Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2010.
OR
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to ___________
Commission
file number 1-8957
ALASKA
AIR GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
91-1292054
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
19300
International Boulevard, Seattle, Washington 98188
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (206) 392-5040
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
The
registrant has 35,766,831
common shares, par value $1.00, outstanding at April 30,
2010.
ALASKA
AIR GROUP, INC.
Quarterly
Report on Form 10-Q for the three months ended March 31, 2010
TABLE
OF CONTENTS
37
|
|||
2
As used
in this Form 10-Q, the terms “Air Group,” “our,”
“we” and the “Company” refer to Alaska Air Group, Inc. and its subsidiaries,
unless the context indicates otherwise. Alaska Airlines, Inc. and
Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,”
respectively, and together as our “airlines.”
Cautionary
Note Regarding Forward-Looking Statements
In
addition to historical information, this Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of
1995. Forward-looking statements are those that predict or
describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements
containing the words "believe," "expect," "will," "anticipate," "intend,"
"estimate," "project," "assume" or other similar expressions, although not all
forward-looking statements contain these identifying
words. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical experience
or the Company’s present expectations. Some
of the things that could cause our actual results to differ from our
expectations are:
|
·
|
general
economic conditions, including the impact of the current economic
environment on customer travel
behavior;
|
· changes
in our operating costs, including fuel, which can be volatile;
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·
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our
significant indebtedness;
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· the
competitive environment in our industry;
|
·
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our
ability to meet our cost reduction
goals;
|
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·
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an
aircraft accident or incident;
|
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·
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labor
disputes and our ability to attract and retain qualified
personnel;
|
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·
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operational
disruptions;
|
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·
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the
concentration of our revenue from a few key
markets;
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·
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actual
or threatened terrorist attacks, global instability and potential U.S.
military actions or activities;
|
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·
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our
reliance on automated systems and the risks associated with changes made
to those systems;
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·
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our
reliance on third-party vendors and partners;
and
|
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·
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changes
in laws and regulations.
|
You
should not place undue reliance on our forward-looking statements because the
matters they describe are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our
control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date on which this report was
filed with the SEC. We expressly disclaim any obligation to issue any
updates or revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters discussed in those
statements. Over time, our actual results, performance or
achievements will likely differ from the anticipated results, performance or
achievements that are expressed or implied by our forward-looking statements,
and such differences might be significant and materially adverse to our
shareholders. For a discussion of these and other risk factors, see
"Item 1A: Risk Factors” of the Company’s annual report on Form 10-K for the year
ended December 31, 2009. Please consider our forward-looking
statements in light of those risks as you read this report.
3
PART I. FINANCIAL INFORMATION
|
||||||||
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
||||||||
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
|
||||||||
Alaska
Air Group, Inc.
|
||||||||
ASSETS
|
||||||||
March
31,
|
December
31,
|
|||||||
(in
millions)
|
2010
|
2009
|
||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 117.7 | $ | 164.2 | ||||
Marketable
securities
|
1,053.5 | 1,027.9 | ||||||
Total
cash and marketable securities
|
1,171.2 | 1,192.1 | ||||||
Receivables
- net
|
137.3 | 111.8 | ||||||
Inventories
and supplies - net
|
49.1 | 45.8 | ||||||
Deferred
income taxes
|
133.0 | 120.3 | ||||||
Fuel
hedge contracts
|
58.9 | 66.2 | ||||||
Prepaid
expenses and other current assets
|
102.1 | 98.1 | ||||||
Total
Current Assets
|
1,651.6 | 1,634.3 | ||||||
Property
and Equipment
|
||||||||
Aircraft
and other flight equipment
|
3,667.6 | 3,660.1 | ||||||
Other
property and equipment
|
635.9 | 631.3 | ||||||
Deposits
for future flight equipment
|
219.5 | 215.5 | ||||||
4,523.0 | 4,506.9 | |||||||
Less
accumulated depreciation and amortization
|
1,387.0 | 1,339.0 | ||||||
Total
Property and Equipment - Net
|
3,136.0 | 3,167.9 | ||||||
Fuel
Hedge Contracts
|
48.1 | 50.8 | ||||||
Other
Assets
|
180.0 | 143.2 | ||||||
Total
Assets
|
$ | 5,015.7 | $ | 4,996.2 | ||||
See
accompanying notes to condensed consolidated financial
statements.
|
||||||||
4
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
|
||||||||
Alaska
Air Group, Inc.
|
||||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
March
31,
|
December
31,
|
|||||||
(in
millions except share amounts)
|
2010
|
2009
|
||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 53.3 | $ | 63.3 | ||||
Accrued
aircraft rent
|
35.8 | 54.0 | ||||||
Accrued
wages, vacation and payroll taxes
|
113.3 | 155.4 | ||||||
Other
accrued liabilities
|
510.0 | 474.5 | ||||||
Air
traffic liability
|
468.9 | 366.3 | ||||||
Current
portion of long-term debt
|
158.2 | 156.0 | ||||||
Total
Current Liabilities
|
1,339.5 | 1,269.5 | ||||||
Long-Term
Debt, Net of Current Portion
|
1,657.2 | 1,699.2 | ||||||
Other
Liabilities and Credits
|
||||||||
Deferred
income taxes
|
170.1 | 151.1 | ||||||
Deferred
revenue
|
419.1 | 435.1 | ||||||
Obligation
for pension and postretirement medical benefits
|
412.8 | 421.0 | ||||||
Other
liabilities
|
131.6 | 148.2 | ||||||
1,133.6 | 1,155.4 | |||||||
Commitments
and Contingencies
|
||||||||
Shareholders'
Equity
|
||||||||
Preferred
stock, $1 par value
|
||||||||
Authorized: 5,000,000
shares, none issued or outstanding
|
- | - | ||||||
Common
stock, $1 par value
|
||||||||
Authorized: 100,000,000
shares
|
||||||||
Issued: 2010
- 36,174,693 shares
|
||||||||
2009
- 35,843,092 shares
|
36.2 | 35.8 | ||||||
Capital
in excess of par value
|
779.7 | 767.0 | ||||||
Treasury
stock (common), at cost: 2010 - 438,734 shares
|
||||||||
2009
- 252,084 shares
|
(13.8 | ) | (5.7 | ) | ||||
Accumulated
other comprehensive loss
|
(237.0 | ) | (240.0 | ) | ||||
Retained
earnings
|
320.3 | 315.0 | ||||||
885.4 | 872.1 | |||||||
Total
Liabilities and Shareholders' Equity
|
$ | 5,015.7 | $ | 4,996.2 | ||||
See
accompanying notes to condensed consolidated financial
statements.
|
5
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
|
||||||||
Alaska
Air Group, Inc.
|
||||||||
Three
Months Ended March 31
|
||||||||
(in
millions except per share amounts)
|
2010
|
2009
|
||||||
Operating
Revenues
|
||||||||
Passenger
|
$ | 748.4 | $ | 684.1 | ||||
Freight
and mail
|
23.0 | 19.4 | ||||||
Other
- net
|
58.5 | 38.9 | ||||||
Total
Operating Revenues
|
829.9 | 742.4 | ||||||
Operating
Expenses
|
||||||||
Wages
and benefits
|
239.3 | 246.0 | ||||||
Variable
incentive pay
|
17.9 | 9.3 | ||||||
Aircraft
fuel, including hedging gains and losses
|
207.3 | 157.7 | ||||||
Aircraft
maintenance
|
57.0 | 59.7 | ||||||
Aircraft
rent
|
37.0 | 38.0 | ||||||
Landing
fees and other rentals
|
55.9 | 54.2 | ||||||
Contracted
services
|
39.6 | 38.4 | ||||||
Selling
expenses
|
33.6 | 25.0 | ||||||
Depreciation
and amortization
|
56.2 | 52.8 | ||||||
Food
and beverage service
|
12.3 | 11.6 | ||||||
Other
|
47.8 | 56.8 | ||||||
Fleet
transition costs - Q200
|
- | 4.8 | ||||||
Total
Operating Expenses
|
803.9 | 754.3 | ||||||
Operating
Income (Loss)
|
26.0 | (11.9 | ) | |||||
Nonoperating
Income (Expense)
|
||||||||
Interest
income
|
7.5 | 8.3 | ||||||
Interest
expense
|
(25.6 | ) | (27.8 | ) | ||||
Interest
capitalized
|
1.7 | 2.8 | ||||||
Other
- net
|
0.6 | (1.0 | ) | |||||
(15.8 | ) | (17.7 | ) | |||||
Income
(loss) before income tax
|
10.2 | (29.6 | ) | |||||
Income
tax expense (benefit)
|
4.9 | (10.4 | ) | |||||
Net
Income (Loss)
|
$ | 5.3 | $ | (19.2 | ) | |||
Basic
Earnings (Loss) per Share:
|
$ | 0.15 | $ | (0.53 | ) | |||
Diluted
Earnings (Loss) Per Share:
|
$ | 0.15 | $ | (0.53 | ) | |||
Shares
used for computation:
|
||||||||
Basic
|
35.667 | 36.326 | ||||||
Diluted
|
36.393 | 36.326 | ||||||
See
accompanying notes to condensed consolidated financial
statements.
|
||||||||
6
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
|
||||||||||||||||||||||||||||
Alaska
Air Group, Inc.
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Common
|
Capital
in
|
Treasury
|
Other
|
|||||||||||||||||||||||||
Shares
|
Common
|
Excess
of
|
Stock,
|
Comprehensive
|
Retained
|
|||||||||||||||||||||||
(in
millions)
|
Outstanding
|
Stock
|
Par
Value
|
at
Cost
|
Loss
|
Earnings
|
Total
|
|||||||||||||||||||||
Balances
at December 31, 2009
|
35.591 | $ | 35.8 | $ | 767.0 | $ | (5.7 | ) | $ | (240.0 | ) | $ | 315.0 | $ | 872.1 | |||||||||||||
Net
income for the three months ended March 31, 2010
|
5.3 | 5.3 | ||||||||||||||||||||||||||
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||
Related
to marketable securities:
|
||||||||||||||||||||||||||||
Change
in fair value
|
3.5 | |||||||||||||||||||||||||||
Reclassification
to earnings
|
(1.8 | ) | ||||||||||||||||||||||||||
Income
tax effect
|
(0.7 | ) | ||||||||||||||||||||||||||
1.0 | 1.0 | |||||||||||||||||||||||||||
Adjustments
related to employee benefit plans:
|
||||||||||||||||||||||||||||
Reclassification
to earnings
|
5.4 | |||||||||||||||||||||||||||
Income
tax effect
|
(1.7 | ) | ||||||||||||||||||||||||||
3.7 | 3.7 | |||||||||||||||||||||||||||
Related
to interest rate derivative instruments:
|
||||||||||||||||||||||||||||
Change
in fair value
|
(2.8 | ) | ||||||||||||||||||||||||||
Income
tax effect
|
1.1 | |||||||||||||||||||||||||||
(1.7 | ) | (1.7 | ) | |||||||||||||||||||||||||
Total
comprehensive loss
|
8.3 | |||||||||||||||||||||||||||
Purchase
of treasury stock
|
(0.279 | ) | (10.5 | ) | (10.5 | ) | ||||||||||||||||||||||
Stock-based
compensation
|
5.0 | 5.0 | ||||||||||||||||||||||||||
Treasury
stock issued under stock plans
|
0.092 | 2.4 | 2.4 | |||||||||||||||||||||||||
Stock
issued for employee stock purchase plan
|
0.016 | 0.1 | 0.2 | 0.3 | ||||||||||||||||||||||||
Stock
issued under stock plans
|
0.316 | 0.3 | 7.5 | 7.8 | ||||||||||||||||||||||||
Balances
at March 31, 2010
|
35.736 | $ | 36.2 | $ | 779.7 | $ | (13.8 | ) | $ | (237.0 | ) | $ | 320.3 | $ | 885.4 | |||||||||||||
See
accompanying notes to condensed consolidated financial
statements.
|
7
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
||||||||
Alaska
Air Group, Inc.
|
||||||||
Three Months Ended March 31 | ||||||||
(in
millions)
|
2010
|
2009
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 5.3 | $ | (19.2 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Fleet
transition costs - Q200
|
- | 4.8 | ||||||
Depreciation
and amortization
|
56.2 | 52.8 | ||||||
Stock-based
compensation
|
5.0 | 5.4 | ||||||
Increase
in air traffic liability
|
102.6 | 26.9 | ||||||
Changes
in other assets and liabilities-net
|
(114.6 | ) | (60.6 | ) | ||||
Net
cash provided by operating activities
|
54.5 | 10.1 | ||||||
Cash
flows from investing activities:
|
||||||||
Property
and equipment additions:
|
||||||||
Aircraft
and aircraft purchase deposits
|
(5.0 | ) | (199.5 | ) | ||||
Other
flight equipment
|
(14.2 | ) | (17.0 | ) | ||||
Other
property and equipment
|
(6.7 | ) | (9.7 | ) | ||||
Total
property and equipment additions
|
(25.9 | ) | (226.2 | ) | ||||
Proceeds
from disposition of assets
|
1.4 | 2.3 | ||||||
Purchases
of marketable securities
|
(284.0 | ) | (160.5 | ) | ||||
Sales
and maturities of marketable securities
|
261.0 | 151.9 | ||||||
Restricted
deposits and other
|
(0.4 | ) | (3.3 | ) | ||||
Net
cash used in investing activities
|
(47.9 | ) | (235.8 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of long-term debt
|
- | 64.0 | ||||||
Proceeds
from sale-leaseback transaction, net
|
- | 230.0 | ||||||
Long-term
debt payments, including line of credit
|
(39.8 | ) | (121.5 | ) | ||||
Purchase
of treasury stock
|
(10.5 | ) | - | |||||
Proceeds
from issuance of common stock
|
11.1 | 2.0 | ||||||
Other
financing activities
|
(13.9 | ) | 5.2 | |||||
Net
cash provided by (used in) financing activities
|
(53.1 | ) | 179.7 | |||||
Net
change in cash and cash equivalents
|
(46.5 | ) | (46.0 | ) | ||||
Cash
and cash equivalents at beginning of year
|
164.2 | 283.1 | ||||||
Cash
and cash equivalents at end of period
|
$ | 117.7 | $ | 237.1 | ||||
Supplemental
disclosure of cash paid during the period for:
|
||||||||
Interest
(net of amount capitalized)
|
$ | 29.5 | $ | 28.7 | ||||
Income
taxes
|
- | - | ||||||
See
accompanying notes to condensed consolidated financial
statements.
|
8
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska
Air Group, Inc.
NOTE
1.
|
BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
and Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of Alaska Air
Group, Inc. (Air Group or the Company) include the accounts of the parent
company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska
Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through
which the Company conducts substantially all of its operations. These interim
condensed consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the Company’s financial position as of March 31, 2010, as well as the results of
operations for the three months ended March 31, 2010 and 2009. The adjustments
made were of a normal recurring nature.
The
Company’s interim condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America (GAAP). In preparing these statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities, as well as the
reported amounts of revenues and expenses. Significant estimates made include
assumptions used to record expenses and revenues associated with the Company’s
Mileage Plan; assumptions used in the calculations of pension expense in the
Company’s defined-benefit plans; and the amounts of certain accrued liabilities.
Actual results may differ from the Company’s estimates.
Reclassifications
Certain
reclassifications have been made to conform the prior year’s data to the current
format.
Prospective
Accounting Pronouncements
New
accounting standards on “Revenue Arrangements with Multiple Deliverables” were
issued in September 2009 and update the current guidance pertaining to
multiple-element revenue arrangements. This new guidance will be
effective for the Company’s annual reporting period beginning January 1,
2011. Management is currently evaluating the impact of this new
standard on the Company’s financial position, results of operations, cash flows,
and disclosures.
9
NOTE
2. FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
Value Measurements
Accounting
standards define fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The standards also establish a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair
value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
Cash,
Cash Equivalents and Marketable Securities
The
Company uses the “market approach” as defined in the accounting standards in
determining the fair value of its cash, cash equivalents and marketable
securities. The securities held by the Company are valued based on observable
prices in active markets and considered to be liquid and easily
tradable.
Amounts
measured at fair value as of March 31, 2010 are as follows (in
millions):
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Cash
and cash equivalents
|
$ | 85.3 | $ | 32.4 | $ | — | $ | 117.7 | ||||||||
Marketable
securities
|
139.6 | 913.9 | — | 1,053.5 | ||||||||||||
Total
|
$ | 224.9 | $ | 946.3 | $ | — | $ | 1,171.2 |
All of
the Company’s marketable securities are classified as
available-for-sale. The securities are carried at fair value, with
the unrealized gains and losses, excluding credit losses, reported in
shareholders’ equity under the caption “accumulated other comprehensive loss”
(AOCL). Realized gains and losses are included in other nonoperating
income (expense) in the condensed consolidated statements of
operations.
The cost
of securities sold is based on the specific identification
method. Interest and dividends on marketable securities are included
in interest income in the condensed consolidated statements of
operations.
Marketable
securities consisted of the following (in millions):
March
31, 2010
|
December
31, 2009
|
|||||||
Amortized
cost:
|
||||||||
Government
securities/agencies
|
$ | 359.5 | $ | 376.7 | ||||
Asset-backed
obligations
|
196.1 | 215.4 | ||||||
Other
corporate obligations
|
482.2 | 421.8 | ||||||
$ | 1,037.8 | $ | 1,013.9 | |||||
Fair
value:
|
||||||||
Government
securities/agencies
|
$ | 363.1 | $ | 381.2 | ||||
Asset-backed
obligations
|
195.5 | 214.7 | ||||||
Other
corporate obligations
|
494.9 | 432.0 | ||||||
$ | 1,053.5 | $ | 1,027.9 |
Of the
marketable securities on hand at March 31, 2010, 22% mature in 2010, 24% in 2011
and 54% thereafter. Gross realized gains and losses for the three
months ended March 31, 2010 and 2009 were not material to the condensed
consolidated financial statements.
Some of
the Company’s asset-backed securities held at March 31, 2010 had credit losses,
as defined in the accounting standards. These credit losses total
$2.2 million and were recorded through earnings in 2009 and represent the
difference between the present value of future cash flows and the amortized cost
basis of the affected securities. No additional credit losses were recorded in
the first quarter of 2010.
10
Management
does not believe the securities associated with the remaining $3.3 million
unrealized loss recorded in AOCL are “other-than-temporarily” impaired, as
defined in the accounting standards, based on the current facts and
circumstances. Management currently does not intend to sell these
securities prior to their recovery nor does it believe that it will be
more-likely-than-not that the Company would need to sell these securities for
liquidity or other reasons.
Gross
unrealized gains and losses, including credit losses, at March 31, 2010 are
presented in the table below (in millions):
Unrealized
Losses
|
||||||||||||||||||||||||||||||||
Unrealized
Gains in AOCL
|
Less
than 12 months
|
Greater
than 12 months
|
Total
Unrealized Losses
|
Less:
Credit Loss Previously Recorded in Earnings
|
Net
Unrealized Losses in AOCL
|
Net
Unrealized Gains/(Losses) in AOCL
|
Fair
Value of Securities with Unrealized Losses
|
|||||||||||||||||||||||||
Government
Securities/Agencies
|
$ | 3.9 | $ | (0.3 | ) | $ | -- | $ | (0.3 | ) | $ | -- | $ | (0.3 | ) | $ | 3.6 | $ | 127.2 | |||||||||||||
Asset-backed
obligations
|
2.2 | (0.3 | ) | (4.7 | ) | (5.0 | ) | (2.2 | ) | (2.8 | ) | (0.6 | ) | 61.1 | ||||||||||||||||||
Other
corporate obligations
|
12.9 | (0.2 | ) | -- | (0.2 | ) | -- | (0.2 | ) | 12.7 | 69.6 | |||||||||||||||||||||
Total
|
$ | 19.0 | $ | (0.8 | ) | $ | (4.7 | ) | $ | (5.5 | ) | $ | (2.2 | ) | $ | (3.3 | ) | $ | 15.7 | $ | 257.9 |
Fair
Value of Financial Instruments
The
majority of the Company’s financial instruments are carried at fair
value. These include, cash, cash equivalents and marketable
securities (Note 2); restricted deposits (Note 6); fuel hedge contracts (Note
3); and interest rate swap agreements (Note 3). 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 is as follows (in
millions):
Carrying
Amount
|
Fair
Value
|
|||||||
Long-term
debt at March 31, 2010
|
$ | 1,815.4 | $ | 1,791.5 | ||||
Long-term
debt at December 31, 2009
|
$ | 1,855.2 | $ | 1,821.3 |
The fair
value of cash and cash equivalents approximates carrying values due to the short
maturity of these instruments. The fair value of marketable
securities is based on market prices. The fair value of fuel hedge
contracts is based on commodity exchange prices. The fair value of
restricted deposits approximates the carrying amount. The fair value
of interest rate swap agreements is based on quoted market swap
rates. The fair value of long-term debt is based on a discounted cash
flow analysis using the Company’s current borrowing rate.
11
NOTE
3. DERIVATIVE
INSTRUMENTS
Fuel
Hedge Contracts
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risk associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options for crude oil and
swap agreements for jet fuel refining margins. The Company records these
instruments on the balance sheet at their fair value. Changes in the
fair value of these fuel hedge contracts are recorded each period in aircraft
fuel expense.
The
following table summarizes the components of aircraft fuel expense for the three
months ended March 31, 2010 and 2009 (in millions):
2010
|
2009
|
|||||||
Raw
or “into-plane” fuel cost
|
$ | 195.2 | $ | 141.9 | ||||
Losses
in value and settlement of fuel hedge contracts
|
12.1 | 15.8 | ||||||
Aircraft
fuel expense
|
$ | 207.3 | $ | 157.7 |
Cash
received, net of premiums expensed, for hedges that settled in the first quarter
of 2010 totaled $0.4 million. In the first quarter of 2009, the
Company recorded a net expense of $25.8 million for hedges settled in that
period.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedge contracts consist of over-the-counter
contracts, which are not traded on an exchange. The fair value of
these contracts is determined based on observable inputs that are readily
available in active markets or can be derived from information available in
active, quoted markets. Therefore, the Company has categorized these
contracts as Level 2 in the fair value hierarchy described in Note
2.
Outstanding
future fuel hedge positions are as follows:
Approximate
% of Expected Fuel Requirements
|
Gallons
Hedged
(in
millions)
|
Approximate
Crude Oil Price per Barrel
|
||||||||||
Second
Quarter 2010
|
50 | % | 45.9 | $ | 69 | |||||||
Third
Quarter 2010
|
50 | % | 48.3 | $ | 74 | |||||||
Fourth
Quarter 2010
|
50 | % | 44.5 | $ | 83 | |||||||
Remainder
of 2010
|
50 | % | 138.7 | $ | 75 | |||||||
First
Quarter 2011
|
50 | % | 44.9 | $ | 87 | |||||||
Second
Quarter 2011
|
41 | % | 39.2 | $ | 83 | |||||||
Third
Quarter 2011
|
36 | % | 35.6 | $ | 86 | |||||||
Fourth
Quarter 2011
|
29 | % | 26.4 | $ | 87 | |||||||
Full
Year 2011
|
39 | % | 146.1 | $ | 85 | |||||||
First
Quarter 2012
|
23 | % | 21.6 | $ | 87 | |||||||
Second
Quarter 2012
|
14 | % | 14.0 | $ | 90 | |||||||
Third
Quarter 2012
|
13 | % | 12.8 | $ | 95 | |||||||
Fourth
Quarter 2012
|
11 | % | 10.5 | $ | 93 | |||||||
Full
Year 2012
|
15 | % | 58.9 | $ | 91 | |||||||
First
Quarter 2013
|
6 | % | 5.2 | $ | 95 | |||||||
Full
Year 2013
|
1 | % | 5.2 | $ | 95 |
12
The
Company also has financial swap agreements in place to fix the refining margin
component for approximately 50%, 21%, and 2% of second, third, and fourth
quarter 2010 jet fuel purchases, respectively, at an average price per gallon of
23 cents per gallon, 27 cents per gallon, and 30 cents per gallon,
respectively.
As of
March 31, 2010 and December 31, 2009, the net fair values of the Company’s fuel
hedge positions were as follows (in millions):
March
31, 2010
|
December
31, 2009
|
|||||||
Crude
oil call options or “caps”
|
$ | 106.1 | $ | 115.9 | ||||
Refining
margin swap contracts
|
0.9 | 1.1 | ||||||
Total
|
$ | 107.0 | $ | 117.0 |
The
balance sheet amounts include capitalized premiums paid to enter into the
contracts of $91.5 million and $88.9 million at March 31, 2010 and December 31,
2009, respectively.
Interest
Rate Swap Agreements
In the
third quarter of 2009, the Company entered into interest rate swap agreements
with a third party designed to hedge the volatility of the underlying variable
interest rate in the Company’s aircraft lease agreements for six B737-800
aircraft. The agreements stipulate that the Company pay a fixed
interest rate over the term of the contract and receive a floating interest
rate. All significant terms of the swap agreement match the terms of
the lease agreements, including interest-rate index, rate reset dates,
termination dates and underlying notional values. The agreements
expire beginning in June 2020 through March 2021 to coincide with the lease
termination dates.
The
Company has formally designated these swap agreements as hedging instruments and
records the effective portion of the hedge as an adjustment to aircraft rent in
the condensed consolidated statement of operations in the period of contract
settlement. The effective portion of the changes in fair value for
instruments that settle in the future is recorded in AOCL in the condensed
consolidated balance sheets.
At March
31, 2010, the Company had a net liability of $0.4 million associated with these
contracts recorded in other accrued liabilities in the condensed consolidated
balance sheets, all of which is expected to be reclassified into earnings within
the next twelve months. 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.
8BNOTE
4. LONG-TERM
DEBT
Long-term
debt obligations were as follows (in millions):
March
31, 2010
|
December
31, 2009
|
|||||||
Fixed-rate
notes payable due through 2024
|
$ | 1,406.3 | $ | 1,440.2 | ||||
Variable-rate
notes payable due through 2024
|
409.1 | 415.0 | ||||||
Long-term
debt
|
1,815.4 | 1,855.2 | ||||||
22BLess
current portion
|
(158.2 | ) | (156.0 | ) | ||||
$ | 1,657.2 | $ | 1,699.2 |
During
the first three months of 2010, the Company had no new debt borrowings and made
scheduled debt payments of $39.8 million.
13
Bank
Lines of Credit
The
Company terminated is previous $185 million credit facility effective March 30,
2010. That facility was replaced with two new $100 million credit
facilities. Both facilities have variable interest rates based on
LIBOR plus a specified margin. Borrowings on one of the $100 million
facilities, which expires in March 2013, are secured by
aircraft. Borrowings on the other $100 million facility, which
expires in March 2014, are secured by certain accounts receivable, spare
engines, spare parts and ground service equipment. The Company has no
immediate plans to borrow using either of these facilities. These
facilities have a requirement to maintain a minimum unrestricted cash and
marketable securities balance of $500 million. The Company is in
compliance with this covenant at March 31, 2010.
Pre-delivery
Payment Facility
Subsequent
to March 31, 2010, the Company terminated its variable-rate pre-delivery payment
facility that had been used to provide a portion of the pre-delivery funding
requirements for the purchase of new Boeing 737-800 aircraft. There
were no borrowings on this facility as of December 31, 2009 or March 31,
2010.
NOTE
5. COMMON
STOCK REPURCHASE
In June
2009, the Board of Directors authorized the Company to repurchase up to $50
million of its common stock. Through March 31, 2010, the Company had repurchased
1,603,478 shares of its common stock for $34.3 million under this
program. In the first quarter of 2010, 278,900 shares were purchased
for $10.5 million.
NOTE
6. EMPLOYEE
BENEFIT PLANS
Pension
Plans - Qualified Defined Benefit
Net
pension expense for the three months ended March 31 included the following
components (in millions):
2010
|
2009
|
|||||||
Service
cost
|
$ | 8.1 | $ | 11.1 | ||||
Interest
cost
|
16.9 | 16.7 | ||||||
Expected
return on assets
|
(17.7 | ) | (12.8 | ) | ||||
Amortization
of prior service cost
|
(0.2 | ) | 1.1 | |||||
Actuarial
loss
|
5.5 | 7.2 | ||||||
Net
pension expense
|
$ | 12.6 | $ | 23.3 |
25BThe
Company contributed $15.2 million to its qualified defined-benefit plans during
the three months ended March 31, 2010, and expects to contribute an additional
$30.4 million to these plans during the remainder of 2010. The
Company made $10.6 million in contributions to its defined-benefit pension plans
during the three months ended March 31, 2009.
Pension
Plans - Nonqualified Defined Benefit
Net
pension expense for the unfunded, noncontributory defined-benefit plans was $0.8
million for the three months ended March 31, 2010 and 2009.
Postretirement
Medical Benefits
Net
periodic benefit cost for the post-retirement medical plans for the three months
ended March 31, 2010 and 2009 was $3.1 million and $3.3 million,
respectively.
14
NOTE
7. OTHER
ASSETS
Other
assets consisted of the following (in millions):
March 31,
2010
|
December
31, 2009
|
|||||||
Restricted
deposits (primarily restricted investments)
|
$ | 87.1 | $ | 86.7 | ||||
Deferred
costs and other*
|
92.9 | 56.5 | ||||||
$ | 180.0 | $ | 143.2 |
*Deferred
costs and other includes deferred financing costs, long-term prepaid rent, lease
deposits and other items.
NOTE
8. MILEAGE
PLAN
Alaska’s
Mileage Plan deferrals and liabilities are included under the following balance
sheet captions (in
millions):
March
31, 2010
|
December
31, 2009
|
|||||||
Current
Liabilities:
|
||||||||
Other
accrued liabilities
|
$ | 287.7 | $ | 267.9 | ||||
Other
Liabilities and Credits (non-current):
|
||||||||
Deferred
revenue
|
395.1 | 410.6 | ||||||
Other
liabilities
|
12.6 | 13.2 | ||||||
$ | 695.4 | $ | 691.7 |
Alaska’s
Mileage Plan revenue is included under the following condensed consolidated
statements of operations captions for the three months ended March 31 (in
millions):
2010
|
2009
|
|||||||
Passenger
revenues
|
$ | 41.1 | $ | 38.8 | ||||
Other
- net revenues
|
42.0 | 24.5 | ||||||
$ | 83.1 | $ | 63.3 |
NOTE
9. STOCK-BASED
COMPENSATION PLANS
The
Company has stock awards outstanding under a number of long-term incentive
equity plans, one of which continues to provide for the grant of stock awards to
directors, officers and employees of the Company and its
subsidiaries. Compensation expense is recorded over the shorter of
the vesting period or the period between the grant date and the date the
employee becomes retirement-eligible as defined in the applicable plan. All
stock-based compensation expense is recorded in wages and benefits in the
condensed consolidated statements of operations.
Stock
Options
During
the three months ended March 31, 2010 the Company granted 129,970 options with a
weighted-average fair value of $18.05 per share. During the same
period in the prior year, the Company granted 384,268 options with a
weighted-average fair value of $14.00 per share.
12BThe
Company recorded stock-based compensation expense related to stock options of
$1.8 million and $2.3 million for the three months ended March 31, 2010 and
2009, respectively. As of March 31, 2010, $4.9 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.
15
As of
March 31, 2010, options to purchase 2,046,098 shares of common stock were
outstanding with a weighted-average exercise price of $29.90. Of that
total, 1,305,791 were exercisable at a weighted-average exercise price of
$30.32.
Restricted
Stock Awards
During
the three months ended March 31, 2010, the Company awarded 123,650 restricted
stock units (RSUs) to certain employees, with a weighted-average grant date fair
value of $33.26. This amount reflects the value of the total RSU
awards at the grant date based on the closing price of the Company’s common
stock.
The
Company recorded stock-based compensation expense related to RSUs of $2.5
million and $2.8 million for the three-month period ended March 31, 2010 and
2009, respectively. As of March 31, 2010 $6.9 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 1.9 years.
Performance
Stock Awards
From time
to time, the Company issues performance stock unit awards (PSUs) to certain
executives. PSUs are similar to RSUs, but vesting is based on
performance or market conditions.
PSUs
issued in early 2008 vest based on a performance condition tied to the Company
achieving a specified pretax margin over a three-year period ending December 31,
2010. PSUs issued in 2010 vest based on a market condition tied to
the Company’s total shareholder return as defined in the plan relative to an
airline peer group measured over the three-year period commencing January 1,
2010. The total grant-date fair value of the PSUs issued in 2010 was
$2.5 million.
The
Company recorded $0.6 million of compensation expense related to PSUs in the
first quarter of 2010. No expense was recorded in the first
quarter of 2009.
Employee
Stock Purchase Plan
35BCompensation
expense recognized under the Employee Stock Purchase Plan was $0.1 million and
$0.3 million for the three months ended March 31, 2010 and 2009,
respectively.
Summary
of Stock-Based Compensation
The table
below summarizes the components of total stock-based compensation for the three
months ended March 31, 2010 and 2009 (in millions):
2010
|
2009
|
|||||||
Stock
options
|
$ | 1.8 | $ | 2.3 | ||||
Restricted
stock units
|
2.5 | 2.8 | ||||||
Performance
stock awards
|
0.6 | -- | ||||||
Employee
stock purchase plan
|
0.1 | 0.3 | ||||||
Total
stock-based compensation
|
$ | 5.0 | $ | 5.4 |
NOTE
10. FLEET
TRANSITION
26BHorizon Transition to All-Q400
Fleet
Horizon’s
long-term goal is to transition to an all-Q400 fleet. During 2009, Horizon had
either terminated its remaining Q200 leases or subleased Q200 aircraft to a
third party. The total charge associated with removing
16
these
aircraft from operation in the first quarter of 2009 was $4.8
million. This charge represented the estimated loss under potential
disposal transactions.
Horizon
has 16 Q200 aircraft that are subleased to a third-party carrier, for which an
accrual for the estimated sublease loss has been recorded. The
Company is evaluating alternatives to the existing sublease arrangements for
these aircraft. The Company may be required to record a charge if the
original lease or sublease arrangements are modified in the
future. However, the nature, timing or amount of any such charge
cannot be reasonably estimated at this time.
Horizon operates
18 CRJ-700 aircraft, which the Company plans to remove from its fleet in the
future. Market conditions have hindered the remarketing efforts for
these CRJ-700 aircraft resulting in a delay of the fleet transition
plan. Depending on the ultimate disposition of the CRJ-700 aircraft,
there may be further associated exit charges. The Company expects to
remove between one and three of these CRJ-700 aircraft from operations in the
second quarter of 2010 and sublease them to a third party. At this
time, management expects the loss on the sublease to be approximately $5 million
per aircraft. The nature, timing or amount of any potential gain or
loss on any future potential transactions on the remaining aircraft cannot be
reasonably estimated at this time. Horizon also subleases two CRJ-700
aircraft to a third-party carrier.
NOTE
11. OPERATING SEGMENT
INFORMATION
Operating
segment information for Alaska and Horizon for the three months ended March 31
was as follows (in millions):
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
revenues:
|
||||||||
Alaska
– mainline (1)
|
$ | 661.1 | $ | 591.3 | ||||
Alaska
– purchased capacity (1)
|
U76.5 | U61.8 | ||||||
Total
Alaska
|
737.6 | 653.1 | ||||||
Horizon
– brand flying
|
92.0 | 89.0 | ||||||
Horizon
– capacity purchase arrangement with Alaska
|
66.4 | 57.8 | ||||||
Total
Horizon
|
158.4 | 146.8 | ||||||
Other
(2)
|
0.3 | 0.3 | ||||||
Elimination
of intercompany revenues
|
(66.4 | ) | (57.8 | ) | ||||
29BConsolidated
|
$ | 30B829.9 | $ | 30B742.4 | ||||
Income
(loss) before income tax:
|
||||||||
Alaska
– mainline
|
$ | 13.2 | $ | (17.4 | ) | |||
Alaska
– purchased capacity
|
U4.0 | (0.9 | ) | |||||
Total
Alaska
|
17.2 | (18.3 | ) | |||||
Horizon
|
(6.2 | ) | (10.5 | ) | ||||
Other
(2)
|
(0.8 | ) | (0.8 | ) | ||||
32BConsolidated
|
$ | 33B10.2 | $ | (29.6 | ) |
17
March
31, 2010
|
December
31, 2009
|
|||||||
Total
assets at end of period:
|
||||||||
Alaska
|
$ | 4,599.5 | $ | 4,541.3 | ||||
Horizon
|
758.7 | 724.1 | ||||||
Other
(2)
|
1,075.6 | 1,052.4 | ||||||
Elimination
of intercompany accounts
|
(1,418.1 | ) | (1,332.8 | ) | ||||
Consolidated
|
$ | 5,015.7 | $ | 4,985.0 |
(1) Alaska
mainline revenue represents revenue from passengers aboard Alaska jets, freight
and mail revenue, and all other revenue. Purchased capacity revenue
represents that revenue earned by Alaska on capacity purchased from and provided
by Horizon and a small third party under a capacity purchase
arrangement.
(2)
Includes the parent company, Alaska Air Group, Inc., including its investments
in Alaska and Horizon, which are eliminated in consolidation.
NOTE
12. 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 liability. In that decision, 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 on
the remedy. That 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 imposed monetary remedies which were paid in the
first quarter of 2010. The amount was not material to the Company’s
financial position, statements of operations or cash flows.
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.
18
ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 condensed consolidated financial statements and
the accompanying notes. All statements in the following discussion
that are not statements of historical information or descriptions of current
accounting policy are forward-looking statements. Please consider our
forward-looking statements in light of the risks referred to in this report’s
introductory cautionary note and the risks mentioned in the Company’s filings
with the Securities and Exchange Commission including those listed in Part I,
“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2009. This overview summarizes MD&A,
which includes the following sections:
|
·
|
First Quarter in Review
– highlights from the first quarter of 2010 outlining some of the major
events that happened during the period and how they affected our financial
performance.
|
|
·
|
Results of Operations –
an in-depth analysis of the results of operations of Alaska and Horizon
for the three months ended March 31, 2010. We believe this
analysis will help the reader better understand our condensed consolidated
statements of operations. This section also includes
forward-looking statements regarding our view of the remainder of
2010.
|
|
·
|
Liquidity and Capital
Resources – an analysis of cash flows, sources and uses of cash,
contractual obligations, commitments and off-balance sheet arrangements,
an overview of financial position and the impact of inflation and changing
prices.
|
Air Group’s filings with the Securities and Exchange
Commission, including its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports are accessible
free of charge at www.alaskaair.com. The information contained on our website is
not a part of this quarterly report on Form 10-Q.
FIRST
QUARTER IN REVIEW
Our
consolidated pretax income was $10.2 million for the first quarter of 2010
compared to a $29.6 million pretax loss in the first quarter of
2009. The year-over-year improvement was due to an $87.5 million
increase in operating revenues and flat non-fuel operating expenses, partially
offset by a $49.6 million increase in our aircraft fuel costs.
|
·
|
Consolidated
unit revenues increased 11% over the first quarter of 2009, stemming from
significant increases in passenger unit revenues that were driven by
higher load factors at both Alaska and Horizon. Baggage fees
contributed $22.7 million to the revenue improvement, reflecting the
benefit of our first bag fee that was introduced during the third quarter
of 2009.
|
|
·
|
Economic
fuel averaged $2.25 per gallon in the first quarter of 2010, compared to
$1.91 in 2009. This increase, partially offset by a slight
decline in consumption, resulted in a $27.1 million increase in our
economic fuel expense for the
quarter.
|
19
Other
significant developments during the first quarter of 2010 and through the filing
of this Form 10-Q are described below.
Operational
Performance
Our
operational results continue to be among the best in the
industry. For the 12 months ended February 2010, Alaska held the No.
1 spot in on-time performance among the 10 largest U.S. airlines. And
recently, Horizon was ranked among the world’s top five airlines in 2009 on-time
performance.
New
Lines of Credit
In the
first quarter, we established two new $100 million variable-interest rate credit
facilities. These facilities replaced the previous $185 million
credit facility that was terminated in March 2010. Borrowings on one
of the $100 million facilities, which expires in March 2013, are secured by
aircraft. Borrowings on the other $100 million facility, which
expires in March 2014, are secured by certain accounts receivable, spare
engines, spare parts and ground service equipment. We have no
immediate plans to borrow using either of these facilities.
New
Markets
In the
first quarter, Alaska began daily non-stop service between Sacramento and Maui,
non-stop service between San Jose and Maui three times per week, and between San
Jose and Kona four times per week.
Alaska
also recently announced daily non-stop service between Portland and Honolulu
beginning in September 2010, between San Diego and Maui beginning in October
2010, and between San Diego and Puerto Vallarta, Mexico beginning in November
2010; and seasonal service four times weekly between Portland and Kona beginning
in November 2010. By the end of the year, Alaska will operate 101
round-trip flights per week to Hawaii – from Seattle, Anchorage, Portland,
Oakland, San Jose, Sacramento, and San Diego.
Horizon
announced four daily non-stop flights between Los Angeles and San Jose, Calif.
beginning in August 2010.
Changes
to Certain Fees
We
announced that we will begin charging $20 for each of the first three
checked bags. This increases the current service charge for the first
bag from $15, but decreases the charges for the second and third
bags. We also announced that we would reduce and simplify fees for
unaccompanied minors and eliminate free same-day standby travel and courtesy
holds on tickets purchased through Alaska/Horizon reservations or our websites.
We expect these changes to provide incremental revenue of approximately $30
million annually. These changes will be effective beginning
June 16, 2010.
On-Board
Wi-Fi
In the
first quarter of 2010, Alaska announced its selection of Aircell to provide
inflight Wi-Fi service, discontinuing its testing with Row 44 satellite-based
equipment. Installation of Aircell’s equipment began in March and we
expect that most of the fleet will be equipped by the end of 2010.
Horizon
Maintenance
In the
course of business, Horizon periodically evaluates outsourcing certain
functions. Management is currently evaluating the potential cost
savings related to outsourcing a portion of heavy maintenance work
currently performed by Horizon. No final decisions have been made at
this time.
Outlook
Given our
normal seasonal pattern, we are encouraged that we are starting out the year
with a first-quarter profit. We have typically reported a loss in the
first quarter.
Looking
ahead, advance bookings for May and June are up on average across the Air Group
system compared to the same periods in 2009 and early yield trends are
encouraging. With the new service described above, we now
expect Alaska’s mainline capacity to grow by 4% - 5% as compared to
2009. We expect Horizon system-wide capacity to be relatively flat in
2010 as compared to 2009.
20
RESULTS
OF OPERATIONS
COMPARISON
OF QUARTER ENDED MARCH 31, 2010 TO QUARTER ENDED MARCH 31, 2009
Our
consolidated net income for the first quarter of 2010 was $5.3 million, or $0.15
per diluted share, compared to a net loss of $19.2 million, or $0.53 per share,
in 2009. Both periods include adjustments to reflect the timing of
gain or loss recognition resulting from mark-to-market accounting related to our
fuel hedge portfolio. In the first quarter of 2010, we recognized net
mark-to-market losses of $12.5 million ($7.8 million after tax, or $0.21 per
share), compared to gains of $10.0 million ($6.2 million after tax, or $0.17 per
share) in the first quarter of 2009.
We
believe disclosure of earnings excluding the impact of these individual charges
is useful information to investors and other readers 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 condensed
consolidated statements of operations;
and
|
|
•
|
It
is useful to monitor performance without these items as it improves a
reader’s ability to compare our results to those of other
airlines.
|
Although
we are presenting these non-GAAP amounts for the reasons above, investors and
other readers should not necessarily conclude that these amounts are
non-recurring, infrequent, or unusual in nature.
Excluding
the mark-to-market adjustments noted above, and as shown in the following table,
our consolidated net income for the first quarter of 2010 was $13.1 million, or
$0.36 per diluted share, compared to an adjusted consolidated net loss of $25.4
million, or $0.70 per share, in the first quarter of 2009.
Three
Months Ended March 31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(in millions except per-share amounts) |
Dollars
|
Diluted
EPS
|
Dollars
|
Diluted
EPS
|
||||||||||||
Net
income (loss) and diluted EPS, excluding
noted items
|
$ | 13.1 | $ | 0.36 | $ | (25.4 | ) | $ | (0.70 | ) | ||||||
Mark-to-market
fuel hedge adjustments, net
of tax
|
(7.8 | ) | (0.21 | ) | 6.2 | 0.17 | ||||||||||
Net
income (loss) and diluted EPS as reported
|
$ | 5.3 | $ | 0.15 | $ | (19.2 | ) | $ | (0.53 | ) |
INDIVIDUAL SUBSIDIARY RESULTS
Our
consolidated results are primarily driven by the results of our two operating
carriers. Alaska reported pretax income of $17.2 million and Horizon reported a
pretax loss of $6.2 million in the first quarter of 2010. Financial and
statistical data for Alaska and Horizon are shown on pages 22 and 29,
respectively. An in-depth discussion of the results of Alaska and Horizon begins
on pages 23 and 30, respectively.
21
Alaska
Airlines Financial and Statistical Data (unaudited)
|
||||||||||||
Three Months Ended March 31 | ||||||||||||
Financial
Data (in
millions):
|
2010
|
2009
|
% Change
|
|||||||||
Operating
Revenues:
|
||||||||||||
Passenger
|
$ | 587.0 | $ | 539.8 | 8.7 | |||||||
Freight
and mail
|
22.0 | 18.3 | 20.2 | |||||||||
Other
- net
|
52.1 | 33.2 | 56.9 | |||||||||
Total
mainline operating revenues
|
661.1 | 591.3 | 11.8 | |||||||||
Passenger
- purchased capacity
|
76.5 | 61.8 | 23.8 | |||||||||
Total
Operating Revenues
|
737.6 | 653.1 | 12.9 | |||||||||
Operating
Expenses:
|
||||||||||||
Wages
and benefits
|
191.2 | 197.4 | (3.1 | ) | ||||||||
Variable
incentive pay
|
14.8 | 7.1 | 108.5 | |||||||||
Aircraft
fuel, including hedging gains and losses
|
171.7 | 131.9 | 30.2 | |||||||||
Aircraft
maintenance
|
42.1 | 46.3 | (9.1 | ) | ||||||||
Aircraft
rent
|
25.9 | 26.5 | (2.3 | ) | ||||||||
Landing
fees and other rentals
|
41.7 | 40.8 | 2.2 | |||||||||
Contracted
services
|
30.6 | 30.5 | 0.3 | |||||||||
Selling
expenses
|
26.7 | 19.1 | 39.8 | |||||||||
Depreciation
and amortization
|
45.7 | 43.3 | 5.5 | |||||||||
Food
and beverage service
|
11.8 | 11.0 | 7.3 | |||||||||
Other
|
34.8 | 42.8 | (18.7 | ) | ||||||||
Total
mainline operating expenses
|
637.0 | 596.7 | 6.8 | |||||||||
Purchased
capacity costs
|
72.5 | 62.7 | 15.6 | |||||||||
Total
Operating Expenses
|
709.5 | 659.4 | 7.6 | |||||||||
Operating
Income (Loss)
|
28.1 | (6.3 | ) |
NM
|
||||||||
Interest
income
|
8.6 | 10.1 | ||||||||||
Interest
expense
|
(22.1 | ) | (23.9 | ) | ||||||||
Interest
capitalized
|
1.7 | 2.5 | ||||||||||
Other
- net
|
0.9 | (0.7 | ) | |||||||||
(10.9 | ) | (12.0 | ) | |||||||||
Income
(Loss) Before Income Tax
|
$ | 17.2 | $ | (18.3 | ) |
NM
|
||||||
Mainline
Operating Statistics:
|
||||||||||||
Revenue
passengers (000)
|
3,641 | 3,573 | 1.9 | |||||||||
RPMs
(000,000) "traffic"
|
4,472 | 4,179 | 7.0 | |||||||||
ASMs
(000,000) "capacity"
|
5,541 | 5,520 | 0.4 | |||||||||
Passenger
load factor
|
80.7 | % | 75.7 | % |
5.0
|
pts | ||||||
Yield
per passenger mile
|
13.13 | ¢ | 12.92 | ¢ | 1.6 | |||||||
Operating
revenue per ASM
|
11.93 | ¢ | 10.71 | ¢ | 11.4 | |||||||
Passenger
revenue per ASM
|
10.59 | ¢ | 9.78 | ¢ | 8.3 | |||||||
Operating
expenses per ASM
|
11.50 | ¢ | 10.81 | ¢ | 6.4 | |||||||
Operating
expenses per ASM, excluding fuel
|
8.40 | ¢ | 8.42 | ¢ | (0.2 | ) | ||||||
Aircraft
fuel cost per gallon
|
$ | 2.38 | $ | 1.80 | 32.3 | |||||||
Economic
fuel cost per gallon
|
$ | 2.25 | $ | 1.91 | 17.8 | |||||||
Fuel
gallons (000,000)
|
72.3 | 73.3 | (1.4 | ) | ||||||||
Average
number of full-time equivalent employees
|
8,537 | 9,021 | (5.4 | ) | ||||||||
Aircraft
utilization (blk hrs/day)
|
9.3 | 9.9 | (6.1 | ) | ||||||||
Average
aircraft stage length (miles)
|
1,068 | 1,016 | 5.1 | |||||||||
Operating
fleet at period-end
|
112 | 112 | - | |||||||||
Purchased
Capacity Operating Statistics:
|
||||||||||||
RPMs
(000,000)
|
271 | 215 | 26.0 | |||||||||
ASMs
(000,000)
|
369 | 316 | 16.8 | |||||||||
Passenger
load factor
|
73.4 | % | 68.0 | % |
5.4
|
pts | ||||||
Yield
per passenger mile
|
28.23 | ¢ | 28.74 | ¢ | (1.8 | ) | ||||||
Operating
revenue per ASM
|
20.73 | ¢ | 19.56 | ¢ | 6.0 | |||||||
Operating
expenses per ASM
|
19.65 | ¢ | 19.84 | ¢ | (1.0 | ) | ||||||
NM
= Not Meaningful
|
22
ALASKA
AIRLINES
Alaska
reported income before income taxes of $17.2 million during the first quarter of
2010 compared to an $18.3 million pretax loss in the first quarter of
2009.
Excluding
the mark-to-market adjustments in each period as noted in the table below,
Alaska would have reported pretax income of $26.5 million in the first quarter
of 2010, compared to a pretax loss of $26.6 million in the same period of
2009.
Three
Months Ended March 31
|
||||||||
(in
millions)
|
2010
|
2009
|
||||||
Income
(loss) before income taxes, excluding items
below
|
$ | 26.5 | $ | (26.6 | ) | |||
Mark-to-market
fuel hedge adjustments
|
(9.3 | ) | 8.3 | |||||
Income
(loss) before income taxes as reported
|
$ | 17.2 | $ | (18.3 | ) |
The
discussion below outlines significant variances between the two
periods.
ALASKA
REVENUES
Total
operating revenues increased $84.5 million, or 12.9%, during the first quarter
of 2010 as compared to the same period in 2009. The components of
Alaska’s revenue are summarized in the following table:
Three
Months Ended March 31
|
||||||||||||
(in
millions)
|
2010
|
2009
|
%
Change
|
|||||||||
Passenger
revenue - mainline
|
$ | 587.0 | $ | 539.8 | 8.7 | |||||||
Freight
and mail
|
22.0 | 18.3 | 20.2 | |||||||||
Other
- net
|
52.1 | 33.2 | 56.9 | |||||||||
Total
mainline operating revenues
|
$ | 661.1 | $ | 591.3 | 11.8 | |||||||
Passenger
revenue - purchased capacity
|
76.5 | 61.8 | 23.8 | |||||||||
Total
Operating Revenues
|
$ | 737.6 | $ | 653.1 | 12.9 |
Operating
Revenue – Mainline
Mainline
passenger revenue increased 8.7% on an 8.3% increase in passenger revenue per
available seat mile (PRASM) on relatively flat capacity. The increase
in PRASM was driven by a five-point increase in load factor and a 1.6% increase
in yields compared to the first quarter of 2009.
Our load
factor in April 2010 was 82.9%,
compared to 78.9% in April 2009. Our advance bookings currently
suggest that load factors will be up about four points in May and 3
½ points in June compared to the prior year.
Ancillary
revenues included in passenger revenue increased from $24.3 million in the first
quarter of 2009 to $38.0 million in the first quarter of 2010. The
increase is primarily due to the implementation of a first checked bag service
charge in the third quarter of 2009. Revenue from the first bag
service charge for mainline operations was $16.6 million in the first quarter of
2010. Without the first bag service charge revenue, yields would have
declined by 1.3% compared to the first quarter of 2009.
Freight
and mail revenue increased by $3.7 million, or 20.2%, primarily as a result of
higher volumes and yields and higher fuel surcharges.
23
Other –
net revenues increased $18.9 million, or 56.9%. Mileage Plan revenues
increased by $17.5 million primarily because of an increase in the rate paid to
us by our credit card partner under the affinity card agreement. This
agreement was finalized in the second quarter of 2009.
Passenger
Revenue – Purchased Capacity
Passenger
revenue – purchased capacity increased by $14.7 million to $76.5 million because
of a 16.8% increase in capacity and a 6.0% increase in unit revenues compared to
the prior year. Unit revenues have increased as a result of a
5.4-point increase in load factors, partially offset by a 1.8% decline in
yields. The decline in yields was tempered by $2.8 million revenue
from the first bag service charge.
ALASKA
EXPENSES
For the
quarter, total operating expenses increased $50.1 million compared to the same
period in 2009 mostly as a result of an increase in fuel expense. We believe it
is useful to summarize operating expenses as follows, which is consistent with
the way expenses are reported internally and evaluated by
management:
Three
Months Ended March 31
|
||||||||||||
(in
millions)
|
2010
|
2009
|
%
Change
|
|||||||||
Mainline
fuel expense
|
$ | 171.7 | $ | 131.9 | 30.2 | |||||||
Mainline
non-fuel expenses
|
465.3 | 464.8 | 0.1 | |||||||||
Mainline
operating expenses
|
637.0 | 596.7 | 6.8 | |||||||||
Purchased
capacity costs
|
72.5 | 62.7 | 15.6 | |||||||||
Total
Operating Expenses
|
$ | 709.5 | $ | 659.4 | 7.6 |
Mainline Operating Expenses
Total
mainline operating expenses increased $40.3 million from the first quarter of
2009. The increase was primarily due to the $39.8 million increase in aircraft
fuel expense compared to the first quarter of 2009 and relatively flat non-fuel
operating expenses. Significant individual expense variances from the
first quarter of 2009 are described more fully below.
Wages
and Benefits
Wages and
benefits declined $6.2 million, or 3.1%, compared to the first quarter of
2009. The components of wages and benefits are shown in the following
table:
Three
Months Ended March 31
|
||||||||||||
(in
millions)
|
2010
|
2009
|
%
Change
|
|||||||||
Wages
|
$ | 133.8 | $ | 134.6 | (0.6 | ) | ||||||
Pension
and defined-contribution retirement benefits
|
21.2 | 29.1 | (27.1 | ) | ||||||||
Medical
benefits
|
21.7 | 18.9 | 14.8 | |||||||||
Other
benefits and payroll taxes
|
14.5 | 14.8 | (2.0 | ) | ||||||||
Total
wages and benefits
|
$ | 191.2 | $ | 197.4 | (3.1 | ) |
Wages were relatively flat on a 5.4% reduction in full-time equivalent employees (FTE) compared to the first quarter of 2009. 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 (which was effective April 1, 2009), and higher average wage rates for other employees following 2009 furloughs, which are generally seniority-based.
24
The 27.1%
decline in pension and other retirement-related benefits is primarily due to an
$11.3 million decline in our defined-benefit pension cost driven by the improved
funded status at the end of 2009 as compared to the previous year and the
closing of the defined-benefit pension plan to new pilot entrants effective with
their new contract in 2009. The defined-benefit pension plan is now
closed to all new entrants.
Medical
benefits increased 14.8% from the prior-year period primarily as a result of
higher post-retirement medical cost for the pilot group in connection with their
new contract effective April 2009 and generally higher costs of medical and
dental services.
We expect
wages and benefits to be lower in 2010 than in 2009 because of the same reasons
discussed above.
Variable
Incentive Pay
Variable
incentive pay increased from $7.1 million in the first quarter of 2009 to $14.8
million in the first quarter of 2010. Pilots, flight attendants, mechanics, and
ramp service agents were all added to the Performance-Based Pay (PBP) incentive
plan throughout 2009. These groups, other than the flight attendants, were not
included in the PBP plan in the first quarter of 2009. The increase
also reflects our expectations for the full year as of the end of the first
quarter this year compared to where our expectations were at the end of the
first quarter of 2009. For the full year of 2010, we currently expect
incentive pay to be approximately $60 million compared to the $61.6 million we
ultimately recorded 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 condensed consolidated
statement of operations as the value of that portfolio increases and decreases.
Our aircraft fuel expense is very volatile, even between quarters, because it
includes these gains or losses in the value of the underlying instrument as
crude oil prices and refining margins increase or decrease. Raw fuel expense is defined
as the price that we generally pay at the airport, or the “into-plane” price,
including taxes and fees. Raw fuel prices are impacted by world oil prices and
refining costs, which can vary by region in the U.S. Raw fuel expense approximates
cash paid to suppliers and does not reflect the effect of our fuel
hedges.
Aircraft
fuel expense increased $39.8 million, or 30.2%, compared to the first quarter of
2009. The elements of the change are illustrated in the following
table:
Three
Months Ended March 31
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2010
|
2009
|
%
Change
|
|||||||||
Fuel
gallons consumed
|
72.3 | 73.3 | (1.4 | ) | ||||||||
Raw
price per gallon
|
$ | 2.25 | $ | 1.62 | 38.9 | |||||||
Total
raw fuel expense
|
$ | 162.7 | $ | 118.8 | 37.0 | |||||||
Net
impact on fuel expense from losses arising from
fuel-hedging activities
|
9.0 | 13.1 |
NM
|
|||||||||
Aircraft
fuel expense
|
$ | 171.7 | $ | 131.9 | 30.2 |
NM = Not meaningful
Fuel
gallons consumed decreased by 1.4% primarily as a result of a longer average
aircraft stage length as we continue to add more capacity to long-haul routes
such as Hawaii.
The raw
fuel price per gallon increased by 38.9% as a result of higher West Coast jet
fuel prices that were primarily due to an increase in crude oil
costs.
25
We also
evaluate economic fuel
expense, which we define as raw fuel expense less the
cash we receive from hedge counterparties for hedges that settle during the
period, offset by the premium expense that we paid for those contracts. A key
difference between aircraft
fuel expense and economic fuel expense is the
timing of gain or loss recognition on our hedge portfolio. When we refer to
economic fuel expense,
we include gains and losses only when they are realized for those contracts that
were settled during the period based on their original contract
terms. We believe this is the best measure of the effect that fuel
prices are currently having on our business because it most closely approximates
the net cash outflow associated with purchasing fuel for our operations.
Accordingly, many industry analysts evaluate our results using this measure, and
it is the basis for most internal management reporting and incentive pay
plans.
Our economic fuel expense is
calculated as follows:
Three
Months Ended March 31
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2010
|
2009
|
%
Change
|
|||||||||
Raw
fuel expense
|
$ | 162.7 | $ | 118.8 | 37.0 | |||||||
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
(0.3 | ) | 21.4 |
NM
|
||||||||
Economic
fuel expense
|
$ | 162.4 | $ | 140.2 | 15.8 | |||||||
Fuel
gallons consumed
|
72.3 | 73.3 | (1.4 | ) | ||||||||
Economic
fuel cost per gallon
|
$ | 2.25 | $ | 1.91 | 17.8 |
NM = Not meaningful
As noted
in the above table, the total net benefit recognized for hedges that settled
during the period was $0.3 million in the first quarter of 2010, compared to net
expense of $21.4 million in the same period of 2009. These amounts
represent the net of the premium expense recognized for those hedges and any
cash received or paid upon settlement.
Aircraft
Maintenance
Aircraft
maintenance declined by $4.2 million, or 9.1%, compared to the prior-year
quarter because of fewer airframe maintenance events during the period and lower
component costs. The number of events is mostly due to timing and we
expect that the full-year maintenance cost will be relatively flat as compared
to 2009.
Selling
Expenses
Selling
expenses increased by $7.6 million, or 39.8%, compared to the first quarter of
2009 as a result of higher credit card and travel agency commissions and ticket
distribution costs resulting from the increase in passenger traffic and average
fares. We expect selling expense to be higher than 2009 levels for
these same reasons.
Other
Operating Expenses
Other
operating expenses decreased by $8.0 million, or 18.7%, from the first quarter
of 2009 because of a decline in professional services, lower de-icing costs
stemming from a milder winter on the West coast, lower personnel non-wage costs
such as hotels, a decline in passenger inconvenience costs as a result of the
improvement in operational reliability, and lower legal costs.
26
Mainline
Unit Costs per Available Seat Mile
Our
mainline operating costs per ASM are summarized below:
Three
Months Ended March 31
|
||||||||||||
2010
|
2009
|
%
Change
|
||||||||||
Total
mainline operating expenses per ASM (CASM)
|
11.50 | ¢ | 10.81 | ¢ | 6.4 | |||||||
Less
the following components:
|
||||||||||||
Aircraft
fuel cost per ASM
|
3.10 | ¢ | 2.39 | ¢ | 29.7 | |||||||
CASM,
excluding fuel
|
8.40 | ¢ | 8.42 | ¢ | (0.2 | ) |
We have listed separately in the above table our fuel costs per ASM and our unit costs, excluding fuel. 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 management of both Alaska and Horizon and by
the 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 employee 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.
|
|
·
|
Although
we disclose our “mainline” passenger unit revenues for Alaska, we do not
(nor are we able to) evaluate mainline unit revenues 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 revenues 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.
|
27
We
currently forecast our mainline costs per ASM excluding fuel and other special
items for the second quarter and full year of 2010 to be down approximately 4% -
5% and 3% - 4%, respectively, compared to 2009.
Purchased
Capacity Costs
Purchased
capacity costs increased $9.8 million, or 15.6%, compared to the first quarter
of 2009 to $72.5 million. Of the total, $66.4 million was paid to
Horizon under the CPA for 353 million ASMs, a capacity increase of 18.1% from
the first quarter of 2009. This expense is eliminated in
consolidation.
28
Horizon
Air Financial and Statistical Data (unaudited)
|
||||||||||||
Three Months Ended March 31 | ||||||||||||
|
||||||||||||
Financial
Data (in
millions):
|
2010
|
2009
|
% Change
|
|||||||||
Operating
Revenues:
|
||||||||||||
Passenger
- brand flying
|
$ | 89.3 | $ | 86.6 | 3.1 | |||||||
Passenger
- Alaska capacity purchase arrangement
|
66.4 | 57.8 | 14.9 | |||||||||
Total
passenger revenue
|
155.7 | 144.4 | 7.8 | |||||||||
Freight
and mail
|
0.6 | 0.7 | (14.3 | ) | ||||||||
Other
- net
|
2.1 | 1.7 | 23.5 | |||||||||
Total
Operating Revenues
|
158.4 | 146.8 | 7.9 | |||||||||
Operating
Expenses:
|
||||||||||||
Wages
and benefits
|
45.4 | 46.4 | (2.2 | ) | ||||||||
Variable
incentive pay
|
3.1 | 2.2 | 40.9 | |||||||||
Aircraft
fuel, including hedging gains and losses
|
35.6 | 25.8 | 38.0 | |||||||||
Aircraft
maintenance
|
14.9 | 13.4 | 11.2 | |||||||||
Aircraft
rent
|
11.1 | 11.5 | (3.5 | ) | ||||||||
Landing
fees and other rentals
|
14.5 | 13.7 | 5.8 | |||||||||
Contracted
services
|
8.3 | 7.5 | 10.7 | |||||||||
Selling
expenses
|
6.9 | 5.9 | 16.9 | |||||||||
Depreciation
and amortization
|
10.2 | 9.2 | 10.9 | |||||||||
Food
and beverage service
|
0.5 | 0.6 | (16.7 | ) | ||||||||
Other
|
9.5 | 11.0 | (13.6 | ) | ||||||||
Fleet
transition costs - Q200
|
- | 4.8 |
NM
|
|||||||||
Total
Operating Expenses
|
160.0 | 152.0 | 5.3 | |||||||||
Operating
Loss
|
(1.6 | ) | (5.2 | ) |
NM
|
|||||||
Interest
income
|
0.5 | 0.4 | ||||||||||
Interest
expense
|
(5.1 | ) | (6.0 | ) | ||||||||
Interest
capitalized
|
- | 0.3 | ||||||||||
(4.6 | ) | (5.3 | ) | |||||||||
Loss
Before Income Tax
|
$ | (6.2 | ) | $ | (10.5 | ) |
NM
|
|||||
Operating
Statistics:
|
||||||||||||
Revenue
passengers (000)
|
1,584 | 1,546 | 2.5 | |||||||||
RPMs
(000,000) "traffic"
|
566 | 524 | 8.0 | |||||||||
ASMs
(000,000) "capacity"
|
793 | 787 | 0.8 | |||||||||
Passenger
load factor
|
71.4 | % | 66.6 | % |
4.8
|
pts | ||||||
Yield
per passenger mile
|
27.51 | ¢ | 27.56 | ¢ | (0.2 | ) | ||||||
Operating
revenue per ASM
|
19.97 | ¢ | 18.65 | ¢ | 7.1 | |||||||
Passenger
revenue per ASM
|
19.63 | ¢ | 18.35 | ¢ | 7.0 | |||||||
Operating
expenses per ASM
|
20.18 | ¢ | 19.31 | ¢ | 4.5 | |||||||
Operating
expenses per ASM, excluding fuel
|
15.69 | ¢ | 16.04 | ¢ | (2.2 | ) | ||||||
Q200
fleet transition costs per ASM
|
0.00 | ¢ | 0.61 | ¢ |
NM
|
|||||||
Aircraft
fuel cost per gallon
|
$ | 2.51 | $ | 1.78 | 41.0 | |||||||
Economic
fuel cost per gallon
|
$ | 2.28 | $ | 1.90 | 20.0 | |||||||
Fuel
gallons (000,000)
|
14.2 | 14.5 | (2.1 | ) | ||||||||
Average
number of full-time equivalent employees
|
3,161 | 3,382 | (6.5 | ) | ||||||||
Aircraft
utilization (blk hrs/day)
|
7.6 | 8.3 | (8.4 | ) | ||||||||
Average
aircraft stage length (miles)
|
326 | 315 | 3.5 | |||||||||
Operating
fleet at period-end
|
58 | 55 | 3 | a/c | ||||||||
NM
= Not Meaningful
|
29
HORIZON
AIR
Horizon
reported a loss before income taxes of $6.2 million during the first quarter of
2010 compared to $10.5 million in the same period of 2009. The
improvement is primarily due to higher operating revenues, relatively flat
non-fuel expenses, and the absence this year of Q200 fleet transition costs,
partially offset by a 38.0% increase in fuel costs.
Excluding
the mark-to-market adjustments in each period as noted in the table below,
Horizon would have reported a pretax loss of $3.0 million in the first quarter
of 2010, compared to a pretax loss of $12.2 million in the same period of
2009.
Three
Months Ended March 31,
|
||||||||
(in millions) |
2010
|
2009
|
||||||
Loss
before income taxes, excluding items
below
|
$ | (3.0 | ) | $ | (12.2 | ) | ||
Mark-to-market
fuel hedge adjustments
|
(3.2 | ) | 1.7 | |||||
Loss
before income taxes as reported
|
$ | (6.2 | ) | $ | (10.5 | ) |
The
discussion below outlines significant variances between the two
periods.
HORIZON
REVENUES
For the
first quarter of 2010, operating revenues increased $11.6 million, or 7.9%,
compared to 2009. Horizon’s passenger revenues are summarized in the
table below:
Three
Months Ended March 31
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(dollars
in millions)
|
Revenues
|
%
ASMs
|
Revenues
|
%
ASMs
|
||||||||||||
Passenger
revenue from Horizon "brand" flying
|
$ | 89.3 | 55 | $ | 86.6 | 62 | ||||||||||
Revenue
from CPA with Alaska
|
66.4 | 45 | 57.8 | 38 | ||||||||||||
Total
passenger revenue and % of ASMs
|
$ | 155.7 | 100 | $ | 144.4 | 100 |
Line-of-business information is presented in the table below. In the CPA arrangement, Alaska assumes the market revenue risk and pays Horizon an agreed-upon rate based on capacity. As a result, yield and load factor information for the CPA arrangement are not presented.
Three
Months Ended March 31, 2010
|
|||||||||||||||||||||||||||||||||||||
Capacity
and Mix
|
Load
Factor
|
Yield
|
RASM
|
||||||||||||||||||||||||||||||||||
2010
Actual (in
millions)
|
Change
Y-O-Y
|
Current
% Total
|
Actual
|
Point
Change
Y-O-Y
|
Actual
|
Change
Y-O-Y
|
Actual
|
Change
Y-O-Y
|
|||||||||||||||||||||||||||||
Brand
Flying
|
440 | (9.8 | %) | 55 | 69.3 | % | 3.8 |
pts
|
29.27 | ¢ | 8.0 | % | 20.90 | ¢ | 14.6 | % | |||||||||||||||||||||
Alaska
CPA
|
353 | 18.1 | % | 45 |
NM
|
NM
|
NM
|
NM
|
NM
|
NM
|
|||||||||||||||||||||||||||
System
Total
|
793 | 0.8 | % | 100 | 71.4 | % | 4.8 |
pts
|
27.51 | ¢ | (0.2 | %) | 19.97 | ¢ | 7.1 | % |
NM = Not
meaningful
Horizon
brand flying includes those routes in the Horizon system not included in the
Alaska CPA. Horizon has the inventory and revenue risk in those
markets. Passenger revenue from Horizon brand flying increased $2.7
million or 3.1% on a 14.3% increase in passenger unit revenues, partially offset
by a nearly 10% decline in brand capacity. The increase in unit revenues is
primarily due to a 3.8-point increase in brand load factor and an 8% improvement
in yield in those markets.
Revenue
from the CPA flying performed on behalf of Alaska totaled $66.4 million during
the first quarter of 2010 compared to $57.8 million in the first quarter of
2009. The increase is primarily due to an 18.1% increase in capacity provided
under this arrangement. Under the CPA, the fee paid by Alaska is based on an
agreed-upon capacity rate, which we expect to be adjusted in the future as we
move to closer to market rates. This revenue is eliminated in
consolidation.
HORIZON
EXPENSES
Total operating expenses increased $8.0 million, or 5.3%, as compared to the same period in
2009. Significant period-over-period changes in the components of operating
expenses are as follows:
Wages
and Benefits
Wages and
benefits decreased $1.0 million, or 2.2%, compared to the first quarter of 2009.
The primary components of wages and benefits are shown in the following
table:
Three
Months Ended March 31
|
||||||||||||
(in
millions)
|
2010
|
2009
|
%
Change
|
|||||||||
Wages
|
$ | 33.4 | $ | 34.2 | (2.3 | ) | ||||||
Medical
benefits
|
5.6 | 4.8 | 16.7 | |||||||||
Other
benefits and payroll taxes
|
6.4 | 7.4 | (13.5 | ) | ||||||||
Total
wages and benefits
|
$ | 45.4 | $ | 46.4 | (2.2 | ) |
Wages
declined 2.3% primarily as a result of a 6.5% decline in full-time equivalent
employees, offset by slightly higher wages per employee. The increase
in average wages per employee is due to a higher average employee seniority
level as recent furloughs have involved less senior employees.
We expect
that wages and benefits will be lower for the full year when compared to 2009
for these same reasons.
Aircraft
Fuel
Aircraft
fuel increased $9.8 million, or 38.0%, compared to the first quarter of
2009. The elements of the change are illustrated in the following
table:
Three
Months Ended March 31
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2010
|
2009
|
%
Change
|
|||||||||
Fuel
gallons consumed
|
14.2 | 14.5 | (2.1 | ) | ||||||||
Raw
price per gallon
|
$ | 2.29 | $ | 1.59 | 44.0 | |||||||
Total
raw fuel expense
|
$ | 32.5 | $ | 23.1 | 40.7 | |||||||
Impact
on fuel expense from (gains) and losses arising from fuel-hedging
activities
|
3.1 | 2.7 |
NM
|
|||||||||
Aircraft
fuel expense
|
$ | 35.6 | $ | 25.8 | 38.0 |
NM = Not
meaningful
30
The raw
fuel price per gallon increased by 44% as a result of higher West Coast jet fuel
prices. Based on the current price of jet fuel, we expect that the
raw price per gallon in 2010 will be higher than in 2009.
Our economic fuel expense is
calculated as follows:
Three
Months Ended March 31
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2010
|
2009
|
%
Change
|
|||||||||
Raw
fuel expense
|
$ | 32.5 | $ | 23.1 | 40.7 | |||||||
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
(0.1 | ) | 4.4 |
NM
|
||||||||
Economic
fuel expense
|
$ | 32.4 | $ | 27.5 | 17.8 | |||||||
Fuel
gallons consumed
|
14.2 | 14.5 | (2.1 | ) | ||||||||
Economic
fuel cost per gallon
|
$ | 2.28 | $ | 1.90 | 20.0 |
NM = Not
meaningful
The total
net benefit recognized for hedges that settled during the period was $0.1
million in the first quarter of 2010 compared to net expense of $4.4 million in
the first quarter of 2009. These amounts represent the premium
expense recognized hedges that settle during the reported period net of any cash
received or paid upon settlement.
Fleet
Transition Costs
Fleet
transition costs associated with the sublease of Q200 aircraft were $4.8 million
during the first quarter of 2009, compared to none this year. The
first quarter 2009 charge represents the estimated lease termination cost
associated with the final six Q200 aircraft that were completely removed from
operation in that quarter.
Operating
Costs per Available Seat Mile (CASM)
Our
operating costs per ASM are summarized below:
Three
Months Ended March 31
|
||||||||||||
2010
|
2009
|
%
Change
|
||||||||||
Total
operating expenses per ASM (CASM)
|
20.18 | ¢ | 19.31 | ¢ | 4.5 | |||||||
Less
the following components:
|
||||||||||||
Aircraft
fuel cost per ASM
|
4.49 | ¢ | 3.27 | ¢ | 37.3 | |||||||
CASM,
excluding fuel
|
15.69 | ¢ | 16.04 | ¢ | (2.2 | ) | ||||||
Fleet
transition costs per ASM
|
0.00 | ¢ | 0.61 | ¢ |
NM
|
|||||||
CASM,
excluding fuel and fleet transition costs
|
15.69 | ¢ | 15.43 | ¢ | 1.7 |
NM = Not
meaningful
We
currently expect our costs per ASM excluding fuel to be flat in the second
quarter and down 2% - 3% for the full year of 2010 compared to
2009.
Consolidated Nonoperating Income
(Expense)
Net
nonoperating expense was $15.8 million in the first quarter of 2010 compared to
$17.7 million in the first quarter of 2009. Interest expense declined
$2.2 million primarily resulting from lower interest rates on our variable-rate
debt. Capitalized interest was $1.1 million lower than in the first
quarter of 2009 because of lower advance aircraft purchase
deposits.
31
Consolidated
Income Tax Expense (Benefit)
We
provide for income taxes each quarter based on either our estimate of the
effective tax rate for the full year or the actual year-to-date effective tax
rate if it is our best estimate of our annual rate. For the first
quarter of 2010, we used the actual year-to-date effective tax rate, as we
believe it to be our best estimate of the full-year rate at this time because of
the difficulty in estimating the full-year pretax income or loss and our
resulting effective tax rate. Our effective income tax rate on pretax
earnings for the first quarter of 2010 was 48.0%, compared to 35.1% in the first
quarter of 2009. In arriving at this rate, we considered a variety of
factors, including year-to-date pretax results, the U.S. federal rate of 35%,
estimated nondeductible expenses and estimated state income taxes.
We
evaluate our tax rate each quarter and make adjustments when necessary. Our
final effective tax rate for the full year is highly dependent on the level of
pretax income or loss and the magnitude of any nondeductible expenses in
relation to that pretax amount.
Critical
Accounting Estimates
For
information on our critical accounting estimates, see Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2009.
Health
Care Legislation
In March
2010, the Patient Protection and Affordable Care Act and the Health Care and
Education Act of 2010 (the Acts) became law. Based on our preliminary
review, the Acts do not appear to create any substantial, immediate
costs. Because we do not provide retirees with medical coverage once
they have reached Medicare eligibility, the elimination of the tax deduction
related to the Medicare Part D subsidy in the Patient Protection and Affordable
Care Act will not impact our financial statements. We are continuing
to evaluate the impact, if any, of the Acts on our financial position and
results of operations. Given the scope and complexity of the legislation and the
fact that extensive implementing regulations remain to be finalized, it is
difficult to predict future impacts of this legislation.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are our existing cash and marketable securities
balance of $1.2 billion (which represents 34% of trailing twelve months revenue)
and our expected cash flow from operations. We also have other
sources of liquidity such as the ability to finance unencumbered aircraft, our
combined $200 million bank line-of-credit facilities, and a “forward sale” of
mileage credits to our affinity card bank partner. Because of the severe
economic uncertainty in 2009 and the volatility of fuel prices in recent years,
we intentionally increased our balance of cash and marketable securities to
current levels. As the economic climate stabilizes, we plan to reduce
our cash and marketable securities to 25% to 30% of revenues over the next two
years, through debt repayment, further share repurchases, pension funding, or a
combination thereof. We will continue to focus on preserving a strong
liquidity position and evaluate our cash needs as conditions
change.
We
believe that our current cash and marketable securities balance of $1.2 billion
combined with future cash flows from operations and other sources of liquidity
will be more than adequate to fund our operations, meet our capital commitments
and debt obligations for at least the next 12 months and would continue to be
sufficient if we reduce our cash balance as described above.
In our
cash and marketable securities portfolio, we generally invest only in U.S.
government securities, asset-backed obligations and corporate debt
securities. We do not generally invest in equities and we do not
invest in auction-rate securities. As of March 31, 2010, we had a
$15.7 million net unrealized gain associated with our cash and marketable
securities balance.
32
Our
overall investment strategy for our marketable securities portfolio has a
primary goal of maintaining and securing the investment
principal. Our investment portfolio is managed by reputable financial
institutions and continually reviewed to ensure that the investments are aligned
with our strategy.
The table
below presents the major indicators of financial condition and
liquidity.
March
31, 2010
|
December
31, 2009
|
Change
|
||||||||||
(dollars
in millions)
|
||||||||||||
Cash
and marketable securities
|
$ | 1,171.2 | $ | 1,192.1 | $ | (20.9 | ) | |||||
Cash
and marketable securities as a percentage of last twelve months
revenue
|
34 | % | 35 | % |
(1
|
)pt | ||||||
Long-term
debt, net of current portion
|
$ | 1,657.2 | $ | 1,699.2 | $ | (42.0 | ) | |||||
Shareholders'
equity
|
$ | 885.4 | $ | 872.1 | $ | 13.3 | ||||||
Long-term
debt-to-capital assuming aircraft operating leases are
capitalized
|
||||||||||||
at
seven times annualized rent
|
75%:
25%
|
76%:24%
|
NA
|
The
following discussion summarizes the primary drivers of the decrease in our cash
and marketable securities balance and our expectation of future cash
requirements.
ANALYSIS
OF OUR CASH FLOWS
Cash
Provided by Operating Activities
During
the first quarter of 2010, net cash provided by operating activities was $54.5
million, compared to $10.1 million generated in the first quarter of 2009. The
increase in operating cash flow was primarily due to the improvement in earnings
and increase of cash inflows for advance ticket sales as compared to the first
quarter of 2009. These increases were partially offset by the payment
of 2009 incentive pay in the first quarter of 2010, which was significantly
larger than the payment of 2008 incentive pay in the first quarter of
2009.
We
typically generate positive cash flows from operations and expect to do so in
2010, but historically we have consumed substantially all of that cash plus
additional debt proceeds for capital expenditures and debt
payments. In 2010, however, we anticipate much lower capital
expenditures than in the past several years and may choose to use our operating
cash flow to prepay long-term debt, provide more funding to our pension plans,
repurchase our common stock, or a combination thereof.
Cash
Used in Investing Activities
Cash used
in investing activities was $47.9 million during the first quarter of 2010,
compared to $235.8 million during the same period of 2009. Our
capital expenditures were lower in the first quarter of 2010 as we purchased no
new aircraft in the first quarter of 2010.
We
currently expect total capital expenditures for 2010 to be as follows (in
millions):
Aircraft-related
|
Non-aircraft
|
Total
|
||||||||||
Alaska
|
$ | 115 | $ | 80 | $ | 195 | ||||||
Horizon
|
3 | 5 | 8 | |||||||||
Total
Air Group
|
$ | 118 | $ | 85 | $ | 203 |
33
A
significant portion of the non-aircraft capital expenditures is for Alaska’s
planned move to Terminal 6 at Los Angeles International Airport. We
are working with Los Angeles World Airports (LAWA) on a project management
agreement, whereby we may manage and finance a significant portion of the total
cost of the project, which will then be reimbursed by LAWA and the
Transportation Security Administration. We are currently in negotiations with
LAWA to finalize the project management and funding specifics.
Cash
Provided by Financing Activities
Net cash
used for financing activities was $53.1 million during the first quarter of 2010
compared to $179.7 million of cash provided
by financing activities during the same period of 2009. The decline
is primarily due to the proceeds from the sale-leaseback transaction in the
first quarter of 2009 for six B737-800 aircraft and no new issuances of debt in
the first quarter of 2010.
Bank
Line-of-Credit Facilities
We
terminated our previous $185 million credit facility effective March 30,
2010. That facility was replaced with two new $100 million credit
facilities. Both facilities have variable interest rates based on
LIBOR plus a specified margin. Borrowings on one of the $100 million
facilities, which expires in March 2013, are secured by
aircraft. Borrowings on the other $100 million facility, which
expires in March 2014, are secured by certain accounts receivable, spare
engines, spare parts and ground service equipment. We have no
immediate plans to borrow using either of these facilities.
Pre-delivery
Payment Facility
Subsequent
to the end of the 2010 first quarter, we terminated our pre-delivery payment
facility. There were no outstanding borrowings under this facility as
of March 31, 2010.
Contractual
Obligations, Commitments and Off-Balance-Sheet Arrangements
Aircraft
Purchase Commitments
We have firm orders to purchase 23 aircraft requiring
future aggregate payments of approximately $571.5 million, as set forth below. Alaska has options to
acquire 40 additional B737s and Horizon has options to acquire 10
Q400s.
The
following table summarizes aircraft purchase commitments as of March 31, 2010
and payments by year:
Delivery
Period - Firm Orders
|
|||||||
Aircraft
|
April
1 – December 31, 2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
Total
|
Boeing
737-800
|
4
|
3
|
2
|
2
|
2
|
2
|
15
|
Bombardier
Q400
|
-
|
-
|
4
|
4
|
-
|
-
|
8
|
Total
|
4
|
3
|
6
|
6
|
2
|
2
|
23
|
Payments
(in millions)
|
$107.3
|
$89.0
|
$144.8
|
$143.1
|
$55.1
|
$32.2
|
$571.5
|
The 2010
deliveries of B737-800 aircraft are all expected to occur in the second and
third quarters.
We expect
to pay for the four B737-800 aircraft deliveries in 2010 with cash on hand. We
expect to pay for the firm orders beyond 2010 and the option aircraft, if
exercised, through internally generated cash, long-term debt, or operating lease
agreements.
34
Contractual
Obligations
The
following table provides a summary of our principal payments under current and
long-term debt obligations, operating lease commitments, aircraft purchase
commitments and other obligations as of March 31, 2010.
April
1 – Dec. 31,
|
Beyond
|
|||||||||||||||||||||||||||
(in
millions)
|
2010
|
2011
|
2012
|
2013
|
2014
|
2014
|
Total
|
|||||||||||||||||||||
Current
and long-term debt obligations
|
$ | 116.2 | $ | 191.5 | $ | 236.3 | $ | 195.8 | $ | 162.6 | $ | 913.0 | $ | 1,815.4 | ||||||||||||||
Operating
lease commitments (1)
|
107.0 | 195.8 | 194.6 | 157.5 | 139.9 | 425.2 | 1,220.0 | |||||||||||||||||||||
Aircraftpurchase
commitments
|
107.3 | 89.0 | 144.8 | 143.1 | 55.1 | 32.2 | 571.5 | |||||||||||||||||||||
Interest
obligations (2)
|
69.0 | 99.2 | 88.6 | 73.3 | 61.8 | 184.0 | 575.9 | |||||||||||||||||||||
Other
purchase obligations (3)
|
51.5 | 51.9 | 52.2 | 42.2 | 54.3 | -- | 252.1 | |||||||||||||||||||||
Total
|
$ | 451.0 | $ | 627.4 | $ | 716.5 | $ | 611.9 | $ | 473.7 | $ | 1,554.4 | $ | 4,434.9 |
(1)
Operating lease commitments generally include aircraft operating leases, airport
property and hangar leases, office space, and other equipment
leases. The aircraft operating leases include lease obligations for
two leased MD-80 aircraft and 16 leased Q200 aircraft, all of
which are no longer in our operating fleets. We have
accrued for these lease commitments based on their discounted future cash flows
and we remain obligated under the existing lease contracts on these
aircraft.
(2) For
variable-rate debt, future obligations are shown above using interest rates in
effect as of March 31, 2010.
(3)
Includes minimum obligations under our long-term power-by-the-hour maintenance
agreements for all B737 engines other than the B737-800.
Pension
Obligations
The
“Contractual Obligations” table above excludes contributions to our various
defined-benefit pension plans, which could be approximately $45 million to $75
million per year based on our historical funding practice. There is
no minimum required contribution in 2010, although the company does plan to
contribute approximately $45 million to the plans in 2010.
Effect of
Inflation
Inflation
and price changes other than for aircraft fuel and passenger fares do not have a
significant effect on our operating revenues, operating expenses and operating
income.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
have been no material changes in market risk from the information provided in
Item 7A “Quantitative and Qualitative Disclosure About Market Risk” in our 2009
10-K except as follows:
Market
Risk – Aircraft Fuel
Currently,
our fuel-hedging portfolio consists almost exclusively 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 March 31, 2010 would increase or decrease the fair value of our
$106.1 million crude oil hedge portfolio by approximately $44.1 million and
$37.5 million, respectively.
35
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 condensed
consolidated financial statements.
Financial
Market Risk
In this
current economic environment, significant volatility in market values and
interest rates is common. We have exposure to market risk associated
with changes in interest rates related primarily to our debt obligations and
short-term investment portfolio. Our debt obligations include
variable-rate instruments, which have exposure to changes in interest
rates. This exposure is somewhat mitigated through our variable-rate
investment portfolio. We have investments in marketable securities,
which are exposed to market risk associated with changes in interest rates and
market values. We generally invest only in government and corporate
bond obligations. We do not invest in auction-rate
securities.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
March 31, 2010, an evaluation was performed under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer (collectively, our “certifying officers”), of the
effectiveness of the design and operation of our disclosure controls and
procedures. These disclosure controls and procedures are designed to ensure that
the information required to be disclosed by us in our periodic reports filed
with or submitted to the Securities and Exchange Commission (the SEC) is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms, and includes, without limitation, controls and
procedures designed to ensure that such information is accumulated and
communicated to our management, including our certifying officers, as
appropriate to allow timely decisions regarding required
disclosure. Our certifying officers concluded, based on their
evaluation, that disclosure controls and procedures were effective as of March
31, 2010.
Changes
in Internal Control over Financial Reporting
We made
no changes in our internal control over financial reporting during the quarter
ended March 31, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
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.
36
ITEM 1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2009, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity
Securities
Total
number of shares purchased
|
Average
price paid per share
|
Maximum
approximate remaining dollar value of shares that can be repurchased under
the plan (1)
|
||||||||||
February
11, 2010 – February 28, 2010 (1)
|
72,000 | $ | 34.39 | |||||||||
March
1, 2010 – March 31, 2010 (1)
|
206,900 | 38.76 | ||||||||||
Total
|
278,900 | $ | 37.64 | $ | 15,737,628 |
(1)
|
Purchased
pursuant to a $50 million repurchase plan authorized by the Board of
Directors in June 2009. The plan expires after twelve
months. Additional purchases have been made subsequent to March
31, 2010.
|
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
See
Exhibit Index on page 39.
37
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ALASKA
AIR GROUP,
INC.
Registrant
Date: May
5, 2010
By: /s/ Brandon S.
Pedersen
Brandon
S. Pedersen
Vice
President/Finance and Controller (Principal Accounting Officer)
By: /s/ Glenn S.
Johnson
Glenn S.
Johnson
Executive
Vice President/Finance and Chief Financial Officer (Principal Financial
Officer)
38
EXHIBIT INDEX
Pursuant
to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The
following exhibits are numbered in accordance with Item 601 of Regulation
S-K.
Exhibit
No.
|
Description
|
|
Exhibits
32.1 and 32.2 are being furnished pursuant to 18 U.S.C. Section 1350 and
shall not deemed
to be “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as
|
|
amended
(“Exchange Act”,) or otherwise subject to the liability of that section.
Such exhibits shall
not be deemed to be incorporated by reference into any filing of the
Company under the Securities
Act of 1933, as amended, or the Exchange Act, whether made before or after
the date
hereof, regardless of any general incorporation language in such
filing.
|
|
*
Filed herewith.
|
|
#
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted
and filed separately with the Securiites and Exchange Commission pursuant
to a Confidential Treatment Application filed with the
Commission.
|
39