 1997,
respectively. The calculation assumed a weighted average rate of
increase for future compensation levels of 5.1% and 3.2% for 1996 and
1997, respectively. The expected long-term rate of return on plan
assets used in 1996 and 1997 was 10%.
Net pension expense for the defined benefit plans included the following
components for 1995, 1996 and 1997 (in millions):
1995 1996 1997
Service cost (benefits earned
during the period) $ 11.4 $ 15.9 $ 17.3
Interest cost on projected
benefit obligation 12.9 15.4 17.3
Actual return on assets (37.0) (23.6) (47.6)
Net amortization
and deferral 23.3 6.5 26.4
Net pension expense $ 10.6 $ 14.2 $ 13.4
The defined contribution plans are deferred compensation plans under
section 401(k) of the Internal Revenue Code. Some of these plans
require Company matching contributions based on a percentage of
participants' contributions. One plan has an Employee Stock Ownership
Plan (ESOP) feature. The ESOP owns 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.
Alaska and Horizon also maintain an unfunded, noncontributory benefit
plan for certain elected officers. The present value of unfunded
benefits for this plan was accrued as of December 31, 1996 and 1997.
Total expense for all pension plans was $22.2 million, $26.5 million and
$29.0 million, respectively, in 1995, 1996 and 1997.
Profit Sharing Plans
Alaska and Horizon have employee profit sharing plans. Profit sharing
expense for 1995, 1996 and 1997 was $-0-, $0.9 million and $13.5
million, respectively.
Other Postretirement 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 at December
31, 1996 and 1997 was $13.5 million and $15.7 million, respectively.
The APBO is unfunded and is included with other liabilities on the
Balance Sheet. Annual expense related to this subsidy is not considered
material to disclose.
Note 8. Income Taxes
Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expense for tax and financial reporting
purposes. Deferred tax assets and liabilities comprise the following at
December 31 (in millions):
1996 1997
Excess of tax over book
depreciation $146.7 $161.8
Training expense 0.8 0.2
Other - net 1.2 1.1
Gross deferred
tax liabilities 148.7 163.1
Loss carryforward (17.8) (0.5)
Alternative minimum tax (44.1) (50.1)
Capital leases (4.5) (4.5)
Ticket pricing adjustments (1.0) (1.2)
Frequent flyer program (6.6) (8.5)
Employee benefits (10.2) (7.8)
Aircraft return provisions (13.9) (16.0)
Deferred gains (3.1) (4.8)
Capitalized interest (1.5) (1.4)
Inventory obsolescence (7.1) (6.5)
Gross deferred tax assets (109.8) (101.3)
Net deferred
tax liabilities $ 38.9 $ 61.8
Current deferred tax asset $ (10.6) $ (10.5)
Noncurrent deferred
tax liability 49.5 72.3
Net deferred
tax liabilities $ 38.9 $ 61.8
After consideration of temporary differences, taxable income for 1997
was approximately $99 million, which was partially offset by net
operating losses generated in prior years. At December 31, 1997, no
federal loss carryforwards remain.
The components of income tax expense were as follows (in millions):
1995 1996 1997
Current tax expense:
Federal $ 5.0 $17.5 $ 26.4
State 0.3 0.9 1.9
Total current 5.3 18.4 28.3
Deferred tax expense:
Federal 9.2 6.7 18.5
State 2.2 1.2 4.4
Total deferred 11.4 7.9 22.9
Total tax expense $16.7 $26.3 $51.2
Income tax expense reconciles to the amount computed by applying the
U.S. federal rate of 35% to income before taxes as follows (in
millions):
1995 1996 1997
Income before
income tax $34.0 $64.3 $123.6
Expected tax expense $11.9 $22.5 $43.3
Nondeductible expenses 3.0 2.8 2.9
State income tax 1.8 1.0 4.1
Other - net -- -- 0.9
Actual tax expense $16.7 $26.3 $51.2
Effective tax rate 49.1% 40.9% 41.4%
Note 9. Earnings per Share
Statement of Financial Accounting Standards No. 128, Earnings per Share
(EPS) was adopted for 1997 calendar year reporting. FAS 128 replaces
"primary" and "fully-diluted" EPS with "basic" and "diluted" EPS. Basic
EPS is calculated by dividing net income by the average number of common
shares outstanding. Diluted EPS is calculated by dividing net income
plus the after-tax interest expense on convertible debt by the average
common shares outstanding plus additional common shares that would have
been outstanding if conversion of the convertible debt and exercise of
in-the-money stock options is assumed. EPS calculations were as follows
(in millions except per share amounts):
1995 1996 1997
Net income $17.3 $38.0 $72.4
Avg. shares outstanding 13.471 14.241 14.785
Basic earnings per share $1.28 $2.67 $4.90
Net income $17.3 $38.0 $72.4
After-tax interest on:
6-1/2% debentures 2.7 5.3 5.3
6-7/8% debentures 2.3 2.3 2.3
7-3/4% debentures 0.6 0.5 --
7-1/4% notes 3.3 -- --
Diluted EPS income $26.2 $46.1 $80.0
Avg. shares outstanding 13.471 14.241 14.785
Assumed conversion of:
6-1/2% debentures 3.151 6.151 6.151
6-7/8% debentures 1.608 1.608 1.608
7-3/4% debentures 0.468 0.361 --
7-1/4% notes 2.053 -- --
Assumed exercise of
stock options 0.014 0.097 0.145
Diluted EPS shares 20.765 22.458 22.689
Diluted earnings per share $1.26 $2.05 $3.53
Note 10. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in millions):
December 31, 1996
Carrying Fair
Amount Value
Cash and cash equivalents $ 49.4 $ 49.4
Marketable securities 52.4 52.2
Restricted deposits 64.6 64.6
Long-term debt 400.4 421.7
December 31, 1997
Carrying Fair
Amount Value
Cash and cash equivalents $102.6 $102.6
Marketable securities 110.1 110.1
Restricted deposits 67.5 67.5
Long-term debt 404.5 521.7
The fair value of cash equivalents approximates carrying value due to
the short maturity of these instruments. The fair value of marketable
securities is based on quoted market prices. The fair value of
restricted deposits approximates the carrying amount. The fair value of
publicly traded long-term debt is based on quoted market prices, and the
fair value of other debt approximates carrying value.
Note 11. Operating Segment Information
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, was adopted for 1997
calendar year reporting. Financial information for Alaska and Horizon
follows (in millions):
1995 1996 1997
Operating revenues:
Alaska $1,142.3 $1,297.3 $1,447.9
Horizon 279.5 301.3 303.6
Elimination of intercompany
revenues (4.3) (6.4) (12.1)
Consolidated 1,417.5 1,592.2 1,739.4
Depreciation and amortization expense:
Alaska 58.2 55.9 56.9
Horizon 9.9 11.4 11.2
Interest income:
Alaska 10.3 11.5 12.2
Horizon 0.4 0.3 0.1
Interest expense:
Alaska 40.3 29.7 25.0
Horizon 0.6 0.9 1.8
Pretax income:
Alaska 43.9 74.5 127.4
Horizon 4.2 0.3 6.3
Air Group (14.1) (10.5) (10.1)
Consolidated 34.0 64.3 123.6
Total assets:
Alaska 1,266.5 1,247.9 1,370.7
Horizon 154.9 173.3 158.0
Air Group 521.1 524.3 668.0
Elimination of intercompany
accounts (629.1) (634.1) (663.6)
Consolidated 1,313.4 1,311.4 1,533.1
Capital expenditures:
Alaska 87.9 229.9 293.0
Horizon 15.4 39.9 145.9
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, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item
14(a) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
January 26, 1998
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc. Schedule II
Additions
Beginning Charged (A) Ending
(In Millions) Balance to Expense Deductions Balance
Year Ended December 31, 1995
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2.3 $0.6 $(1.3) $1.6
Obsolescence allowance for flight
equipment spare parts $12.1 $2.7 $(1.3) $13.5
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $25.6 $7.5 $(0.6) $32.5
Year Ended December 31, 1996
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.6 $0.7 $(1.0) $1.3
Obsolescence allowance for flight
equipment spare parts $13.5 $3.5 $(0.9) $16.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $32.5 $9.4 $(3.3) $38.6
Year Ended December 31, 1997
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.3 $1.0 $(1.1) $1.2
Obsolescence allowance for flight
equipment spare parts $16.1 $3.4 $(1.5) $18.0
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $38.6 $11.4 $(6.8) $43.2
(A) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX
Certain of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference from the document
described in parenthesis. Certain others are filed herewith.
3.(i) Articles of Incorporation of Alaska Air Group, Inc. as amended through
May 21, 1996
3.(ii) Bylaws of Alaska Air Group, Inc., as amended through Feb. 8, 1996
(Exhibit 3.(ii) to 1995 10-K)
4.1 Amended and Restated Rights Agreement dated 8/7/96 between Alaska Air
Group, Inc. and The First National Bank of Boston, as Rights Agent
(Exhibit 2.1 to Form 8A-A filed 8/8/96)
10.1 Lease Agreement dated Feb. 1, 1979 between Alaska Airlines, Inc. and
the Alaska Industrial Development Authority (AIDA) (Exhibit 10-15 to
Registration Statement No. 2-70742)
10.2 Lease Agreement dated April 1, 1978 between Alaska Airlines, Inc. and
the AIDA (Exhibit 10-16 to Registration Statement No. 2-70742)
10.3 Management Incentive Plan (1992 Proxy Statement)
10.4 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)
10.5 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended through May
7, 1992 (Registration Statement No. 33-22358)
10.6 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended through May
19, 1992 (Registration Statement No. 33-52242)
#10.7 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
and Letter Agreement #1 dated January 22, 1990 (Exhibit 10-14 to 1990
10-K)
#10.8 Agreement dated September 18, 1996 between Alaska Airlines, Inc. and
Boeing for the purchase of 12 Boeing 737-400 aircraft (Exhibit 10.1 to
Third Quarter 1996 10-Q)
#10.9 Agreement dated August 28, 1996 between Horizon Air Industries, Inc.
and Bombardier for the purchase of 25 de Havilland Dash 8-200 aircraft
(Exhibit 10.2 to Third Quarter 1996 10-Q)
10.10 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and George D. Bagley (1996 Proxy Statement)
10.11 Alaska Air Group, Inc. 1996 Long-Term Incentive Equity Plan
(Registration Statement 333-09547)
10.12 Alaska Air Group, Inc. Non Employee Director Stock Plan (Registration
Statement 333-33727)
10.13 Alaska Air Group, Inc. Profit Sharing Stock Purchase Plan
(Registration Statement 333-39889)
10.14 Alaska Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity
Plan (Registration Statement 333-39899)
*10.15 Alaska Air Group, Inc. Supplementary Retirement Plan for Elected
Officers
*10.16 1995 Elected Officers Supplementary Retirement Plan
*12 Calculation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-K)
*23 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.