UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
| | | | | | | | |
Delaware | | 91-1292054 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | |
19300 International Boulevard, | Seattle, | WA | 98188 |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Ticker Symbol | Name of each exchange on which registered |
Common stock, $0.01 par value | ALK | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
The registrant has 123,663,778125,232,721 common shares, par value $0.01, outstanding at October 30, 2020.July 31, 2021.
This document is also available on our website at http://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20202021
TABLE OF CONTENTS
As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2019, and Item 1A. "Risk Factors" of Part II of this Form 10-Q.2020. Please consider our forward-looking statements in light of those risks as you read this report.
PART I
| | |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| (in millions) | (in millions) | September 30, 2020 | | December 31, 2019 | (in millions) | June 30, 2021 | | December 31, 2020 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 1,855 | | | $ | 221 | | Cash and cash equivalents | $ | 1,025 | | | $ | 1,370 | |
Marketable securities | Marketable securities | 1,904 | | | 1,300 | | Marketable securities | 2,926 | | | 1,976 | |
Total cash and marketable securities | Total cash and marketable securities | 3,759 | | | 1,521 | | Total cash and marketable securities | 3,951 | | | 3,346 | |
Receivables - net | Receivables - net | 321 | | | 323 | | Receivables - net | 567 | | | 480 | |
Inventories and supplies - net | Inventories and supplies - net | 57 | | | 72 | | Inventories and supplies - net | 52 | | | 57 | |
Prepaid expenses, assets held-for-sale, and other current assets | Prepaid expenses, assets held-for-sale, and other current assets | 328 | | | 121 | | Prepaid expenses, assets held-for-sale, and other current assets | 201 | | | 123 | |
Total Current Assets | Total Current Assets | 4,465 | | | 2,037 | | Total Current Assets | 4,771 | | | 4,006 | |
| Property and Equipment | Property and Equipment | | | | Property and Equipment | | | |
Aircraft and other flight equipment | Aircraft and other flight equipment | 7,851 | | | 8,549 | | Aircraft and other flight equipment | 7,996 | | | 7,761 | |
Other property and equipment | Other property and equipment | 1,395 | | | 1,306 | | Other property and equipment | 1,433 | | | 1,398 | |
Deposits for future flight equipment | Deposits for future flight equipment | 595 | | | 533 | | Deposits for future flight equipment | 402 | | | 583 | |
| | 9,841 | | | 10,388 | | | 9,831 | | | 9,742 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | 3,460 | | | 3,486 | | Less accumulated depreciation and amortization | 3,703 | | | 3,531 | |
Total Property and Equipment - Net | Total Property and Equipment - Net | 6,381 | | | 6,902 | | Total Property and Equipment - Net | 6,128 | | | 6,211 | |
| Operating lease assets | Operating lease assets | 1,516 | | | 1,711 | | Operating lease assets | 1,375 | | | 1,400 | |
Goodwill | Goodwill | 1,943 | | | 1,943 | | Goodwill | 1,943 | | | 1,943 | |
Intangible assets - net | Intangible assets - net | 107 | | | 122 | | Intangible assets - net | 103 | | | 107 | |
Other noncurrent assets | Other noncurrent assets | 337 | | | 278 | | Other noncurrent assets | 336 | | | 379 | |
Other Assets | Other Assets | 3,903 | | | 4,054 | | Other Assets | 3,757 | | | 3,829 | |
| Total Assets | Total Assets | $ | 14,749 | | | $ | 12,993 | | Total Assets | $ | 14,656 | | | $ | 14,046 | |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| (in millions, except share amounts) | (in millions, except share amounts) | September 30, 2020 | | December 31, 2019 | (in millions, except share amounts) | June 30, 2021 | | December 31, 2020 |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | Current Liabilities | | | | Current Liabilities | | | |
Accounts payable | Accounts payable | $ | 93 | | | $ | 146 | | Accounts payable | $ | 159 | | | $ | 108 | |
Accrued wages, vacation and payroll taxes | Accrued wages, vacation and payroll taxes | 541 | | | 470 | | Accrued wages, vacation and payroll taxes | 439 | | | 527 | |
Air traffic liability | Air traffic liability | 1,071 | | | 900 | | Air traffic liability | 1,533 | | | 1,073 | |
| Other accrued liabilities | Other accrued liabilities | 406 | | | 431 | | Other accrued liabilities | 661 | | | 424 | |
Deferred revenue | Deferred revenue | 663 | | | 750 | | Deferred revenue | 922 | | | 733 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 283 | | | 269 | | Current portion of operating lease liabilities | 263 | | | 290 | |
Current portion of long-term debt | Current portion of long-term debt | 1,150 | | | 235 | | Current portion of long-term debt | 869 | | | 1,138 | |
Total Current Liabilities | Total Current Liabilities | 4,207 | | | 3,201 | | Total Current Liabilities | 4,846 | | | 4,293 | |
| Long-Term Debt, Net of Current Portion | Long-Term Debt, Net of Current Portion | 2,672 | | | 1,264 | | Long-Term Debt, Net of Current Portion | 2,319 | | | 2,357 | |
| Noncurrent Liabilities | Noncurrent Liabilities | | | | Noncurrent Liabilities | | | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,320 | | | 1,439 | | Long-term operating lease liabilities, net of current portion | 1,222 | | | 1,268 | |
Deferred income taxes | Deferred income taxes | 499 | | | 715 | | Deferred income taxes | 439 | | | 407 | |
Deferred revenue | Deferred revenue | 1,520 | | | 1,240 | | Deferred revenue | 1,424 | | | 1,544 | |
Obligation for pension and postretirement medical benefits | Obligation for pension and postretirement medical benefits | 601 | | | 571 | | Obligation for pension and postretirement medical benefits | 660 | | | 665 | |
Other liabilities | Other liabilities | 476 | | | 232 | | Other liabilities | 422 | | | 524 | |
| | 4,416 | | | 4,197 | | | 4,167 | | | 4,408 | |
Commitments and Contingencies | Commitments and Contingencies | | | | Commitments and Contingencies | 0 | | 0 |
Shareholders' Equity | Shareholders' Equity | | | | Shareholders' Equity | | | |
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding | Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding | 0 | | | 0 | | Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding | 0 | | | 0 | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2020 - 133,011,377 shares; 2019 - 131,812,173 shares, Outstanding: 2020 - 123,661,433 shares; 2019 - 123,000,307 shares | 1 | | | 1 | | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares | | Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,579,403 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,229,459 shares; 2020 - 124,217,590 shares | 1 | | | 1 | |
Capital in excess of par value | Capital in excess of par value | 366 | | | 305 | | Capital in excess of par value | 454 | | | 391 | |
Treasury stock (common), at cost: 2020 - 9,349,944 shares; 2019 - 8,811,866 shares | (674) | | | (643) | | |
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares | | Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares | (674) | | | (674) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (450) | | | (465) | | Accumulated other comprehensive loss | (487) | | | (494) | |
Retained earnings | Retained earnings | 4,211 | | | 5,133 | | Retained earnings | 4,030 | | | 3,764 | |
| | 3,454 | | | 4,331 | | | 3,324 | | | 2,988 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 14,749 | | | $ | 12,993 | | Total Liabilities and Shareholders' Equity | $ | 14,656 | | | $ | 14,046 | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except per share amounts) | (in millions, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | (in millions, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
Operating Revenues | Operating Revenues | | | | | | | | Operating Revenues | | | | | | | |
Passenger revenue | Passenger revenue | $ | 572 | | | $ | 2,211 | | | 2,362 | | | 6,038 | | Passenger revenue | $ | 1,352 | | | $ | 309 | | | $ | 2,011 | | | $ | 1,790 | |
Mileage Plan other revenue | Mileage Plan other revenue | 84 | | | 118 | | | 266 | | | 346 | | Mileage Plan other revenue | 118 | | | 73 | | | 212 | | | 182 | |
Cargo and other | Cargo and other | 45 | | | 60 | | | 130 | | | 169 | | Cargo and other | 57 | | | 39 | | | 101 | | | 85 | |
Total Operating Revenues | Total Operating Revenues | 701 | | | 2,389 | | | 2,758 | | | 6,553 | | Total Operating Revenues | 1,527 | | | 421 | | | 2,324 | | | 2,057 | |
Operating Expenses | Operating Expenses | | | | | | | | Operating Expenses | | | | | | | |
Wages and benefits | Wages and benefits | 495 | | | 608 | | | 1,579 | | | 1,732 | | Wages and benefits | 510 | | | 472 | | | 1,003 | | | 1,084 | |
Variable incentive pay | Variable incentive pay | 42 | | | 46 | | | 65 | | | 125 | | Variable incentive pay | 34 | | | 16 | | | 67 | | | 23 | |
Payroll support program grant wage offset | (398) | | | 0 | | | (760) | | | 0 | | |
Payroll Support Program grant wage offset | | Payroll Support Program grant wage offset | (503) | | | (362) | | | (914) | | | (362) | |
Aircraft fuel, including hedging gains and losses | Aircraft fuel, including hedging gains and losses | 125 | | | 486 | | | 568 | | | 1,408 | | Aircraft fuel, including hedging gains and losses | 274 | | | 59 | | | 477 | | | 443 | |
Aircraft maintenance | Aircraft maintenance | 84 | | | 106 | | | 244 | | | 341 | | Aircraft maintenance | 102 | | | 45 | | | 183 | | | 160 | |
Aircraft rent | Aircraft rent | 74 | | | 82 | | | 229 | | | 247 | | Aircraft rent | 62 | | | 74 | | | 124 | | | 155 | |
Landing fees and other rentals | Landing fees and other rentals | 109 | | | 143 | | | 323 | | | 388 | | Landing fees and other rentals | 144 | | | 83 | | | 273 | | | 214 | |
Contracted services | Contracted services | 36 | | | 72 | | | 138 | | | 214 | | Contracted services | 54 | | | 30 | | | 105 | | | 102 | |
Selling expenses | Selling expenses | 24 | | | 77 | | | 83 | | | 236 | | Selling expenses | 41 | | | 4 | | | 74 | | | 59 | |
Depreciation and amortization | Depreciation and amortization | 105 | | | 106 | | | 320 | | | 317 | | Depreciation and amortization | 98 | | | 107 | | | 195 | | | 215 | |
Food and beverage service | Food and beverage service | 14 | | | 57 | | | 70 | | | 159 | | Food and beverage service | 35 | | | 7 | | | 58 | | | 56 | |
Third-party regional carrier expense | Third-party regional carrier expense | 29 | | | 42 | | | 92 | | | 125 | | Third-party regional carrier expense | 37 | | | 26 | | | 67 | | | 63 | |
Other | Other | 89 | | | 137 | | | 310 | | | 411 | | Other | 117 | | | 78 | | | 222 | | | 221 | |
Special items - merger-related costs | 1 | | | 5 | | | 5 | | | 39 | | |
Special items - impairment charges and other | Special items - impairment charges and other | 121 | | | 0 | | | 350 | | | 0 | | Special items - impairment charges and other | (4) | | | 69 | | | 14 | | | 229 | |
Special items - restructuring charges | Special items - restructuring charges | 322 | | | 0 | | | 322 | | | 0 | | Special items - restructuring charges | (23) | | | 0 | | | (12) | | | 0 | |
Special items - merger-related costs | | Special items - merger-related costs | 0 | | | 1 | | | 0 | | | 4 | |
Total Operating Expenses | Total Operating Expenses | 1,272 | | | 1,967 | | | 3,938 | | | 5,742 | | Total Operating Expenses | 978 | | | 709 | | | 1,936 | | | 2,666 | |
Operating Income (Loss) | Operating Income (Loss) | (571) | | | 422 | | | (1,180) | | | 811 | | Operating Income (Loss) | 549 | | | (288) | | | 388 | | | (609) | |
Nonoperating Income (Expense) | Nonoperating Income (Expense) | | | | | Nonoperating Income (Expense) | | | | |
Interest income | Interest income | 7 | | | 11 | | | 23 | | | 31 | | Interest income | 6 | | | 7 | | | 13 | | | 16 | |
Interest expense | Interest expense | (34) | | | (18) | | | (64) | | | (60) | | Interest expense | (39) | | | (17) | | | (71) | | | (30) | |
Interest capitalized | Interest capitalized | 4 | | | 4 | | | 8 | | | 11 | | Interest capitalized | 3 | | | 1 | | | 6 | | | 4 | |
Other—net | 5 | | | (3) | | | 16 | | | (20) | | |
Other - net | | Other - net | 9 | | | 6 | | | 19 | | | 11 | |
Total Nonoperating Income (Expense) | Total Nonoperating Income (Expense) | (18) | | | (6) | | | (17) | | | (38) | | Total Nonoperating Income (Expense) | (21) | | | (3) | | | (33) | | | 1 | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | (589) | | | 416 | | | (1,197) | | | 773 | | Income (Loss) Before Income Tax | 528 | | | (291) | | | 355 | | | (608) | |
Income tax (benefit) expense | (158) | | | 94 | | | (320) | | | 185 | | |
Income tax expense (benefit) | | Income tax expense (benefit) | 131 | | | (77) | | | 89 | | | (162) | |
Net Income (Loss) | Net Income (Loss) | $ | (431) | | | $ | 322 | | | $ | (877) | | | $ | 588 | | Net Income (Loss) | $ | 397 | | | $ | (214) | | | $ | 266 | | | $ | (446) | |
| Basic Earnings (Loss) Per Share: | $ | (3.49) | | | $ | 2.61 | | | $ | (7.12) | | | $ | 4.76 | | |
Diluted Earnings (Loss) Per Share: | $ | (3.49) | | | $ | 2.60 | | | $ | (7.12) | | | $ | 4.74 | | |
Basic Income (Loss) Per Share: | | Basic Income (Loss) Per Share: | $ | 3.18 | | | $ | (1.74) | | | $ | 2.13 | | | $ | (3.62) | |
Diluted Income (Loss) Per Share: | | Diluted Income (Loss) Per Share: | $ | 3.13 | | | $ | (1.74) | | | $ | 2.10 | | | $ | (3.62) | |
Shares used for computation: | Shares used for computation: | | | Shares used for computation: | | |
Basic | Basic | 123.647 | | | 123.280 | | | 123.255 | | | 123.330 | | Basic | 124.977 | | | 123.296 | | | 124.640 | | | 123.058 | |
Diluted | Diluted | 123.647 | | | 124.067 | | | 123.255 | | | 124.051 | | Diluted | 126.825 | | | 123.296 | | | 126.388 | | | 123.058 | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | (in millions) | 2020 | | 2019 | | 2020 | | 2019 | (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Net Income (Loss) | Net Income (Loss) | $ | (431) | | | $ | 322 | | | $ | (877) | | | $ | 588 | | Net Income (Loss) | $ | 397 | | | $ | (214) | | | $ | 266 | | | $ | (446) | |
| Other Comprehensive Income (Loss): | Other Comprehensive Income (Loss): | | Other Comprehensive Income (Loss): | |
Related to marketable securities: | Related to marketable securities: | | Related to marketable securities: | |
Unrealized holding gain (loss) arising during the period | Unrealized holding gain (loss) arising during the period | 2 | | | 4 | | | 32 | | | 31 | | Unrealized holding gain (loss) arising during the period | 0 | | | 31 | | | (11) | | | 30 | |
Reclassification of (gain) loss into Other - net nonoperating income (expense) | (2) | | | (5) | | | (11) | | | (3) | | |
Reclassification of gain into Other - net nonoperating income | | Reclassification of gain into Other - net nonoperating income | (2) | | | (6) | | | (6) | | | (9) | |
Income tax effect | Income tax effect | 0 | | | 0 | | | (5) | | | (7) | | Income tax effect | 1 | | | (6) | | | 4 | | | (5) | |
Total | Total | 0 | | | (1) | | | 16 | | | 21 | | Total | (1) | | | 19 | | | (13) | | | 16 | |
| Related to employee benefit plans: | Related to employee benefit plans: | | Related to employee benefit plans: | |
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense) | 7 | | | 8 | | | 22 | | | 24 | | |
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income | | Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income | 9 | | | 8 | | | 17 | | | 15 | |
Income tax effect | Income tax effect | (1) | | | (2) | | | (5) | | | (6) | | Income tax effect | (2) | | | (2) | | | (4) | | | (4) | |
Total | Total | 6 | | | 6 | | | 17 | | | 18 | | Total | 7 | | | 6 | | | 13 | | | 11 | |
| Related to interest rate derivative instruments: | Related to interest rate derivative instruments: | | Related to interest rate derivative instruments: | |
Unrealized holding gain (loss) arising during the period | Unrealized holding gain (loss) arising during the period | 2 | | | (5) | | | (25) | | | (17) | | Unrealized holding gain (loss) arising during the period | 1 | | | (2) | | | 9 | | | (27) | |
Reclassification of loss into Aircraft rent | Reclassification of loss into Aircraft rent | 1 | | | 1 | | | 2 | | | 2 | | Reclassification of loss into Aircraft rent | 0 | | | 0 | | | 0 | | | 1 | |
Income tax effect | Income tax effect | (1) | | | 0 | | | 5 | | | 3 | | Income tax effect | 0 | | | 1 | | | (2) | | | 6 | |
Total | Total | 2 | | | (4) | | | (18) | | | (12) | | Total | 1 | | | (1) | | | 7 | | | (20) | |
| Other Comprehensive Income (Loss) | 8 | | | 1 | | | 15 | | | 27 | | |
Other Comprehensive Income | | Other Comprehensive Income | 7 | | | 24 | | | 7 | | | 7 | |
| Comprehensive Income (Loss) | Comprehensive Income (Loss) | $ | (423) | | | $ | 323 | | | $ | (862) | | | $ | 615 | | Comprehensive Income (Loss) | $ | 404 | | | $ | (190) | | | $ | 273 | | | $ | (439) | |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total | | | | |
Balances at December 31, 2020 | 124.217 | | | $ | 1 | | | $ | 391 | | | $ | (674) | | | $ | (494) | | | $ | 3,764 | | | $ | 2,988 | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (131) | | | (131) | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 0 | | | — | | | 0 | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | | | |
CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.225 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
Balances at March 31, 2021 | 124.442 | | | $ | 1 | | | $ | 409 | | | $ | (674) | | | $ | (494) | | | $ | 3,633 | | | $ | 2,875 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 397 | | | 397 | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | 0.009 | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
CARES Act warrant issuance | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued for employee stock purchase plan | 0.716 | | | — | | | 23 | | | — | | | — | | | — | | | 23 | | | | | |
Stock issued under stock plans | 0.062 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | | | |
Balances at June 30, 2021 | 125.229 | | 1 | | 454 | | (674) | | | (487) | | | 4,030 | | | 3,324 | | | | | |
| (in millions) | (in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total | (in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total | |
Balances at December 31, 2019 | Balances at December 31, 2019 | 123.000 | | $ | 1 | | | $ | 305 | | | $ | (643) | | | $ | (465) | | | $ | 5,133 | | | $ | 4,331 | | Balances at December 31, 2019 | 123.000 | | | $ | 1 | | | $ | 305 | | | $ | (643) | | | $ | (465) | | | $ | 5,133 | | | $ | 4,331 | | |
| Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (232) | | | (232) | | Net loss | — | | | — | | | — | | | — | | | — | | | (232) | | | (232) | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (17) | | | — | | | (17) | | |
Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (17) | | | — | | | (17) | | |
Common stock repurchase | Common stock repurchase | (0.538) | | | — | | | 0 | | | (31) | | | — | | | — | | | (31) | | Common stock repurchase | (0.538) | | | — | | | — | | | (31) | | | — | | | — | | | (31) | | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 9 | | — | | | — | | | — | | | 9 | | Stock-based compensation | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | |
| Cash dividend declared ($0.375 per share) | Cash dividend declared ($0.375 per share) | — | | | — | | | — | | | — | | | — | | | (45) | | | (45) | | Cash dividend declared ($0.375 per share) | — | | | — | | | — | | | — | | | (45) | | | (45) | | |
| Stock issued under stock plans | Stock issued under stock plans | 0.123 | | — | | | 0 | | | — | | | — | | | — | | | 0 | | Stock issued under stock plans | 0.123 | | | — | | | — | | | — | | | — | | | — | | | 0 | | |
Balances at March 31, 2020 | 122.585 | | $ | 1 | | | $ | 314 | | | $ | (674) | | | $ | (482) | | | $ | 4,856 | | | $ | 4,015 | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | 122.585 | | | $ | 1 | | | $ | 314 | | | $ | (674) | | | $ | (482) | | | $ | 4,856 | | | $ | 4,015 | | |
Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (214) | | | (214) | | Net loss | — | | | — | | | — | | | — | | | — | | | (214) | | | (214) | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 24 | | | — | | | 24 | | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 24 | | | — | | | 24 | | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | 2 | | — | | | — | | | — | | | 2 | | Stock-based compensation | — | | | — | | | 2 | | | — | | | — | | | — | | | 2 | | |
CARES Act warrant issuance | CARES Act warrant issuance | — | | | — | | | 7 | | — | | | — | | | — | | | 7 | | CARES Act warrant issuance | — | | | — | | | 7 | | | — | | | — | | | — | | | 7 | | |
| Stock issued for employee stock purchase plan | Stock issued for employee stock purchase plan | 1.000 | | | — | | | 27 | | | — | | | — | | | — | | | 27 | | Stock issued for employee stock purchase plan | 1.000 | | | — | | | 27 | | | — | | | — | | | — | | | 27 | | |
Stock issued under stock plans | Stock issued under stock plans | 0.054 | | — | | | — | | | — | | | — | | | — | | | 0 | | Stock issued under stock plans | 0.054 | | | — | | | 0 | | | — | | | — | | | — | | | 0 | | |
Balances at June 30, 2020 | Balances at June 30, 2020 | 123.639 | | $ | 1 | | | $ | 350 | | | $ | (674) | | | $ | (458) | | | $ | 4,642 | | | $ | 3,861 | | Balances at June 30, 2020 | 123.639 | | | $ | 1 | | | $ | 350 | | | $ | (674) | | | $ | (458) | | | $ | 4,642 | | | $ | 3,861 | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (431) | | | (431) | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 8 | | — | | | 8 | | |
Stock-based compensation | — | | | — | | | 7 | | | — | | | 7 | | |
CARES Act warrant issuance | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | |
Stock issued under stock plans | 0.022 | | | — | | | — | | | — | | | — | | | — | | | 0 | | |
Balances at September 30, 2020 | 123.661 | | $ | 1 | | | $ | 366 | | | $ | (674) | | | $ | (450) | | | $ | 4,211 | | | $ | 3,454 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
Balances at December 31, 2018 | 123.194 | | | $ | 1 | | | $ | 232 | | | $ | (568) | | | $ | (448) | | | $ | 4,534 | | | $ | 3,751 | |
Cumulative effect of accounting changes(a) | — | | | — | | | — | | | — | | | 0 | | | 3 | | | 3 | |
Net income | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 15 | | | — | | | 15 | |
Common stock repurchase | (0.215) | | | — | | | 0 | | | (13) | | | — | | | — | | | (13) | |
Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | |
Cash dividend declared ($0.35 per share) | — | | | — | | | — | | | — | | | — | | | (43) | | | (43) | |
Stock issued for employee stock purchase plan | 0.391 | | | — | | | 20 | | | — | | | — | | | — | | | 20 | |
Stock issued under stock plans | 0.134 | | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
Balances at March 31, 2019 | 123.504 | | | $ | 1 | | | $ | 261 | | | $ | (581) | | | $ | (433) | | | $ | 4,498 | | | $ | 3,746 | |
Net income | — | | | — | | | — | | | — | | | — | | | 262 | | | 262 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 11 | | | — | | | 11 | |
Common stock repurchase | (0.194) | | | — | | | — | | | (12) | | | — | | | — | | | (12) | |
Stock-based compensation | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | |
Cash dividend declared ($0.35 per share) | — | | | — | | | — | | | — | | | — | | | (43) | | | (43) | |
Stock issued under stock plans | 0.028 | | | — | | | 0 | | | — | | | — | | | — | | | 0 | |
Balances at June 30, 2019 | 123.338 | | | $ | 1 | | | $ | 270 | | | $ | (593) | | | $ | (422) | | | $ | 4,717 | | | $ | 3,973 | |
Net income | — | | | — | | | — | | | — | | | — | | | 322 | | | 322 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Common stock repurchase | (0.465) | | | — | | | 0 | | | (28) | | | — | | | — | | | (28) | |
Stock-based compensation | — | | | — | | | 7 | | | — | | | — | | | — | | | 7 | |
Cash dividend declared ($0.35 per share) | — | | | — | | | — | | | — | | | — | | | (43) | | | (43) | |
Stock issued for employee stock purchase plan | 0.394 | | | — | | | 20 | | | — | | | — | | | — | | | 20 | |
Stock issued under stock plans | 0.011 | | | — | | | 0 | | | — | | | — | | | — | | | 0 | |
Balances at September 30, 2019 | 123.278 | | | $ | 1 | | | $ | 297 | | | $ | (621) | | | $ | (421) | | | $ | 4,996 | | | $ | 4,252 | |
(a)Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net income (Loss) | $ | (877) | | | $ | 588 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 320 | | | 317 | |
Stock-based compensation and other | 14 | | | 20 | |
Special items - impairment charges and other | 350 | | | 0 | |
Special items - restructuring charges | 322 | | | 0 | |
Payroll support program grant wage offset | (760) | | | 0 | |
Changes in certain assets and liabilities: | | | |
Payroll support program grant funding | 753 | | | 0 | |
Changes in deferred tax provision | (220) | | | 187 | |
Increase in air traffic liability | 171 | | | 244 | |
Increase in deferred revenue | 193 | | | 97 | |
Pension contribution | 0 | | | (65) | |
Other - net | (150) | | | (7) | |
Net cash provided by operating activities | 116 | | | 1,381 | |
Cash flows used in investing activities: | | | |
Property and equipment additions: | | | |
Aircraft and aircraft purchase deposits | (61) | | | (286) | |
Other flight equipment | (49) | | | (125) | |
Other property and equipment | (94) | | | (116) | |
Total property and equipment additions, including capitalized interest | (204) | | | (527) | |
Purchases of marketable securities | (2,092) | | | (1,446) | |
Sales and maturities of marketable securities | 1,520 | | | 1,228 | |
Other investing activities | 9 | | | 37 | |
Net cash used in investing activities | (767) | | | (708) | |
Cash flows from financing activities: | | | |
Proceeds from issuance of debt | 2,581 | | | 356 | |
Common stock repurchases | (31) | | | (752) | |
Dividends paid | (45) | | | (53) | |
Long-term debt payments | (238) | | | (129) | |
Other financing activities | 19 | | | 40 | |
Net cash provided by (used in) financing activities | 2,286 | | | (538) | |
Net increase in cash, cash equivalents, and restricted cash | 1,635 | | | 135 | |
Cash, cash equivalents, and restricted cash at beginning of year | 232 | | | 114 | |
Cash, cash equivalents, and restricted cash at end of the period | $ | 1,867 | | | $ | 249 | |
| | | |
Cash paid during the period for: | | | |
Interest (net of amount capitalized) | $ | 38 | | | $ | 48 | |
Income taxes | 0 | | | 2 | |
| | | |
Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | | |
Cash and cash equivalents | $ | 1,855 | | | $ | 237 | |
Restricted cash included in Prepaid expenses, assets held-for-sale and other current assets | 12 | | | 12 | |
Total cash, cash equivalents, and restricted cash at end of the period | $ | 1,867 | | | $ | 249 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net Income (Loss) | $ | 266 | | | $ | (446) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 195 | | | 215 | |
Stock-based compensation and other | 24 | | | 7 | |
Special items - impairment charges and other | 14 | | | 229 | |
Special items - restructuring charges | (12) | | | 0 | |
Changes in certain assets and liabilities: | | | |
Changes in deferred tax provision | 33 | | | (98) | |
Increase in air traffic liability | 460 | | | 231 | |
Increase in deferred revenue | 69 | | | 84 | |
Other - net | (42) | | | 99 | |
Net cash provided by operating activities | 1,007 | | | 321 | |
Cash flows from investing activities: | | | |
Property and equipment additions: | | | |
Aircraft and aircraft purchase deposits | (30) | | | (58) | |
Other flight equipment | (38) | | | (43) | |
Other property and equipment | (34) | | | (67) | |
Total property and equipment additions, including capitalized interest | (102) | | | (168) | |
Purchases of marketable securities | (2,524) | | | (1,004) | |
Sales and maturities of marketable securities | 1,561 | | | 1,038 | |
Other investing activities | (5) | | | 10 | |
Net cash used in investing activities | (1,070) | | | (124) | |
Cash flows from financing activities: | | | |
Proceeds from issuance of debt | 363 | | | 1,265 | |
Common stock repurchases | 0 | | | (31) | |
Dividends paid | 0 | | | (45) | |
Long-term debt payments | (681) | | | (125) | |
Other financing activities | 37 | | | 27 | |
Net cash provided by (used in) financing activities | (281) | | | 1,091 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (344) | | | 1,288 | |
Cash, cash equivalents, and restricted cash at beginning of period | 1,386 | | | 232 | |
Cash, cash equivalents, and restricted cash at end of the period | $ | 1,042 | | | $ | 1,520 | |
| | | |
Cash paid during the period for: | | | |
Interest (net of amount capitalized) | $ | 61 | | | $ | 25 | |
Income taxes | 0 | | | 0 | |
| | | |
Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | | |
Cash and cash equivalents | $ | 1,025 | | | $ | 1,509 | |
Restricted cash included in Prepaid expenses, assets held-for-sale, and other current assets | 17 | | | 11 | |
Total cash, cash equivalents, and restricted cash at end of the period | $ | 1,042 | | | $ | 1,520 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2019.2020. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of SeptemberJune 30, 20202021 and the results of operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. Such adjustments were of a normal recurring nature.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the novel coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of operating results for the entire year.
Recently Adopted Accounting Pronouncement
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an "expected credit loss model" on certain financial instruments. The ASU also amends the impairment model for available-for-sale debt securities, and requires the estimation of credit losses to be recorded as allowances instead of reductions to amortized cost. The ASU was effective for the Company beginning January 1, 2020, and was adopted prospectively, but it did not have a significant impact on the Company's financial statements and disclosures.
NOTE 2. COVID-19 PANDEMIC
The public health and economic crisescrisis resulting from the outbreak of COVID-19 beginning in the first quarter of 2020 has had an unprecedentedcontinues to have a significant impact on the Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result, the Company has experienced several months of modest improvement in demand, traffic remains well below 2019 levels. It is uncertain when the impacts of the crisis may resolve and when demand may returncontinues to normal levels.fly less capacity than it had pre-pandemic.
In response to the COVID-19 pandemic,Beginning in 2020, the Company implemented a "Peace-of-Mind" waiver, which allows travelersvarious cost-saving initiatives, including permanently parking aircraft, restructuring the workforce through early-out and incentive leave programs, and obtaining funding available under programs offered by the U.S. Department of the Treasury (the Treasury). As demand has improved and the business has grown back towards pre-pandemic flying levels, these programs have been adjusted to book ticketsmeet the needs of the airline. The impacts of these programs for travel for a specified period of time that can be changed or canceled without incurring change fees. In the third quarter, the waiver was extended to cover all ticketed travel purchased through December 31, 2020,three and beginning insix months ended June 30, 2021 all change fees will be eliminated for first class and main cabin fares. Cancellations and postponement of travel exceeded new bookings in March and April, and had a material impact on second and third quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.are described below.
Lease Return Costs
The Company has taken decisive actionremoved 40 leased Aircraft from operating service in 2020, and recorded an estimate of the expected future lease return costs for the aircraft. Lease return costs include the write off of associated maintenance deposits, as the Company no longer expects to reduce costs and preserve cash and liquidity.perform maintenance events covered by those deposits. The total net charge recorded in 2020 for aircraft that were parked amounted to $209 million. In the first quarter of 2021, the Company implemented a company-wide hiring freeze,recorded an additional $18 million in incremental costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor, which was classified as Special items - impairment charges and other on the condensed consolidated statements of operations. In the second quarter, expected costs to return leased aircraft was reduced salariesby $4 million. The lease return cost estimates are based on the Company's best estimate of senior management and hours for management employees, suspended annual pay increases and solicited voluntary leavescosts to return aircraft as of absence. the date of this filing.
In addition to these payroll saving measures,the second quarter of 2021, the Company initiated a plan to reactivate up to twelve previously parked Airbus aircraft to support the Company's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. These reactivations create flexibility as management seeks to return capacity, mitigating against both staffing and supply chain risks that could constrain Alaska or Horizon's available capacity. Management's plans to return to 100% of pre-pandemic levels by no later than summer 2022 are consistent with previous plans, but some recovery has actively negotiated with vendor partnersbeen accelerated into the second half of 2021 in response to reduce contractual minimums and spendingthe strong demand recovery that took place in line with the reductionsecond quarter.The first of these reactivated aircraft are expected to reenter revenue service beginning in demand. In the third quarter management madeof 2021, with all reactivated by the difficult decision to reducesecond quarter of 2022. The Company currently anticipates these aircraft will be removed from operating service beginning in late 2022 through the Company's workforce through voluntary and involuntary leaves.
end
With demand dramatically depressed,of 2023. At this time, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from service. As of September 30, 2020, 64 mainline aircraft were temporarily grounded. The Company made the decision in the first quarter of 2020does not anticipate material changes to permanently remove 12 Airbus aircraft from the operating fleet. In the third quarter of 2020, an additional 8 Airbus aircraft were permanently removed from the operating fleet. As of September 30, 2020, all operating regional aircraft were in service.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount of an asset or asset group may not be recoverable.
To determine if impairment exists, a recoverability test is performed comparing the sum of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.
Given the temporary and permanent parking of certain aircraft described above, the Company performed impairment tests on certain long-lived assets in each of the quarters of 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in the first and third quarters of 2020.
In the first quarter, the Company recorded an impairment charge of $83 million for the 12 permanently parked Airbus aircraft, which was comprised of operating lease right of use assets, estimable return costs and related leasehold improvements. In the second quarter, the Company identified additional estimable return costs relating to those permanently parked aircraft, andpreviously recorded, an additional $70 million charge.
Also in the first quarter, the Company recorded an impairment charge of $58 million reflecting the amount for which carrying value exceeded fair value of the Q400 fleet. The Company also recorded additional impairment charges relating to 2 non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.
In the third quarter, the Company determined that ten owned Airbus A320 aircraft were impaired, as those aircraft have been specifically identified for retirement prior to the end of their expected useful lives. The Company decided to permanently park eight of these aircraft as of September 30, 2020. As such, the Company recorded an impairment charge of $121 million, representing the amount by which carrying value exceeded fair value for the aircraft and related capital improvements and spare parts inventory. The adjusted net book value of $219 million for the 8 aircraft that have been permanently parked and the 2 Q400 aircraft mentioned above has been transferred to held-for-sale assets in Other current assets on the condensed consolidated balance sheet.
A summary of the impairment charges recordedleases for aircraft and other flight equipment for the nine months ended September 30, 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Airbus Aircraft | | Q400 Aircraft | | Total Impairment |
Aircraft and other flight equipment, net | | $ | 132 | | | $ | 58 | | | $ | 190 | |
Operating lease assets | | 62 | | | 0 | | | 62 | |
Inventory and supplies - net | | 2 | | | 0 | | | 2 | |
Prepaid expenses and other current assets | | 0 | | | 3 | | | 3 | |
Other accrued liabilities | | 78 | | | 0 | | | 78 | |
Total impairment charges - Long-lived assets | | $ | 274 | | | $ | 61 | | | $ | 335 | |
The Company will continuereturning to evaluate the need for further impairment of long-lived assets as expectations of future demand, market conditions and fleet decisions evolve.
Valuation of intangible assets and goodwill
The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.
Given the strain in the general economic environment andservice generally expire within a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types at the end of each quarter in 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $10 million was recorded in the first quarter. No additional impairment charges were identified for definite-lived intangibles as a result of the second and third quarter impairment tests.near term window.
Workforce restructuring
The Company expectscontinues to expect that demand will remain depressed intobe below pre-pandemic levels through the end of 2021, and expectsbut management will continue rebuilding capacity to rebuild capacity levels to approximately 80% by summer 2021. Accordingly, the2019 levels. The Company reduced its workforce in the third quarter of 2020 to better align with the expected size of the business. To mitigate the need for involuntary furloughs, various early-out and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs, over 600 employees took permanent early-outs and over 3,300 employees took voluntary or incentive leaves. As of June 30, 2021, approximately 1,800 employees remain on a result of the participation in these mitigation programs, the involuntary furloughs that became effective October 1, 2020 were limited to approximately 400 employees.voluntary leave program. The Company recalled approximately 220 flight attendantsexpects all employees on November 1, 2020. In additionleave to these furloughs, the Company permanently eliminated approximately 300 non-union management positions.return to work by October 2021.
AsIn 2020, as a result of these programs, the Company recorded expense of $322$220 million to Special items - restructuring charges in the condensed consolidated statement of operations in the third quarter of 2020. The charge is primarily comprised of wageswage expense for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. In the first quarter of 2021, the Company refined capacity expectations and training schedules, and delayed certain recalls to a future period beyond what was anticipated in the accrual at December 31, 2020, resulting in additional expense of $11 million. In the second quarter, demand improved at an accelerated pace, and the Company issued recall notices to all pilots on incentive leave for return-to-work by October 2021. As a result, $23 million of incentive leave accrual was reversed and recognized as a benefit within Special items - restructuring charges in the condensed consolidated statements of operations during the three months ended June 30, 2021. In total, the Company has recorded a net benefit from these adjustments of $12 million during the six months ended June 30, 2021.
Other considerationsThe table below presents a roll forward of the outstanding voluntary leave liability (in millions): | | | | | | | | |
| | Six Months Ended June 30, 2021 |
Total voluntary leave liability balance at January 1 | | $ | 127 | |
Cash payments | | (79) | |
Charges and adjustments | | (12) | |
Total voluntary leave liability balance at June 30 | | $ | 36 | |
The Company evaluated outstanding receivable balancesaccrual is based on the Company's best estimate of capacity expectations and training schedules for risk2021, as of non-payment.the date of this filing. The Company identified a $5 million receivable from a vendor that filed for bankruptcy duringwill make the first quarter.majority of the remaining cash payments associated with this liability in 2021. The Company expects to file a bankruptcy claim but, as the notebalance is unsecured, management determined that collectability is not probable. Therefore, the full $5 million was reservedreflected in accrued wages, benefits and charged to Special items - impairment charges and other inpayroll taxes on the condensed consolidated statement of operations in the first quarter.
For the three and nine months ended September 30, 2020, the Company concluded that the use of a year-to-date effective tax rate estimate was more appropriate than the annual effective tax rate method as estimates of the Company's full-year tax loss are not reliable at this time given the uncertainty of the travel demand environment.
Although it is not certain when the impacts of COVID-19 will subside and demand for air travel will return, the Company has implemented meaningful plans to reduce expenses, build liquidity and preserve cash. At September 30, 2020, given the balance of cash, cash equivalents and marketable securities, as well as anticipated access to liquidity and cash flows from future operations, the Company expects it will meet all cash obligations, as well as remain in compliance with the financial debt covenants in its existing financing arrangements, for the next 12 months. Refer to Note 5. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.sheet.
CARES Act Funding
During the secondfirst quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the U.S. DepartmentTreasury through an extension of the Treasury (the Treasury) through the payroll support programPayroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act.Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the PSP and associatedsupporting agreements, Alaska and Horizon received $992total funds of approximately $539 million in the first quarter of 2021. In April 2021, Alaska and Horizon received an additional $80 million in funds made available under PSP 2.
Also in April 2021, Alaska, Horizon and McGee finalized additional agreements with the Treasury under a third round of the PSP, made available under the American Rescue Plan Act of 2021 (PSP 3). Under PSP 3 and the supporting agreements, Alaska, Horizon, and McGee received total funds of $585 million in the second quarter. In the third quarter of 2020, Alaska and Horizon were informed by the Treasury of $29 million in additional funds available under the PSP. Similarly, McGee entered into an agreement to receive a total of $30 million, which was received in three installments in the second and third quarters.2021.
Total funds of approximately $1.1 billion are to be used exclusively toward continuing to pay employee salaries, wages and benefits. Upon receipt ofOf the funds,amounts received during the Company is subject to various conditions, including, but not limited to, refraining from conducting involuntary furloughs or reducing employee rates of pay through September 30, 2020 and placing limits on executive compensation. Other conditions also prohibit the Company from repurchasing common stock and from paying dividends until Septembersix months ended June 30, 2021, and required the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation through September 30, 2020.
The funds received took the form of debt, warrants and a grant. The$311 million represented unsecured debt portion of $290 millionand was recorded at par, and $16 million represented warrants of $8 millionrecorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance sheet at fair value determined using the Black-Scholes model.sheet. The residual amount of $753remaining $892 million was recorded as grant proceeds. These amounts are inclusive of additional funding of $8 million made available to McGee under the first installment of the PSP program (PSP 1). The grant will be recognized into earningsis recorded as eligiblean offset to wages, salaries and benefits as eligible expenses are incurred. During the three and ninesix months ended SeptemberJune 30, 2020,2021, the Company recognized $398 million and $760$914 million of the PSP grant proceeds as a wage offset. Included within the third quarter total offsetthis $914 million is approximately $17$21 million infor employee retention credits for employer taxes, as stipulatedprovided for in the CARES Act. The Company expectsdoes not expect to record anany additional $10 million in wage offset in the fourth quarter.2021.
In the third quarter of 2020, the Company reached an agreement with
Total funds contracted from the Treasury to participate inunder the CARES Act loan program. The loan agreement providesthree Payroll Support Programs are allocated as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Grants | | Loans | | Warrants | | Total Proceeds |
PSP 1 | $ | 757 | | | $ | 293 | | | $ | 9 | | | $ | 1,059 | |
PSP 2 | 457 | | | 160 | | | 9 | | | 626 | |
PSP 3 | 431 | | | 147 | | | 7 | | | 585 | |
Total | $ | 1,645 | | | $ | 600 | | | $ | 25 | | | $ | 2,270 | |
Funds are exclusively used for a secured term loan facility, which allows Alaska to borrow up to $1.3 billion. In October 2020, the amountpayment of employee salaries, wages and benefits. Upon receipt of the loan available was increasedfunds issued under PSP 3, certain conditions and restrictions were extended. These conditions include, but are not limited to, $1.9 billion. Inrefraining from conducting involuntary furloughs or reducing employee pay rates through September 30, 2021 and placing limits on executive compensation and severance through April 1, 2023. Alaska Air Group also agreed to continue the Company borrowed $135 million under the loan facility. Refer to Note 5. Long-Term Debtsuspension of dividends and Note 8. Shareholders' Equity for further details regarding terms of the CARES loan agreement.share repurchases until September 30, 2022.
NOTE 3. REVENUE
Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. In the third quarter of 2020, the Company announced beginning on January 1, 2021 it would no longer collecteliminated ticket change fees indefinitely from those guests traveling onits main cabin orand first class fares. Mileage Plan other revenue includes brand and marketing revenue from the Company'sour co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
The Company disaggregates revenue by segment in Note 9. The detailslevel of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Passenger ticket revenue, including ticket breakage and net of taxes and fees | $ | 459 | | | $ | 1,868 | | | $ | 1,894 | | | $ | 5,099 | |
Passenger ancillary revenue | 49 | | | 157 | | | 196 | | | 428 | |
Mileage Plan passenger revenue | 64 | | | 186 | | | 272 | | | 511 | |
Total Passenger revenue | $ | 572 | | | $ | 2,211 | | | $ | 2,362 | | | $ | 6,038 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Passenger ticket revenue, including ticket breakage and net of taxes and fees | $ | 1,114 | | | $ | 222 | | | $ | 1,639 | | | $ | 1,435 | |
Passenger ancillary revenue | 84 | | | 31 | | | 134 | | | 147 | |
Mileage Plan passenger revenue | 154 | | | 56 | | | 238 | | | 208 | |
Total Passenger revenue | $ | 1,352 | | | $ | 309 | | | $ | 2,011 | | | $ | 1,790 | |
Mileage Plan™ Loyalty Program
Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Passenger revenue | $ | 64 | | | $ | 186 | | | $ | 272 | | | $ | 511 | |
Mileage Plan other revenue | 84 | | | 118 | | | 266 | | | 346 | |
Total Mileage Plan revenue | $ | 148 | | | $ | 304 | | | $ | 538 | | | $ | 857 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Passenger revenue | $ | 154 | | | $ | 56 | | | $ | 238 | | | $ | 208 | |
Mileage Plan other revenue | 118 | | | 73 | | | 212 | | | 182 | |
Total Mileage Plan revenue | $ | 272 | | | $ | 129 | | | $ | 450 | | | $ | 390 | |
Cargo and Other
Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cargo revenue | $ | 31 | | | $ | 36 | | | $ | 83 | | | $ | 104 | |
Other revenue | 14 | | | 24 | | | 47 | | | 65 | |
Total Cargo and other revenue | $ | 45 | | | $ | 60 | | | $ | 130 | | | $ | 169 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Cargo revenue | $ | 34 | | | $ | 28 | | | $ | 61 | | | $ | 52 | |
Other revenue | 23 | | | 11 | | | 40 | | | 33 | |
Total Cargo and other revenue | $ | 57 | | | $ | 39 | | | $ | 101 | | | $ | 85 | |
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $36 million$484 million and $582 millionnet refunds from the prior year-end air traffic liability balance for the ninethree months ended SeptemberJune 30, 2021 and 2020, and 2019.$175 million and $484 million for the six months ended June 30, 2021 and 2020.
Given the reductionincrease in demand for air travel stemmingfrom the recovery from the COVID-19 pandemic, advance bookings and associated cash receipts have been significantly depressed.increased in relation to prior year. The Company also experienced elevated cancellations beginning in March 2020,increased revenue recognition from credits redeemed for travel, for which led to cash refunds or the issuance of credits for future travel. Since March, the Company has issued cash refunds of approximately $475 million and credits for future travel of $850 million. At September 30, 2020, such credits, which areremaining balance is included in the air traffic liability balance, totaled $617and total $387 million, net of breakage. In April 2020,2021, the Company announced updated expiration terms for these credits, extending to July 2021. At this time, the Company is unable to estimate how and when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demandDecember 31, 2021 for air travel.possible travel through November 30, 2022.
Mileage PlanTM assets and liabilities
The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $45$61 million of such receivables as of SeptemberJune 30, 20202021 and $105$48 million as of December 31, 2019. Consistent with the significant cancellation activity outlined above, the Company experienced incremental redeposits in the third quarter. Given the uncertainty around the return in2020. As demand for air travel continues to increase unpredictably, the Company is unable to determine how and whentiming of recognition of mileage credits will be recognized in earnings.may differ from current assumptions.
The table below presents a roll forward of the total frequent flyer liability (in millions):
| | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | | | 2020 | | 2019 |
Total Deferred Revenue balance at January 1 | | | | | $ | 1,990 | | | $ | 1,874 | |
Travel miles and companion certificate redemption - Passenger revenue | | | | | (272) | | | (511) | |
Miles redeemed on partner airlines - Other revenue | | | | | (21) | | | (84) | |
Increase in liability for mileage credits issued | | | | | 486 | | | 692 | |
Total Deferred Revenue balance at Sept 30 | | | | | $ | 2,183 | | | $ | 1,971 | |
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | | | 2021 | | 2020 |
Total Deferred Revenue balance at January 1 | | | | | $ | 2,277 | | | $ | 1,990 | |
Travel miles and companion certificate redemption - Passenger revenue | | | | | (238) | | | (208) | |
Miles redeemed on partner airlines - Other revenue | | | | | (17) | | | (21) | |
Increase in liability for mileage credits issued | | | | | 324 | | | 313 | |
Total Deferred Revenue balance at June 30 | | | | | $ | 2,346 | | | $ | 2,074 | |
NOTE 4. FAIR VALUE MEASUREMENTS
In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.
Fair Value of Financial Instruments on a Recurring Basis
As of SeptemberJune 30, 2020,2021, total cost basis for all marketable securities was $1.9$2.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.
Fair values of financial instruments on the condensed consolidated balance sheet (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | | | | | | | | | | |
Assets | | | | | | | | | | | |
Marketable securities | | | | | | | | | | | |
U.S. government and agency securities | $ | 479 | | | $ | 0 | | | $ | 479 | | | $ | 330 | | | $ | 0 | | | $ | 330 | |
Equity mutual funds | 6 | | | 0 | | | 6 | | | 6 | | | 0 | | | 6 | |
Foreign government bonds | 0 | | | 20 | | | 20 | | | 0 | | | 31 | | | 31 | |
Asset-backed securities | 0 | | | 232 | | | 232 | | | 0 | | | 211 | | | 211 | |
Mortgage-backed securities | 0 | | | 262 | | | 262 | | | 0 | | | 176 | | | 176 | |
Corporate notes and bonds | 0 | | | 859 | | | 859 | | | 0 | | | 523 | | | 523 | |
Municipal securities | 0 | | | 46 | | | 46 | | | 0 | | | 23 | | | 23 | |
Total Marketable securities | 485 | | | 1,419 | | | 1,904 | | | 336 | | | 964 | | | 1,300 | |
Derivative instruments | | | | | | | | | | | |
Fuel hedge—call options | 0 | | | 7 | | | 7 | | | 0 | | | 11 | | | 11 | |
Interest rate swap agreements | 0 | | | 0 | | | 0 | | | 0 | | | 3 | | | 3 | |
Total Assets | $ | 485 | | | $ | 1,426 | | | $ | 1,911 | | | $ | 336 | | | $ | 978 | | | $ | 1,314 | |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Derivative instruments | | | | | | | | | | | |
| | | | | | | | | | | |
Interest rate swap agreements | 0 | | | (29) | | | (29) | | | 0 | | | (10) | | | (10) | |
Total Liabilities | $ | 0 | | | $ | (29) | | | $ | (29) | | | $ | 0 | | | $ | (10) | | | $ | (10) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | | | | | | | | | | |
Assets | | | | | | | | | | | |
Marketable securities | | | | | | | | | | | |
U.S. government and agency securities | $ | 298 | | | $ | 0 | | | $ | 298 | | | $ | 407 | | | $ | 0 | | | $ | 407 | |
Equity mutual funds | 5 | | | 0 | | | 5 | | | 7 | | | 0 | | | 7 | |
Foreign government bonds | 0 | | | 31 | | | 31 | | | 0 | | | 20 | | | 20 | |
Asset-backed securities | 0 | | | 330 | | | 330 | | | 0 | | | 224 | | | 224 | |
Mortgage-backed securities | 0 | | | 253 | | | 253 | | | 0 | | | 290 | | | 290 | |
Corporate notes and bonds | 0 | | | 1,943 | | | 1,943 | | | 0 | | | 978 | | | 978 | |
Municipal securities | 0 | | | 66 | | | 66 | | | 0 | | | 50 | | | 50 | |
Total Marketable securities | 303 | | | 2,623 | | | 2,926 | | | 414 | | | 1,562 | | | 1,976 | |
Derivative instruments | | | | | | | | | | | |
Fuel hedge - call options | 0 | | | 92 | | | 92 | | | 0 | | | 15 | | | 15 | |
| | | | | | | | | | | |
Total Assets | $ | 303 | | | $ | 2,715 | | | $ | 3,018 | | | $ | 414 | | | $ | 1,577 | | | $ | 1,991 | |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Derivative instruments | | | | | | | | | | | |
| | | | | | | | | | | |
Interest rate swap agreements | 0 | | | (16) | | | (16) | | | 0 | | | (25) | | | (25) | |
Total Liabilities | $ | 0 | | | $ | (16) | | | $ | (16) | | | $ | 0 | | | $ | (25) | | | $ | (25) | |
The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts isare determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available information as of SeptemberJune 30, 2020.2021.
Maturities for marketable securities (in millions):
| | | | | | | | | | | |
September 30, 2020 | Cost Basis | | Fair Value |
Due in one year or less | $ | 702 | | | $ | 704 | |
Due after one year through five years | 1,108 | | | 1,139 | |
Due after five years through 10 years | 54 | | | 55 | |
| | | |
Total | $ | 1,864 | | | $ | 1,898 | |
| | | | | | | | | | | |
June 30, 2021 | Cost Basis | | Fair Value |
Due in one year or less | $ | 1,538 | | | $ | 1,539 | |
Due after one year through five years | 1,280 | | | 1,294 | |
Due after five years through 10 years | 88 | | | 88 | |
| | | |
Total | $ | 2,906 | | | $ | 2,921 | |
Fair Value of Other Financial Instruments
The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash, Cash Equivalents, and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.
The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.
Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of SeptemberJune 30, 2020,2021, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate debt is Level 2, except for $732as it is estimated using observable inputs, while the estimated fair value of $780 million whichof other fixed-rate debt, including PSP notes payable, is classified as Level 3, as certain inputs used are unobservable.it is not actively traded and is valued using discounted cash flows which is an unobservable input.
Fixed-rate debt on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Fixed-rate debt at cost | $ | 1,889 | | | $ | 473 | |
Non-recurring purchase price accounting fair value adjustment | 2 | | | 2 | |
Total fixed-rate debt | $ | 1,891 | | | $ | 475 | |
| | | |
Estimated fair value | $ | 1,960 | | | $ | 483 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| | | |
| | | |
Total fixed-rate debt | $ | 1,896 | | | $ | 1,662 | |
| | | |
Estimated fair value | $ | 2,019 | | | $ | 1,778 | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded during the three and nine months ended September 30, 2020. No material impairment chargesimpairments were recorded during the three and ninesix months ended SeptemberJune 30, 2019.2021.
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheet (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Fixed-rate notes payable due through 2029 | $ | 427 | | | $ | 475 | |
Fixed-rate PSP notes payable due through 2030 | 290 | | | 0 | |
Fixed-rate EETC payable due through 2025 & 2027 | 1,174 | | | 0 | |
Variable-rate notes payable due through 2029 | 1,966 | | | 1,032 | |
Less debt issuance costs and unamortized debt discount | (35) | | | (8) | |
Total debt | 3,822 | | | 1,499 | |
Less current portion | 1,150 | | | 235 | |
Long-term debt, less current portion | $ | 2,672 | | | $ | 1,264 | |
| | | |
Weighted-average fixed-interest rate | 4.3 | % | | 3.3 | % |
Weighted-average variable-interest rate | 1.9 | % | | 2.9 | % |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Fixed-rate notes payable due through 2029 | $ | 180 | | | $ | 198 | |
Fixed-rate PSP notes payable due through 2031 | 600 | | | 290 | |
Fixed-rate EETC payable due through 2025 & 2027 | 1,116 | | | 1,174 | |
Variable-rate notes payable due through 2029 | 1,315 | | | 1,866 | |
Less debt issuance costs and unamortized debt discount | (23) | | | (33) | |
Total debt | 3,188 | | | 3,495 | |
Less current portion | 869 | | | 1,138 | |
Long-term debt, less current portion | $ | 2,319 | | | $ | 2,357 | |
| | | |
Weighted-average fixed-interest rate | 3.7 | % | | 4.3 | % |
Weighted-average variable-interest rate | 1.6 | % | | 1.9 | % |
Approximately $642$562 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at SeptemberJune 30, 2020.2021, resulting in an effective weighted-average interest rate for the full debt portfolio of 3.1%.
During the ninesix months ended SeptemberJune 30, 2020,2021, the Company obtained proceeds from issuanceissued $363 million of debt, of $2.6 billion from multiple lenders and sources. New proceeds are comprised of $1.2 billion in Enhanced Equipment Trust Certificates (EETC), $589$311 million from secured debt financing backed by a total of 32 aircraft, $290 million in an unsecured loanloans from the PSP and $135$54 million from the CARES Act loan program. Also included in proceeds from issuance of debt is $400 million drawn on existing lines of credit. Details around these issuances are more fully described below. Issuances of debt aredebt. Debt proceeds were offset by $238$681 million in debt payments.
Inpayments. Included within total debt payments is the third quarterfull repayment of 2020, the Company obtained $1.2 billion in private funding through$135 million loan from the issuance of Enhanced Equipment Trust Certificates (EETC). The EETC are collateralized by 42 Boeing 737 aircraftU.S. Treasury made available under the CARES Act and 19 Embraer E175 aircraft. Principal and interest payments are due semiannually, beginningthe $363 million outstanding balance on February 15, 2021.two credit facilities.
The $290$600 million PSP note is annotes are unsecured senior term loanloans with a 10-year term, bearing an interest rate of 1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The loan isPSP notes are prepayable at par at any time. Alaska and Horizon PSP proceeds were deposited into an account which will be drawn down over time for payroll expenses. That account and the balance of the proceeds will serve as the only collateral for the loan.without penalty.
CARES Act Loan Program
In the third quarter of 2020, the Company finalized an agreement with the Treasury to obtain up to $1.3$1.9 billion via a secured term loan facility. In October 2020, the Company was informed by the Treasury that the total loan available would increase to $1.9 billion. Following the October upsize, obligations of the CompanyObligations under the loan agreement arewere secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 3430 aircraft and 15 spare engines.
As of September 30, In 2020, the Company has drawndrew $135 million available under the agreement, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021, after a required initial draw of 10%. All proceeds drawn must bewhich was used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act.
The full balance was repaid in the second quarter of 2021. In conjunctionaccordance with the initial draw,related agreement, the Company grantedfacility terminated at the Treasury 427,080 warrants to purchase ALK common stock at a strike pricetime of $31.61. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in stockholders' equity, with an offsetting debt discount to the CARES Loan issuance.payment.
Debt Maturity
At SeptemberJune 30, 20202021 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
| | | | | |
| Total |
Remainder of 2020 | $ | 73 | |
2021 | 1,201 | |
2022 | 393 | |
2023 | 357 | |
2024 | 265 | |
Thereafter | 1,568 | |
Total | $ | 3,857 | |
| | | | | |
| Total |
Remainder of 2021 | $ | 227 | |
2022 | 796 | |
2023 | 334 | |
2024 | 240 | |
2025 | 261 | |
Thereafter | 1,353 | |
Total | $ | 3,211 | |
Bank Lines of Credit
The Company has 3 credit facilities with availability totaling $461$486 million as of SeptemberJune 30, 2020. All 32021, resulting from the second quarter 2021 repayment of $363 million. One of the credit facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. A second credit facility, which was renegotiated in September 2020, resulting in decreased capacity from $150 million to $120 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The second credit facility for $250 million expires in June 2024 and is secured by aircraft. These two facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $91$86 million expires in June 2021, with a mechanism for annual renewal,2022 and is secured by aircraft.
During the nine months ended September 30, 2020, the Company drew $400 million on the first 2 existing facilities, of which a total of $37 million has since been repaid. The Company has an outstanding balance of $363 million from the first two facilities, and the outstanding balance is classified as short-term on the condensed consolidated balance sheet. The Company also has secured letters of credit against the $91 million facility.third facility, but has no plans to borrow using either of the other two facilities. All 3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at SeptemberJune 30, 2020.2021.
NOTE 6. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 11 | | | $ | 11 | | | $ | 37 | | | $ | 32 | |
Pension expense included in Wages and benefits | 11 | | | 11 | | | 37 | | | 32 | |
| | | | | | | |
Interest cost | 19 | | | 23 | | | 57 | | | 67 | |
Expected return on assets | (28) | | | (24) | | | (83) | | | (71) | |
Amortization of prior service cost (credit) | (1) | | | (1) | | | (1) | | | (1) | |
Recognized actuarial loss | 9 | | | 9 | | | 26 | | | 27 | |
Pension expense included in Nonoperating Income (Expense) | $ | (1) | | | $ | 7 | | | $ | (1) | | | $ | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 13 | | | $ | 13 | | | $ | 26 | | | $ | 26 | |
Pension expense included in Wages and benefits | 13 | | | 13 | | | 26 | | | 26 | |
| | | | | | | |
Interest cost | 14 | | | 19 | | | 28 | | | 38 | |
Expected return on assets | (30) | | | (27) | | | (61) | | | (55) | |
| | | | | | | |
Recognized actuarial loss | 9 | | | 8 | | | 18 | | | 17 | |
Pension expense included in Nonoperating Income (Expense) | $ | (7) | | | $ | 0 | | | $ | (15) | | | $ | 0 | |
In the third quarter of 2020, the Company also recorded $16 million of pension expense within Special items - restructuring charges for those pilots accepting certain furlough mitigation programs, which is not reflected in the table above.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of SeptemberJune 30, 20202021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | Aircraft Maintenance Deposits |
Remainder of 2020 | | | | | | | | | $ | 343 | | | $ | 36 | | | $ | 7 | |
2021 | | | | | | | | | 549 | | | 166 | | | 35 | |
2022 | | | | | | | | | 333 | | | 174 | | | 45 | |
2023 | | | | | | | | | 192 | | | 179 | | | 24 | |
2024 | | | | | | | | | 21 | | | 184 | | | 6 | |
Thereafter | | | | | | | | | 25 | | | 880 | | | 2 | |
Total | | | | | | | | | $ | 1,463 | | | $ | 1,619 | | | $ | 119 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | |
Remainder of 2021 | | | | | | | | | $ | 107 | | | $ | 82 | | | |
2022 | | | | | | | | | 1,458 | | | 173 | | | |
2023 | | | | | | | | | 1,207 | | | 178 | | | |
2024 | | | | | | | | | 291 | | | 183 | | | |
2025 | | | | | | | | | 76 | | | 188 | | | |
Thereafter | | | | | | | | | 12 | | | 877 | | | |
Total | | | | | | | | | $ | 3,151 | | | $ | 1,681 | | | |
(a)Includes non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.
During the nine months ended September 30, 2020 the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations and rates. The impact of those negotiations on our leases was not material to the operating lease liability. The Company has also deferred the payment of remaining 2020 contractual aircraft commitments, including those related to the B737 MAX9, to periods beyond 2020.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of SeptemberJune 30, 2020,2021, Alaska had commitments to purchase 32 B737 MAX963 B737-9 MAX aircraft, with contracted deliveries between 20202021 and 2023. As a result of the grounding order mandated by the FAA on March 13, 2019, the delivery schedule for these MAX aircraft is subject to change.2024. Future minimum contractual payments for these aircraft have been updated to reflect the possibleexpected delivery timing, but are also subject to change. Horizon also has commitments to purchase 312 E175 aircraft with deliveries in 2023.between 2022 and 2025. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2026.2027. In addition, Alaska has options to purchase 37 B73739 B737-9 MAX aircraft, and Horizon has options to purchase 3021 E175 aircraft. Alaska also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries in 2022.
The cancelable purchase commitments and option payments are not reflected in the table above. Given the COVID-19 pandemic, the Company is in discussion with aircraft manufacturers regarding these purchase commitments and delivery timelines.
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
This forward-looking statement is based on management's current understanding of the relevant laws and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of SeptemberJune 30, 2020,2021, the Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.
CARES Act Warrant IssuanceIssuances
As additional taxpayer protection required under the PSP programs, during the ninesix months ended SeptemberJune 30, 20202021 the Company granted the Treasury a total of 915,930539,508 warrants to purchase Alaska Air Group (ALK) common stock at a strike price of $31.61, based on the closing price on April 9, 2020.stock. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a five yearfive-year term.
Additionally, in connectionconjunction with the execution ofOctober 2020 draw on the CARES Act loan agreement,Loan, the Company agreed to issue warrants to the Treasury to purchase up to an aggregate of 4,115,786 shares of ALK common stock (the Warrant Agreement). Under the Warrant Agreement, warrants will be granted to the Treasury in conjunction with each new borrowing under the Agreement. Warrants to purchase shares shall be equal to 10% of each borrowing, divided by $31.61, the closing price of Air Group common stock on April 9, 2020. Pursuant to the Warrant Agreement, on the closing date, Air Group granted the Treasury 427,080 warrants to purchase ALK common stock at a strike price of $31.61. Upon upsizestock. The value of the loan agreementwarrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in October 2020, an additional 1,983,550stockholders' equity.
Total warrants were added to the aggregate.outstanding are as follows as of June 30, 2021: | | | | | | | | | | | |
| Number of shares of ALK common stock | | Strike Price |
PSP 1 | 928,127 | | | 31.61 |
CARES Act loan warrants | 427,080 | | | 31.61 |
PSP 2 | 305,499 | | | 52.25 |
PSP 3 | 221,812 | | | 66.39 |
Total | 1,882,518 | | | |
Accumulated other comprehensive loss
Components of accumulated other comprehensive loss, net of tax (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Related to marketable securities | $ | 25 | | | $ | 9 | |
Related to employee benefit plans | (453) | | | (469) | |
Related to interest rate derivatives | (22) | | | (5) | |
Total | $ | (450) | | | $ | (465) | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Related to marketable securities | $ | 10 | | | $ | 23 | |
Related to employee benefit plans | (485) | | | (498) | |
Related to interest rate derivatives | (12) | | | (19) | |
Total | $ | (487) | | | $ | (494) | |
Earnings (Loss) Per Share (EPS)
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and ninesix months ended SeptemberJune 30, 2020 and 2019,2021, anti-dilutive shares excluded from the calculation of EPS were not material.
NOTE 9. OPERATING SEGMENT INFORMATION
Alaska Air Group has two operating airlines—airlines – Alaska and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with SkyWest, under which Alaska receives all passenger revenues.
Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions.
Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of 3three reportable operating segments:
•Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Operating segment information is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 401 | | | $ | 171 | | | $ | 0 | | | $ | 0 | | | $ | 572 | | | $ | 0 | | | $ | 572 | |
CPA revenues | 0 | | | 0 | | | 95 | | | (95) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 65 | | | 19 | | | 0 | | | 0 | | | 84 | | | 0 | | | 84 | |
Cargo and other | 45 | | | 0 | | | 0 | | | 0 | | | 45 | | | 0 | | | 45 | |
Total Operating Revenues | 511 | | | 190 | | | 95 | | | (95) | | | 701 | | | 0 | | | 701 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 872 | | | 248 | | | 78 | | | (97) | | | 1,101 | | | 46 | | | 1,147 | |
Economic fuel | 90 | | | 38 | | | 0 | | | 0 | | | 128 | | | (3) | | | 125 | |
Total Operating Expenses | 962 | | | 286 | | | 78 | | | (97) | | | 1,229 | | | 43 | | | 1,272 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 8 | | | 0 | | | 0 | | | (1) | | | 7 | | | 0 | | | 7 | |
Interest expense | (28) | | | 0 | | | (6) | | | 0 | | | (34) | | | 0 | | | (34) | |
Interest capitalized | 4 | | | 0 | | | 0 | | | 0 | | | 4 | | | 0 | | | 4 | |
Other - net | 4 | | | 0 | | | 0 | | | 1 | | | 5 | | | 0 | | | 5 | |
Total Nonoperating Income (Expense) | (12) | | | 0 | | | (6) | | | 0 | | | (18) | | | 0 | | | (18) | |
Income (Loss) Before Income Tax | $ | (463) | | | $ | (96) | | | $ | 11 | | | $ | 2 | | | $ | (546) | | | $ | (43) | | | $ | (589) | |
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 1,850 | | | $ | 361 | | | $ | 0 | | | $ | 0 | | | $ | 2,211 | | | $ | 0 | | | $ | 2,211 | |
CPA revenues | 0 | | | 0 | | | 112 | | | (112) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 107 | | | 11 | | | 0 | | | 0 | | | 118 | | | 0 | | | 118 | |
Cargo and other | 58 | | | 1 | | | 0 | | | 1 | | | 60 | | | — | | | 60 | |
Total Operating Revenues | 2,015 | | | 373 | | | 112 | | | (111) | | | 2,389 | | | 0 | | | 2,389 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,226 | | | 275 | | | 94 | | | (119) | | | 1,476 | | | 5 | | | 1,481 | |
Economic fuel | 411 | | | 75 | | | 0 | | | 0 | | | 486 | | | 0 | | | 486 | |
Total Operating Expenses | 1,637 | | | 350 | | | 94 | | | (119) | | | 1,962 | | | 5 | | | 1,967 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 17 | | | 0 | | | 0 | | | (6) | | | 11 | | | 0 | | | 11 | |
Interest expense | (18) | | | 0 | | | (7) | | | 7 | | | (18) | | | 0 | | | (18) | |
Interest capitalized | 4 | | | 0 | | | 0 | | | 0 | | | 4 | | | 0 | | | 4 | |
Other - net | (3) | | | 0 | | | 0 | | | 0 | | | (3) | | | 0 | | | (3) | |
Total Nonoperating Income (Expense) | 0 | | | 0 | | | (7) | | | 1 | | | (6) | | | 0 | | | (6) | |
Income (Loss) Before Income Tax | $ | 378 | | | $ | 23 | | | $ | 11 | | | $ | 9 | | | $ | 421 | | | $ | (5) | | | $ | 416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 1,072 | | | $ | 280 | | | $ | 0 | | | $ | 0 | | | $ | 1,352 | | | $ | 0 | | | $ | 1,352 | |
CPA revenues | 0 | | | 0 | | | 111 | | | (111) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 102 | | | 16 | | | 0 | | | 0 | | | 118 | | | 0 | | | 118 | |
Cargo and other | 55 | | | 0 | | | 0 | | | 2 | | | 57 | | | 0 | | | 57 | |
Total Operating Revenues | 1,229 | | | 296 | | | 111 | | | (109) | | | 1,527 | | | 0 | | | 1,527 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 984 | | | 286 | | | 91 | | | (127) | | | 1,234 | | | (530) | | | 704 | |
Economic fuel | 253 | | | 66 | | | 0 | | | 1 | | | 320 | | | (46) | | | 274 | |
Total Operating Expenses | 1,237 | | | 352 | | | 91 | | | (126) | | | 1,554 | | | (576) | | | 978 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | |
Interest expense | (34) | | | 0 | | | (5) | | | 0 | | | (39) | | | 0 | | | (39) | |
Interest capitalized | 3 | | | 0 | | | 0 | | | 0 | | | 3 | | | 0 | | | 3 | |
Other - net | 9 | | | 0 | | | 0 | | | 0 | | | 9 | | | 0 | | | 9 | |
Total Nonoperating Income (Expense) | (16) | | | 0 | | | (5) | | | 0 | | | (21) | | | 0 | | | (21) | |
Income (Loss) Before Income Tax | $ | (24) | | | $ | (56) | | | $ | 15 | | | $ | 17 | | | $ | (48) | | | $ | 576 | | | $ | 528 | |
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | $ | 225 | | | $ | 84 | | | $ | 0 | | | $ | 0 | | | $ | 309 | | | $ | 0 | | | $ | 309 | |
CPA revenues | 0 | | | 0 | | | 81 | | | (81) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | 56 | | | 17 | | | 0 | | | 0 | | | 73 | | | 0 | | | 73 | |
Cargo and other | 39 | | | 0 | | | 0 | | | 0 | | | 39 | | | 0 | | | 39 | |
Total Operating Revenues | 320 | | | 101 | | | 81 | | | (81) | | | 421 | | | 0 | | | 421 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 746 | | | 210 | | | 68 | | | (82) | | | 942 | | | (292) | | | 650 | |
Economic fuel | 45 | | | 20 | | | 0 | | | 0 | | | 65 | | | (6) | | | 59 | |
Total Operating Expenses | 791 | | | 230 | | | 68 | | | (82) | | | 1,007 | | | (298) | | | 709 | |
Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | 11 | | | 0 | | | 0 | | | (4) | | | 7 | | | 0 | | | 7 | |
Interest expense | (18) | | | 0 | | | (5) | | | 6 | | | (17) | | | 0 | | | (17) | |
Interest capitalized | 1 | | | 0 | | | 0 | | | 0 | | | 1 | | | 0 | | | 1 | |
Other - net | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | |
Total Nonoperating Income (Expense) | 0 | | | 0 | | | (5) | | | 2 | | | (3) | | | 0 | | | (3) | |
Income (Loss) Before Income Tax | $ | (471) | | | $ | (129) | | | $ | 8 | | | $ | 3 | | | $ | (589) | | | $ | 298 | | | $ | (291) | |
| | | Nine Months Ended September 30, 2020 | | Six Months Ended June 30, 2021 |
| | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | Operating Revenues | | | | | | | | | | | | | | Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | Passenger revenues | $ | 1,860 | | | $ | 502 | | | $ | 0 | | | $ | 0 | | | $ | 2,362 | | | $ | 0 | | | $ | 2,362 | | Passenger revenues | $ | 1,578 | | | $ | 433 | | | $ | 0 | | | $ | 0 | | | $ | 2,011 | | | $ | 0 | | | $ | 2,011 | |
CPA revenues | CPA revenues | 0 | | | 0 | | | 281 | | | (281) | | | 0 | | | 0 | | | 0 | | CPA revenues | 0 | | | 0 | | | 215 | | | (215) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | Mileage Plan other revenue | 219 | | | 47 | | | 0 | | | 0 | | | 266 | | | 0 | | | 266 | | Mileage Plan other revenue | 182 | | | 30 | | | 0 | | | 0 | | | 212 | | | 0 | | | 212 | |
Cargo and other | Cargo and other | 128 | | | 0 | | | 0 | | | 2 | | | 130 | | | 0 | | | 130 | | Cargo and other | 99 | | | 0 | | | 0 | | | 2 | | | 101 | | | 0 | | | 101 | |
Total Operating Revenues | Total Operating Revenues | 2,207 | | | 549 | | | 281 | | | (279) | | | 2,758 | | | 0 | | | 2,758 | | Total Operating Revenues | 1,859 | | | 463 | | | 215 | | | (213) | | | 2,324 | | | 0 | | | 2,324 | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | Operating expenses, excluding fuel | 2,777 | | | 727 | | | 238 | | | (289) | | | 3,453 | | | (83) | | | 3,370 | | Operating expenses, excluding fuel | 1,877 | | | 551 | | | 179 | | | (236) | | | 2,371 | | | (912) | | | 1,459 | |
Economic fuel | Economic fuel | 448 | | | 120 | | | 0 | | | 0 | | | 568 | | | 0 | | | 568 | | Economic fuel | 427 | | | 118 | | | 0 | | | 0 | | | 545 | | | (68) | | | 477 | |
Total Operating Expenses | Total Operating Expenses | 3,225 | | | 847 | | | 238 | | | (289) | | | 4,021 | | | (83) | | | 3,938 | | Total Operating Expenses | 2,304 | | | 669 | | | 179 | | | (236) | | | 2,916 | | | (980) | | | 1,936 | |
Nonoperating Income (Expense) | Nonoperating Income (Expense) | | | | | | | | | | | | | | Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | Interest income | 33 | | | 0 | | | 0 | | | (10) | | | 23 | | | 0 | | | 23 | | Interest income | 13 | | | 0 | | | 0 | | | 0 | | | 13 | | | 0 | | | 13 | |
Interest expense | Interest expense | (58) | | | 0 | | | (16) | | | 10 | | | (64) | | | 0 | | | (64) | | Interest expense | (61) | | | 0 | | | (10) | | | 0 | | | (71) | | | 0 | | | (71) | |
Interest capitalized | Interest capitalized | 8 | | | 0 | | | 0 | | | 0 | | | 8 | | | 0 | | | 8 | | Interest capitalized | 6 | | | 0 | | | 0 | | | 0 | | | 6 | | | 0 | | | 6 | |
Other - net | Other - net | 16 | | | 0 | | | 0 | | | 0 | | | 16 | | | 0 | | | 16 | | Other - net | 19 | | | 0 | | | 0 | | | 0 | | | 19 | | | 0 | | | 19 | |
Total Nonoperating Income (Expense) | Total Nonoperating Income (Expense) | (1) | | | 0 | | | (16) | | | 0 | | | (17) | | | 0 | | | (17) | | Total Nonoperating Income (Expense) | (23) | | | 0 | | | (10) | | | 0 | | | (33) | | | 0 | | | (33) | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | (1,019) | | | $ | (298) | | | $ | 27 | | | $ | 10 | | | $ | (1,280) | | | $ | 83 | | | $ | (1,197) | | Income (Loss) Before Income Tax | $ | (468) | | | $ | (206) | | | $ | 26 | | | $ | 23 | | | $ | (625) | | | $ | 980 | | | $ | 355 | |
| | | Nine Months Ended September 30, 2019 | | Six Months Ended June 30, 2020 |
| | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenues | Operating Revenues | | | | | | | | | | | | | | Operating Revenues | | | | | | | | | | | | | |
Passenger revenues | Passenger revenues | $ | 5,039 | | | $ | 999 | | | $ | 0 | | | $ | 0 | | | $ | 6,038 | | | $ | 0 | | | $ | 6,038 | | Passenger revenues | $ | 1,459 | | | $ | 331 | | | $ | 0 | | | $ | 0 | | | $ | 1,790 | | | $ | 0 | | | $ | 1,790 | |
CPA revenues | CPA revenues | 0 | | | 0 | | | 340 | | | (340) | | | 0 | | | 0 | | | 0 | | CPA revenues | 0 | | | 0 | | | 186 | | | (186) | | | 0 | | | 0 | | | 0 | |
Mileage Plan other revenue | Mileage Plan other revenue | 312 | | | 34 | | | 0 | | | 0 | | | 346 | | | 0 | | | 346 | | Mileage Plan other revenue | 154 | | | 28 | | | 0 | | | 0 | | | 182 | | | 0 | | | 182 | |
Cargo and other | Cargo and other | 163 | | | 2 | | | 1 | | | 3 | | | 169 | | | 0 | | | 169 | | Cargo and other | 83 | | | 0 | | | 0 | | | 2 | | | 85 | | | 0 | | | 85 | |
Total Operating Revenues | Total Operating Revenues | 5,514 | | | 1035 | | | 341 | | | (337) | | | 6,553 | | | 0 | | | 6,553 | | Total Operating Revenues | 1,696 | | | 359 | | | 186 | | | (184) | | | 2,057 | | | 0 | | | 2,057 | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | Operating expenses, excluding fuel | 3,545 | | | 817 | | | 286 | | | (353) | | | 4,295 | | | 39 | | | 4,334 | | Operating expenses, excluding fuel | 1,905 | | | 479 | | | 160 | | | (192) | | | 2,352 | | | (129) | | | 2,223 | |
Economic fuel | Economic fuel | 1,191 | | | 218 | | | 0 | | | 0 | | | 1,409 | | | (1) | | | 1,408 | | Economic fuel | 358 | | | 82 | | | 0 | | | 0 | | | 440 | | | 3 | | | 443 | |
Total Operating Expenses | Total Operating Expenses | 4,736 | | | 1,035 | | | 286 | | | (353) | | | 5,704 | | | 38 | | | 5,742 | | Total Operating Expenses | 2,263 | | | 561 | | | 160 | | | (192) | | | 2,792 | | | (126) | | | 2,666 | |
Nonoperating Income (Expense) | Nonoperating Income (Expense) | | | | | | | | | | | | | | Nonoperating Income (Expense) | | | | | | | | | | | | | |
Interest income | Interest income | 50 | | | 0 | | | 0 | | | (19) | | | 31 | | | 0 | | | 31 | | Interest income | 25 | | | 0 | | | 0 | | | (9) | | | 16 | | | 0 | | | 16 | |
Interest expense | Interest expense | (58) | | | 0 | | | (22) | | | 20 | | | (60) | | | 0 | | | (60) | | Interest expense | (30) | | | 0 | | | (10) | | | 10 | | | (30) | | | 0 | | | (30) | |
Interest capitalized | Interest capitalized | 11 | | | 0 | | | 0 | | | 0 | | | 11 | | | 0 | | | 11 | | Interest capitalized | 4 | | | 0 | | | 0 | | | 0 | | | 4 | | | 0 | | | 4 | |
Other - net | Other - net | (20) | | | 0 | | | 0 | | | 0 | | | (20) | | | 0 | | | (20) | | Other - net | 12 | | | 0 | | | 0 | | | (1) | | | 11 | | | 0 | | | 11 | |
Total Nonoperating Income (Expense) | Total Nonoperating Income (Expense) | (17) | | | 0 | | | (22) | | | 1 | | | (38) | | | 0 | | | (38) | | Total Nonoperating Income (Expense) | 11 | | | 0 | | | (10) | | | 0 | | | 1 | | | 0 | | | 1 | |
Income (Loss) Before Income Tax | Income (Loss) Before Income Tax | $ | 761 | | | $ | 0 | | | $ | 33 | | | $ | 17 | | | $ | 811 | | | $ | (38) | | | $ | 773 | | Income (Loss) Before Income Tax | $ | (556) | | | $ | (202) | | | $ | 16 | | | $ | 8 | | | $ | (734) | | | $ | 126 | | | $ | (608) | |
|
(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocationsallocation and excludes certain income and charges. See Note A in the accompanying pages for further information.
(c)Includes payroll support program grantPayroll Support Program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.
Total assets were as follows (in millions):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Mainline | $ | 20,586 | | | $ | 19,207 | |
Horizon | 1,231 | | | 1,266 | |
Consolidating & Other | (7,068) | | | (7,480) | |
Consolidated | $ | 14,749 | | | $ | 12,993 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Mainline | $ | 19,920 | | | $ | 19,754 | |
Horizon | 1,251 | | | 1,170 | |
Consolidating & Other | (6,515) | | | (6,878) | |
Consolidated | $ | 14,656 | | | $ | 14,046 | |
| | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, and in Item 1A. "Risk Factors" of Part II of this Form 10-Q.2020. This overview summarizes the MD&A, which includes the following sections:
•ThirdSecond Quarter Review—highlights from the thirdsecond quarter of 20202021 outlining some of the major events that happened during the period and how they affected our financial performance.
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and ninesix months ended SeptemberJune 30, 2020.2021. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2020.2021.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRDSECOND QUARTER REVIEW
COVID-19 ImpactsBusiness Recovery and ResponseFinancial Outlook
TheSecond quarter 2021 results indicate we have reached a turning point in our recovery from the significant impacts of the COVID-19 on our businesspandemic. Early in the pandemic we shared plans to return capacity in a prudent manner, only when demand supported doing so. We also established structural cost removal targets that have been unprecedented,positioned the airline well for returning to profitability in recovery. With the strong return of demand in the second quarter, we reported an adjusted net loss that was significantly better than previous quarterly losses, and have presented us with some ofwe currently expect double-digit adjusted pre-tax profit margins in the greatest challenges in our 88-year history. The cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country beginning in March 2020 has driven demand for air travel to historic lows.third quarter.
AlthoughIn the second half of 2021, we remain committed to returning capacity in a deliberate manner to match the return of leisure and business demand in the markets we serve. We also continue to return to 2019 capacity levels no later than the summer of 2022, though we have seen slow improvementsincreased our near-term flying expectations as we ramp towards that target. To support this plan and prepare for growth beyond 2022, in demand through the second quarter of 2021, we exercised options for 13 Boeing 737-9 MAX with deliveries in 2023 and third quarters of 2020 as daily passenger counts have grown from a low of 5,000 per day2024, and nine E175 to approximately 40,000be operated by Horizon Air with deliveries in September,2022 and 2023. In addition, we remain well below prior-year traffic levels. Some targeted promotions, including a "Buy the Row" sale, have provided meaningful cash bookings and positive reactions from guests, indicating that there is underlying demand for air travel when the time is right. Based on several recent studies performed on the safety of air travel during the pandemic, we strongly believe air travel is, and has been, safe and we stand ready asexpanded our guests return to travel over the coming months.long-term capacity agreement with SkyWest by eight aircraft beginning in 2022.
However,Our guidance for 2021 compares against 2019 as we expectbelieve it provides a more meaningful indication of the pace and quality of recovery to be slow and we face the reality that our airlines are, and will be, significantly smaller than we were a year ago, we had to make the difficult decision to reduce our workforce at the end ofpre-pandemic levels. For the third quarter. We initiated various early-outquarter, we are planning for capacity to be approximately 17% to 20% below the same period in 2019, coupled with increased passenger counts as leisure travel continues through the summer months and furlough mitigation programs for frontline work groups,business travel rebuilds as well as incentive leaves for Alaska pilots and aircraft mechanics. These leaves were accepted by approximately 4,000 employees, including over 600 employees volunteering for early-out separation from the Company. In addition,workplaces reopen. As we reduced our non-union management positions by approximately 300 positions. As a result of these actions, we were ablecontinue to reduce the number of involuntary furloughs to approximately 400. Costs of $322 million associatedbe disciplined with these programs were recorded in the third quarter. We expect these workforce reductions will result in permanent annual savings of approximately $130 million.
These and other structural cost reduction measures are critical to reaching our monthly cash preservation goals. We believe getting to a zero cash burn position will be a leading indicator of industry health and recovery, and we believe we will be the first airline to reach this goal. Ourreturning capacity and cash bookings planning assumptions do not represent guidance,optimizing the aircraft gauge for flown routes, we anticipate third quarter load factors to range between 82% and we will adjust our plans if demand trends do not support these assumptions.85%.
Looking forward,The guidance we have provided and our outlook more broadly are sensitive to health trends, exposure to variants of the COVID-19 virus, and regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. Our people continue to focus on keeping costs low, running a great operation, and welcoming guests back to travel with Next-Level Care to ensure they are safe and comfortable when they fly. These competitive advantages we have cultivated over many years will continue to serve us well in 2021 and beyond, and we are planning for capacity inconfident that we are prepared to meet the fourth quarter to be approximately 40% below the same period in 2019. We expect to see continued increases in passenger countschallenges ahead and that we will emerge from the holiday travel seasonpandemic a stronger and as Hawai'i reopens to tourism travel. However, we do expect load factors to be in the range of 45% to 55% given our decision to block middle seats on the majority of our mainline flights through January 6, 2021.more resilient airline.
Currently, bySustainability Updates
As we move beyond the summer of 2021, our planning assumption is that capacity will be approximately 80% of the summer of 2019. Although, that is subject to change given the ever-changing dynamicimpacts of the COVID-19 pandemic, we have shifted our focus back to our 2025 strategic plan, which was announced in 2019. During the second quarter, we continued to make strides towards our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. As part of these commitments, we announced a partnership with Boeing on the demand for737-9 MAX ecoDemonstrator program, aimed at testing advanced technologies to enhance the safety and sustainability of air travel. We will remain flexible asIn the situation changessecond quarter we also announced we are the first airline to implement network optimization software, Flyways, which uses artificial intelligence and are committedmachine learning to take advantageoptimize air traffic and enable more fuel-efficient flight paths for aggregate savings of opportunities that may arise as the industry begins to recover.fuel, carbon emissions and time.
MaintainingAs a significant liquidity balance is also paramountreflection of the importance of the commitments made, we continue to preserving our financial strength. In additiontie a portion of long-term executive compensation to the $1 billion in CARES Act funding obtained in the second quarterachievement of 2020,diversity goals. Additionally, we have also sourced $589 million in secured financing, drawn $400 million fromincorporated a carbon emission target into our existing credit facilities, and issued $1.2 billion in EETCs. We also have available to us $1.9 billion in CARES Act loans, fromcompany-wide performance-based pay program, for which we have drawn $135 millioncurrently expect to support general business operations. As of November 3, 2020, our cash and marketable securities balance was approximately $3.5 billion.
Guest and employee safety
Our commitment tomeet the health and safety of our guests and employees remains our top priority. In response to the crisis, we have partnered with experts to build our Next-Level Care initiative. In doing so, we have added layers of safety with over 100 safety measures through all stages of travel. Some examples of measures that are helping our guests build confidence include:
•Making the pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;
•Requiring masks for both guests aged 2 and older and employees, and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so;
•Using the latest air filtration technology and hospital grade filters to remove particulates and fully recycle air in the cabin every 2 to 3 minutes;
•Exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmission on board, and;
•Providing for adequate social distancing in our airports and on-board, including blocking middle seats on mainline aircraft through January 6, 2021.
oneworld Invitation
In July 2020, we received our formal invitation to join the oneworld alliance. Upon entrance to the alliance, Alaska guests will be able to access the full range of customer services and benefits, and Mileage Plan members will be able to earn and redeem rewards on all oneworld member airlines. The Company is working to accelerate its timeline for entrance into the alliance, with a focus on completion by the end of the first quarter of 2021.targeted goal.
Financial Overview
Our consolidated pretax loss was $589 million duringpre-tax income for the thirdsecond quarter of 2020,2021 was $528 million, compared to pretax profita pre-tax loss of $416$291 million in the thirdsecond quarter of 2019.2020. The shift to pretax loss was$819 million improvement is primarily driven primarily by a decreasean increase of $1.1 billion in operating revenuesrevenue and $141 million of $1.7 billion stemming fromincreased wage offsets provided by extensions of the sharp decline in demand, $322 million in restructuring costs, and $121 million in special charges from asset impairment,PSP of the CARES Act. These improvements were offset by a decrease$292 million increase in non-fuel operating expenses of $334costs, excluding special items, and a $215 million including wage offsets from the payroll support program of the CARES Act of $398 million. Pretax loss was also offset by a decreaseincrease in fuel expense of $361 million.as the operation ramps up to meet increased demand.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
RESULTS OF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of the payroll support programPayroll Support Program grant wage offset, impairment and other charges, merger-related costs,special items, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:
•By excluding fuel expense and certain special items (including the payroll support programPayroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.
•Cost per ASM (CASM) excluding fuel and certain special items, such as the payroll support programPayroll Support Program grant wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
•Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) areis an important metricsmetric for the employee annual cash incentive plan, which covers the majority of employees within the Air Group organization.
•CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.
•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
•Although we disclose our unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Consolidated Operating Statistics:(a) | | | | | | | | | | | |
Revenue passengers (000) | 3,595 | | 12,574 | | (71.4)% | | 14,012 | | 35,018 | | (60.0)% |
RPMs (000,000) "traffic" | 3,817 | | 15,026 | | (74.6)% | | 16,127 | | 42,113 | | (61.7)% |
ASMs (000,000) "capacity" | 7,871 | | 17,519 | | (55.1)% | | 27,483 | | 50,006 | | (45.0)% |
Load factor | 48.5% | | 85.8% | | (37.3) pts | | 58.7% | | 84.2% | | (25.5) pts |
Yield | 14.99¢ | | 14.71¢ | | 1.9% | | 14.65¢ | | 14.34¢ | | 2.1% |
RASM | 8.90¢ | | 13.64¢ | | (34.8)% | | 10.04¢ | | 13.10¢ | | (23.4)% |
CASM excluding fuel and special items(b) | 14.00¢ | | 8.43¢ | | 66.1% | | 12.57¢ | | 8.59¢ | | 46.3% |
Economic fuel cost per gallon(b) | $1.32 | | $2.13 | | (38.0)% | | $1.65 | | $2.18 | | (24.3)% |
Fuel gallons (000,000) | 97 | | 227 | | (57.4)% | | 344 | | 646 | | (46.7)% |
ASMs per fuel gallon | 81.3 | | 77.2 | | 5.3% | | 79.9 | | 77.4 | | 3.2% |
Average full-time equivalent employees (FTEs) | 16,027 | | 22,247 | | (28.0)% | | 18,112 | | 22,000 | | (17.7)% |
Mainline Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 2,156 | | 9,655 | | (77.7)% | | 9,736 | | 26,725 | | (63.6)% |
RPMs (000,000) "traffic" | 2,958 | | 13,538 | | (78.2)% | | 13,816 | | 37,917 | | (63.6)% |
ASMs (000,000) "capacity" | 6,280 | | 15,702 | | (60.0)% | | 23,339 | | 44,816 | | (47.9)% |
Load factor | 47.1% | | 86.2% | | (39.1) pts | | 59.2% | | 84.6% | | (25.4) pts |
Yield | 13.56¢ | | 13.66¢ | | (0.7)% | | 13.46¢ | | 13.29¢ | | 1.3% |
RASM | 8.14¢ | | 12.83¢ | | (36.6)% | | 9.46¢ | | 12.30¢ | | (23.1)% |
CASM excluding fuel and special items(b) | 13.88¢ | | 7.81¢ | | 77.7% | | 11.90¢ | | 7.91¢ | | 50.4% |
Economic fuel cost per gallon(b) | $1.31 | | $2.13 | | (38.5)% | | $1.66 | | $2.17 | | (23.5)% |
Fuel gallons (000,000) | 69 | | 193 | | (64.2)% | | 270 | | 549 | | (50.8)% |
ASMs per fuel gallon | 91.0 | | 81.4 | | 11.8% | | 86.4 | | 81.6 | | 5.9% |
Average FTEs | 12,032 | | 16,789 | | (28.3)% | | 13,730 | | 16,599 | | (17.3)% |
Aircraft utilization | 7.3 | | 11.3 | | (35.4)% | | 8.3 | | 10.9 | | (23.9)% |
Average aircraft stage length | 1,244 | | 1,281 | | (2.9)% | | 1,263 | | 1,298 | | (2.7)% |
Operating fleet(d) | 217 | | 238 | | (21) a/c | | 217 | | 238 | | (21) a/c |
Regional Operating Statistics:(c) | | | | | | | | | | | |
Revenue passengers (000) | 1,439 | | 2,919 | | (50.7)% | | 4,276 | | 8,293 | | (48.4)% |
RPMs (000,000) "traffic" | 859 | | 1,488 | | (42.3)% | | 2,311 | | 4,196 | | (44.9)% |
ASMs (000,000) "capacity" | 1,592 | | 1,817 | | (12.4)% | | 4,143 | | 5,190 | | (20.2)% |
Load factor | 54.0% | | 81.9% | | (27.9 pts) | | 55.8% | | 80.8% | | (25.0 pts) |
Yield | 19.89¢ | | 24.23¢ | | (17.9)% | | 21.72¢ | | 23.81¢ | | (8.8)% |
RASM | 11.91¢ | | 20.51¢ | | (41.9)% | | 13.24¢ | | 19.93¢ | | (33.6)% |
Operating fleet | 94 | | 94 | | — a/c | | 94 | | 94 | | — a/c |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Consolidated Operating Statistics:(a) | | | | | | | | | | | |
Revenue passengers (000) | 8,712 | | 1,485 | | 486.7% | | 13,379 | | 10,417 | | 28.4% |
RPMs (000,000) "traffic" | 10,334 | | 1,654 | | 524.8% | | 15,727 | | 12,310 | | 27.8% |
ASMs (000,000) "capacity" | 13,413 | | 4,307 | | 211.4% | | 23,810 | | 19,612 | | 21.4% |
Load factor | 77.0% | | 38.4% | | 38.6 pts | | 66.1% | | 62.8% | | 3.3 pts |
Yield | 13.09¢ | | 18.68¢ | | (29.9)% | | 12.79¢ | | 14.54¢ | | (12.0)% |
RASM | 11.38¢ | | 9.77¢ | | 16.5% | | 9.76¢ | | 10.49¢ | | (7.0)% |
CASM excluding fuel and special items(b) | 9.20¢ | | 21.87¢ | | (57.9)% | | 9.95¢ | | 12.00¢ | | (17.1)% |
Economic fuel cost per gallon(b) | $1.90 | | $1.20 | | 58.3% | | $1.85 | | $1.77 | | 4.5% |
Fuel gallons (000,000) | 168 | | 54 | | 211.1% | | 294 | | 248 | | 18.5% |
ASMs per fuel gallon | 79.8 | | 79.8 | | —% | | 81.0 | | 79.1 | | 2.4% |
Average full-time equivalent employees (FTEs) | 19,001 | | 15,836 | | 20.0% | | 18,071 | | 19,115 | | (5.5)% |
Mainline Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 6,151 | | 905 | | 579.7% | | 9,302 | | 7,580 | | 22.7% |
RPMs (000,000) "traffic" | 8,966 | | 1,276 | | 602.7% | | 13,555 | | 10,858 | | 24.8% |
ASMs (000,000) "capacity" | 11,611 | | 3,363 | | 245.3% | | 20,464 | | 17,060 | | 20.0% |
Load factor | 77.2% | | 37.9% | | 39.3 pts | | 66.2% | | 63.6% | | 2.6 pts |
Yield | 11.96¢ | | 17.63¢ | | (32.2)% | | 11.64¢ | | 13.44¢ | | (13.4)% |
RASM | 10.59¢ | | 9.52¢ | | 11.2% | | 9.09¢ | | 9.94¢ | | (8.6)% |
CASM excluding fuel and special items(b) | 8.48¢ | | 22.19¢ | | (61.8)% | | 9.17¢ | | 11.17¢ | | (17.9)% |
Economic fuel cost per gallon(b) | $1.88 | | $1.20 | | 56.7% | | $1.84 | | $1.78 | | 3.4% |
Fuel gallons (000,000) | 135 | | 38 | | 255.3% | | 233 | | 201 | | 15.9% |
ASMs per fuel gallon | 86.0 | | 88.5 | | (2.8)% | | 87.8 | | 84.9 | | 3.4% |
Average FTEs | 14,021 | | 12,340 | | 13.6% | | 13,247 | | 14,579 | | (9.1)% |
Aircraft utilization | 9.9 | | 5.6 | | 76.8% | | 9.2 | | 8.8 | | 4.5% |
Average aircraft stage length | 1,320 | | 1,144 | | 15.4% | | 1,313 | | 1,270 | | 3.4% |
Operating fleet(d) | 202 | | 225 | | (23) a/c | | 202 | | 225 | | (23) a/c |
Regional Operating Statistics:(c) | | | | | | | | | | | |
Revenue passengers (000) | 2,562 | | 580 | | 341.7% | | 4,077 | | 2,837 | | 43.7% |
RPMs (000,000) "traffic" | 1,367 | | 378 | | 261.6% | | 2,172 | | 1,452 | | 49.6% |
ASMs (000,000) "capacity" | 1,802 | | 945 | | 90.7% | | 3,346 | | 2,552 | | 31.1% |
Load factor | 75.9% | | 40.0% | | 35.9 pts | | 64.9% | | 56.9% | | 8.0 pts |
Yield | 20.48¢ | | 22.12¢ | | (7.4)% | | 19.95¢ | | 22.80¢ | | (12.5)% |
RASM | 16.41¢ | | 10.63¢ | | 54.4% | | 13.84¢ | | 14.07¢ | | (1.6)% |
Operating fleet | 94 | | 94 | | — a/c | | 94 | | 94 | | — a/c |
(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.
(c)Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)Excludes 20 Airbusall aircraft permanently parked in the first nine months of 2020.removed from operating service.
Given the unusual nature of 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2021 to 2019.
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FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited) |
Alaska Air Group, Inc. | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2019 | | Change | | 2021 | | 2019 | | Change |
Passenger revenue | $ | 1,352 | | | $ | 2,111 | | | (36) | % | | $ | 2,011 | | | $ | 3,827 | | | (47) | % |
Mileage plan other revenue | 118 | | | 118 | | | — | % | | 212 | | | 228 | | | (7) | % |
Cargo and other | 57 | | | 59 | | | (3) | % | | 101 | | | 109 | | | (7) | % |
Total operating revenues | $ | 1,527 | | | $ | 2,288 | | | (33) | % | | $ | 2,324 | | | $ | 4,164 | | | (44) | % |
| | | | | | | | | | | |
Operating expense, excluding fuel and special items | $ | 1,234 | | | $ | 1,414 | | | (13) | % | | $ | 2,371 | | | $ | 2,819 | | | (16) | % |
Economic fuel | 274 | | | 502 | | | (45) | % | | 477 | | | 922 | | | (48) | % |
Special items | (530) | | | 8 | | NM | | (912) | | | 34 | | NM |
Total operating expenses | $ | 978 | | | $ | 1,924 | | | (49) | % | | $ | 1,936 | | | $ | 3,775 | | | (49) | % |
| | | | | | | | | | | |
Total nonoperating expense | (21) | | | (13) | | | 62 | % | | (33) | | | (32) | | | 3 | % |
Income (loss) before income tax | $ | 528 | | | $ | 351 | | | 50 | % | | $ | 355 | | | $ | 357 | | | (1) | % |
| | | | | | | | | | | |
Consolidated Operating Statistics(a): | | | | | | | | | | | |
Revenue passengers (000) | 8,712 | | 12,026 | | (28) | % | | 13,379 | | 22,442 | | (40) | % |
RPMs (000,000) "traffic" | 10,334 | | 14,638 | | (29) | % | | 15,727 | | 27,087 | | (42) | % |
ASMs (000,000) "capacity" | 13,413 | | 16,980 | | (21) | % | | 23,810 | | 32,487 | | (27) | % |
Load Factor | 77.0% | | 86.2% | | (9.2) | pts | | 66.1% | | 83.4% | | (17.3) | pts |
Yield | 13.09¢ | | 14.43¢ | | (9) | % | | 12.79¢ | | 14.13¢ | | (9) | % |
RASM | 11.38¢ | | 13.48¢ | | (16) | % | | 9.76¢ | | 12.82¢ | | (24) | % |
CASMex | 9.20¢ | | 8.33¢ | | 10 | % | | 9.95¢ | | 8.68¢ | | 15 | % |
FTEs | 19,001 | | 21,921 | | (13) | % | | 18,071 | | 21,876 | | (17) | % |
(a)2019 comparative operating statistics have been recalculated using the information presented above, and as filed in our second quarter 2019 Form 10-Q.
COMPARISON OF THREE MONTHS ENDED SEPTEMBERJUNE 30, 20202021 TO THREE MONTHS ENDED SEPTEMBERJUNE 30, 20192020
Our consolidated net lossincome for the three months ended SeptemberJune 30, 20202021 was $431$397 million, or $3.49$3.13 per diluted share, compared to a net incomeloss of $322$214 million, or $2.60$1.74 per diluted share, for the three months ended SeptemberJune 30, 2019.2020.
Excluding the impact of the payroll support programPayroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the thirdsecond quarter of 20202021 was $399$38 million, or $3.23$0.30 per diluted share, compared to an adjusted net incomeloss of $326$439 million, or $2.63$3.57 per diluted share, in the thirdsecond quarter of 2019.2020. The following tables reconcile our adjusted net income and adjusted earningsloss per diluted share (EPS) to amounts as reported in accordance with GAAP:
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
(in millions, except per share amounts) | (in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS | (in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income (loss) and diluted EPS | $ | (431) | | | $ | (3.49) | | | $ | 322 | | | $ | 2.60 | | |
Payroll support program grant wage offset | (398) | | | (3.22) | | | — | | | — | | |
GAAP net income (loss) per share | | GAAP net income (loss) per share | $ | 397 | | | $ | 3.13 | | | $ | (214) | | | $ | (1.74) | |
Payroll Support Program grant wage offset | | Payroll Support Program grant wage offset | (503) | | | (3.97) | | | (362) | | | (2.94) | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (3) | | | (0.02) | | | — | | | — | | Mark-to-market fuel hedge adjustments | (46) | | | (0.36) | | | (6) | | | (0.05) | |
Special items - impairment charges and other | Special items - impairment charges and other | 121 | | | 0.98 | | | — | | | — | | Special items - impairment charges and other | (4) | | | (0.03) | | | 69 | | | 0.56 | |
Special items - restructuring charges | | Special items - restructuring charges | (23) | | | (0.18) | | | — | | | — | |
Special items - merger-related costs | Special items - merger-related costs | 1 | | | 0.01 | | | 5 | | | 0.04 | | Special items - merger-related costs | — | | | — | | | 1 | | | 0.01 | |
Special items - restructuring charges | 322 | | | 2.60 | | | — | | | — | | |
Income tax effect of reconciling items above | Income tax effect of reconciling items above | (11) | | | (0.09) | | | (1) | | | (0.01) | | Income tax effect of reconciling items above | 141 | | | 1.11 | | | 73 | | | 0.59 | |
Non-GAAP adjusted net income (loss) and diluted EPS | $ | (399) | | | $ | (3.23) | | | $ | 326 | | | $ | 2.63 | | |
Non-GAAP adjusted net loss per share | | Non-GAAP adjusted net loss per share | $ | (38) | | | $ | (0.30) | | | $ | (439) | | | $ | (3.57) | |
CASM reconciliation is summarized below:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in cents) | 2020 | | 2019 | | % Change |
Consolidated: | | | | | |
CASM | 16.16 | ¢ | | 11.23 | ¢ | | 44 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (5.06) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.59 | | | 2.77 | | | (43) | % |
Special items - merger-related costs | 0.01 | | | 0.03 | | | (67) | % |
Special items - impairment charges and other | 1.53 | | | — | | | NM |
Special items - restructuring charges | 4.09 | | | — | | | NM |
CASM excluding fuel and special items | 14.00 | ¢ | | 8.43 | ¢ | | 66 | % |
| | | | | |
Mainline: | | | | | |
CASM | 16.80 | ¢ | | 10.46 | ¢ | | 61 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (5.56) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.43 | | | 2.62 | | | (45) | % |
Special items - merger-related costs | 0.02 | | | 0.03 | | | (33) | % |
| | | | | |
Special items - impairment charges and other | 1.93 | | | — | | | NM |
Special items - restructuring charges | 5.10 | | | — | | | NM |
CASM excluding fuel and special items | 13.88 | ¢ | | 7.81 | ¢ | | 78 | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
(in cents) | 2021 | | 2020 | | % Change |
Consolidated: | | | | | |
CASM | 7.29 | ¢ | | 16.46 | ¢ | | (56) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (3.75) | | | (8.40) | | | (55) | % |
Aircraft fuel, including hedging gains and losses | 2.04 | | | 1.37 | | | 49 | % |
Special items - impairment charges and other | (0.03) | | | 1.60 | | | (102) | % |
Special items - restructuring charges | (0.17) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 9.20 | ¢ | | 21.87 | ¢ | | (58) | % |
| | | | | |
Mainline: | | | | | |
CASM | 6.24 | ¢ | | 15.79 | ¢ | | (60) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (3.79) | | | (9.69) | | | (61) | % |
Aircraft fuel, including hedging gains and losses | 1.78 | | | 1.16 | | | 53 | % |
| | | | | |
Special items - impairment charges and other | (0.03) | | | 2.11 | | | (101) | % |
Special items - restructuring charges | (0.20) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 8.48 | ¢ | | 22.19 | ¢ | | (62) | % |
OPERATING REVENUES
Total operating revenues decreased $1.7increased $1.1 billion or 71%, during the thirdsecond quarter of 20202021 compared to the same period in 2019.2020. The changes are summarized in the following table:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Passenger revenue | $ | 572 | | | $ | 2,211 | | | (74) | % |
Mileage Plan other revenue | 84 | | | 118 | | | (29) | % |
Cargo and other | 45 | | | 60 | | | (25) | % |
Total operating revenues | $ | 701 | | | $ | 2,389 | | | (71) | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Passenger revenue | $ | 1,352 | | | $ | 309 | | | 338 | % |
Mileage Plan other revenue | 118 | | | 73 | | | 62 | % |
Cargo and other | 57 | | | 39 | | | 46 | % |
Total operating revenues | $ | 1,527 | | | $ | 421 | | | 263 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the thirdsecond quarter of 2021 increased by $1.0 billion, primarily driven by a significant increase in passenger traffic. In the second quarter of 2020, decreased by $1.6 billion, or 74%, onwe experienced a 75% decline in traffic. Decreased revenue year-over-year isnear complete loss of demand driven by the significant ongoing reductions in demand caused by the COVID-19 pandemic. Impacts toAs recovery has taken hold, including wide availability of the vaccine and removal of restrictions throughout the markets we serve, demand began in March 2020, and continued through the third quarter. Although third quarter results show sequential improvement from the prior quarter as more guests return to flying, capacity was reduced 55% of that flown in the third quarter of 2019, with a 37 point reduction in system-wide load factors.for air travel has increased exponentially driven primarily by leisure travelers.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue decreased $34increased by $45 million, or 29%62%, as compared to the same prior-year period, primarily on a reductionlargely due to an increase in miles purchasedcommissions from our bank card partners driven by our affinityincreased consumer spending and new card partner, consistent with an overall reductionacquisitions. Performance of Mileage Plan other revenues outpaced all other revenue sources, and resulted in consumer spending.the best performance of the program ever in the second quarter of 2021.
Cargo and Other Revenueother
On a consolidated basis, Cargo and other revenue for the thirdsecond quarter of 2020 decreased2021 increased by $15$18 million, or 25%46%, as compared to the same prior-year period. The decreaseincrease is primarily due to reducedthe return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters due to design issues that we are working to address with our third-party vendor.increase scheduled departures.
OPERATING EXPENSES
Total operating expenses decreased $695increased $269 million, or 35%38%, compared to the thirdsecond quarter of 2019.2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Fuel expense | $ | 125 | | | $ | 486 | | | (74) | % |
Non-fuel operating expenses, excluding special items | 1,101 | | | 1,476 | | | (25) | % |
Payroll support program grant wage offset | (398) | | | — | | | NM |
Special items - merger-related costs | 1 | | | 5 | | | (80) | % |
| | | | | |
Special items - impairment charges and other | 121 | | | — | | | NM |
Special items - restructuring charges | 322 | | | — | | | NM |
Total operating expenses | $ | 1,272 | | | $ | 1,967 | | | (35) | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Fuel expense | $ | 274 | | | $ | 59 | | | 364 | % |
Non-fuel operating expenses, excluding special items | 1,234 | | | 942 | | | 31 | % |
Payroll Support Program grant wage offset | (503) | | | (362) | | | 39 | % |
Special items - impairment charges and other | (4) | | | 69 | | | (106) | % |
Special items - restructuring charges | (23) | | | — | | | NM |
Special items - merger-related costs | — | | | 1 | | | (100) | % |
Total operating expenses | $ | 978 | | | $ | 709 | | | 38 | % |
Fuel Expense
Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.
Aircraft fuel expense decreased $361increased $215 million, or 74%, compared to the thirdsecond quarter of 2019.2020. The elements of the change are illustrated in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 123 | | | $ | 1.27 | | | $ | 481 | | | $ | 2.11 | |
Losses on settled hedges | 5 | | | 0.05 | | | 5 | | | 0.02 | |
Consolidated economic fuel expense | 128 | | | 1.32 | | | $ | 486 | | | $ | 2.13 | |
Mark-to-market fuel hedge adjustments | (3) | | | (0.03) | | | — | | | — | |
GAAP fuel expense | $ | 125 | | | $ | 1.29 | | | $ | 486 | | | $ | 2.13 | |
Fuel gallons | 97 | | | | | 227 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2021 | | 2020 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 330 | | | $ | 1.96 | | | $ | 60 | | | $ | 1.11 | |
(Gain)/loss on settled hedges | (10) | | | (0.06) | | | 5 | | | 0.09 | |
Consolidated economic fuel expense | 320 | | | 1.90 | | | $ | 65 | | | $ | 1.20 | |
Mark-to-market fuel hedge adjustments | (46) | | | (0.27) | | | (6) | | | (0.11) | |
GAAP fuel expense | $ | 274 | | | $ | 1.63 | | | $ | 59 | | | $ | 1.09 | |
Fuel gallons | 168 | | | | | 54 | | | |
Raw fuel expense per gallon for the three months ended SeptemberJune 30, 2020 decreased2021 increased by approximately 40%77% due to lowerhigher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The decreaseincrease in raw fuel price per gallon during the thirdsecond quarter of 20202021 was primarily driven by a 27% decrease24% increase in crude oil prices and a 79% decrease in refining margins, when compared to the prior year. Crude oil prices have been dramatically impacted by the COVID-19 pandemic and the related reduction in demand. The decreaseprices. This is also due to a year-over-year declinecoupled with an increase in consumption of 130114 million gallons, or 57%, primarily on a significant reductionan increase in scheduled departures.
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.
LossesGains recognized for hedges that settled during the thirdsecond quarter were $5$10 million in 2020,2021, compared to losses of $5 million in the same period in 2019.2020. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.
Non-fuel Expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel, the payroll support programPayroll Support Program grant wage offset and special items. Significant operating expense variances from 20192020 are more fully described below. | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages and benefits | $ | 510 | | | $ | 472 | | | 8 | % |
Variable incentive pay | 34 | | | 16 | | | 113 | % |
Aircraft maintenance | 102 | | | 45 | | | 127 | % |
Aircraft rent | 62 | | | 74 | | | (16) | % |
Landing fees and other rentals | 144 | | | 83 | | | 73 | % |
Contracted services | 54 | | | 30 | | | 80 | % |
Selling expenses | 41 | | | 4 | | | 925 | % |
Depreciation and amortization | 98 | | | 107 | | | (8) | % |
Food and beverage service | 35 | | | 7 | | | 400 | % |
Third-party regional carrier expense | 37 | | | 26 | | | 42 | % |
Other | 117 | | | 78 | | | 50 | % |
Total non-fuel operating expenses, excluding special items | $ | 1,234 | | | $ | 942 | | | 31 | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Wages and benefits | $ | 495 | | | $ | 608 | | | (19) | % |
Variable incentive pay | 42 | | | 46 | | | (9) | % |
Aircraft maintenance | 84 | | | 106 | | | (21) | % |
Aircraft rent | 74 | | | 82 | | | (10) | % |
Landing fees and other rentals | 109 | | | 143 | | | (24) | % |
Contracted services | 36 | | | 72 | | | (50) | % |
Selling expenses | 24 | | | 77 | | | (69) | % |
Depreciation and amortization | 105 | | | 106 | | | (1) | % |
Food and beverage service | 14 | | | 57 | | | (75) | % |
Third-party regional carrier expense | 29 | | | 42 | | | (31) | % |
Other | 89 | | | 137 | | | (35) | % |
Total non-fuel operating expenses, excluding special items | $ | 1,101 | | | $ | 1,476 | | | (25) | % |
Wages and Benefits
Wages and benefits decreasedincreased during the thirdsecond quarter of 20202021 by $113$38 million, or 19%8%, compared to 2019.2020. The primary components of Wages and benefits are shown in the following table:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Wages | $ | 356 | | | $ | 460 | | | (23) | % |
Pension - Defined benefit plans service cost | 11 | | | 10 | | | 10 | % |
Defined contribution plans | 28 | | | 34 | | | (18) | % |
Medical and other benefits | 75 | | | 71 | | | 6 | % |
Payroll taxes | 25 | | | 33 | | | (24) | % |
Total wages and benefits | $ | 495 | | | $ | 608 | | | (19) | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages | $ | 386 | | | $ | 350 | | | 10 | % |
Pension - Defined benefit plans service cost | 13 | | | 13 | | | — | % |
Defined contribution plans | 26 | | | 30 | | | (13) | % |
Medical and other benefits | 59 | | | 54 | | | 9 | % |
Payroll taxes | 26 | | | 25 | | | 4 | % |
Total wages and benefits | $ | 510 | | | $ | 472 | | | 8 | % |
Wages decreased $104increased $36 million, or 23%10%, on a 28% reduction20% increase in FTEs. The decrease isIncreased wages as compared to the prior period are primarily due to voluntarythe result of leaves of absence with an average of 4,600 employees on leave throughout the quarter, as well as reductionstaken and reduction in executive pay and hours for management employees and reducing represented employees work hoursin 2020 which were not repeated in 2021.
Defined contribution plan expense decreased 13% as compared to minimums. Reduced employee wages directly correlate with2020 as a result of a one-time adjustment recorded in the reductionsecond quarter of 2021 for employer contributions to those participating in retirement contributions and payroll taxes.incentive leave programs.
Variable Incentive Pay
Variable incentive pay expense decreased $4increased $18 million or 9%, during the thirdsecond quarter of 20202021 compared to the same period in 2019, due to the2020 on increased expectation thatof achievement of key financial metrics will not be achieved under the performance based pay program. The decrease was offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July 2020, and increased operational bonuses as compared to the prior year.metrics.
Aircraft Maintenance
Aircraft maintenance expense decreasedincreased by $22$57 million or 21%, during the thirdsecond quarter of 20202021 compared to the same period in 2019. The decrease2020. This is primarily due to fewera significant increase in utilization of aircraft as we return to capacity, resulting in increased engine events, and heavy checks asand power-by-the-hour expense.
Aircraft Rent
Aircraft rent expense decreased by $12 million, or 16%, during the second quarter of 2021 compared to the prior year, as well as lower power-by-the-hour expensesame period in 2020 primarily the result of the full impairment taken on reduced third quarter utilization of covered aircraft. These decreases were offset by penalties accrued for failure to meet minimum obligations under certain contracts and costs incurredleased Airbus aircraft in the temporary grounding of certain aircraft, although we are currently in negotiations with these service providers with respect to these penalties.2020.
Landing fees and other rentals
Landing fees and other rentals decreasedincreased by $34$61 million, or 24%73%, during the thirdsecond quarter of 20202021 compared to the same period in 2019 on2020 primarily due to a 45% decreasesignificant increase in departures. DecreasedIncreased departure-related costs were offsetcoupled by rate increases at many of our airports.hub airports, including the renegotiated lease at our largest airport hub Seattle-Tacoma International Airport.
Contracted Services
Contracted services decreasedincreased by $36$24 million, or 50%80%, during the thirdsecond quarter of 20202021 compared to the same period in 20192020 driven primarily by decreasedincreased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.
Selling Expense
Selling expense decreasedincreased by $53$37 million or 69%, during the thirdsecond quarter of 20202021 compared to the same period in 2019,2020, primarily driven by a significant reductionincrease in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs also contributed tocommissions incurred with the year-over-year decline given the renegotiationincrease of certain contracts.overall travel.
Food and Beverage Service
Food and beverage service decreasedincreased by $43$28 million or 75%, during the thirdsecond quarter of 20202021 compared to the same period in 2019.2020. This decreaseincrease is consistent with the overall reductionincrease in revenue passengers as compared to the prior-year period, as well as the temporary closurereturn of the majoritymany of our airport lounges and temporary eliminationon-board products in the second quarter of buy-on-board service.2021.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, decreasedincreased by $13$11 million, or 31%42%, during the thirdsecond quarter of 20202021 compared to the same period in 2019.2020. The reductionincrease in expense is primarily due to a 11% reductionincreases in departures flown by SkyWest as compared to the prior-year period. Increased expense was partially offset by a pass through of CARES Act PSP funding of $5 million received in the second quarter to offset SkyWest pilot and flight attendant wages and benefits.
Other expense
Other expense increased $39 million, or 50%, during the second quarter of 2021 compared to the same period a reduction in departure-related contractual rates,2020. Increased expense is primarily driven by incremental crew hotel stays and per diem, consistent with the elimination of PenAir flying.overall increase in departures and capacity, as well as additional expense for professional services.
Special Items - Impairment and other charges
We recorded a benefit associated with impairment and other charges of $121$4 million in the thirdsecond quarter of 2020,2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the impairment for ten owned Airbus aircraft which are expected to be retired prioroperating fleet but not yet returned to the end of their originally anticipated useful life, eight of which have been permanently parked.lessor.
Special Items - Restructuring charges
We recorded a benefit for workforce restructuring charges of $322$23 million in the thirdsecond quarter of 2020 relating to the right-sizing of our workforce2021 primarily as a result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for thoseissuing recall notices to pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payouts.lines for periods earlier than were previously anticipated.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline recorded an adjusted pretax loss of $24 million in the second quarter of 2021, compared to a pretax loss of $463$471 million in the thirdsecond quarter of 2020, compared to a pretax profit of $3782020. The $447 million in the third quarter of 2019. The $841 million shift to pretax lossimprovement was primarily driven by a $1.4 billion decreasean $847 million increase in Passenger revenues as a result of the COVID-19 pandemic,increased demand for air travel, offset by a $354$238 million decreaseincrease in non-fuel operating costs and a $321$208 million decreaseincrease in economic fuel cost.
The decreaseincrease in Mainline passenger revenue for the thirdsecond quarter of 20202021 was primarily driven by a 78% declinesignificant increase in traffic on a 60% decrease in capacity. The overall decreases in both traffic and capacity were driven by the significant reduction indue to increased demand as a result of the COVID-19 pandemic.for air travel.
Non-fuel operating expenses decreasedincreased significantly, on cost savings driven by reducedincreased variable costs, on reducedlargely consistent with the overall increase in capacity as well as decreased wages and benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lowerdepartures. Higher raw fuel prices, combined with a 64% decreasesignificant increase in gallons consumed, drove the declineincrease in Mainline fuel expense.
Regional
Regional operations generated an adjusted pretax loss of $56 million in the second quarter of 2021, compared to a pretax loss of $96$129 million in the thirdsecond quarter of 2020, compared to a pretax profit of $23 million in the third quarter of 2019.2020. The increase in theimproved pretax loss was attributable to a $183$195 million declineincrease in operating revenues, partially offset by a $37$76 million decrease in fuel costs and an $27 million decreaseincrease in non-fuel operating expenses.expenses and a $46 million increase in fuel costs.
Regional passenger revenue decreased 53%increased significantly compared to the thirdsecond quarter of 2019,2020, primarily driven by a 42% decline in traffic on a 12% decrease in capacity. The overall decrease in bothincreased traffic and capacity are driven by the significant reductionresurgence in demand as a result of the COVID-19 pandemic.for air travel.
The decreaseincrease in non-fuel operating expenses is primarily due to the 12% declineincreased variable costs and higher CPA rates on an increase in capacity, as well as a discontinuationoffset by the pass through of our partnership with PenAir for contract flyingCARES Act PSP funds recorded in the statesecond quarter of Alaska.2021.
Horizon
Horizon achieved aan adjusted pretax profit of $11$15 million in both the thirdsecond quarter of 2020 and2021 compared to $8 million in the thirdsecond quarter of 2019. Profit recorded by Horizon in the third quarter2020. Increased profit is primarily the result of incremental flying as a proportion of overall Air Groupincreased capacity as compared to the prior year. Horizon revenues are recorded based upon purchased capacity, and are not impacted by changes to ticket prices and customer demand. Horizon profit is also the result of significantflown, coupled with substantial progress in cost reduction efforts implemented in response to the COVID-19 pandemic.efforts.
COMPARISON OF NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 TO NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020
Our consolidated net lossincome for the ninesix months ended SeptemberJune 30, 20202021 was $877$266 million, or $7.12$2.10 per diluted share, compared to a net incomeloss of $588$446 million, or $4.74$3.62 per diluted share, for the ninesix months ended SeptemberJune 30, 2019.2020.
Our adjusted net loss for the ninesix months ended SeptemberJune 30, 20202021 was $940$474 million, or $7.63$3.75 per diluted share, compared to an adjusted net incomeloss of $617$541 million, or $4.97$4.40 per diluted share, in the ninesix months ended SeptemberJune 30, 2019.2020. The following tables reconcile our adjusted net incomeloss and adjusted diluted EPS to amounts as reported in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Reported GAAP net income (loss) and diluted EPS | $ | (877) | | | $ | (7.12) | | | $ | 588 | | | $ | 4.74 | |
Payroll support program grant wage offset | (760) | | | (6.16) | | | — | | | — | |
Mark-to-market fuel hedge adjustments | — | | | — | | | (1) | | | (0.01) | |
Special items - merger-related costs | 5 | | | 0.04 | | | 39 | | | 0.31 | |
Special items - impairment charges and other | 350 | | | 2.84 | | | — | | | — | |
Special items - restructuring charges | 322 | | | 2.61 | | | — | | | — | |
Income tax effect of reconciling items above | 20 | | | 0.16 | | | (9) | | | (0.07) | |
Non-GAAP adjusted net income (loss) and diluted EPS | $ | (940) | | | $ | (7.63) | | | $ | 617 | | | $ | 4.97 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Reported GAAP net income (loss) and diluted EPS | $ | 266 | | | $ | 2.10 | | | $ | (446) | | | $ | (3.62) | |
Payroll Support Program grant wage offset | (914) | | | (7.23) | | | (362) | | | (2.94) | |
Mark-to-market fuel hedge adjustments | (68) | | | (0.54) | | | 3 | | | 0.02 | |
Special items - merger-related costs | — | | | — | | | 4 | | | 0.03 | |
Special items - impairment charges and other | 14 | | | 0.11 | | | 229 | | | 1.86 | |
Special items - restructuring charges | (12) | | | (0.09) | | | — | | | — | |
Income tax effect of reconciling items above | 240 | | | 1.90 | | | 31 | | | 0.25 | |
Non-GAAP adjusted net loss per share | $ | (474) | | | $ | (3.75) | | | $ | (541) | | | $ | (4.40) | |
Our operating costs per ASM are summarized below:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in cents) | 2020 | | 2019 | | % Change |
Consolidated: | | | | | |
CASM | 14.33 | ¢ | | 11.48 | ¢ | | 25 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (2.77) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 2.07 | | | 2.82 | | | (27) | % |
Special items - merger-related costs | 0.02 | | | 0.08 | | | (75) | % |
Special items - impairment charges and other | 1.27 | | | — | | | NM |
Special items - restructuring charges | 1.17 | | | — | | | NM |
CASM excluding fuel and special items | 12.57 | ¢ | | 8.59 | ¢ | | 46 | % |
| | | | | |
Mainline: | | | | | |
CASM | 13.56 | ¢ | | 10.65 | ¢ | | 27 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (2.89) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.92 | | | 2.65 | | | (28) | % |
Special items - merger-related costs | 0.02 | | | 0.09 | | | (78) | % |
Special items - impairment charges and other | 1.24 | | | — | | | NM |
Special items - restructuring charges | 1.37 | | | — | | | NM |
CASM excluding fuel and special items | 11.90 | ¢ | | 7.91 | ¢ | | 50 | % |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in cents) | 2021 | | 2020 | | % Change |
Consolidated: | | | | | |
CASM | 8.13 | ¢ | | 13.59 | ¢ | | (40) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (3.84) | | | (1.85) | | | 108 | % |
Aircraft fuel, including hedging gains and losses | 2.00 | | | 2.26 | | | (12) | % |
Special items - impairment charges and other | 0.07 | | | 1.17 | | | (94) | % |
Special items - restructuring charges | (0.05) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.01 | | | (100) | % |
CASM excluding fuel and special items | 9.95 | ¢ | | 12.00 | ¢ | | (17) | % |
| | | | | |
Mainline: | | | | | |
CASM | 6.72 | ¢ | | 12.39 | ¢ | | (46) | % |
Less the following components: | | | | | |
Payroll Support Program grant wage offset | (4.21) | | | (1.91) | | | 120 | % |
Aircraft fuel, including hedging gains and losses | 1.75 | | | 2.12 | | | (17) | % |
Special items - impairment charges and other | 0.07 | | | 0.99 | | | (93) | % |
Special items - restructuring charges and other | (0.06) | | | — | | | NM |
Special items - merger-related costs | — | | | 0.02 | | | (100) | % |
CASM excluding fuel and special items | 9.17 | ¢ | | 11.17 | ¢ | | (18) | % |
OPERATING REVENUES
Total operating revenues decreased $3.8 billion,increased $267 million, or 58%13%, during the first ninesix months of 20202021 compared to the same period in 2019.2020. The changes are summarized in the following table:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Passenger revenue | $ | 2,362 | | | $ | 6,038 | | | (61) | % |
Mileage Plan other revenue | 266 | | | 346 | | | (23) | % |
Cargo and other | 130 | | | 169 | | | (23) | % |
Total operating revenues | $ | 2,758 | | | $ | 6,553 | | | (58) | % |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Passenger revenue | $ | 2,011 | | | $ | 1,790 | | | 12 | % |
Mileage Plan other revenue | 212 | | | 182 | | | 16 | % |
Cargo and other | 101 | | | 85 | | | 19 | % |
Total operating revenues | $ | 2,324 | | | $ | 2,057 | | | 13 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the first ninesix months of 2020 decreased2021 increased by $3.7 billion,$221 million, or 61%12%, on a 45% decrease28% increase in capacity, and a 26 point decreasepassenger traffic, driven primarily by rebounding demand for leisure travel experienced in load factor. Decreased revenue year-over-year is primarily duethe second quarter of 2021. As travel restrictions were removed, including the full removal of restrictions in the state of California in June of 2021, passenger counts increased dramatically as compared to the near complete lossprior year. These improvements were offset by a decrease of 12% in yield, stemming from promotional activities undertaken to stimulate demand dueand increase bookings during what is typically a low booking period.
We expect to the COVID-19 pandemic. Load factors and unit revenues in the first two months of 2020 were in-line with our original expectations. In March 2020, demand deteriorated at an unprecedented level, and in responsesee continued improvement to Passenger revenue as we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Moderate recovery began in June 2020, however, resurgence of cases throughout the United States slowed that recovery in July 2020. Targeted promotions, coupled withprogress through 2021, driven by continued growth of guest confidence in airdemand and capacity, as well as improvements to business travel ledas employees return to sequential revenue improvement in the third quarter. We expect that fourth quarter revenue will continue to show improvement, given the holiday travel season and reopening of Hawaii, however, revenues will remain well below 2019 levels.work.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue decreased $80increased $30 million, or 23%16%, in the first ninesix months of 20202021 compared to the first ninesix months of 2019,2020, due largely to a reductionan increase in purchased miles and decreased commissionscommission received from our affinity card partner consistent with fewerstemming from growing consumer spend and incremental new affinity card holders in 2020 and an overall reduction in consumer spending.acquisitions.
Cargo and other
On a consolidated basis, Cargo and other revenue decreased $39increased $16 million, or 23%19%, in the first ninesix months of 20202021 compared to the first ninesix months of 2019.2020. The decreaseincrease is primarily due to reducedthe return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters. we increase scheduled departures.
We expect that our cargo and other revenues will continuebe positively impacted as compared to be negatively impacted in the fourth quarter2020 due to ongoing capacity reductions.the elimination of freighter limitations.
OPERATING EXPENSES
Total operating expenses decreased $1.8 billion,$730 million, or 31%27%, compared to the first ninesix months of 2019.2020. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Fuel expense | $ | 568 | | | $ | 1,408 | | | (60) | % |
Non-fuel operating expenses, excluding special items | 3,453 | | | 4,295 | | | (20) | % |
Payroll support program grant wage offset | (760) | | | — | | | NM |
Special items - merger-related costs | 5 | | | 39 | | | (87) | % |
Special items - impairment charges and other | 350 | | | — | | | NM |
Special items - restructuring charges | 322 | | | — | | | NM |
Total operating expenses | $ | 3,938 | | | $ | 5,742 | | | (31) | % |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Fuel expense | $ | 477 | | | $ | 443 | | | 8 | % |
Non-fuel operating expenses, excluding special items | 2,371 | | | 2,352 | | | 1 | % |
Payroll Support Program grant wage offset | (914) | | | (362) | | | 152 | % |
Special items - impairment charges and other | 14 | | | 229 | | | (94) | % |
Special items - restructuring charges | (12) | | | — | | | NM |
Special items - merger-related costs | — | | | 4 | | | (100) | % |
Total operating expenses | $ | 1,936 | | | $ | 2,666 | | | (27) | % |
Fuel Expense
Aircraft fuel expense decreased $840increased $34 million, or 60%8%, compared to the ninesix months ended SeptemberJune 30, 2019.2020. The elements of the change are illustrated in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 553 | | | $ | 1.61 | | | $ | 1,397 | | | $ | 2.16 | |
Losses on settled hedges | 15 | | | 0.04 | | | 12 | | | 0.02 | |
Consolidated economic fuel expense | 568 | | | 1.65 | | | $ | 1,409 | | | $ | 2.18 | |
Mark-to-market fuel hedge adjustments | — | | | — | | | (1) | | | — | |
GAAP fuel expense | $ | 568 | | | $ | 1.65 | | | $ | 1,408 | | | $ | 2.18 | |
Fuel gallons | 344 | | | | | 646 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 552 | | | $ | 1.87 | | | $ | 430 | | | $ | 1.73 | |
(Gain)/loss on settled hedges | (7) | | | (0.02) | | | 10 | | | 0.04 | |
Consolidated economic fuel expense | 545 | | | 1.85 | | | $ | 440 | | | $ | 1.77 | |
Mark-to-market fuel hedge adjustments | (68) | | | (0.23) | | | 3 | | | 0.01 | |
GAAP fuel expense | $ | 477 | | | $ | 1.62 | | | $ | 443 | | | $ | 1.78 | |
Fuel gallons | 294 | | | | | 248 | | | |
The raw fuel price per gallon decreased 25%increased 8% due to lowerhigher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The decreaseincrease in raw fuel price per gallon during the first ninesix months of 20202021 was driven by a 26% decrease10% increase in crude oil prices, andoffset by a 56%65% decrease in refining margins.
LossesGains recognized for hedges that settled in the first ninesix months of 20202021 were $15$7 million, compared to losses of $12$10 million in the same period in 2019.2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.
We expect our economic fuel cost per gallon in the fourththird quarter to range between $1.20$1.95 and $1.25$2.00 per gallon based on current market West Coast jet fuel prices and trends.prices.
Non-fuel Expense and Non- special items
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(in millions) | (in millions) | 2020 | | 2019 | | % Change | (in millions) | 2021 | | 2020 | | % Change |
Wages and benefits | Wages and benefits | $ | 1,579 | | | $ | 1,732 | | | (9) | % | Wages and benefits | $ | 1,003 | | | $ | 1,084 | | | (7) | % |
Variable incentive pay | Variable incentive pay | 65 | | | 125 | | | (48) | % | Variable incentive pay | 67 | | | 23 | | | 191 | % |
Aircraft maintenance | Aircraft maintenance | 244 | | | 341 | | | (28) | % | Aircraft maintenance | 183 | | | 160 | | | 14 | % |
Aircraft rent | Aircraft rent | 229 | | | 247 | | | (7) | % | Aircraft rent | 124 | | | 155 | | | (20) | % |
Landing fees and other rentals | Landing fees and other rentals | 323 | | | 388 | | | (17) | % | Landing fees and other rentals | 273 | | | 214 | | | 28 | % |
Contracted services | Contracted services | 138 | | | 214 | | | (36) | % | Contracted services | 105 | | | 102 | | | 3 | % |
Selling expenses | Selling expenses | 83 | | | 236 | | | (65) | % | Selling expenses | 74 | | | 59 | | | 25 | % |
Depreciation and amortization | Depreciation and amortization | 320 | | | 317 | | | 1 | % | Depreciation and amortization | 195 | | | 215 | | | (9) | % |
Food and beverage service | Food and beverage service | 70 | | | 159 | | | (56) | % | Food and beverage service | 58 | | | 56 | | | 4 | % |
Third-party regional carrier expense | Third-party regional carrier expense | 92 | | | 125 | | | (26) | % | Third-party regional carrier expense | 67 | | | 63 | | | 6 | % |
Other | Other | 310 | | | 411 | | | (25) | % | Other | 222 | | | 221 | | | — | % |
Total non-fuel operating expenses, excluding special items | Total non-fuel operating expenses, excluding special items | $ | 3,453 | | | $ | 4,295 | | | (20) | % | Total non-fuel operating expenses, excluding special items | $ | 2,371 | | | $ | 2,352 | | | 1 | % |
Wages and Benefits
Wages and benefits decreased during the first ninesix months of 20202021 by $153$81 million, or 9%7%. The primary components of wages and benefits are shown in the following table:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Wages | $ | 1,159 | | | $ | 1,305 | | | (11) | % |
Pension—Defined benefit plans service cost | 37 | | | 31 | | | 19 | % |
Defined contribution plans | 96 | | | 100 | | | (4) | % |
Medical and other benefits | 205 | | | 203 | | | 1 | % |
Payroll taxes | 82 | | | 93 | | | (12) | % |
Total wages and benefits | $ | 1,579 | | | $ | 1,732 | | | (9) | % |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2021 | | 2020 | | % Change |
Wages | $ | 743 | | | $ | 803 | | | (7) | % |
Pension—Defined benefit plans service cost | 26 | | | 26 | | | — | % |
Defined contribution plans | 58 | | | 68 | | | (15) | % |
Medical and other benefits | 124 | | | 130 | | | (5) | % |
Payroll taxes | 52 | | | 57 | | | (9) | % |
Total wages and benefits | $ | 1,003 | | | $ | 1,084 | | | (7) | % |
Wages decreased $146$60 million, or 11%7%, on an 18%a 5% decrease in FTEs. The decrease isDecreased wages as compared to the prior period are primarily due tothe result of voluntary early-outs, as well as leaves of absence and incentive lines accepted by nearly 7,000 employees in the second and third quarters, as well as reduction in executive pay and hours for management employees.2020 which carried into 2021. These decreasesreductions were offset by increased wage rates followingwages in the mid-2019 ratificationsecond quarter as we began to rebuild staffing and provide incentives to employees in response to increasing demand. Reductions to defined-contribution plan expense, medical and other benefits, and payroll taxes are a direct result of new contracts for employees represented by the Aircraft Mechanics Fraternal Association and the International Association of Machinists.decline in wages.
For the full year, we expect wages and benefits will declineincrease compared to the prior year2020 as we reduceincrease scheduled flying and executive salaries, and realize savings generatedreturn workers from our reduction in workforce necessaryincentive leaves or other absences to align with our expectation of increased demand. Additionally, as labor shortages continue to impact many of our markets, we expect to see continued wage pressure as we offer premium and bonus pay to attract and retain employees.
Variable Incentive Pay
Variable incentive pay expense decreased $60increased $44 million, or 48%191%, during the first ninesix months of 20202021 as compared to the same period in 2019.2020. The decreaseincrease is primarily due to the expectation that incremental key financial metricstargets will not be achieved under the performance based pay program, offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July 2020, and increased operational bonuses as compared to the prior year.program.
Aircraft Maintenance
Aircraft maintenance expense decreasedincreased by $97$23 million, or 28%14%, during the first ninesix months of 20202021 compared to the same period in 2019.2020. The decreaseincrease is primarily due to increased component repairs which were delayed from 2020 as a significant reduction in engine events and heavy checks,result of increased flight hours, as well as reducedincreased power-by-the-hour expense on reducedcombined with increased utilization inof covered aircraft, offset by penalties recorded for failure to meet contractual minimum obligations.aircraft.
We expect full year aircraft maintenance expense to be lowerhigher than 20192020 on reducedincreased aircraft utilization and parking of certain aircraft.utilization.
Landing fees and other rentals
Landing fees and other rentals decreasedincreased by $65$59 million, or 17%28%, during the first ninesix months of 20202021 compared to the same period in 2019,2020, primarily due to a 39% decreasesignificant increase in departures, offset bycombined with increased rates at certain of our airports.
For the full year we expect landing fees and other rentals to decreaseincrease as compared to 2019, however, not at the same rate2020 as decreased departures. We expectwe continue to see continued rate increasesincrease capacity and departures on increased rates at many of our airports, as well as negative net settlements to cover airport operating costs.
Contracted Services
Contracted services decreased by $76 million, or 36%, during the first nine months of 2020 compared to the same period in 2019. This decrease is primarily a result of reduced vendor spend directly correlating to reduced year-over-year departures and passengers as a result of the COVID-19 pandemic.
For the full year, we expect contracted services expense to be significantly lower than in 2019, given our ongoing cost reduction efforts and significant reduction in departures.hub airports.
Selling Expense
Selling expense decreasedincreased by $153$15 million, or 65%25%, during the first ninesix months of 20202021 compared to the same period in 2019,2020, primarily driven by a significant reductionincrease in distribution costs and credit card commissions. ReducedIncreased marketing spend and sponsorship costs given the continued delay inreturn of professional sports and events also contributed to the year-over-year decline.increase.
We expect full year selling expense will decreaseincrease in-line with the reductionincrease to revenue as a result of reducedincreased distribution costs on lowerhigher bookings, as well as reducedincreased sponsorship and marketing costs.
Food and beverage service
Food and beverage service decreased by $89 million, or 56%, during the first nine months of 2020 compared to the same period in 2019. This decrease is primarily due to the 62% decrease in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges in the second quarter of 2020 and the temporary elimination of buy-on-board service.
We expect food and beverage service to decrease as compared to 2019, consistent with our expectation of reduced passengers throughout 2020.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, decreased $33increased $4 million, or 26%6%, during the first ninesix months of 20202021 compared to the same period in 2019.2020. The decreaseincrease is primarily due to a 14% decrease26% increase in SkyWest departures as compared to the prior year. Increased SkyWest activity was offset by the receipt and recognition of $14 million in pass-through of CARES Act PSP funding for pilot and flight attendant wages and benefits.
For the full year, we expect third-party regional carrier expense to be lowerhigher than 2019 due to decreased flying and reduced contractual rates.2020 driven by increased departures.
Special Items—Merger-Related Costs
We recorded special items of $5 million in the first nine months of 2020 for merger-related costs associated with our acquisition of Virgin America, compared to $39 million in the first nine months of 2019. Costs incurred in the first nine months of 2020 are primarily comprised of certain technology integration costs. We expect 2020 will be the final year in which we incur integration related charges.
Special Items - Impairment and other charges
We recorded impairment and other charges of $350$14 million in the first ninesix months of 2020, driven by our current expectation2021, consisting of decreased future cash flows stemmingcosts associated with leased aircraft that have been retired and removed from the COVID-19 pandemic. Impairment and other charges primarily consist ofoperating fleet but not yet returned to the write downlessor. We continue to fair value for ten owned Airbus A320 aircraft identified for sale, the full write-down of the operating lease assets and related spare inventory and parts, as well asevaluate total estimated leasecosts to return costs for certain leased Airbus aircraft which werethese permanently parked the write-down of our owned Q400 fleetaircraft, and make updates to fair value, and the full write-off of gate assets at Dallas Love Field.
Additional impairment charges may be recorded as we finalize our long-term fleet strategy.total expense where necessary.
Special Items - Restructuring charges
We recorded a restructuring chargesbenefit of $322$12 million in the first ninesix months of 2020 relating to the right-sizing of our workforce2021 primarily as a result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for thoseissuing recall notices to pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payouts.lines for periods earlier than were previously anticipated.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline reported an adjusted pretax loss was $1 billion$468 million in the first ninesix months of 2020,2021, compared to an adjusted pretax profitloss of $761$556 million in the same period in 2019.2020. The $1.8 billion shift$88 million improvement to pretax loss was driven by a $3.3 billion decrease$163 million increase in Mainline operating revenues offset bycoupled with a $768$28 million decrease in Mainline non-fuel operating expense andexpense. These improvements were offset by a $743$69 million decreaseincrease in Mainline fuel expense.
As compared to the prior year, lowerhigher Mainline revenues are primarily attributable to a 64% decrease25% increase in traffic andon a 4820 point decreaseincrease in capacity, driven by the significant reductionincrease in demand as a result ofrecovering from the COVID-19 pandemic. Non-fuel operating expenses decreased significantly on cost savings driven by reducedincreased from higher variable costs on reducedincreased capacity, as well as decreasedrising wages and benefits expense from voluntary leaves of absenceas we expand our workforce to meet growing demand and a reduction in hours for management employees. Lowerleisure travel seasonality. Higher raw fuel prices, combined with decreasedincreased consumption from the reduction in flying, drove the decreasegrowth in Mainline fuel expense.
Regional
Regional operations generated aincurred an adjusted pretax loss of $298$206 million in the first ninesix months of 2020,2021, compared to break-evenan adjusted pretax loss of $202 million in the first ninesix months of 2019.2020. The shift to a pretaxincreased loss was attributable to a $486$72 million decreaseincrease in non-fuel operating revenues, partiallyexpenses and a $36 million increase in fuel costs, offset by a $98$104 million decreaseincrease in fuel costs andoperating revenues.
The increase to regional revenues is driven by a $90 million decrease50% increase in traffic as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses. The decrease in regional revenues is primarily due to the 20% decrease in capacity, spurred by the COVID-19 pandemic.
Horizon
Horizon achieved aan adjusted pretax profit of $27$26 million in the first ninesix months of 2020,2021, compared to an adjusted pretax profit of $33$16 million in the same period in 2019,2020, primarily due to significantimproved operational performance and cost reduction efforts implemented in response to the COVID-19 pandemic.management.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, increasemanage liquidity and help to preserve the relative strength of our balance sheet. From the onset of the pandemic,In 2020, we have taken the following keytook significant actions to enhance and preserve our liquidity:liquidity, withstand depressed demand, and prepare for the recovery ahead. In 2021, we have achieved the following, which we believe positions us well for recovery:
•Obtained approximately $1.1Generated positive operating cash flow of $1.0 billion, bolstered by improved advance bookings for increased demand for air travel, and the receipt of $1.2 billion in payroll support funding from the U.S. Treasury under extensions of CARES Act funding to use towards paymentprograms, $892 million of wages and benefits;which is included in operating cash flow;
•Executed an agreement withRepaid $681 million in debt, including the U.S. Departmenttermination of the Treasury to obtain up to $1.9 billion through the CARES Act Loan program, secured by certain Mileage Plan assetsloan, and cash flow streams, 34 aircraft and 15 spare engines;the full repayment of two outstanding lines of credit;
•Obtained $1.2 billion in financing through the issuance of EETC, collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft;Decreased debt-to-capitalization ratio to 56% at June 30, 2021 from 61% at December 31, 2020;
•Raised $589 million in secured financing collateralized by 32 aircraft;
•Drew $400 millionFinalized a previously announced amendment to the existing aircraft purchase agreement with Boeing, which significantly reduced our 2021 capital commitments and provides slide rights to defer commitments from existing credit facilities;
•Suspended our share repurchase program and quarterly dividend indefinitely,2022 to later years, and;
•Reduced plannedMaintained low capital expenditures, by nearly $550which are expected to be approximately $225 million for 2020,in 2021, including suspensionrenegotiated timing of pre-delivery payments and deferral of non-essential capital projects.
Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors. The liquidity raised from these financings, coupled with
As the availability of additional liquiditybusiness continues to recover and our meaningful cost reductions have provided the Company with confidence in our abilityreturns to withstand the depressed demand and prepare for the recovery ahead. Despite the significant amount of debt raised, our adjusted net debt is flat as compared to the end of 2019. We will also continue to execute additional cost restructuring initiatives in an effort to transition from a cash-burn focus towardsprofitability, reducing outstanding debt and repairingstrengthening our balance sheet. is a high priority. Based on our expectations about the recovery ahead, we expect to generate cash flow from operations of zero to $100 million in the third quarter. This is lower than in the second quarter due to the expectation of no further government support and seasonal booking patterns that result in less cash bookings for future travel.
We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations and meet our debt payment obligations, and to remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
The table below presents the major indicators of financial condition and liquidity: | | | | | | | | | | | | | | | | | |
(in millions) | June 30, 2021 | | December 31, 2020 | | Change |
Cash and marketable securities | $ | 3,951 | | | $ | 3,346 | | | 18 % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 103 | % | | 94 | % | | 9 pts |
Total debt | 3,188 | | | 3,495 | | | (9) % |
Shareholders’ equity | $ | 3,324 | | | $ | 2,988 | | | 11% |
| | | | | | | | | | | | | | | | | |
(in millions) | September 30, 2020 | | December 31, 2019 | | Change |
Cash and marketable securities | $ | 3,759 | | | $ | 1,521 | | | 147 % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 75 | % | | 22 | % | | 53 pts |
Total debt | 3,822 | | | 1,499 | | | 155 % |
Shareholders’ equity | $ | 3,454 | | | $ | 4,331 | | | (20)% |
| Debt-to-capitalization, adjusted for operating leases | Debt-to-capitalization, adjusted for operating leases | | Debt-to-capitalization, adjusted for operating leases | |
(in millions) | (in millions) | September 30, 2020 | | December 31, 2019 | | Change | (in millions) | June 30, 2021 | | December 31, 2020 | | Change |
Long-term debt, net of current portion | Long-term debt, net of current portion | $ | 2,672 | | | $ | 1,264 | | | 111% | Long-term debt, net of current portion | $ | 2,319 | | | $ | 2,357 | | | (2)% |
Capitalized operating leases | Capitalized operating leases | 1,603 | | | 1,708 | | | (6)% | Capitalized operating leases | 1,485 | | | 1,558 | | | (5)% |
COVID-19 related borrowings(a) | COVID-19 related borrowings(a) | 769 | | | — | | | NM | COVID-19 related borrowings(a) | 425 | | | 734 | | | (42)% |
Adjusted debt, net of current portion of long-term debt | Adjusted debt, net of current portion of long-term debt | $ | 5,044 | | | $ | 2,972 | | | 70% | Adjusted debt, net of current portion of long-term debt | $ | 4,229 | | | $ | 4,649 | | | (9)% |
Shareholders' equity | Shareholders' equity | 3,454 | | | 4,331 | | | (20)% | Shareholders' equity | 3,324 | | | 2,988 | | | 11% |
Total invested capital | Total invested capital | $ | 8,498 | | | $ | 7,303 | | | 16% | Total invested capital | $ | 7,553 | | | $ | 7,637 | | | (1)% |
| Debt-to-capitalization, including operating leases | Debt-to-capitalization, including operating leases | 59 | % | | 41 | % | | 18 pts | Debt-to-capitalization, including operating leases | 56 | % | | 61 | % | | (5) pts |
(a)To best reflect our leverage, at September 30, 2020, we included the remaining short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.
| Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | | Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | |
(in millions) | (in millions) | September 30, 2020 | | December 31, 2019 | (in millions) | June 30, 2021 | | December 31, 2020 |
Current portion of long-term debt | Current portion of long-term debt | $ | 1,150 | | | $ | 235 | | Current portion of long-term debt | $ | 869 | | | $ | 1,138 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 283 | | | 269 | | Current portion of operating lease liabilities | 263 | | | 290 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 2,672 | | | 1,264 | | Long-term debt, net of current portion | 2,319 | | | 2,357 | |
Long-term operating lease liabilities, net of current portion | Long-term operating lease liabilities, net of current portion | 1,320 | | | 1,439 | | Long-term operating lease liabilities, net of current portion | 1,222 | | | 1,268 | |
Total adjusted debt | Total adjusted debt | 5,425 | | | 3,207 | | Total adjusted debt | 4,673 | | | 5,053 | |
Less: Cash and marketable securities | Less: Cash and marketable securities | (3,759) | | | (1,521) | | Less: Cash and marketable securities | (3,951) | | | (3,346) | |
Adjusted net debt | Adjusted net debt | $ | 1,666 | | | $ | 1,686 | | Adjusted net debt | $ | 722 | | | $ | 1,707 | |
| (in millions) | (in millions) | Last Twelve Months Ended September 30, 2020 | | Last Twelve Months Ended December 31, 2019 | (in millions) | Twelve Months Ended June 30, 2021 | | Twelve Months Ended December 31, 2020 |
GAAP Operating Income(a) | $ | (928) | | | $ | 1,063 | | |
GAAP Operating Loss(a) | | GAAP Operating Loss(a) | $ | (778) | | | $ | (1,775) | |
Adjusted for: | Adjusted for: | | Adjusted for: | |
Special items | (78) | | | 44 | | |
Payroll Support Program grant wage offset and special items | | Payroll Support Program grant wage offset and special items | (712) | | | 71 | |
Mark-to-market fuel hedge adjustments | Mark-to-market fuel hedge adjustments | (5) | | | (6) | | Mark-to-market fuel hedge adjustments | (79) | | | (8) | |
Depreciation and amortization | Depreciation and amortization | 426 | | | 423 | | Depreciation and amortization | 400 | | | 420 | |
Aircraft rent | Aircraft rent | 313 | | | 331 | | Aircraft rent | 268 | | | 299 | |
EBITDAR | EBITDAR | $ | (272) | | | $ | 1,855 | | EBITDAR | $ | (901) | | | $ | (993) | |
Adjusted net debt to EBITDAR | Adjusted net debt to EBITDAR | (6.1x) | | 0.9x | Adjusted net debt to EBITDAR | (0.8x) | | (1.7x) |
(a)Operating incomeloss can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.
ANALYSIS OF OUR CASH FLOWS
Cash Used inProvided by Operating Activities
For the first ninesix months of 2020,2021, net cash provided by operating activities was $116 million,$1.0 billion, compared to $1.4 billion$321 million during the same period in 2019.2020. The $1.3 billion decrease$686 million increase in our operating cash flows is primarily attributable to a $793$712 million decline inimprovement to net income, netaided by the receipt and recognition of non-cash special items for impairment and workforce reduction. The decrease$892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is also due to continued increases in advanced bookings and a significant cashreduction in refund activity and a decline in advance bookings aswhen compared to the same period in the prior year, all as a resultfirst six months of the COVID-19 pandemic.2020.
Cash Used in Investing Activities
Cash used in investing activities was $767 million$1.1 billion during the first ninesix months of 2020,2021, compared to $708$124 million during the same period of 2019.2020. The increase to cash used in investing activities is primarily due to an increase in net purchases of marketable securities, which were $572$963 million in the first ninesix months of 2020,2021, compared to $218net sales of $34 million in the ninesix months ended SeptemberJune 30, 2019. Increased2020. The shift to net purchases is primarily driven by additional cash on hand from borrowingsincreased operating cash flow and the PSP program, which allowed the Company to invest additional funds. These increases were offset by the postponement of capital expenditures in 2020 as a result of the COVID-19 pandemic.
Cash Used inProvided by (Used in) Financing Activities
Cash fromused in financing activities was $2.3$281 million during the first six months of 2021 compared to cash provided by financing activities of $1.1 billion during the same period in 2020. During the first ninesix months of 20202021, we utilized cash on hand to repay $681 million of outstanding long-term debt, compared to cash used for financing activitiespayments of $538$125 million during the same period in 2019. During the first nine months of 2020, we had2020. These payments were offset by proceeds from debt issuances of $2.6 billion, including funding from the EETC,$363 million, primarily a result of the loan portion of the proceeds from the PSP and $135 million drawn on the CARES Act secured term loan. These proceeds were partially offset by debt payments of $238 million, dividend payments totaling $45 million, and $31 millionPSP, compared to $1.3 billion issued in common stock repurchases.2020 in response to the COVID-19 pandemic.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of SeptemberJune 30, 2020,2021, we have firm orders to purchase 3575 aircraft, and firm commitments to lease 13 aircraft. Alaska also has cancelablean agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by eight aircraft in 2022. Alaska also has cancellable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2026. We could incur a loss2027. At this time, we do not expect to take delivery of pre-delivery payments and credits as a cancellation fee.these 30 Airbus aircraft. Alaska also has options to acquire 37 B73739 B737-9 MAX aircraft with deliveries from 20212024 through 2024,2026, and Horizon has options to acquire 3021 E175 aircraft with deliveries from 20222023 through 2024. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, Alaska has options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
Given the drastically reduced demand for air travel as a result of the COVID-19 pandemic, we are currently evaluating
The following table summarizes our overall fleet strategy and long-term plan. We are also in the process of negotiating with aircraft manufacturers and lessors to optimize timing of fleet activity. It is probable that the current outlook as stated below will change significantly. This table represents anticipated fleet activitycount by year, as of SeptemberJune 30, 2020:
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| Actual Fleet | | Anticipated Fleet Activity |
Aircraft | September 30, 2020 | | 2020 Additions | | 2020 Removals | | December 31, 2020 | | 2021 Changes | | December 31, 2021 |
B737 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | |
B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | |
B737-800 | 61 | | | — | | | — | | | 61 | | | — | | | 61 | |
B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | |
B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | |
B737 MAX9(a) | — | | | 3 | | | — | | | 3 | | | 15 | | | 18 | |
A320(b) | 41 | | | — | | | — | | | 41 | | | (7) | | | 34 | |
A321neo | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
Total Mainline Fleet | 217 | | | 3 | | | — | | | 220 | | | 8 | | | 228 | |
Q400 operated by Horizon | 32 | | | — | | | — | | | 32 | | | — | | | 32 | |
E175 operated by Horizon | 30 | | | — | | | — | | | 30 | | | — | | | 30 | |
E175 operated by third party | 32 | | | — | | | — | | | 32 | | | — | | | 32 | |
Total Regional Fleet | 94 | | | — | | | — | | | 94 | | | — | | | 94 | |
Total | 311 | | | 3 | | | — | | | 314 | | | 8 | | | 322 | |
2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual Fleet | | Anticipated Fleet Activity(a) |
Aircraft | June 30, 2021 | | 2021 Additions | | 2021 Removals | | Dec 31, 2021 | | 2022 Changes | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 |
B737 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | |
B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | | | — | | | 11 | |
B737-800 | 61 | | | — | | | — | | | 61 | | | — | | | 61 | | | — | | | 61 | |
B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | | | — | | | 12 | |
B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | | | — | | | 79 | |
B737-9 MAX | 5 | | | 7 | | | — | | | 12 | | | 31 | | | 43 | | | 22 | | | 65 | |
A320(b) | 21 | | | 7 | | | (1) | | | 27 | | | (3) | | | 24 | | | (24) | | | — | |
A321neo | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | | — | | | 10 | |
Total Mainline Fleet | 202 | | | 14 | | | (1) | | | 215 | | | 28 | | | 243 | | | (2) | | | 241 | |
Q400 operated by Horizon(c) | 32 | | | — | | | — | | | 32 | | | — | | | 32 | | | — | | | 32 | |
E175 operated by Horizon(c) | 30 | | | — | | | — | | | 30 | | | 5 | | | 35 | | | 4 | | | 39 | |
E175 operated by third party(c) | 32 | | | — | | | — | | | 32 | | | 8 | | | 40 | | | — | | | 40 | |
Total Regional Fleet | 94 | | | — | | | — | | | 94 | | | 13 | | | 107 | | | 4 | | | 111 | |
Total | 296 | | | 14 | | | (1) | | | 309 | | | 41 | | | 350 | | | 2 | | | 352 | |
(a)The three B737 MAX9 aircraft previously reflected in 2020 were originally contracted for delivery in 2019Anticipated fleet activity reflects intended early retirement and delayed due to the MAX grounding, andextensions or replacement of certain leases, not all of which have been shifted to 2020, but are not expected to enter revenue service until 2021. Seven B737 MAX9 deliveries originally contracted for 2020 have been shifted to 2021 based on our current estimate of expected delivery dates. The Company continues to discuss delivery timelines with Boeing.yet.
(b)Actual fleet at SeptemberJune 30, 2020,2021, excluding 20 Airbus aircraft permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12 of these aircraft to operating service, seven of which are planned for 2021 and five for 2022.
(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. Under the terms of our capacity purchase agreement with a third party, in 2023 an additional spare aircraft will be leased to support the operational integrity of the network.
For future firm orders and option exercises, we may finance the aircraft through cash flow from operations or long-term debt, or lease arrangements.debt.
Fuel Hedge Positions
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. However, given the sharp decline in demand and our capacity resulting from the COVID-19 pandemic, we are currently overhedged relative to our target of 50% of consumption through the remainder of 2020. Our crude oil positions are as follows:
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| Approximate Gallons Hedged (in millions) | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
| | | | | |
Fourth Quarter 2020 | 90 | | $64 | | $2 |
Full Year 2020 | 90 | | $64 | | $2 |
First Quarter 2021 | 60 | | $62 | | $2 |
Second Quarter 2021 | 65 | | $60 | | $2 |
Third Quarter 2021 | 55 | | $56 | | $2 |
Fourth Quarter 2021 | 35 | | $50 | | $3 |
Full Year 2021 | 215 | | $58 | | $2 |
First Quarter 2022 | 15 | | $51 | | $3 |
Full Year 2022 | 15 | | $51 | | $3 |
| | | | | | | | | | | | | | | | | |
| Approximate Gallons Hedged (in millions) | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Third Quarter 2021 | 100 | | $60 | | $2 |
Fourth Quarter 2021 | 90 | | $61 | | $3 |
Remainder of 2021 | 190 | | $60 | | $2 |
First Quarter 2022 | 80 | | $67 | | $3 |
Second Quarter 2022 | 60 | | $66 | | $3 |
Third Quarter 2022 | 40 | | $70 | | $3 |
Fourth Quarter 2022 | 20 | | $71 | | $3 |
Full Year 2022 | 200 | | $68 | | $3 |
Contractual Obligations
The following table provides a summary of our contractual obligations as of SeptemberJune 30, 2020.2021. For agreements with variable terms, amounts included reflect our minimum obligations.
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(in millions) | Remainder of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Beyond 2024 | | Total |
Current and long-term debt obligations | $ | 73 | | | $ | 1,201 | | | $ | 393 | | | $ | 357 | | | $ | 265 | | | $ | 1,568 | | | $ | 3,857 | |
Aircraft lease commitments | 88 | | | 310 | | | 276 | | | 219 | | | 166 | | | 679 | | | 1,738 | |
Facility lease commitments | 3 | | | 9 | | | 8 | | | 7 | | | 7 | | | 84 | | | 118 | |
Aircraft maintenance deposits | 7 | | | 35 | | | 45 | | | 24 | | | 6 | | | 2 | | | 119 | |
Aircraft purchase commitments (a) | 343 | | | 549 | | | 333 | | | 192 | | | 21 | | | 25 | | | 1,463 | |
Interest obligations (b) | 16 | | | 118 | | | 88 | | | 75 | | | 63 | | | 153 | | | 513 | |
Other obligations (c) | 39 | | | 181 | | | 185 | | | 190 | | | 197 | | | 910 | | | 1,702 | |
Total | $ | 569 | | | $ | 2,403 | | | $ | 1,328 | | | $ | 1,064 | | | $ | 725 | | | $ | 3,421 | | | $ | 9,510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Beyond 2025 | | Total |
Current and long-term debt obligations | $ | 227 | | | $ | 796 | | | $ | 334 | | | $ | 240 | | | $ | 261 | | | $ | 1,353 | | | $ | 3,211 | |
Aircraft lease commitments(a) | 162 | | | 280 | | | 219 | | | 167 | | | 159 | | | 633 | | | 1,620 | |
Facility lease commitments | 6 | | | 10 | | | 9 | | | 8 | | | 6 | | | 88 | | | 127 | |
Aircraft-related commitments(b) | 107 | | | 1,458 | | | 1,207 | | | 291 | | | 76 | | | 12 | | | 3,151 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Interest obligations (c) | 55 | | | 98 | | | 72 | | | 57 | | | 51 | | | 175 | | | 508 | |
Other obligations (d) | 89 | | | 184 | | | 189 | | | 196 | | | 197 | | | 898 | | | 1,753 | |
Total | $ | 646 | | | $ | 2,826 | | | $ | 2,030 | | | $ | 959 | | | $ | 750 | | | $ | 3,159 | | | $ | 10,370 | |
(a)Although the Company has contractual obligationsFuture minimum lease payments for purchaseaircraft includes commitments in 2020, informal agreementsfor aircraft which have been reached with aircraft manufacturers to defer payments beyond 2020.removed from operating service, as we have remaining obligation under existing terms.
(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.
(c)For variable-rate debt, future obligations are shown above using forecasted interest rates forecast as of SeptemberJune 30, 2020.2021.
(c)(d)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.
During the nine months ended September 30, 2020, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations. The Company has also deferred 2020 aircraft payments, including those related to the B737 MAX9, to periods beyond 2020. Discussions remain ongoing with aircraft manufacturers and lessors to optimize the timing of aircraft deliveries and lease returns.
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.
While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. Given our current expectation of operating losses for the remainder of the year, we expect to file for a cash refund for the 2020 tax year.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three months ended SeptemberJune 30, 2020.2021. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 2, "COVID-19," for discussion about the estimates used in the Company's impairment analyses.2020.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Adjusted net debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit
Aircraft Stage Length - represents the average miles flown per aircraft departure
ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items
CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control
Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus capitalized operating leases) divided by total equity plus adjusted debt
Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding
Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised
Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period
Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers
Mainline - represents flying Boeing 737, Airbus 320 family and Airbus 321neo jets and all associated revenues and costs
Productivity - number of revenue passengers per full-time equivalent employee
RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile
Regional - represents capacity purchased by Alaska from Horizon SkyWest and PenAir.SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon SkyWest and PenAirSkyWest under the respective capacity purchased arrangement (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon.
RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM
Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
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ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2020,2021, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of SeptemberJune 30, 2020.2021.
Changes in Internal Control over Financial Reporting
In the quarter ended September 30, 2020, the Company implemented a new revenue accounting system, and updated the relevant control structure. Other than this implementation, thereThere have been no changes in the Company’s internal controls over financial reporting during the quarter ended SeptemberJune 30, 2020,2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
PART II
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ITEM 1. LEGAL PROCEEDINGS |
We areThe Company is a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these mattersits business and with respect to which no material liability is not likelyexpected. Liabilities for litigation related contingencies are recorded when a loss is determined to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant lawbe probable and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. OnIn February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets. It did not award injunctive relief against Alaska Airlines.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
Except for the additional risk factors below, thereThere have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and is expected to continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.
In late 2019, an outbreak of novel coronavirus and its resulting disease (COVID-19) was detected in Wuhan, China. Since that time, COVID-19 has spread rapidly throughout the globe, including within the United States, where over one million cases have been positively diagnosed to date. In March 2020, the President of the United States declared a national emergency in response to the rapid spread, and all markets we serve have implemented some measure of travel restriction or stay-at-home order. These orders, combined with a wariness among the public of travel by aircraft due to perceived risk of infection, have resulted in an unprecedented decline in business and leisure travel. Cancellations of conventions and conferences, sporting events, concerts and other similar events, as well as the closure of popular tourist destinations, have contributed to this decline. This reduction in demand has materially negatively impacted our revenues and results of operations. As there is no indication of when these restrictions may be lifted or when demand may return, we expect to continue to see negative impacts from the COVID-19 pandemic on our business. Our operations could be negatively affected further if our employees are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to additional governmental COVID-19 curfews or “shelter
in place” health orders or similar restrictions. Measures restricting the ability of our airport or inflight employees to come to work may cause a further deterioration in our service or operations, all of which could negatively affect our business.
In response to the pandemic, we have implemented and continue to implement a comprehensive strategy to mitigate the impacts on our business. This strategy may itself have negative impacts on our business and operations. One such action is the waiver of change fees and the ability to rebook travel for an extended period beyond standard rebooking terms. The loss of change fee revenue, combined with ongoing significant ticket cancellation activity, has adversely impacted our revenues and liquidity, and we expect such impacts to continue if governmental authorities extend existing travel restriction or stay-at-home orders or impose new orders or other restrictions intended to mitigate the spread of COVID-19, if businesses continue to restrict nonessential travel for their employees, or if the perceived risk of infection persists.
We have also implemented significant cash preservation and cost reduction strategies in response to the impacts of COVID-19. These strategies include, but are not limited to, capital expenditure reductions, hiring freezes, solicitation of voluntary leaves of absence and renegotiation of contractual terms and conditions. These measures, while helpful in slowing the rate at which we utilize our cash, are not expected to fully recover the loss of cash as a result of decreased ticket sales.
The Company may also experience significant supply chain disruptions as the COVID-19 pandemic may also adversely impact our suppliers. See “Item 1A., Risk Factors – We are dependent on a limited number of suppliers for aircraft and parts” of our Annual Report on Form 10-K for further discussion of risks related to the Company’s dependence on a limited number of suppliers. Should COVID-19 cause our limited vendors to have performance problems, reduced or ceased operations, or bankruptcies, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.
At this time, we are unable to predict what impact the pandemic will have on future customer behavior. Future business travel may be impacted by widespread use of videoconferencing or the reduction of business travel budgets. Travelers may also become more reluctant in general to travel. In addition, the Company has incurred, and will continue to incur COVID-19 related costs for enhanced aircraft cleaning and additional procedures to limit transmission among employees and guests. Although these procedures are elective, the industry may in the future be subject to further cleaning and safety measures, which may be costly and take a significant amount of time to implement. These contingencies, individually and combined, could have a material adverse impact on our business. See “Item 1A., Risk Factors – Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.” of our Annual Report on Form 10-K for further discussion of the Company’s vulnerability to a general economic downturn or recession.
We have a significant amount of debt and fixed obligations and have incurred substantial incremental debt in response to the COVID-19 pandemic. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position.
We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments, as well as non-cancelable commitments for airport and facility leases, maintenance and other obligations. In response to the COVID-19 pandemic, we have incurred and continue to seek new financing sources to fund our operations while demand remains at an unprecedented low level and for the unknown duration of any economic recovery period. Further, as we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.
Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, the impacts of COVID-19, or from other risks as described in “Item 1A., Risk Factors” of our Annual Report on Form 10-K, may prohibit us from doing so in the future and may adversely affect our overall liquidity.
We have accepted certain conditions by accepting funding under the payroll support program of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The CARES Act was signed into law on March 27, 2020, providing U.S. airlines and related businesses the ability to access liquidity in the form of grants, loans, loan guarantees and other investments by the U.S. government.
In the second quarter of 2020, the Company, Alaska Airlines, Horizon Air, and McGee entered agreements with the United States Department of the Treasury (Treasury) to secure approximately $1 billion of funding under the CARES Act payroll support program (PSP), of which $290 million is in the form of an unsecured senior term loan payable over ten years. PSP proceeds must be used exclusively for employee payroll and benefits expenses in accordance with the terms and conditions of the PSP agreements and the applicable provisions of the CARES Act.
In the third quarter of 2020, the Company and its airline subsidiaries entered agreements with the Treasury to obtain access to term loans of approximately $1.3 billion under the CARES Act loan program. Funds drawn under the loan program must be secured with assets owned by Alaska Airlines or Horizon Air. In October of 2020, Treasury informed the Company it would amend these agreements to increase the total amount of available secured loan funds to $1.9 billion.
To date, the Company has drawn $135 million from the loan facility, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021. All proceeds must be used for general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreements and the applicable provisions of the CARES Act. All borrowings are pre-payable in whole or in part and are ultimately due and payable on September 26, 2025 (or March 28, 2025 with respect to the portion of the loan, if any, secured with certain loyalty program assets).
In addition to repayment commitments, we are subject to the following conditions under our CARES Act PSP and loan agreements:
•Alaska Airlines, Horizon Air and McGee had to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits for non-officer employees through September 30, 2020;
•Alaska Airlines and Horizon Air had to maintain DOT-prescribed levels of air service to markets they served as of March 1, 2020, through September 30, 2020 (subject to extension through March 1, 2022);
•The Company may not repurchase its common stock or pay dividends on its common stock until the later of September 30, 2021, or one year after secured loan funds are repaid;
•The Company must meet minimum liquidity and collateral coverage ratio requirements until the secured loan funds are repaid;
•Compensation and severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through the later of March 24, 2022, or one year after secured loan funds are repaid; and
•The Company must maintain certain internal controls and records, and provide any additional reporting required by the U.S. government, relating to PSP and loan funding.
These conditions may adversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate at market-competitive levels and retain key personnel.2020.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.
On September 30, 2020,In the second quarter of 2021, the Company issued the New PSP Warrant (as defined in Item 5. “Other Information” below)271,437 warrants to the United States Department of the Treasury (“Treasury”) in connection with the payroll support programPayroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 915,9291,455,436 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $31.61$52.25 (49,625 shares related to PSP2) and $66.39 (221,812 shares related to PSP3) per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
In addition, in connection with increases on September 28, 2020 and October 30, 2020 in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, the Company may issue the Additional Loan Program Warrants (as defined in Item 5. “Other Information” below) to Treasury pursuant to the loan program, resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program. A warrant to purchase 427,080 shares of the Company’s common stock was issued on September 28, 2020. Additional warrants will be issued to Treasury in conjunction with each new borrowing under the A&R Loan Agreement (as defined in Item 5. “Other Information” below). Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were or, when issued will be, issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. MINE SAFETY DISCLOSURES |
None.
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ITEM 5. OTHER INFORMATION |
On September 30, 2020, the Company and Treasury agreed to an increase of $28.7 million in the payroll support available to Alaska Airlines and Horizon under the payroll support program (PSP) under the CARES Act, which resulted in an increase in the unsecured term loan borrowed from Treasury by approximately $8.6 million, bringing the total amount in unsecured funds borrowed from Treasury under the payroll support program for Alaska Airlines and Horizon to approximately $280.8 million (the “New Maximum Alaska Airlines Loan Amount”). As a result of this increase, on September 30, 2020, the Company issued additional warrants to Treasury to purchase 27,258 shares of the Company’s common stock (the “New PSP Warrant”).None.
In addition, on September 28, 2020, the Company, Alaska Airlines and Treasury agreed to an increase of $173 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in an initial aggregate lender commitment of $1,301 million. On October 30, 2020, the Company, Alaska Airlines and Treasury agreed to a further increase of $627 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in a new aggregate initial lender commitment of $1,928 million under such program. In connection with the new aggregate initial lender commitment, Alaska Airlines, as Borrower, the Company, as Parent, the guarantors party thereto from time to time, the Treasury, as the initial lender, and Bank of New York Mellon, as administrative agent and collateral agent, entered into a Restatement Agreement (the “Restatement Agreement”) to amend and restate the Loan and Guarantee Agreement (the “A&R Loan Agreement”), and Alaska Airlines, Horizon and, in each case, the guarantors party thereto each entered into an amended and restated Pledge and Security Agreement (together, the “A&R Pledge and Security Agreements”) relating to the collateral that secure the new aggregate initial lender commitment pursuant to the A&R Loan Agreement. As a result of the increases in the aggregate initial lender commitment, additional warrants to purchase 2,530,845 shares of the Common Stock are issuable by the Company to Treasury from time to time in connection with borrowings made pursuant to the A&R Loan Agreement (the “Additional Loan Program Warrants”), resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program.
On November 4, 2020, the Board of Directors (the “Board”) adopted resolutions (the “Resolutions”) pursuant to Section 204 of the General Corporation Law of the State of Delaware, which Resolutions ratify, confirm and approve the additional corporate actions taken on September 28, 2020, September 30, 2020 and October 30, 2020 as described above. Specifically, the Resolutions ratify, confirm and approve: (i) the New Maximum Alaska Airlines Loan Amount, the issuance to Treasury of the New PSP Warrant and the issuance of shares of the Company’s common stock upon exercise of the New PSP Warrant; and (ii) the New Initial Lender Commitment, including the execution, delivery and performance of the Restatement Agreement, the A&R Loan Agreement, the A&R Pledge and Security Agreements and all additional loan documents required to be executed or otherwise related to such agreements, as well as the transactions contemplated by such loan documents, the issuance to Treasury of the Additional Loan Program Warrants and the issuance of shares of the Company’s common stock upon exercise of the Additional Loan Program Warrants. Pursuant to the Resolutions, the Board ratified the foregoing corporate actions because it determined that such actions may not have been approved by the Board. Any claim that the defective corporate acts or putative stock ratified by the Board are void or voidable due to the failure of authorization specified in the Resolutions, or that the Delaware Court of Chancery should declare in its discretion that the ratification thereof not be effective or be effective only on certain conditions, must be brought within 120 days from the later of the validation effective time (which is November 4, 2020), and the giving of this notice (which is deemed given on the date that this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission).
The following documents are filed as part of this report:
1.Exhibits: See Exhibit Index.
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.
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ALASKA AIR GROUP, INC. | |
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/s/ CHRISTOPHER M. BERRY | |
Christopher M. Berry | |
Vice President Finance and Controller | |
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November 5, 2020August 3, 2021 | |
EXHIBIT INDEX
| | | | | | | | | | | | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
4.1 | | 8-K | July 6, 2020 | 4.1 |
4.2 | | 8-K | July 6, 2020 | 4.2 |
4.3 | | 8-K | July 6, 2020 | 4.3 |
4.4 | | 8-K | July 6, 2020 | 4.4 |
4.5 | | 8-K | July 6, 2020 | 4.5 |
4.6 | | 8-K | July 6, 2020 | 4.6 |
4.7 | | 8-K | July 6, 2020 | 4.7 |
4.8 | | 8-K | July 6, 2020 | 4.8 |
4.9 | | 8-K | July 6, 2020 | 4.9 |
4.10 | Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider. * | 8-K | July 6, 2020 | 4.10 |
4.11 | | 8-K | July 6, 2020 | 4.11 |
4.12 | Participation Agreement (N568AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, ** | 8-K | July 6, 2020 | 4.12 |
4.13 | | 8-K | July 6, 2020 | 4.13 |
4.14 | Participation Agreement (N494AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, *** | 8-K | July 6, 2020 | 4.14 |
4.15 | | 8-K | July 6, 2020 | 4.15 |
4.16 | Participation Agreement (N626QX), dated as of July 2, 2020, among Horizon U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, **** | 8-K | July 6, 2020 | 4.16 |
4.17 | | 8-K | July 6, 2020 | 4.17 |
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4.18 | Form of Series 2020-1 Equipment Notes issued by Alaska Airlines (included in Exhibits 4.13 and 4.15). | 8-K | July 6, 2020 | 4.18 |
4.19 | Form of Series 2020-1 Equipment Notes issued by Horizon (included in Exhibit 4.17). | 8-K | July 6, 2020 | 4.19 |
4.20† | | 10-Q | | |
4.21† | | 10-Q | | |
4.22† | | 10-Q | | |
4.23† | | 10-Q | | |
4.24† | | 10-Q | | |
10.1† | | 10-Q | | |
10.2† | Loan and Guarantee Agreement, dated as of September 28, 2020, and amended and restated as of October 30, 2020 among Alaska Airlines, Inc., as Borrower, the Guarantors party hereto from time to time, the United States Department of the Treasury, and The Bank of New York Mellon, as Administrative Agent and Collateral Agent | 10-Q | | |
10.3† | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
99.1 | | 8-K | July 6, 2020 | 99.1 |
99.2 | | 8-K | July 6, 2020 | 99.2 |
99.3 | | 8-K | July 6, 2020 | 99.3 |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
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† | Filed herewith |
* | Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and it (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed. |
** | Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.1 filed herewith contains a list of documents applicable to the Boeing 737-890 Aircraft (other than the Aircraft bearing U.S. Registration No. N568AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.12 and 4.13, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-890 Aircraft. Exhibit 99.1 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.12 and 4.13 with respect to the Aircraft bearing U.S. Registration No. N568AS. |
*** | Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.2 filed herewith contains a list of documents applicable to the Boeing 737-990ER Aircraft (other than the Aircraft bearing U.S. Registration No. N494AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.14 and 4.15, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-990ER Aircraft. Exhibit 99.2 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.14 and 4.15 with respect to the Aircraft bearing U.S. Registration No. N494AS. |
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**** | Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.3 filed herewith contains a list of documents applicable to the Embraer E175 LR Aircraft (other than the Aircraft bearing U.S. Registration No. N626QX) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.16 and 4.17, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Embraer E175 LR Aircraft. Exhibit 99.3 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.16 and 4.17 with respect to the Aircraft bearing U.S. Registration No. N626QX. |
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Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
4.1† | | | | |
4.2† | | | | |
4.3† | | | | |
4.4† | | | | |
4.5† | | | | |
4.6† | | | | |
10.1† | | | | |
10.2† | | | | |
10.3† | | | | |
10.4† | | | | |
10.5†* | | | | |
10.6† | | | | |
10.7† | | | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
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† | Filed herewith |
* | Certain confidential portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended. |