UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE[NO FEE REQUIRED]
For the fiscal year ended December 31, 19941997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . to . . . . . . . .
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 431-7040
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $1.00 Par Value New York Stock Exchange
Rights to Purchase Series A
Participating Preferred Stock New York Stock Exchange
7-3/4%6-1/2% Convertible SubordinatedSenior Debentures Due 2010 Unlisted2005 New York Stock Exchange
6-7/8% ConvertibleConv. Subordinated Debentures Due 2014 New York Stock Exchange
7-1/4% Convertible Subordinated
Notes Due 2006 New York Stock Exchange
10.21% Series B Cumulative Redeemable
Preferred Stock Due 1997 Unlisted
As of December 31, 1994,1997, common shares outstanding totaled 13,400,090.18,282,732.
The aggregate market value of the common shares of Alaska Air Group, Inc.
held by nonaffiliates, 13,213,78918,223,488 shares, was approximately $198$706 million
(based on the closing price of these shares, $15.00,$38.75, on the New York Stock
Exchange on such date).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement Relating to Part III
19951998 Annual Meeting of Shareholders
Exhibit Index begins on page 33.35.
PART I
ITEM 1.BUSINESS
General1. BUSINESS
GENERAL INFORMATION
Alaska Air Group, Inc. (Air Group or the Company) is a holding company
which was incorporated in Delaware in 1985. Its two principal
subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon). Both subsidiaries operate as airlines. However, each subsidiary'sairlines,
although their business plan,plans, competition and economic risks differ
substantially. Alaska is a major airline, operates an all jet fleet,
and its average passenger trip length is 850846 miles. Horizon is a
regional airline, operates jet and turboprop aircraft, and its average
passenger trip is 210241 miles. Business segment information is reported in
the Notes to Consolidated Financial Statements. The Company'sAir Group's executive
offices are located at 19300 Pacific Highway South, Seattle, Washington
98188. The business of the Company is somewhat seasonal. Quarterlyseasonal, and quarterly
operating income tends to peak during the third quarter.
Alaska
Alaska Airlines is an Alaska corporation that was organized in 1932 and
incorporated in 1937. Alaska serves 36
airports35 cities in six states (Alaska,
Washington, Oregon, California, Nevada and Arizona), threeone city in Canada,
four cities in Mexico and threefive cities in Russia. In each year since
1973, Alaska has carried more passengers between Alaska and the U.S.
mainland than any other airline. Alaska Airlines also serves four smaller cities in
California, four in Washington, and many small communities in Alaska through
subcontracts with local carriers.
In 1994,1997, Alaska carried 9.012.3 million
passengers. Passenger traffic within Alaska and between Alaska and the
U.S. mainland accounted for 25%26% of Alaska's total1997 revenue passenger
miles, while West Coast traffic accounted for 65% and66%, the Mexico markets 10%8% and
Russia less than 1%. Based on passenger enplanements, Alaska's leading
airports are Seattle, Portland, Anchorage and Los Angeles. Based on
revenues, its leading nonstop routes wereare Seattle-Anchorage, Seattle-Los
Angeles and Seattle-
San Francisco.Seattle-San Diego. At December 31, 1997, Alaska's operating
fleet at December 31, 1994 consisted of 7278 jet aircraft. The majority of Alaska flights, and
certain Northwest Airlines flights, are dual-designated in airline
computer reservation systems as Alaska Airlines and Northwest Airlines
in order to facilitate feed traffic between the two airlines. Alaska
Airlines also serves three smaller cities in California, three in
Washington, and many small communities in Alaska through code share
marketing agreements with local carriers.
Horizon
Horizon, a Washington corporation, began service in 1981 and was
acquired by Air Group in 1986. It is the largest regional airline in
the Pacific Northwest, and serves 36 airports33 cities in sixfive states (Washington,
Oregon, Montana, Idaho, Utah and California) and twofour cities in Canada. In
1994,1997, Horizon carried 3.53.7 million passengers. Based on passenger
enplanements, Horizon's leading airports are Seattle, Portland, Spokane
and Boise. Based on revenues, its leading nonstop routes wereare Seattle-
Portland, Seattle-Spokane Seattle-Portland, Seattle-Boise, Seattle-Vancouver,
B.C. and Portland-Boise.Seattle-Boise. At December 31, 1994,1997,
Horizon's operating fleet consisted of ten15 jet and 5547 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code in
airline computer reservation systems. CertainMost Horizon flights are also
dual-designated in these reservation systems as Northwest Airlines and
Alaska Airlines. Currently, 32% of Horizon's passengers connect to
either Alaska or Northwest.
Airline Regulation
United States Department of Transportation (DOT) - The DOT has the authority to
regulate certain airline economic functions including financial and statistical
reporting, consumer protection, computerized reservations systems and essential
air transportation. The DOT is also charged with determining which U.S.
carriers will receive the authority to provide service to international
destinations. International operating authority is subject to bilateral
agreements between the United States and the respective countries. The
countries establish the number of carriers to provide service, approve the
carriers selected to provide such service and the size of aircraft to be used.
The DOT reviews the carriers authorized under bilateral agreements every five
years. Horizon's authority to operate the Seattle-Vancouver, Seattle-Victoria
and the Portland-Vancouver routes is to be reviewed in August 1997, March 1999
and July 1995, respectively. Alaska's authority to serve its various Mexico
destinations are to be reviewed during 1995 and 1996. The bilateral agreement
with Russia will be reviewed in December 1995. The Company expects to be
granted authority to continue to operate its international routes. During
January 1995, Alaska applied to the DOT to serve Oakland and San Diego from
Vancouver.
Federal Aviation Administration (FAA) - The FAA, an agency within the DOT, has
jurisdiction to regulate aviation safety generally, including: the licensing of
pilots and maintenance personnel; the establishment of minimum standards for
training and maintenance; and technical standards of flight, communications and
ground equipment. All aircraft must have and maintain certificates of
airworthiness issued by the FAA. Alaska and Horizon aircraft, maintenance
facilities and procedures are subject to inspection by the FAA. The FAA has the
authority to suspend temporarily or revoke permanently the authority of an air
carrier or its licensed personnel for failure to comply with Federal Aviation
Regulations and to levy civil penalties for such failure.
Labor Relations - The air transportation industry is regulated under the Railway
Labor Act, which vests in the National Mediation Board certain regulatory powers
with respect to disputes between airlines and labor unions arising under
collective bargaining agreements.
Environmental - Special noise ordinances or agreements restrict the type of
aircraft, the timing and the number of flights operated by Alaska and other air
carriers at five Los Angeles area airports plus San Diego, Palm Springs, San
Francisco and Seattle.
In 1990, Congress passed the Airport Noise and Capacity Act of 1990 (Act). The
Act addressed the need to establish a national aviation noise policy and limit
the ability of airports and local communities to implement procedures that would
interfere with interstate commerce or the national air transportation system.
The Act also called for the phase out of Stage II airplanes (generally older
aircraft not meeting certain noise emission standards) in the contiguous 48
states by December 31, 1999. The Stage II phase-out provisions of the Act do
not apply to aircraft operated solely within the state of Alaska. To implement
the phase out within the contiguous 48 states, the FAA has proposed regulations
and a timetable. Alaska believes that its current fleet plan will enable it to
comply with the FAA's proposed regulations.
Competition
Competition in the air transportation industry is intense. Currently, any
domestic air carrier deemed fit by the DOT is allowed to operate scheduled
passenger service in the United States. Together, Alaska and Horizon carry less
than 2% of all U.S. passenger traffic.
Alaska and Horizon compete in the West Coast, Arizona and Nevada markets with
American, America West, Delta, MarkAir, Reno Air, Shuttle by United, Southwest
Airlines, United and United Express. Alaska also competes primarily with
United, Northwest, Delta and MarkAir in the Lower 48-to-Alaska market. Some of
these competitors are substantially larger than Alaska and Horizon, have greater
financial resources and have more extensive route systems. Due to its shorthaul
markets, Horizon is subject to competition from surface transportation,
particularly the private automobile.
Alaska and Horizon integrate their flight schedules to provide the best
possible service between any two points served by their systems. Both
airlines distinguish themselves from competitors by providing a higher
level of customer service. The airlines' excellent service in the form
of advance seat assignments, a first class section, attention to
customer needs, high-quality food and beverage service, more legroom, well-maintained
aircraft and other amenities has been recognized by independent studies
and surveys of air travelers. Alaska and Horizon offer competitive
fares.
BUSINESS RISKS
The Company's operations and financial results are subject to various
uncertainties such as intense competition, volatile fuel prices, a
largely unionized labor force, the need to finance large capital
expenditures, government regulation, potential aircraft incidents and
general economic conditions.
Competition
Competition in the air transportation industry is intense. Any domestic
air carrier deemed fit by the DOT is allowed to operate scheduled
passenger service in the United States. Together, Alaska and Horizon
carry 2.3% of all U.S. domestic passenger traffic. Alaska and Horizon
compete with one or more domestic or foreign airlines on most of their
routes. Some of these competitors are substantially larger than Alaska
and Horizon, have greater financial resources and have more extensive
route systems. Due to its shorthaul markets, Horizon is also subject to
competition from surface transportation, particularly the automobile.
Most largemajor U.S. carriers have developed, independently or in partnership
with others, large computerized reservation systems (CRS). Due to contractual
requirements imposed by CRSs, most travel agencies contract with a single CRS to
sell tickets. Airlines,
including Alaska, and Horizon, are charged industry-set fees to have
their flight schedules included in the various CRS displays.displays used by
travel agents and airlines. These systems are currently the predominant
means of distributing airline tickets. In order to reduce anti-competitiveanti-
competitive practices, the DOT regulates the display of all airline
schedules and fares. Alaska is exploring alternatives to existing
distribution methods.
American Airlines, ownerFuel
Fuel costs represented 14.5% of the SABRE CRS, has filed suit
against Alaska to prevent Alaska from reducing its levelCompany's total operating expenses
in 1997. Fuel prices, which can be volatile and are largely outside of
display purchased
from SABRE without also doing so in all other CRSs. At Alaska's request, the DOT is seeking comment from interested partiesCompany's control, can have a significant impact on the subject.Company's
operating results. Currently, a one cent change in the fuel price per
gallon affects annual fuel costs by approximately $3.2 million. The
Company has in the past hedged against its exposure to fluctuations in
the price of jet fuel, but does not currently do so. The Company
evaluates hedging strategies on an ongoing basis.
Unionized Labor Force
Labor costs represented 33% of the Company's total operating expenses in
1997. Wage rates can have a significant impact on the Company's
operating results. At December 31, 1997, labor unions represented 88%
of Alaska's and 43% of Horizon's employees. The air transportation
industry is regulated under the Railway Labor Act, which vests in the
National Mediation Board certain regulatory powers with respect to
disputes between airlines and labor unions. The Company cannot predict
the outcome of union contract negotiations nor control actions (e.g.
work stoppage or slowdown) unions might take to try to influence those
negotiations.
Leverage and Future Capital Requirements
The Company, like many airlines, is highly leveraged, which increases
the volatility of its earnings. Due to high fixed costs, including
aircraft lease commitments, a decrease in revenues could result in a
disproportionately greater decrease in earnings. In addition, the
Company has an ongoing need to finance new aircraft deliveries and there
is no assurance that such financing will be available in sufficient
amounts or on acceptable terms. See Item 7 for management's discussion
of liquidity and capital resources.
Government Regulation; International Routes
The Company, like other airlines, is subject to regulation by the
Federal Aviation Administration (FAA) and the United States Department
of Transportation (DOT). The FAA, under its mandate to ensure aviation
safety, has the authority to ground aircraft and to suspend temporarily
or revoke permanently the authority of an air carrier or its licensed
personnel for failure to comply with Federal Aviation Regulations and to
levy civil penalties for such failure. The DOT has the authority to
regulate certain airline economic functions including financial and
statistical reporting, consumer protection, computerized reservations
systems, essential air transportation and international route authority.
The Company is subject to bilateral agreements between the United States
and the foreign countries to which the Company provides service. There
can be no assurance that existing bilateral agreements between the
United States and the foreign governments will continue or that the
Company's designation to operate such routes will continue.
Risk of Loss and Liability; Weather
The Company, like other airlines, is exposed to potential catastrophic
losses in the event of aircraft accidents or terrorist incidents.
Consistent with industry standards, the Company maintains insurance
against such losses. However, any aircraft accident, even if fully
insured, could cause a negative public perception of the Company with
adverse financial consequences. Unusually adverse weather, as occurred
during December 1996 in the Pacific Northwest, can significantly reduce
flight operations, resulting in lost revenues and added expenses.
OTHER INFORMATION
Frequent Flyer Program
All major airlines have developed frequent flyer programs as a way of
increasing passenger loyalty. Alaska's Mileage Plan allows members to
earn mileage by flying on Alaska, Horizon and other participating
airlines, and by using the services of non-airline partners, which
include a credit card partner, telephone companies, hotels and car
rental agencies. Alaska is paid by non-airline partners for the miles
it credits to member accounts. Alaska has the ability to change the
Mileage Plan terms, conditions, partners, mileage credits and award
levels.
Mileage can be redeemed for free or discounted travel and for other
travel industry awards. Upon accumulating the necessary mileage,
members notify Alaska of their award selection. Once selected, awards can be changed, subject to a
change fee.selection Over 90%70% of the flight
awards selected are subject to blackout dates and capacity-controlled
seating. Currently,Effective in January 1996, miles earned must be redeemed
within three years, otherwise they expire.have no expiration. As of
the year end 19941996 and 1993,1997, Alaska estimates that 662,000504,000 and 698,000
roundtrip652,000
round trip flight awards could have been redeemed by Mileage Plan
members who have mileage credits exceeding the 20,000 mile free round
trip domestic ticket award threshold. At December 31, 1994,1997, fewer than
27%4% of these flight awards were issued and outstanding. Effective
January 31, 1995, the threshold for a free round trip domestic award will be
increased from 15,000 miles to 20,000 miles.
For the years
1994, 19931995, 1996 and 1992,1997, approximately 226,000, 188,000242,000, 173,000 and 174,000185,000 round
trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 5%7% for 1995, 4% for 1996, and 3% for
1997, of the total passenger miles flown for each period.
Alaska maintains a liability for its Mileage Plan obligation which is
based on its total miles outstanding, less an estimate for miles whichthat
will never be redeemed. The net miles outstanding are allocated between
those credited for travel on Alaska, Horizon or other airline partners
and those credited for using the services of non-airline partners.
Miles credited for travel on Alaska, Horizon or other airline partners
are accrued at Alaska's incremental cost of providing the air travel.
The incremental cost includes the cost of meals, fuel, reservations and
insurance. The incremental cost does not include a contribution to
overhead, aircraft cost or profit. A portion of the proceeds received
from non-airline partners is also deferred. At December 31, 19941996 and
1993,1997, the total liability for miles outstanding was $17.4$17.3 million and
$14.7$22.3 million, respectively.
Employees
Alaska had 8,578 active full-time and part-time employees at December
31, 1997. The following is a summary of Alaska's union contracts as of
December 31, 1997:
Number of
Union Employee Group Employees Contract Status
International Mechanic, Rampservice 1,786 Amendable 8/31/97
Association of and Related Crafts In negotiation
Machinists and
Aerospace Workers
Clerical, Office and 3,094 Amendable 5/20/99
Passenger Service
Air Line Pilots Pilots 1,085 Amendable 4/30/03
Association International
Association of Flight Attendants 1,491 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 61 Amendable 4/1/98
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 2/9/02
Union of America
Horizon had 2,851 active full-time and part-time employees at December
31, 1997. The following is a summary of Horizon's union contracts as of
December 31, 1997:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 403 Amendable 4/24/98
Union of America related classifications
Dispatchers 26 Amendable 5/10/02
Association of Flight Attendants 281 Amendable 1/28/03
Flight Attendants
National Automobile, Station personnel 33 Amendable 1/17/01
Aerospace, Transportation in Canada
and General Workers
International Brotherhood Pilots 495 Initial contract
of Teamsters negotiations in 1998
Selected Quarterly Consolidated Financial Information (Unaudited)
Selected financial data for each quarter of 1994 and 1993 is as follows (in
millions, except per share):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1994 1993 1994 1993 1994 1993 1994 1993
Operating revenues $280.4 $250.2 $330.5 $277.5 $386.8 $323.4 $318.0 $277.2
Operating income (2.9) (16.8) 24.5 2.1 52.3 20.7 1.2 (22.7)
Net income (loss) (6.3) (15.0) 9.7 (3.6) 24.3 8.0 (5.1) (20.3)
Earnings (loss) per share:
Primary (.47) (1.25) .72 (.33) 1.81 .60 (.38) (1.52)
Fully diluted * * .61 * 1.36 .53 * *
* Anti-dilutive
Results for 4th Quarter
1993 include an after-tax special charge of $9.8 million
to recognize the lower value of the Boeing 727 fleet and the acceleration of its
retirement. The fully diluted earnings1996 1997 1996 1997 1996 1997 1996 1997
(in millions, except per share amounts for the second and
third quarters differ from those previously reported. The Company changed the
earningsshare)
Operating revenues $351.4 $380.4 $416.7 $435.0 $464.9 $501.2 $359.2 $422.8
Operating income
(loss) (5.2) (5.4) 39.6 40.9 63.0 76.3 (8.4) 27.2
Net income (loss) (7.2) (5.7) 18.0 20.8 32.8 42.2 (5.6) 15.1
Earnings (loss) per share calculation to properly reflect the dilution of the
investment options that remain outstanding after the 1993 repurchase of
convertible preferred stock.share:
Basic (0.52) (0.39) 1.26 1.43 2.27 2.88 (0.38) 0.98
Diluted (0.52) (0.39) 0.88 1.01 1.53 1.96 (0.38) 0.73
The total of the amounts shown as quarterly earnings per share (EPS) may
differ from the amount shown on the Consolidated Statement of Income
because the annual computation is made separately and is based upon
average number of shares and(and equivalent shares for diluted EPS)
outstanding for the year.
Employees
Alaska had 6,901 active full-time and part-time employees at December 31, 1994,
of which approximately 87% are represented by labor unions.
The unions and the number of Alaska employees represented by each as of December
31, 1994 and the amendable dates of existing contracts are outlined below:
Number of
Union Employee Group Employees Contract Status
International
Association Mechanic, Rampservice 1,558 Amendable 9/1/97
of Machinists and and related
Aerospace Workers classifications
Clerical, Office and 2,154 Amendable 9/30/92
Passenger Service (In negotiation)
Air Line Pilots Pilots 874 Amendable 12/1/97
Association International
Association of Flight Attendants 1,335 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 80 Amendable 4/1/95
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 4/24/96
Horizon had 2,951 active full-time and part-time employees at December 31, 1994,
of which approximately 20% are represented by labor unions.
The unions and the number of Horizon employees represented by each as of
December 31, 1994 and the amendable dates of existing contracts are outlined
below:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 275 Amendable 1/1/95
Union of America related classifications (New contract is
waiting to be ratified)
Dispatchers 16 In negotiation
Association of Flight Attendants 249 Amendable 6/15/96
Flight Attendants
Canadian Brotherhood Station personnel 53 Amendable 7/10/95
of Railway, Transport in British Columbia
and General Workers
The Company's labor contracts currently in negotiation are not expected, when
finalized, to have a material adverse impact on results of operations.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their average
age at December 31, 1994.1997.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Alaska Airlines
Boeing 737-200C 111 4 47 1 8 1417.4
Boeing 737-400 140 3 19 22 225 28 3.9
McDonnell Douglas MD-80 140 16 26 42 6
23 49 72 68.2
26 52 78 7.6
Horizon
Fairchild Metroliner III 18 5 18 23 9
Dornier 328 30 _ 9 9 1-- 11 11 10.7
de Havilland Dash 8 37 _ 23 23 7-- 36 36 6.3
Fokker F-28 62-69 3 12 15 14.6
3 59 62 _ 10 10 21
5 60 65 99.0
Part II, Item 7.,7, "Management's Discussion and Analysis of Results of
Operations and Financial Condition," discusses future orders and options
for additional aircraft.
SixteenTwelve of the 2326 aircraft owned by Alaska as of December 31, 19941997 are
subject to liens securing long-term debt. TheAlaska's leased McDonnell DouglasB737-200C,
B737-400 and MD-80 aircraft have lease expiration dates of 1995 to 2013. The B737-400 leases have expiration
dates ofin 1999, between
2002 to 2004.and 2015, and between 1998 and 2013, respectively. Horizon's
leased Fairchild Metroliner III, de Havilland Dash 8 and Fokker F-28 and Dornier 328
aircraft have expiration dates between 1998 and 2000, 1999 and 2013 and
2000 and 2002, respectively. However, as part of 1995its fleet
standardization plan, Horizon expects to 2001, 1995return to 2006, 1996 to 1997, and 2008 to 2009, respectively.the lessors or
otherwise dispose of all of the Metroliners during 1998. Alaska and
Horizon have the option to extend most of the leases for additional
periods, or the right to purchase the aircraft at the end of the lease
term, usually at the then fair market value of the aircraft. For
information regarding obligations under capital leases and long-term
operating leases, see Notes to Consolidated Financial Statements.
Special noise ordinances or agreements restrict the type of aircraft,
the timing and the number of flights operated by Alaska and other air
carriers at four Los Angeles area airports plus San Diego, Palm Springs,
San Francisco and Seattle. At December 31, 1997, all of Alaska's
aircraft meet the Stage 3 noise requirements under the Airport Noise and
Capacity Act of 1990.
Ground Facilities and Services
Alaska and Horizon lease ticket counters, gates, cargo and baggage,
office space and other support areas at the majority of the airports
they serve. Alaska also owns terminal buildings at various Alaska
cities and Horizon owns its terminal
at the Portland International Airport.cities.
Alaska has centralized operations in several buildings located at or
near Seattle-Tacoma International Airport (Sea-Tac) in Seattle,
Washington. The owned buildings, including land unless located on
leased airport property, include: a three-bay hangar facility with
maintenance shops; a flight operations and training center; an air cargo
facility; a reservationreservations and office facility; a four-story office
building; its corporate headquarters; and two storage warehouses.
Alaska also leases a two-bay hangar/office facility at Sea-Tac.
Alaska's other major facilities include: its Anchoragea regional headquarters
building, an air cargo facility (completed in 1997) and a leased
hangar/office facility in Anchorage; a Phoenix reservations center; and
a leased two-bay maintenance facility in Oakland; and a leased hangar/office facility in Anchorage.Oakland.
Horizon owns its Seattle corporate headquarters building and leases
a
maintenance facilityfacilities at the Portland airport.and Boise airports. A new $17
million operations, training and aircraft maintenance facility is under
construction in Portland and is expected to be completed in the second
quarter of 1998.
ITEM 3.LEGAL3. LEGAL PROCEEDINGS
In October 1991, Alaska gave notice of termination of its code sharing
and frequent flyer relationship with MarkAir, an airline based in the
state of Alaska. Both companies have filed suit against one another in
connection with that termination allegingasserting breach of contract and other
causes of actionclaims under state law. In addition, MarkAir claimed that the termination was in violation
of Federal Antitrust Laws.June 1992, MarkAir filed for protection
under Chapter 11 of the U.S. Bankruptcy CodeCode. In June 1997, MarkAir
claimed damages of $57 million (later revised to $70 million) in
June 1992.connection with Alaska's actions. In December 1993,January 1998, MarkAir's counsel
notified the Company that, after application of attorneys' fees and
prejudgement interest, its total claim was between $104 and $140
million. If MarkAir agreedwere to dismiss
all antitrust claimsprevail at the $140 million amount, the
after-tax effect would be to reduce shareholders' equity by
approximately $82 million or 17%. However, the Company believes that it
has valid defenses and is vigorously defending itself against the
Company. In 1994, the U.S. District Court
which had jurisdiction over the case approved the settlement. Discovery
continueslawsuit. Trial is scheduled to begin in a related Alaska state court case pertaining to breach of contract
and other state law claims. The Company believes the ultimate resolution of
this legal proceeding will not result in a material adverse impact on the
financial position or results of operations of the Company.
In December 1992, the U.S. Department of Justice filed suit against most major
domestic airlines, including the Company, alleging that they have violated the
antitrust laws by conspiring to fix prices for domestic airline tickets in
violation of Section 1 of the Sherman Act. During 1994, six of the airlines,
including the Company, entered into consent decrees with the U.S. Department of
Justice. The agreement requires no refunds or monetary cost to the Company.July 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Alaska Air Group, Inc., their positions and
their respective ages (as of March 1, 1995)1998) are as follows:
Officer
Continuously
Name Position Age Officer Since
John F. Kelly Chairman, President and Chief 5053 1981
Executive Officer of Alaska
Air Group, Inc. and Chairman
and CEO of Alaska Airlines, Inc.
Marjorie E. LawsHarry G. Lehr Senior Vice President/Corporate Affairs 54 1983
and Corporate SecretaryFinance 57 1986
of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Steven G. Hamilton Vice President/Legal and General 5558 1988
Counsel of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Harry G. Lehr Senior Vice President/Planning 54 1986Keith Loveless Corporate Secretary and FinanceAssociate 41 1996
General Counsel of Alaska Air
Group, Inc., and Alaska Airlines, Inc.
PART IIThe above officers have been employed as officers of Air Group or its
subsidiary, Alaska Airlines, for more than five years except for Keith
Loveless, who was elected as Corporate Secretary in 1996. Mr. Loveless
joined the Alaska Airlines legal department in 1986 and continues to
hold his current position as associate general counsel of Alaska
Airlines, a post he has held since 1993.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1994,1997, there were 13,400,09018,282,732 shares of common stock
issued and outstanding and 6,1834,876 shareholders of record. The Company
also held 3,153,5892,748,030 treasury shares at a cost of $71.8$62.6 million. In December 1992, theThe
Company suspended the quarterly dividendhas not paid dividends on the common stock due to the 1992 net loss
and the difficult economic environment.since 1992. Air
Group's common stock is listed on the New York Stock Exchange (symbol:
ALK).
The following table shows the trading range of Alaska Air Group common
stock on the New York Stock Exchange for 19941996 and 1993.
1994 19931997.
1996 1997
High Low High Low
First Quarter 18-7/27-3/4 15-7/8 13-5/27-5/8 18 15-5/820-3/4
Second Quarter 16-1/8 13-3/30-3/4 17-7/8 14-1/24-1/4 26-1/4 23
Third Quarter 17-7/28-1/8 14-3/19-1/8 15 12-1/433-5/16 25-1/16
Fourth Quarter 18 13-1/25-1/8 17-3/20-5/8 12-1/2
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Year Ended December 31 1994 1993 1992 1991 1990
FINANCIAL DATA (a) (In Millions, Except Per Share)
Operating Revenues
Passenger $1,170.2 $1,002.0 $1,000.6 $999.9 $953.2
Freight, mail and other 145.4 126.3 114.8 104.1 93.8
Total Operating Revenues 1,315.6 1,128.3 1,115.4 1,104.0 1,047.0
Operating Expenses 1,240.6 1,145.1 1,210.2 1,069.4 1,018.6
Operating Income (Loss) 75.0 (16.8) (94.8) 34.6 28.4
Interest expense, net of
interest capitalized (46.6) (37.2) (37.1) (31.9) (11.2)
Interest income 7.8 7.1 7.4 11.7 7.3
Other - net 4.8 1.1 (1.2) 1.8 3.4
Income (loss) before
income tax expense
and accounting change 41.0 (45.8) (125.7) 16.2 27.9
Income (loss) before
accounting change 22.5 (30.9) (80.3) 10.3 17.2
Net Income (Loss) $ 22.5 $(30.9) $(84.8) $10.3 $17.2
Per Common Share Data:
Average primary
shares outstanding 13.4 13.3 13.3 13.4 13.7
Primary earnings per share
before accounting change $1.68 $(2.51) $(6.53) $.27 $.82
Primary earnings per share(a)1.68 (2.51) (6.87) .27 .82
Fully diluted
earnings per share(a) 1.62 (b) (b) (b) (b)
Cash dividends per share _ _ .15 .20 .20
Book value per share $14.27 $12.51 $14.76 $21.50 $21.23
Balance Sheet Data:
Working capital (deficit) $(147.1) $(61.3) $(85.2) $(10.9) $(128.3)
Property and equipment,net 859.3 690.6 790.9 819.8 700.4
Total assets 1,315.8 1,135.0 1,208.4 1,225.4 1,021.4
Long-term debt and capital
lease obligations 589.9 525.4 487.8 500.0 281.8
Redeemable preferred stock _ _ 61.2 60.9 60.7
Shareholders' equity $191.3 $166.8 $196.7 $284.4 $279.8
Return on average equity(c) 12.6% (18.4%) (38.0%) 1.3% 3.6%
Ratio of earnings
to fixed charges(d) 1.36 .51 (.37) .97 1.13
AIRLINE OPERATING DATA
Revenue passengers (000) 12,439 9,189 8,629 7,889 7,274
Revenue passenger
miles (000,000) 8,320 6,074 6,023 5,353 4,851
Available seat
miles (000,000) 13,247 10,412 10,522 9,575 9,099
Revenue passenger
load factor 62.8% 58.3% 57.2% 55.9% 53.3%
Breakeven passenger
load factor 60.0% 60.3% 63.7% 55.1% 51.8%
Yield per passenger mile 14.1c 16.5c 16.6c 18.7c 19.6c
Operating expenses per
available seat mile 9.4c 11.0c 11.5c 11.2c 11.2c
Average number
of employees(e) 9,043 8,458 8,666 8,081 7,65340-1/8 30-3/16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
1993 1994 1995 1996 1997
Consolidated Financial Data:
Year Ended December 31 (in millions, except per share amounts):
Operating Revenues $1,128.3 $1,315.6 $1,417.5 $1,592.2 $1,739.4
Operating Expenses 1,145.1 1,241.6 1,341.8 1,503.2 1,600.4
Operating Income (Loss) (16.8) 74.0 75.7 89.0 139.0
Nonoperating expense, net (a) (29.0) (33.0) (41.7) (24.7) (15.4)
Income (loss) before income tax (45.8) 41.0 34.0 64.3 123.6
Net Income (Loss) $(30.9) $22.5 $17.3 $38.0 $72.4
Average shares outstanding 13.340 13.367 13.485 14.241 14.785
Basic earnings (loss) per share $(2.51) $1.69 $1.28 $2.67 $4.90
Diluted earnings (loss) per share (2.51) 1.62 1.26 2.05 3.53
At End of Period (in millions, except ratio):
Total assets $1,135.0 $1,315.8 $1,313.4 $1,311.4 $1,533.1
Long-term debt and capital lease obligations 525.4 589.9 522.4 404.1 401.4
Shareholders' equity 166.8 191.3 212.5 272.5 475.3
Ratio of earnings to fixed charges (b) 1.36 1.28 1.57 2.10
Alaska Airlines Operating Data:
Revenue passengers (000) 6,438 8,958 10,140 11,805 12,284
Revenue passenger miles (RPM) (000,000) 5,514 7,587 8,584 9,831 10,386
Available seat miles (ASM) (000,000) 9,426 12,082 13,885 14,904 15,436
Revenue passenger load factor 58.5% 62.8% 61.8% 66.0% 67.3%
Yield per passenger mile 14.32c 12.20c 11.59c 11.67c 12.49c
Operating revenues per ASM 9.62c 8.79c 8.23c 8.70c 9.38c
Operating expenses per ASM 9.88c 8.27c 7.71c 8.10c 8.51c
Average full-time equivalent employees 6,191 6,486 6,993 7,652 8,236
Horizon Air Operating Data:
Revenue passengers (000) 2,752 3,482 3,796 3,753 3,686
Revenue passenger miles (RPM) (000,000) 560 733 841 867 889
Available seat miles (ASM) (000,000) 986 1,165 1,414 1,462 1,446
Revenue passenger load factor 56.8% 62.9% 59.5% 59.3% 61.5%
Yield per passenger mile 37.93c 33.35c 31.48c 33.14c 32.56c
Operating revenues per ASM 22.65c 22.06c 19.77c 20.61c 21.00c
Operating expenses per ASM 21.76c 20.95c 19.47c 20.60c 20.60c
Average full-time equivalent employees 2,267 2,557 2,864 2,891 2,756
c=cents
(a) Includes capitalized interest of $.4 million, $.4 million, $.2 million, $1.0 million and $5.3 million
for 1993, 1994, 1995, 1996, and 1997, respectively.
(b) For 1993, earnings are inadequate to cover fixed charges by $50.0 million.
Alaska Airlines Financial and Statistical Data
Quarter Ended December 31 Year Ended December 31
Financial Data (in millions): 1996 1997 % Change 1996 1997 % Change
Operating Revenues:
Passenger $254.8 $313.0 22.8 $1,146.8 $1,297.0 13.1
Freight and mail 19.3 20.7 7.3 82.7 82.9 0.2
Other - net 18.4 16.2 (12.0) 67.8 68.0 0.3
Total Operating Revenues 292.5 349.9 19.6 1,297.3 1,447.9 11.6
Operating Expenses:
Wages and benefits 96.8 106.1 9.6 383.6 423.8 10.5
Employee profit sharing (6.7) 2.4 NM 0.9 12.1 NM
Contracted services 10.3 11.6 12.6 36.9 42.5 15.2
Aircraft fuel 51.5 49.3 (4.3) 200.5 199.7 (0.4)
Aircraft maintenance 16.3 18.6 14.1 57.1 67.4 18.0
Aircraft rent 37.6 38.2 1.6 146.0 148.5 1.7
Food and beverage service 10.6 11.8 11.3 44.2 46.7 5.7
Commissions 19.7 22.9 16.2 88.7 100.8 13.6
Other selling expenses 14.5 11.7 (19.3) 64.3 63.9 (0.6)
Depreciation and amortization 13.6 14.9 9.6 55.9 56.9 1.8
Gain on sale of assets (5.7) (0.9) NM (9.3) (1.2) NM
Landing fees and other rentals 12.4 12.7 2.4 49.9 53.1 6.4
Other 22.6 26.2 15.9 88.6 99.4 12.2
Total Operating Expenses 293.5 325.5 10.9 1,207.3 1,313.6 8.8
Operating Income (Loss) (1.0) 24.4 NM 90.0 134.3 49.2
Interest income 3.1 3.9 11.5 12.2
Interest expense (6.1) (5.9) (29.7) (25.0)
Interest capitalized 0.6 1.1 0.6 3.4
Other - net 1.3 0.1 2.1 2.5
(1.1) (0.8) (15.5) (6.9)
Income (Loss) Before Income Tax $(2.1) $23.6 $74.5 $127.4
Operating Statistics:
Revenue passengers (000) 2,804 2,958 5.5 11,805 12,284 4.1
RPMs (000,000) 2,307 2,490 7.9 9,831 10,386 5.6
ASMs (000,000) 3,495 3,847 10.1 14,904 15,436 3.6
Passenger load factor 66.0% 64.7% (1.3)pts 66.0% 67.3% 1.3 pts
Breakeven load factor 69.3% 60.2% (9.1)pts 62.4% 60.5% (1.9)pts
Yield per passenger mile 11.04c 12.57c 13.8 11.67c 12.49c 7.1
Operating revenue per ASM 8.37c 9.10c 8.7 8.70c 9.38c 7.8
Operating expenses per ASM 8.40c 8.46c 0.8 8.10c 8.51c 5.1
Fuel cost per gallon 80.7c 71.7c (11.0) 75.2c 72.6c (3.5)
Fuel gallons (000,000) 63.9 68.8 7.7 266.6 275.2 3.2
Average number of employees 7,923 8,223 3.8 7,652 8,236 7.6
Aircraft utilization (block hours) 10.8 11.2 3.7 11.3 11.4 0.9
Operating fleet at period-end 74 78 5.4 74 78 5.4
NM = Not Meaningful
c=cents
Horizon Air Financial and Statistical Data
Quarter Ended December 31 Year Ended December 31
Financial Data (in millions): 1996 1997 % Change 1996 1997 % Change
Operating Revenues:
Passenger $64.7 $72.7 12.4 $287.3 $289.5 0.8
Freight and mail 2.8 2.7 (3.6) 11.2 11.2 0.0
Other - net 0.7 1.0 42.9 2.8 2.9 3.6
Total Operating Revenues 68.2 76.4 12.0 301.3 303.6 0.8
Operating Expenses:
Wages and benefits 23.3 23.9 2.6 92.5 94.4 2.1
Employee profit sharing (0.7) 0.8 NM 0.0 1.4 NM
Contracted services 1.6 1.7 6.2 5.8 6.3 8.6
Aircraft fuel 9.3 8.4 (9.7) 33.7 32.8 (2.7)
Aircraft maintenance 10.8 8.0 (25.9) 41.7 41.4 (0.7)
Aircraft rent 9.0 9.4 4.4 35.3 35.5 0.6
Food and beverage service 0.7 0.5 (28.6) 2.5 1.9 (24.0)
Commissions 4.4 4.1 (6.8) 19.2 17.9 (6.8)
Other selling expenses 4.3 3.6 (16.3) 17.5 16.5 (5.7)
Depreciation and amortization 2.9 2.7 (6.9) 11.4 11.2 (1.8)
Loss (gain) on sale of assets (0.6) (0.1) NM 0.2 (0.7) NM
Landing fees and other rentals 3.2 3.5 9.4 12.9 13.5 4.7
Other 7.1 6.7 (5.6) 28.5 25.7 (9.8)
Total Operating Expenses 75.3 73.2 (2.8) 301.2 297.8 (1.1)
Operating Income (Loss) (7.1) 3.2 NM 0.1 5.8 NM
Interest income 0.2 0.0 0.3 0.1
Interest expense (0.3) (0.3) (0.9) (1.8)
Interest capitalized 0.3 0.6 0.4 1.8
Other - net 0.1 0.1 0.4 0.4
0.3 0.4 0.2 0.5
Income (Loss) Before Income Tax $(6.8) $3.6 $0.3 $6.3
Operating Statistics:
Revenue passengers (000) 903 938 3.9 3,753 3,686 (1.8)
RPMs (000,000) 211 231 9.6 867 889 2.6
ASMs (000,000) 365 376 2.9 1,462 1,446 (1.1)
Passenger load factor 57.8% 61.5% 3.7 pts 59.3% 61.5% 2.2 pts
Breakeven load factor 65.4% 58.3% (7.1)pts 59.3% 60.2% 0.9 pts
Yield per passenger mile 30.71c 31.48c 2.5 33.14c 32.56c (1.8)
Operating revenue per ASM 18.70c 20.32c 8.7 20.61c 21.00c 1.9
Operating expenses per ASM 20.64c 19.47c (5.7) 20.60c 20.60c (0.0)
Fuel cost per gallon 84.4c 76.3c (9.6) 78.9c 77.5c (1.7)
Fuel gallons (000,000) 11.0 11.0 0.0 42.7 42.4 (0.7)
Average number of employees 2,947 2,774 (5.8) 2,891 2,756 (4.7)
Aircraft utilization (block hours) 7.3 7.1 (2.7) 7.7 7.1 (7.8)
Operating fleet at period-end 62 62 0.0 62 62 0.0
NM = Not Meaningful
c=cents
(a)For 1992, primary earnings per share includes ($.34) for the $4.6 million
cumulative effect of the postretirement benefits accounting change as of
January 1, 1992.
(b) Anti-dilutive.
(c) For the 1990-1993 calculations, net income (loss) was reduced for preferred
stock dividends and shareholders' equity excluded redeemable preferred
stock.
(d) For 1993, 1992 and 1991, earnings are inadequate to cover fixed charges by
$50 million, $142.1 million and $2.4 million, respectively.
(e) Full-time equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Industry Conditions
During 1994, the character of competition changed on the West Coast due to the
December 1993 purchase of Morris Air by Southwest Airlines, and the October
start-up of Shuttle by United. Low air fares are now a permanent1997, as part of the fare structure onTaxpayer Relief Act, the West Coast.10% passenger
ticket tax was replaced with a new system that combines a percentage tax
with a per passenger segment fee. Effective October 1, 1997, the ticket
tax is 9% plus $1 per segment. The Companypercentage tax is scheduled to
decrease over time and the segment fee is scheduled to increase. The $6
international departure tax has respondedincreased to $12 and a new $12
international arrival tax has been added. However, the Act retains the
$6 rate for travel between Alaska and the U.S. mainland. This tax and
the international taxes will be indexed to the changing industry environment by aggressively
matching competitors'CPI beginning January 1,
1999. The Taxpayer Relief Act also included these items that will
affect the Company and the airline industry: (a) a new tax of 7.5% on
payments to air fares, increasingcarriers for the sale of miles in frequent flyer
programs; (b) a phased-in increase from 50% to 80% for the deductible
percentage of per diems paid to flight frequency,crews; and improving
utilization(c) faster cost
recovery for alternative minimum tax purposes of aircraft facilities, equipmentpurchased in
1999 and people.
Resultslater years.
During 1996, fuel prices increased significantly for the Company and
most of Operations
1994 COMPARED WITH 1993its competitors (approximately 20% or 12 cents per gallon over
1995 levels for Alaska Airlines). During 1997, fuel prices decreased
approximately 3.5% from 1996 levels.
RESULTS OF OPERATIONS
1997 Compared with 1996 Consolidated net income in 19941997 was $22.5$72.4
million, or $1.68$4.90 per share (primary)(basic) and $1.62$3.53 per share (fully diluted)(diluted),
compared with a
net lossincome of $30.9$38.0 million, or $2.51$2.67 per share (basic)
and $2.05 per share (diluted) in 1993. The fully diluted
calculation is based on 19.6 million shares, which gives effect to the 1993
repurchase of the convertible preferred stock. The results for 1993 include an
after-tax special charge of $9.8 million to recognize the lower value of the
Boeing 727 fleet and the acceleration of its retirement. Without such charge,
the 1993 net loss would have been $21.1 million, or $1.77 per share.
Operating1996. Consolidated operating income
was $75.0$139.0 million in 1997 compared to an operating losswith $89.0 million in 1996. Of the
$50.0 million improvement, $35.6 million occurred in the fourth quarter.
Severe winter storms, high fuel prices and matching of $16.8
million for 1993. The improved operating results reflect higher operating
revenues, and the effects of cost reductions and productivity improvements.
Operating revenues increased 17% to $1.316 billion. Passenger revenues, which
accounted for 89% of total operating revenues, increased 17% on a 37% increase
in passenger traffic. Traffic gains were due to a 27% increase in system
capacity,competitors'
lower fares that stimulated traffic throughout most ofadversely affected the system, and
improvements in market share. The load factor increased from 58.3% in 1993 to
62.8%. Yields declined 15% to 14.1 cents in 1994. The static value of a one
cent movement in yield is approximately $801996 fourth quarter. Alaska's annual
operating income improved by $44.3 million, per year. However, in a
dynamic, price-sensitive business, a one cent increase will not necessarily
result in a revenue improvement of this magnitude.
Freight and mail revenues increased $7.5 million or 9% due to a military charter
contract in the state of Alaska, increased freight volumes, and increased
freight rates, offsetwhile Horizon's improved by
lower mail volumes. The lower mail volumes resulted
from Alaska's decision to not bid on certain U.S. mail contracts so that
capacity could be made available for higher yielding freight.
Other-net revenues rose by $11.6 million or 27% due to increased revenues from
Alaska's frequent flyer program, maintenance contracts and inflight liquor
sales.
Operating Expenses Operating expenses increased 8% to $1.241 billion on a
capacity increase of 27%. For the separate airlines, Alaska's operating
expenses increased 7% to $998.7 million on a 28% increase in capacity, and
Horizon's operating expenses increased 14% to $244.0 million on an 18% increase
in capacity.$5.7 million. A discussion of operating expensesresults for the two airlines
follows.
Alaska Airlines Operating income increased 49.2% to $134.3 million,
resulting in a 9.3% operating margin as compared to a 6.9% margin in
1996. 1997 operating revenue per available seat mile (ASM) increased
7.8% to 9.38 cents while operating expenses per available seat mile
increased 5.1% to 8.51 cents.
The increase in revenue per ASM was due to a 7.1% increase in system
passenger yield combined with a 1.3 point improvement in passenger load
factor. Most markets, including the three largest (Pacific Northwest -
Southern California, Seattle - Anchorage and Pacific Northwest -
Northern California), experienced increases in yields. Most markets
also experienced increases in load factor including the Seattle-
Anchorage market, which had a 4.9 point improvement. The higher yields
and load factors reflect a more stabilized competitive environment in
1997.
Freight and mail revenues decreased 3.6% in the first half of 1997 due
to more competition and increased 4.1% in the second half due to
increased cargo capacity and higher mail rates.
Other-net revenues were essentially unchanged because an additional $5
million of proceeds from partners in Alaska's frequent flyer program
were offset by a similar increase in the frequent flyer award liability.
The table below shows the major operating expense elements on a unit-costcost per
available seat mile (ASM) basis for Alaska in 19941996 and 1993.1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change %
1994 1993 Change Change
Wages and benefits 2.67 3.16 (.49) (16)2.57 2.74 .17 7
Employee profit sharing .01 .08 .07 NM
Contracted services .25 .28 .03 12
Aircraft fuel 1.08 1.31 (.23) (18)1.35 1.29 (.06) (4)
Aircraft maintenance .34 .46 (.12) (26).38 .44 .06 16
Aircraft rent 1.13 1.35 (.22) (16).98 .96 (.02) (2)
Food and beverage service .30 .30 -- --
Commissions .61 .68 (.07) (10).59 .65 .06 10
Other selling expenses .43 .41 (.02) (5)
Depreciation &and amortization .39 .52 (.13) (25)
Special charges _ .16 (.16).38 .37 (.01) (3)
Gain on sale of assets (.06) (.01) .05 NM
Landing fees and other rentals .33 .34 .01 3
Other 2.05 2.24 (.19) (8).59 .66 .07 12
Alaska Airlines Total 8.27 9.88 (1.61) (16)8.10 8.51 .41 5
NM = Not Meaningful
Alaska's lowerhigher unit costs were primarily due to an extensiveincreased labor costs.
Significant unit cost reduction effortchanges are discussed below.
Employees increased 7.6% (primarily in reservations and better utilization of aircraft, facilities, equipment and people, as well as a
2%customer service
positions) to service the 4.1% increase in passengers and also to
improve on-time within 15 minutes flight departure performance, which
improved from 77% on-time in 1996 to 82% on-time in 1997. Excluding
profit sharing, average seats per aircraft. Average daily aircraft utilization
increased 26% from 8.2 block hours to 10.3 block hours. Wageswages and benefits per ASM decreased 16%employee were up 2.7%,
primarily due to improved productivityhigher pilot wage rates and higher health insurance
costs. The numbernet effect was that wages and benefits expense increased
more than the ASM growth, resulting in a 7% increase in cost per ASM.
Profit sharing expense increased the cost per ASM by .07 cents.
Effective for 1997, Alaska changed its profit sharing program so that
eligible employees will receive their pro rata share of equivalent employees increased 5% while capacity increased 28% and traffic
increased 38%. Effective May 1, 1994, Alaska and10% of Alaska's
adjusted pre-tax profits starting with the Associationfirst dollar of Flight
Attendants began a new five-year contract, which is modeled after the contract
used at Southwest Airlines and which provides flight attendants the opportunity
to earn increased wages through increased flying. It also provides a lower
starting rate of pay, more flexible work rules and reduced pension expenses.pre-tax
profits.
Fuel expense per ASM decreased 18%4%, primarily due to a 10%3.5% decrease in
the price of fuel
and the continued transition to more fuel efficient aircraft. The average cost
per gallon declined 6.9 cents to 59.9 cents in 1994. Lower fuel prices reduced
fuel expense by $15.1 million. Currently, a 1 cent change in fuel prices
affects annual fuel costs by approximately $2.2 million.fuel.
Maintenance expense per ASM increased 16% because significantly more
engine repair expense was incurred in 1997 and a smaller proportion of
airframe maintenance costs were capitalized.
Commission expense per ASM increased 10%, less than the 13% increase in
passenger revenues because a lower percentage of sales were made by
travel agents. In addition, the commission rate paid to travel agents
decreased 26%from 10% to 8% for sales made after September 30, 1997.
The gain on sale of assets in 1996 is primarily due to the replacementsale of older
aircraft and due to significant improvements in maintenance programs, techniques
and efficiency. With an average age of less than six years at December 31,
1994, Alaska's fleet is believed to be one of the youngest among U.S.three
jet
airlines.
Aircraft rent per ASM decreased 16% primarily due to a substantial increase in
utilization, offset by higher rents for new aircraft.
Depreciation and amortization expense per ASM decreased 25% due to the
retirement of the 727 fleet and increased utilization of the remaining aircraft.
Other expense per ASM decreased 8%increased 12%, primarily due to lower unithigher costs
for advertising,
food, building rentalsrelated to property and personnel expenses.other taxes, flight crew hotels, employee hiring
and communications.
Horizon Air Operating income increased from $0.1 million to $5.8
million, resulting in a 1.9% operating margin as compared to a zero
margin in 1996. For 1997, operating revenue per ASM increased 1.9% to
21.00 cents while operating expenses per available seat mile remained
even at 20.60 cents.
The increase in revenue per ASM was due to a 2.2 point increase in
system passenger load factor, partially offset by a 1.8% decrease in
passenger yield. The Seattle-to-Canada, Seattle-to-Montana and the
Seattle-Boise markets experienced significant increases in load factors.
The decrease in yields is believed to be due to a longer average
passenger trip length in 1997 and to the presence of the passenger
transportation tax for 10 months in 1997 versus 4 months in 1996.
The table below shows the major operating expense elements on a unit-costcost per
ASM basis for Horizon for 1994in 1996 and 1993.1997.
Horizon Air Operating Expenses Per ASM (In Cents)
1996 1997 Change %
1994 1993 Change Change
Wages and benefits 6.75 7.07 (.32) (5)6.33 6.53 .20 3
Employee profit sharing -- .09 .09 NM
Contracted services .39 .43 .04 10
Aircraft fuel 1.84 1.93 (.09) (5)2.30 2.27 (.03) (1)
Aircraft maintenance 2.33 2.41 (.08) (3)2.85 2.86 .01 --
Aircraft rent 2.73 2.792.41 2.45 .04 2
Food and beverage service .17 .13 (.04) (24)
Commissions 1.31 1.24 (.07) (5)
Other selling expenses 1.20 1.14 (.06) (2)
Commissions 1.56 1.65 (.09) (5)
Depreciation &and amortization .75 .94 (.19) (20).78 .77 (.01) (1)
Loss (gain) on sale of assets .01 (.05) (.06) NM
Landing fees and other rentals .88 .93 .05 6
Other 4.99 4.96 .03 11.97 1.81 (.16) (8)
Horizon Air Total 20.95 21.75 (.80) (4)
Horizon's cost20.60 20.60 -- --
NM = Not Meaningful
Wages and benefits per ASM declined 4% to 20.95 centsincreased, primarily due to the acquisition of
higher capacity aircraftwage
rates, payroll taxes and cost reduction efforts.more 401(k) plan employer matching costs.
Profit sharing expense increased due to profitable operations.
Contracted services increased due to higher security screening and
hiring costs. Food and beverage decreased due to a conscious effort to
reduce costs and improve efficiency. Other expense decreased due to
less flight crew training and personnel costs, lower insurance rates and
decreased supplies expense.
Consolidated Nonoperating Income (Expense) Other Income (Expense) increased $5.0Nonoperating expense
decreased $9.3 million to $34.0
million. Interest expense was $9.3$15.4 million, higher in 1994primarily due to highersmaller
average debt balances, lower interest rates on variable interest rate
debt and higher average debt balances. Other-netmore interest capitalized.
1996 Compared with 1995 Consolidated net income in 1996 was $38.0
million, or $2.67 per share (basic) and $2.05 per share (diluted),
compared with net income of $17.3 million, or $1.28 per share (basic)
and $1.26 per share (diluted) in 1995. Consolidated operating income
was $89.0 million compared with $75.7 million in 1995. Alaska's
operating income improved by $17.7 million, but it was offset by lower
operating results at Horizon.
Alaska Airlines Operating income increased $4.124.5% to $90.0 million,
due to gains on the early retirement of debt and
vendor credits.
1993 COMPARED WITH 1992 The consolidated net loss for 1993 was $30.9 million,
or $2.51 per share,resulting in a 6.9% operating margin as compared with a net loss of $84.8 million, or $6.876.3% margin in
1995. Operating revenue per share, in 1992.available seat mile (ASM) increased 5.8% to
8.70 cents while operating expenses per ASM decreased 5.1% to 8.10
cents. The results include an after-tax charge of $9.8 million in 1993
and $16.6 million in 1992 for the early retirement of the 727 fleet. In
addition, 1992 includes a $4.6 million charge related to a change in accounting
for postretirement benefits. The operating loss for 1993 was $16.8 million,
compared to an operating loss of $94.8 million for 1992. The improved operating
results reflect lower operating expenses.
Operating revenues in 1993 were $1.128 billion, 1% greater than the $1.115
billion posted in 1992. Passenger revenues were approximately even with 1992
due to a 1% increase in traffic, offset by a 1% decline in yields. Freight and
mail revenues increased $6.7 million or 9% due to increased freight and mail
rates and increased service in Alaska. Other-net revenues rose $4.9 million or
13% due to increased revenues from Alaska's frequent flyer program.
Operating expenses decreased 5% to $1.145 billion. The decreaserevenue per ASM was primarily due to a cost reduction program initiated during the first quarter 1993.4.2 point
improvement in system passenger load factor. Higher unit costs were
largely due to higher fuel prices and heavier passenger loads.
Horizon Air Operating expenses per ASM declined 4% from 11.5 centsincome decreased 98% to 11.0 cents. Fuel
expense per ASM decreased 12%$0.1 million primarily
due to the use of more fuel-efficient aircraftfourth quarter, which was negatively impacted by adverse
weather, increased competition, higher than normal maintenance expense
and costs associated with transitioning to a 3% decrease in the cost of fuel. Maintenance expense per ASM declined 22% due
to the replacement of older aircraft. Aircraft rent and depreciation expense
per ASM rose 19% due to the addition of new aircraft. Other expenses per ASM
decreased 12% due to lower expenditures for food, advertising, promotion,
supplies and personnel expenses.
Othersimplified fleet.
Consolidated Nonoperating Income (Expense) was $29.0Nonoperating expense
decreased from $41.7 million in 1993 compared to $30.9$24.7 million in
1992. The decrease was primarily due to lower
interest rates on variable debt offset by
lessand smaller average debt balances. In
addition, 1995 included a $2.2 million write-off of capitalized interest.
Liquidity and Capital Resourcesdebt
issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
DecemberDec. 31, 1994 December1996 Dec. 31, 19931997 Change
(In millions, except ratiosdebt-to-equity and per share amounts)
Cash and marketable securities $104.9 $ 101.1 $ 3.8$101.8 $212.7 $110.9
Working capital (deficit) (147.1) (61.3) (85.8)
Total assets 1,315.8 1,135.0 180.8(185.6) (48.7) 136.9
Long-term debt 589.9 525.4 64.5and
capital lease obligations 404.1 401.4 (2.7)
Shareholders' equity 191.3 166.8 24.5272.5 475.3 202.8
Book value per common share $14.27 $ 12.51 $ 1.76
Debt/equity ratio 76%$18.83 $26.00 $7.17
Debt-to-equity 60%:24% 76%40% 46%:24%54% NA
1994 FINANCIAL CHANGES1997 Financial Changes The Company's cash and marketable securities
portfolio increased by $4$111 million during 1994.1997. Operating activities
provided $144$205 million of cash in 1994.1997. Additional cash was provided by
$104 million in newthe sale and leaseback of four B737-400 aircraft and 13 Dash 8-200
aircraft ($247 million), issuance of common stock ($129 million) and
issuance of long-term debt and $25 million in short-term borrowings.($28 million). Cash was used for $439
million of capital expenditures including the purchase of fourtwo new MD-83
aircraft, onethree new B737-400 aircraft, a previously leased B737-400
one used B737-200C
aircraft, 13 new Dash 8-200 aircraft, flight equipment deposits and
other capital expendituresairframe and engine overhauls, net repayment of short-term borrowings
($18947 million), and the repayment of debt ($71 million), and the repayment of short-term borrowings ($2026 million).
Like manymost airlines, the Company has a working capital deficit. The deficit
increased during 1994 due to the cash purchase of two aircraft and an increase
in current portion of capital lease obligations. The
existence of a working capital deficit has not in the past impaired the
Company's ability to meet its obligations as they become due and it is
not expected to do so in the future.
Financing Arrangements During 1994, four MD-83 aircraft were financed under
ten-year loan agreements which bear interest at rates which vary based on
LIBOR. The principal amount financed was $104 million. In addition, capital
lease obligationsShareholders' equity increased $57.9by $203 million due to changes in the lease
agreements for twosale of 3.45
million shares of common stock and net income of $72 million. These
factors increased equity to 54% of capital, an improvement of 14
percentage points.
Financing Activities During 1997, Alaska sold four B737-400 aircraft
that were previously classified as
operating leases.
During early 1995, Alaska's lines ofand leased them back for 18 years; Horizon sold 13 Dash 8-200 aircraft
and leased them back for 15 years.
In November 1997, Standard & Poors raised its corporate credit (which totalled $70 million) were
replaced withrating on
Air Group and Alaska to double B minus from single B plus, citing a
$75 million credit facility with commercial banks. Advances
understabilized competitive position and improving financial profile.
In January 1998, the new facility may either be for up to a 364-day term, or up to a
maximum maturity of three years. Borrowings may be used for aircraft
acquisitionsCompany called its 6-7/8% convertible subordinated
debentures and, other corporate purposes and they bear interest at a rate which
varies based on LIBOR.recent stock prices, expects that substantially
all of them will be converted into 1.608 million shares of common stock.
Commitments During 1994,1997, Alaska's lease commitments increased
approximately $194 million due to the sale and leaseback of four B737-
400 aircraft. In addition, Alaska took delivery of six new B737-400ordered 15 Boeing 737 aircraft under operating leases and restructured all 20 of its B737-400 aircraft leases.
As partalong
with an option to acquire 10 more. The value of the restructuring, Alaska purchased oneorders is
approximately $510 million. Horizon's lease commitments increased
approximately $156 million due to the acquisition of the 2013 new Dash 8-200
aircraft. In addition, Horizon ordered 10 new Dash 8-200 aircraft,
in 1994,
agreed to purchase one each in 1995 and 1996, and received options to purchase
up to four more of the 20 between 1997 and 1999. The fixed term of the leases
was increased from eight years to ten years. As a result of the restructuring,
Alaska expects to save more than $6 million per year over the term of the
leases. Also during 1994, Alaska further restructured its aircraft orders with
McDonnell Douglas, replacing an order for ten MD-90s plus options with an order
for four MD-83s. This restructuring will reduce future capital spending by $360valued at approximately $100 million.
During 1994, Horizon took delivery of seven new Dornier 328 aircraft under 15-
year operating leases, and five used Fokker F-28 aircraft under three-year
operating leases. At December 31, 1994,1997, the Company
had firm orders for 1746 aircraft with a total cost of approximately
$293$1,015 million as set forth below. In addition, Alaska has options to
acquire 22 more B737s and Horizon has options to acquire 25 more Dash 8-
200s. Alaska and Horizon expect to finance the new planes with either
leases, long-term debt or internally generated cash.
Delivery Period - Firm Orders
Aircraft 1995 1996 1997 1998 1999 2000 2001 2002 2003-05 Total
Dornier 328Boeing B737-400 9 2 -- -- -- -- 11
Boeing B737-700 -- 3 -- -- -- -- 3
Boeing B737-900 -- -- -- 5 5 -- 10
de Havilland Dash 8-200 11 1 2 23 -- -- 7 22
Total 20 6 11
McDonnell Douglas MD-80 2 2 2 6
Total 3 4 4 6 175 5 7 46
Cost (Millions) $78 $85 $85 $45 $293
Operating leases have been completed for the Dornier 328 orders. The Company
expects to finance the other aircraft through new long-term debt and internally
generated cash.$398 $167 $30 $175 $175 $70 $1,015
The Company accrues the costs associated with returning leased aircraft
over the lease period. As leased aircraft are retired, the costs are
charged against the established reserve. At December 31, 1994, $261997, $43
million was reserved for leased aircraft returns.
Deferred Taxes At December 31, 1994,1997, net deferred tax liabilities were
$19$62 million, which includes $82$112 million of net temporary differences
offset by $38
million of net operating loss (NOL) carryforwards and $25$50 million of Alternative Minimum Tax (AMT) credit carryforwards.credits. The
Company believes that all of its deferred tax assets, including the NOL andits AMT
credit carryforwards,credits, will be realized through profitable operations.
Year 2000 Computer Issue During the reversalpast eight years, the Company has
been engaged in a number of existing temporary differences or tax planning
strategies such asprojects to improve its information
technology infrastructure. The Company expects to complete these
projects during 1998 and 1999 at an estimated cost of $5 to $10 million.
As a result of these activities, the Company's systems will be Year 2000
compliant. The direct cost of projects solely intended to correct Year
2000 problems is expected to be less than $1 million.
1996 Financial Changes The Company's cash and marketable securities
portfolio decreased by $33 million during 1996. Operating activities
provided $223 million of cash in 1996. Additional cash was provided by
the sale and leaseback of three B737-400 aircraft ($86 million), the
sale of aircraft.
1993 FINANCIAL CHANGES Cashthree MD-80 aircraft ($52 million) and marketable securities increased by $18 million
in 1993. Operations generated $49 million, proceeds received from
aircraft financing
were $84 million, and short-term borrowings added $20 million.the issuance of common stock ($21 million). Cash was used for the
repaymentpurchase of debttwo new MD-83 aircraft, two used B737-400 aircraft, two
previously leased B737-200Cs, airframe and engine overhauls and other
capital expenditures ($79 million), the repurchase of preferred stock ($33209 million), and capital expendituresaircraft purchase deposits ($3061
million). Cash was also used to repay net short-term borrowings ($19
million), and $134 million of long-term debt (including $100 million
repaid early). During 1993,1996, Alaska replaced its $75 million credit
facility with a $125 million credit facility with substantially the Company
repurchased all of its outstanding redeemable preferred stock for $60same
terms and conditions.
1995 Financial Changes The Company's cash and marketable securities
portfolio increased by $30 million saving the Company more than $4 million annually after taxes. The seller
provided a $27 million loan to assist with the stock purchase.
1992 FINANCIAL CHANGES Despite the $84.8 million net loss, operatingduring 1995. Operating activities
provided $20$126 million of cash in 1992. During 1992, capital spending totaled
$278 million for six MD-831995. Additional cash was provided by
flight equipment deposits returned ($11 million), net short-term
borrowings ($41 million), the sale and leaseback of two B737-400
aircraft other equipment($56 million) and depositsnew long-term debt proceeds ($129 million).
Cash was used for future flight equipment. Thesethe purchase of one previously leased B737-400
aircraft, airframe and engine overhauls and other capital expenditures
were financed
through debt ($47 million), sale/leasebacks ($215103 million) and internally
generated cash.the repayment of debt and capital lease obligations
($237 million). Included in the above numbers are the June 1995
issuance of $132.3 million of 6-1/2% convertible senior debentures due
2005, and the August 1995 redemption of the 7-1/4% zero coupon,
convertible subordinated notes for $127.7 million
EFFECT OF INFLATION Inflation and specific price changes do not have a
significant effect on the Company's operating revenues, operating
expenses and operating income, because such revenues and expenses
generally reflect current price levels.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 16, 1995.20, 1997. See "Executive Officers of the
Registrant" in Part I following Item 4 for information relating to
executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 16, 1995.20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Security Ownership of Certain Beneficial Owners and Management,"
incorporated herein by reference from the definitive Proxy Statement for
Air Group's Annual Meeting of Shareholders to be held on May 16, 1995.19, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Transactions with Management and Others," incorporated herein by
reference from the definitive Proxy Statement for Air Group's Annual
Meeting of Shareholders to be held on May 16, 1995.20, 1997.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Consolidated Financial Statements: Page(s)
Selected Quarterly Consolidated Financial Information (Unaudited) 45
Consolidated Balance Sheet as of December 31, 19941996 and 1993 18-191997 20-21
Consolidated Statement of Income for the years ended
December 31, 1994, 19931995, 1996 and 1992 201997 22
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1994, 19931995, 1996 and 1992 211997 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 19931995, 1996 and 1992 221997 24
Notes to Consolidated Financial Statements 23-3025-32
Report of Independent Public Accountants 3133
Consolidated Financial Statement Schedule II,
Valuation and Qualifying Accounts,
for the years ended December 31, 1994, 19931995, 1996 and 1992 321997 34
See Exhibit Index on page 33.35.
(b) Alaska Air Group did not file any reportsA report on Form 8-K during the fourth
quarter of 1994.announcing orders for 15 Boeing 737 series
aircraft was filed on November 20, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALASKA AIR GROUP, INC.
By: /s/ John F. Kelly Date: February 9, 199510,
1998
John F. Kelly, Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on February
9, 199510, 1998 on behalf of the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman, Chief Executive Officer, President and Director
John F. Kelly
/s/ Harry G. Lehr Senior Vice President/Planning and Finance
Harry G. Lehr (Principal Financial Officer)
/s/ Bradley D. Tilden Controller
Bradley D. Tilden (Principal Accounting Officer)
/s/ William H. Clapp Director
William H. Clapp
/s/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
Mary Jane Fate
/s/ Bruce R. Kennedy Director
Bruce R. Kennedy
/s/ R. Marc Langland Director
R. Marc Langland
/s/ Bruce R. McCaw Director
Bruce R. McCaw
/s/ Byron I. Mallott Director
Byron I. Mallott
/s/ Robert L. Parker, Jr. Director
Robert L. Parker, Jr.
/s/ John V. Rindlaub. Director
John V. Rindlaub.
/s/ Richard A. Wien Director
Richard A. Wien
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
As of December 31 (In Thousands) 1994 1993Millions) 1996 1997
Current Assets
Current Assets
Cash and cash equivalents $11,605 $27,179$49.4 $102.6
Marketable securities 93,337 73,97052.4 110.1
Receivables - less allowance for doubtful
accounts (1994(1996 - $2,285; 1993$1.3; 1997 - $2,621) 70,055 75,274$1.2) 69.7 72.6
Inventories and supplies 40,250 41,26947.8 47.2
Prepaid expenses and other assets 57,396 56,49880.9 92.1
Total Current Assets 272,643 274,190300.2 424.6
Property and Equipment
Flight equipment 776,551 614,717851.6 950.1
Other property and equipment 208,502 217,967234.8 258.5
Deposits for future flight equipment 52,885 79,765
1,037,938 912,44984.4 108.9
1,170.8 1,317.5
Less accumulated depreciation and amortization 260,001 247,145
777,937 665,304326.3 373.8
844.5 943.7
Capital leasesleases:
Flight and other equipment 103,076 44,38144.4 44.4
Less accumulated amortization 21,676 19,079
81,400 25,30225.5 27.5
18.9 16.9
Total Property and Equipment - Net 859,337 690,606863.4 960.6
Intangible Assets - Subsidiaries 65,671 67,71161.6 59.6
Other Assets 118,120 102,44786.2 88.3
Total Assets $1,315,771 $1,134,954$1,311.4 $1,533.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
As of December 31 (In Thousands) 1994 1993Millions) 1996 1997
Current Liabilities
Accounts payable $48,592 $45,582$65.4 $73.9
Accrued aircraft rent 43,762 39,11952.8 60.7
Accrued wages, vacation and payroll taxes 51.5 70.1
Other accrued liabilities 59,591 46,679
Accrued wages, vacation pay and payroll taxes 47,364 40,19282.0 73.5
Short-term borrowings
(Interest rate: 19941996 - 6.0%; 19935.6%) 47.0 - 4.25%) 25,000 20,000
Air traffic liability 123,433 108,360163.0 166.4
Current portion of long-term debt and
capital lease obligations 72,005 35,57524.1 28.7
Total Current Liabilities 419,747 335,507485.8 473.3
Long-Term Debt and Capital Lease Obligations 589,904 525,418404.1 401.4
Other Liabilities and Credits
Deferred income taxes 28,585 20,99849.5 72.3
Deferred income 23,018 25,82718.1 19.5
Other liabilities 63,239 60,371
114,842 107,19681.4 91.3
149.0 183.1
Commitments
Shareholders' Equity
Preferred stock, $1 par value
Authorized: 5,000,000 shares - -
Common stock, $1 par value
Authorized: 30,000,00050,000,000 shares
Issued: 19941996 - 16,553,67917,223,281 shares
19931997 - 16,495,21021,030,762 shares 16,554 16,49517.2 21.0
Capital in excess of par value 152,756 152,017166.8 292.5
Treasury stock,at cost:1994-3,153,589 1996 - 2,748,550 shares
19931997 - 3,153,5892,748,030 shares (71,807) (71,807)(62.6) (62.6)
Deferred compensation (4,697) (5,813)(2.7) (1.8)
Retained earnings 98,472 75,941
191,278 166,833153.8 226.2
272.5 475.3
Total Liabilities and Shareholders' Equity $1,315,771 $1,134,954$1,311.4 $1,533.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Year Ended December 31
(In Thousands exceptMillions Except Per Share Amounts) 1994 1993 19921995 1996 1997
Operating Revenues
Passenger $1,170,201 $1,001,975 $1,000,618$1,258.2 $1,427.7 $1,574.5
Freight and mail 91,545 84,048 77,31195.2 93.9 94.1
Other - net 53,874 42,306 37,44964.1 70.6 70.8
Total Operating Revenues 1,315,620 1,128,329 1,115,3781,417.5 1,592.2 1,739.4
Operating Expenses
Wages and benefits 401,700 368,152 370,567427.8 477.0 531.7
Contracted services 36.8 42.7 48.8
Aircraft fuel 152,320 142,572 162,768181.2 234.2 232.6
Aircraft maintenance 68,306 67,438 87,68779.2 98.7 108.7
Aircraft rent 168,516 154,879 123,732172.1 181.2 183.9
Food and beverage service 44.7 46.6 48.5
Commissions 91,850 80,108 86,33593.1 101.5 106.6
Other selling expenses 72.8 81.8 80.4
Depreciation and amortization 56,591 58,407 56,757
Special charges - 15,000 26,00068.3 67.5 68.3
Loss (gain) on sale of assets 0.2 (9.1) (1.9)
Landing fees and other rentals 57.7 62.4 66.2
Other 301,339 258,546 296,373107.9 118.7 126.6
Total Operating Expenses 1,240,622 1,145,102 1,210,2191,341.8 1,503.2 1,600.4
Operating Income (Loss) 74,998 (16,773) (94,841)
Other75.7 89.0 139.0
Nonoperating Income (Expense)
Interest income 7,779 7,088 7,37410.4 11.1 10.6
Interest expense (46,960) (37,624) (43,223)(51.5) (38.4) (33.6)
Interest capitalized 353 446 6,102
Loss on sale of assets (1,016) (649) (2,339)0.2 1.0 5.3
Other - net 5,807 1,700 1,221
(34,037) (29,039) (30,865)(0.8) 1.6 2.3
(41.7) (24.7) (15.4)
Income (loss) before income tax expense (credit) and accounting change 40,961 (45,812) (125,706)34.0 64.3 123.6
Income tax expense (credit) 18,430 (14,894) (45,436)
Income (loss) before accounting change 22,531 (30,918) (80,270)
Cumulative effect of accounting change - - (4,567)16.7 26.3 51.2
Net Income (Loss) $22,531 $(30,918) $(84,837)
Primary$17.3 $38.0 $72.4
Basic Earnings Per Share Amounts:
Earnings (loss) before accounting change $1.68 $(2.51) $(6.53)
Cumulative effect of accounting change - - (.34)
Net earnings (loss) per common share $1.68 $(2.51) $(6.87)
Fully$1.28 $2.67 $4.90
Diluted Earnings Per Share $1.62 * *$1.26 $2.05 $3.53
Shares used for computation:
Primary 13,378 13,340 13,309
Fully diluted 19,598 * *
* Anti-dilutiveBasic 13.471 14.241 14.785
Diluted 20.765 22.458 22.689
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Common Stock
Capital in Treasury Deferred
$1 ParCommon Excess of Stock Compen- Retained
(In Thousands) ValueMillions) Stock Par Value at Cost sation Earnings Total
Balances at December 31, 1991 $16,384 $150,478 ($71,807) ($14,515) $203,907 $284,447
Net loss for 1992 (84,837) (84,837)
Cash dividends on common
stock ($.15 per share) (1,998) (1,998)
Preferred stock dividends
and accretion (6,688) (6,688)1994 $16.6 $152.8 $(71.8) $(4.8) $98.5 $191.3
1995 net income 17.3 17.3
Stock issued under stock plans 99 1,367 1,4660.1 2.6 2.7
Treasury stock purchase
Employee Stock Ownership PlansPlan
shares allocated 4,334 4,3341.2 1.2
Balances at December 31, 1992 16,483 151,845 (71,807) (10,181) 110,384 196,724
Net loss for 1993 (30,918) (30,918)
Preferred stock dividends and
early redemption premium (3,525) (3,525)1995 16.7 155.4 (71.8) (3.6) 115.8 212.5
1996 net income 38.0 38.0
Stock issued under stock plans 12 172 1840.5 9.7 10.2
Treasury stock activity:
Purchase (4,466 shares) (0.1) (0.1)
Sale (409,524 shares) 1.7 9.3 11.0
Employee Stock Ownership PlansPlan
shares allocated 4,368 4,3680.9 0.9
Balances at December 31, 1993 16,495 152,017 (71,807) (5,813) 75,941 166,833
Net1996 17.2 166.8 (62.6) (2.7) 153.8 272.5
1997 net income for 1994 22,531 22,53172.4 72.4
Issuance of 3,450,000 shares
of common stock 3.5 118.4 121.9
Stock issued under stock plans 59 739 7980.3 7.1 7.4
Stock issued for convertible
subordinated debentures 0.0 0.2 0.2
Treasury stock activity:
Purchase (2,094 shares) (0.1) (0.1)
Sale (2,614 shares) 0.1 0.1
Employee Stock Ownership PlansPlan 0.0
shares allocated 1,116 1,1160.9 0.9
Balances at December 31, 1994 $16,554 $152,756 ($71,807) ($4,697) $98,472 $191,2781997 $21.0 $292.5 $(62.6) $(1.8) $226.2 $475.3
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Year Ended December 31 (In Thousands) 1994 1993 1992Millions) 1995 1996 1997
Cash and cash equivalents at beginning of year $27,179 $6,880 $19,086
Cash flows from operating activities:
Income (loss) before accounting change 22,531 (30,918) (80,270)Net income $17.3 $38.0 $72.4
Adjustments to reconcile net income to cash:
Depreciation and amortization 56,591 58,407 56,75768.3 67.5 68.3
Amortization of airframe and engine overhauls 20,954 29,402 34,265
Special charges - 15,000 26,000overhau 24.3 34.6 35.1
Loss (gain) on disposition of assets and debt retired (1,072) (315) 2,339de 1.9 (9.1) (1.9)
Increase (decrease) in deferred income taxes 7,587 (8,113) (25,797)12.4 8.5 22.8
Decrease (increase) in accounts receivable 5,219 9,135 (23,118)
Decrease (increase)(18.5) 18.8 (2.9)
Increase in other current assets 121 (15,122) (7,370)(17.2) (13.9) (10.6)
Increase in air traffic liability 15,073 11,569 19,5001.0 38.6 3.4
Increase in other current liabilities 27,737 1,085 19,826
Interest on zero coupon notes 9,946 9,881 9,203
Leased aircraft return payments and other-net (20,554) (31,554) (11,101)15.5 36.9 26.5
Other-net 20.5 3.0 (7.9)
Net cash provided by operating activities 144,133 48,457 20,234125.5 222.9 205.2
Cash flows from investing activities:
Proceeds from disposition of assets 6,504 7,193 7933.8 58.1 6.9
Purchases of marketable securities (76,129) (150,636) (111,768)(169.4) (53.5) (443.6)
Sales and maturities of marketable securities 56,762 153,217 118,966
Restricted deposits (5,955) (4,045) (3,007)153.5 110.4 385.9
Flight equipment deposits returned 5,460 2,685 3,32110.8 1.1 8.7
Additions to flight equipment deposits (1,085) (764) (16,873)(0.5) (60.5) (68.4)
Additions to property and equipment (187,543) (29,605) (261,073)
Payments received on loans to ESOPs 1,313 4,128 4,747(102.8) (209.3) (370.6)
Restricted deposits and other 3.9 0.5 (2.0)
Net cash used in investing activities (200,673) (17,827) (264,894)(100.7) (153.2) (483.1)
Cash flows from financing activities:
Proceeds from short-term borrowings 25,000 20,000 96,30369.9 47.0 56.4
Repayment of short-term borrowings (20,000) - (96,303)(29.0) (65.9) (103.4)
Proceeds from sale and leaseback transactions - 36,500 214,59056.0 85.6 246.7
Proceeds from issuance of long-term debt 104,000 47,200 84,700128.8 - 28.0
Long-term debt and capital lease payments (70,920) (79,375) (59,904)(237.4) (133.9) (25.9)
Proceeds from issuance of common stock 798 184 1,466
Repurchase2.8 10.2 129.3
Proceeds from sale of preferredtreasury stock - (33,375)10.9 -
Cash dividends - (2,429) (8,398)
Gain (loss) on debt retirement 2,088 964(1.7) - -
Net cash provided by (used in)
financing activities 40,966 (10,331) 232,454(10.6) (46.1) 331.1
Net increase (decrease) in cash and cash equivalents (15,574) 20,299 (12,206)14.2 23.6 53.2
Cash and cash equivalents at beginning of year 11.6 25.8 49.4
Cash and cash equivalents at end of year $11,605 $27,179 $6,880$25.8 $49.4 $102.6
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $44,786 $33,622 $38,952$52.6 $43.5 $28.7
Income taxes (refunds) 2,204 (18,554) (2,168)5.0 20.6 22.1
Noncash investing and financing activities: 1994 - Capital lease obligations of $57.9 million were incurred due to changes in lease agreements.
1993 - The preferred stock was repurchased in exchange for a $27 million note
payable and a $33.4 million cash payment.
1992 -None None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 19941997
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Alaska Air
Group, Inc. (Company or Air Group) and its subsidiaries, the principal
subsidiaries being Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon). All significant intercompany transactions
are eliminated. Both subsidiariesPreparation of financial statements requires the use of
management's estimates. Actual results could differ from those
estimates. Certain reclassifications have been made in prior years'
financial statements to conform to the 1997 presentation.
Alaska and Horizon operate as airlines. However, each subsidiary'stheir business plan,plans,
competition and economic risks differ substantially due to the passenger
capacity and range of aircraft operated.substantially. Alaska is a major
airline serving Alaska, the West Coast, Mexico and Eastern Russia. It
operates an all jet fleet and its average passenger trip is 850846 miles.
Horizon is a regional airline serving the Pacific Northwest, Northern
California and Western Canada. It operates both jet and turboprop
aircraft, and its average passenger trip is 210241 miles. Substantially
all of Alaska's and Horizon's sales occur in the United States. See
Note 1011 for businessoperating segment information.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. They are carried at cost, which
approximates market. The Company reduces its cash balance when checks
are disbursed. Due to the time delay in checks clearing the banks, the
Company normally maintains a negative cash balance on its books which is
reported as a current liability. The amount of the negative cash
balance was $12.5 million and $10.1 million at December 31, 1996 and
1997, respectively.
Inventories and Supplies
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. For repairable parts, anAn allowance for obsolescence is
accrued on a straight-line basis over the estimated useful lives of the
aircraft. Inventories related to the retired B727 fleet and other
surplus items are carried at their net realizable value. The allowance
at December 31, 19941996 and 19931997 for all inventories was $12.1$16.1 million and
$8.3$18.0 million, respectively.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and depreciated using the
straight-
linestraight-line method over their estimated useful lives, which are as
follows:
Aircraft and other
flight equipment 8-20 years
Buildings 10-30 years
Capitalized leases and
leasehold improvements Term of lease
Other equipment 3-15 years
Assets and related obligations for items financed under capital leases
are initially recorded at an amount equal to the present value of the
future minimum lease payments. The cost of major airframe overhauls,
engine overhauls, and other modifications which extend the life or
improve the usefulness of aircraft are capitalized and amortized over
their estimated period of use. Other repair and maintenance costs are
expensed when incurred. The Company periodically reviews long-lived
assets for impairment.
Capitalized Interest
Interest is capitalized on flight equipment purchase deposits and ground
facilities progress payments as a cost of the related asset and is
depreciated over the estimated useful life of the asset.
Interest capitalization is
suspended when there is a substantial delay in aircraft deliveries.
Intangible Assets-Subsidiaries
The excess of the purchase price over the fair value of net assets
acquired is recorded as an intangible asset and is amortized over 40
years. Accumulated amortization at December 31, 19941996 and 19931997 was $17$21.1
million and $15$23.1 million, respectively.
Deferred Income
Deferred income results from the sale and leaseback of aircraft, the
receipt of manufacturer or vendor credits, and from the sale of foreign
tax benefits. This income is recognized over the term of the applicable
agreements.
Passenger Revenues
Passenger revenues are considered earned at the time transportation service is
provided. Tickets sold but not yet used are included in air traffic liability.
Frequent Flyer Awards
Alaska operates a frequent flyer award program that provides travel
awards to members based on accumulated mileage. The estimated
incremental cost of providing free travel is recognized as an expense
and accrued as a liability and reported as expense as miles are accumulated. Alaska also defers
recognition of income on a portion of the payments it receives from
travel partners associated with its frequent flyer program. The
incremental costfrequent flyer award liability and deferred partner revenues areis relieved as travel awards are used.issued.
Passenger Revenues
Passenger revenues are considered earned at the time service is
provided. Tickets sold but not yet used are reported as air traffic
liability.
Contracted Services
Contracted services includes the expenses for aircraft ground handling,
security, temporary employees and other similar services.
Other Selling Expenses
Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, advertising and promotional costs.
The costs of advertising are expensed the first time the advertising
takes place. Advertising expense was $15.2 million, $15.6 million, and
$11.0 million, respectively, in 1995, 1996 and 1997.
Income Taxes
In January 1992,Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, (FAS 109),
"Accounting for Income Taxes," was adopted. FAS 109which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements
or tax returns.
Earnings Per Share
Primary earnings per share is calculated by dividing net income after reductionStock Options
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for preferred stock dividends by the average number of common shares and
dilutive common stock equivalents outstanding. Common stock equivalents result
from the assumed exercise of stock options. Fully diluted earnings per share
gives effect to the conversion of convertible debt (after elimination of related
interest expense, net of income tax effect).See Note 6 for more information.
Derivative Financial Instruments
The Company periodically enters into interest rate swap agreements to
hedge interest rate risk. The differential to be paid or received on interest rate swapfrom
these agreements is accrued as interest rates change and is recognized
currently in the income statement. The Company periodically enters into
hedge agreements to reduce its exposure to fluctuations in the price of
jet fuel. A gain or loss is recorded quarterly if the fuel index
average exceeds the ceiling price or falls below the floor price.
Reclassifications
Certain reclassifications have been made in prior years' financial statements to
conform to the 1994 presentation.
Note 2. Marketable Securities
Marketable securities are investments that are readily convertible to
cash but
whoseand have original maturity datesmaturities that exceed three months. They are
classified as available for sale and consisted of the following at
December 31 (in thousands)millions):
1994 19931996 1997
Cost:
U.S. govtgovernment securities $78,045 $66,744
Other 15,292 7,226
$93,337 $73,970$48.4 $75.1
Asset backed obligations 4.0 35.0
$52.4 $110.1
Fair value:
U.S. govtgovernment securities $76,558 $66,665
Other 15,069 7,224
$91,627 $73,889
Gross$48.2 $75.2
Asset backed obligations 4.0 35.0
$52.2 $110.2
There were no material unrealized holding gains:
U.S. govt securities $ _ $71
Other _ 3
$ _ $74
Gross unrealized holding losses:
U.S. govt securities $1,487 $150
Other 223 5
$1,710 $155gains or losses at December
31, 1996 or 1997.
Of the marketable securities on hand at December 31, 1994, 55%1997, 54% will
mature during 19951998 and the remainder will mature during 1996.1999. Based on
specific identification of securities sold, the following occurred in
19941996 and 1997 (in thousands)millions):
1996 1997
Proceeds from sales $56,762$110.4 $385.9
Gross realized gains $ 400.3 0.1
Gross realized losses $ 499
The above0.1 0.1
Realized gains and losses are included in 1994reported as a component of interest
income of $7.8 million.income.
Note 3. Other Assets
Other assets consisted of the following at December 31 (in thousands)millions):
1994 19931996 1997
Restricted deposits $66,858 $60,903$64.6 $67.5
Leasehold rights 14,075 16,9238.4 5.5
Deferred costs 15,942 16,938
Receivables 21,245 7,683
$118,120 $102,447and other 13.2 15.3
$86.2 $88.3
Leasehold rights and deferred costs are amortized over the term of the
related lease or contract.
At December 31, 1994, deferred costs include $6.2 million
of capitalized training costs associated with the B737-400 aircraft. These
costs are being amortized over a five-year period which began in April 1992.
Note 4. Long-TermLong-term Debt and Capital Lease Obligations
At December 31, 19941996 and 1993,1997, long-term debt and capital lease
obligations were as follows (in thousands)millions):
1994 1993
7.4%1996 1997
8.7%* fixed rate notes payable
due through 2004 $115.5 $103.5
6.4%* variable rate notes payable
due through 2009 $375,908 $308,700
7-3/4%98.6 114.9
6-1/2% convertible subordinatedsenior
debentures due 2005-2010 14,354 14,6382005 132.3 132.1
6-7/8% convertible subordinated
debentures due 2004-2014 54,041 60,181
7-1/4% zero coupon,
convertible subordinated
notes due 2006 129,369 143,75454.0 54.0
Long-term debt 573,672 527,273400.4 404.5
Capital lease obligations 88,237 33,72027.8 25.6
Less current portion (72,005) (35,575)
$589,904 $525,418(24.1) (28.7)
$404.1 $401.4
* weighted average for 19941997
At December 31, 1994,1997, borrowings of $362.4$218.4 million are secured by flight
equipment and real property. During 1994, the Company repurchased $6.4 million of its 7-3/4% and 6-7/8%
convertible subordinated debentures for a $1.1 million pretax gain. The remaining 7-3/4%6-1/2% and 6-7/8% debentures are
convertible into common stock at $28.25$21.50 and $33.60 per share,
respectively, subject to adjustments in certain events. Also, during 1994,The 6-1/2%
debentures are redeemable at the Company repurchased 55,922Company's option on or after June 15,
1998, initially at a redemption price of its 7-1/4% notes,
which had a book value of $24.3 million, for a $1.0 million pretax gain. Each104.33% of the remaining notes can be converted into 12.4 sharesprincipal
amount, declining ratably to 100% over six years. The 6-7/8% debentures
are redeemable at the Company's option at a redemption price of common stock.
Holders101.38%
of these notes have a put optionthe principal amount at December 31, 1997, declining ratably to require the Company to purchase
each note100%
on April 18, 1996 at their then accreted value of $490.58. The
Company may elect to pay in cash or shares of common stock or in any
combination thereof.June 15, 1999.
At December 31, 1994,1997, Alaska had $70 million in lines of credit, none of which
were being used, with commercial banks. In early 1995, these credit agreements
were replaced with a $75$125 million credit facility with
commercial banks. Advances under the newthis facility may either be for up to a 364-day term, or up to a
maximum maturity of threefour years. Borrowings may be used for aircraft
acquisitions or other corporate purposes, and they bear interest at a
rate which varies based on LIBOR. At December 31, 1997, no borrowings
were outstanding under this credit facility.
Certain Alaska loan agreements contain provisions that require
maintenance of specific levels of net worth, leverage and fixed charge
coverage, and limit dividends, investments, lease obligations, sales of assets and
additional indebtedness. At December 31, 1994,1997, the Company was in
compliance with all loan provisions, and under the most restrictive loan
provisions, Alaska had $28.5$140 million of net worth above the minimum.
During 1994, four MD-83 aircraft were financed with $104 million in ten-year
loans at variable interest rates based on LIBOR. In addition, capital lease
obligations increased $57.9 million due to changes in the lease agreements for
two B737-400 aircraft that were previously classified as operating leases.
At December 31, 1994,1997, long-term debt principal payments for the next
five years were (in thousands)millions):
1995 $ 40,762
1996* $ 37,621
1997 $ 34,795
1998 $ 35,736$26.3
1999 $ 35,967
* Excludes the effect of a put option on the 7-1/4% notes.$26.3
2000 $57.3
2001 $47.6
2002 $14.5
Note 5. Commitments
Lease Commitments
Lease contracts for 109113 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased.
Total rent expense was $196.9$201.9 million, $180.4$214.7 million and $149.7$218.7
million, in 1994, 19931995, 1996 and 1992,1997, respectively. Future minimum lease
payments under capitallong-term operating leases and long-term operatingcapital leases as of
December 31, 19941997 are shown below (in thousands)millions):
Capital
Leases
Operating Leases Total
RealCapital
Aircraft Property
1995 $38,200 $170,871 $14,190 $223,261
1996 33,560 157,983 12,207 203,750
1997 4,140 143,159 10,971 158,270Facilities Leases
1998 4,138 134,285 10,556 148,979$178.2 $16.9 $ 4.1
1999 4,136 128,775 10,444 143,355165.6 16.7 4.1
2000 156.3 14.9 4.1
2001 140.3 9.8 4.1
2002 137.5 5.2 4.1
Thereafter 19,068 676,998 36,304 732,370804.9 71.0 6.8
Total lease payments 103,242 $1,412,071 $94,672 $1,609,985$1,582.8 $134.5 27.3
Less amount representing interest 15,005(1.7)
Present value of capital lease payments $88,237$25.6
Aircraft Commitments
The Company has firm orders for 11 Dornier 328s24 Boeing 737 series aircraft to be
delivered between 1995 and 1998 and six MD-83s2002 and 22 Dash 8-200s to be delivered
between 19951998 and 1997.2005. The total amount of these commitments is
approximately $293 million.$1.015 billion. As of December 31, 1994,1997, deposits related
to the future equipment deliveries were $43.2$100.6 million. The manufacturer has agreed to provide lease financing for
all of the Dornier 328s. In addition to
the ordered aircraft, the Company holds purchase options on 40 Dornier 328s.22 Boeing
737s and 25 Dash 8-200s.
Note 6. Stock Plans
Air Group has three stock option plans, which provide for the purchase
of Air Group common stock at its marketa stipulated price on the date of grant by
certain officers and key employees of Air Group and its subsidiaries.
Under the 1988 Plan, options for 1,720,700 shares were granted. Under
the 1996 and 1997 Plans, options for 519,900 shares have been granted
and, at December 31, 1997, 401,975 shares were available for grant.
Under all plans, the incentive and nonqualified stock options granted
have terms of up to approximately ten years. Up to halfGrantees are 25% vested
after one year, 50% after two years, 75% after three years and 100%
after four years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995, 1996 and 1997, respectively:
dividend yield of 0%, 0% and 0%; volatility of 37%, 36% and 34%; risk-
free interest rates of 6.46%, 6.33% and 5.69%; and expected lives of 5,
5 and 5 years. Using these assumptions, the weighted average fair value
of options providegranted was $6.69, $9.58 and $14.04 in 1995, 1996 and 1997,
respectively.
Air Group follows APB Opinion 25 and related Interpretations in
accounting for stock appreciation rights.options. Accordingly, no compensation cost has
been recognized for these plans. Had compensation cost for the
Company's stock options been determined in accordance with Financial
Accounting Standard 123, net income and earnings per share (EPS) would
have been reduced to the pro forma amounts indicated below. The
reductions in future years are likely to be larger than shown below
because options vest over four years and new grants are typically made
each year.
1995 1996 1997
Net income (in millions):
As reported $17.3 $38.0 $72.4
Pro forma 17.1 37.4 71.4
Basic EPS:
As reported $1.28 $2.67 $4.90
Pro forma 1.27 2.63 4.83
Diluted EPS:
As reported $1.26 $2.05 $3.53
Pro forma 1.25 2.03 3.48
Changes in the number of shares subject to option, with their weighted
average exercise prices, are summarized as
follows:below:
Shares Price
Outstanding, Dec. 31, 1994 1993 19921,044,143 $17.15
Granted 425,500 15.37
Exercised (165,005) 16.11
Canceled (143,050) 17.80
Outstanding, beginningDec. 31, 1995 1,161,588 $16.56
Granted 379,900 22.51
Exercised (504,138) 17.05
Canceled (45,525) 17.13
Outstanding, Dec. 31, 1996 991,825 $18.57
Granted 245,800 35.25
Exercised (349,575) 17.36
Canceled (8,125) 17.03
Outstanding, Dec. 31, 1997 879,925 $23.72
At December 31, 1997, 245,800 of year 861,362 770,420 885,720
Granted(a) 330,200 172,200 43,100
Exercised (58,469) (12,600) (98,400)
Canceled (88,950) (68,658) (60,000)
Outstanding, endthe outstanding options (none of year 1,044,143 861,362 770,420
Exercisable, end
of year(b) 644,843 542,012 450,845
Available for granting
in future periods 409,000 701,867 805,409
Averagewhich
are currently exercisable) had an exercise price of options:
Exercised during the
year $13.65 $14.65 $14.89
Outstanding at year-
end $17.15 $17.06 $17.32
(a)$35.25 and a
remaining contractual life of 10.0 years. The other 634,125 outstanding
options had a weighted average exercise price of the options granted in 1994 was $16.53
(b) Options$19.24 (ranging from
$15.00 to $24.00), and a weighted average remaining contractual life of
7.9 years. The number of shares exercisable at year end 1994 expire between Juneyear-end with their
weighted average exercise prices, are summarized below:
Shares Price
December 31, 1995 and
June 2004.
In addition, 2,273,700 shares of common stock are subject to
nontransferable investment options held by management employees, for which
the Company received $3.1 million, which is included with other liabilities
on the Balance Sheet. These options are subject to mandatory redemption at
$3.1 million in February596,338 $17.24
December 31, 1996 243,675 16.70
December 31, 1997 and they allow the holder to purchase common
stock at $27 per share until that date.161,775 19.08
Note 7. Employee Benefit Plans
Pension Plans
Four defined benefit and five defined contribution retirement plans
cover various employee groups of Alaska and Horizon. The defined
benefit plans provide benefits based on an employee's term of service
and average compensation for a specified period of time before
retirement. Pension costsplans are funded as required by the Employee
Retirement Income Security Act of 1974 (ERISA).
The defined benefit plan assets are primarily invested in common stocks and fixed
income securities. Plan assets exceeded the accumulated benefit
obligation at December 31, 19941996 and 1993.1997. The following table sets
forth the funded status of the plans at December 31, 19941996 and 19931997 (in
thousands)millions):
1994 19931996 1997
Benefit obligation -
Vested $ 114,861 $126,341$180.9 $211.5
Nonvested 15,820 12,68722.1 38.4
Accumulated benefit
obligation $ 130,681 $139,028$203.0 $249.9
Plan assets at fair value $ 144,102 $145,974$223.7 $289.2
Projected benefit obligation 147,200 159,529230.7 307.4
Plan assets less projected
benefit obligation (3,098) (13,555)(7.0) (18.2)
Unrecognized transition asset (1,374) (1,658)(0.8) (0.5)
Unrecognized prior service cost 3,521 1,5762.6 60.1
Unrecognized loss 15,839 26,68432.6 (0.8)
Prepaid pension cost $ 14,888 $13,04727.4 $ 40.6
The weighted average discount rate used to determine the projected
benefit obligation was 9.0%7.5% and 7.9%7.25% as of December 31, 19941996 and 1993,1997,
respectively. The calculation also assumed a 5.2% weighted average rate of
increase for future compensation levels of 5.1% and 3.2% for 19941996 and
1993.1997, respectively. The expected long-term rate of return on plan
assets used in 19941996 and 19931997 was 10%.
Net pension expense for the defined benefit plans included the following
components for 1994, 19931995, 1996 and 19921997 (in thousands)millions):
1994 1993 19921995 1996 1997
Service cost (benefits earned
during the period) $12,351 $10,041 $8,395$ 11.4 $ 15.9 $ 17.3
Interest cost on projected
benefit obligation 11,859 10,449 8,88312.9 15.4 17.3
Actual return on assets (2,061) (14,123) (9,079)(37.0) (23.6) (47.6)
Net amortization
and deferral (10,810) 2,244 (2,171)23.3 6.5 26.4
Net pension expense $ 11,339 $8,611 $6,02810.6 $ 14.2 $ 13.4
The defined contribution plans are deferred compensation plans under
section 401(k) of the Internal Revenue Code. Some of these plans
require Company matching contributions based on a percentage of
participants' contributions. One plan has an Employee Stock Ownership
Plan (ESOP) feature. The ESOP owns Air Group common shares which are
held in trust for eligible employees. The Company has recorded deferred
compensation to reflect the value of the shares not yet allocated to
eligible employees' accounts. As these shares are allocated to
employees, compensation expense is recorded and deferred compensation is
reduced.
Alaska and Horizon also maintain an unfunded, noncontributory benefit
plan for certain elected officers. The present value of unfunded
benefits for this plan was accrued as of December 31, 19941996 and 1993.1997.
Total expense for all pension plans was $22.5$22.2 million, $19.8$26.5 million and
$18.8$29.0 million, respectively, in 1994, 19931995, 1996 and 1992.1997.
Profit Sharing Plans
Alaska and Horizon have employee profit sharing plans. Profit sharing
expense for 1994, 19931995, 1996 and 19921997 was $3.6 million, $2.3$-0-, $0.9 million and $1.6$13.5
million, respectively.
Other Postretirement Benefits
The Company allows retirees to continue their medical, dental and vision
benefits by paying all or a portion of the respective active employee plan premium
until eligible for Medicare, currently age 65. This results in a
subsidy to retirees because the premiums received by the Company are
less than the actual cost of the retirees' claims. Effective January 1, 1992, Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," was adopted. The new standard requires that the cost of
postretirement employee benefits other than pensions be recognized during
an employee's active service period. Prior to 1992, the cost of these
benefits was expensed as claims were incurred. The cumulative effect of
the accounting change for years prior to January 1, 1992 was an after-tax
charge of $4.6 million.
The following table sets forth the status of theaccumulated
postretirement benefit obligation (APBO) for this subsidy at December
31, 19941996 and 1993 (in thousands):
1994 1993
Accumulated postretirement benefit
obligation (APBO):
Retirees $ 913 $309
Active plan participants
eligible for retirement 1,675 2,193
Active plan participants
not eligible for retirement 4,933 6,391
Unrecognized prior service cost (326) (381)
Unrecognized actuarial gain 3,244 980
Accrued postretirement
benefit cost $ 10,439 $9,4921997 was $13.5 million and $15.7 million, respectively.
The Company's APBO is unfunded. Net annual postretirement benefit costs
for 1994, 1993unfunded and 1992 includeis included with other liabilities on the
following components (in thousands):
1994 1993 1992
Service cost - benefits
attributedBalance Sheet. Annual expense related to service
during the period $682 $655 $855
Interest on APBO 596 591 643
Net amortization and
deferral (12) (38) _
Net postretirement
benefit cost $1,266 $1,208 $1,498
An 8.5% health care cost trend rate was assumed for 1995. The rate was
assumedthis subsidy is not considered
material to decrease by 1/2% annually to 5.5% for 2001 and remain at that
level thereafter. Increasing the rate by 1 percentage point in each year
would increase the APBO as of December 31, 1994 by $1.1 million and the net
periodic postretirement benefit cost for 1994 by $228,000. The weighted-
average discount rates used in determining the APBO for 1994 and 1993 were
9.0% and 7.9%, respectively.disclose.
Note 8. Special Charges
Results for 1993 and 1992 include special charges of $15 million and $26
million, respectively, to recognize an impairment of the value of the
Boeing B727 fleet. The special charges include reserves for future excess
lease costs and the write-down of capitalized overhauls and spare parts to
net realizable value.
Note 9. Income Taxes
The components of income tax expense (credit) were as follows (in
thousands):
1994 1993 1992
Current tax expense (credit):
Federal $8,044 $(4,907) $(21,057)
State 72 (253) (1,714)
Total current 8,116 (5,160) (22,771)
Deferred tax expense (credit):
Federal 8,032 (8,164) (19,451)
State 2,282 (1,570) (3,214)
Total deferred 10,314 (9,734) (22,665)
Total before accounting
change 18,430 (14,894) (45,436)
Deferred income tax
credit cumulative effect
of FAS 106 _ _ (2,613)
Total tax expense(credit) $18,430 $(14,894) $(48,049)
The actual income tax expense (credit) reported differs from the "expected"
tax expense (credit) (computed by applying the federal corporate tax rate
of 35% for 1994 and 1993 and 34% for 1992) as follows (in thousands):
1994 1993 1992
Income (loss) before
income tax $40,961 $(45,812) $(125,706)
Expected tax
expense (credit) $14,336 $(16,035) $(42,740)
Nondeductible expense 2,386 1,210 1,068
Federal rate change _ 1,016 _
Tax-exempt interest
income _ (170)
State income tax 1,531 (1,185) (3,252)
Other - net 177 100 (342)
Actual tax expense
(credit) $18,430 $(14,894) $(45,436)
Effective tax rate 45.0% 32.5% 36.1%
Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expense for tax and financial reporting
purposes. Deferred tax assets and liabilities comprise the following at
December 31 (in thousands)millions):
1994 19931996 1997
Excess of tax over book
depreciation $117,085 $95,499$146.7 $161.8
Training expense 2,218 3,1670.8 0.2
Other - net 1,252 3581.2 1.1
Gross deferred
tax liabilities 120,555 99,024148.7 163.1
Loss carryforward (38,275) (43,798)(17.8) (0.5)
Alternative minimum tax (24,502) (16,346)(44.1) (50.1)
Capital leases (4,507) (3,615)
Pricing adjustment (1,190) (1,083)(4.5) (4.5)
Ticket pricing adjustments (1.0) (1.2)
Frequent flyer program (6,518) (5,576)(6.6) (8.5)
Employee benefits (11,812) (9,567)(10.2) (7.8)
Aircraft maintenance (7,681) (8,231)
Gain on sale of assets (5,456) (2,125)return provisions (13.9) (16.0)
Deferred gains (3.1) (4.8)
Capitalized interest (1,617) _(1.5) (1.4)
Inventory obsolescence (7.1) (6.5)
Gross deferred tax assets (101,558) (90,341)(109.8) (101.3)
Net deferred
tax liabilities $18,997 $8,683$ 38.9 $ 61.8
Current deferred tax asset $(9,588) $(12,315)$ (10.6) $ (10.5)
Noncurrent deferred
tax liability 28,585 20,99849.5 72.3
Net deferred
tax liabilities $18,997 $8,683
The book income and$ 38.9 $ 61.8
After consideration of temporary differences, for 1994 resulted in taxable income of $12for 1997
was approximately $99 million, which was partially offset by net
operating losses generated in prior years. Note 10. Business Segment Information
Financial information for Alaska and HorizonAt December 31, 1997, no
federal loss carryforwards remain.
The components of income tax expense were as follows (in thousands)millions):
1994 1993 1992
Operating revenues:
Alaska1995 1996 1997
Current tax expense:
Federal $ 1,061,5945.0 $17.5 $ 906,806 $ 908,286
Horizon $ 256,905 $ 223,333 $ 208,149
Operating26.4
State 0.3 0.9 1.9
Total current 5.3 18.4 28.3
Deferred tax expense:
Federal 9.2 6.7 18.5
State 2.2 1.2 4.4
Total deferred 11.4 7.9 22.9
Total tax expense $16.7 $26.3 $51.2
Income tax expense reconciles to the amount computed by applying the
U.S. federal rate of 35% to income (loss)before taxes as follows (in
millions):
Alaska $ 62,872 $ (24,313) $ (101,013)
Horizon $ 12,922 $ 8,757 $ 7,305
Total assets:
Alaska $ 1,244,985 $ 1,037,546 $ 1,088,090
Horizon $ 152,263 $ 141,940 $ 147,076
Depreciation1995 1996 1997
Income before
income tax $34.0 $64.3 $123.6
Expected tax expense $11.9 $22.5 $43.3
Nondeductible expenses 3.0 2.8 2.9
State income tax 1.8 1.0 4.1
Other - net -- -- 0.9
Actual tax expense $16.7 $26.3 $51.2
Effective tax rate 49.1% 40.9% 41.4%
Note 9. Earnings per Share
Statement of Financial Accounting Standards No. 128, Earnings per Share
(EPS) was adopted for 1997 calendar year reporting. FAS 128 replaces
"primary" and amortization
expense:
Alaska $ 47,684 $ 48,953 $ 47,140
Horizon $ 8,681 $ 9,276 $ 9,564
Capital expenditures:
Alaska $ 173,093 $ 21,116 $ 258,556
Horizon $ 15,535 $ 8,800 $ 16,389"fully-diluted" EPS with "basic" and "diluted" EPS. Basic
EPS is calculated by dividing net income by the average number of common
shares outstanding. Diluted EPS is calculated by dividing net income
plus the after-tax interest expense on convertible debt by the average
common shares outstanding plus additional common shares that would have
been outstanding if conversion of the convertible debt and exercise of
in-the-money stock options is assumed. EPS calculations were as follows
(in millions except per share amounts):
1995 1996 1997
Net income $17.3 $38.0 $72.4
Avg. shares outstanding 13.471 14.241 14.785
Basic earnings per share $1.28 $2.67 $4.90
Net income $17.3 $38.0 $72.4
After-tax interest on:
6-1/2% debentures 2.7 5.3 5.3
6-7/8% debentures 2.3 2.3 2.3
7-3/4% debentures 0.6 0.5 --
7-1/4% notes 3.3 -- --
Diluted EPS income $26.2 $46.1 $80.0
Avg. shares outstanding 13.471 14.241 14.785
Assumed conversion of:
6-1/2% debentures 3.151 6.151 6.151
6-7/8% debentures 1.608 1.608 1.608
7-3/4% debentures 0.468 0.361 --
7-1/4% notes 2.053 -- --
Assumed exercise of
stock options 0.014 0.097 0.145
Diluted EPS shares 20.765 22.458 22.689
Diluted earnings per share $1.26 $2.05 $3.53
Note 11.10. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in thousands)millions):
December 31, 19941996
Carrying Fair
Amount Value
Cash and cash equivalents $11,605 $11,605$ 49.4 $ 49.4
Marketable securities 93,337 91,62752.4 52.2
Restricted deposits 66,858 66,858
Long-term receivables 21,245 21,24564.6 64.6
Long-term debt 573,672 549,000400.4 421.7
December 31, 19931997
Carrying Fair
Amount Value
Cash and cash equivalents $27,179 $27,179$102.6 $102.6
Marketable securities 73,970 73,889110.1 110.1
Restricted deposits 60,903 75,000
Long-term receivables 7,683 7,68367.5 67.5
Long-term debt 527,273 521,000404.5 521.7
The fair value of cash equivalents approximates carrying value due to
the short maturity of these instruments. The fair value of marketable
securities is based on quoted market prices. The fair valuesvalue of
restricted deposits and long-term receivables approximateapproximates the carrying amounts.amount. The fair value of
publicly traded long-term debt is based on quoted market prices, and the
fair value of other debt approximates carrying value.
During 1993, the Company entered intoNote 11. Operating Segment Information
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an interest rate swap agreement to
reduce the interest expense on a portionEnterprise and Related Information, was adopted for 1997
calendar year reporting. Financial information for Alaska and Horizon
follows (in millions):
1995 1996 1997
Operating revenues:
Alaska $1,142.3 $1,297.3 $1,447.9
Horizon 279.5 301.3 303.6
Elimination of its fixed rate debt. The
agreement, which expires in 1996, effectively changes the Company's
interest rate on the debt from a fixed rate to a floating rate based on
LIBOR. Variable interest payments are paid to a financial institution semi-
annually based on a notional principal amountintercompany
revenues (4.3) (6.4) (12.1)
Consolidated 1,417.5 1,592.2 1,739.4
Depreciation and amortization expense:
Alaska 58.2 55.9 56.9
Horizon 9.9 11.4 11.2
Interest income:
Alaska 10.3 11.5 12.2
Horizon 0.4 0.3 0.1
Interest expense:
Alaska 40.3 29.7 25.0
Horizon 0.6 0.9 1.8
Pretax income:
Alaska 43.9 74.5 127.4
Horizon 4.2 0.3 6.3
Air Group (14.1) (10.5) (10.1)
Consolidated 34.0 64.3 123.6
Total assets:
Alaska 1,266.5 1,247.9 1,370.7
Horizon 154.9 173.3 158.0
Air Group 521.1 524.3 668.0
Elimination of $201 million. In 1996,
the Company will receive a $33.2 million payment from the financial
institution. At December 31, 1994, $18.3 million of this amount is shown
as a receivable in other assets. The Company is exposed to higher
interest payments if LIBOR increases and is exposed to credit loss in the
event of nonperformance by the financial institution. Through December
31, 1994, this swap has resulted in a $1.1 million reduction in interest
expense.
The Company enters into hedge agreements to reduce its exposure to
fluctuations in the price of jet fuel. The agreements establish a ceiling
price and floor price, and they provide for quarterly measurements of the
average price of fuel, as determined by an index. The Company records a
gain or loss if a quarterly average exceeds the ceiling or falls below the
floor. The fuel hedges had no material effect on 1994 operating results.
At December 31, 1994, the Company had a fuel hedge agreement in place with
a ceiling price of 65 cents covering approximately 50% of the expected fuel
usage through July 1995, and a floor price of 44 cents covering
approximately 50% of the expected fuel usage through July 1995. At
December 31, 1994, the fuel index was at 50 cents.intercompany
accounts (629.1) (634.1) (663.6)
Consolidated 1,313.4 1,311.4 1,533.1
Capital expenditures:
Alaska 87.9 229.9 293.0
Horizon 15.4 39.9 145.9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Alaska Air Group, Inc.:
We have audited the accompanying consolidated balance sheet of Alaska
Air Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 19941997 and 1993,1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994.1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Alaska Air
Group, Inc. and subsidiaries as of December 31, 1994 and 1993,1997and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994,1997, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item
14(a) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in theour audits of the basic financial statements and,
in our opinion, is fairly statesstated in all material respects the financial data required to be set forth
therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
January 25, 199526, 1998
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc. Schedule II
Additions
Charged
Beginning toCharged (A) Ending
(In Thousands)Millions) Balance to Expense Deductions Balance
Year Ended December 31, 19921995
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2,556 $1,237 $(579) $3,214
Obsolesence$2.3 $0.6 $(1.3) $1.6
Obsolescence allowance for flight
equipment spare parts $3,765 $2,578 $ - $6,343$12.1 $2.7 $(1.3) $13.5
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $21,529 $32,230 $(13,956) $39,803$25.6 $7.5 $(0.6) $32.5
Year Ended December 31, 19931996
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $3,214 $912 $(1,505) $2,621
Obsolesence$1.6 $0.7 $(1.0) $1.3
Obsolescence allowance for flight
equipment spare parts $6,343 $1,994 $0 $8,337$13.5 $3.5 $(0.9) $16.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $39,803 $22,324 $(31,394) $30,733$32.5 $9.4 $(3.3) $38.6
Year Ended December 31, 19941997
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2,621 $944 $(1,280) $2,285
Obsolesence$1.3 $1.0 $(1.1) $1.2
Obsolescence allowance for flight
equipment spare parts $8,337 $4,401 $(663) $12,075$16.1 $3.4 $(1.5) $18.0
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $30,733 $9,007 $(14,180) $25,560$38.6 $11.4 $(6.8) $43.2
(A) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX
Certain of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference from the document
described in parenthesis. Certain others are filed herewith.
3.(i) CertificateArticles of Incorporation of Alaska Air Group, Inc. as amended through
May 20, 1987 (Exhibit 3-01 to 1987 10-K).21, 1996
3.(ii) Bylaws of Alaska Air Group, Inc., as amended through September
14, 1993Feb. 8, 1996
(Exhibit 3.(ii) to 1993 10K)1995 10-K)
4.1 Indenture dated June 15, 1985, between Alaska Airlines, Inc.Amended and Bankamerica Trust Company of New York, including form of
Debenture (Exhibit 4-02 to Registration Statement No. 2-98555).
4.2Restated Rights Agreement dated as of December 2, 19868/7/96 between Alaska Air
Group, Inc. and The First National Bank of Boston, as Rights Agent
(Exhibit No. 12.1 to Form 8A8A-A filed December 12, 1986).8/8/96)
10.1 Lease and Assignment of Sublease Agreement dated FebruaryFeb. 1, 1979 between Alaska Airlines, Inc. and
the Alaska Industrial Development Authority (AIDA) (Exhibit 10-15 to
Registration Statement No. 2-70742).
10.2 Lease and Assignment and Sublease Agreement dated April 1, 1978 between Alaska Airlines, Inc. and
the Alaska Industrial
Development AuthorityAIDA (Exhibit 10-16 to Registration Statement No. 2-70742).
10.3 Alaska Air Group, Inc. 1975 Stock Option Plan, as amended through
May 7, 1991.
10.4 Management Incentive Plan (1992 Alaska Air Group, Inc. Proxy Statement).
10.5
10.4 Loan Agreement dated as of December 1, 1984, between Alaska Airlines,
Inc. and the Industrial Development Corporation of the Port of Seattle
(Exhibit 10-38 to 1984 10-K).
10.6
10.5 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended through May
7, 1992.
10.7 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and John F. Kelly (1992 Alaska Air Group, Inc.
Proxy Statement).
10.81992 (Registration Statement No. 33-22358)
10.6 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended through May
19, 1992 (Registration Statement No. 33-523242).
10.9 Purchase Agreement between McDonnell Douglas Corporation and
Alaska Airlines, Inc. DAC 88-36-D, dated October 14, 1988
(Exhibit 10-17 to 1988 10-K).
10.10 Capital Performance Plan (Exhibit 4.3 to Registration Statement
33-33087).
#10.11 Purchase Agreement dated March 30, 1990 between McDonnell Douglas
Corporation and Alaska Airlines, Inc. for the purchase of up to
40 MD90-30 aircraft (Exhibit 10-13 to 1990 10-K)
#10.1233-52242)
#10.7 Lease Agreement dated January 22, 1990 between International Lease
Finance Corporation and Alaska Airlines, Inc. for the lease of a B737-400B737-
400 aircraft, summaries of 19 substantially identical lease agreements for 19 additional B737-400 aircraft
and Letter Agreement #1 dated January 22, 1990 (Exhibit 10-14 to 1990
10-K)
#10.13 Purchase#10.8 Agreement dated asSeptember 18, 1996 between Alaska Airlines, Inc. and
Boeing for the purchase of May 15, 1991,12 Boeing 737-400 aircraft (Exhibit 10.1 to
Third Quarter 1996 10-Q)
#10.9 Agreement dated August 28, 1996 between Horizon Air Industries, Inc.
and Dornier Luftfahrt GmbHBombardier for the purchase of up to 60 Dornier 32825 de Havilland Dash 8-200 aircraft
(Exhibit 10-1910.2 to May 30, 1991 8-
K).
#10.14 Amendment dated as of June 25, 1993 to the Purchase Agreement
dated as of May 15, 1991,Third Quarter 1996 10-Q)
10.10 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and Dornier Luftfahrt GmbHGeorge D. Bagley (1996 Proxy Statement)
10.11 Alaska Air Group, Inc. 1996 Long-Term Incentive Equity Plan
(Registration Statement 333-09547)
10.12 Alaska Air Group, Inc. Non Employee Director Stock Plan (Registration
Statement 333-33727)
10.13 Alaska Air Group, Inc. Profit Sharing Stock Purchase Plan
(Registration Statement 333-39889)
10.14 Alaska Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity
Plan (Registration Statement 333-39899)
*10.15 Alaska Air Group, Inc. Supplementary Retirement Plan for the purchase of up to 60 Dornier
328 aircraft (Exhibit 10-19a to Second Quarter 1993 10-Q).
*11 Computation of Earnings Per Common Share.Elected
Officers
*10.16 1995 Elected Officers Supplementary Retirement Plan
*12 Calculation of Ratio of Earnings to Fixed Charges
and Preferred
Dividends.
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-K).
*23 Consent of Arthur Andersen & Co.LLP
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.