Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
|
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE
REQUIRED]
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For the
fiscal year ended December 31, 2009
OR
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE
REQUIRED]
|
For the
transition period from
to
Commission
File Number 000-19978
ALASKA
AIRLINES, INC.
An
Alaska Corporation
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92-0009235
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19300 International Boulevard, Seattle, Washington 98188
Telephone:
(206) 392-5040
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(I.R.S.
Employer Identification No.)
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Securities
registered pursuant to Section 12(b) of the
Act: None
Securities registered
pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer x Smaller reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes No x
The
registrant meets the conditions specified in General Instruction I(1)(a) and (b)
of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure
format permitted by General Instruction I(2).
The
registrant is a wholly-owned subsidiary of Alaska Air Group, Inc., a Delaware
corporation, and there is no market for the registrant’s common stock, par value
$1.00 per share. As of February 15, 2010, shares of common stock
outstanding totaled 500.
ALASKA
AIRLINES, INC.
ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
As used
in this Form 10-K, the terms “Alaska,” “our,” “we” and the “Company” refer to
Alaska Airlines, Inc., unless the context indicates otherwise.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, Section 21E of the Securities Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are those that predict or describe future events or trends and that
do not relate solely to historical matters. You can generally identify
forward-looking statements as statements containing the words “believe,”
“expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or
other similar expressions, although not all forward-looking statements contain
these identifying words. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical experience or the Company’s present expectations.
You
should not place undue reliance on our forward-looking statements because the
matters they describe are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our control.
Our
forward-looking statements are based on the information currently available to
us and speak only as of the date on which this report was filed with the SEC. We
expressly disclaim any obligation to issue any updates or revisions to our
forward-looking statements, even if subsequent events cause our expectations to
change regarding the matters discussed in those statements. Over time, our
actual results, performance or achievements will likely differ from the
anticipated results, performance or achievements that are expressed or implied
by our forward-looking statements, and such differences might be significant and
materially adverse to our shareholders. For a discussion of these and other risk
factors in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our
forward-looking statements in light of those risks as you read this
report.
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ITEM 1. OUR
BUSINESS
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Alaska
Airlines, Inc., an Alaska corporation, is a wholly-owned subsidiary of Alaska
Air Group, Inc. (Air Group), a Delaware corporation. Air Group is
also the parent company of Horizon Air Industries, Inc. (Horizon) and Alaska Air
Group Leasing. Alaska is a major airline organized in 1932 and incorporated in
the state of Alaska in 1937. We became a wholly-owned subsidiary of
Air Group in 1985 pursuant to reorganization into a holding company
structure. We operate an all-jet fleet with an average passenger trip
length in 2009 of 1,180 miles. Horizon is a regional airline that operates both
turboprop and jet aircraft
We
continue to distinguish ourselves from competitors by providing award-winning
customer service and differentiating amenities. Our outstanding employees and
excellent service in the form of advance seat assignments, expedited check-in
with Airport of the Future®, web check-in, flight alerts, an award-winning
frequent flyer program, well-maintained aircraft, a first-class section, and
other amenities are regularly recognized by independent studies, awards, and
surveys of air travelers. For example, Alaska has ranked “Highest in Customer
Satisfaction among Traditional Network Carriers” in both 2009 and 2008 by J.D.
Power and Associates and won the “Program of the Year” Freddie award for 2008
and 2007 for our Mileage Plan program. We are very proud of these awards and we
continue to strive to have the best customer service in the
industry.
WHERE YOU CAN FIND MORE INFORMATION
Our
filings with the Securities and Exchange Commission, including our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports are available on our website at www.alaskaair.com, free of
charge, as soon as reasonably practicable after the electronic filing of these
reports with the Securities and Exchange Commission. The information contained
on our website is not a part of this annual report on Form 10-K.
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ALASKA
RANKED “HIGHEST IN CUSTOMER SATISFACTION AMONG TRADITIONAL NETWORK
CARRIERS” IN BOTH
2009
AND 2008 BY
J.D. POWER AND
ASSOCIATES.
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OUR OPERATIONS
We offer
extensive north/south service within the western U.S., Canada and Mexico, and
passenger and dedicated cargo services to and within the state of Alaska. We
also provide long-haul east/west service to Hawaii and twelve cities in the
mid-continental and eastern U.S., primarily from Seattle, where we have our
largest concentration of departures; although we do offer long-haul departures
from other cities as well.
In 2009,
we carried 15.6 million revenue passengers in our mainline operations, and
we carry more passengers between Alaska and the U.S. mainland than any other
airline. Based on the number of passengers carried in 2009, our leading airports
are Seattle, Los Angeles, Anchorage and Portland. Based on 2009 revenues, the
leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles, and
Seattle-San Diego. At December 31, 2009, our operating fleet consisted of
115 jet aircraft, compared to 110 aircraft as of December 31,
2008.
Our passenger traffic by market is
presented below:
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2009
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2008
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|||||||
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West
Coast
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36 | % | 41 | % | ||||
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Within
Alaska and between Alaska and the U.S. mainland
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21 | % | 23 | % | ||||
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Transcon/midcon
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23 | % | 20 | % | ||||
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Mexico
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9 | % | 8 | % | ||||
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Hawaii
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9 | % | 5 | % | ||||
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Canada
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2 | % | 3 | % | ||||
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Total
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100 | % | 100 | % | ||||
Alaska
and Horizon integrate their flight schedules to provide convenient, competitive
connections between most points served by their systems. In 2009 and 2008,
approximately 22% and 23%, respectively, of Horizon’s passengers connected to
flights operated by Alaska.
For a
more in-depth discussion of our business, the industry, regulatory environment,
and other important matters, please see Air Group’s annual report on Form 10-K
filed with the Securities and Exchange Commission on February 19,
2010.
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ITEM 1A. RISK
FACTORS
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If any of
the following occurs, our business, financial condition and results of
operations could suffer. In such case, the trading price of our common stock
could also decline. We operate in a continually changing business
environment. In this environment, new risks may emerge and already
identified risks may vary significantly in terms of impact and likelihood of
occurrence. Management cannot predict such developments, nor can it assess the
impact, if any, on our business of such new risk factors or of events described
in any forward-looking statements.
ECONOMY
AND FINANCE
The
current economic climate has impacted demand for our product and could harm our
financial condition and results of operations if the environment does not
improve.
The
recent economic recession resulted in a decline in demand for air travel. If the
economic climate does not improve and traffic does not improve as we expect, we
will likely need to adjust our capacity plans, which could harm our business,
financial condition and results of operations.
Our
business, financial condition, and results of operations are substantially
exposed to the volatility of jet fuel prices. Increases in jet fuel costs would
harm our business.
Fuel
costs constitute a significant portion of our total operating expenses,
accounting for 20% and 35% of total operating expenses for the years ended
December 31, 2009 and 2008, respectively. Significant increases in average
fuel costs during the past several years have negatively affected our results of
operations.
Future
increases in the price of jet fuel will harm our financial condition and results
of operations, unless we are able to increase fares or add additional ancillary
fees to attempt to recover increasing fuel costs.
Our
indebtedness and other fixed obligations could increase the volatility of
earnings and otherwise restrict our activities and potentially lead to liquidity
constraints.
We have,
and will continue to have for the foreseeable future, a significant amount of
debt. Due to our high fixed costs, including aircraft lease commitments and debt
service, a decrease in revenues results in a disproportionately greater decrease
in earnings.
Our
outstanding long-term debt and other fixed obligations could have important
consequences. For example, they could:
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•
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limit
our ability to obtain additional financing to fund our future capital
expenditures, acquisitions, working capital or other
purposes;
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•
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require
us to dedicate a material portion of our operating cash flow to fund lease
payments and interest payments on indebtedness, thereby reducing funds
available for other purposes; and
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•
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limit
our ability to withstand competitive pressures and reduce our flexibility
in responding to changing business and economic conditions, including
reacting to the current economic
slowdown.
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Although
we have historically been able to generate sufficient cash flow from our
operations to pay our debt and other fixed obligations as they become due, we
cannot ensure we will be able to do so in the future. If we fail to do so, our
business could be harmed.
We are
required to comply with specific financial covenants in certain agreements. We
cannot be certain that we will be able to comply with these covenants or
provisions or that these requirements will not limit our ability to finance our
future operations or capital needs.
Our
continuing obligation to fund our traditional defined-benefit pension plans
could negatively affect our ability to compete in the marketplace.
Our
defined-benefit pension plan assets are subject to market risk. If market
returns are poor in the future, as they were in 2008, any future obligation to
make additional cash contributions in accordance with the Pension Protection Act
of 2006 could increase and harm our liquidity. Poor market returns also lead to
higher pension expense in our statement of operations.
Increases
in insurance costs or reductions in insurance coverage would harm our business,
financial condition and results of operations.
Aviation
insurers could increase their premiums in the event of additional terrorist
attacks, hijackings, airline accidents or other events adversely affecting the
airline industry. Furthermore, the full hull and liability war risk insurance
provided by the government is currently mandated through August 31, 2010.
Although the government may again extend the deadline for providing such
coverage, we cannot be certain that any extension will occur, or if it does, for
how long the extension will last. It is expected that, should the government
stop providing such coverage to the airline industry, the premiums charged by
aviation insurers for this coverage will be substantially higher than the
premiums currently charged by the government and the coverage will be much more
limited, including smaller aggregate limits and shorter cancellation periods.
Significant increases in insurance premiums would adversely affect our business,
financial condition and results of operations.
SAFETY,
COMPLIANCE AND OPERATIONAL EXCELLENCE
Our
reputation and financial results could be harmed in the event of an airline
accident or incident.
An
accident or incident involving one of our aircraft could involve a significant
loss of life and result in a loss of confidence in our airlines by the flying
public. We could experience significant potential claims from injured passengers
and surviving relatives, as well as costs for the repair or replacement of a
damaged aircraft and its consequential temporary or permanent loss from service.
We maintain liability insurance in amounts and of the type generally consistent
with industry practice. However, the amount of such coverage may not be adequate
to fully cover all claims and we may be forced to bear substantial losses from
an accident. Substantial claims resulting from an accident in excess of our
related insurance coverage would harm our business and financial results.
Moreover, any aircraft accident or incident, even if fully insured and even if
it does not involve one of our airlines, could cause a public perception that
our airlines or the equipment they fly is less safe or reliable than other
transportation alternatives, which would harm our business.
Changes
in government regulation imposing additional requirements and restrictions on
our operations or on the airports at which we operate could increase our
operating costs and result in service delays and disruptions.
Airlines
are subject to extensive regulatory and legal requirements, both domestically
and internationally, that involve significant compliance costs. In the last
several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA
have issued regulations that have required significant expenditures relating to
the maintenance and operation of airlines. Similarly, many aspects of an
airline’s operations are subject to increasingly stringent federal, state and
local laws protecting the environment.
Because
of significantly higher security and other costs incurred by airports since
September 11, 2001, many airports have increased their rates and charges to
air carriers. Additional laws, regulations, taxes, and airport rates and charges
have been proposed from time to time that could significantly increase the cost
of airline operations or reduce the demand for air travel. Although lawmakers
may impose these additional fees and view them as “pass-through” costs, we
believe that a higher total ticket price will influence consumer purchase and
travel decisions and may result in an overall decline in passenger traffic,
which would harm our business.
If
we do not maintain the privacy and security of customer-related information, we
could damage our reputation, incur substantial additional costs and become
subject to litigation.
We
receive, retain, and transmit certain personal information about our
customers. In addition, our online operations at alaskaair.com depend
on the secure transmission of confidential information over public networks,
including credit card information. A compromise of our security
systems or those of other business partners that results in our customers’
personal information being obtained by unauthorized persons could adversely
affect our reputation with our customers and others, as well as our operations,
results of operations, financial position and liquidity, and could result in
litigation against us or the imposition of penalties. In addition, a
security breach could require that we expend significant additional resources
related to the security of information systems and could result in a disruption
of our operations, particularly our online sales operations.
Additionally,
the use of individually identifiable data by our business and our business
partners is regulated at the international, federal and state
levels. Privacy and information security laws and regulations change,
and compliance with them may result in cost increases due to necessary systems
changes and the development of new administrative processes.
The
airline industry continues to face potential security concerns and related
costs.
The
terrorist attacks of September 11, 2001 and their aftermath negatively
affected the airline industry, including our company. Additional terrorist
attacks, the fear of such attacks or other hostilities involving the U.S. could
have a further significant negative effect on the airline industry, including
us, and could:
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•
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significantly
reduce passenger traffic and yields as a result of a potentially dramatic
drop in demand for air travel;
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•
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significantly
increase security and insurance
costs;
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•
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make
war risk or other insurance unavailable or extremely
expensive;
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•
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increase
fuel costs and the volatility of fuel
prices;
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•
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increase
costs from airport shutdowns, flight cancellations and delays resulting
from security breaches and perceived safety threats;
and
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•
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result
in a grounding of commercial air traffic by the
FAA.
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The
occurrence of any of these events would harm our business, financial condition
and results of operations.
Our
operations are often affected by factors beyond our control, including delays,
cancellations, and other conditions, which could harm our financial condition
and results of operations.
Like
other airlines, our operations often are affected by delays, cancellations and
other conditions caused by factors largely beyond our control.
A local
dam in the Kent Valley near the Seattle-Tacoma International Airport is partly
compromised. Many of the services necessary for our operations are
located in the valley, e.g., fuel supply, power, catering, reservations call
centers, etc. If the area experiences heavy rains, flooding could
occur and our operations could be disrupted. The Army Corps of
Engineers estimates that the dam will be repaired within three to five
years. We have contingency plans in place and are continuing to
monitor the situation.
Other
conditions that might impact our operations include:
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•
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air
traffic congestion at airports or other air traffic control
problems;
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•
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adverse
weather conditions;
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•
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increased
security measures or breaches in
security;
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•
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international
or domestic conflicts or terrorist activity;
and
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•
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other
changes in business conditions.
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Due to
our geographic area of operations, we believe a large portion of our operation
is more susceptible to adverse weather conditions than that of many of our
competitors. A general reduction in airline passenger traffic as a result of any
of the above-mentioned factors could harm our business, financial condition and
results of operations.
STRATEGY
We
depend on a few key markets to be successful.
Our
strategy is to focus on serving a few key markets, including Seattle, Portland,
Los Angeles and Anchorage. A significant portion of our flights occurs to and
from our Seattle hub. In 2009, passengers to and from Seattle accounted for 64%
of Air Group’s total passengers.
We
believe that concentrating our service offerings in this way allows us to
maximize our investment in personnel, aircraft, and ground facilities, as well
as to gain greater advantage from sales and marketing efforts in those regions.
As a result, we remain highly dependent on our key markets. Our business could
be harmed by any circumstances causing a reduction in demand for air
transportation in our key markets. An increase in competition in our key markets
could also cause us to reduce fares or take other competitive measures that
could harm our business, financial condition and results of
operations.
Our
failure to successfully meet cost reduction goals at could harm our
business.
We
continue to strive toward aggressive cost-reduction goals that are an important
part of our business strategy of offering the best value to passengers through
competitive fares while achieving acceptable profit margins and return on
capital. However, with our capacity reductions in 2009 and increased costs in
areas such as wages and benefits, we experienced a 10% increase in non-fuel unit
cost. If we are unable to reduce our non-fuel unit costs over the long-term and
achieve targeted profitability, we will likely not be able to grow our business
in the future and therefore our financial results may suffer.
We
rely on third-party vendors for certain critical activities.
We have
historically relied on outside vendors for a variety of services and functions
critical to our business, including airframe and engine maintenance, ground
handling, fueling, computer reservation system hosting and software maintenance.
As part of our cost-reduction efforts, our reliance on outside vendors has
increased and may continue to do so in the future. In recent years, Alaska has
subcontracted its heavy aircraft maintenance, fleet service, facilities
maintenance, and ground handling services at certain airports, including
Seattle-Tacoma International Airport, to outside vendors.
Our use
of outside vendors increases our exposure to several risks. In the event that
one or more vendors goes into bankruptcy, ceases operation or fails to perform
as promised, replacement services may not be readily available at competitive
rates, or at all. Although we believe that our vendor oversight and quality
control is among the best in the industry, if one of our vendors fails to
perform adequately we may experience increased costs, delays, maintenance
issues, safety issues or negative public perception of our airline. Vendor
bankruptcies, unionization, regulatory compliance issues or significant changes
in the competitive marketplace among suppliers could adversely affect vendor
services or force Alaska to renegotiate existing agreements on less favorable
terms. These events could result in disruptions in Alaska’s operations or
increases in its cost structure.
We
are dependent on a limited number of suppliers for aircraft and
parts.
We are
dependent on Boeing as our sole supplier for aircraft and many of its aircraft
parts. Additionally, we are dependent on a sole supplier for aircraft engines.
As a result, we are more vulnerable to any problems associated with the supply
of those aircraft and parts, including design defects, mechanical problems,
contractual performance by the manufacturers, or adverse perception by the
public that would result in customer avoidance or in actions by the FAA
resulting in an inability to operate our aircraft.
INFORMATION
TECHNOLOGY
We
rely heavily on automated systems to operate our business, and a failure of
these systems or by their operators could harm our business.
We depend
on automated systems to operate our business, including our airline reservation
system, our telecommunication systems, our website, our maintenance systems, our
kiosk check-in terminals, and other systems. Substantially all of our tickets
are issued to passengers as electronic tickets and the majority of our customers
check in using our website or our airport kiosks. We depend on our reservation
system to be able to issue, track and accept these electronic tickets. In order
for our operations to work efficiently, our website, reservation system, and
check-in systems must be able to accommodate a high volume of traffic, maintain
secure information, and deliver important flight information. Substantial or
repeated website, reservations system or telecommunication systems failures
could reduce the attractiveness of our services and cause our customers to
purchase tickets from another airline. In addition, we rely on other automated
systems for crew scheduling, flight dispatch, and other operational needs.
Disruption in, changes to, or a breach of these systems could result in the loss
of important data, an increase of our expenses and a possible temporary
cessation of our operations.
BRAND
AND REPUTATION
A
significant increase in labor costs or change in key personnel could adversely
affect our business and results of operations.
We
compete against the major U.S. airlines and other businesses for labor in many
highly skilled positions. If we are unable to hire, train and retain qualified
employees at a reasonable cost, or if we lose the services of key personnel, we
may be unable to grow or sustain our business. In such case, our operating
results and business prospects could be harmed. We may also have difficulty
replacing management or other key personnel who leave and, therefore, the loss
of any of these individuals could harm our business.
Labor
costs are a significant component of our total expenses, accounting for
approximately 31% and 23% of our total operating expenses in 2009 and 2008,
respectively. As of December 31, 2009, labor unions represented
approximately 82% of our employees. Each of our represented employee groups has
a separate collective bargaining agreement, and could make demands that would
increase our operating expenses and adversely affect our financial performance
if we agree to them.
Although
we have been successful in negotiating new contracts or extending existing
contracts with a number of workgroups recently, future uncertainty around open
contracts could be a distraction to many employees, reduce employee engagement
in our business and divert management’s attention from other projects and
issues.
We
rely on partner airlines for codeshare and frequent flyer marketing
arrangements.
We are a
party to marketing agreements with a number of domestic and international air
carriers, or “partners,” including, but not limited to, American Airlines and
Delta Air Lines. These agreements provide that certain flight segments operated
by us are held out as partner “codeshare” flights and that certain partner
flights are held out for sale as Alaska codeshare flights. In addition, the
agreements generally provide that members of our Mileage Plan program can earn
miles on or redeem miles for partner flights and vice versa. We receive a
significant amount of revenue from flights sold under codeshare arrangements. In
addition, we believe that the frequent flyer arrangements are an important part
of our Mileage Plan program. The loss of a significant partner or certain
partner flights could have a negative effect on our revenues or the
attractiveness of our Mileage Plan, which we believe is a source of competitive
advantage.
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ITEM 1B. UNRESOLVED
STAFF COMMENTS
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None
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ITEM 2.
PROPERTIES
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AIRCRAFT
The
following tables describe the aircraft we operate and their average age at
December 31, 2009:
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Aircraft
Type
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Passenger
Capacity
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Owned
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Leased
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Total
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Average
Age
in
Years
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|||||||||||||||||
| Boeing: | ||||||||||||||||||||||
|
737-400
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144 | 3 | 24 | 27 | 14.1 | |||||||||||||||||
| 737-400C* | 72 | 5 | — | 5 | 17.3 | |||||||||||||||||
| 737-400F* | — | 1 | — | 1 | 10.8 | |||||||||||||||||
| 737-700 | 124 | 17 | 2 | 19 | 9.1 | |||||||||||||||||
| 737-800 | 157 | 41 | 10 | 51 | 2.3 | |||||||||||||||||
| 737-900 | 172 | 12 | — | 12 | 7.4 | |||||||||||||||||
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Total
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79 | 36 | 115 | 7.5 | ||||||||||||||||||
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*
|
C=Combination
freighter/passenger; F=Freighter
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Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” discusses future orders and options for additional
aircraft.
Most of
our owned aircraft secure long-term debt arrangements or collateralize our
revolving credit facility.
Our
leased 737-400, 737-700, and 737-800 aircraft have lease expiration dates
between 2010 and 2016, in 2010, and between 2015 and 2021, respectively. We 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. We have four MD-80 aircraft,
one owned and three under long-term lease arrangements through 2012, currently
in temporary storage.
We
completed our transition to an all-Boeing operating fleet during
2008.
The
following table displays the currently anticipated fleet counts for Alaska as of
the end of each quarter in 2010.
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31-Mar-10
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30-Jun-10
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30-Sep-10
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31-Dec-10
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|||||||||||||||
| 737-400 | 24 | 24 | 24 | 23 | ||||||||||||||
| 737-400C* | 5 | 5 | 5 | 5 | ||||||||||||||
| 737-400F* | 1 | 1 | 1 | 1 | ||||||||||||||
| 737-700 | 19 | 19 | 18 | 17 | ||||||||||||||
| 737-800 | 51 | 55 | 55 | 55 | ||||||||||||||
| 737-900 | 12 | 12 | 12 | 12 | ||||||||||||||
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Totals
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112 | 116 | 115 | 113 | ||||||||||||||
|
*
|
C=Combination
freighter/passenger; F=Freighter
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GROUND FACILITIES AND SERVICES
We lease
ticket counters, gates, cargo and baggage space, office space, and other support
areas at the majority of the airports they serve. We also own terminal buildings
in various cities in the state of Alaska.
We have
centralized operations in several buildings located at or near Seattle-Tacoma
International Airport (Sea-Tac) near Seattle, Wash. These include a five-bay
hangar and shops complex (used primarily for line maintenance), a flight
operations and training center, an air cargo facility, an information technology
office and datacenter, an office building, and corporate headquarters complex.
We also lease a stores warehouse, and office space for a customer service and
reservation facility in Kent, Wash. Our major facilities outside of Seattle
include a regional headquarters building, an air cargo facility and a
hangar/office facility in Anchorage, as well as leased reservations facilities
in Phoenix, Ariz. and Boise, Idaho. We use our own employees for ground handling
services at most of our airports in the state of Alaska. At other airports
throughout our system, those services are contracted to various third-party
vendors.
|
ITEM 3. LEGAL
PROCEEDINGS
|
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) alleging that we violated the CBA by,
among other things, subcontracting the ramp service operation in Seattle. The
dispute was referred to an arbitrator and hearings on the grievance commenced in
January 2007, with a final hearing date in August 2007. In February 2010, the
arbitrator issued a final decision. The decision does not require us
to alter the existing subcontracting arrangements for ramp service in
Seattle. The award sustains the right to subcontract other operations
in the future so long as the requirements of the CBA are met. The
award imposes monetary remedies which have not been fully calculated, but are
not expected to be material.
Other
items
We are a
party to routine litigation matters incidental to our business and with respect
to which no material liability is expected.
Management
believes the ultimate disposition of these matters is not likely to materially
affect our financial position or results of operations. This
forward-looking statement is based on management’s current understanding of the
relevant law and facts, and it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.
|
ITEM 5. MARKET FOR THE REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
All of
our outstanding shares are owned by Air Group. As of February 15,
2010, we had 500 shares of common stock, $1.00 par value per share, issued and
outstanding. There is no established public trading market for our
stock.
|
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
As
permitted by General Instruction I(2)(a), the following section contains
management’s narrative analysis of our results of operations as of and for the
year ended December 31, 2009. See Air Group’s Annual Report on Form
10-K filed February 19, 2010 for further discussion and analysis.
OVERVIEW
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand the
Company, our operations and our present business environment. MD&A is
provided as a supplement to – and should be read in conjunction with – our
financial statements and the accompanying notes. All statements in the following
discussion that are not statements of historical information or descriptions of
current accounting policy are forward-looking statements. Please consider our
forward-looking statements in light of the risks referred to in this report’s
introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk
Factors.” This overview summarizes the MD&A, which includes the following
sections:
|
|
•
|
Year in
Review—highlights from 2009 outlining some of the major events that
happened during the year and how they affected our financial
performance.
|
|
|
•
|
Results of
Operations—an in-depth analysis of the results of our operations
for 2009 compared to 2008. We believe this analysis will help
the reader better understand our statements of operations. Financial and
statistical data are also included here. This section includes
forward-looking statements regarding our view of
2010.
|
YEAR IN REVIEW
In 2009,
we reported net income of $109.7 million compared to a net loss of $96.4 million
in 2008. The $206.1 million improvement was primarily due to the $613.4 million
decline in aircraft fuel costs, partially offset by a $215.3 million decline in
operating revenues. The decline in fuel cost was substantially driven
by the 43% reduction in the raw cost of fuel per gallon. The 6.7%
decline in operating revenues can be attributed to the following:
|
|
•
|
a
7.8% decline in mainline passenger revenue because of demand weakness
stemming from the economic recession;
and
|
|
|
•
|
a
one-time benefit of $42.3 million recorded in 2008 associated with a
change in our Mileage Plan terms.
|
These
declines were offset by:
|
|
•
|
our
new $15 first bag service charge, which went into effect on July 7,
2009. In 2009, the fee generated $39.7 million of incremental
revenue.
|
|
|
•
|
a
$39.7 million improvement in Mileage Plan commission revenues included in
“Other-net.”
|
See
“Results of Operations” below for further discussion of changes in revenues and
operating expenses.
Accomplishments
and Highlights
Accomplishments
and highlights from 2009 include:
|
|
•
|
We
improved our operational performance again in 2009 as measured by on-time
arrivals and completion rate as reported to the Department of
Transportation (DOT). We led the ten largest carriers in on-time
performance for eight months of the
year.
|
|
|
•
|
For
the second year in a row, we ranked “Highest in Customer Satisfaction
among Traditional Network Carriers” in 2009 by J.D. Power and
Associates.
|
|
|
•
|
We
won the 2008 “Program of the Year” Freddie award for our Mileage Plan
program in 2009. This is the fifth time that we have won this
highest award and the second year in a row. We also won top
honors for “Best Web Site,” “Best Elite-Level Program,” and “Best Member
Communications.”
|
|
|
•
|
During
the year, we reached agreements with several of our labor groups that
provide for improved productivity and a common gain-sharing
formula. See “Update on Labor Negotiations” below for further
discussion.
|
|
|
•
|
For
the year, our employees earned $61.6 million in incentive pay for meeting
certain operational and financial goals. We also contributed nearly $150
million to our defined benefit pension
plans.
|
Update
on Labor Negotiations
We have
had success recently with new bargaining agreements or contract extensions with
a number of represented employees. All of the new agreements or
extensions ratified in 2009 include participation by the represented employees
in Air Group’s Performance-Based Pay (PBP) incentive plan as approved by the
Compensation Committee of the Board of Directors. PBP is described in
Note 8 to the financial statements. Our ultimate goal is to include all
employees in PBP in order to have common goals and targets that everyone is
working together to achieve.
New Pilot
Contract
On May
19, 2009, our pilots, represented by the Air Line Pilots Association, ratified a
new four-year contract. This negotiated agreement replaces the
contract that had been in place since May 1, 2005. The terms of the
2005 contract were the result of an arbitrator’s decision and included immediate
wage reductions that averaged approximately 26% across the pilot group, work
rule changes, and higher employee health care contributions.
The
significant terms of the new contract are as follows:
|
•
|
Average
pilot wages increased approximately 14% effective April 1,
2009. The contract also provides for step increases of 1.5% on
the first two anniversary dates of the contract and 1.8% on the third
anniversary.
|
|
•
|
Participation
in PBP.
|
|
•
|
The
defined-benefit pension plan for pilots is now closed to new
entrants. Newly hired pilots will participate in a
defined-contribution plan that includes a company contribution equal to
13.5% of eligible wages. Incumbents had the option of (1)
remaining in the defined-benefit pension plan, (2) moving to a new blended
option with lower service credit under the defined benefit plan and higher
401(k) contribution or (3) voluntarily freezing service credit in the
existing defined benefit plan in exchange for a higher 401(k)
contribution.
|
|
•
|
Upon
retirement, pilots are now allowed to receive a cash payment of an amount
equivalent to 25% of their accrued sick leave balance multiplied by their
hourly rate.
|
|
•
|
The
new contract provides for better productivity and flexibility. We
expect to realize savings from these productivity enhancements when we
resume capacity growth.
|
Pilots
received a one-time bonus of $20.3 million in the aggregate following
ratification of the contract. The transition expense associated with
establishing the sick-leave payout program described above was $15.5
million. These items have been combined and reported in 2009 as “New
pilot contract transition costs” in the statements of operations.
Contract
Extensions
In March
2009, our flight attendants, represented by the AFA, ratified a two-year
contract extension. The contract will become amendable in April
2012. As part of the contract, flight attendants will receive a 1.5%
pay increase on May 1, 2010 and May 1, 2011 and will participate in
PBP. The flight attendants received a bonus upon ratification of the
contract totaling $2.0 million in the aggregate.
In August
2009, we reached an agreement on a two-year contract extension with our aircraft
technicians. The extended contract, which becomes amendable on
October 17, 2011, provides technicians with 1.5% pay scale increases in October
2009 and 2010. Technicians now also participate in PBP. The technicians received
a bonus upon ratification of the contract totaling $1.3 million in the
aggregate.
In
December 2009, our ramp service and stores agents, represented by the IAM,
ratified a two-year extension of their collective bargaining agreement, which
will now become amendable on July 19, 2012. This agreement includes
participation in PBP, a 1.5% pay increase in June 2010 and 2011, and a signing
bonus of approximately $0.5 million in the aggregate.
Our
clerical, office and passenger service employees (COPS), also represented by the
IAM, rejected a two-year extension proposal nearly identical to the terms of the
proposal ratified by the ramp service employees and stores agents. As
a result, COPS employees are the only remaining work group, besides station
personnel in Mexico, that participate in a profit-sharing plan other than
PBP.
New
Mileage Plan Affinity Card Agreement
In June
2009, we revised our Mileage Plan affinity credit card agreement with Bank of
America. This revised agreement enhances the economics of our Mileage
Plan program and provides for, among other things, an increase in the rate at
which we sell miles to the bank. This revised agreement was effective
January 1, 2009 and expires on December 31, 2014.
First
Bag Service Charge
In 2009,
we joined nearly all major domestic carriers in charging for a first checked
bag. The $15 service charge began July 7, 2009. This fee
does not apply to our MVP or MVP Gold Mileage Plan members, for those traveling
solely with the state of Alaska, or for certain other
passengers. This service charge generated $39.7 million of
incremental revenue in the last six months of 2009.
New
Baggage Service Guarantee
Concurrent
with the first bag service charge, we introduced a guarantee to compensate
passengers if their bags are not at the baggage claim within 25 minutes after
their flight parks at the gate. Passengers have the choice of 2,500
Mileage Plan miles or a $25 voucher that can be used on a future
flight. This guarantee is for all passengers with luggage, including
those not subject to the bag service charge. We believe that we are
the only airline that offers this guarantee to customers. To date, the cost of
providing this guarantee has been minimal as our baggage performance has been
excellent.
New
Markets
In 2009,
we added several new cities and non-stop routes to our overall
network. Those new routes are:
|
New
Non-Stop Route
|
Frequency
|
Start
Date
|
|
Between
Bellingham, Wash. and Las Vegas
|
4 x
weekly
|
6/25/2009
|
|
Between
Portland, Ore. and Maui
|
Daily
|
7/3/2009
|
|
Between
Seattle and Austin, Tex.
|
Daily
|
8/3/2009
|
|
Between
San Jose and Austin
|
Daily
|
9/2/2009
|
|
Between
Seattle and Houston
|
Daily
|
9/23/2009
|
|
Between
Seattle and Atlanta
|
Daily
|
10/23/2009
|
|
Between
Oakland, Calif. and Maui
|
4 x
weekly
|
11/9/2009
|
|
Between
Oakland and Kona
|
3 x
weekly
|
11/10/2009
|
|
Service
between Portland and Chicago
|
Daily
|
11/16/2009
|
Outlook
Our
primary focus every year is to run safe, compliant and reliable
operations. In addition to our primary objective, in 2010 our key
initiative is to maintain our focus on optimizing revenue. Our
specific focus will be on the way we merchandise fares and ancillary products
and services, as well as broader employee involvement in our marketing
efforts. In addition to the focus on revenue, both of our airlines
have initiatives under way designed to reduce costs. We are focused on improving
productivity and controlling overhead.
Our
fourth quarter 2009 revenue performance marked the first quarter-over-quarter
improvement in the top line in 2009, providing a solid outlook as we move into
2010.
For the
first quarter, our advance booked load factors are up significantly, although we
expect the higher load factors, which were driven by deep price discounting,
will be offset by a decline in yields, resulting in only modest unit revenue
increases in the first quarter.
RESULTS OF OPERATIONS
2009 COMPARED WITH 2008
Our
pretax income for 2009 was $183.8 million compared to a pretax loss of $153.3
million in 2008. Items that impact the comparability between the
periods are as follows:
|
|
•
|
Both periods include adjustments to reflect timing
of gain and loss recognition resulting from mark-to-market fuel hedge
accounting. For 2009, we recognized net mark-to-market gains of
$73.7 million, compared to net losses of $118.9 million in
2008.
|
|
|
•
|
2009 included the new pilot contract transition
costs of $35.8 million.
|
|
|
•
|
2008 included fleet transition costs of $47.5
million related to the transition out of the MD-80
fleet.
|
|
|
•
|
2008 included realized losses on the early
termination of fuel-hedge contracts originally scheduled to settle in 2009
and 2010 of $41.5 million.
|
|
|
•
|
2008 included a $42.3 million benefit related to a
change in the terms of our Mileage Plan
program.
|
|
|
•
|
2008 included restructuring charges of $12.9
million related to the reduction in work
force.
|
ADJUSTED
(NON-GAAP) RESULTS
We
believe disclosure of earnings excluding the impact of these individual charges
is useful information to readers of this report because:
|
|
|
|
|
•
|
It
is consistent with how we present information in our quarterly earnings
press releases;
|
|
|
•
|
We
believe it is the basis by which we are evaluated by industry
analysts;
|
|
|
•
|
Our
results excluding these items are most often used in internal management
and board reporting and
decision-making;
|
|
|
•
|
Our
results excluding these adjustments serve as the basis for our various
employee incentive plans, thus the information allows investors to better
understand the changes in variable incentive pay expense in our statements
of operations; and
|
|
|
•
|
It
is useful to monitor performance without these items as it improves a
reader’s ability to compare our results to those of other
airlines.
|
Although
we are presenting these non-GAAP amounts for the reasons above, investors and
other readers should not necessarily conclude that these amounts are
non-recurring, infrequent, or unusual in nature.
Excluding
the items noted above, and as shown in the following table, our pretax income
for 2009 was $145.9 million, compared to $25.2 million in 2008.
|
Years
Ended December 31
|
||||||||
|
(in millions)
|
2009
|
2008
|
||||||
|
Income
before income taxes, excluding items below
|
$ | 145.9 | $ | 25.2 | ||||
|
Change
in Mileage Plan terms
|
-- | 42.3 | ||||||
|
New
pilot contract transition costs
|
(35.8 | ) | -- | |||||
|
Restructuring
charges
|
-- | (12.9 | ) | |||||
|
Fleet
transition costs – MD-80
|
-- | (47.5 | ) | |||||
|
Mark-to-market
fuel hedge adjustments
|
73.7 | (118.9 | ) | |||||
|
Realized
losses on hedge portfolio restructuring
|
-- | (41.5 | ) | |||||
|
Income
(loss) before income taxes as reported
|
$ | 183.8 | $ | (153.3 | ) | |||
|
Three Months Ended December
31
|
Year Ended December 31
|
|||||||||||||||||||||||||||||||
|
Financial
Data (in
millions):
|
2009
|
2008
|
% Change
|
2009
|
2008
|
% Change
|
2007
|
% Change
|
||||||||||||||||||||||||
|
Operating
Revenues:
|
||||||||||||||||||||||||||||||||
|
Passenger
|
$ | 594.5 | $ | 602.5 | (1.3 | ) | $ | 2,438.8 | $ | 2,643.7 | (7.8 | ) | $ | 2,547.2 | 3.8 | |||||||||||||||||
|
Freight
and mail
|
22.5 | 22.2 | 1.4 | 91.5 | 99.3 | (7.9 | ) | 94.2 | 5.4 | |||||||||||||||||||||||
|
Other
- net
|
50.8 | 34.0 | 49.4 | 187.3 | 135.2 | 38.5 | 147.1 | (8.1 | ) | |||||||||||||||||||||||
|
Change
in Mileage Plan terms
|
- | - |
NM
|
- | 42.3 |
NM
|
- |
NM
|
||||||||||||||||||||||||
|
Total
mainline operating revenues
|
667.8 | 658.7 | 1.4 | 2,717.6 | 2,920.5 | (6.9 | ) | 2,788.5 | 4.7 | |||||||||||||||||||||||
|
Passenger
- purchased capacity
|
77.0 | 66.9 | 15.1 | 288.4 | 300.8 | (4.1 | ) | 281.4 | 6.9 | |||||||||||||||||||||||
|
Total
Operating Revenues
|
744.8 | 725.6 | 2.6 | 3,006.0 | 3,221.3 | (6.7 | ) | 3,069.9 | 4.9 | |||||||||||||||||||||||
|
Operating
Expenses:
|
||||||||||||||||||||||||||||||||
|
Wages
and benefits
|
197.7 | 183.8 | 7.6 | 792.6 | 742.7 | 6.7 | 753.9 | (1.5 | ) | |||||||||||||||||||||||
|
Variable
incentive pay
|
17.6 | 5.0 | 252.0 | 61.6 | 15.8 | 289.9 | 13.5 | 17.0 | ||||||||||||||||||||||||
|
Aircraft
fuel, including hedging gains and losses
|
143.1 | 298.4 | (52.0 | ) | 549.0 | 1,162.4 | (52.8 | ) | 737.5 | 57.6 | ||||||||||||||||||||||
|
Aircraft
maintenance
|
40.5 | 38.5 | 5.2 | 169.9 | 150.6 | 12.8 | 149.8 | 0.5 | ||||||||||||||||||||||||
|
Aircraft
rent
|
27.2 | 23.8 | 14.3 | 109.0 | 106.2 | 2.6 | 112.8 | (5.9 | ) | |||||||||||||||||||||||
|
Landing
fees and other rentals
|
42.4 | 40.8 | 3.9 | 166.8 | 167.7 | (0.5 | ) | 170.1 | (1.4 | ) | ||||||||||||||||||||||
|
Contracted
services
|
30.3 | 29.7 | 2.0 | 118.9 | 130.2 | (8.7 | ) | 124.1 | 4.9 | |||||||||||||||||||||||
|
Selling
expenses
|
27.9 | 20.4 | 36.8 | 104.7 | 116.0 | (9.7 | ) | 129.3 | (10.3 | ) | ||||||||||||||||||||||
|
Depreciation
and amortization
|
45.9 | 42.7 | 7.5 | 178.5 | 165.9 | 7.6 | 142.3 | 16.6 | ||||||||||||||||||||||||
|
Food
and beverage service
|
12.8 | 11.2 | 14.3 | 47.7 | 48.3 | (1.2 | ) | 46.9 | 3.0 | |||||||||||||||||||||||
|
Other
|
41.9 | 40.1 | 4.5 | 161.2 | 170.3 | (5.3 | ) | 173.1 | (1.6 | ) | ||||||||||||||||||||||
|
New
pilot contract transition costs
|
- | - |
NM
|
35.8 | - |
NM
|
- |
NM
|
||||||||||||||||||||||||
|
Restructuring
charges
|
- | 9.2 |
NM
|
- | 12.9 |
NM
|
- |
NM
|
||||||||||||||||||||||||
|
Fleet
transition costs - MD-80
|
- | - |
NM
|
- | 47.5 |
NM
|
- |
NM
|
||||||||||||||||||||||||
|
Total
mainline operating expenses
|
627.3 | 743.6 | (15.6 | ) | 2,495.7 | 3,036.5 | (17.8 | ) | 2,553.3 | 18.9 | ||||||||||||||||||||||
|
Purchased
capacity costs
|
75.2 | 66.9 | 12.4 | 281.5 | 313.7 | (10.3 | ) | 302.8 | 3.6 | |||||||||||||||||||||||
|
Total
Operating Expenses
|
702.5 | 810.5 | (13.3 | ) | 2,777.2 | 3,350.2 | (17.1 | ) | 2,856.1 | 17.3 | ||||||||||||||||||||||
|
Operating
Income (Loss)
|
42.3 | (84.9 | ) |
NM
|
228.8 | (128.9 | ) |
NM
|
213.8 |
NM
|
||||||||||||||||||||||
|
Interest
income
|
9.4 | 13.1 | 38.6 | 51.3 | 64.8 | |||||||||||||||||||||||||||
|
Interest
expense
|
(20.6 | ) | (25.0 | ) | (88.1 | ) | (92.5 | ) | (86.2 | ) | ||||||||||||||||||||||
|
Interest
capitalized
|
1.6 | 4.1 | 7.3 | 20.2 | 25.7 | |||||||||||||||||||||||||||
|
Other
- net
|
2.5 | (0.7 | ) | (2.8 | ) | (3.4 | ) | (3.1 | ) | |||||||||||||||||||||||
| (7.1 | ) | (8.5 | ) | (45.0 | ) | (24.4 | ) | 1.2 | ||||||||||||||||||||||||
|
Income
(Loss) Before Income Tax
|
$ | 35.2 | $ | (93.4 | ) |
NM
|
$ | 183.8 | $ | (153.3 | ) |
NM
|
$ | 215.0 |
NM
|
|||||||||||||||||
|
Mainline
Operating Statistics:
|
||||||||||||||||||||||||||||||||
|
Revenue
passengers (000)
|
3,765 | 3,772 | (0.2 | ) | 15,561 | 16,809 | (7.4 | ) | 17,558 | (4.3 | ) | |||||||||||||||||||||
|
RPMs
(000,000) "traffic"
|
4,550 | 4,302 | 5.8 | 18,362 | 18,712 | (1.9 | ) | 18,451 | 1.4 | |||||||||||||||||||||||
|
ASMs
(000,000) "capacity"
|
5,675 | 5,590 | 1.5 | 23,144 | 24,218 | (4.4 | ) | 24,208 | 0.0 | |||||||||||||||||||||||
|
Passenger
load factor
|
80.2 | % | 77.0 | % |
3.2
|
pts | 79.3 | % | 77.3 | % |
2.0
|
pts | 76.2 | % |
1.1
|
pts | ||||||||||||||||
|
Yield
per passenger mile
|
13.07 | ¢ | 14.01 | ¢ | (6.7 | ) | 13.28 | ¢ | 14.13 | ¢ | (6.0 | ) | 13.81 | ¢ | 2.3 | |||||||||||||||||
|
Operating
revenues per ASM "RASM"
|
11.77 | ¢ | 11.78 | ¢ | (0.1 | ) | 11.74 | ¢ | 12.06 | ¢ | (2.7 | ) | 11.52 | ¢ | 4.7 | |||||||||||||||||
|
Change
in Mileage Plan terms per ASM
|
- | - |
NM
|
- | 0.17 | ¢ |
NM
|
- |
NM
|
|||||||||||||||||||||||
|
Passenger
revenue per ASM “PRASM”
|
10.48 | ¢ | 10.78 | ¢ | (2.8 | ) | 10.54 | ¢ | 10.92 | ¢ | (3.5 | ) | 10.52 | ¢ | 3.7 | |||||||||||||||||
|
Operating
expenses per ASM
|
11.05 | ¢ | 13.30 | ¢ | (16.9 | ) | 10.78 | ¢ | 12.54 | ¢ | (14.0 | ) | 10.55 | ¢ | 18.9 | |||||||||||||||||
|
Operating
expenses per ASM, excluding fuel, new pilot contract transition costs,
restructuring charges and fleet transition costs
|
8.53 | ¢ | 7.80 | ¢ | 9.4 | 8.26 | ¢ | 7.49 | ¢ | 10.2 | 7.50 | ¢ | (0.1 | ) | ||||||||||||||||||
|
Aircraft
fuel cost per gallon
|
$ | 1.91 | $ | 3.95 | (51.6 | ) | $ | 1.81 | $ | 3.48 | (48.0 | ) | $ | 2.08 | 67.3 | |||||||||||||||||
|
Economic
fuel cost per gallon
|
$ | 2.26 | $ | 2.52 | (10.3 | ) | $ | 2.05 | $ | 3.00 | (31.7 | ) | $ | 2.20 | 36.4 | |||||||||||||||||
|
Fuel
gallons (000,000)
|
75.0 | 75.5 | (0.7 | ) | 304.9 | 333.8 | (8.7 | ) | 354.3 | (5.8 | ) | |||||||||||||||||||||
|
Average
number of full-time equivalent employees
|
8,701 | 9,156 | (5.0 | ) | 8,915 | 9,628 | (7.4 | ) | 9,679 | (0.5 | ) | |||||||||||||||||||||
|
Aircraft
utilization (blk hrs/day)
|
9.3 | 10.0 | (7.0 | ) | 9.8 | 10.6 | (7.5 | ) | 10.9 | (2.8 | ) | |||||||||||||||||||||
|
Average
aircraft stage length (miles)
|
1,058 | 995 | 6.3 | 1,034 | 979 | 5.6 | 926 | 5.7 | ||||||||||||||||||||||||
|
Operating
fleet at period-end
|
115 | 110 | 5 a/c | 115 | 110 | 5 a/c | 115 | (5 | ) a/c | |||||||||||||||||||||||
|
Purchased
Capacity Operating Statistics:
|
||||||||||||||||||||||||||||||||
|
RPMs
(000,000)
|
276 | 227 | 21.6 | 1,053 | 1,100 | (4.3 | ) | 1,099 | 0.1 | |||||||||||||||||||||||
|
ASMs
(000,000)
|
373 | 316 | 18.0 | 1,431 | 1,469 | (2.6 | ) | 1,453 | 1.1 | |||||||||||||||||||||||
|
Passenger
load factor
|
74.0 | % | 71.8 | % |
2.2
|
pts | 73.6 | % | 74.9 | % |
(1.3
|
)pts | 75.6 | % |
(0.7
|
)pts | ||||||||||||||||
|
Yield
per passenger mile
|
27.90 | ¢ | 29.47 | ¢ | (5.3 | ) | 27.39 | ¢ | 27.35 | ¢ | 0.1 | 25.61 | ¢ | 6.8 | ||||||||||||||||||
|
RASM
|
20.64 | ¢ | 21.17 | ¢ | (2.5 | ) | 20.15 | ¢ | 20.48 | ¢ | (1.6 | ) | 19.37 | ¢ | 5.7 | |||||||||||||||||
|
Operating
expenses per ASM
|
20.16 | ¢ | 21.17 | ¢ | (4.8 | ) | 19.67 | ¢ | 21.35 | ¢ | (7.9 | ) | 20.84 | ¢ | 2.4 | |||||||||||||||||
|
NM
= Not Meaningful
|
||||||||||||||||||||||||||||||||
REVENUES
Total
operating revenues declined $215.3 million, or 6.7%, during 2009 compared to
2008. The changes are summarized in the following table:
|
Years Ended December 31
|
||||||||||||
|
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
|
Passenger
revenue—mainline
|
$ | 2,438.8 | $ | 2,643.7 | (7.8 | ) | ||||||
|
Freight
and mail
|
91.5 | 99.3 | (7.9 | ) | ||||||||
|
Other—net
|
187.3 | 135.2 | 38.5 | |||||||||
|
Change
in Mileage Plan terms
|
---- | 42.3 |
NM
|
|||||||||
|
Total
mainline operating revenues
|
$ | 2,717.6 | $ | 2,920.5 | (6.9 | ) | ||||||
|
Passenger
revenue—purchased capacity
|
288.4 | 300.8 | (4.1 | ) | ||||||||
|
Total
operating revenues
|
$ | 3,006.0 | $ | 3,221.3 | (6.7 | ) | ||||||
NM = Not
Meaningful
Operating
Revenues – Mainline
Mainline
passenger revenue in 2009 fell by 7.8% on a 4.4% reduction in capacity. There
was a 3.5% decline in PRASM, which was driven by a 6.0% drop in ticket yield
compared to 2008, partially offset by a two-point increase in load
factor.
Passenger
revenues were also bolstered by the implementation of our first-checked-bag fee
in the third quarter of 2009 ($34.5 million) and the full-year impact of our
second-checked-bag fee implemented in the third quarter of 2008, partially
offset by a decline in other fees that resulted from fewer
passengers.
Freight
and mail revenue decreased $7.8 million, or 7.9%, primarily as a result of lower
mail volumes and yield and lower freight fuel surcharges because of the decline
in fuel prices in 2009, partially offset by higher freight volumes and better
freight pricing.
Other--net
revenue increased $52.1 million, or 38.5%, from 2008. Mileage Plan
revenue increased by $50.0 million primarily because of an increase in the rate
paid to us by our credit card partner under the affinity card agreement and an
increase in the number of miles needed to redeem a travel award. This change
reduces our estimate of the fair value of a mile and results in a lower amount
deferred as a liability for future travel and increases the amount of commission
revenue we record when miles are sold.
Passenger
Revenue– Purchased Capacity
Passenger
revenue--purchased capacity flying fell by $12.4 million over the same period of
last year because of a 2.6% decline in capacity combined with a 1.6% decrease in
unit revenue compared to the prior year. Unit revenue dropped as a result of a
1.3-point decline in load factor on flat ticket yield.
EXPENSES
For 2009,
total operating expenses decreased $573.0 million or 17.1% compared to 2008 as a
result of lower mainline operating costs, most notably aircraft fuel and fleet
transition charges, partially offset by higher wages and benefits and new pilot
contract transition costs.
We
believe it is useful to summarize operating expenses as follows, which is
consistent with the way expenses are reported internally and evaluated by
management:
|
Years Ended
December 31
|
||||||||||||
|
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
|
Mainline
fuel expense
|
$ | 549.0 | $ | 1,162.4 | (52.8 | ) | ||||||
|
Mainline
non-fuel expenses
|
1,946.7 | 1,874.1 | 3.9 | |||||||||
|
Mainline
operating expenses
|
$ | 2,495.7 | $ | 3,036.5 | (17.8 | ) | ||||||
|
Purchased
capacity costs
|
281.5 | 313.7 | (10.3 | ) | ||||||||
|
Total
Operating Expenses
|
$ | 2,777.2 | $ | 3,350.2 | (17.1 | ) | ||||||
Mainline
Operating Expenses
Total
mainline operating expenses declined $540.8 million or 17.8% during 2009
compared to the prior year. Significant operating expense variances from
2008 are more fully described below.
Wages
and Benefits
Wages and
benefits were up $49.9 million, or 6.7%, compared to 2008. The
primary components of wages and benefits are shown in the following
table:
|
Years Ended
December 31
|
||||||||||||
|
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
|
Wages
|
$ | 540.4 | $ | 547.1 | (1.2 | ) | ||||||
|
Pension
and defined-contribution retirement benefits
|
114.8 | 68.7 | 67.1 | |||||||||
|
Medical
benefits
|
83.3 | 72.3 | 15.2 | |||||||||
|
Other
benefits and payroll taxes
|
54.1 | 54.6 | (0.9 | ) | ||||||||
|
Total
wages and benefits
|
$ | 792.6 | $ | 742.7 | 6.7 | |||||||
Wages
declined 1.2% on a 7.4% reduction in FTEs compared to 2008. Wages
have not declined in step with the FTE reduction because of higher wage rates
for the pilot group in connection with their new contract and increased average
wages for certain other employees stemming from higher average
seniority.
The 67.1%
increase in pension and other retirement-related benefits is primarily due to a
$45.0 million increase in our defined-benefit pension cost driven by the
significant decline in the market value of pension assets at the end of
2008.
Medical
benefits increased 15.2% from the prior year primarily as a result of an
increase in the post-retirement medical expense for the pilot group in
connection with their new contract and an increase in overall medical
costs.
We expect
wages and benefits to decline in 2010 as compared to 2009 because of a
significant decline in our defined-benefit pension cost, and productivity and
overhead reduction initiatives that should reduce the average number of
full-time equivalent employees. These declines will likely be
partially offset by increased pilot wage rates stemming from the full year
impact of the 2009 contract, normal step and scale wage increases in other
represented employee groups, and higher employee and retiree medical
costs.
Variable
Incentive Pay
Variable
incentive pay expense increased from $15.8 million in 2008 to $61.6 million in
2009. The increase is partially due to the fact that in 2009, our financial and
operational results exceeded targets established by our Board. In 2008, our
performance fell short of targets. The increase can also be
attributed to the addition of pilots, flight attendants and mechanics to the PBP
incentive plan.
Over the
long term, our plan is designed to pay at target, although we may or may not
meet those targets in any single year. At target, we estimate the PBP expense
would be $30 million and aggregate incentive pay for all plans would be
approximately $40 million to $45 million for 2010, which would be lower than in
2009.
Aircraft
Fuel
Aircraft
fuel expense includes both raw
fuel expense (as defined below) plus the effect of mark-to-market
adjustments to our fuel hedge portfolio included in our statement of operations
as the value of that portfolio increases and decreases. Our aircraft fuel
expense is very volatile, even between quarters, because it includes these gains
or losses in the value of the underlying instrument as crude oil prices and
refining margins increase or decrease. Raw fuel expense is defined
as the price that we generally pay at the airport, or the “into-plane” price,
including taxes and fees. Raw fuel prices are impacted by world oil prices and
refining costs, which can vary by region in the U.S. Raw fuel expense approximates
cash paid to suppliers and does not reflect the effect of our fuel
hedges.
Aircraft
fuel expense declined $613.4 million, or 52.8%, compared to 2008. The elements
of the change are illustrated in the following table:
|
Years Ended
December 31
|
||||||||||||
|
(in millions, except
per-gallon amounts)
|
2009
|
2008
|
%
Change
|
|||||||||
|
Fuel
gallons consumed
|
304.9 | 333.8 | (8.7 | ) | ||||||||
|
Raw
price per gallon
|
$ | 1.88 | $ | 3.31 | (43.2 | ) | ||||||
|
Total
raw fuel expense
|
$ | 572.3 | $ | 1,103.8 | (48.2 | ) | ||||||
|
Net
impact on fuel expense from (gains) and losses arising from fuel-hedging
activities
|
(23.3 | ) | 58.6 |
NM
|
||||||||
|
Aircraft
fuel expense
|
$ | 549.0 | $ | 1,162.4 | (52.8 | ) | ||||||
|
NM
|
=
Not meaningful
|
Fuel
gallons consumed declined 8.7%, primarily as a result of a 6.6% reduction in
aircraft flight hours and the improved fuel efficiency of our fleet as we
completed the transition to newer, more fuel-efficient B737-800 aircraft in the
second half of 2008.
The raw
fuel price per gallon declined 43.2% as a result of lower West Coast jet fuel
prices driven by lower crude oil costs and refining margins.
We also
evaluate economic fuel expense, which we define as raw fuel expense less the
cash we receive from hedge counterparties for hedges that settle during the
period, offset by the premium expense that we paid for those contracts. A key
difference between aircraft fuel expense and economic fuel expense is the timing
of gain or loss recognition on our hedge portfolio. When we refer to economic
fuel expense, we include gains and losses only when they are realized for those
contracts that were settled during the period based on their original contract
terms. We believe this is the best measure of the effect that fuel
prices are currently having on our business because it most closely approximates
the net cash outflow associated with purchasing fuel for our operations.
Accordingly, many industry analysts evaluate our results using this measure, and
it is the basis for most internal management reporting and incentive pay
plans.
Our economic fuel expense is
calculated as follows:
|
Years Ended
December 31
|
||||||||||||
|
(in
millions, except per-gallon amounts)
|
2009
|
2008
|
%
Change
|
|||||||||
|
Raw
fuel expense
|
$ | 572.3 | $ | 1,103.8 | (48.2 | ) | ||||||
|
Plus
or minus: net of cash received from settled hedges and premium expense
recognized
|
50.4 | (101.8 | ) |
NM
|
||||||||
|
Economic
fuel expense
|
$ | 622.7 | $ | 1,002.0 | (37.9 | ) | ||||||
|
Fuel
gallons consumed
|
304.9 | 333.8 | (8.7 | ) | ||||||||
|
Economic
fuel cost per gallon
|
$ | 2.05 | $ | 3.00 | (31.7 | ) | ||||||
|
NM
|
=
Not meaningful
|
As noted
above, the total net expense recognized for hedges that settled during the
period was $50.4 million in 2009, compared to a net cash benefit of $101.8
million in 2008. These amounts represent the net of the premium
expense recognized for those hedges and any cash received or paid upon
settlement. The decrease is primarily due to the significant drop in crude oil
prices over the past year.
We
currently expect our raw and economic fuel price per gallon to be approximately
$2.24 in the first quarter of 2010. As oil prices are volatile, we
are unable to forecast the full year cost with any certainty.
Aircraft
Maintenance
Aircraft
maintenance increased by $19.3 million, or 12.8%, compared to the prior year
primarily because of a higher average cost of airframe maintenance events and a
new power-by-the-hour (PBH) maintenance agreement on our B737-700 and B737-900
aircraft engines, partially offset by the benefits of our fleet transition, as
we have replaced all of our aging MD-80s with newer B737-800s, and lower PBH
costs associated with our 747-400 aircraft engines that resulted from a decline
in flight hours.
We expect
aircraft maintenance to be relatively flat in 2010.
Contracted
Services
Contracted
services declined by $11.3 million, or 8.7%, compared to 2008 as a result of the
reduction in the number of flights operated throughout our system to ports where
vendors are used and a reduction in project contract labor.
We expect
contracted services to increase in 2010 as we provide a full year of service to
some of our new destinations requiring vendor support.
Selling
Expenses
Selling
expenses declined by $11.3 million, or 9.7%, compared to 2008 as a result of
lower revenue-related expenses such as credit card costs, travel agency
commissions and ticket distribution costs that resulted from the decline in
passenger traffic. Mileage Plan expenses were also lower because the estimated
incremental cost of providing free travel was lower because of the decline in
fuel costs. These declines were partially offset by higher advertising
costs.
We expect
selling expenses will be slightly higher in 2010 as compared to 2009, primarily
due to higher revenue-related expenses.
Depreciation
and Amortization
Depreciation
and amortization increased $12.6 million, or 7.6%, compared to
2008. This is primarily due to the ten B737-800 aircraft delivered in
2009, partially offset by the sale-leaseback of six B737-800 aircraft in the
first quarter of 2009.
We expect
depreciation and amortization to be higher in 2010 due to the full-year impact
of aircraft that were delivered in 2009 and are expected to be delivered in
2010.
Other
Operating Expenses
Other
operating expenses declined $9.1 million, or 5.3%, compared to the prior
year. The decline is primarily driven by a reduction in outside
professional services costs and flight crew-related costs such as hotels and
per-diems.
New
Pilot Contract Transition Costs
As
mentioned previously, we recorded $35.8 million in connection with the new
four-year contract ratified by Alaska’s pilots in the second
quarter.
Restructuring
Charges and Fleet Transition Costs
In the
third quarter of 2008, we announced work force reductions among union and
non-union employees. The affected non-union employees were terminated
in the third quarter, resulting in a $1.6 million severance
charge. For union personnel, we recorded an $11.3 million charge in
2008.
During
2008, we retired four MD-80 aircraft that were under long-term lease
arrangements and placed them in temporary storage at an aircraft storage
facility. The $47.5 million charge in 2008 represented the remaining discounted
lease payments under the lease contracts and our estimate of maintenance costs
that will be incurred in the future to meet the minimum return conditions under
the lease requirements.
Mainline
Operating Costs per Available Seat Mile (CASM)
Our mainline operating costs per
mainline ASM are summarized below:
|
Years Ended
December 31
|
||||||||||||
|
2009
|
2008
|
%
Change
|
||||||||||
|
Total
mainline operating expenses per ASM (CASM)
|
10.78 | ¢ | 12.54 | ¢ | (14.0 | ) | ||||||
|
Less
the following components:
|
||||||||||||
|
Aircraft
fuel costs per ASM
|
2.37 | ¢ | 4.80 | ¢ | (50.6 | ) | ||||||
|
New
pilot contract transition costs per ASM
|
0.15 | ¢ | --- |
NM
|
||||||||
|
Restructuring
costs per ASM
|
--- | 0.05 | ¢ |
NM
|
||||||||
|
Fleet
transition charges per ASM
|
--- | 0.20 | ¢ |
NM
|
||||||||
|
CASM,
excluding fuel and noted items
|
8.26 | ¢ | 7.49 | ¢ | 10.2 | |||||||
|
NM
|
=
Not meaningful
|
CASM,
excluding fuel and noted items increased from the prior-year period because of
the increase in wages and benefits and other expenses as discussed above,
partially offset by a 4.4% reduction in capacity.
We have
listed separately in the above table our fuel costs, new pilot contract
transition costs, fleet transition charges and restructuring charges per ASM and
our unit cost excluding these items. These amounts are included in CASM, but for
internal purposes we consistently use unit cost metrics that exclude fuel and
certain special items to measure our cost-reduction progress. We believe that
such analysis may be important to investors and other readers of these financial
statements for the following reasons:
|
•
|
By eliminating fuel expense and certain special
items from our unit cost metrics, we believe that we have better
visibility into the results of our non-fuel cost-reduction
initiatives. Our industry is highly competitive and is
characterized by high fixed costs, so even a small reduction in non-fuel
operating costs can result in a significant improvement in operating
results. In addition, we believe that all domestic carriers are
similarly impacted by changes in jet fuel costs over the long run, so it
is important for management (and thus investors) to understand the impact
of (and trends in) company-specific cost drivers such as labor rates and
productivity, airport costs, maintenance costs, etc., which are more
controllable by management.
|
|
•
|
Cost per ASM excluding fuel and certain special
items is one of the most important measures used by managements of both
Alaska and Horizon and by our Board of Directors in assessing quarterly
and annual cost performance. For Alaska Airlines, these
decision-makers evaluate operating results of the “mainline” operation,
which includes the operation of the B737 fleet branded in Alaska Airlines
livery. The revenue and expenses associated with purchased
capacity are evaluated
separately.
|
|
|
•
|
Cost per ASM excluding fuel (and other items as
specified in our plan documents) is an important metric for the PBP
incentive plan that covers the majority of our
employees.
|
|
|
•
|
Cost per ASM excluding fuel and certain special
items is a measure commonly used by industry analysts, and we believe it
is the basis by which they compare our airlines to others in the
industry. The measure is also the subject of frequent questions
from investors.
|
|
|
•
|
Disclosure of the individual impact of certain
noted items provides investors the ability to measure and monitor
performance both with and without these special items. We believe that
disclosing the impact of certain items such as fleet transition costs, new
pilot contract transition costs, and restructuring charges is important
because it provides information on significant items that are not
necessarily indicative of future performance. Industry analysts and
investors consistently measure our performance without these items for
better comparability between periods and among other
airlines.
|
|
|
•
|
Although
we disclose our “mainline” passenger unit revenue for Alaska, we do not
(nor are we able to) evaluate mainline unit revenue excluding the impact
that changes in fuel costs have had on ticket prices. Fuel
expense represents a large percentage of our total mainline operating
expenses. Fluctuations in fuel prices often drive changes in
unit revenue in the mid-to-long term. Although we believe it is
useful to evaluate non-fuel unit costs for the reasons noted above, we
would caution readers of these financial statements not to place undue
reliance on unit costs excluding fuel as a measure or predictor of future
profitability because of the significant impact of fuel costs on our
business.
|
We
currently forecast our mainline costs per ASM
excluding fuel and other special items for the first quarter and full year of
2010 to be flat and down 3%, respectively, compared to 2009. The expected
decline in unit cost stems from lower pension costs and lower projected
incentive payments offset by modest increases in other expense
areas.
Purchased
Capacity Costs
Purchased
capacity costs decreased $32.2 million compared to 2008. Of the
total, $261.7 million was paid to Horizon under the CPA for 1.4 billion
ASMs.
NONOPERATING INCOME (EXPENSE)
Net
nonoperating expense was $45.0 million in 2009 compared to $24.4 million in
2008. Interest income declined $12.7 million compared to 2008
primarily as a result of lower interest income from the receivable from Horizon
and lower average portfolio returns, partially offset by a higher average
balance of cash and marketable securities. Interest expense declined
$4.4 million on lower average interest rates on our variable-rate debt on a
relatively stable average debt balance. Capitalized interest was $12.9
million lower than in 2008 because of lower advance aircraft purchase deposits
and the deferred future aircraft deliveries.
INCOME TAX EXPENSE (BENEFIT)
We file a
consolidated tax return with Air Group and other Air Group
subsidiaries. Each member of the consolidated group calculates its
tax provision and tax liability, if applicable, on a separate
basis. Our effective income tax rate on pretax income or loss for
2009 was 40.3%, compared to 37.1% for 2008. The difference between the
effective tax rates for both periods and our marginal tax rate of approximately
37.8% is primarily the magnitude of nondeductible expenses, such as employee
per-diem costs and stock-based compensation expense recorded for certain stock
awards.
Our
effective tax rate can vary significantly between quarters and for the full
year, depending on the magnitude of non-deductible expenses in proportion to
pretax results.
|
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
|
We have
interest-rate risk on our variable-rate debt obligations and our
available-for-sale marketable investment portfolio, and commodity-price risk in
jet fuel required to operate our aircraft fleet. We purchase the majority of our
jet fuel at prevailing market prices and seek to manage market risk through
execution of our hedging strategy and other means. We have market-sensitive
instruments in the form of fixed-rate debt instruments, and financial derivative
instruments used to hedge our exposure to jet-fuel price increases and
interest-rate increases. We do not purchase or hold any derivative financial
instruments for trading purposes.
Market Risk – Aircraft Fuel
Currently,
our fuel-hedging portfolio consists of crude oil call options and jet fuel
refining margin swap contracts. We utilize the contracts in our portfolio as
hedges to decrease our exposure to the volatility of jet fuel prices. Call
options are designed to effectively cap our cost of the crude oil component of
fuel prices, allowing us to limit our exposure to increasing fuel
prices.
With
these call option contracts, we still benefit from the decline in crude oil
prices, as there is no downward exposure other than the premiums that we pay to
enter into the contracts. We believe there is risk in not hedging against the
possibility of fuel price increases. We estimate that a 10% increase or decrease
in crude oil prices as of December 31, 2009 would increase or decrease the
fair value of our crude oil hedge portfolio by approximately $33.7 million and
$25.7 million, respectively.
Our
portfolio of fuel hedge contracts was worth $96.2 million at December 31,
2009, for which we have paid $73.8 million of premiums to counterparties,
compared to a portfolio value of $23.5 million at December 31, 2008. We do
not have any collateral held by counterparties to these agreements as of
December 31, 2009.
We
continue to believe that our fuel hedge program is an important part of our
strategy to reduce our exposure to volatile fuel prices. We expect to continue
to enter into these types of contracts prospectively, although significant
changes in market conditions could affect our decisions. For more discussion,
see Note 3 to our financial statements.
Financial Market Risk
We have
exposure to market risk associated with changes in interest rates related
primarily to our debt obligations and short-term investment portfolio. Our debt
obligations include variable-rate instruments, which have exposure to changes in
interest rates. This exposure is somewhat mitigated through our variable-rate
investment portfolio. A hypothetical 10% change in the average interest rates
incurred on variable-rate debt during 2009 would correspondingly change our net
earnings and cash flows associated with these items by approximately $1.0
million. In order to help mitigate the risk of interest rate fluctuations, we
have fixed the interest rates on certain existing variable-rate debt agreements
over the past several years. Our variable-rate debt is approximately 23% of our
total long-term debt at December 31, 2009 compared to 24% at
December 31, 2008.
We also have investments in marketable
securities, which are exposed to market risk associated with changes in interest
rates. If short-term interest rates were to average 1% more than they did in
2009, interest income would increase by approximately $11.4 million.
|
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
SELECTED QUARTERLY FINANCIAL INFORMATION
(unaudited)
|
(in
millions, except per share)
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||||||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
|
Operating
revenues
|
$ | 653.1 | $ | 733.4 | $ | 749.3 | $ | 820.4 | $ | 858.8 | $ | 941.9 | $ | 744.8 | $ | 725.6 | ||||||||||||||||
|
Operating
income (loss)
|
(6.3 | ) | (37.4 | ) | 56.1 | 91.6 | 136.7 | (98.2 | ) | 42.3 | (84.9 | ) | ||||||||||||||||||||
|
Net
income (loss)
|
(12.1 | ) | (25.6 | ) | 25.8 | 56.2 | 77.3 | (69.3 | ) | 18.7 | (57.7 | ) | ||||||||||||||||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board
of Directors and Shareholder
Alaska
Airlines, Inc.:
We have
audited the accompanying balance sheets of Alaska Airlines, Inc. as of
December 31, 2009 and 2008, and the related statements of operations,
shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2009. In connection with our audits of the
financial statements, we also have audited financial statement schedule II.
These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Alaska Airlines, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
2009, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth thereon.
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(included in FASB ASC Topic 320, Investments-Debt and Equity
Securities) and the measurement date
provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (included in FASB ASC Topic 960, Plan Accounting – Defined
Benefit Pension Plans), effective
January 1, 2008.
/s/ KPMG
LLP
Seattle,
Washington
February
23, 2010
ALASKA
AIRLINES, INC.
BALANCE SHEETS
|
As of December 31 (in
millions)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 164.2 | $ | 283.0 | ||||
|
Marketable
securities
|
1,027.9 | 794.3 | ||||||
|
Total
cash and marketable securities
|
1,192.1 | 1,077.3 | ||||||
|
Receivables
from related companies
|
274.6 | 285.9 | ||||||
|
Receivables
- less allowance for doubtful accounts of $1.5
|
104.7 | 98.9 | ||||||
|
Inventories
and supplies - net
|
27.3 | 26.7 | ||||||
|
Deferred
income taxes
|
110.1 | 146.7 | ||||||
|
Fuel
hedge contracts
|
54.0 | 13.7 | ||||||
|
Prepaid
expenses and other current assets
|
47.7 | 30.1 | ||||||
|
Total
Current Assets
|
1,810.5 | 1,679.3 | ||||||
|
Property
and Equipment
|
||||||||
|
Aircraft
and other flight equipment
|
3,035.6 | 2,898.5 | ||||||
|
Other
property and equipment
|
540.1 | 519.8 | ||||||
|
Deposits
for future flight equipment
|
169.2 | 237.6 | ||||||
| 3,744.9 | 3,655.9 | |||||||
|
Less
accumulated depreciation and amortization
|
1,136.6 | 1,009.8 | ||||||
|
Total
Property and Equipment - Net
|
2,608.3 | 2,646.1 | ||||||
|
Fuel
Hedge Contracts
|
42.2 | 29.8 | ||||||
|
Other
Assets
|
80.3 | 73.4 | ||||||
|
Total
Assets
|
$ | 4,541.3 | $ | 4,428.6 | ||||
See
accompanying notes to financial statements.
BALANCE
SHEETS - (continued)
|
As of December 31 (in millions except share
amounts)
|
2009
|
2008
|
||||||
|
LIABILITIES
AND SHAREHOLDER’S EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 52.9 | $ | 49.4 | ||||
|
Payables
to related companies
|
73.2 | 53.5 | ||||||
|
Accrued
aircraft rent
|
50.8 | 60.2 | ||||||
|
Accrued
wages, vacation and payroll taxes
|
132.7 | 101.2 | ||||||
|
Other
accrued liabilities
|
506.4 | 510.7 | ||||||
|
Air
traffic liability
|
365.9 | 372.2 | ||||||
|
Fuel
hedge contracts liability
|
- | 20.0 | ||||||
|
Current
portion of long-term debt
|
131.2 | 225.1 | ||||||
|
Total
Current Liabilities
|
1,313.1 | 1,392.3 | ||||||
|
Long-Term
Debt, Net of Current Portion
|
1,376.6 | 1,334.1 | ||||||
|
Other
Liabilities and Credits
|
||||||||
|
Deferred
income taxes
|
104.7 | 2.0 | ||||||
|
Deferred
revenue
|
410.5 | 394.1 | ||||||
|
Obligation
for pension and postretirement medical benefits
|
421.0 | 584.7 | ||||||
|
Other
liabilities
|
112.6 | 126.4 | ||||||
| 1,048.8 | 1,107.2 | |||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholder’s
Equity
|
||||||||
|
Common
stock, $1 par value
|
||||||||
|
Authorized: 1,000
shares
|
||||||||
|
Issued
and outstanding: 2009 and 2008 - 500 shares
|
- | - | ||||||
|
Capital
in excess of par value
|
649.9 | 640.1 | ||||||
|
Accumulated
other comprehensive loss
|
(240.0 | ) | (328.3 | ) | ||||
|
Retained
earnings
|
392.9 | 283.2 | ||||||
| 802.8 | 595.0 | |||||||
|
Total
Liabilities and Shareholder’s Equity
|
$ | 4,541.3 | $ | 4,428.6 | ||||
See
accompanying notes to financial statements.
ALASKA
AIRLINES, INC.
STATEMENTS OF OPERATIONS
|
Year Ended December 31
(in
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Operating
Revenues
|
||||||||||||
|
Passenger
|
$ | 2,438.8 | $ | 2,643.7 | $ | 2,547.2 | ||||||
|
Freight
and mail
|
91.5 | 99.3 | 94.2 | |||||||||
|
Other
- net
|
187.3 | 135.2 | 147.1 | |||||||||
|
Change
in Mileage Plan terms
|
- | 42.3 | - | |||||||||
|
Total
mainline operating revenues
|
2,717.6 | 2,920.5 | 2,788.5 | |||||||||
|
Passenger
– purchased capacity
|
288.4 | 300.8 | 281.4 | |||||||||
|
Total
Operating Revenues
|
3,006.0 | 3,221.3 | 3,069.9 | |||||||||
|
Operating
Expenses
|
||||||||||||
|
Wages
and benefits
|
792.6 | 742.7 | 753.9 | |||||||||
|
Variable
incentive pay
|
61.6 | 15.8 | 13.5 | |||||||||
|
Aircraft
fuel, including hedging gains and losses
|
549.0 | 1,162.4 | 737.5 | |||||||||
|
Aircraft
maintenance
|
169.9 | 150.6 | 149.8 | |||||||||
|
Aircraft
rent
|
109.0 | 106.2 | 112.8 | |||||||||
|
Landing
fees and other rentals
|
166.8 | 167.7 | 170.1 | |||||||||
|
Contracted
services
|
118.9 | 130.2 | 124.1 | |||||||||
|
Selling
expenses
|
104.7 | 116.0 | 129.3 | |||||||||
|
Depreciation
and amortization
|
178.5 | 165.9 | 142.3 | |||||||||
|
Food
and beverage service
|
47.7 | 48.3 | 46.9 | |||||||||
|
Other
|
161.2 | 170.3 | 173.1 | |||||||||
|
New
pilot contract transition costs
|
35.8 | - | - | |||||||||
|
Restructuring
charges
|
- | 12.9 | - | |||||||||
|
Fleet
transition costs - MD-80
|
- | 47.5 | - | |||||||||
|
Total
mainline operating expenses
|
2,495.7 | 3,036.5 | 2,553.3 | |||||||||
|
Purchased
capacity costs
|
281.5 | 313.7 | 302.8 | |||||||||
|
Total
Operating Expenses
|
2,777.2 | 3,350.2 | 2,856.1 | |||||||||
|
Operating
Income (Loss)
|
228.8 | (128.9 | ) | 213.8 | ||||||||
|
Nonoperating
Income (Expense)
|
||||||||||||
|
Interest
income
|
38.6 | 51.3 | 64.8 | |||||||||
|
Interest
expense
|
(88.1 | ) | (92.5 | ) | (86.2 | ) | ||||||
|
Interest
capitalized
|
7.3 | 20.2 | 25.7 | |||||||||
|
Other
- net
|
(2.8 | ) | (3.4 | ) | (3.1 | ) | ||||||
| (45.0 | ) | (24.4 | ) | 1.2 | ||||||||
|
Income
(loss) before income tax
|
183.8 | (153.3 | ) | 215.0 | ||||||||
|
Income
tax expense (benefit)
|
74.1 | (56.9 | ) | 80.2 | ||||||||
|
Net
Income (Loss)
|
$ | 109.7 | $ | (96.4 | ) | $ | 134.8 | |||||
See
accompanying notes to financial statements.
STATEMENTS OF SHAREHOLDER’S EQUITY
|
Capital
in
|
Accumulated
Other
|
|||||||||||||||||||
|
Common
|
Excess
of
|
Comprehensive
|
Retained
|
|||||||||||||||||
|
(in millions)
|
Stock
|
Par
Value
|
Loss
|
Earnings
|
Total
|
|||||||||||||||
|
Balances
at December 31, 2006
|
$ | -- | $ | 620.0 | $ | (191.4 | ) | $ | 244.8 | $ | 673.4 | |||||||||
|
2007
net income
|
$ | 134.8 | 134.8 | |||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||
|
Related
to marketable securities:
|
||||||||||||||||||||
|
Change
in fair value
|
3.2 | |||||||||||||||||||
|
Reclassification
to earnings
|
2.0 | |||||||||||||||||||
|
Income
tax effect
|
(1.9 | ) | ||||||||||||||||||
| 3.3 | 3.3 | |||||||||||||||||||
|
Related
to employee benefit plans:
|
||||||||||||||||||||
|
Pension
liability adjustment, net of $29.6 tax effect
|
49.8 | 49.8 | ||||||||||||||||||
|
Postretirement
medical liability adjustment, net of $2.5 tax effect
|
4.1 | 4.1 | ||||||||||||||||||
|
Officers
supplemental retirement plan, net of $0.5 tax effect
|
0.9 | 0.9 | ||||||||||||||||||
|
Total
comprehensive income
|
192.9 | |||||||||||||||||||
|
Stock-based
compensation
|
10.5 | 10.5 | ||||||||||||||||||
|
Impact
of issuance of Air Group stock under stock plans
|
(0.2 | ) | (0.2 | ) | ||||||||||||||||
|
Balances
at December 31, 2007
|
$ | -- | $ | 630.3 | $ | (133.3 | ) | $ | 379.6 | $ | 876.6 | |||||||||
|
2008
net loss
|
(96.4 | ) | (96.4 | ) | ||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||
|
Related
to marketable securities:
|
||||||||||||||||||||
|
Change
in fair value
|
(8.7 | ) | ||||||||||||||||||
|
Reclassification
to earnings
|
(0.2 | ) | ||||||||||||||||||
|
Income
tax effect
|
3.3 | |||||||||||||||||||
| (5.6 | ) | (5.6 | ) | |||||||||||||||||
|
Related
to employee benefit plans:
|
||||||||||||||||||||
|
Pension
liability adjustment, net of $113.5 tax effect
|
(188.9 | ) | (188.9 | ) | ||||||||||||||||
|
Postretirement
medical liability adjustment, net of $0.5 tax effect
|
(0.8 | ) | (0.8 | ) | ||||||||||||||||
|
Officers
supplemental retirement plan, net of $0.1 tax effect
|
0.3 | 0.3 | ||||||||||||||||||
|
Total
comprehensive loss
|
(291.4 | ) | ||||||||||||||||||
|
Stock-based
compensation
|
10.8 | 10.8 | ||||||||||||||||||
|
Impact
of issuance of Air Group stock under stock plans
|
(1.0 | ) | (1.0 | ) | ||||||||||||||||
|
Balances
at December 31, 2008
|
$ | -- | $ | 640.1 | $ | (328.3 | ) | $ | 283.2 | $ | 595.0 | |||||||||
See
accompanying notes to financial statements.
ALASKA
AIRLINES, INC.
STATEMENTS
OF SHAREHOLDER’S EQUITY – (continued)
|
Accumulated
|
||||||||||||||||||||
|
STATEMENTEQUITY
|
Capital
in
|
Other
|
||||||||||||||||||
|
Common
|
Excess
of
|
Comprehensive
|
Retained
|
|||||||||||||||||
|
(In millions)
|
Stock
|
Par
Value
|
Loss
|
Earnings
|
Total
|
|||||||||||||||
|
Balances
at December 31, 2008
|
$ | -- | $ | 640.1 | $ | (328.3 | ) | $ | 283.2 | $ | 595.0 | |||||||||
|
2009
net income
|
109.7 | 109.7 | ||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||
|
Related
to marketable securities:
|
||||||||||||||||||||
|
Change
in fair value
|
20.4 | |||||||||||||||||||
|
Reclassification
to earnings
|
(2.5 | ) | ||||||||||||||||||
|
Income
tax effect
|
(6.7 | ) | ||||||||||||||||||
| 11.2 | 11.2 | |||||||||||||||||||
|
Related
to employee benefit plans:
|
||||||||||||||||||||
|
Pension
liability adjustment, net of $42.3 tax effect
|
71.9 | 71.9 | ||||||||||||||||||
|
Postretirement
medical liability adjustment, net of $2.3 tax effect
|
3.9 | 3.9 | ||||||||||||||||||
|
Officers
supplemental retirement plan, net of $0.2 tax effect
|
(0.2 | ) | (0.2 | ) | ||||||||||||||||
|
Related
to interest rate derivative instruments:
|
||||||||||||||||||||
|
Change
in fair value
|
2.4 | |||||||||||||||||||
|
Income
tax effect
|
(0.9 | ) | ||||||||||||||||||
| 1.5 | 1.5 | |||||||||||||||||||
|
Total
comprehensive income
|
198.0 | |||||||||||||||||||
|
Stock-based
compensation
|
10.2 | 10.2 | ||||||||||||||||||
|
Impact
of issuance of Air Group stock under stock plans
|
(0.4 | ) | (0.4 | ) | ||||||||||||||||
|
Balances
at December 31, 2009
|
$ | -- | $ | 649.9 | $ | (240.0 | ) | $ | 392.9 | $ | 802.8 | |||||||||
|
Year Ended December
31 (in
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 109.7 | $ | (96.4 | ) | $ | 134.8 | |||||
|
Adjustments
to reconcile net income (loss) to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Non-cash
impact of pilot contract transition costs
|
15.5 | - | - | |||||||||
|
Restructuring
charges
|
- | 12.9 | - | |||||||||
|
Fleet
transition costs
|
- | 47.5 | - | |||||||||
|
Depreciation
and amortization
|
178.5 | 165.9 | 142.3 | |||||||||
|
Stock-based
compensation
|
10.2 | 10.8 | 10.5 | |||||||||
|
Changes
in fair values of open fuel hedge contracts
|
(72.7 | ) | 71.0 | (35.4 | ) | |||||||
|
Changes
in deferred income taxes
|
77.6 | (66.1 | ) | 48.0 | ||||||||
|
(Increase)
decrease in receivables - net
|
5.5 | 110.2 | (317.1 | ) | ||||||||
|
Increase
in prepaid expenses and other current assets
|
(14.7 | ) | (13.9 | ) | 10.8 | |||||||
|
Increase
(decrease) in air traffic liability
|
(6.3 | ) | 7.6 | 53.2 | ||||||||
|
Increase
(decrease) in other current liabilities
|
41.0 | 6.6 | 75.5 | |||||||||
|
Increase
(decrease) in deferred revenue and other-net
|
(59.7 | ) | (9.1 | ) | 71.6 | |||||||
|
Net
cash provided by operating activities
|
284.6 | 247.0 | 194.2 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Property
and equipment additions:
|
||||||||||||
|
Aircraft
and aircraft purchase deposits
|
(293.7 | ) | (246.1 | ) | (523.1 | ) | ||||||
|
Other
flight equipment
|
(26.3 | ) | (42.3 | ) | (37.0 | ) | ||||||
|
Other
property and equipment
|
(37.6 | ) | (35.4 | ) | (46.3 | ) | ||||||
|
Total
property and equipment additions
|
(357.6 | ) | (323.8 | ) | (606.4 | ) | ||||||
|
Proceeds
from disposition of assets
|
0.8 | 6.8 | 61.4 | |||||||||
|
Purchases
of marketable securities
|
(942.6 | ) | (766.0 | ) | (1,149.3 | ) | ||||||
|
Sales
and maturities of marketable securities
|
725.0 | 579.6 | 1,321.1 | |||||||||
|
Restricted
deposits and other
|
(7.6 | ) | 8.3 | (2.2 | ) | |||||||
|
Net
cash used in investing activities
|
(582.0 | ) | (495.1 | ) | (375.4 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of long-term debt
|
188.9 | 658.5 | 281.9 | |||||||||
|
Proceeds
from sale-leaseback transactions, net
|
230.0 | - | - | |||||||||
|
Long-term
debt payments
|
(240.3 | ) | (331.7 | ) | (127.2 | ) | ||||||
|
Net
cash provided by financing activities
|
178.6 | 326.8 | 154.7 | |||||||||
|
Net
change in cash and cash equivalents
|
(118.8 | ) | 78.7 | (26.5 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
283.0 | 204.3 | 230.8 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 164.2 | $ | 283.0 | $ | 204.3 | ||||||
|
Supplemental
disclosure of cash paid during the year for:
|
||||||||||||
|
Interest
(net of amount capitalized)
|
$ | 82.2 | $ | 68.2 | $ | 58.9 | ||||||
|
Income
taxes
|
- | 0.5 | 8.4 | |||||||||
See
accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
|
Alaska
Airlines, Inc.
|
|
December 31,
2009
|
NOTE
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
Alaska
Airlines, Inc. (“Alaska” or “the Company”), an Alaska corporation, is a wholly
owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation.
Air Group is also the parent company of Horizon Air Industries, Inc. (Horizon)
and Alaska Air Group Leasing (AAGL). Horizon is a regional airline that operates
both turboprop and jet aircraft. These financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America and their preparation requires the use of management's estimates.
Actual results may differ from these estimates.
Nature
of Operations
For
detailed information about the Company’s operations, see Item 1. “Our Business”
in this Form 10-K.
The
Company’s operations and financial results are subject to various uncertainties,
such as general economic conditions, volatile fuel prices, industry instability,
intense competition, a largely unionized work force, the need to finance large
capital expenditures and the related availability of capital, government
regulation, and potential aircraft incidents.
Approximately
82% of the Company’s employees are covered by collective bargaining agreements,
including approximately 28% that are covered under agreements that are currently
in negotiations or become amendable prior to December 31,
2010.
The
airline industry is characterized by high fixed costs. Small fluctuations in
load factors and yield (a measure of ticket prices) can have a significant
impact on operating results. The Company has been and continues working to
reduce unit costs to better compete with carriers that have lower cost
structures.
Substantially
all sales occur in the United States.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with original maturities of
three months or less. They are carried at cost, which approximates market value.
The Company reduces cash balances when checks are disbursed. Due to the time
delay in checks clearing the banks, the Company normally maintains a negative
balance in its cash disbursement accounts, which is reported as a current
liability. The amount of the negative cash balance was $21.1 million and $11.2
million at December 31, 2009 and 2008, respectively, and is included in
accounts payable.
Receivables
Receivables
consist primarily of airline traffic (including credit card) receivables,
amounts from customers, Mileage Plan partners, government tax authorities, and
other miscellaneous amounts due to the Company, and are net of an allowance for
doubtful accounts. Management determines the allowance for doubtful accounts
based on known troubled accounts and historical experience applied to an aging
of accounts.
Inventories
and Supplies—net
Expendable aircraft parts, materials
and supplies are stated at average cost and are included in inventories and
supplies-net. An obsolescence allowance for expendable parts is accrued based on
estimated lives of the corresponding fleet type and salvage values. Surplus
inventories are carried at their net realizable value. The allowance for all
non-surplus expendable inventories was $8.4 million and $7.1 million at
December 31, 2009 and 2008, respectively. Inventory and supplies-net also
includes fuel inventory of $11.5 million and $14.0 million at December 31,
2009 and 2008, respectively. Repairable and rotable aircraft parts inventories
are included in flight equipment.
Property,
Equipment and Depreciation
Property
and equipment are recorded at cost and depreciated using the straight-line
method over their estimated useful lives, which are as follows:
|
Aircraft
and related flight equipment:
|
|
|
Boeing
737-400/700/800/900
|
20
years
|
|
Buildings
|
25-30
years
|
|
Minor
building and land improvements
|
10
years
|
|
Capitalized
leases and leasehold improvements
|
Shorter of lease term or
estimated
useful life
|
|
Computer
hardware and software
|
3-5
years
|
|
Other
furniture and equipment
|
5-10
years
|
All
remaining MD-80 flight equipment has been depreciated to its expected salvage
value.
“Related
flight equipment” includes rotable and repairable spare inventories, which are
depreciated over the associated fleet life unless otherwise noted.
Maintenance
and repairs, other than engine maintenance on B737-400, -700 and -900 engines,
are expensed when incurred. Major modifications that extend the life or improve
the usefulness of aircraft are capitalized and depreciated over their estimated
period of use. Maintenance on B737-400, -700 and -900 engines is covered under
power-by-the-hour agreements with third parties, whereby the Company pays a
determinable amount, and transfers risk, to a third party. The
Company expenses the contract amounts based on engine usage.
The
Company evaluates long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the total carrying amount of an
asset or asset group may not be recoverable. The Company groups assets for
purposes of such reviews at the lowest level for which identifiable cash flows
of the asset group are largely independent of the cash flows of other groups of
assets and liabilities. An impairment loss is considered when estimated future
undiscounted cash flows expected to result from the use of the asset or asset
group and its eventual disposition are less than its carrying amount. If the
asset or asset group is not considered recoverable, a write- down equal to the
excess of the carrying amount over the fair value will be recorded.
Internally
Used Software Costs
The
Company capitalizes costs to develop internal-use software that are incurred in
the application development stage. Amortization commences when the software is
ready for its intended use and the amortization period is the estimated useful
life of the software, generally three to five years. Capitalized costs primarily
include contract labor and payroll costs of the individuals dedicated to the
development of internal-use software. The Company capitalized software
development costs of $0.7 million, $1.0 million, and $3.0 million during the
years ended December 31, 2009, 2008, and 2007, respectively.
Workers
Compensation and Employee Health-Care Accruals
The
Company uses a combination of self-insurance and insurance programs to provide
for workers compensation claims and employee health care benefits. Liabilities
associated with the risks that are retained by the Company are not discounted
and are estimated, in part, by considering historical claims experience,
severity factors and other actuarial assumptions. The estimated accruals for
these liabilities could be significantly affected if future occurrences and
claims differ from these assumptions and historical trends.
Deferred
Revenue
Deferred
revenue results primarily from the sale of mileage credits. This revenue is
recognized when award transportation is provided or over the term of the
applicable agreement.
Operating
Leases
The
Company leases aircraft, airport and terminal facilities, office space, and
other equipment under operating leases. Some of these lease agreements contain
rent escalation clauses or rent holidays. For scheduled rent escalation clauses
during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy, the Company records minimum rental expenses on a
straight-line basis over the terms of the leases in the statements of
operations.
Leased
Aircraft Return Costs
Cash
payments associated with returning leased aircraft are accrued when it is
probable that a cash payment will be made and that amount is reasonably
estimable. Any accrual is based on the time remaining on the lease,
planned aircraft usage and the provisions included in the lease agreement,
although the actual amount due to any lessor upon return will not be known with
certainty until lease termination.
As leased
aircraft are returned, any payments are charged against the established accrual.
The accrual is part of other current and long-term liabilities, and was $8.3
million and $13.3 million as of December 31, 2009 and December 31,
2008, respectively.
Revenue
Recognition
Passenger
revenue is recognized when the passenger travels. Tickets sold but not yet used
are reported as air traffic liability until travel or date of expiration.
Passenger traffic commissions and related fees are expensed when the related
revenue is recognized. Passenger traffic commissions and related fees not yet
recognized are included as a prepaid expense. Due to complex pricing structures,
refund and exchange policies, and interline agreements with other airlines,
certain amounts are recognized as revenue using estimates regarding both the
timing of the revenue recognition and the amount of revenue to be recognized.
These estimates are generally based on the Company’s historical
data.
Passenger
revenue also includes certain “ancillary” or non-ticket revenue such as
reservations fees, ticket change fees, and baggage service
charges. These fees are recognized as revenue when the related
services are provided.
Freight
and mail revenues are recognized when service is provided.
Other--net
revenues are primarily related to the Mileage Plan and they are recognized as
described in the “Mileage Plan” paragraph below. Other—net also includes certain
ancillary revenues such as on-board food and beverage sales, commissions from
car and hotel vendors, travel insurance commissions. These items are
recognized as revenue when the services are provided. Boardroom
(airport lounges) memberships are recognized as revenue over the membership
period.
Mileage
Plan
Alaska
operates a frequent flyer program (“Mileage Plan”) that provides travel awards
to members based on accumulated mileage. For miles earned by flying on Alaska or
Horizon and through airline partners, the estimated cost of providing free
travel awards is recognized as a selling expense and accrued as a liability as
miles are earned and accumulated.
Alaska
also sells mileage credits to non-airline partners such as hotels, car rental
agencies, a grocery store chain, and a major bank that offers Alaska Airlines
affinity credit cards. The Company defers the portion of the sales proceeds that
represents the estimated fair value of the award transportation and recognizes
that amount as revenue when the award transportation is provided. The deferred
proceeds are recognized as passenger revenue for awards redeemed and flown on
Alaska or Horizon, and as other-net revenue for awards redeemed and flown on
other airlines (less the cost paid to the other airline). The portion of the
sales proceeds not deferred is recognized as commission income and included in
other revenue-net in the statements of operations.
Alaska’s
Mileage Plan deferred revenue and liabilities are included under the following
balance sheet captions at December 31 (in millions):
|
Balance
Sheet Captions
|
2009
|
2008
|
||||||
|
Current
Liabilities:
|
||||||||
|
Other
accrued liabilities
|
$ | 267.9 | $ | 280.4 | ||||
|
Other
Liabilities and Credits:
|
||||||||
|
Deferred
revenue
|
410.6 | 394.1 | ||||||
|
Other
liabilities
|
13.2 | 15.9 | ||||||
|
Total
|
$ | 691.7 | $ | 690.4 | ||||
The
amounts recorded in other accrued liabilities relate primarily to deferred
revenue expected to be realized within one year, including $41.6 million and
$43.4 million at December 31, 2009 and 2008, respectively, associated with
Mileage Plan awards issued but not yet flown.
Alaska’s
Mileage Plan revenue is included under the following statements of operations
captions for the years ended December 31 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Passenger
revenues
|
$ | 175.1 | $ | 144.2 | $ | 115.6 | ||||||
|
Other-net
revenues
|
151.5 | 101.5 | 112.0 | |||||||||
|
Change
in Mileage Plan
terms
|
— | 42.3 | — | |||||||||
|
Total
Mileage Plan revenues
|
$ | 326.6 | $ | 288.0 | $ | 227.6 | ||||||
During
2008, the Company changed the terms of its Mileage Plan program regarding the
expiration of award miles. Beginning in the third quarter, Mileage Plan accounts
with no activity for two years are deleted. As a result of the deletion of a
number of accounts, the Company reduced its liability for future travel awards
by $42.3 million, which has been recorded in the statements of operations as
“Change in Mileage Plan terms.”
Aircraft
Fuel
Aircraft
fuel includes raw jet fuel and associated “into-plane” costs, fuel taxes, oil,
and all of the gains and losses associated with fuel hedge
contracts.
Contracted Services
Contracted
services includes expenses for ground handling, security, navigation fees,
temporary employees, data processing fees, and other similar
services.
Selling
Expenses
Selling
expenses include credit card fees, global distribution systems charges, the
estimated cost of Mileage Plan free travel awards, advertising, promotional
costs, commissions, and incentives. Advertising production costs are expensed
the first time the advertising takes place. Advertising expense was $15.7
million, $12.6 million, and $12.0 million during the years ended
December 31, 2009, 2008, and 2007, respectively.
Capitalized Interest
Interest
is capitalized on flight equipment purchase deposits as a cost of the related
asset, and is depreciated over the estimated useful life of the asset. The
capitalized interest is based on the Company’s weighted-average borrowing
rate.
Derivative
Financial Instruments
The
Company accounts for financial derivative instruments as prescribed under the
accounting standards for derivatives and hedging activity. See Note 3 and Note
12 for further discussion.
Income Taxes
The
Company files a consolidated tax return with Air Group and other Air Group
subsidiaries. Each member of the consolidated tax group calculates
its provision and tax liability, if applicable, on a separate
basis. The Company uses the asset and liability approach for
accounting and reporting income taxes. Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. A valuation allowance would be established, if
necessary, for the amount of any tax benefits that, based on available evidence,
are not expected to be realized. The Company accounts for unrecognized tax
benefits in accordance with the accounting standards. See Note 11 for further
discussion.
Taxes
Collected from Passengers
Taxes
collected from passengers, including sales taxes, airport and security fees and
other fees, are recorded on a net basis within passenger revenue in the
statements of operations.
Stock-Based
Compensation
Accounting
standards require companies to recognize as expense the fair value of stock
options and other equity-based compensation issued to employees as of the grant
date. These standards apply to all stock awards that Air Group grants to the
Company’s employees as well as the Air Group Employee Stock Purchase Plan
(ESPP), which features a look-back provision and allows employees to purchase
stock at a 15% discount. All stock-based compensation expense is recorded in
wages and benefits in the statements of operations.
Accounting
Pronouncements Adopted in 2009
Effective
July 2, 2009, the Accounting Standards Codification (ASC) of the Financial
Accounting Standards Board (FASB) became the single official source of
authoritative, nongovernmental GAAP in the United States. Although
the Company’s accounting policies were not affected by the conversion to ASC,
references to specific accounting standards in these notes to the financial
statements have been changed to eliminate references to previous
standards.
In March
2008, the FASB issued new standards regarding disclosures about derivatives
instruments and hedging. These new standards require entities that
use derivative instruments to provide certain qualitative disclosures about
their objectives and strategies for using such instruments, amounts and location
of the derivatives in the financial statements, among other
disclosures. This standard was adopted as of January 1,
2009. The required disclosures are included in Note 3 and Note
12. The adoption of this standard did not have a material impact on
the disclosures historically provided.
In April
2009, the FASB issued a new standard that clarifies the determination of fair
value for assets and liabilities that may be involved in transactions that would
not be considered orderly as defined in the position statement. In
April 2009, the FASB also issued new accounting standards that provide
additional guidance in determining whether a debt security is
other-than-temporarily impaired and how entities should record the impairment in
the financial statements. The standard requires credit losses, as
defined, to be recorded through the statement of operations and the remaining
impairment loss to be recorded through accumulated other comprehensive
income. Both of these standards were effective for the Company as of
June 30, 2009. See Note 5 and Note 12 for a discussion of the impact
of these new positions to the Company’s financial statements.
In April
2009, the FASB issued new accounting standards that require companies to
provide, on an interim basis, disclosures that were previously only required in
annual statements for the fair value of financial instruments. This
new standard was effective for the Company as of June 30, 2009. The
required disclosures impacted the Company’s Form 10Q filings for the second and
third quarters in 2009. The new standards did not have an impact on
annual financial statements.
In
December 2008, the FASB issued new accounting standards regarding disclosure
about pension and other postretirement benefits which, among other things,
expands the disclosure regarding assets in an employer’s pension and
postretirement benefit plans. The standard requires the Company to
add the fair value hierarchy disclosures required by the accounting standards as
it relates to the investments of the pension and postretirement benefit
plans. This statement is effective for annual financial statements
for fiscal years ending after December 15, 2009. See Note 8 for the
disclosures required by this standard. This position had no impact on
the Company’s financial position or results of operations.
Fourth
Quarter Adjustments
There
were no significant adjustments in the fourth quarters of 2009, 2008 and
2007.
NOTE
2. FLEET TRANSITION AND IMPAIRMENT
In March
2006, the Company’s Board of Directors approved a plan to accelerate the
retirement of its MD-80 fleet (15 owned and 11 leased aircraft at the time) and
remove those aircraft from service by the end of 2008. As a result,
the Company recorded a $47.5 million charge in 2008 reflecting the remaining
discounted future lease payments and other contract-related costs associated
with the removal of the remaining MD-80 aircraft from operations. The actual
remaining future cash payments are included in the lease commitment table in
Note 7.
NOTE
3. FUEL HEDGE CONTRACTS
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risks associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options for crude oil and
swap agreements for jet fuel refining margins, among other
initiatives. The Company records these instruments on the balance
sheet at their fair value. Changes in the fair value of these fuel hedge
contracts are recorded each period in aircraft fuel expense.
The
following table summarizes the components of aircraft fuel expense for the years
ended December 31, 2009, 2008 and 2007 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Raw
or “into-plane” fuel cost
|
$ | 572.3 | $ | 1,103.8 | $ | 825.7 | ||||||
|
(Gains)
or losses in value and settlements of fuel hedge contracts
|
(23.3 | ) | 58.6 | (88.2 | ) | |||||||
|
Aircraft
fuel expense
|
$ | 549.0 | $ | 1,162.4 | $ | 737.5 | ||||||
The
premiums expensed, net of any cash received, for hedges that settled during 2009
totaled $50.4 million. The cash received, net of premiums expensed,
in 2008 and 2007 was $101.8 million and $44.9 million, respectively, for fuel
hedge contracts that settled during the period based on their originally
scheduled settlement date. The Company also realized losses of $41.5 million on
fuel hedge contracts terminated in the fourth quarter of 2008 that had scheduled
settlement dates in 2009 and 2010. These amounts represent the difference
between the cash paid or received at settlement and the amount of premiums paid
for the contracts at origination.
As of
December 31, 2009 and 2008, the fair values of the Company’s fuel hedge
positions were $96.2 million and $23.5 million, respectively, including
capitalized premiums paid to enter into the contracts of $73.8 million and $73.9
million, respectively.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedging contracts consist of over-the-counter
contracts, which are not traded on an exchange. The fair value of these
contracts is determined based on observable inputs that are readily available in
active markets or can be derived from information available in active, quoted
markets. Therefore, the Company has categorized these contracts as Level 2 in
the fair value hierarchy described in Note 12.
Outstanding fuel hedge positions as of
December 31, 2009 are as follows:
|
Approximate
%
of
Expected
Fuel
Requirements
|
Gallons
Hedged
(in millions)
|
Approximate
Crude
Oil
Price
per
Barrel
|
|
|
First Quarter 2010
|
50%
|
36.2
|
$69
|
|
Second Quarter 2010
|
50%
|
38.1
|
$69
|
|
Third Quarter 2010
|
50%
|
40.1
|
$74
|
|
Fourth Quarter 2010
|
50%
|
37.0
|
$83
|
|
Full Year 2010
|
50%
|
151.4
|
$74
|
|
First Quarter 2011
|
50%
|
37.3
|
$87
|
|
Second Quarter 2011
|
41%
|
32.5
|
$83
|
|
Third Quarter 2011
|
36%
|
29.6
|
$86
|
|
Fourth Quarter 2011
|
22%
|
16.5
|
$84
|
|
Full Year 2011
|
37%
|
115.9
|
$85
|
|
First Quarter 2012
|
23%
|
17.9
|
$87
|
|
Second Quarter 2012
|
7%
|
5.8
|
$86
|
|
Third Quarter 2012
|
6%
|
5.3
|
$97
|
|
Fourth Quarter 2012
|
6%
|
4.4
|
$93
|
|
Full Year 2012
|
10%
|
33.4
|
$89
|
NOTE
4. NEW PILOT CONTRACT TRANSITION COSTS AND RESTRUCTURING CHARGES
New
Pilot Contract Transition Costs
On May 19, 2009, the Company announced
that its pilots, represented by the Air Line Pilots Association, ratified a new
four-year contract. Among other items, the contract has a provision
that allows for pilots to receive, at retirement, a cash payment equal to 25% of
their accrued sick leave balance multiplied by their hourly rate. The transition
expense associated with establishing this sick-leave payout program was $15.5
million. Pilots also received a one-time cash bonus following
ratification of the contract of $20.3 million in the aggregate. These
items have been combined and reported as “New pilot contract transition costs”
in the statements of operations.
Restructuring
Charges
In 2008,
the Company announced reductions in work force among union and non-union
employees and recorded a $12.9 million charge representing the severance
payments and estimated medical coverage obligation for the affected
employees.
The
following table displays the activity and balance of the severance and related
cost components of the Company’s restructuring accrual as of and for the years
ended December 31, 2009, 2008 and 2007 (in millions):
|
Accrual
for Severance and Related
Costs
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$ | 7.2 | $ | 0.7 | $ | 19.9 | ||||||
|
Restructuring
charges and adjustments
|
— | 12.9 | — | |||||||||
|
Cash
payments
|
(7.2 | ) | (6.4 | ) | (19.2 | ) | ||||||
|
Balance
at end of year
|
$ | — | $ | 7.2 | $ | 0.7 | ||||||
NOTE 5. MARKETABLE
SECURITIES
All of
the Company’s marketable securities are classified as available-for-sale. The
securities are carried at fair value, with the unrealized gains and losses
reported in shareholders’ equity under the caption “accumulated other
comprehensive loss” (AOCL). Realized gains and losses are included in other
nonoperating income (expense) in the statements of operations.
The cost
of securities sold is based on the specific identification method. Interest and
dividends on marketable securities are included in interest income in the
statements of operations.
The
Company’s overall investment strategy has a primary goal of maintaining and
securing its investment principal. The Company’s investment portfolio is managed
by well-known financial institutions and continually reviewed to ensure that the
investments are aligned with the Company’s documented strategy.
Marketable securities consisted of the
following at December 31 (in millions):
|
2009
|
2008
|
|||||||
|
Cost:
|
||||||||
|
U.S.
government securities
|
$ | 376.7 | $ | 329.1 | ||||
|
Asset-backed
obligations
|
215.4 | 198.0 | ||||||
|
Other
corporate obligations
|
421.8 | 263.7 | ||||||
| $ | 1,013.9 | $ | 790.8 | |||||
|
Fair
value:
|
||||||||
|
U.S.
government securities
|
$ | 381.2 | $ | 342.8 | ||||
|
Asset-backed
obligations
|
214.7 | 187.7 | ||||||
|
Other
corporate obligations
|
432.0 | 263.8 | ||||||
| $ | 1,027.9 | $ | 794.3 | |||||
Activity
for marketable securities for the years ended December 31, 2009, 2008 and
2007 is as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Proceeds
from sales and maturities
|
$ | 725.0 | $ | 579.6 | $ | 1,321.1 | ||||||
|
Gross
realized gains
|
7.0 | 7.2 | 4.8 | |||||||||
|
Gross
realized losses
|
2.3 | 3.8 | 2.9 | |||||||||
Of the
marketable securities on hand at December 31, 2009, 35% mature in 2010, 24%
in 2011, and 41% thereafter.
Some of
the Company’s asset-backed securities held at December 31, 2009 had credit
losses, as defined in the accounting standards. Based on a future
cash flow analysis, the Company determined that it does not expect to recover
the full amortized cost basis of certain asset-backed
obligations. This analysis estimated the expected future cash flows
by using a discount rate equal to the effective interest rate implicit in the
securities at the date of acquisition. The inputs used to estimate
future cash flows included the default, foreclosure, and bankruptcy rates on the
underlying mortgages and expected home pricing trends. The Company
also looked at the average credit scores of the individual mortgage holders and
the average
loan-to-value percentage. The majority of the credit losses were
recorded in the second quarter of 2009.
The
aggregate credit losses recorded in other nonoperating expense totaled $2.2
million in 2009 representing the difference between the present value of future
cash flows and the amortized cost basis of the affected
securities.
Management
does not believe the securities associated with the remaining $3.5 million
unrealized loss recorded in AOCL are “other-than-temporarily” impaired, as
defined in the accounting standards, based on the current facts and
circumstances. Management currently does not intend to sell these
securities prior to their recovery nor does it believe that it will be
more-likely-than-not that the Company would need to sell these securities for
liquidity or other reasons.
During
2008, the Company determined that certain corporate debt securities were
other-than-temporarily impaired. As such, the Company recorded a $3.5 million
loss in other--net nonoperating expense in 2008 representing the difference
between the estimated fair market value and the amortized cost of the
securities.
Gross
unrealized gains and losses at December 31, 2009 are presented in the table
below (in millions):
|
Unrealized
Losses
|
||||||||||||||||||||||||||||||||
|
Unrealized
Gains
|
Less
than 12 months
|
Greater
than 12 months
|
Total
Unrealized Losses
|
Less:
Credit Loss Recorded in Earnings
|
Net
Unrealized Losses in AOCL
|
Net
Unrealized Gains/(Losses) in AOCL
|
Fair
Value of Securities with Unrealized Losses
|
|||||||||||||||||||||||||
|
U.S.
Government Securities
|
$ | 4.7 | $ | (0.2 | ) | $ | — | $ | (0.2 | ) | $ | — | $ | (0.2 | ) | $ | 4.5 | $ | 76.8 | |||||||||||||
|
Asset-backed
obligations
|
2.4 | (0.2 | ) | (5.1 | ) | (5.3 | ) | (2.2 | ) | (3.1 | ) | (0.7 | ) | 61.2 | ||||||||||||||||||
|
Other
corporate obligations
|
10.4 | (0.2 | ) | — | (0.2 | ) | — | (0.2 | ) | 10.2 | 37.7 | |||||||||||||||||||||
|
Total
|
$ | 17.5 | $ | (0.6 | ) | $ | (5.1 | ) | $ | (5.7 | ) | $ | (2.2 | ) | $ | (3.5 | ) | $ | 14.0 | $ | 175.7 | |||||||||||
Gross
unrealized gains and losses at December 31, 2008 are presented in the table
below (in millions):
|
Unrealized
Losses
|
||||||||||||||||||||||||
|
Unrealized
Gains
|
Less than
12 months
|
Greater than
12
months
|
Total
|
Net
Unrealized
Losses/Gains
in
AOCI
|
Fair Value of
Securities with
Unrealized
Losses
|
|||||||||||||||||||
|
U.S.
Government Securities
|
$ | 10.5 | $ | — | $ | — | $ | — | $ | 10.5 | $ | — | ||||||||||||
|
Asset-backed
obligations
|
0.7 | (9.3 | ) | (2.4 | ) | (11.7 | ) | (11.0 | ) | 138.6 | ||||||||||||||
|
Other
corporate obligations
|
1.8 | (4.3 | ) | (1.0 | ) | (5.3 | ) | (3.5 | ) | 154.8 | ||||||||||||||
|
Total
|
$ | 13.0 | $ | (13.6 | ) | $ | (3.4 | ) | $ | (17.0 | ) | $ | (4.0 | ) | $ | 293.4 | ||||||||
NOTE
6. LONG-TERM DEBT
At
December 31, 2009 and 2008, long-term debt obligations were as follows (in
millions):
|
2009
|
2008
|
|||||||
|
Fixed-rate
notes payable due through 2022*
|
$ | 1,160.9 | $ | 1,192.1 | ||||
|
Variable-rate
notes payable due through 2019*
|
346.9 | 252.2 | ||||||
|
Bank
line-of-credit facility expiring in 2010*
|
-- | 75.0 | ||||||
|
Pre-delivery
payment facility expiring in 2011*
|
-- | 39.9 | ||||||
|
Long-term
debt
|
1,507.8 | 1,559.2 | ||||||
|
Less
current portion
|
(131.2 | ) | (225.1 | ) | ||||
| $ | 1,376.6 | $ | 1,334.1 | |||||
|
*
|
The
weighted-average fixed-interest rate was 6.2% as of December 31, 2009
and 2008. The weighted-average variable-interest rate, including the
interest rate on the pre-delivery payment and bank line-of-credit
facilities, was 2.7% and 4.0% as of December 31, 2009 and 2008,
respectively.
|
At
December 31, 2009, all of the Company’s borrowings were secured by flight
equipment.
The
Company has an $80 million variable-rate revolving pre-delivery payment (PDP)
facility to provide a portion of the pre-delivery funding requirements for the
purchase of new Boeing 737-800 aircraft. The interest rate is based on the
one-month LIBOR plus a specified margin. Borrowings are secured by the Company’s
rights under the Boeing purchase agreement. The principal amounts outstanding on
the PDP facility relate to specified aircraft and are repaid at the time the
Company takes delivery of the aircraft, if not before. During the second quarter of 2009, the available amount
on the facility was reduced from $152 million to $90.5 million and then again to
$80 million on August 31, 2009. The reduction was primarily driven by
the decline in the remaining future obligations under the purchase agreement
with Boeing. The facility expires on August 31, 2011.
During
2009, the Company borrowed $178.5 million using fixed-rate and variable-rate
debt secured by flight equipment and another $10.4 million from the PDP
facility. The Company made payments of $240.3 million, including
$50.3 million on the PDP facility and $75 million on the bank line-of-credit
facility.
At
December 31, 2009, long-term debt principal payments for the next five
years are as follows (in millions):
|
Total
|
||||
|
2010
|
$ | 131.2 | ||
|
2011
|
165.4 | |||
|
2012
|
209.0 | |||
|
2013
|
167.1 | |||
|
2014
|
132.5 | |||
|
Thereafter
|
702.6 | |||
|
Total
principal payments
|
$ | 1,507.8 | ||
Bank
Line of Credit
The
Company has a $185 million credit facility with a syndicate of financial
institutions. The interest rate on the credit facility varies depending on
certain financial ratios specified in the agreement with a minimum interest rate
of LIBOR plus a specified margin. The agreement provides that any borrowings
will be secured by either aircraft or cash collateral. The facility expires on
March 31, 2010. The facility has a requirement to maintain a minimum
unrestricted cash and marketable securities balance of $500 million. The Company
is in compliance with this covenant at December 31, 2009. As of
December 31, 2009, there were no borrowings outstanding under this credit
facility. Management is currently in the process
of renewing this facility and believes it will be able to do so at terms
that are acceptable to the Company.
NOTE 7.
COMMITMENTS
Lease
Commitments
At
December 31, 2009, the Company had lease contracts for 39 aircraft, three
of which are non-operating aircraft, which have remaining noncancelable lease
terms of less than one year to over eleven years. The majority of airport and
terminal facilities are also leased. Total rent expense was $223.6 million,
$221.3 million, and $231.1 million, in 2009, 2008, and 2007,
respectively.
Future
minimum lease payments with noncancelable terms in excess of one year as of
December 31, 2009 are shown below (in millions):
|
Operating
Leases
|
||||||||
|
Aircraft
|
Facilities
|
|||||||
|
2010
|
114.3 | 47.0 | ||||||
|
2011
|
98.3 | 36.1 | ||||||
|
2012
|
102.3 | 32.1 | ||||||
|
2013
|
95.8 | 8.0 | ||||||
|
2014
|
88.5 | 4.6 | ||||||
|
Thereafter
|
218.4 | 61.2 | ||||||
|
Total
lease payments
|
$ | 717.6 | $ | 189.0 | ||||
Aircraft
Commitments
In 2005,
the Company entered into an aircraft purchase agreement to acquire B737-800
aircraft with deliveries beginning in January 2006 and continuing through April
2011. In April 2009, the Company entered into an agreement with Boeing to defer
the delivery of a number of B737-800 aircraft and committed to purchase an
additional four aircraft to be delivered in 2014 and 2015. As of
December 31, 2009, the Company was committed to purchasing 15 B737-800
aircraft, four of which will be delivered in 2010. The company also has options
to purchase an additional 40 B737-800 aircraft.
At
December 31, 2009, the Company had firm purchase commitments for 15 total
aircraft requiring remaining aggregate payments of approximately $443.0
million.
The
Company expects to pay for the 2010 deliveries with cash on hand. The
Company expects to pay for firm orders beyond 2010 and the option aircraft, if
exercised, through internally generated cash, long-term debt, or operating lease
arrangements.
NOTE 8.
EMPLOYEE BENEFIT PLANS
Four
defined-benefit and four defined-contribution retirement plans cover various
employee groups of the Company. The defined-benefit plans provide benefits based
on an employee’s term of service and average compensation for a specified period
of time before retirement. With the ratification of the pilot collective
bargaining agreement in 2009, the qualified defined-benefit pension plans are no
longer open to new entrants.
The
Company also maintains an unfunded, noncontributory defined-benefit plan for
certain elected officers and an unfunded, non-contributory defined-contribution
plan for other elected officers.
Accounting
standards require recognition of the overfunded or underfunded status of an
entity’s defined-benefit pension and other postretirement plan as an asset or
liability in the financial statements and requires recognition of the funded
status in other comprehensive income.
Qualified
Defined-Benefit Pension Plans
The
Company’s pension plans are funded as required by the Employee Retirement Income
Security Act of 1974 (ERISA).
The
defined-benefit plan assets consist primarily of marketable equity and
fixed-income securities. The Company uses a December 31 measurement date
for these plans.
Weighted
average assumptions used to determine benefit obligations as of
December 31:
Discount
rates of 5.85% and 6.20% were used as of December 31, 2009 and 2008,
respectively. For 2009, the rate of compensation increase used varied from 3.21%
to 4.53%, depending on the related workgroup. For 2008, the range of
compensation increases was 3.52% to 4.53%.
Weighted
average assumptions used to determine net periodic benefit cost for the years
ended December 31:
Discount
rates of 6.20%, 6.00%, and 5.75% were used for the years ended December 31,
2009, 2008, and 2007, respectively. For all three years, the expected return on
plan assets used was 7.75%, and the rate of compensation increase used varied
from 3.52% to 4.53%, depending on the plan and the related
workgroup.
In
determining the discount rate used, the Company’s policy is to use the rates at
or near the end of the year on high-quality long-term bonds with maturities that
closely match the expected timing of future cash distributions from the plan. In
determining the expected return on plan assets, the Company assesses the current
level of expected returns on risk-free investments (primarily government bonds),
the historical level of the risk premium associated with the other asset classes
in which the portfolio is invested and the expectations for future returns of
each asset class. The expected return for each asset class is then weighted
based on the target asset allocation to develop the expected long-term rate of
return on assets assumption for the portfolio.
Plan assets are invested in common
comingled trust funds invested in equity and fixed income
securities. The asset allocation of the funds in the qualified
defined-benefit plans, by asset category, is as follows as of the end of 2009
and 2008:
|
2009
|
2008
|
|||||||
|
Asset
category:
|
||||||||
|
Money
market fund
|
10 | % | -- | % | ||||
|
Domestic
equity securities
|
45 | 49 | ||||||
|
Non-U.S.
equity securities
|
18 | 21 | ||||||
|
Fixed
income securities
|
27 | 30 | ||||||
|
Plan
assets
|
100 | % | 100 | % | ||||
The
Company’s investment policy focuses on achieving maximum returns at a reasonable
risk for pension assets over a full market cycle. The Company uses a fund
manager and invests in various asset classes to diversify risk. Target
allocations for the primary asset classes are approximately:
|
Domestic
equities:
|
50 | % | ||
|
Non-U.S.
equities:
|
20 | % | ||
|
Fixed
income:
|
30 | % |
Pension
assets are rebalanced periodically to maintain these target asset allocations.
An individual equity investment will not exceed 10% of the entire equity
portfolio. Fixed-income securities carry a minimum “A” rating by Moody’s and/or
Standard and Poor’s and the average life of the bond portfolio may not exceed
ten years. The Company does not currently intend to invest plan assets in the
Company’s common stock.
The
Company made a $100 million contribution to the plan on December 30,
2009. The majority of that contribution was invested in a money
market account at year-end and will be distributed to the other investment
categories throughout 2010 in accordance with the target asset
allocations.
As of
December 31, 2009, other than the money market fund, all assets were invested in
common comingled trust funds. The Company uses the net asset values
of these funds to determine fair value as allowed using the practical expediency
method outlined in the accounting standards. The fund categories
included in plan assets as of December 31, 2009 and 2008, their amounts, and
their fair value hierarchy level are as follows (dollars in
millions):
|
2009
|
2008
|
Level
|
||||||||||
|
Fund
type:
|
||||||||||||
|
Money
market fund
|
$ | 90.6 | $ | --- | 1 | |||||||
|
U.S.
equity market fund
|
408.0 | 316.3 | 2 | |||||||||
|
Non-U.S.
equity fund
|
164.4 | 136.7 | 2 | |||||||||
|
U.S.
debt index fund
|
147.6 | 153.6 | 2 | |||||||||
|
Government/credit
bond index fund
|
96.3 | 43.4 | 2 | |||||||||
|
Plan
assets
|
$ | 906.9 | $ | 650.0 | ||||||||
Nonqualified
Defined-Benefit Pension Plan
Alaska
also maintains an unfunded, noncontributory defined-benefit plan for certain
elected officers. This plan uses a December 31 measurement
date.
Weighted
average assumptions used to determine benefit obligations as of
December 31:
Discount
rates of 5.85% and 6.20% were used as of December 31, 2009 and 2008
respectively. The rate of compensation increase used was 5.00% as of
December 31, 2009 and 2008.
Weighted
average assumptions used to determine net periodic benefit cost for the years
ended December 31:
Discount
rates of 6.20%, 6.00%, and 5.75% were used for the years ended December 31,
2009, 2008, and 2007, respectively. The rate of compensation increase used was
5.00% for all three years presented.
Combined
Disclosures for Defined-Benefit Pension Plans
The
following table sets forth the status of the plans for 2009 and 2008 (in
millions):
|
Qualified
|
Nonqualified
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Projected
benefit obligation (PBO)
|
||||||||||||||||
|
Beginning
of year
|
$ | 1,094.9 | $ | 1,056.9 | $ | 36.0 | $ | 34.9 | ||||||||
|
Service
cost
|
44.2 | 46.6 | 0.7 | 0.9 | ||||||||||||
|
Interest
cost
|
66.9 | 62.7 | 2.2 | 2.1 | ||||||||||||
|
Plan
amendments
|
(29.6 | ) | (0.5 | ) | — | — | ||||||||||
|
Curtailment
(gain) loss
|
— | (2.9 | ) | — | — | |||||||||||
|
Actuarial
(gain) loss
|
47.3 | (31.1 | ) | 0.6 | (0.1 | ) | ||||||||||
|
Transfer
to pilot long-term disability plan
|
(3.0 | ) | — | — | — | |||||||||||
|
Benefits
paid
|
(40.9 | ) | (36.8 | ) | (2.2 | ) | (1.8 | ) | ||||||||
|
End
of year
|
$ | 1,179.8 | $ | 1,094.9 | $ | 37.3 | $ | 36.0 | ||||||||
|
Plan
assets at fair value
|
||||||||||||||||
|
Beginning
of year
|
$ | 650.0 | $ | 910.6 | $ | — | $ | — | ||||||||
|
Actual
return on plan assets
|
150.0 | (275.5 | ) | — | — | |||||||||||
|
Employer
contributions
|
147.8 | 51.7 | 2.2 | 1.8 | ||||||||||||
|
Benefits
paid
|
(40.9 | ) | (36.8 | ) | (2.2 | ) | (1.8 | ) | ||||||||
|
End
of year
|
$ | 906.9 | $ | 650.0 | $ | — | $ | — | ||||||||
|
Funded
status (unfunded)
|
$ | (272.9 | ) | $ | (444.9 | ) | $ | (37.3 | ) | $ | (36.0 | ) | ||||
|
Percent
funded
|
76.9 | % | 59.4 | % | — | — | ||||||||||
Of the
total $1.2 billion PBO for the qualified plans, approximately 57% represents the
obligation of the plan covering Alaska’s pilots. The accumulated benefit
obligation for the combined qualified defined-benefit pension plans was $1,102.5
million and $1,017.9 million at December 31, 2009 and 2008, respectively.
The accumulated benefit obligation for the nonqualified defined-benefit plan was
$36.9 million and $35.8 million at December 31, 2009 and 2008,
respectively.
The plan
amendment and the transfer to the pilot long-term disability plan in 2009 were
the result of plan changes in the new pilot collective bargaining agreement
ratified during the year. See further discussion under “Pilot
Long-term Disability Benefits” below.
As of
December 31, 2009 and 2008, the amounts recognized in the balance sheets
were as follows (in millions):
|
2009
|
2008
|
|||||||||||||||
|
Qualified
|
Nonqualified
|
Qualified
|
Nonqualified
|
|||||||||||||
|
Accrued
benefit liability-current
|
$ | — | $ | 2.5 | $ | — | $ | 2.5 | ||||||||
|
Accrued
benefit liability-long term
|
272.9 | 34.8 | 444.9 | 33.5 | ||||||||||||
|
Total
liability recognized
|
$ | 272.9 | $ | 37.3 | $ | 444.9 | $ | 36.0 | ||||||||
AMOUNTS
NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN ACCUMULATED OTHER
COMPREHENSIVE INCOME OR LOSS (AOCI):
|
2009
|
2008
|
|||||||||||||||
|
Qualified
|
Nonqualified
|
Qualified
|
Nonqualified
|
|||||||||||||
|
Prior
service cost (credit)
|
$ | (17.5 | ) | $ | 0.1 | $ | 16.3 | $ | 0.2 | |||||||
|
Net
loss
|
395.0 | 4.8 | 475.4 | 4.3 | ||||||||||||
|
Amount
recognized in AOCI (pretax)
|
$ | 377.5 | $ | 4.9 | $ | 491.7 | $ | 4.5 | ||||||||
The expected amortization of prior
service credit and net loss from AOCI in 2010 is $(0.9) million and $22.2
million, respectively, for the qualified defined-benefit pension plans. For the
nonqualified defined-benefit pension plans, the expected combined amortization
of prior service cost and net loss from AOCI in 2010 is $0.2 million.
Net
pension expense for the defined-benefit plans included the following components
for 2009, 2008, and 2007 (in millions):
|
Qualified
|
Nonqualified
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
Service
cost
|
$ | 44.2 | $ | 46.6 | $ | 49.7 | $ | 0.7 | $ | 0.9 | $ | 1.1 | ||||||||||||
|
Interest
cost
|
66.9 | 62.7 | 60.9 | 2.2 | 2.1 | 1.9 | ||||||||||||||||||
|
Expected
return on assets
|
(51.3 | ) | (71.8 | ) | (66.3 | ) | — | — | — | |||||||||||||||
|
Amortization
of prior service cost
|
4.3 | 4.4 | 4.9 | 0.1 | 0.1 | 0.1 | ||||||||||||||||||
|
Curtailment
loss
|
— | 0.5 | — | — | — | — | ||||||||||||||||||
|
Recognized
actuarial loss
|
28.9 | 5.6 | 13.4 | 0.1 | 0.2 | 0.3 | ||||||||||||||||||
|
Net
pension expense
|
$ | 93.0 | $ | 48.0 | $ | 62.6 | $ | 3.1 | $ | 3.3 | $ | 3.4 | ||||||||||||
Historically,
the Company’s practice has been to contribute to the qualified defined-benefit
pension plans in an amount equal to the greater of 1) the minimum required by
law, 2) the PPA target liability, or 3) the service cost as actuarially
calculated. There are no current funding requirements for the Company’s plans in
2010. However, the Company anticipates that it will continue with its historical
funding practice in 2010, which would result in funding of approximately $50
million. The Company expects to contribute approximately $2.5 million to the
nonqualified defined-benefit pension plans during 2010.
Future
benefits expected to be paid over the next ten years under the defined-benefit
pension plans from the assets of those plans as of December 31, 2009 are as
follows (in millions):
|
Qualified
|
Nonqualified
|
|||||||
|
2010
|
$ | 36.4 | $ | 2.5 | ||||
|
2011
|
48.8 | 2.2 | ||||||
|
2012
|
50.0 | 2.4 | ||||||
|
2013
|
57.2 | 2.5 | ||||||
|
2014
|
64.7 | 2.7 | ||||||
|
2015–
2019
|
$ | 394.9 | $ | 17.3 | ||||
Postretirement
Medical Benefits
The
Company allows retirees to continue their medical, dental, and vision benefits
by paying all or a portion of the active employee plan premium until eligible
for Medicare, currently age 65. This results in a subsidy to retirees, because
the premiums received by the Company are less than the actual cost of the
retirees’ claims. The accumulated postretirement benefit obligation (APBO) for
this subsidy is unfunded. This liability was determined using an assumed
discount rate of 5.85% and 6.20% at December 31, 2009 and 2008,
respectively.
|
2009
|
2008
|
|||||||
|
Accumulated
postretirement benefit obligation
|
||||||||
|
Beginning
of year
|
$ | 109.9 | $ | 101.7 | ||||
|
Service
cost
|
5.6 | 4.2 | ||||||
|
Interest
cost
|
7.8 | 5.6 | ||||||
|
Plan
amendments
|
4.1 | — | ||||||
|
Curtailments
|
— | (0.5 | ) | |||||
|
Actuarial
(gain) loss
|
(6.7 | ) | 1.9 | |||||
|
Transfer
to pilot long-term disability plan
|
(0.6 | ) | — | |||||
|
Benefits
paid
|
(2.8 | ) | (3.0 | ) | ||||
|
End
of year
|
$ | 117.3 | $ | 109.9 | ||||
|
Plan
assets at fair value
|
||||||||
|
Beginning
of year
|
$ | — | $ | — | ||||
|
Employer
contributions
|
2.8 | 3.0 | ||||||
|
Benefits
paid
|
(2.8 | ) | (3.0 | ) | ||||
|
End
of year
|
$ | — | $ | — | ||||
|
Funded
status (unfunded)
|
$ | (117.3 | ) | $ | (109.9 | ) | ||
The plan
amendment and the transfer to the pilot long-term disability plan in 2009 were
the result of plan changes in the new pilot collective bargaining agreement
ratified during the year. See further discussion under “Pilot
Long-term Disability Benefits” below.
As of
December 31, 2009 and 2008, the amounts recognized in the balance sheets
were as follows (in millions):
|
2009
|
2008
|
|||||||
|
Accrued
benefit liability-current
|
$ | 4.2 | $ | 4.4 | ||||
|
Accrued
benefit liability-long term
|
113.1 | 105.5 | ||||||
|
Total
liability recognized
|
$ | 117.3 | $ | 109.9 | ||||
AMOUNTS
NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN
AOCI:
|
2009
|
2008
|
|||||||
|
Prior
service cost
|
$ | 2.6 | $ | 1.4 | ||||
|
Net
loss
|
15.7 | 23.1 | ||||||
|
Amount
recognized in AOCI (pretax)
|
$ | 18.3 | $ | 24.5 | ||||
The
expected combined amortization of prior service cost and net loss from AOCI in
2010 is $0.3 million.
The Company uses a December 31
measurement date to assess obligations associated with the subsidy of retiree
medical costs. Net periodic benefit cost for the postretirement medical plans
included the following components for 2009, 2008 and 2007 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Service
cost
|
$ | 5.6 | $ | 4.2 | $ | 4.6 | ||||||
|
Interest
cost
|
7.8 | 5.6 | 6.3 | |||||||||
|
Amortization
of prior service cost
|
2.9 | (0.3 | ) | (0.3 | ) | |||||||
|
Recognized
actuarial loss
|
0.8 | 0.5 | 2.4 | |||||||||
|
Net
periodic benefit cost
|
$ | 17.1 | $ | 10.0 | $ | 13.0 | ||||||
This is
an unfunded plan. The Company expects to contribute approximately $4.2 million
to the postretirement medical benefits plan in 2010, which is equal to the
expected benefit payments.
Future
benefits expected to be paid over the next ten years under the postretirement
medical benefits plan as of December 31, 2009 are as follows (in
millions):
|
2010
|
$ | 4.2 | |||
|
2011
|
4.8 | ||||
|
2012
|
5.2 | ||||
|
2013
|
5.9 | ||||
|
2014
|
6.6 | ||||
| 2015 - 2019 | 44.2 |
The
assumed health care cost trend rates to determine the expected 2010 benefits
cost are 9.2%, 9.2%, 5% and 4% for medical, prescription drugs, dental and
vision costs, respectively. The assumed trend rate declines steadily through
2028 where the ultimate assumed trend rates are 4.7% for medical, prescription
drugs and dental, and 4% for vision.
A 1% higher or lower trend rate in
health care costs has the following effect on the Company’s postretirement
medical plans during 2009, 2008 and 2007 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Change
in service and interest cost
|
||||||||||||
|
1%
higher trend rate
|
$ | 2.1 | $ | 1.4 | $ | 1.6 | ||||||
|
1%
lower trend rate
|
(1.7 | ) | (1.2 | ) | (1.4 | ) | ||||||
|
Change
in year-end postretirement benefit obligation
|
||||||||||||
|
1%
higher trend rate
|
$ | 14.4 | $ | 13.3 | $ | 12.2 | ||||||
|
1%
lower trend rate
|
(12.4 | ) | (11.5 | ) | (10.6 | ) | ||||||
Defined-Contribution
Plans
The
defined-contribution plans are deferred compensation plans under section 401(k)
of the Internal Revenue Code. All of these plans require Company contributions.
Total expense for the defined-contribution plans was $19.2 million, $17.7
million, and $16.4 million in 2009, 2008, and 2007,
respectively. Management expects that Company contributions
will increase in 2010 as pilots that elected to freeze or reduce their service
credits in the defined-benefit pension plan will receive a higher Company
contribution under the new collective bargaining agreement.
The
Company also has a noncontributory, unfunded defined-contribution plan for
certain elected officers of the Company who are ineligible for the nonqualified
defined-benefit pension plan. Amounts recorded as liabilities under the plan are
not material to the balance sheets at December 31, 2009 and
2008.
Pilot
Long-term Disability Benefits
The
collective bargaining agreement with Alaska’s pilots calls for the removal of
long-term disability benefits from the defined-benefit plan for any pilot that
was not already receiving long-term disability payments prior to January 1,
2010. As a result of this plan change, the PBO of $32.6 million
associated with assumed future disability payments was removed from the overall
defined-benefit pension plan liability, $29.6 million of which was recorded
through AOCI. Furthermore, the removal of the plan from the
defined-benefit pension plan reduced the accumulated postretirement benefit
obligation for medical costs as the new plan no longer considers long-term
disability to be “retirement” from the Company.
The new
long-term disability plan removes the service requirement that was in place
under the former defined-benefit plan. Therefore, the liability is
calculated based on estimated future benefit payments associated with pilots
that were assumed to be disabled on a long-term basis as of December 31, 2009
and does not include any assumptions for future disability. The liability
includes the discounted expected future benefit payments and medical
costs. The total liability at December 31, 2009 is $3.1 million,
which is recorded net of a prefunded trust account of $0.5 million, and is
included in long-term other liabilities on the balance sheets.
Employee
Incentive-Pay Plans
The
Company has three separate plans that pay employees based on certain financial
and operational metrics. The aggregate expense under these plans in 2009, 2008
and 2007 was $61.6 million, $15.8 million, $13.5 million, respectively. The
plans are summarized below:
|
|
•
|
Performance-Based Pay
(PBP) is a program that rewards all employees other than clerical, office
and passenger service employees (COPS) and station employees in
Mexico. The program is based on four separate metrics related
to: (1) Air Group profitability, (2) safety,
(3) achievement of unit-cost goals, and (4) employee
engagement.
|
|
|
•
|
The
Profit Sharing
Plan is based on Air Group profitability and includes the employees
that don’t participate in PBP.
|
|
|
•
|
The
Operational Performance
Rewards Program entitles all employees to quarterly payouts of up
to $300 per person if certain operational and customer service objectives
are met.
|
NOTE
9. DETAIL OF OTHER FINANCIAL STATEMENT CAPTIONS
Receivables
Receivables
consisted of the following at December 31 (in millions):
|
2009
|
2008
|
||||||||
|
Airline
traffic receivables
|
$ | 54.9 | $ | 46.4 | |||||
|
Mileage
Plan receivables
|
31.9 | 29.6 | |||||||
|
Receivables
from fuel-hedging counterparties
|
0.9 | — | |||||||
|
Other
receivables
|
18.5 | 24.4 | |||||||
|
Allowance
for doubtful accounts
|
(1.5 | ) | (1.5 | ) | |||||
| $ | 104.7 | $ | 98.9 | ||||||
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current
assets consisted of the following at December 31 (in millions):
|
2009
|
2008
|
|||||||
|
Prepaid
aircraft rent
|
$ | 3.4 | $ | 3.4 | ||||
|
Prepaid
fuel
|
6.8 | 5.9 | ||||||
|
Prepaid
engine maintenance
|
13.3 | — | ||||||
|
Other
|
24.2 | 20.8 | ||||||
| $ | 47.7 | $ | 30.1 | |||||
Other
Assets
Other
assets consisted of the following at December 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Restricted deposits
(primarily restricted
investments)
|
$ | 65.0 | $ | 57.4 | ||||
|
Deferred
costs and other*
|
15.3 | 16.0 | ||||||
| $ | 80.3 | $ | 73.4 | |||||
|
*
|
Deferred
costs and other includes deferred financing costs, long-term prepaid rent,
lease deposits and other items.
|
At
December 31, 2009, the Company’s restricted deposits were primarily
restricted investments used to guarantee various letters of credit and workers
compensation self-insurance programs. The restricted investments consist of
highly liquid securities with original maturities of three months or less. They
are carried at cost, which approximates fair value.
Other
Accrued Liabilities (current)
Other
accrued liabilities consisted of the following at December 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Mileage Plan
current liabilities
|
$ | 267.9 | $ | 280.4 | ||||
|
Pension
liability (nonqualified plans)
|
2.5 | 2.5 | ||||||
|
Postretirement
medical benefits liability
|
4.2 | 4.4 | ||||||
|
Other*
|
231.8 | 223.4 | ||||||
| $ | 506.4 | $ | 510.7 | |||||
|
*
|
Other
consists of property and transportation taxes and accruals for ground
operations, facilities rent, maintenance, and fuel, among other
items.
|
Other
Liabilities (noncurrent)
Other
liabilities consisted of the following at December 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Mileage
Plan liability
|
$ | 13.2 | $ | 15.9 | ||||
|
Uncertain
tax position liability (see Note 11)
|
0.9 | 10.6 | ||||||
|
Aircraft
rent-related
|
23.3 | 55.5 | ||||||
|
Other*
|
75.2 | 44.4 | ||||||
| $ | 112.6 | $ | 126.4 | |||||
* Other consists of
workers' compensation and deferred credits on aircraft purchases, among other
items.
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss consisted of the following at December 31 (in
millions, net of tax):
|
2009
|
2008
|
|||||||
|
Unrealized
loss (gain) on marketable securities considered
available-for-sale
|
$ | (8.7 | ) | $ | 2.5 | |||
|
Related
to pension plans
|
238.8 | 310.4 | ||||||
|
Related
to postretirement medical benefits
|
11.4 | 15.4 | ||||||
|
Related
to interest rate derivatives
|
(1.5 | ) | — | |||||
| $ | 240.0 | $ | 328.3 | |||||
NOTE
10. STOCK-BASED COMPENSATION PLANS
Stock-based
compensation recorded by the Company relates to stock awards granted to company
employees by Air Group. As the Company does not have common stock
that is traded on an exchange and all equity-based awards are related to Air
Group common stock, the disclosures below have been limited. For a
full discussion of the Air Group stock-based compensation plans, see the Alaska
Air Group annual report on Form 10-K filed on February 19, 2010.
The
Company has stock awards outstanding under a number of Air Group’s long-term
incentive equity plans, only one of which (the 2008 Long-Term Incentive Equity
Plan) continues to provide for the granting of stock awards to officers and
employees of the Company. Compensation expense is recorded over the
shorter of the vesting period or the period between grant date and the date the
employee becomes retirement-eligible as defined in the applicable
plan. All stock-based compensation expense is recorded in wages and
benefits in the statements of operations.
Stock
Options
Under the
various plans, options for 8,299,258 shares of Air Group’s common stock have
been granted to directors and employees of Air Group and its subsidiaries and,
at December 31, 2009, 1,406,393 shares were available for future grant of
either options or stock awards. Under all plans, the stock options granted have
terms of up to ten years. Substantially all grantees are 25% vested after one
year, 50% after two years, 75% after three years, and 100% after four
years.
During
2009, Air Group granted 347,588 options to the Company’s employees with a
weighted-average exercise price of $27.56 per share and a weighted-average fair
value of $14.00 per share. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2009, 2008, and
2007:
|
2009
|
2008
|
2007
|
|
|
Expected
volatility
|
52%
|
42%
|
43%
|
|
Expected
term
|
6 years
|
5.7 years
|
6 years
|
|
Risk-free
interest rate
|
2.00%
|
2.96%
|
4.80%
|
|
Expected
dividend yield
|
—
|
—
|
—
|
|
Weighted-average
fair value of options granted
|
$14.00
|
$10.98
|
$19.27
|
The
expected market price volatility of Air Group’s common stock is based on the
historical volatility over a time period commensurate with the expected term of
the awards. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect for the term nearest the expected term of the option at the time
of grant. The dividend yield is zero as Air Group does not pay dividends and has
no plans to do so in the immediate future. The expected term of the options and
the expected forfeiture rates are based on historical experience for various
homogenous employee groups.
The
Company recorded stock-based compensation expense related to stock options of
$3.8 million, $4.3 million, and $4.0 million in 2009, 2008, and 2007,
respectively. The total intrinsic value of options exercised during 2009 was
$1.3 million. A total of 254,758 options vested during 2009 with an aggregate
fair value of $3.8 million. As of December 31, 2009, $3.8 million of
compensation cost associated with unvested stock option awards attributable to
future service had not yet been recognized. This amount will be recognized as
expense over a weighted-average period of 2.2 years.
Restricted
Stock Awards
Air Group
has restricted stock units (RSUs) outstanding under the 2004 and 2008 Long-term
Incentive Equity Plans. As of December 31, 2009, 1,125,791 total RSUs have
been granted to employees of Alaska and Horizon under these plans. The RSUs are
non-voting and are not eligible for dividends. The fair value of the RSU awards
is based on the closing price of Air Group’s common stock on the date of
grant. During 2009, Air Group awarded 226,097 RSUs to certain employees of the
Company, with a weighted-average grant date fair value of $27.17 per
share. Compensation cost for RSUs is generally recognized over the
shorter of three years from the date of grant as the awards “cliff vest” after
three years, or the period from the date of grant to the employee’s retirement
eligibility. The Company recorded stock-based compensation expense related to
RSUs of $5.1 million, $5.4 million, and $4.8 million in 2009, 2008, and 2007,
respectively. These amounts are included in wages and benefits in the statements
of operations.
As of
December 31, 2009, $4.7 million of compensation cost associated with
unvested restricted stock awards attributable to future service had not yet been
recognized. This amount will be recognized as expense over a weighted-average
period of 1.8 years.
Performance
Stock Awards
During
the first quarters of 2008 and 2007, Air Group awarded Performance Share Unit
awards (PSUs) to certain executives. PSUs are similar to RSUs, but vesting is
based on a performance condition tied to Air Group achieving a specified pretax
margin over a three-year period. The PSU plan allows a portion of the PSUs to
vest even if the specified pretax margin falls below the target but above the
minimum threshold, and additional shares to be granted if the margin target is
exceeded, subject to a maximum. The Company intends to regularly review its
assumptions about meeting the performance goal and expected vesting, and to
adjust the related compensation expense accordingly. Based on expectations of
the number of PSUs that will ultimately vest, the Company did not record any
expense in 2009, recorded a credit of $0.3 million in 2008, and recorded
compensation expense of $0.3 million during 2007.
Employee
Stock Purchase Plan
Air Group
sponsors an ESPP whereby employees can purchase Air Group common stock at 85% of
the closing market price on the first day of the offering period or the
quarterly purchase date, whichever is lower. Because of these attributes, the
ESPP is considered compensatory under accounting standards and as such,
compensation cost is recognized. Compensation cost for the ESPP was $1.3 million
in 2009 and $1.4 million in both 2008 and 2007. The grant date fair value is
calculated using the Black-Scholes model in the same manner as the Company’s
option awards for 85% of the share award plus the intrinsic value of the 15%
discount.
Summary
of Stock-Based Compensation
The table
below summarizes the components of total stock-based compensation for the years
ended December 31, 2009, 2008 and 2007:
|
(in
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Stock
options
|
$ | 3.8 | $ | 4.3 | $ | 4.0 | ||||||
|
Restricted
stock units
|
5.1 | 5.4 | 4.8 | |||||||||
|
Performance
share units
|
— | (0.3 | ) | 0.3 | ||||||||
|
Employee
stock purchase plan
|
1.3 | 1.4 | 1.4 | |||||||||
|
Total
stock-based compensation
|
$ | 10.2 | $ | 10.8 | $ | 10.5 | ||||||
NOTE
11. INCOME TAXES
Deferred
Income Taxes
Deferred
income taxes reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and such
amounts for tax purposes.
Deferred
tax (assets) and liabilities comprise the following at December 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Excess
of tax over book depreciation
|
$ | 523.1 | $ | 477.1 | ||||
|
Fuel
hedge contracts
|
9.1 | — | ||||||
|
Other—net
|
9.6 | 4.7 | ||||||
|
Gross
deferred tax liabilities
|
541.8 | 481.8 | ||||||
|
Mileage
Plan
|
(252.6 | ) | (255.3 | ) | ||||
|
Fuel
hedge contracts
|
— | (19.6 | ) | |||||
|
AMT
and other tax credits
|
(56.8 | ) | (62.3 | ) | ||||
|
Leased
aircraft return provision
|
(1.8 | ) | (5.2 | ) | ||||
|
Inventory
obsolescence
|
(6.4 | ) | (5.7 | ) | ||||
|
Deferred
gains
|
(4.8 | ) | (5.9 | ) | ||||
|
Employee
benefits
|
(191.5 | ) | (244.7 | ) | ||||
|
Loss
carryforwards*
|
(12.9 | ) | (3.1 | ) | ||||
|
Other—net
|
(20.4 | ) | (24.7 | ) | ||||
|
Gross
deferred tax assets
|
(547.2 | ) | (626.5 | ) | ||||
|
Net
deferred tax (assets) liabilities
|
$ | (5.4 | ) | $ | (144.7 | ) | ||
|
Current
deferred tax asset
|
$ | (110.1 | ) | $ | (146.7 | ) | ||
|
Noncurrent
deferred tax liability
|
104.7 | 2.0 | ||||||
|
Net
deferred tax (asset) liability
|
$ | (5.4 | ) | $ | (144.7 | ) | ||
|
*
|
Federal
loss carryforwards of $24.6 million ($8.6 million tax effected) expire
beginning in 2029. State loss carryforwards of $91.7 million
($4.3 million tax effected) expire beginning in 2010 and ending in
2029.
|
In 2009,
a new federal law liberalized rules for certain net operating losses (NOLs),
increasing the carryback period for 2008 or 2009 NOLs from two years to up to
five years at the taxpayer’s election. In addition, the new law
suspended the 90-percent limitation on the utilization of NOLs for Alternative
Minimum Tax (AMT) NOLs attributed to the extended carryback
election. Because of these law changes, the Company recorded $5.0
million in federal and state income tax receivables and a corresponding decrease
in federal and state AMT credit carryforwards.
The
Company has concluded that it is more likely than not that its deferred tax
assets will be realizable and thus no valuation allowance has been recorded as
of December 31, 2009. This conclusion is based on the expected future
reversals of existing taxable temporary differences, anticipated future taxable
income, and the potential for future tax planning strategies to generate taxable
income, if needed. The Company will continue to reassess the need for a
valuation allowance during each future reporting period.
Components
of Income Tax Expense (Benefit)
The
components of income tax expense (benefit) were as follows (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Current
tax expense (benefit):
|
||||||||||||
|
Federal
|
$ | (3.4 | ) | $ | 11.5 | $ | 28.4 | |||||
|
State
|
(1.2 | ) | — | 4.8 | ||||||||
|
Total
current
|
(4.6 | ) | 11.5 | 33.2 | ||||||||
|
Deferred
tax expense (benefit):
|
||||||||||||
|
Federal
|
69.7 | (60.9 | ) | 44.5 | ||||||||
|
State
|
9.0 | (7.5 | ) | 2.5 | ||||||||
|
Total
deferred
|
78.7 | (68.4 | ) | 47.0 | ||||||||
|
Total
tax expense (benefit) related to income
(loss)
|
$ | 74.1 | $ | (56.9 | ) | $ | 80.2 | |||||
Income
Tax Rate Reconciliation
Income
tax expense (benefit) reconciles to the amount computed by applying the U.S.
federal rate of 35% to income (loss) before income tax and accounting change as
follows (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Income
(loss) before income tax
|
$ | 183.8 | $ | (153.3 | ) | $ | 215.0 | |||||
|
Expected
tax expense (benefit)
|
64.3 | (53.7 | ) | 75.2 | ||||||||
|
Nondeductible
expenses
|
2.6 | 2.6 | 2.8 | |||||||||
|
State
income taxes
|
5.4 | (4.9 | ) | 4.8 | ||||||||
|
Other—net*
|
1.8 | (0.9 | ) | (2.6 | ) | |||||||
|
Actual
tax expense (benefit)
|
$ | 74.1 | $ | (56.9 | ) | $ | 80.2 | |||||
|
Effective
tax rate
|
40.3 | % | 37.1 | % | 37.3 | % | ||||||
|
*
|
In
2007, other-net includes $1.0 million of tax benefits due to a favorable
decision in a matter with the State of California and $1.0 million of tax
benefits related to the recognition of California income tax credit
carryforwards.
|
Uncertain
Tax Positions
The
Company has identified its federal tax return and its state tax returns in
Alaska, Oregon, and California as “major” tax jurisdictions. The
periods subject to examination for the Company’s federal and Alaska income tax
returns are the 2003 through 2008 tax years; however, the 2003 to 2005 tax
returns are subject to examination only to a limited extent due to net operating
losses carried forward from and carried back to those periods. In
California, the income tax years 2000 through 2008 remain open to examination.
The 2000 to 2004 California tax returns are subject to examination only to the
extent of the net operating loss carryforwards from those years that were
utilized in 2005 and 2006. In Oregon, the income tax years 2001 to
2008 remain open to examination. The 2001 to 2004 Oregon tax returns
are subject to examination only to the extent of net operating loss
carryforwards from those years that were utilized in 2006 and later
years.
Because
of the resolution of uncertain tax positions in the fourth quarter of 2009, the
Company reevaluated its tax position. As a result, the Company
recorded a $8.6 million reduction of the liability. The Company also
reversed $1.2 million of previously accrued interest on these tax positions
through interest expense in the statements of operations. At December
31, 2009, the total amount of unrecognized tax benefits of $0.9 million is
recorded as a liability, all of which would impact the effective tax
rate.
No
interest or penalties related to these tax positions were accrued as of December
31, 2009.
Changes
in the liability for unrecognized tax benefits during 2008 and 2009 are as
follows (in millions):
|
Balance
at December 31, 2007
|
$ | 13.6 | ||
|
Gross
increases—tax positions in prior period
|
0.8 | |||
|
Gross
decreases—tax positions in prior period
|
(6.3 | ) | ||
|
Gross
increases—current-period tax positions
|
2.5 | |||
|
Settlements
|
— | |||
|
Lapse
of statute of limitations
|
— | |||
|
Balance
at December 31, 2008
|
$ | 10.6 | ||
|
Gross
increases—tax positions in prior period
|
— | |||
|
Gross
decreases—tax positions in prior period
|
(9.8 | ) | ||
|
Gross
increases—current-period tax positions
|
0.1 | |||
|
Settlements
|
— | |||
|
Lapse
of statute of limitations
|
— | |||
|
Balance
at December 31, 2009
|
$ | 0.9 |
NOTE
12. FINANCIAL INSTRUMENTS
Fair
Value Measurements
Accounting
standards define fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The standards also establish a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair
value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or
liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
Cash,
Cash Equivalents and Marketable Securities
The
Company uses the “market approach” in determining the fair value of its cash,
cash equivalents and marketable securities. The securities held by the Company
are valued based on observable prices in active markets.
Amounts
measured at fair value as of December 31, 2009 are as follows (in
millions):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | 164.2 | $ | — | $ | — | $ | 164.2 | ||||||||
|
Marketable
securities
|
108.9 | 919.0 | — | 1,027.9 | ||||||||||||
|
Total
|
$ | 273.1 | $ | 919.0 | $ | — | $ | 1,192.1 | ||||||||
Amounts
measured at fair value as of December 31, 2008 are as follows (in
millions):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | 257.1 | $ | 25.9 | $ | — | $ | 283.0 | ||||||||
|
Marketable
securities
|
68.3 | 726.0 | — | 794.3 | ||||||||||||
|
Total
|
$ | 325.4 | $ | 751.9 | $ | — | $ | 1,077.3 | ||||||||
Interest
Rate Swap Agreements
In the
third quarter of 2009, the Company entered into interest rate swap agreements
with a third party designed to hedge the volatility of the underlying variable
interest rate in the Company’s aircraft lease agreements for six B737-800
aircraft. The agreements stipulate that the Company pay a fixed
interest rate over the term of the contract and receive a floating interest
rate. All significant terms of the swap agreement match the terms of
the lease agreements, including interest-rate index, rate reset dates (every six
months), termination dates and underlying notional values. The
agreements expire beginning in February 2020 through March 2021 to coincide with
the lease termination dates.
The
Company has formally designated these swap agreements as hedging instruments and
will record the effective portion of the hedge as an adjustment to aircraft rent
in the statement of operations in the period of contract
settlement. The effective portion of the changes in fair value for
instruments that settle in the future are recorded in AOCL in the balance
sheets.
At
December 31, 2009, the Company had an asset of $2.4 million associated with
these contracts, all of which is expected to be reclassified into earnings
within the next twelve months and is recorded in prepaid expenses and other
current assets in the balance sheets. The fair value of these
contracts is determined based on the difference between the fixed interest rate
in the agreements and the observable LIBOR-based interest forward rates at
period end, multiplied by the total notional value. As such, the
Company places these contracts in Level 2 of the fair value
hierarchy.
Fair
Value of Financial Instruments
The
majority of the Company’s financial instruments are carried at fair value. Those
include cash, cash equivalents and marketable securities (Note 5), restricted
deposits (Note 9), fuel hedge contracts (Note 3), and interest rate swap
agreements (Note 12). The Company’s long-term fixed-rate debt is not carried at
fair value.
The
estimated fair value of the Company’s long-term debt was as follows (in
millions):
|
Carrying
Amount
|
Fair
Value
|
|||||||
|
Long-term
debt at December 31, 2009
|
$ | 1,507.8 | $ | 1,481.2 | ||||
|
Long-term
debt at December 31, 2008
|
$ | 1,559.2 | $ | 1,696.9 | ||||
The fair
value of cash equivalents approximates carrying values due to the short maturity
of these instruments. The fair value of marketable securities is based on market
prices. The fair value of fuel hedge contracts is based on commodity exchange
prices. The fair value of restricted deposits approximates the carrying amount.
The fair value of interest rate swap agreements is based on quoted market swap
rates. The fair value of long-term debt is based on a discounted cash
flow analysis using the Company’s current borrowing rate.
Concentrations
of Credit
The
Company continually monitors its positions with, and the credit quality of, the
financial institutions that are counterparties to its fuel-hedging contracts and
interest rate swap agreements and does not anticipate nonperformance by the
counterparties.
The
Company could realize a loss in the event of nonperformance by any single
counterparty to these contracts. However, the Company enters into transactions
only with large, well-known financial institution counterparties that have
strong credit ratings. In addition, the Company limits the amount of investment
credit exposure with any one institution.
The Company’s trade receivables do not
represent a significant concentration of credit risk at December 31, 2009
due to the frequency that settlement takes place and the dispersion across many
industry and government segments.
NOTE
13. RELATED PARTY TRANSACTIONS
Capacity
Purchase Agreement
The
Company has entered into a Capacity Purchase Agreement (CPA) with Horizon,
whereby the Company purchases capacity in certain routes (“CPA markets”) from
Horizon as specified by the agreement. Under the CPA, the Company pays Horizon a
contractual amount for the purchased capacity in the CPA markets, regardless of
the revenue collected on those flights. The amount paid to Horizon is generally
based on Horizon’s operating costs, plus a margin. The Company establishes the
scheduling, routes and pricing for the flights, and has the inventory and
revenue risk in those markets.
The
Company paid $261.7 million, $293.7 million and $283.4 million to Horizon under
the CPA agreement for the years ended December 31, 2009, 2008, and 2007,
respectively.
Intercompany
Services
The
Company performs all ticket processing for Horizon. Horizon’s ticket sales are
recorded by Alaska as air traffic liability and revenue is allocated to and
recorded by Horizon when transportation is provided.
Mileage
Plan participants may redeem miles on Horizon flights. As of January 1, 2009,
the Company began allocating Mileage Plan revenue to Horizon for miles redeemed
on Horizon flights and also began allocating expenses to Horizon for miles
earned on Horizon flights. For 2009, $7.0 million of passenger
revenue was allocated to Horizon for miles redeemed on Horizon flights and less
than $0.1 million of selling expenses was allocated to Horizon for miles earned
on Horizon flights.
The
Company provides certain services to Horizon for which the Company receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of certain information and
communication systems, processing Horizon’s revenue transactions, accounting and
payroll services, and other administrative services. Additionally, the Company
pays certain leasing and other facilities costs on Horizon’s behalf that are
reimbursed monthly by Horizon. Total amounts received by the Company from
Horizon were $12.1 million, $9.8 million and $10.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
In the
normal course of business, Alaska and Horizon each provide certain ground
handling services to the other company. Charges for ground services provided by
the Company to Horizon totaled $9.9 million, $8.9 million and $7.1 million
during the years ended December 31, 2009, 2008 and 2007, respectively.
Charges for ground services provided by Horizon to the Company totaled $6.3
million, $9.0 million and $9.8 million for the years ended December 31,
2009, 2008 and 2007, respectively.
The
Company also advances Horizon funds at varying interest rates. All amounts are
payable on demand. Interest income recognized related to the Horizon receivable
totaled $5.3 million, $9.5 million and $11.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Offsetting this amount is
interest paid to Horizon on ticket sales processed
by
Alaska. Interest expense related to these ticket sales was $2.2 million, $4.6
million and $3.6 million for the years ended December 31, 2009, 2008 and
2007, respectively.
At
December 31, 2009, receivables from related companies include $114.0
million from Horizon, $6.8 million from Alaska Air Group Leasing (AAGL) and
$153.8 million from Air Group. At December 31, 2009, payables to related
companies include $2.6 million to Horizon, $0.8 million to AAGL and $69.8
million to Air Group.
NOTE
14. CONTINGENCIES
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska
violated the CBA by, among other things, subcontracting the ramp service
operation in Seattle. The dispute was referred to an arbitrator and hearings on
the grievance commenced in January 2007, with a final hearing date in August
2007. In July 2008, the arbitrator issued a final decision regarding basic
liability in the matter. In that ruling, the arbitrator found that Alaska had
violated the CBA and instructed Alaska and the IAM to negotiate a remedy. In
February 2010, the arbitrator issued a final decision. The decision
does not require Alaska to alter the existing subcontracting arrangements for
ramp service in Seattle. The award sustains the right to subcontract
other operations in the future so long as the requirements of the CBA are
met. The award imposes monetary remedies which have not been fully
calculated, but are not expected to be material.
Other
items
The
Company is a party to routine litigation matters incidental to its business and
with respect to which no material liability is expected.
Management
believes the ultimate disposition of the matters discussed above is not likely
to materially affect the Company’s financial position or results of operations.
This forward-looking statement is based on management’s current understanding of
the relevant law and facts, and it is subject to various contingencies,
including the potential costs and risks associated with litigation and the
actions of arbitrators, judges and juries.
|
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
|
ITEM 9A. CONTROLS AND
PROCEDURES
|
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of
December 31, 2009, an evaluation was performed under the supervision and
with the participation of our management, including our chief executive officer
and chief financial officer (collectively, our “certifying officers”), of the
effectiveness of the design and operation of our disclosure controls and
procedures. These disclosure controls and procedures are designed to ensure that
the information required to be disclosed by us in our current and periodic
reports filed with or submitted to the Securities and Exchange Commission (the
SEC) is recorded, processed, summarized and reported within the time periods
specified by the SEC’s rules and forms, and that the information is accumulated
and communicated to our management, including our certifying officers, on a
timely basis. Our certifying officers concluded, based on their evaluation, that
disclosure controls and procedures were effective as of December 31,
2009.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
There
were no changes to the Company’s internal control over financial reporting
identified in management’s evaluation during the year ended December 31,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO Framework). Based on our evaluation, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
We intend
to regularly review and evaluate the design and effectiveness of our disclosure
controls and procedures and internal control over financial reporting on an
ongoing basis and to improve these controls and procedures over time and to
correct any deficiencies that we may discover in the future. While we believe
the present design of our disclosure controls and procedures and internal
control over financial reporting are effective, future events affecting our
business may cause us to modify our controls and procedures.
|
ITEM 9B. OTHER
INFORMATION
|
None
PART IV
|
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
The
following documents are filed as part of this report:
|
1.
|
Financial
Statement Schedules: Financial Statement Schedule II, Valuation
and Qualifying Accounts, for the years ended December 31, 2009, 2008
and 2007 on page 58.
|
|
2.
|
Exhibits: See Exhibit Index on page 55.
|
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
AIRLINES, INC.
|
||||
|
By:
|
/s/ WILLIAM S. AYER
|
Date:
February 24, 2010
|
||
|
William
S. Ayer,
|
||||
|
Chairman
and Chief Executive Officer
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on February 24, 2010 on behalf of the
registrant and in the capacities indicated.
|
/S/ WILLIAM S. AYER
William
S. Ayer
|
Chairman,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
|
/S/ GLENN S. JOHNSON
Glenn
S. Johnson
|
Executive
Vice President/Finance and Chief Financial Officer (Principal Financial
Officer)
|
|
/S/ BRANDON S. PEDERSEN
Brandon
S. Pedersen
|
Vice
President/Finance and Controller
(Principal
Accounting Officer)
|
|
/S/ PATRICIA M. BEDIENT
Patricia
M. Bedient
|
Director
|
|
/S/ MARK R. HAMILTON
Mark
R. Hamilton
|
Director
|
|
/S/ JESSIE J. KNIGHT, JR.
Jessie
J. Knight, Jr.
|
Director
|
|
/S/ DENNIS F. MADSEN
Dennis
F. Madsen
|
Director
|
|
/S/ BYRON I. MALLOTT
Byron
I. Mallott
|
Director
|
EXHIBIT INDEX
Certain
of the following exhibits have heretofore been filed with the Securities and
Exchange Commission and are incorporated by reference from the documents
described in parentheses. Certain others are filed herewith. The exhibits are
numbered in accordance with Item 601 of Regulation S-K.
|
3.1
|
Articles
of Incorporation of Alaska Airlines, Inc. as amended through March 7,
1991 (Filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q
for the period ended June 30, 2002, filed on August 14, 2002 and
incorporated herein by reference.)
|
|
3.2
|
Bylaws
of Registrant, as amended and in effect February 12, 2003 (Filed as
Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2004, filed on February 25, 2005 and incorporated herein by
reference.)
|
|
4.1
|
Trust
Indenture and Security Agreement for Alaska Airlines Equipment Trust
Certificates, Series A and B (Filed as Exhibit 4(a)(1) to Amendment No. 1
to Registrant’s Registration Statement on Form S-3, Registration No.
33-46668, and incorporated herein by reference.)
|
|
4.2
|
Trust
Indenture and Security Agreement for Alaska Airlines Equipment Trust
Certificates, Series C and D (Filed as Exhibit 4(a)(1) to Amendment No. 2
to Registrant’s Registration Statement on Form S-3, Registration No.
33-46668, and incorporated herein by reference.)
|
|
4.3
|
Participation
Agreement for Alaska Airlines Equipment Trust Certificates, Series A and B
(Filed as Exhibit 4(b)(1) to Amendment No. 1 to Registrant’s Registration
Statement on Form S-3, Registration No. 33-46668, and incorporated herein
by reference.)
|
|
4.4
|
Participation
Agreement for Alaska Airlines Equipment Trust Certificates, Series C and C
(Filed as Exhibit 4(b)(1) to Amendment No. 2 to Registrant’s Registration
Statement on Form S-3, Registration No. 33-46668, and incorporated herein
by reference.)
|
|
4.5
|
Lease
Agreement for Alaska Airlines Equipment Trust Certificates (Filed as
Exhibit 4(b)(2) to Registrant’s Registration Statement on Form S-3,
Registration No. 33-46668, and incorporated herein by
reference.)
|
|
10.1#
|
Credit
Agreement, dated March 25, 2005, among Alaska Airlines, Inc., as borrower,
Bank of America, N.A., as administrative agent, Citicorp USA, Inc., as
syndication agent, U.S. Bank National Association, as documentation agent,
and other lenders (Filed as Exhibit 10.1 to Registrant’s Quarterly Report
on Form 10-Q for the period ended March 31, 2005, filed on May 6,
2005 and incorporated herein by reference.)
|
|
10.1.1
|
First
Amendment to March 25, 2005 Credit Agreement, dated September 29, 2005
(Filed as Exhibit 10.1.1 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Annual Report on Form 10-K for the year ended December 31, 2007,
filed on February 20, 2008 and incorporated herein by
reference.)
|
|
10.1.2#
|
Second
Amendment to March 25, 2005 Credit Agreement, dated April 25, 2007 (Filed
as Exhibit 10.1 to Alaska Air Group, Inc.’s {Commission File No. 1-8957}
Quarterly Report on Form 10-Q for the period ended March 31, 2007,
filed on May 8, 2007 and incorporated herein by
reference.)
|
|
10.1.3
|
Third
Amendment to March 25, 2005 Credit Agreement, dated July 30, 2007 (Filed
as Exhibit 10.1 to Alaska Air Group, Inc.’s {Commission File No. 1-8957}
Quarterly Report on Form 10-Q for the period ended September 30,
2007, filed on November 7, 2007 and incorporated herein by
reference.)
|
|
10.1.4#
|
Fourth
Amendment to March 25, 2005 Credit Agreement, dated
September 24, 2008 (Filed as Exhibit 10.1 to Alaska Air Group, Inc.’s
{Commission File No. 1-8957} Quarterly Report on Form 10-Q for the period
ended September 30, 2008, filed on November 7, 2008 and
incorporated herein by reference.)
|
|
10.2#
|
Credit
Agreement, dated October 19, 2005, among Alaska Airlines, Inc., as
borrower, HSH Nordbank AG New York Branch, as security agent, and other
loan participants (Filed as Exhibit 10.1 to Registrant’s Quarterly Report
on Form 10-Q for the period ended September 30, 2005, filed on
November 9, 2005 and incorporated herein by reference.)
|
|
10.2.1#
|
First
Amendment to October 19, 2005 Credit Agreement, dated March 27, 2007
(Filed as Exhibit 10.2.1 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Annual Report on Form 10-K for the year ended December 31, 2007,
filed on February 20, 2008 and incorporated herein by
reference.)
|
|
10.2.2#
|
Second
Amendment to October 19, 2005 Credit Agreement, dated November 26, 2007
(Filed as Exhibit 10.2.2 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Annual Report on Form 10-K for the year ended December 31, 2007,
filed on February 20, 2008 and incorporated herein by
reference.)
|
|
10.3#
|
Aircraft
General Terms Agreement, dated June 15, 2005, between the Boeing Company
and Alaska Airlines, Inc. (Filed as Exhibit 10.1 to Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2005, filed on
August 5, 2005 and incorporated herein by reference.)
|
|
10.4#
|
Purchase
Agreement No. 2497, dated June 15, 2005, between the Boeing Company and
Alaska Airlines, Inc. (Filed as Exhibit 10.2 to Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2005, filed on
August 5, 2005 and incorporated herein by reference.)
|
|
10.5#
|
Lease
Agreement, dated January 22, 1990, between International Lease Finance
Corporation and Alaska Airlines, Inc., summaries of 19 substantially
identical lease agreements and Letter Agreement #1, dated January 22, 1990
(Filed as Exhibit 10-14 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Annual Report on Form 10-K for the year ended December 31,
1990, filed on April 11, 1991 and incorporated herein by
reference.)
|
|
10.6*
|
Alaska
Air Group Performance Based Pay Plan (formerly “Management Incentive
Plan”), as amended and restated December 2, 2009 (Filed as Exhibit 10.7 to
Alaska Air Group, Inc.’s {Commission File No. 1-8957} Annual Report on
Form 10-K for the year ended December 31, 2009, filed on February 19, 2010
and incorporated herein by reference.)
|
|
10.7*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan (Filed as Exhibit 10.1 to
Alaska Air Group, Inc.’s {Commission File No. 1-8957} Current Report on
Form 8-K, filed on May 22, 2008 and incorporated herein by
reference.)
|
|
10.7.1*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Nonqualified Stock
Option Agreement (Filed as Exhibit 10.2 to Alaska Air Group, Inc.’s
{Commission File No. 1-8957} Current Report on Form 8-K, filed on May 22,
2008 and incorporated herein by reference.)
|
|
10.7.2*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Stock Unit Award
Agreement (Filed as Exhibit 10.3 to Alaska Air Group, Inc.’s {Commission
File No. 1-8957} Current Report on Form 8-K, filed on May 22, 2008 and
incorporated herein by reference.)
|
|
10.7.3*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Form of Director Deferred
Stock Unit Award Agreement (Filed as Exhibit 10.4 to Alaska Air Group,
Inc.’s {Commission File No. 1-8957} Current Report on Form 8-K, filed on
May 22, 2008 and incorporated herein by
reference.)
|
|
10.7.4*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option
Agreement – Incentive Award (Filed as Exhibit 10.1 to Alaska Air Group,
Inc.’s {Commission File No. 1-8957} Current Report on Form 8-K, filed on
February 2, 2009 and incorporated herein by reference.)
|
|
10.7.5*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award Agreement
– Incentive Award (Filed as Exhibit 10.2 to Alaska Air Group, Inc.’s
{Commission File No. 1-8957} Current Report on Form 8-K, filed on February
2, 2009 and incorporated herein by reference.)
|
|
10.7.6*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award Agreement
(Filed as Exhibit 10.1 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Current Report on Form 8-K, filed on February 5, 2010 and
incorporated herein by reference.)
|
|
10.7.7*
|
Alaska
Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option
Agreement (Filed as Exhibit 10.2 to Alaska Air Group, Inc.’s {Commission
File No. 1-8957} Current Report on Form 8-K, filed on February 5, 2010 and
incorporated herein by reference.)
|
|
10.8*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan and original form of stock
option and restricted stock unit agreements (Filed as Exhibit 10.2 to
Registrant’s Annual Report on Form 10-K for the year ended December
31, 2004, filed on February 25, 2005 and incorporated herein by
reference.)
|
|
10.8.1*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Nonqualified Stock Option
Agreement (Filed as Exhibit 10.8.1 to Alaska Air Group, Inc.’s {Commission
File No. 1-8957} Annual Report on Form 10-K for the year ended December
31, 2007, filed on February 20, 2008 and incorporated herein by
reference.)
|
|
10.8.2*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Stock Unit Award Agreement
(Filed as Exhibit 10.8.2 to Alaska Air Group, Inc.’s {Commission File No.
1-8957} Annual Report on Form 10-K for the year ended December 31, 2007,
filed on February 20, 2008 and incorporated herein by
reference.)
|
|
10.8.3*
|
Alaska
Air Group, Inc. 2004 Long-Term Incentive Plan Performance Stock Unit Award
Agreement (Filed as Exhibit 10.3 to Alaska Air Group, Inc.’s {Commission
File No. 1-8957} Current Report on Form 8-K, filed on February 14, 2008
and incorporated herein by reference.)
|
|
10.9*
|
Alaska
Air Group, Inc. 1999 Long-Term Incentive Equity Plan (Filed as
Exhibit 99.1 to Alaska Air Group, Inc.’s Registration Statement on
Form S-8, Registration No. 333-87563, filed on September 22, 1999 and
incorporated herein by reference.)
|
|
10.10*
|
Alaska
Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity Plan (Filed as
Exhibit 99.2 to Alaska Air Group, Inc.’s Registration Statement on
Form S-8, Registration No. 333-39889, filed on November 10, 1997 and
incorporated herein by reference.)
|
|
10.11*
|
Alaska
Air Group, Inc. 1996 Long-Term Incentive Equity Plan (Filed as
Exhibit 99.1 to Alaska Air Group, Inc.’s Registration Statement on
Form S-8, Registration No. 333-09547, filed on August 5, 1996 and
incorporated herein by reference.)
|
|
10.12*
|
Alaska
Air Group, Inc. Non Employee Director Stock Plan (Filed as
Exhibit 99.1 to Alaska Air Group, Inc.’s Registration Statement on
Form S-8, Registration No. 333-33727, filed on August 15, 1997 and
incorporated herein by reference.)
|
|
10.13*
|
Alaska
Airlines, Inc. and Alaska Air Group, Inc. Supplementary Retirement Plan
for Elected Officers, as amended November 7, 1994 (Filed as Exhibit 10.15
to Alaska Air Group, Inc.’s {Commission File No. 1-8957} Annual Report on
Form 10-K for the year ended December 31, 1997, filed on February 10,
1998 and incorporated herein by reference.)
|
|
10.14*
|
Alaska
Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan, as
amended by First Amendment to the Alaska Air Group, Inc. 1995 Elected
Officers Supplementary Retirement Plan and Second Amendment to the Alaska
Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan (Filed
as Exhibit 10.13 to Amendment No. 1 to Alaska Air Group, Inc.’s
Registration Statement on Form S-1, Registration No. 333-107177,
filed on September 23, 2003 and incorporated herein by
reference.)
|
|
10.15*
|
Form
of Alaska Air Group, Inc. Change of Control Agreement for named executive
officers, as amended and restated November 28, 2007 (Filed as Exhibit
10.16 to Alaska Air Group, Inc.’s {Commission File No. 1-8957} Annual
Report on Form 10-K for the year ended December 31, 2007, filed on
February 20, 2008 and incorporated herein by
reference.)
|
|
10.16*
|
Alaska
Air Group, Inc. Nonqualified Deferred Compensation Plan, as amended and
restated on December 1, 2005 (Filed as Exhibit 10.17 to Alaska Air Group,
Inc.’s {Commission File No. 1-8957} Annual Report on Form 10-K for the
year ended December 31, 2007, filed on February 20, 2008 and incorporated
herein by reference.)
|
|
10.17*
|
Separation
Agreement between Gregg Saretsky and Alaska Airlines, Inc. dated December
10, 2008 (Filed as Exhibit 10.1 to Alaska Air Group, Inc.’s {Commission
File No. 1-8957} Current Report on Form 8-K, filed on December 10,
2008 and incorporated herein by reference.)
|
|
†
|
Filed
herewith.
|
|
*
|
Indicates
management contract or compensatory plan or
arrangement.
|
|
#
|
Pursuant
to 17 CFR 240.24b-2, confidential information has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the
Commission.
|
Schedule II
ALASKA
AIRLINES, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
(in
millions)
|
Beginning
Balance
|
Additions
Charged
to Expense
|
Deductions
|
Ending
Balance
|
||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
Reserve
deducted from asset to which it applies:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 2.5 | $ | 1.6 | $ | (2.5 | ) | $ | 1.6 | |||||||
|
Obsolescence
allowance for flight equipment spare parts
|
$ | 14.0 | $ | 2.4 | $ | (1.3 | ) | $ | 15.1 | |||||||
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
Reserve
deducted from asset to which it applies:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 1.6 | $ | 1.5 | $ | (1.6 | ) | $ | 1.5 | |||||||
|
Obsolescence
allowance for flight equipment spare parts
|
$ | 15.1 | $ | 1.1 | $ | (9.1 | ) | $ | 7.1 | |||||||
|
Year
Ended December 31, 2009
|
||||||||||||||||
|
Reserve
deducted from asset to which it applies:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 1.5 | $ | 1.4 | $ | (1.4 | ) | $ | 1.5 | |||||||
|
Obsolescence
allowance for flight equipment spare parts (a)
|
$ | 7.1 | $ | 1.3 | $ | 0.0 | $ | 8.4 | ||||||||
|
(a)
|
Deductions
in 2008 are primarily related to the write off of the MD-80 and B737-200
parts allowances against their respective costs
bases.
|
-58-