UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes. No.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The registrant has 14,558,77914,577,144 common shares, par value $1.00,
outstanding at March 31,June 30, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or Air
Group) unaudited financial statements: (i) consolidated balance sheets as
of March 31, 1997 andJune 30, 1997and December 31, 1996; (ii) consolidated statements of
income for the threequarters and six months ended March 31,June 30, 1997 and 1996; (iii)
consolidated statement of shareholders' equity for the threesix months ended
March 31,June 30, 1997; and, (iv) consolidated statements of cash flows for the threesix
months ended March 31,June 30, 1997 and 1996. Also attached are the accompanying
notes to the Company's consolidated financial statements that have changed
significantly during the threesix months ended March 31,June 30, 1997. These statements,
which should be read in conjunction with the financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 1996,
include all adjustments that are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods. The
adjustments made were of a normal recurring nature.
Air Group is a holding company incorporated in Delaware in 1985. Its
principal subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
FirstSecond Quarter 1997 Compared with FirstSecond Quarter 1996
The consolidated net lossincome for the firstsecond quarter of 1997 was $5.7$20.8
million, or $0.39$1.41 per share (primary) and $1.01 per share (fully diluted),
compared with a net lossincome of $7.2$18.0 million, or $0.52$1.24 per share (primary) and
$0.88 per share (fully diluted) in 1996. TheConsolidated operating lossincome for
the firstsecond quarter of 1997 was $5.4$40.9 million compared to an operating loss of $5.2$39.6 million for
1996. Alaska's operating loss narrowedincome increased to $1.5$42.1 million from $3.4$37.3
million loss for 1996, while Horizon'sHorizon recorded an operating loss widenedof $800,000
compared to $3.7a $2.7 million from $1.5 million
lossoperating income for 1996. Airline financial
and statistical data is shown following the Air Group financial statements.
A discussion of this data follows.
Alaska Airlines The operating loss decreasedOperating income increased 12.9% to $1.5$42.1 million,
resulting in a negative 0.5%an 11.5% operating margin as compared to a negative 1.2%10.9% margin in
1996. Operating revenue per available seat mile (ASM) increased 8.6%6.6% to
8.709.56 cents while operating expenses per ASM increased 7.8%5.9% to 8.748.46 cents.
The increase in revenue per ASM was primarily due to a 4.72.8 point
improvement in system passenger load factor. Essentially allMost markets experienced
increases in load factors. The Seattle-Anchorage market experienced a 13.27.8
point increase in load factor. The increase in revenue per ASM was also
favorably impacted by a 2.8%2.9% increase in system passenger yield. IncreasedMost
markets experienced increases in yields, inwith the Pacific Northwest toCalifornia, Nevada and
Arizona markets showing the Bay Area and to
Southern California markets were partially offset by lower yields in the
Seattle-Anchorage market.largest increases.
Freight and mail revenues decreased 7%1% due to a reduction in military
charter work in Alaska and lower mail volumes.volumes,
reflecting increased competition in the state of Alaska. Other-net
revenues increased 1.2%7.7% due to increased revenues from travel partners in
Alaska's frequent flyer program, offset by lower maintenance service revenue.program.
The table below shows the major operating expense elements on a cost per
ASM basis for Alaska for the firstsecond quarters of 1996 and 1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 2.61 2.77 .16 62.49 2.79 .30 12
Employee profit sharing - .08 .08 NM
Contracted services .24 .26 .02 8
Aircraft fuel 1.22 1.50 .28 231.30 1.23 (.07) (5)
Aircraft maintenance .39 .41 .02 5.37 .42 .05 14
Aircraft rent 1.02 1.02 - -.96 .94 (.02) (2)
Food and beverage service .30 .30 -- --
Commissions .56 .63 .07 13.62 .66 .04 7
Other selling expenses .43 .41 (.02) (5)
Depreciation &and amortization .41 .38 (.03) (7).36 .36 -- --
Landing fees and other rentals .34 .36.33 .35 .02 6
Other 1.56 1.67 .11 7.59 .66 .07 12
Alaska Airlines Total 8.11 8.74 .63 87.99 8.46 .47 6
NM = Not Meaningful
Alaska's higher unit costs were primarily due to higher fuel prices and
costs associated with higher load factors.an increased labor costs.
Significant unit cost changes are discussed below.
Higher load factors resulted in revenueRevenue passengers increasingincreased by 7.5%3.6% while ASMs grew only 2.3%0.5%. Employees
increased 8.6%10.0% (primarily in reservationreservations and customer service positions)
to service the added workload.additional passengers and improve on-time performance.
Excluding profit sharing, average wages and benefits per employee were up
2.3% primarily due to higher pilot wage rates and higher health insurance
costs. The net effect was that wages and benefits expense increased more
than the ASM growth, resulting in a 6%12% increase in cost per ASM.
Estimated profit sharing expense increased the cost per ASM by .08 cents.
Effective for 1997, Alaska changed its profit sharing program so that
eligible employees will receive their pro rata share of 10% of Alaska's
adjusted pre-tax profits. Actual profit sharing is based on full year
results and will be calculated and paid in early 1998.
Fuel expense per ASM increased 23%decreased 5%, due to a 21% increase6% decrease in the price of
fuel andoffset by lower fuel efficiency due to heavier passenger loads and
shorter average aircraft stage length.
Maintenance expense per ASM increased 5%14% because Alaska performed more
repair work that is expensed currently and less major airframe and engine
overhaul work which is capitalized.
Commission expense per ASM increased 13%7%, in line with the 13%8% increase in
passenger revenues.
Depreciation and amortization expense per ASM decreased 7% primarily due to
the sale (and leaseback) of two aircraft in late March 1996 and a 2%
increase in aircraft utilization.
Other expense per ASM increased 7%12%. Approximately half of the increase is
due to a tax refund received in the second quarter of 1996. The remainder
is primarily due to higher costs related to higher loads, such as booking fees,employee hiring, communications
charges, credit card
commissions and food expense.liability insurance.
Horizon Air TheHorizon recorded an operating loss increased to $3.7 million, resulting in a
negative 5.2% operating margin asof $800,000 compared to
a negative 2.1% margin in$2.7 million operating income for 1996. Operating revenue per ASM
increased 0.6%decreased 3.9% to 20.6020.69 cents while operating expenses per ASM increased
3.7%0.7% to 21.6620.92 cents.
The increasedecrease in revenue per ASM was due to a small increase7.2% decrease in passenger
yield while(believed to be largely due to the presence of the 10% passenger
ticket tax in 1997 compared with no tax in 1996), which was partially
offset by a 2.0 point improvement in system passenger load factor remained constant.
Freight and mail revenues decreased 4% due to decreased capacity.factor.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon for the firstsecond quarters of 1996 and 1997.
Horizon Air Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 6.42 6.76 .346.39 6.70 .31 5
Contracted services .25 .26 .01 4
Aircraft fuel 2.16 2.62 .46 212.22 2.18 (.04) (2)
Aircraft maintenance 2.81 3.00 .192.90 3.10 .20 7
Aircraft rent 2.432.42 2.48 .05 2.06 3
Food and beverage service .14 .12 (.02) (14)
Commissions 1.37 1.30 (.07) (5)1.34 1.26 (.08) (6)
Other selling expenses 1.19 1.19 -- --
Depreciation &and amortization .80 .85 .05 6
Loss (gain) on sale of assets .17 (.20) (.37) NM.83 .78 (.05) (6)
Landing fees and other rentals .87 .94 .07 8.90 .93 .03 3
Other 3.86 3.91 .05 12.19 1.92 (.27) (13)
Horizon Air Total 20.89 21.66 .77 4
NM = Not Meaningful
Horizon's unit costs20.77 20.92 .15 1
Wages and benefits per ASM increased 4% primarily due to: (a)to higher wagepilot wages
and higher health insurance costs. Maintenance expense per ASM increased
due to costs associated with transitioning to a simplified fleet. Other
expense per ASM decreased due to less flight crew training and personnel
costs, lower insurance rates and fringe benefits costs; (b) 19% higher fuel prices; (c) higher
maintenance expense on leased aircraft that will be returned to lessors
earlier than originally planned; and (d) one-time costs to prepare F-28-
4000 aircraft for service to replace F-28-1000 aircraft.decreased supplies expense.
Consolidated Other Income (Expense) Non-operating expense decreased $3.6$2.3
million to $4.7$4.4 million primarily due to smaller average debt balances and
lower interest rates on variable interest rate debt.
Six Months 1997 Compared with Six Months 1996
The consolidated net income for the six months ended June 30, 1997 was
$15.1 million, or $1.03 per share (primary) and $0.84 per share (fully
diluted), compared with net income of $10.8 million, or $0.76 per share
(primary) and $0.66 per share (fully diluted) in 1996. Consolidated
operating income for the first six months of 1997 was $35.5 million
compared to $34.4 million for 1996. Alaska's operating income increased to
$40.6 million from $34.0 million for 1996, while Horizon recorded an
operating loss of $4.5 million compared to a $1.3 million operating income
for 1996. A discussion of operating results for the two airlines follows.
Alaska Airlines Operating income increased 19.4% to $40.6 million,
resulting in a 6.0% operating margin as compared to a 5.5% margin in 1996.
Operating revenue per ASM increased 7.5% to 9.14 cents while operating
expenses per ASM increased 6.9% to 8.60 cents.
The increase in revenue per ASM was due to a 3.7 point improvement in
system passenger load factor combined with a 2.8% increase in system
passenger yield.
Unit costs increased 6.9% due to a 9.3% increase in employees, increased
pilot wage rates, $3.0 million of profit sharing expense, 7.0% higher fuel
prices and costs associated with higher load factors.
Horizon Air Operating revenues decreased 4.5% due to a 1.2% drop in
passenger traffic combined with a 3.3% decrease in passenger yield. The
yield decline is believed to be largely due to the presence of the 10%
passenger ticket tax during March to June 1997 compared with no tax in
1996.
Operating expenses decreased less than one percent in spite of a capacity
decrease of 2.8%. Unit costs increased due to higher wage rates, higher
fuel prices and costs associated with transitioning to a simplified fleet.
Consolidated Other Income (Expense) Non-operating expense decreased $5.9
million to $9.1 million for the same reasons as noted above in the second
quarter comparison.
Income Tax CreditExpense Accounting standards require the Company to provide for
income taxes each quarter based on its estimate of the effective tax rate
for the full year. The volatility of air fares and the seasonality of the
Company's business make it very difficult to accurately forecastestimate full-year pretax
results. In addition, a relatively small change in pretax results can
cause a significant change in the effective tax rate due to the magnitude
of nondeductible expenses, such as goodwill amortization and employee per
diem costs. In estimating the 43.6%42.8% tax rate for the first quarterhalf of 1997,
the Company considered a variety of factors, including the U.S. federal
rate of 35%, estimates of nondeductible expenses and state income taxes,
and the 40.9% tax rate used for full year 1996. This rate is evaluated
each quarter and adjustments are made if necessary.
New Accounting Standards During March 1997, the Financial Accounting
Standards Board issued FAS 128, Earnings Per Share (EPS). The new standard
replaces "primary" and "fully diluted" EPS amounts with "basic" and
"diluted" EPS amounts, respectively. The purpose of the change is to
simplify the EPS calculations and provide consistency with international
accounting standards. Had FAS 128 been in effect during 1996, the
Company's basic EPS would have been $2.67 (versus $2.65 primary EPS) and
diluted EPS would have been $2.05 (the same as fully diluted EPS). FAS 128
is effective for fiscal years ending after December 15, 1997 and requires
restatement of prior years' earnings per share. Early adoption is not
permitted.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
Dec.Dec 31, 1996 March 31,June 30, 1997 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $ 101.8 $ 78.2128.6 $ (23.6)26.8
Working capital (deficit) (185.6) (218.5) (32.9)(185.0) 0.6
Long-term debt
and capital lease obligations 404.1 397.3 (6.8)418.5 14.4
Shareholders' equity 272.5 268.9 (3.6)290.1 17.6
Book value per common share $ 18.83 $ 18.4719.90 $ (0.36)1.07
Debt-to-equity 60%:40% 60%59%:40%41% NA
The Company's cash and marketable securities portfolio decreasedincreased by $24$27
million during the first threesix months of 1997. Operating activities provided
$37$112 million of cash during this period. Additional cash was provided by
the sale and leaseback of two B737-400 aircraft and four Dash 8-200
aircraft ($99 million) and issuance of long-term debt ($28 million). Cash
was used for $39$189 million of capital expenditures including the purchase of
two new MD-83 aircraft, one new B737-400 aircraft, a previously leased
B737-200C aircraft, afour new Dash 8-200 aircraft, flight equipment deposits
and airframe and engine overhauls, net repayment of short-term borrowings
($19 million) and the repayment of debt ($610 million).
The working capital deficit increased by $33 million primarily dueIn June 1997, Standard & Poors revised its outlook on Air Group and Alaska
to the
purchase of propertypositive from stable, citing a stabilized competitive position and
equipment.
Shareholders' equity decreased only $4 million in spite of a $6 million net
loss due to the issuance of $2 million of common stock under stock plans.improving financial profile.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1991, Alaska gave notice of termination of its code sharing and
frequent flyer relationship with MarkAir, an airline based in the state of
Alaska. Both companies have filed suit against one another in connection
with that termination alleging breach of contract and other causes of
action under state law. In June 1992, MarkAir filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. In June 1997 MarkAir claimed
damages of $57 million in connection with Alaska's actions. If MarkAir
were to prevail, the after-tax effect would be to reduce shareholders'
equity by approximately $35 million or 12%. However, the Company believes
that it has adequate defenses and is vigorously defending itself against
the lawsuit.
In 1996, Horizon gave notice of termination of its aircraft leases and
purchase agreement with Dornier (a German aircraft manufacturer), began
returning leased aircraft to Dornier (who disputed Horizon's right to
return the aircraft) and began an arbitration process to settle the dispute
with Dornier. In June 1997, Horizon and Dornier dismissed all claims and
counterclaims and agreed on a plan for Horizon to return all remaining
leased aircraft to Dornier by the end of 1997.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Air Group's annual meeting of stockholders was held on May 20, 1997.
(b) Not applicable.
(c) Three directors were elected with the following results:
Votes Against Broker
Director Votes For or Withheld Non-Votes
M.J. Fate 11,652,046 1,371,757 0
J.F. Kelly 11,561,796 1,462,007 0
B.R. Kennedy 11,666,007 1,357,796 0
ITEM 5. Other Information
The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1996, and
were all reinstated effectivefor the period March 7, 1997. These taxes are due to expire
on1997 through September 30,
1997. As part of the Taxpayer Relief Act, the cargo waybill tax was
extended in its current form and the other taxes in revised forms through
September 30, 2007. The passenger ticket tax was replaced with a new
system that combines a percentage tax with a per passenger segment fee.
For sales and travel beginning October 1, 1997, the ticket tax is 9% plus
$1 per segment. The percentage tax is scheduled to decrease over time and
the segment fee is scheduled to increase. The $6 international departure
tax has increased to $12 and a new $12 international arrival tax has been
added. However, the Act retains the $6 rate for travel between Alaska and
the U.S. mainland. This tax and the international taxes will be indexed to
the CPI beginning January 1, 1999.
The Taxpayer Relief Act also included these items that will affect the
Company and the airline industry: (a) a new tax of 7.5% on payments to air
carriers for the sale of miles in frequent flyer programs; (b) a phased-in
increase from 50% to 80% for the deductible percentage of per diems paid to
flight crews; and (c) faster cost recovery for alternative minimum tax
purposes of aircraft purchased in 1999 and later years.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of per-share earnings.
Exhibit 27 - Financial data schedule.
(b) A reportNo reports on Form 8-K describing changes inwere filed during the employee profit sharing
programs was filed on February 20,second quarter of 1997.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: May 2,August 6, 1997
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
December 31, March 31,
(In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.4 $18.3
Marketable securities 52.4 59.9
Receivables - net 69.7 82.7
Inventories and supplies 47.8 48.3
Prepaid expenses and other assets 80.9 69.4
Total Current Assets 300.2 278.6
Property and Equipment
Flight equipment 815.9 830.8
Other property and equipment 270.4 277.7
Deposits for future flight equipment 84.5 91.1
1,170.8 1,199.6
Less accumulated depreciation and amortization 326.3 339.2
844.5 860.4
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.5 25.9
18.9 18.5
Total Property and Equipment - Net 863.4 878.9
Intangible Assets - Subsidiaries 61.6 61.1
Other Assets 86.2 90.1
Total Assets $1,311.4 $1,308.7
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
December 31, June 30,
(In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.4 $82.3
Marketable securities 52.4 46.3
Receivables - net 69.7 93.6
Inventories and supplies 47.8 47.3
Prepaid expenses and other assets 80.9 71.3
Total Current Assets 300.2 340.8
Property and Equipment
Flight equipment 815.9 872.4
Other property and equipment 270.4 283.1
Deposits for future flight equipment 84.5 82.9
1,170.8 1,238.4
Less accumulated depreciation and amortization 326.3 347.6
844.5 890.8
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.5 26.5
18.9 17.9
Total Property and Equipment - Net 863.4 908.7
Intangible Assets - Subsidiaries 61.6 60.6
Other Assets 86.2 90.2
Total Assets $1,311.4 $1,400.3
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
(In Millions) 1996 1997
Current Liabilities
Accounts payable $65.4 $72.2
Accrued aircraft rent 52.8 51.9
Accrued wages, vacation and payroll taxes 51.5 46.2
Other accrued liabilities 82.0 64.8
Short-term borrowings
(Interest rate: 1996 - 5.6%; 1997 - 5.9%) 47.0 28.0
Air traffic liability 163.0 209.4
Current portion of long-term debt and
capital lease obligations 24.1 24.6
Total Current Liabilities 485.8 497.1
Long-Term Debt and Capital Lease Obligations 404.1 397.3
Other Liabilities and Credits
Deferred income taxes 49.5 44.7
Deferred income 18.1 16.8
Other liabilities 81.4 83.9
149.0 145.4
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1996 - 17,223,281 shares
1997 - 17,307,356 shares 17.2 17.3
Capital in excess of par value 166.8 168.4
Treasury stock, at cost: 1996 - 2,748,550 shares
1997 - 2,748,577 shares (62.6) (62.6)
Deferred compensation (2.8) (2.3)
Retained earnings 153.9 148.1
272.5 268.9
Total Liabilities and Shareholders' Equity $1,311.4 $1,308.7
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
(In Millions) 1996 1997
Current Liabilities
Accounts payable $65.4 $74.0
Accrued aircraft rent 52.8 55.7
Accrued wages, vacation and payroll taxes 51.5 52.5
Other accrued liabilities 82.0 68.3
Short-term borrowings
(Interest rate: 1996 - 5.6%; 1997 - 6.1%) 47.0 28.4
Air traffic liability 163.0 218.7
Current portion of long-term debt and
capital lease obligations 24.1 28.2
Total Current Liabilities 485.8 525.8
Long-Term Debt and Capital Lease Obligations 404.1 418.5
Other Liabilities and Credits
Deferred income taxes 49.5 60.5
Deferred income 18.1 18.6
Other liabilities 81.4 86.8
149.0 165.9
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1996 - 17,223,281 shares
1997 - 17,327,706 shares 17.2 17.3
Capital in excess of par value 166.8 168.8
Treasury stock, at cost: 1996 - 2,748,550 shares
1997 - 2,750,562 shares (62.6) (62.7)
Deferred compensation (2.7) (2.2)
Retained earnings 153.8 168.9
272.5 290.1
Total Liabilities and Shareholders' Equity $1,311.4 $1,400.3
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended March 31
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $312.6 $342.9
Freight and mail 21.4 20.0
Other - net 17.4 17.5
Total Operating Revenues 351.4 380.4
Operating Expenses
Wages and benefits 114.3 122.5
Aircraft fuel 50.5 62.7
Aircraft maintenance 23.5 25.2
Aircraft rent 44.1 44.9
Commissions 23.0 24.8
Depreciation and amortization 17.1 16.7
Loss (gain) on sale of assets 0.7 (0.7)
Landing fees and other rentals 15.0 15.9
Other 68.4 73.8
Total Operating Expenses 356.6 385.8
Operating Loss (5.2) (5.4)
Other Income (Expense)
Interest income 2.6 1.9
Interest expense (11.1) (8.4)
Interest capitalized 0.0 1.0
Other - net 0.2 0.8
(8.3) (4.7)
Loss before income tax (13.5) (10.1)
Income tax credit 6.3 4.4
Net Loss $(7.2) $(5.7)
Loss Per Share $(0.52) $(0.39)
Shares used for computation 13.7
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended June 30
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $374.2 $391.7
Freight and mail 24.9 24.7
Other - net 17.6 18.6
Total Operating Revenues 416.7 435.0
Operating Expenses
Wages and benefits 117.5 132.9
Contracted services 9.9 10.9
Aircraft fuel 57.3 54.8
Aircraft maintenance 24.6 26.8
Aircraft rent 45.2 44.7
Food and beverage service 11.9 12.0
Commissions 26.9 27.1
Other selling expenses 20.6 19.8
Depreciation and amortization 16.8 16.7
Loss on sale of assets 0.1 0.1
Landing fees and other rentals 15.7 16.8
Other 30.6 31.5
Total Operating Expenses 377.1 394.1
Operating Income 39.6 40.9
Other Income (Expense)
Interest income 2.9 2.2
Interest expense (9.8) (8.6)
Interest capitalized - 1.3
Other - net 0.2 0.7
(6.7) (4.4)
Income before income tax 32.9 36.5
Income tax expense 14.9 15.7
Net Income $18.0 $20.8
Primary Earnings Per Share $1.24 $1.41
Fully Diluted Earnings Per Share $0.88 $1.01
Shares used for computation:
Primary 14.5 14.7
Fully diluted 22.7 22.5
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Six Months Ended June 30
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $686.8 $734.6
Freight and mail 46.3 44.8
Other - net 35.0 36.0
Total Operating Revenues 768.1 815.4
Operating Expenses
Wages and benefits 231.8 255.3
Contracted services 19.3 21.9
Aircraft fuel 107.8 117.5
Aircraft maintenance 48.1 52.0
Aircraft rent 89.3 89.6
Food and beverage service 22.3 23.0
Commissions 49.9 51.9
Other selling expenses 39.6 40.2
Depreciation and amortization 34.0 33.4
Loss (gain) on sale of assets 0.8 (0.5)
Landing fees and other rentals 30.7 32.7
Other 60.1 62.9
Total Operating Expenses 733.7 779.9
Operating Income 34.4 35.5
Other Income (Expense)
Interest income 5.5 4.1
Interest expense (20.9) (17.0)
Interest capitalized - 2.3
Other - net 0.4 1.5
(15.0) (9.1)
Income before income tax 19.4 26.4
Income tax expense 8.6 11.3
Net Income $10.8 $15.1
Primary Earnings Per Share $0.76 $1.03
Fully Diluted Earnings Per Share $0.66 $0.84
Shares used for computation:
Primary 14.2 14.6
Fully diluted 22.4 22.5
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Capital in Treasury Deferred
Common Excess of Stock Compen- Retained
(In Millions) Stock Par Value at Cost sation Earnings Total
Balances at December 31, 1996 $17.2 $166.8 $(62.6) $(2.7) $153.8 $272.5
Net lossincome for the threesix months
ended March 31,June 30, 1997 (5.7) (5.7)15.1 15.1
Stock issued under stock plans 0.1 1.6 1.72.0 2.1
Treasury stock purchase
(3,000 shares) (0.1) (0.1)
Employee Stock Ownership Plan
shares allocated 0.4 0.40.5 0.5
Balances at March 31,June 30, 1997 $17.3 $168.4 $(62.6) $(2.3) $148.1 $268.9$168.8 $(62.7) $(2.2) $168.9 $290.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Three Months Ended March 31 (In Millions) 1996 1997
Cash flows from operating activities:
Net loss $(7.2) $(5.7)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 17.1 16.7
Amortization of airframe and engine overhauls 7.6 8.4
Loss (gain) on disposition of assets 0.7 (0.7)
Deferred income taxes (6.7) (4.8)
Increase in accounts receivable (26.6) (13.0)
Decrease in other current assets 14.1 11.0
Increase in air traffic liability 45.5 46.5
Decrease in other current liabilities (4.9) (16.6)
Other-net 4.5 (5.1)
Net cash provided by operating activities 44.1 36.7
Cash flows from investing activities:
Proceeds from disposition of assets 1.0 2.9
Purchases of marketable securities (13.4) (14.6)
Sales and maturities of marketable securities 48.4 7.0
Restricted deposits 2.5 (0.6)
Additions to flight equipment deposits - (6.7)
Additions to property and equipment (20.5) (32.1)
Net cash provided by (used in) investing activities 18.0 (44.1)
Cash flows from financing activities:
Proceeds from short-term borrowings - 28.0
Repayment of short-term borrowings (65.9) (47.0)
Proceeds from sale and leaseback transactions 57.4 -
Long-term debt and capital lease payments (19.7) (6.4)
Proceeds from issuance of common stock 4.9 1.7
Net cash used in financing activities (23.3) (23.7)
Net increase (decrease) in cash and cash equivalents 38.8 (31.1)
Cash and cash equivalents at beginning of year 25.8 49.4
Cash and cash equivalents at end of year $64.6 $18.3
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $9.0 $4.7
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Six Months Ended June 30 (In Millions) 1996 1997
Cash flows from operating activities:
Net income $10.8 $15.1
Adjustments to reconcile net income to cash:
Depreciation and amortization 34.0 33.4
Amortization of airframe and engine overhauls 16.2 17.2
Loss (gain) on disposition of assets 0.8 (0.5)
Increase in deferred income taxes 7.1 11.0
Increase in accounts receivable (0.7) (23.9)
Decrease (increase) in other current assets (14.6) 10.1
Increase in air traffic liability 76.5 55.7
Increase (decrease) in other current liabilities 7.4 (1.2)
Other-net 1.7 (4.6)
Net cash provided by operating activities 139.2 112.3
Cash flows from investing activities:
Proceeds from disposition of assets 3.8 0.2
Purchases of marketable securities (13.4) (22.8)
Sales and maturities of marketable securities 70.6 28.9
Restricted deposits 1.5 (1.1)
Flight equipment deposits returned 1.1 3.3
Additions to flight equipment deposits (0.6) (23.8)
Additions to property and equipment (139.4) (165.1)
Net cash used in investing activities (76.4) (180.4)
Cash flows from financing activities:
Proceeds from short-term borrowings - 56.4
Repayment of short-term borrowings (65.9) (75.0)
Proceeds from sale and leaseback transactions 57.4 99.1
Proceeds from issuance of long-term debt - 28.0
Long-term debt and capital lease payments (48.0) (9.5)
Proceeds from issuance of common stock 10.0 2.0
Proceeds from sale of treasury stock 10.9 -
Net cash provided by (used in) financing activities (35.6) 101.0
Net increase in cash and cash equivalents 27.2 32.9
Cash and cash equivalents at beginning of period 25.8 49.4
Cash and cash equivalents at end of period $53.0 $82.3
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $26.8 $14.8
Income taxes (refunds) (0.8) (4.5)
Noncash investing and financing activities None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 1997
Alaska Air Group, Inc.
Note 1. Summary of Significant Policies (See Note 1 to Consolidated
Financial Statements at December 31, 1996)
Basis of presentation
Effective with the second quarter 1997, three new line items have been
added to the statement of income to provide more details of operating
expenses. Contracted services includes the expenses for aircraft ground
handling, security, temporary employees and similar outside services.
Other selling expenses includes computerized reservations systems (CRS)
charges, credit card commissions, advertising and promotional costs.
Property, Equipment and Depreciation
Effective January 1, 1997, the estimated salvage value of B737-400
flight equipment was changed to 10% from 20%. The new estimate was
adopted to recognize the lower expected salvage values for this aircraft
type. The annual effect of the change will be to increase depreciation
expense $0.5 million and decrease net income $0.3 million ($.02 per
share).
Note 2. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1996)
During the second quarter of 1997, Alaska's lease commitments increased
approximately $98 million due to the sale and leaseback of two B737-400
aircraft under 18-year operating leases.
AirlineAlaska Airlines Financial and Statistical Data
Quarter Ended March 31
Alaska Airlines Horizon AirJune 30 Six Months Ended June 30
% %
Financial Data (in millions): 1996 1997 Change 1996 1997 Change
Operating Revenues:
Passenger $245.1 $277.4 13.2 $69.0 $67.8 (1.7)$302.7 $326.0 7.7 $547.8 $603.5 10.2
Freight and mail 18.7 17.4 (7.0) 2.7 2.622.1 21.9 (0.9) 40.8 39.3 (3.7)
Other - net 16.6 16.8 1.2 0.8 0.6 (25.0)18.1 7.7 33.4 34.8 4.2
Total Operating Revenues 280.4 311.6 11.1 72.5 71.0 (2.1)341.6 366.0 7.1 622.0 677.6 8.9
Operating Expenses:
Wages and benefits 91.5 99.2 8.4 22.7 23.3 2.694.8 106.7 12.6 186.3 205.9 10.5
Employee profit sharing 0.0 3.0 NM 0.0 3.0 NM
Contracted services 9.0 9.9 10.0 17.6 19.9 13.1
Aircraft fuel 42.8 53.7 25.5 7.6 9.0 18.449.5 47.3 (4.4) 92.3 101.0 9.4
Aircraft maintenance 13.6 14.8 8.8 9.9 10.4 5.114.3 16.2 13.3 27.9 31.0 11.1
Aircraft rent 35.6 36.4 2.2 8.6 8.5 (1.2)36.6 36.2 (1.1) 72.1 72.6 0.7
Food and beverage service 11.4 11.6 1.8 21.4 22.1 3.3
Commissions 19.6 22.6 15.3 4.9 4.5 (8.2)23.7 25.1 5.9 43.3 47.7 10.2
Other selling expenses 16.3 15.7 (3.7) 30.9 31.8 2.9
Depreciation and amortization 14.2 13.7 (3.5) 2.8 2.9 3.613.8 13.9 0.7 28.0 27.7 (1.1)
Loss (gain) on sale of assets 0.1 0.1 0.0 NM 0.6 (0.7)0.2 0.1 NM
Landing fees and other rentals 11.9 12.7 6.7 3.1 3.2 3.212.5 13.6 8.8 24.4 26.3 7.8
Other 54.5 60.0 10.1 13.8 13.6 (1.4)22.3 24.6 10.3 43.6 47.9 9.9
Total Operating Expenses 283.8 313.1 10.3 74.0 74.7 0.9304.3 323.9 6.4 588.0 637.0 8.3
Operating Loss (3.4) (1.5) (1.5) (3.7)Income 37.3 42.1 12.9 34.0 40.6 19.4
Interest income 2.6 2.4 0.0 0.03.0 2.7 5.7 5.1
Interest expense (8.9) (6.2) (0.1) (0.5)(7.6) (6.5) (16.5) (12.7)
Interest capitalized 0.0 0.70.8 0.0 0.31.5
Other - net 0.4 0.8 (0.0) 0.1
(5.9) (2.3) (0.1) (0.1)
Loss before income tax credit $(9.3) $(3.8) $(1.6) $(3.8)0.6 1.6
(4.2) (2.2) (10.2) (4.5)
Income Before Income Tax $33.1 $39.9 $23.8 $36.1
Operating Statistics:
Revenue passengers (000) 2,576 2,770 7.5 907 856 (5.6)3,005 3,114 3.6 5,581 5,884 5.4
RPMs (000,000) 2,126 2,342 10.2 209 204 (2.6)2,504 2,621 4.6 4,630 4,963 7.2
ASMs (000,000) 3,500 3,582 2.3 354 345 (2.6)3,809 3,829 0.5 7,309 7,410 1.4
Passenger load factor 60.7% 65.4% 4.765.7% 68.5% 2.8 pts 59.1% 59.1% 0.063.3% 67.0% 3.7 pts
Breakeven load factor 64.2% 67.1% 2.958.2% 59.4% 1.2 pts 60.0% 63.4% 3.460.9% 63.0% 2.1 pts
Yield per passenger mile 11.53c 11.84c12.09c 12.44c 2.9 11.83c 12.16c 2.8
33.02c 33.30c 0.8
Operating revenuesrevenue per ASM 8.01c 8.70c 8.6 20.48c 20.60c 0.68.97c 9.56c 6.6 8.51c 9.14c 7.5
Operating expenses per ASM 8.11c 8.74c 7.8 20.89c 21.66c 3.77.99c 8.46c 5.9 8.04c 8.60c 6.9
Fuel cost per gallon 68.5c 83.2c 21.3 73.6c 87.9c 19.473.7c 69.5c (5.6) 71.2c 76.2c 7.0
Fuel gallons (000,000) 62.5 64.6 3.4 10.4 10.3 (1.0)67.1 68.0 1.3 129.6 132.6 2.3
Average number of employees 7,297 7,921 8.6 2,840 2,812 (1.0)7,511 8,265 10.0 7,404 8,093 9.3
Aircraft utilization (block hours) 10.911.5 11.5 0.0 11.2 2.3 7.6 7.0 (7.8)11.3 0.9
Operating fleet at period-end 74 75 1.4 62 59 (4.8)76 76 0.0 76 76 0.0
NM = Not Meaningful
c = cents
Horizon Air Financial and Statistical Data
Quarter Ended June 30 Six Months Ended June 30
% %
Financial Data (in millions): 1996 1997 Change 1996 1997 Change
Operating Revenues:
Passenger $73.0 $68.0 (6.8) $142.1 $135.8 (4.4)
Freight and mail 2.8 2.8 0.0 5.5 5.4 (1.8)
Other - net 0.9 0.6 (33.3) 1.5 1.2 (20.0)
Total Operating Revenues 76.7 71.4 (6.9) 149.1 142.4 (4.5)
Operating Expenses:
Wages and benefits 22.7 23.1 1.8 45.5 46.4 2.0
Contracted services 0.9 1.0 11.1 1.7 2.0 17.6
Aircraft fuel 7.9 7.5 (5.1) 15.5 16.5 6.5
Aircraft maintenance 10.3 10.7 3.9 20.2 21.0 4.0
Aircraft rent 8.6 8.5 (1.2) 17.2 17.1 (0.6)
Food and beverage service 0.5 0.4 (20.0) 0.9 0.9 (0.0)
Commissions 4.8 4.3 (10.4) 9.6 8.8 (8.3)
Other selling expenses 4.3 4.1 (4.7) 8.7 8.4 (3.4)
Depreciation and amortization 3.0 2.7 (10.0) 5.8 5.6 (3.4)
Loss (gain) on sale of assets 0.0 0.0 0.0 0.6 (0.6) NM
Landing fees and other rentals 3.2 3.2 0.0 6.3 6.4 1.6
Other 7.8 6.7 (14.1) 15.8 14.4 (8.9)
Total Operating Expenses 74.0 72.2 (2.4) 147.8 146.9 (0.6)
Operating Income (Loss) 2.7 (0.8) NM 1.3 (4.5) NM
Interest income 0.0 0.0 0.1 0.1
Interest expense (0.2) (0.5) (0.3) (1.1)
Interest capitalized 0.0 0.5 0.0 0.8
Other - net 0.1 0.1 (0.1) 0.2
(0.1) 0.1 (0.3) 0.0
Income (Loss) Before Income Tax $2.6 $(0.7) $1.0 $(4.5)
Operating Statistics:
Revenue passengers (000) 920 881 (4.3) 1,828 1,737 (5.0)
RPMs (000,000) 208 209 0.3 417 412 (1.2)
ASMs (000,000) 356 345 (3.1) 710 690 (2.8)
Passenger load factor 58.5% 60.5% 2.0 pts 58.8% 59.8% 1.0 pts
Breakeven load factor 56.2% 61.2% 5.0 pts 58.1% 62.3% 4.2 pts
Yield per passenger mile 35.09c 32.57c (7.2) 34.06c 32.93c (3.3)
Operating revenue per ASM 21.54c 20.69c (3.9) 21.01c 20.64c (1.7)
Operating expenses per ASM 20.77c 20.92c 0.7 20.83c 21.29c 2.2
Fuel cost per gallon 77.5c 74.7c (3.6) 75.5c 81.3c 7.7
Fuel gallons (000,000) 10.2 10.1 (1.0) 20.6 20.3 (1.5)
Average number of employees 2,832 2,704 (4.5) 2,836 2,758 (2.7)
Aircraft utilization (block hours) 7.7 6.9 (10.4) 7.7 7.0 (9.1)
Operating fleet at period-end 59 59 0.0 59 59 0.0
NM = Not Meaningful
c = cents