UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q (Mark One) For the quarterly period ended OR For the transition period fromtox (Mark One)þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 31,September 30, 2005.o¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8957
ALASKA AIR GROUP, INC. (Exact name of registrant as specified in its charter) 19300 International Boulevard, Seattle, Washington 98188 (Address of principal executive offices) Registrant’s telephone number, including area code: (206) 392-5040 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The registrant has Delaware 91-1292054 Delaware
(State or other jurisdiction of
incorporation or organization) 91-1292054
(I.R.S. Employer
Identification No.)þx Noo¨þx Noo¨27,182,60827,603,113 common shares, par value $1.00, outstanding at March 31,September 30, 2005.
| PART I. FINANCIAL INFORMATION | ||||||||
Item | Condensed Consolidated Financial Statements | 3 | ||||||
Item 2. | 24 | |||||||
Item 3. | 43 | |||||||
Item 4. | Controls and Procedures | 44 | ||||||
| PART II. OTHER INFORMATION | ||||||||
Item 1. | 45 | |||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 45 | ||||||
Item 3. | 45 | |||||||
Item 4. | 45 | |||||||
Item 5. | Other Information | 45 | ||||||
| 46 | ||||||||
TABLE OF CONTENTS
| 47 | ||
Cautionary Note regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Some of the things that could cause our actual results to differ from our expectations are: changes in our operating costs including fuel, which can be volatile; the competitive environment and other trends in our industry; our ability to meet our cost reduction goals; labor disputes; economic conditions; our reliance on automated systems; increases in government fees and taxes; actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities; insurance costs; changes in laws and regulations; liability and other claims asserted against us; failure to expand our business; interest rates and the availability of financing;operational disruptions; compliance with financial covenants; our ability to attract and retain qualified personnel; changes in our business plans;third-party vendors and partners; our significant indebtedness; and downgrades of our credit ratings;ratings and inflation.availability of financing. For a discussion of these and other risk factors, see Item 7 of the Company’s Annual Report for the year ended December 31, 2004 on Form 10-K under the caption “Risk Factors.” All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.
2
PART I. FINANCIAL INFORMATION
| ITEM 1. | Condensed Consolidated Financial Statements |
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
ASSETS
| March 31, | December 31, | |||||||
| (In Millions) | 2005 | 2004 | ||||||
Current Assets | ||||||||
| Cash and cash equivalents | $ | 272.4 | $ | 54.3 | ||||
| Marketable securities | 491.1 | 819.6 | ||||||
| Receivables – net | 119.6 | 99.4 | ||||||
| Inventories and supplies – net | 43.7 | 42.0 | ||||||
| Deferred income taxes | 80.2 | 74.7 | ||||||
| Fuel hedge contracts | 124.4 | 65.7 | ||||||
| Prepaid expenses and other current assets | 102.7 | 86.6 | ||||||
Total Current Assets | 1,234.1 | 1,242.3 | ||||||
Property and Equipment | ||||||||
| Flight equipment | 2,225.0 | 2,294.3 | ||||||
| Other property and equipment | 467.8 | 471.8 | ||||||
| Deposits for future flight equipment | 82.5 | 67.1 | ||||||
| 2,775.3 | 2,833.2 | |||||||
| Less accumulated depreciation and amortization | 951.8 | 924.9 | ||||||
Total Property and Equipment – Net | 1,823.5 | 1,908.3 | ||||||
Intangible Assets | 38.6 | 38.6 | ||||||
Fuel Hedge Contracts | 65.1 | 30.3 | ||||||
Other Assets | 139.3 | 115.5 | ||||||
Total Assets | $ | 3,300.6 | $ | 3,335.0 | ||||
(In Millions) | September 30, 2005 | December 31, 2004 | ||||
ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 26.7 | $ | 28.0 | ||
Marketable securities | 719.0 | 845.9 | ||||
Restricted securities lending collateral | 76.5 | — | ||||
Receivables - net | 130.1 | 99.4 | ||||
Inventories and supplies - net | 48.1 | 42.0 | ||||
Deferred income taxes | 61.8 | 74.7 | ||||
Fuel hedge contracts | 140.7 | 65.7 | ||||
Prepaid expenses and other current assets | 105.2 | 86.6 | ||||
Total Current Assets | 1,308.1 | 1,242.3 | ||||
Property and Equipment | ||||||
Aircraft and other flight equipment | 2,258.8 | 2,294.3 | ||||
Other property and equipment | 473.5 | 471.8 | ||||
Aircraft purchase deposits | 214.3 | 67.1 | ||||
| 2,946.6 | 2,833.2 | |||||
Less accumulated depreciation and amortization | 988.0 | 924.9 | ||||
Total Property and Equipment - Net | 1,958.6 | 1,908.3 | ||||
Intangible Assets | 38.6 | 38.6 | ||||
Fuel Hedge Contracts | 71.1 | 30.3 | ||||
Other Assets | 133.3 | 115.5 | ||||
Total Assets | $ | 3,509.7 | $ | 3,335.0 | ||
See accompanying notes to condensed consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS’ EQUITY
| March 31, | December 31, | |||||||
| (In Millions Except Share Amounts) | 2005 | 2004 | ||||||
Current Liabilities | ||||||||
| Accounts payable | $ | 142.3 | $ | 143.8 | ||||
| Accrued aircraft rent | 64.3 | 75.3 | ||||||
| Accrued wages, vacation and payroll taxes | 112.5 | 133.0 | ||||||
| Other accrued liabilities | 342.7 | 301.6 | ||||||
| Air traffic liability | 340.3 | 250.2 | ||||||
| Current portion of long-term debt and capital lease obligations | 54.0 | 53.4 | ||||||
Total Current Liabilities | 1,056.1 | 957.3 | ||||||
Long-Term Debt and Capital Lease Obligations, Net of Current | 980.4 | 989.6 | ||||||
Other Liabilities and Credits | ||||||||
| Deferred income taxes | 131.1 | 173.6 | ||||||
| Deferred revenue | 307.4 | 304.7 | ||||||
| Other liabilities | 241.1 | 245.0 | ||||||
| 679.6 | 723.3 | |||||||
Commitments and Contingencies | ||||||||
Shareholders’ Equity | ||||||||
| Preferred stock, $1 par value | — | — | ||||||
| Authorized: 5,000,000 shares, none issued or outstanding | ||||||||
| Common stock, $1 par value | 29.8 | 29.8 | ||||||
| Authorized: 100,000,000 shares Issued: | ||||||||
| Issued: 2005 - 29,832,756 shares 2004 - 29,777,388 shares | ||||||||
| Capital in excess of par value | 497.5 | 496.5 | ||||||
| Treasury stock (common), at cost: 2005 - 2,650,148 shares 2004 - 2,651,368 shares | (60.5 | ) | (60.5 | ) | ||||
| 2004 - 2,651,368 shares | ||||||||
| Deferred stock-based compensation | (3.1 | ) | (3.4 | ) | ||||
| Accumulated other comprehensive loss | (82.7 | ) | (81.6 | ) | ||||
| Retained earnings | 203.5 | 284.0 | ||||||
| 584.5 | 664.8 | |||||||
Total Liabilities and Shareholders’ Equity | $ | 3,300.6 | $ | 3,335.0 | ||||
(In Millions) | September 30, 2005 | December 31, 2004 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 138.4 | $ | 143.8 | ||||
Accrued aircraft rent | 64.0 | 75.3 | ||||||
Accrued wages, vacation and payroll taxes | 93.9 | 133.0 | ||||||
Other accrued liabilities | 350.7 | 301.6 | ||||||
Air traffic liability | 320.5 | 250.2 | ||||||
Securities lending obligation | 76.5 | — | ||||||
Current portion of long-term debt and capital lease obligations | 57.6 | 53.4 | ||||||
Total Current Liabilities | 1,101.6 | 957.3 | ||||||
Long-Term Debt and Capital Lease Obligations | 970.0 | 989.6 | ||||||
Other Liabilities and Credits | ||||||||
Deferred income taxes | 176.3 | 173.6 | ||||||
Deferred revenue | 276.5 | 264.8 | ||||||
Other liabilities | 285.7 | 284.9 | ||||||
| 738.5 | 723.3 | |||||||
Commitments and Contingencies | ||||||||
Shareholders’ Equity | ||||||||
Preferred stock, $1 par value | ||||||||
Authorized: 5,000,000 shares, none issued or outstanding | — | — | ||||||
Common stock, $1 par value | ||||||||
Authorized: 100,000,000 shares | ||||||||
Issued: 2005 -30,130,917 shares | ||||||||
2004 - 29,777,388 shares | 30.1 | 29.8 | ||||||
Capital in excess of par value | 513.0 | 496.5 | ||||||
Treasury stock, at cost: 2005 - 2,527,804 shares | ||||||||
2004 - 2,651,368 shares | (57.7 | ) | (60.5 | ) | ||||
Deferred stock-based compensation | (9.2 | ) | (3.4 | ) | ||||
Accumulated other comprehensive loss | (87.7 | ) | (81.6 | ) | ||||
Retained earnings | 311.1 | 284.0 | ||||||
| 699.6 | 664.8 | |||||||
Total Liabilities and Shareholders’ Equity | $ | 3,509.7 | $ | 3,335.0 | ||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.
| Three Months Ended March 31 | ||||||||
| (In Millions Except Per Share Amounts) | 2005 | 2004 | ||||||
Operating Revenues | ||||||||
| Passenger | $ | 587.0 | $ | 553.3 | ||||
| Freight and mail | 20.3 | 18.6 | ||||||
| Other – net | 35.2 | 26.1 | ||||||
Total Operating Revenues | 642.5 | 598.0 | ||||||
Operating Expenses | ||||||||
| Wages and benefits | 244.7 | 241.8 | ||||||
| Contracted services | 30.6 | 27.5 | ||||||
| Aircraft fuel | 146.7 | 107.8 | ||||||
| Aircraft maintenance | 61.2 | 50.8 | ||||||
| Aircraft rent | 46.1 | 47.8 | ||||||
| Food and beverage service | 11.5 | 11.6 | ||||||
| Other selling expenses and commissions | 37.4 | 38.4 | ||||||
| Depreciation and amortization | 34.2 | 36.1 | ||||||
| Landing fees and other rentals | 52.2 | 42.6 | ||||||
| Other | 51.4 | 49.7 | ||||||
| Restructuring charges, primarily write-off of Oakland leasehold improvements | 7.4 | — | ||||||
| Impairment of F-28 aircraft and spare engines | — | 2.4 | ||||||
Total Operating Expenses | 723.4 | 656.5 | ||||||
Operating Loss | (80.9 | ) | (58.5 | ) | ||||
Nonoperating Income (Expense) | ||||||||
| Interest income | 5.9 | 4.6 | ||||||
| Interest expense | (14.1 | ) | (12.7 | ) | ||||
| Interest capitalized | 0.8 | 0.3 | ||||||
| Fuel hedging gains | 108.2 | 0.4 | ||||||
| Other – net | (2.9 | ) | (0.3 | ) | ||||
| 97.9 | (7.7 | ) | ||||||
| Income (loss) before income tax and accounting change | 17.0 | (66.2 | ) | |||||
| Income tax expense (benefit) | 7.1 | (23.5 | ) | |||||
| Income (loss) before accounting change | 9.9 | (42.7 | ) | |||||
| Cumulative effect of accounting change, net of tax | (90.4 | ) | — | |||||
Net Loss | $ | (80.5 | ) | $ | (42.7 | ) | ||
Basic Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $ | 0.36 | $ | (1.59 | ) | |||
| Cumulative effect of accounting change | (3.33 | ) | — | |||||
| Net Loss Per Share | $ | (2.97 | ) | $ | (1.59 | ) | ||
Diluted Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $ | 0.34 | $ | (1.59 | ) | |||
| Cumulative effect of accounting change | (2.73 | ) | — | |||||
| Net Loss Per Share | $ | (2.39 | ) | $ | (1.59 | ) | ||
Pro Forma Results(assuming change in method of accounting was applied retrospectively): | ||||||||
| Pro forma net loss | NA | $ | (40.5 | ) | ||||
| Pro Forma Basic and Diluted Loss Per Share | $ | (1.51 | ) | |||||
| Shares used for computation: | ||||||||
| Basic | 27.147 | 26.778 | ||||||
| Diluted | 33.158 | 26.778 | ||||||
Three Months Ended September 30 (In Millions Except Per Share Amounts) | 2005 | 2004 | ||||||
Operating Revenues | ||||||||
Passenger | $ | 777.4 | $ | 706.0 | ||||
Freight and mail | 26.1 | 25.5 | ||||||
Other - net | 42.2 | 36.7 | ||||||
Total Operating Revenues | 845.7 | 768.2 | ||||||
Operating Expenses | ||||||||
Wages and benefits | 221.5 | 248.9 | ||||||
Contracted services | 30.8 | 19.7 | ||||||
Aircraft fuel | 204.1 | 148.4 | ||||||
Aircraft maintenance | 55.2 | 37.0 | ||||||
Aircraft rent | 46.9 | 46.7 | ||||||
Food and beverage service | 13.5 | 14.3 | ||||||
Selling expenses | 44.3 | 37.5 | ||||||
Depreciation and amortization | 36.3 | 35.7 | ||||||
Landing fees and other rentals | 52.4 | 49.3 | ||||||
Other | 51.9 | 46.4 | ||||||
Restructuring charges | (1.4 | ) | 27.5 | |||||
Total Operating Expenses | 755.5 | 711.4 | ||||||
Operating Income | 90.2 | 56.8 | ||||||
Nonoperating Income (Expense) | ||||||||
Interest income | 8.6 | 7.9 | ||||||
Interest expense | (16.1 | ) | (13.6 | ) | ||||
Interest capitalized | 2.8 | 0.5 | ||||||
Fuel hedging gains | 62.9 | 66.9 | ||||||
Other - net | (1.6 | ) | 0.7 | |||||
| 56.6 | 62.4 | |||||||
Income before income tax | 146.8 | 119.2 | ||||||
Income tax expense | 56.6 | 45.2 | ||||||
Net Income | $ | 90.2 | $ | 74.0 | ||||
Basic Earnings Per Share | $ | 3.28 | $ | 2.75 | ||||
Diluted Earnings Per Share | $ | 2.71 | $ | 2.29 | ||||
Pro Forma Results (assuming change in method of accounting was applied retrospectively): | ||||||||
Pro Forma Net Income | NA | $ | 84.1 | |||||
Pro Forma Basic Earnings Per Share | NA | $ | 3.13 | |||||
Pro Forma Diluted Earnings Per Share | NA | $ | 2.61 | |||||
Shares used for computation: | ||||||||
Basic | 27.502 | 26.862 | ||||||
Diluted | 33.857 | 32.631 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Capital in | Treasury | Deferred | Other | ||||||||||||||||||||||||||||
| Shares | Common | Excess of | Stock, | Stock-Based | Comprehensive | Retained | ||||||||||||||||||||||||||
| (In Millions) | Outstanding | Stock | Par Value | at Cost | Compensation | Loss | Earnings | Total | ||||||||||||||||||||||||
| Balances at December 31, 2004 | 27.126 | $ | 29.8 | $ | 496.5 | $ | (60.5 | ) | $ | (3.4 | ) | $ | (81.6 | ) | $ | 284.0 | $ | 664.8 | ||||||||||||||
| Net loss for the three months ended March 31, 2005 | (80.5 | ) | (80.5 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Related to marketable securities: | ||||||||||||||||||||||||||||||||
| Change in fair value | (0.5 | ) | ||||||||||||||||||||||||||||||
| Reclassification to earnings | 2.5 | |||||||||||||||||||||||||||||||
| Income tax effect | (0.7 | ) | ||||||||||||||||||||||||||||||
| 1.3 | 1.3 | |||||||||||||||||||||||||||||||
| Related to fuel hedges: | ||||||||||||||||||||||||||||||||
| Reclassification to earnings | (3.8 | ) | ||||||||||||||||||||||||||||||
| Income tax effect | 1.4 | |||||||||||||||||||||||||||||||
| (2.4 | ) | (2.4 | ) | |||||||||||||||||||||||||||||
| Total comprehensive loss | (81.6 | ) | ||||||||||||||||||||||||||||||
| Amortization of deferred stock-based compensation | 0.3 | 0.3 | ||||||||||||||||||||||||||||||
| Treasury stock sales | 0.001 | — | — | — | — | |||||||||||||||||||||||||||
| Stock issued for employee stock purchase plan | 0.032 | — | 0.6 | — | 0.6 | |||||||||||||||||||||||||||
| Stock issued under stock plans | 0.024 | — | 0.4 | — | 0.4 | |||||||||||||||||||||||||||
| Balances at March 31, 2005 | 27.183 | $ | 29.8 | $ | 497.5 | $ | (60.5 | ) | $ | (3.1 | ) | $ | (82.7 | ) | $ | 203.5 | $ | 584.5 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS (unaudited)
Alaska Air Group, Inc.
| Three Months Ended March 31 (In Millions) | 2005 | 2004 | ||||||
Cash flows from operating activities: | ||||||||
| Net loss | $ | (80.5 | ) | $ | (42.7 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Cumulative effect of accounting change, net of tax effect | 90.4 | — | ||||||
| Restructuring charges, primarily write-off of Oakland leasehold improvements | 7.4 | — | ||||||
| Impairment of F-28 aircraft and spare engines | — | 2.4 | ||||||
| Depreciation and amortization | 34.2 | 36.1 | ||||||
| Amortization of airframe and engine overhauls | — | 18.7 | ||||||
| Stock-based compensation | 0.3 | — | ||||||
| Changes in fair values of open fuel hedge contracts | (97.3 | ) | (0.4 | ) | ||||
| (Gain) loss on sale of assets | (0.3 | ) | 0.4 | |||||
| Changes in deferred income taxes | 6.3 | (22.9 | ) | |||||
| Increase in receivables — net | (20.2 | ) | (22.3 | ) | ||||
| Increase in prepaid expenses and other current assets | (17.3 | ) | (29.6 | ) | ||||
| Increase in air traffic liability | 90.1 | 71.9 | ||||||
| Increase in other current liabilities | 8.7 | 4.8 | ||||||
| Increase (decrease) in deferred revenue and other-net | (25.1 | ) | 5.2 | |||||
| Net cash provided by (used in) operating activities | (3.3 | ) | 21.6 | |||||
Cash flows from investing activities: | ||||||||
| Proceeds from disposition of assets | 2.0 | 4.1 | ||||||
| Purchases of marketable securities | (127.0 | ) | (187.9 | ) | ||||
| Sales and maturities of marketable securities | 457.4 | 142.3 | ||||||
| Property and equipment additions: | ||||||||
| Aircraft purchase deposits | (41.2 | ) | (3.3 | ) | ||||
| Capitalized overhauls | — | (13.6 | ) | |||||
| Aircraft | (57.4 | ) | (40.1 | ) | ||||
| Other flight equipment | (1.9 | ) | (5.9 | ) | ||||
| Other property | (11.2 | ) | (5.4 | ) | ||||
| Aircraft deposits returned | 7.2 | 14.0 | ||||||
| Restricted deposits and other | 1.1 | (2.0 | ) | |||||
| Net cash provided by (used in) investing activities | 229.0 | (97.8 | ) | |||||
Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt, net | — | 62.6 | ||||||
| Long-term debt and capital lease payments | (8.6 | ) | (15.1 | ) | ||||
| Proceeds from issuance of common stock | 1.0 | 0.7 | ||||||
| Net cash provided by (used in) financing activities | (7.6 | ) | 48.2 | |||||
| Net change in cash and cash equivalents | 218.1 | (28.0 | ) | |||||
| Cash and cash equivalents at beginning of year | 54.3 | 192.9 | ||||||
Cash and cash equivalents at end of period | $ | 272.4 | $ | 164.9 | ||||
| Supplemental disclosure of cash paid during the period for: | ||||||||
| Interest (net of amount capitalized) | $ | 9.8 | $ | 9.0 | ||||
| Income taxes | 0.7 | — | ||||||
| Noncash investing and financing activities: | ||||||||
| Assets acquired under capital leases | — | 34.2 | ||||||
Nine Months Ended September 30 (In Millions Except Per Share Amounts) | 2005 | 2004 | ||||||
Operating Revenues | ||||||||
Passenger | $ | 2,061.9 | $ | 1,896.7 | ||||
Freight and mail | 71.3 | 68.3 | ||||||
Other - net | 111.5 | 102.5 | ||||||
Total Operating Revenues | 2,244.7 | 2,067.5 | ||||||
Operating Expenses | ||||||||
Wages and benefits | 693.5 | 737.1 | ||||||
Contracted services | 96.2 | 79.1 | ||||||
Aircraft fuel | 526.0 | 384.8 | ||||||
Aircraft maintenance | 174.6 | 137.9 | ||||||
Aircraft rent | 140.0 | 141.5 | ||||||
Food and beverage service | 37.1 | 39.5 | ||||||
Selling expenses | 119.5 | 111.5 | ||||||
Depreciation and amortization | 105.8 | 105.8 | ||||||
Landing fees and other rentals | 156.5 | 138.5 | ||||||
Other | 156.4 | 147.0 | ||||||
Restructuring charges | 20.7 | 27.5 | ||||||
Impairment of aircraft and related spare parts | — | 39.6 | ||||||
Total Operating Expenses | 2,226.3 | 2,089.8 | ||||||
Operating Income (Loss) | 18.4 | (22.3 | ) | |||||
Nonoperating Income (Expense) | ||||||||
Interest income | 21.6 | 18.6 | ||||||
Interest expense | (45.5 | ) | (38.9 | ) | ||||
Interest capitalized | 4.9 | 1.1 | ||||||
Fuel hedging gains | 198.6 | 93.3 | ||||||
Other - net | (4.5 | ) | 0.5 | |||||
| 175.1 | 74.6 | |||||||
Income before income tax and accounting change | 193.5 | 52.3 | ||||||
Income tax expense | 76.0 | 22.7 | ||||||
Income before accounting change | 117.5 | 29.6 | ||||||
Cumulative effect of accounting change, net of tax | (90.4 | ) | — | |||||
Net Income | $ | 27.1 | $ | 29.6 | ||||
Basic Earnings Per Share: | ||||||||
Income before accounting change | $ | 4.31 | $ | 1.10 | ||||
Cumulative effect of accounting change | (3.32 | ) | NA | |||||
Net Income Per Share | $ | 0.99 | $ | 1.10 | ||||
Diluted Earnings Per Share: | ||||||||
Income before accounting change | $ | 3.62 | $ | 0.98 | ||||
Cumulative effect of accounting change | (2.69 | ) | NA | |||||
Net Income Per Share | $ | 0.93 | $ | 0.98 | ||||
Pro Forma Results(assuming change in method of accounting was applied retrospectively): | ||||||||
Pro Forma Net Income | NA | $ | 45.8 | |||||
Pro Forma Basic Earnings Per Share | NA | $ | 1.71 | |||||
Pro Forma Diluted Earnings Per Share | NA | $ | 1.48 | |||||
Shares used for computation: | ||||||||
Basic | 27.274 | 26.820 | ||||||
Diluted | 33.523 | 32.691 | ||||||
See accompanying notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.
(In Millions) | Common Shares Outstanding | Common Stock | Capital in Excess of Par Value | Treasury at Cost | Deferred Stock-Based Compensation | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||
Balances at December 31, 2004: | 27.126 | $ | 29.8 | $ | 496.5 | $ | (60.5 | ) | $ | (3.4 | ) | $ | (81.6 | ) | $ | 284.0 | $ | 664.8 | |||||||||
Net income for the nine months ended September 30, 2005 | 27.1 | 27.1 | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||
Related to marketable securities: | |||||||||||||||||||||||||||
Change in fair value | (2.2 | ) | |||||||||||||||||||||||||
Reclassification to earnings | 3.3 | ||||||||||||||||||||||||||
Income tax effect | (0.4 | ) | |||||||||||||||||||||||||
| 0.7 | 0.7 | ||||||||||||||||||||||||||
Related to fuel hedges: | |||||||||||||||||||||||||||
Reclassification to earnings | (10.8 | ) | |||||||||||||||||||||||||
Income tax effect | 4.0 | ||||||||||||||||||||||||||
| (6.8 | ) | (6.8 | ) | ||||||||||||||||||||||||
Total comprehensive loss | 21.0 | ||||||||||||||||||||||||||
Deferred stock-based compensation | 6.9 | (6.9 | ) | — | |||||||||||||||||||||||
Amortization of deferred stock-based compensation | 1.1 | 1.1 | |||||||||||||||||||||||||
Treasury stock sales, including $0.3 tax benefit | 0.123 | — | — | 2.8 | 2.8 | ||||||||||||||||||||||
Stock issued for employee stock purchase plan | 0.094 | 0.1 | 6.5 | — | 6.6 | ||||||||||||||||||||||
Stock issued under stock plans, including $0.9 tax benefit | 0.260 | 0.2 | 3.1 | — | 3.3 | ||||||||||||||||||||||
Balances at September 30, 2005 | 27.603 | $ | 30.1 | $ | 513.0 | $ | (57.7 | ) | $ | (9.2 | ) | $ | (87.7 | ) | $ | 311.1 | $ | 699.6 | |||||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Air Group, Inc.
Nine Months Ended September 30 (In Millions) | 2005 | 2004 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 27.1 | $ | 29.6 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Cumulative effect of accounting change, net of tax effect | 90.4 | — | ||||||
Restructuring charges | 20.7 | 27.5 | ||||||
Impairment of aircraft and related spare parts | — | 39.6 | ||||||
Depreciation and amortization | 105.8 | 105.8 | ||||||
Amortization of airframe and engine overhauls | — | 48.3 | ||||||
Stock-based compensation | 1.1 | — | ||||||
Changes in fair values of open fuel hedge contracts | (126.6 | ) | (80.4 | ) | ||||
Loss (gain) on sale of assets | 1.4 | (1.4 | ) | |||||
Changes in deferred income taxes | 68.7 | 28.4 | ||||||
(Increase) decrease in receivables - net | (30.7 | ) | 0.2 | |||||
Increase in prepaid expenses and other current assets | (28.4 | ) | (13.8 | ) | ||||
Increase in air traffic liability | 70.3 | 42.2 | ||||||
Increase (decrease) in other current liabilities | (12.8 | ) | 31.4 | |||||
Increase (decrease) in deferred revenue and other-net | (6.8 | ) | 26.1 | |||||
Net cash provided by operating activities | 180.2 | 283.5 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from disposition of assets | 5.4 | 11.1 | ||||||
Purchases of marketable securities | (908.7 | ) | (717.0 | ) | ||||
Sales and maturities of marketable securities | 1,036.7 | 615.9 | ||||||
Securities lending collateral | (76.5 | ) | — | |||||
Securities lending obligation | 76.5 | — | ||||||
Property and equipment additions: | ||||||||
Aircraft and aircraft purchase deposits | (253.6 | ) | (52.0 | ) | ||||
Capitalized overhauls | — | (44.1 | ) | |||||
Other flight equipment | (39.6 | ) | (22.0 | ) | ||||
Other property and equipment | (24.1 | ) | (25.7 | ) | ||||
Aircraft deposits returned | 7.5 | 19.2 | ||||||
Restricted deposits and other | (3.6 | ) | (4.5 | ) | ||||
Net cash used in investing activities | (180.0 | ) | (219.1 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of long-term debt, net | 20.0 | 94.6 | ||||||
Long-term debt and capital lease payments | (35.4 | ) | (193.2 | ) | ||||
Proceeds from issuance of common stock | 13.9 | 2.3 | ||||||
Net cash used in financing activities | (1.5 | ) | (96.3 | ) | ||||
Net change in cash and cash equivalents | (1.3 | ) | (31.9 | ) | ||||
Cash and cash equivalents at beginning of period | 28.0 | 158.8 | ||||||
Cash and cash equivalents at end of period | $ | 26.7 | $ | 126.9 | ||||
Supplemental disclosure of cash paid (refunded) during the period for: | ||||||||
Interest (net of amount capitalized) | $ | 35.5 | $ | 34.8 | ||||
Income taxes | (1.8 | ) | (39.6 | ) | ||||
Noncash investing and financing activities: | ||||||||
Assets acquired under long-term debt and capital leases | — | 44.7 | ||||||
Credit received for flight deposits deferred in other liabilities | 9.7 | — | ||||||
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska Air Group, Inc.
Note 1. Basis of Presentation and Significant Accounting Policies
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Alaska Air Group, Inc. (Air Group or the Company) include the accounts of the parent company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. These interim condensed consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments have been made which are necessary to present fairly the Company’s financial position as of September 30, 2005, as well as the results of operations for the three and nine months ended September 30, 2004 and 2005. The adjustments made were of a normal recurring nature.
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these condensed consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities theand disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates made include assumptions used to record liabilities, expenses and revenues associated with the Company’s Mileage Plan, amounts to be paid to lessors upon aircraft lease terminations, the fair market value of surplus or impaired aircraft, engines and parts, assumptions used in the calculations of pension expense in the Company’s Defined Benefit Plansdefined benefit plans, and the amounts of certain accrued liabilities. Actual results may differ from the Company’s estimates.
Reclassifications
Certain reclassifications have been made to conform the prior year’s data to the current format.
Securities Lending
From time to time, the Company lends certain marketable securities to third parties for a time period of less than one year. During the time period in which these securities are loaned to the third parties, the Company requires cash collateral for 102% of the daily market value of the loaned securities. This cash collateral is restricted and is deposited with a lending agent and invested by that agent in accordance with the Company’s guidelines to generate additional income, which is shared with the lending agent. As of September 30, 2005, the Company had $74.8 million of securities on loan under the program. These affected securities are included as marketable securities and included in current assets. The Company maintains full ownership rights to the securities loaned and continues to earn interest and appreciation on them. The Company has an indemnification agreement with the lending agent in the event a borrower becomes insolvent or fails to return securities. The cash collateral is classified in current assets as restricted securities lending collateral in our consolidated balance sheets and the related liability is classified in current liabilities as securities lending obligation.
Stock Options
The Company applies the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”,Employees,” and related Interpretations in accounting for stock options.
The following table represents the pro forma net income (loss) before accounting change and pro forma net lossincome per share (EPS) had compensation cost for the Company’s stock options been determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” In accordance with SFAS No. 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model and then amortized ratably over the vesting period.period (in millions, except per share amounts):
8
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Income before accounting change as reported | $ | 90.2 | $ | 74.0 | $ | 117.5 | $ | 29.6 | ||||||||
Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.3 | — | 0.7 | — | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects | (1.2 | ) | (1.1 | ) | (3.5 | ) | (3.4 | ) | ||||||||
Pro forma income before accounting change | $ | 89.3 | $ | 72.9 | $ | 114.7 | $ | 26.2 | ||||||||
Net income as reported | $ | 90.2 | $ | 74.0 | $ | 27.1 | $ | 29.6 | ||||||||
Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.3 | — | 0.7 | — | ||||||||||||
Deduct: Total stock-based compensation expense determined under fair value-based methods for all awards, net of related tax | (1.2 | ) | (1.1 | ) | (3.5 | ) | (3.4 | ) | ||||||||
Pro forma net income | $ | 89.3 | $ | 72.9 | $ | 24.3 | $ | 26.2 | ||||||||
Basic EPS before accounting change: | ||||||||||||||||
As reported | $ | 3.28 | $ | 2.75 | $ | 4.31 | $ | 1.10 | ||||||||
Pro forma | 3.25 | 2.71 | 4.21 | 0.98 | ||||||||||||
Basic EPS: | ||||||||||||||||
As reported | $ | 3.28 | $ | 2.75 | $ | 0.99 | $ | 1.10 | ||||||||
Pro forma | 3.25 | 2.71 | 0.89 | 0.98 | ||||||||||||
Diluted EPS before accounting change: | ||||||||||||||||
As reported | $ | 2.71 | $ | 2.29 | $ | 3.62 | $ | 0.98 | ||||||||
Pro forma | 2.68 | 2.26 | 3.54 | 0.88 | ||||||||||||
Diluted EPS: | ||||||||||||||||
As reported | $ | 2.71 | $ | 2.29 | $ | 0.93 | $ | 0.98 | ||||||||
Pro forma | 2.68 | 2.26 | 0.85 | 0.88 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| Income (loss) before accounting change (in millions) | ||||||||
| Income (loss) as reported | $ | 9.9 | $ | (42.7 | ) | |||
| Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.2 | — | ||||||
| Deduct: Total stock-based compensation expense determined under fair value- based methods for all awards, net of related tax | (1.0 | ) | (1.1 | ) | ||||
Pro forma income (loss) before accounting change | $ | 9.1 | $ | (43.8 | ) | |||
| Net loss as reported | $ | (80.5 | ) | $ | (42.7 | ) | ||
| Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.2 | — | ||||||
| Deduct: Total stock-based compensation expense determined under fair value- based methods for all awards, net of related tax | (1.0 | ) | (1.1 | ) | ||||
| Pro forma net loss | $ | (81.3 | ) | $ | (43.8 | ) | ||
| Basic EPS before accounting change: | ||||||||
| As reported | $ | 0.36 | $ | (1.59 | ) | |||
| Pro forma | 0.34 | (1.64 | ) | |||||
| Basic EPS: | ||||||||
| As reported | $ | (2.97 | ) | $ | (1.59 | ) | ||
| Pro forma | (2.99 | ) | (1.64 | ) | ||||
| Diluted EPS before accounting change: | ||||||||
| As reported | $ | 0.34 | $ | (1.59 | ) | |||
| Pro forma | 0.31 | (1.64 | ) | |||||
| Diluted EPS: | ||||||||
| As reported | $ | (2.39 | ) | $ | (1.59 | ) | ||
| Pro forma | (2.42 | ) | (1.64 | ) | ||||
9
During the fourth quarter of 2004, the Financial Accounting Standards Board issued SFAS 123R, “Share Based Payment: An Amendment of SFAS Nos. 123 and 95”. The new standard requires companies to recognize as expense the fair value of stock options and other equity-based compensation issued to employees as of the grant date. This new standard will apply to both stock options that we grantthe Company grants to employees and ourthe Employee Stock Purchase Plan, which features a look-back provision and allows employees to purchase stock at a 15% discount. Our optionsImplementation of SFAS 123R will be effective January 1, 2006. Options are typically granted with gradedratable vesting provisions, and we intendthe Company intends to amortize compensation cost over the service period using the straight line method. Due to a recent decision by the Securities and Exchange Commission, implementation of SFAS 123R will be effective January 1, 2006. We intendThe Company intends to use the “modified prospective method” upon adoption whereby previously awarded but unvested equity awards are accounted for in accordance with SFAS 123R and prospective amounts are recognized in the income statement instead of simply being disclosed. Once adopted, we expect our stock basedthe Company expects that stock-based compensation expense, as measured under SFAS 123R, will be approximately $ 6$6 million to $10 million per year on a pre-tax basis.
Note 2. Change in Accounting Principle
Effective January 1, 2005, the Company changed its method of accounting for major airframe and engine overhauls from thecapitalize and amortize method to thedirect expense method. Under the former method, these costs were capitalized and amortized to maintenance expense over the shorter of the life of the overhaul or the remaining lease term. Under thedirect expense method, overhaul costs are expensed as incurred. The Company believes that thedirect expense method is preferable because it eliminates the judgment and estimation needed to determine overhaul versus repair allocations in maintenance activities. Additionally, the Company’s approved maintenance program for the majority of its airframes now focuses more on shorter, but more frequent, maintenance visits that result in a higher portion of the work being repair activity.visits. Management also believes that thedirect expense method is the predominant method used in the airline industry. Accordingly, effective January 1, 2005, the Company wrote off the net book value of its previously capitalized airframe and engine overhauls for all aircraft in a charge totaling $144.7 million pre-tax ($90.4 million after tax). The Company does not believe disclosing the effect of adopting thedirect expense method on net income for the period ended March 31,September 30, 2005 provides meaningful information because of changes in the Company’s maintenance program, including the execution of a “power by the hour” engine maintenance agreement with a third party in late 2004.
10
Note 3. Restructuring Charges
During the second quarter of 2005, Alaska contracted out ramp services at the Seattle-Tacoma International Airport. This event resulted in a reduction of approximately 475 employees in Seattle. Severance and related costs associated with this restructuring were originally estimated at $16.1 million, which was recorded in the second quarter.
During the third quarter of 2004, Alaska announced a management reorganization and the closure of its Oakland heavy maintenance base, contracting out of the Company’s fleet service and ground support
equipment and facility maintenance functions, as well as other initiatives. Restructuring charges totaling $53.4 million were recorded in 2004, with $38.7 million remaining accrued at December 31, 2004.
The following table displays the activity and balance of the severance and related costs components of the Company’s restructuring accrual as of and for the nine months ended September 30, 2005. The restructuring charge adjustment relates to our changes in estimated costs of medical coverage extended to impacted employees and a change in the number of employees affected since the original accrual was recorded. The Company expects to record additional adjustments in future quarters as the number of impacted employees that select the extended medical coverage becomes known.
Accrual for Severance and Related Costs
| Nine Months Ended September 30, | ||||||||
| 2005 | 2004 | |||||||
Balance at December 31, 2004 and 2003, respectively | $ | 38.7 | $ | — | ||||
Restructuring charges | 16.1 | 27.5 | ||||||
Restructuring charge adjustments | (3.4 | ) | — | |||||
Cash payments | (44.3 | ) | (1.2 | ) | ||||
Balance at September 30, 2005 and 2004, respectively | $ | 7.1 | $ | 26.3 | ||||
The Company will make the majority of the remaining cash payments in the fourth quarter of 2005. The accrual for severance and related costs at September 30, 2005 is included in accrued wages, vacation and payroll taxes in the consolidated balance sheets.
During March 2005, the Company notified the Port of Oakland of its decision to terminate the lease for the Oakland hangar as part of its ongoing restructuring efforts. Accordingly, the Company has recorded an impairment charge of $7.7 million in the first quarter of 2005 for the leasehold improvements that will be abandoned as a result of the lease termination. Additionally, the Company has recorded a charge forof $0.3 million for certain costs associated with the lease termination.
The following table displays the activity and balance of the asset impairment and lease termination, costs components of the Company’s restructuring reserve as of and for the three months ended March 31, 2005 ($ in millions):
| Asset Impairment and Lease Termination Costs | ||||
| Balance at December 31, 2004 | $ | 0.0 | ||
| Asset impairment charge | 7.7 | |||
| Write-off of impaired assets | (7.7 | ) | ||
| Lease termination costs | 0.3 | |||
| Cash payments | (0.1 | ) | ||
| Balance at March 31, 2005 | $ | 0.2 | ||
During the third quarter of 2004, Alaska announced a management reorganization and the closure of its Oakland heavy maintenance base, contracting out of the Company’s fleet service and ground support equipment and facility maintenance functions, as well as other initiatives. In total, these restructuring activities are expected to result in a reduction of approximately 900 employees.
The following table displays the activity and balance of the severance and related costs components of the Company’s restructuring reserve as of and for the three months ended March 31, 2005. The restructuring adjustment relates to our change in estimated costs of medical coverage extended to impacted employees. We expect to record similar adjustments in future quarters as actual medical costs become known. There were no restructuring charges during the first quarter of 2004 ($ in millions):
| Severance and Related Costs | ||||
| Balance at December 31, 2004 | $ | 38.7 | ||
| Restructuring adjustment | (0.6 | ) | ||
| Cash payments | (20.3 | ) | ||
| Balance at March 31, 2005 | $ | 17.8 | ||
The Company will make the majority of the remaining cash payments during the second quarter of 2005.
11
Note 4. Impairment of F-28 Aircraft and Related Spare Engines
During the first quarter of 2004, Horizon recorded an impairment charge of $2.4 million associated with its F-28 aircraft and spare engines to lower the carrying value of these assets to their estimated net realizable value.
Note 5.4. Derivative Financial Instruments
The Company records all derivative instruments, all of which are currently fuel hedge contracts, on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or other comprehensive income, depending on the type of hedging instrument and the effectiveness of the hedges.earnings.
The Company’s operations are inherently dependent upon the price and availability of aircraft fuel, which accounted for 20.5%approximately 20% of all of 2004 and 16.5%24% of year-to-date 2005 and 2004 operating expenses (excluding impairment and restructuring charges), respectively.. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into swap agreements and call options for crude oil.
Because of historical variations in the spread between the prices of West Texas Intermediate crude oil and jet fuel since the second quarter of 2004, the Company’s hedge contracts are not “highly correlated” to changes in prices of aircraft fuel, as defined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The impacts on the Company’s reported results are as follows:
The following table summarizes realized fuel hedging gains and changes in fair value of hedging contracts outstanding as of March 31,September 30, 2005 and 2004 (in millions):
12
| Three Months Ended September 30 | ||||||||||||||||
| Alaska Airlines | Horizon Air | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 179.5 | $ | 133.7 | $ | 28.0 | $ | 18.7 | ||||||||
Less: gains on settled hedges included in fuel expense | (2.9 | ) | (3.5 | ) | (0.5 | ) | (0.5 | ) | ||||||||
GAAP fuel expense | $ | 176.6 | $ | 130.2 | $ | 27.5 | $ | 18.2 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (34.9 | ) | (8.5 | ) | (5.2 | ) | (1.2 | ) | ||||||||
Economic fuel expense | $ | 141.7 | $ | 121.7 | $ | 22.3 | $ | 17.0 | ||||||||
Mark-to-market hedging gains included in nonoperating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 19.9 | $ | 50.3 | $ | 2.9 | $ | 6.9 | ||||||||
| Nine Months Ended September 30 | ||||||||||||||||
| Alaska Airlines | Horizon Air | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 465.2 | $ | 347.4 | $ | 71.6 | $ | 49.9 | ||||||||
Less: gains on settled hedges included in fuel expense | (9.5 | ) | (11.0 | ) | (1.3 | ) | (1.5 | ) | ||||||||
GAAP fuel expense | $ | 455.7 | $ | 336.4 | $ | 70.3 | $ | 48.4 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (71.9 | ) | (11.7 | ) | (10.9 | ) | (1.6 | ) | ||||||||
Economic fuel expense | $ | 383.8 | $ | 324.7 | $ | 59.4 | $ | 46.8 | ||||||||
Mark-to-market hedging gains included in nonoperating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 100.2 | $ | 70.4 | $ | 15.6 | $ | 9.6 | ||||||||
| Alaska Airlines | Horizon Air | |||||||||||||||
| Three Months Ended March 31 | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 131.0 | $ | 96.7 | $ | 19.5 | $ | 14.6 | ||||||||
| Less: gains on settled hedges included in fuel expense | (3.4 | ) | (3.1 | ) | (0.4 | ) | (0.4 | ) | ||||||||
| GAAP fuel expense | $ | 127.6 | $ | 93.6 | $ | 19.1 | $ | 14.2 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (15.7 | ) | — | (2.5 | ) | — | ||||||||||
| Economic fuel expense | $ | 111.9 | $ | 93.6 | $ | 16.6 | $ | 14.2 | ||||||||
| Mark-to-market hedging gains included in nonoperating income (expense) | $ | 77.7 | $ | 0.4 | $ | 12.3 | $ | — | ||||||||
FuelOutstanding fuel hedge positions entered into by Alaska and Horizonas of September 30, 2005 are currently as follows:
| Approximate % of | |||||||||||||||||
| Expected Fuel | Gallons Hedged | Approximate Crude | |||||||||||||||
| Requirements | (in millions) | Oil Price per Barrel | |||||||||||||||
| Second Quarter 2005 | 50 | % | 51.9 | $ | 28.97 | ||||||||||||
| Third Quarter 2005 | 50 | % | 55.7 | $ | 28.81 | ||||||||||||
| Fourth Quarter 2005 | 50 | % | 50.4 | $ | 31.85 | ||||||||||||
| First Quarter 2006 | 50 | % | 50.8 | $ | 35.70 | ||||||||||||
| Second Quarter 2006 | 50 | % | 53.5 | $ | 39.76 | ||||||||||||
| Third Quarter 2006 | 40 | % | 45.9 | $ | 41.58 | ||||||||||||
| Fourth Quarter 2006 | 30 | % | 31.2 | $ | 42.70 | ||||||||||||
| First Quarter 2007 | 20 | % | 20.9 | $ | 43.09 | ||||||||||||
| Second Quarter 2007 | 15 | % | 16.5 | $ | 43.86 | ||||||||||||
| Third Quarter 2007 | 15 | % | 17.7 | $ | 43.50 | ||||||||||||
| Fourth Quarter 2007 | 10 | % | 10.7 | $ | 47.29 | ||||||||||||
| First Quarter 2008 | 5 | % | 5.4 | $ | 51.56 | ||||||||||||
| Approximate % of Expected Fuel Requirements | Gallons Hedged (in millions) | Approximate Crude Oil Price per Barrel | ||||||
Fourth Quarter 2005 | 50 | % | 50.4 | $ | 31.85 | |||
First Quarter 2006 | 50 | % | 50.8 | $ | 35.70 | |||
Second Quarter 2006 | 50 | % | 53.5 | $ | 39.76 | |||
Third Quarter 2006 | 40 | % | 45.9 | $ | 41.58 | |||
Fourth Quarter 2006 | 30 | % | 31.2 | $ | 42.70 | |||
First Quarter 2007 | 20 | % | 20.9 | $ | 43.09 | |||
Second Quarter 2007 | 19 | % | 21.3 | $ | 45.11 | |||
Third Quarter 2007 | 22 | % | 26.0 | $ | 45.27 | |||
Fourth Quarter 2007 | 17 | % | 17.8 | $ | 47.89 | |||
First Quarter 2008 | 11 | % | 12.3 | $ | 50.44 | |||
Second Quarter 2008 | 6 | % | 7.1 | $ | 49.26 | |||
Third Quarter 2008 | 6 | % | 6.8 | $ | 48.97 | |||
Fourth Quarter 2008 | 5 | % | 5.5 | $ | 48.68 | |||
The fair values of the Company’s fuel hedge positions for the period ended March 31,September 30, 2005 and December 31, 2004 were $189.5$211.8 million and $96.0 million, respectively, and are presented as fuel hedge contracts as both current and non-current assets in the consolidated balance sheets.
Note 6.5. Other Assets
Other
At September 30, 2005 and December 31, 2004 , other assets consisted of the following (in millions):
13
| September 30, 2005 | December 31, 2004 | |||||
Restricted deposits (primarily restricted investments) | $ | 95.1 | $ | 84.2 | ||
Deferred costs and other | 38.2 | 27.7 | ||||
Restricted cash for senior convertible notes | — | 3.6 | ||||
| $ | 133.3 | $ | 115.5 | |||
| March 31, 2005 | December 31, 2004 | |||||||
| Restricted deposits (primarily restricted investments) | $ | 85.4 | $ | 84.2 | ||||
| Deferred costs and other | 52.4 | 27.7 | ||||||
| Restricted cash for senior convertible notes | 1.5 | 3.6 | ||||||
| $ | 139.3 | $ | 115.5 | |||||
Note 7.6. Mileage Plan
Alaska’s Mileage Plan liabilities are included under the following balance sheet captions (in millions):
| March 31, 2005 | December 31, 2004 | |||||||
Current Liabilities: | ||||||||
| Other accrued liabilities | $ | 149.5 | $ | 136.6 | ||||
Other Liabilities and Credits (non-current): | ||||||||
| Deferred revenue | 257.9 | 252.9 | ||||||
| Other liabilities | 20.1 | 19.8 | ||||||
| $ | 427.5 | $ | 409.3 | |||||
| September 30, 2005 | December 31, 2004 | |||||
Current Liabilities: | ||||||
Other accrued liabilities | $ | 159.0 | $ | 136.6 | ||
Other Liabilities and Credits (non-current): | ||||||
Deferred revenue | 265.9 | 252.9 | ||||
Other liabilities | 20.5 | 19.8 | ||||
Total | $ | 445.4 | $ | 409.3 | ||
Note 8.7. Employee Benefit Plans
Pension Plans-Qualified Defined Benefit
Net pension expense for the three and nine months ended March 31September 30 included the following components (in millions):
| March 31, 2005 | March 31, 2004 | |||||||
| Service cost | $ | 13.7 | $ | 13.7 | ||||
| Interest cost | 12.9 | 12.0 | ||||||
| Expected return on assets | (12.5 | ) | (10.7 | ) | ||||
| Amortization of prior service cost | 1.2 | 1.3 | ||||||
| Actuarial gain | 3.6 | 3.7 | ||||||
| Net pension expense | $ | 18.9 | $ | 20.0 | ||||
14
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 13.3 | $ | 13.5 | $ | 38.8 | $ | 40.9 | ||||||||
Interest cost | 12.9 | 11.8 | 38.7 | 35.8 | ||||||||||||
Expected return on assets | (12.5 | ) | (10.9 | ) | (37.5 | ) | (32.3 | ) | ||||||||
Amortization of prior service cost | 1.2 | 1.1 | 3.6 | 3.7 | ||||||||||||
Actuarial loss | 3.6 | 3.6 | 10.8 | 11.0 | ||||||||||||
SFAS No. 88 curtailment charge* | — | 1.0 | — | 1.0 | ||||||||||||
Net pension expense | $ | 18.5 | $ | 20.1 | $ | 54.4 | $ | 60.1 | ||||||||
| * | In connection with the restructuring charges and the reductions in force as discussed in Note 3, the Company recorded curtailment charges pursuant to SFAS No.88 in 2004. These charges are included in restructing charges in the condensed consolidated financial statements. |
The Company made $30.7 million and $69.3 million in contributions during the three and nine months ended September 30, 2005, respectively. The Company made $16.5 million and $49.4 million in contributions to its defined benefit pension plans during the three and nine months ended March 31, 2004. The Company made $19.3 million in contributions during the three months ended March 31, 2005, and expects to contribute an additional $38.5 million to these plans during the remainder of 2005.September 30, 2004, respectively.
Pension Plans-Nonqualified Defined Benefit
Net pension expense for the unfunded, noncontributory defined benefit plans for certain elected officers of the Company for the three and nine months ended March 31September 30 included the following components (in millions):
| March 31, 2005 | March 31, 2004 | |||||||
| Service cost | $0.3 | $0.3 | ||||||
| Interest cost | 0.4 | 0.5 | ||||||
| Actuarial gain | 0.1 | 0.2 | ||||||
| Net pension expense | $0.8 | $1.0 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
Service cost | $ | 0.6 | $ | 0.2 | $ | 1.2 | $ | 0.8 | ||||
Interest cost | 0.4 | 0.4 | 1.2 | 1.4 | ||||||||
Actuarial loss | 0.1 | 0.1 | 0.3 | 0.5 | ||||||||
Net pension expense | $ | 1.1 | $ | 0.7 | $ | 2.7 | $ | 2.7 | ||||
Postretirement Medical Benefits
Net periodic benefit cost for the postretirement medical plans for the three and nine months ended March 31September 30 included the following components:
| March 31, 2005 | March 31, 2004 | |||||||
| Service cost | $1.0 | $1.2 | ||||||
| Interest cost | 1.1 | 1.3 | ||||||
| Amortization of prior service cost | (0.1 | ) | (0.1 | ) | ||||
| Actuarial gain | 0.5 | 0.7 | ||||||
| Net periodic benefit cost | $2.5 | $3.1 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 1.1 | $ | 0.6 | $ | 3.1 | $ | 3.0 | ||||||||
Interest cost | 1.1 | 0.7 | 3.3 | 3.3 | ||||||||||||
Amortization of prior service cost | (0.1 | ) | (0.1 | ) | (0.3 | ) | (0.3 | ) | ||||||||
Actuarial loss | 0.5 | 0.4 | 1.5 | 1.8 | ||||||||||||
Net periodic benefit cost | $ | 2.6 | $ | 1.6 | $ | 7.6 | $ | 7.8 | ||||||||
Note 9.8. Earnings Per Share
SFAS No. 128, “Earnings
Income per Share” requires that companies use income from continuing operations before extraordinary itemsshare was calculated as follows (in millions except per share amounts).
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||
Basic Earnings Per Share | |||||||||||||
Income before accounting change | $ | 90.2 | $ | 74.0 | $ | 117.5 | $ | 29.6 | |||||
Weighted average shares outstanding | 27.502 | 26.862 | 27.274 | 26.820 | |||||||||
Income per share before accounting change | $ | 3.28 | $ | 2.75 | $ | 4.31 | $ | 1.10 | |||||
Cumulative effect of accounting change, net of tax | NA | NA | $ | (90.4 | ) | NA | |||||||
Weighted average shares outstanding | NA | NA | 27.274 | NA | |||||||||
Per share cumulative effect of accounting change | NA | NA | $ | (3.32 | ) | NA | |||||||
Net income | $ | 90.2 | $ | 74.0 | $ | 27.1 | $ | 29.6 | |||||
Weighted average shares outstanding | 27.502 | 26.862 | 27.274 | 26.820 | |||||||||
Net income per share | $ | 3.28 | $ | 2.75 | $ | 0.99 | $ | 1.10 | |||||
Diluted Earnings Per Share | |||||||||||||
Income before accounting change | $ | 90.2 | $ | 74.0 | $ | 117.5 | $ | 29.6 | |||||
Interest on convertible notes, net of tax | 1.5 | 1.0 | 4.0 | 2.6 | |||||||||
Diluted income before accounting change | $ | 91.7 | $ | 75.0 | $ | 121.5 | $ | 32.2 | |||||
Weighted average diluted shares outstanding | 33.857 | 32.631 | 33.523 | 32.691 | |||||||||
Income per share before accounting change | $ | 2.71 | $ | 2.29 | $ | 3.62 | $ | 0.98 | |||||
Cumulative effect of accounting change, net of tax | NA | NA | $ | (90.4 | ) | NA | |||||||
Weighted average shares outstanding | NA | NA | 33.523 | NA | |||||||||
Per share cumulative effect of accounting change | NA | NA | $ | (2.69 | ) | NA | |||||||
Net income | $ | 90.2 | $ | 74.0 | $ | 27.1 | $ | 29.6 | |||||
Interest on convertible notes, net of tax | 1.5 | 1.0 | 4.0 | 2.6 | |||||||||
Diluted net income | $ | 91.7 | $ | 75.0 | $ | 31.1 | $ | 32.2 | |||||
Weighted average shares outstanding | 33.857 | 32.631 | 33.523 | 32.691 | |||||||||
Net income per share | $ | 2.71 | $ | 2.29 | $ | 0.93 | $ | 0.98 | |||||
For the quarter and the cumulative effect of an accounting change as the “control number” in determining whether potential common shares are dilutive or antidilutive. As the Company reported income before the accounting change in 2005, the potential common shares from the Company’s common stock options and senior convertible notes are included in the calculation for diluted earnings (loss) per share. Therefore, for the threenine months ended March 31,September 30, 2005 and 2004, the dilutive impact of common stock options and 5.8 million common shares that would have been outstanding upon conversion of the senior convertible notes were included in the calculations. OptionsOutstanding options to purchase 3.90.9 million and 1.8
million common shares were excluded from the calculation for the quarter and nine months ended September 30, 2005, respectively, as the effectimpact of those options would have been antidilutive. For the senior convertible
15
notesquarter and nine months ended September 30, 2004, options to purchase 3.3 million and 3.2 million common shares, respectively, were excluded from the computation of diluted loss per share in 2004 because the impact would have been antidilutive. Income (loss) per share was calculated as follows (in millions except per share amounts).
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Basic Earnings (Loss) Per Share | ||||||||
| Income (loss) before accounting change | $ | 9.9 | $ | (42.7 | ) | |||
| Weighted average shares outstanding | 27.147 | 26.778 | ||||||
| Income (loss) per share before accounting change | $ | 0.36 | $ | (1.59 | ) | |||
| Cumulative effect of accounting change, net of tax | $ | (90.4 | ) | NA | ||||
| Weighted average shares outstanding | 27.147 | NA | ||||||
| Per share cumulative effect of accounting change | $ | (3.33 | ) | NA | ||||
| Net loss | $ | (80.5 | ) | $ | (42.7 | ) | ||
| Weighted average shares outstanding | 27.147 | 26.778 | ||||||
| Net loss per share | $ | (2.97 | ) | $ | (1.59 | ) | ||
Diluted Earnings (Loss) Per Share | ||||||||
| Income (loss) before accounting change | $ | 9.9 | $ | (42.7 | ) | |||
| Interest on convertible notes, net of tax | 1.2 | — | ||||||
| Diluted income (loss) before accounting change | $ | 11.1 | $ | (42.7 | ) | |||
| Weighted average diluted shares outstanding | 33.158 | 26.778 | ||||||
| Income (loss) per share before accounting change | $ | 0.34 | $ | (1.59 | ) | |||
| Cumulative effect of accounting change, net of tax | $ | (90.4 | ) | NA | ||||
| Weighted average diluted shares outstanding | 33.158 | NA | ||||||
| Per share cumulative effect of accounting change | $ | (2.73 | ) | NA | ||||
| Net loss | $ | (80.5 | ) | $ | (42.7 | ) | ||
| Interest on convertible notes, net of tax | 1.2 | — | ||||||
| Diluted net loss | $ | (79.3 | ) | $ | (42.7 | ) | ||
| Weighted average diluted shares outstanding | 33.158 | 26.778 | ||||||
| Net loss per share | $ | (2.39 | ) | $ | (1.59 | ) | ||
16
Note 10.9. Operating Segment Information
Operating segment information for Alaska and Horizon for the three-month periodthree and nine month periods ended March 31September 30 was as follows (in millions):
| Three Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| Operating revenues: | ||||||||
| Alaska | $ | 523.3 | $ | 491.3 | ||||
| Horizon | 121.2 | 110.3 | ||||||
| Elimination of intercompany revenues | (2.0 | ) | (3.6 | ) | ||||
| Consolidated | $ | 642.5 | $ | 598.0 | ||||
| Income (loss) before income tax and accounting change: | ||||||||
| Alaska | $ | 15.4 | $ | (53.2 | ) | |||
| Horizon | 4.6 | (10.4 | ) | |||||
| Other* | (3.0 | ) | (2.6 | ) | ||||
| Consolidated | $ | 17.0 | $ | (66.2 | ) | |||
| Total assets at end of period: | ||||||||
| Alaska | $ | 3,062.0 | $ | 3,185.8 | ||||
| Horizon | 342.4 | 317.0 | ||||||
| Other* | 760.0 | 854.7 | ||||||
| Elimination of intercompany accounts | (863.8 | ) | (958.2 | ) | ||||
| Consolidated | $ | 3,300.6 | $ | 3,399.3 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Operating revenues: | ||||||||||||||||
Alaska | $ | 689.3 | $ | 632.8 | $ | 1,828.9 | $ | 1,701.7 | ||||||||
Horizon | 153.7 | 139.3 | 415.5 | 374.3 | ||||||||||||
Other* | 0.3 | 0.2 | 0.8 | 0.5 | ||||||||||||
Elimination of intercompany revenues | 2.4 | (4.1 | ) | (0.5 | ) | (9.0 | ) | |||||||||
Consolidated | $ | 845.7 | $ | 768.2 | $ | 2,244.7 | $ | 2,067.5 | ||||||||
Income (loss) before income tax and accounting change: | ||||||||||||||||
Alaska | $ | 133.0 | $ | 97.9 | $ | 170.5 | $ | 41.9 | ||||||||
Horizon | 17.3 | 24.4 | 33.0 | 18.7 | ||||||||||||
Other* | (3.5 | ) | (3.1 | ) | (10.0 | ) | (8.3 | ) | ||||||||
Consolidated | $ | 146.8 | $ | 119.2 | $ | 193.5 | $ | 52.3 | ||||||||
Total assets at end of period: | ||||||||||||||||
Alaska | $ | 3,226.6 | $ | 3,161.1 | ||||||||||||
Horizon | 325.6 | 304.1 | ||||||||||||||
Other* | 872.2 | 882.2 | ||||||||||||||
Elimination of intercompany accounts | (914.7 | ) | (935.9 | ) | ||||||||||||
Consolidated | $ | 3,509.7 | $ | 3,411.5 | ||||||||||||
* Includes the parent company, Alaska Air Group, Inc., including its investments in Alaska and Horizon, which are eliminated in consolidation.
| * | Includes the parent company, Alaska Air Group, Inc, including its investments in Alaska and Horizon, which are eliminated in consolidation. |
Note 11. Long-term10. Long-Term Debt and Capital Lease Obligations
At March 31,September 30, 2005 and December 31, 2004, long-term debt and capital lease obligations were as follows (in millions):
| 2005 | 2004 | |||||||
| Fixed rate notes payable due through 2015 | $ | 357.7 | $ | 361.3 | ||||
| Variable rate notes payable due through 2018 | 526.4 | 531.2 | ||||||
| Senior convertible notes due through 2023 | 150.0 | 150.0 | ||||||
| Long-term debt | 1,034.1 | 1,042.5 | ||||||
| Capital lease obligations | 0.3 | 0.5 | ||||||
| Less current portion | (54.0 | ) | (53.4 | ) | ||||
| $ | 980.4 | $ | 989.6 | |||||
17
| September 30, 2005 | December 31, 2004 | |||||||
Fixed rate notes payable due through 2020 | $ | 589.5 | $ | 361.3 | ||||
Variable rate notes payable due through 2018 | 287.8 | 531.2 | ||||||
Senior convertible notes due through 2023 | 150.0 | 150.0 | ||||||
Long-term debt | 1,027.3 | 1,042.5 | ||||||
Capital lease obligations | 0.3 | 0.5 | ||||||
Less current portion | (57.6 | ) | (53.4 | ) | ||||
| $ | 970.0 | $ | 989.6 | |||||
During the first nine months of 2005, Horizon issued $20.0 million of debt secured by flight equipment, having a fixed interest rate of 6.07% and a fifteen-year term.
During 2004, Alaska repaid its $150 million credit facility and, on December 23, 2004, that facility expired. On March 25, 2005, Alaska Airlines, Inc. finalized a $160 million variable rate credit facility with a syndicate of financial institutions that will expire in March 2008. The interest rate on the credit facility varies depending on certain financial ratios specified in the agreement with a minimum interest rate of LIBOR plus 200 basis points. Any borrowings will be secured by either aircraft or cash collateral. This credit facility contains contractual restrictions and requires maintenance of specific levels of net worth, maintenance of certain debt and leases to net worth, leverage and fixed charge coverage ratios, and limits on liens, asset dispositions, dividends, and certain other expenditures. Such provisions restrict Alaska Airlines from distributing any funds to Alaska Air Group in the form of dividends and limit the amount of funds Alaska Airlines can loan to Alaska Air Group. As of March 31,September 30, 2005, Alaska could loan up to $300.0 million was available to loan to Alaska Air Group without violating the covenants in the credit facility. As of March 31,September 30, 2005, there are no outstanding borrowings on this credit facility.
Holders
In the second and third quarters of the Company’s $150.0 million senior convertible notes due in 2023 (Notes) may elect to surrender the Notes for conversion into shares of the Company’s common stock. The conversion price of the Notes is $26.00 through March 2008. Upon a conversion of the Notes, in lieu of delivering shares of the Company’s common stock,2005, the Company may electexercised its option under several of its existing variable rate long-term debt arrangements to pay cashfix the interest rates through maturity. The fixed rates on these affected debt arrangements range from 5.2% to 6.5%. These changes did not result in any gain or a combinationloss in the consolidated statements of cash and the Company’s common stock for the Notes surrendered. The Company may also redeem all or a portion of the Notes in cash or common stock or a combination at any time on or after the third anniversary of the issuance of the Notes. In addition, holders may redeem all or a portion of their Notes for cash on the 5th, 10th and 15th anniversaries of the issuance of the Notes or upon the occurrence of a change of control or tax event at principal plus accrued interest.operations.
Subsequent to the firstend of the third quarter Horizon financedof 2005, Alaska finalized a CRJ-700 that was purchasedpre-delivery payment facility to assist in its pre-delivery funding requirements on the purchase of B737-800 aircraft. See Note 13.
Note 11. Aircraft Commitments
Alaska entered into an aircraft purchase agreement during the second quarter of 2005 to acquire 35 B737-800 aircraft with deliveries beginning in January 2006 and continuing through April 2011. The purchase agreement also includes options to purchase an additional 15 aircraft. Concurrent with the execution of this purchase agreement, Alaska paid $110.9 million in aircraft purchase and option deposits using cash and delivered duringa credit of $9.7 million received from the first quarter.manufacturer. The financing was completed$9.7 million credit has been deferred as other liabilities in the Company’s balance sheet and will be applied to the purchase price of future aircraft upon delivery.
As of Sep 30, 2005, the Company has firm purchase commitments for 43 aircraft requiring aggregate future payments of approximately $1.3 billion. In addition to the 15 options noted above, Horizon had options to purchase 11 Q400’s and 19 CRJ 700’s. However, these commitments and number of options for Horizon changed subsequent to the end of the quarter (See Note 13). Alaska and Horizon expect to finance the firm orders and, to the extent exercised, the option aircraft with a $20 millionleases, long-term debt arrangement that has a fifteen year term and a fixed interest rate of 6.07%.or internally generated cash.
Note 12. Contingencies
The Company’s former pilot contract provided that, if a negotiated agreement on the entire contract was not reached by December 15, 2004, ten contract issues plus wage rates would be submitted to an interest arbitrator. The arbitration became effective on May 1, 2005 and resulted in an average pilot wage reduction of approximately 26%, various work rule changes, and higher employee health care contributions. No changes were made to the pilots’ pension or profit sharing plans.
18
The Company is a party to routine commercial and employment litigation incidental to its business and with respect to which no material liability is expected. Management believes the ultimate disposition of these matters is not likely to materially affect the Company’s financial position or results of operations. However, this belief is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
The
In May 2005, the Air Line Pilots Association filed a lawsuit in federal district court in Seattle to overturn the current labor contract covering Alaska’s pilots as established by an arbitrator, which was effective May 1, 2005. On July 21, 2005, the Company could potentially be responsible for environmental remediation costs primarily relatedfiled a motion to jet fueldismiss the lawsuit. On October 28, 2005, the district court granted the Company’s motion to dismiss. This decision is subject to appeal.
In March 2005, the Company filed a claim against the International Association of Machinists (IAM) seeking to compel arbitration of the dispute regarding the subcontracting of the Company’s ramp service operation in Seattle. On May 10, 2005, the IAM filed a counter claim against the Company alleging that the Company violated the status quo and other petroleum contaminationengaged in bad faith bargaining. On May 13, 2005, the Company announced that occursit had subcontracted the ramp service operation in Seattle, resulting in the normal courseimmediate reduction of business at various owned or leased locationsapproximately 475 employees represented by the IAM. Shortly after this event, the IAM filed a motion for a preliminary injunction seeking to reverse the subcontracting by the Company. That motion was heard and denied by a federal court judge on June 2, 2005. The Company’s lawsuit is still pending in federal court and a September 2006 trial date has been set for the Company’s system.IAM’s counter claim. The Company has established an accrual for estimated remediation costs for known contaminationfiled a motion to dismiss the IAM’s counter claim. At this time, the Company is not certain as to what the outcome will be.
Note 13. Subsequent Events
On October 19, 2005, Alaska finalized a $172 million variable rate revolving loan facility with a syndicate of lenders to provide a portion of the pre-delivery funding requirements of the Company’s purchase of up to 38 new Boeing 737-800 aircraft (23 of which are firm orders) under the current aircraft purchase agreement. The facility will expire on August 31, 2009. The interest rate is based on information currently available.one-month LIBOR plus a specified margin. Any borrowings will be secured by the Company’s rights under the Boeing purchase agreement. The accrualinitial draw on the facility was not significant at March 31, 2005.$61.3 million, which was used to reimburse Alaska for the facility’s portion of the pre-delivery payments made to date.
19
Alaska Airlines Financial and Statistical Data (unaudited)
| Three Months Ended March 31 | ||||||||||||
| % | ||||||||||||
| Financial Data (in millions): | 2005 | 2004 | Change | |||||||||
| Operating Revenues: | ||||||||||||
| Passenger | $ | 471.3 | $ | 449.3 | 4.9 | |||||||
| Freight and mail | 19.3 | 17.7 | 9.0 | |||||||||
| Other — net | 32.7 | 24.3 | 34.6 | |||||||||
| Total Operating Revenues | 523.3 | 491.3 | 6.5 | |||||||||
| Operating Expenses: | ||||||||||||
| Wages and benefits | 199.7 | 200.8 | (0.5 | ) | ||||||||
| Contracted services | 27.8 | 23.1 | 20.3 | |||||||||
| Aircraft fuel | 127.6 | 93.6 | 36.3 | |||||||||
| Aircraft maintenance | 50.1 | 43.5 | 15.2 | |||||||||
| Aircraft rent | 28.4 | 29.5 | (3.7 | ) | ||||||||
| Food and beverage service | 10.9 | 11.2 | (2.7 | ) | ||||||||
| Other selling expenses and commissions | 32.7 | 33.9 | (3.5 | ) | ||||||||
| Depreciation and amortization | 30.3 | 32.8 | (7.6 | ) | ||||||||
| Loss on sale of assets | — | 0.8 | NM | |||||||||
| Landing fees and other rentals | 40.6 | 33.2 | 22.3 | |||||||||
| Other | 38.4 | 36.9 | 4.1 | |||||||||
| Restructuring charges, primarily write-off of Oakland leasehold improvements | 7.4 | — | NM | |||||||||
| Total Operating Expenses | 593.9 | 539.3 | 10.1 | |||||||||
| Operating Loss | (70.6 | ) | (48.0 | ) | NM | |||||||
| Interest income | 6.3 | 5.3 | ||||||||||
| Interest expense | (11.5 | ) | (10.8 | ) | ||||||||
| Interest capitalized | 0.7 | 0.1 | ||||||||||
| Fuel hedging gains | 93.4 | 0.4 | ||||||||||
| Other — net | (2.9 | ) | (0.2 | ) | ||||||||
| 86.0 | (5.2 | ) | ||||||||||
| Income (Loss) Before Income Tax | $ | 15.4 | $ | (53.2 | ) | NM | ||||||
Operating Statistics: | ||||||||||||
| Revenue passengers (000) | 3,851 | 3,592 | 7.2 | |||||||||
| RPMs (000,000) | 3,897 | 3,580 | 8.9 | |||||||||
| ASMs (000,000) | 5,370 | 5,178 | 3.7 | |||||||||
| Passenger load factor | 72.6 | % | 69.1 | % | 3.5 pts | |||||||
| Yield per passenger mile | 12.09 | ¢ | 12.55 | ¢ | (3.7 | ) | ||||||
| Operating revenue per ASM | 9.74 | ¢ | 9.49 | ¢ | 2.6 | |||||||
| Operating expenses per ASM (a) | 11.06 | ¢ | 10.42 | ¢ | 6.1 | |||||||
| Operating expense per ASM excluding fuel and restructuring charges (a) | 8.55 | ¢ | 8.61 | ¢ | (0.7 | ) | ||||||
| Raw fuel cost per gallon (a) | 155.6 | ¢ | 116.6 | ¢ | 33.4 | |||||||
| GAAP fuel cost per gallon (a) | 151.5 | ¢ | 112.9 | ¢ | 34.2 | |||||||
| Economic fuel cost per gallon (a) | 132.9 | ¢ | 112.9 | ¢ | 17.7 | |||||||
| Fuel gallons (000,000) | 84.2 | 82.9 | 1.6 | |||||||||
| Average number of employees | 9,219 | 9,984 | (7.7 | ) | ||||||||
| Aircraft utilization (blk hrs/day) | 10.7 | 10.4 | 2.9 | |||||||||
| Operating fleet at period-end | 109 | 108 | 0.9 | |||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
| 2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||||||||||||||
Financial Data (in millions): | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||
Passenger | $ | 624.1 | $ | 576.6 | 8.2 | % | $ | 1,656.6 | $ | 1,545.8 | 7.2 | % | ||||||||||
Freight and mail | 25.2 | 24.5 | 2.9 | % | 68.4 | 65.3 | 4.7 | % | ||||||||||||||
Other - net | 40.0 | 31.7 | 26.2 | % | 103.9 | 90.6 | 14.7 | % | ||||||||||||||
Total Operating Revenues | 689.3 | 632.8 | 8.9 | % | 1,828.9 | 1,701.7 | 7.5 | % | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||||
Wages and benefits | 174.5 | 207.3 | -15.8 | % | 556.2 | 611.8 | -9.1 | % | ||||||||||||||
Contracted services | 27.6 | 17.8 | 55.1 | % | 87.0 | 70.3 | 23.8 | % | ||||||||||||||
Aircraft fuel | 176.6 | 130.2 | 35.6 | % | 455.7 | 336.4 | 35.5 | % | ||||||||||||||
Aircraft maintenance | 43.2 | 27.1 | 59.4 | % | 143.5 | 111.3 | 28.9 | % | ||||||||||||||
Aircraft rent | 29.5 | 28.1 | 5.0 | % | 87.2 | 85.5 | 2.0 | % | ||||||||||||||
Food and beverage service | 12.8 | 13.7 | -6.6 | % | 35.2 | 37.9 | -7.1 | % | ||||||||||||||
Selling expenses | 34.0 | 35.9 | -5.3 | % | 97.9 | 101.1 | -3.2 | % | ||||||||||||||
Depreciation and amortization | 31.9 | 32.0 | -0.3 | % | 92.9 | 95.2 | -2.4 | % | ||||||||||||||
Landing fees and other rentals | 40.4 | 37.6 | 7.4 | % | 121.5 | 106.1 | 14.5 | % | ||||||||||||||
Other | 39.8 | 34.6 | 15.0 | % | 119.7 | 110.4 | 8.4 | % | ||||||||||||||
Restructuring charges | (1.4 | ) | 27.5 | NM | 20.7 | 27.5 | NM | |||||||||||||||
Impairment of aircraft and related spare parts | — | — | NM | — | 36.8 | NM | ||||||||||||||||
Total Operating Expenses | 608.9 | 591.8 | 2.9 | % | 1,817.5 | 1,730.3 | 5.0 | % | ||||||||||||||
Operating Income (Loss) | 80.4 | 41.0 | NM | 11.4 | (28.6 | ) | NM | |||||||||||||||
Interest income | 9.2 | 8.4 | 23.1 | 20.0 | ||||||||||||||||||
Interest expense | (13.0 | ) | (11.6 | ) | (36.9 | ) | (33.1 | ) | ||||||||||||||
Interest capitalized | 2.6 | 0.4 | 4.5 | 0.7 | ||||||||||||||||||
Fuel hedging gains | 54.8 | 58.8 | 172.1 | 82.1 | ||||||||||||||||||
Other - net | (1.0 | ) | 0.9 | (3.7 | ) | 0.8 | ||||||||||||||||
| 52.6 | 56.9 | 159.1 | 70.5 | |||||||||||||||||||
Income Before Income Tax and Accounting Change | $ | 133.0 | $ | 97.9 | NM | $ | 170.5 | $ | 41.9 | NM | ||||||||||||
Operating Statistics: | ||||||||||||||||||||||
Revenue passengers (000) | 4,632 | 4,589 | 0.9 | % | 12,715 | 12,296 | 3.4 | % | ||||||||||||||
RPMs (000,000) | 4,598 | 4,571 | 0.6 | % | 12,812 | 12,255 | 4.5 | % | ||||||||||||||
ASMs (000,000) | 5,822 | 6,012 | -3.2 | % | 16,735 | 16,825 | -0.5 | % | ||||||||||||||
Passenger load factor | 79.0 | % | 76.0 | % | 3.0 pts | 76.6 | % | 72.8 | % | 3.8 pts | ||||||||||||
Yield per passenger mile | 13.57 | ¢ | 12.62 | ¢ | 7.4 | % | 12.93 | ¢ | 12.61 | ¢ | 2.5 | % | ||||||||||
Operating revenue per ASM | 11.84 | ¢ | 10.53 | ¢ | 12.4 | % | 10.93 | ¢ | 10.11 | ¢ | 8.1 | % | ||||||||||
Operating expenses per ASM (a) | 10.46 | ¢ | 9.84 | ¢ | 6.1 | % | 10.86 | ¢ | 10.28 | ¢ | 5.6 | % | ||||||||||
Operating expense per ASM excluding fuel, navigation fee refund, restructuring and impairment charges(a) | 7.53 | ¢ | 7.35 | ¢ | 2.4 | % | 8.04 | ¢ | 7.95 | ¢ | 1.2 | % | ||||||||||
Raw fuel cost per gallon (a) | $ | 1.99 | $ | 1.40 | 41.8 | % | $ | 1.78 | $ | 1.30 | 37.4 | % | ||||||||||
GAAP fuel cost per gallon (a) | $ | 1.95 | $ | 1.36 | 43.3 | % | $ | 1.74 | $ | 1.26 | 38.6 | % | ||||||||||
Economic fuel cost per gallon (a) | $ | 1.56 | $ | 1.27 | 23.0 | % | $ | 1.46 | $ | 1.21 | 20.8 | % | ||||||||||
Fuel gallons (000,000) | 90.4 | 95.8 | -5.7 | % | 260.8 | 267.6 | -2.5 | % | ||||||||||||||
Average number of employees | 8,961 | 10,201 | -12.2 | % | 9,108 | 10,147 | -10.2 | % | ||||||||||||||
Aircraft utilization (blk hrs/day) | 10.9 | 11.8 | -7.6 | % | 10.8 | 11.1 | -2.7 | % | ||||||||||||||
Operating fleet at period-end | 110 | 107 | 2.8 | % | 110 | 107 | 2.8 | % | ||||||||||||||
NM = Not Meaningful
(a) See Note A on page
| (a) | See Note A on Page 22. |
20
Horizon Air Financial and Statistical Data (unaudited)
| Quarter Ended March 31 | ||||||||||||
| % | ||||||||||||
| Financial Data (in millions): | 2005 | 2004 | Change | |||||||||
| Operating Revenues: | ||||||||||||
| Passenger | $ | 117.7 | $ | 106.5 | 10.5 | |||||||
| Freight and mail | 1.0 | 0.9 | 11.1 | |||||||||
| Other — net | 2.5 | 2.9 | (13.8 | ) | ||||||||
| Total Operating Revenues | 121.2 | 110.3 | 9.9 | |||||||||
| Operating Expenses: | ||||||||||||
| Wages and benefits | 43.2 | 41.5 | 4.1 | |||||||||
| Contracted services | 5.5 | 5.2 | 5.8 | |||||||||
| Aircraft fuel | 19.1 | 14.2 | 34.5 | |||||||||
| Aircraft maintenance | 11.1 | 7.3 | 52.1 | |||||||||
| Aircraft rent | 17.7 | 18.3 | (3.3 | ) | ||||||||
| Food and beverage service | 0.6 | 0.4 | 50.0 | |||||||||
| Other selling expenses and commissions | 6.7 | 6.5 | 3.1 | |||||||||
| Depreciation and amortization | 3.6 | 3.0 | 20.0 | |||||||||
| Gain on sale of assets | (0.2 | ) | (0.4 | ) | NM | |||||||
| Landing fees and other rentals | 11.8 | 9.9 | 19.2 | |||||||||
| Other | 11.5 | 11.5 | 0.0 | |||||||||
| Impairment of F-28 aircraft and spare engines | — | 2.4 | NM | |||||||||
| Total Operating Expenses | 130.6 | 119.8 | 9.0 | |||||||||
| Operating Income (Loss) | (9.4 | ) | (9.5 | ) | NM | |||||||
| Interest income | 0.3 | — | ||||||||||
| Interest expense | (1.2 | ) | (1.3 | ) | ||||||||
| Interest capitalized | 0.1 | 0.2 | ||||||||||
| Fuel hedging gains | 14.8 | — | ||||||||||
| Other — net | — | 0.2 | ||||||||||
| 14.0 | (0.9 | ) | ||||||||||
| Income (Loss) Before Income Tax | $ | 4.6 | $ | (10.4 | ) | NM | ||||||
Operating Statistics: | ||||||||||||
| Revenue passengers (000) | 1,475 | 1,267 | 16.4 | |||||||||
| RPMs (000,000) | 540 | 450 | 20.0 | |||||||||
| ASMs (000,000) | 782 | 692 | 13.0 | |||||||||
| Passenger load factor | 69.0 | % | 65.0 | % | 4.0 pts | |||||||
| Yield per passenger mile | 21.82 | ¢ | 23.67 | ¢ | (7.8 | ) | ||||||
| Operating revenue per ASM | 15.50 | ¢ | 15.94 | ¢ | (2.8 | ) | ||||||
| Operating expenses per ASM (a) | 16.69 | ¢ | 17.30 | ¢ | (3.5 | ) | ||||||
| Operating expense per ASM excluding fuel and impairment charges (a) | 14.25 | ¢ | 14.91 | ¢ | (4.4 | ) | ||||||
| Raw fuel cost per gallon (a) | 162.5 | ¢ | 121.7 | ¢ | 33.5 | |||||||
| GAAP fuel cost per gallon (a) | 158.5 | ¢ | 117.7 | ¢ | 34.7 | |||||||
| Economic fuel cost per gallon (a) | 137.7 | ¢ | 117.7 | ¢ | 17.0 | |||||||
| Fuel gallons (000,000) | 12.0 | 12.0 | 0.0 | |||||||||
| Average number of employees | 3,363 | 3,344 | 0.6 | |||||||||
| Aircraft utilization (blk hrs/day) | 8.4 | 7.7 | 9.1 | |||||||||
| Operating fleet at period-end | 66 | 64 | 3.1 | |||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
| 2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||||||||||||||
Financial Data (in millions): | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||
Passenger | $ | 151.2 | $ | 134.5 | 12.4 | % | $ | 405.8 | $ | 360.4 | 12.6 | % | ||||||||||
Freight and mail | 1.0 | 1.0 | 0.0 | % | 2.9 | 3.0 | -3.3 | % | ||||||||||||||
Other - net | 1.5 | 3.8 | -60.5 | % | 6.8 | 10.9 | -37.6 | % | ||||||||||||||
Total Operating Revenues | 153.7 | 139.3 | 10.3 | % | 415.5 | 374.3 | 11.0 | % | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||||
Wages and benefits | 45.3 | 39.7 | 14.1 | % | 131.6 | 122.1 | 7.8 | % | ||||||||||||||
Contracted services | 6.1 | 5.0 | 22.0 | % | 17.7 | 15.4 | 14.9 | % | ||||||||||||||
Aircraft fuel | 27.5 | 18.2 | 51.1 | % | 70.3 | 48.4 | 45.2 | % | ||||||||||||||
Aircraft maintenance | 11.9 | 9.9 | 20.2 | % | 31.1 | 26.6 | 16.9 | % | ||||||||||||||
Aircraft rent | 17.5 | 18.6 | -5.9 | % | 52.8 | 56.0 | -5.7 | % | ||||||||||||||
Food and beverage service | 0.7 | 0.6 | 16.7 | % | 1.9 | 1.6 | 18.8 | % | ||||||||||||||
Selling expenses | 8.1 | 6.7 | 20.9 | % | 22.1 | 19.9 | 11.1 | % | ||||||||||||||
Depreciation and amortization | 4.1 | 3.4 | 20.6 | % | 12.0 | 9.7 | 23.7 | % | ||||||||||||||
Landing fees and other rentals | 12.2 | 11.0 | 10.9 | % | 35.7 | 31.2 | 14.4 | % | ||||||||||||||
Other | 10.1 | 9.4 | 7.4 | % | 31.0 | 31.2 | -0.6 | % | ||||||||||||||
Impairment of aircraft and spare parts | — | — | NM | — | 2.8 | NM | ||||||||||||||||
Total Operating Expenses | 143.5 | 122.5 | 17.1 | % | 406.2 | 364.9 | 11.3 | % | ||||||||||||||
Operating Income | 10.2 | 16.8 | NM | 9.3 | 9.4 | NM | ||||||||||||||||
Interest income | 0.3 | 0.3 | 1.0 | 0.9 | ||||||||||||||||||
Interest expense | (1.6 | ) | (0.9 | ) | (4.3 | ) | (3.2 | ) | ||||||||||||||
Interest capitalized | 0.2 | 0.1 | 0.4 | 0.4 | ||||||||||||||||||
Fuel hedging gains | 8.1 | 8.1 | 26.5 | 11.2 | ||||||||||||||||||
Other - net | 0.1 | — | 0.1 | — | ||||||||||||||||||
| 7.1 | 7.6 | 23.7 | 9.3 | |||||||||||||||||||
Income Before Income Tax and Accounting Change | $ | 17.3 | $ | 24.4 | NM | $ | 33.0 | $ | 18.7 | NM | ||||||||||||
Operating Statistics: | ||||||||||||||||||||||
Revenue passengers (000) | 1,755 | 1,641 | 6.9 | % | 4,868 | 4,362 | 11.6 | % | ||||||||||||||
RPMs (000,000) | 683 | 601 | 13.6 | % | 1,843 | 1,586 | 16.2 | % | ||||||||||||||
ASMs (000,000) | 911 | 830 | 9.8 | % | 2,542 | 2,314 | 9.9 | % | ||||||||||||||
Passenger load factor | 75.0 | % | 72.4 | % | 2.6 pts | 72.5 | % | 68.5 | % | 4.0 pts | ||||||||||||
Yield per passenger mile | 22.14 | ¢ | 22.38 | ¢ | -1.1 | % | 22.02 | ¢ | 22.73 | ¢ | -3.1 | % | ||||||||||
Operating revenue per ASM | 16.87 | ¢ | 16.78 | ¢ | 0.6 | % | 16.35 | ¢ | 16.18 | ¢ | 1.0 | % | ||||||||||
Operating expenses per ASM (a) | 15.75 | ¢ | 14.76 | ¢ | 6.7 | % | 15.98 | ¢ | 15.77 | ¢ | 1.3 | % | ||||||||||
Operating expense per ASM excluding fuel and impairment charges(a) | 12.73 | ¢ | 12.57 | ¢ | 1.3 | % | 13.21 | ¢ | 13.56 | ¢ | -2.6 | % | ||||||||||
Raw fuel cost per gallon (a) | $ | 2.04 | $ | 1.44 | 41.8 | % | $ | 1.85 | $ | 1.34 | 38.4 | % | ||||||||||
GAAP fuel cost per gallon (a) | $ | 2.00 | $ | 1.40 | 43.1 | % | $ | 1.82 | $ | 1.30 | 40.1 | % | ||||||||||
Economic fuel cost per gallon (a) | $ | 1.62 | $ | 1.31 | 23.9 | % | $ | 1.54 | $ | 1.26 | 22.1 | % | ||||||||||
Fuel gallons (000,000) | 13.7 | 13.0 | 5.4 | % | 38.6 | 37.2 | 3.8 | % | ||||||||||||||
Average number of employees | 3,508 | 3,439 | 2.0 | % | 3,428 | 3,399 | 0.9 | % | ||||||||||||||
Aircraft utilization (blk hrs/day) | 9.0 | 8.7 | 3.4 | % | 8.6 | 8.3 | 3.6 | % | ||||||||||||||
Operating fleet at period-end | 65 | 65 | 0.0 | % | 65 | 65 | 0.0 | % | ||||||||||||||
NM = Not Meaningful
(a) See Note A on page
| (a) | See Note A on Page 22. |
21
Note A:
Pursuant to Item 10 of Regulation S-K, we are providing disclosure of the reconciliation of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. The non-GAAP financial measures provide management the ability to measure and monitor performance both with and without the cost of aircraft fuel (including the gains and losses associated with our fuel hedging program where appropriate), the navigation fee refund, restructuring charges, and aircraft impairment charges. Because the cost and availability of aircraft fuel are subject to many economic and political factors beyond our control and we record changes in the fair value of our hedge portfolio in our income statement, it is our view that the measurement and monitoring of performance without fuel is important. In addition, we believe the disclosure of financial performance without the navigation fee refund and impairment and restructuring charges is useful to investors. Finally, these non-GAAP financial measures are also more comparable to financial measures reported to the Department of Transportation by other major network airlines.
The following tables reconcile our non-GAAP financial measures to the most directly comparable GAAP financial measures for both Alaska Airlines, Inc. and Horizon Air Industries, Inc.:
Alaska Airlines, Inc.:($ in millions) Three Months Ended March 31, 2005 2004 Operating expenses $ 593.9 $ 539.3 ASMs (000,000) 5,370 5,178 Operating expenses per ASM 11.06 ¢ 10.42 ¢ Operating expenses $ 593.9 $ 539.3 Less: aircraft fuel (127.6 ) (93.6 ) Less: restructuring charges (7.4 ) — Operating expense excluding fuel & restructuring charges $ 458.9 $ 445.7 ASMs (000,000) 5,370 5,178 Operating expense per ASM excluding fuel 8.55 ¢ 8.61 ¢ Pretax income (loss) reported GAAP amounts $ 15.4 $ (53.2 ) Less: mark-to-market hedging gains included in nonoperating income (expense) (77.7 ) (0.4 ) Add: Restructuring charges 7.4 — Pretax loss excluding restructuring charges and mark-to-market hedging gains $ (54.9 ) $ (53.6 )
Aircraft fuel reconciliations:
| Three Months Ended March 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 131.0 | $ | 1.56 | $ | 96.7 | $ | 1.17 | ||||||||
| Less: gains on settled hedges included in fuel expense | (3.4 | ) | (0.04 | ) | (3.1 | ) | (0.04 | ) | ||||||||
| GAAP fuel expense | $ | 127.6 | $ | 1.52 | $ | 93.6 | $ | 1.13 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (15.7 | ) | (0.19 | ) | — | — | ||||||||||
| Economic fuel expense | $ | 111.9 | $ | 1.33 | $ | 93.6 | $ | 1.13 | ||||||||
| Fuel gallons (000,000) | 84.2 | 82.9 | ||||||||||||||
| Mark-to-market gains (losses) included in non-operating income related to hedges that settle in future periods | $ | 77.7 | $ | 0.4 | ||||||||||||
($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Unit cost reconciliations: | ||||||||||||||||
Operating expenses | $ | 608.9 | $ | 591.8 | $ | 1,817.5 | $ | 1,730.3 | ||||||||
ASMs (000,000) | 5,822 | 6,012 | 16,735 | 16,825 | ||||||||||||
Operating expenses per ASM | 10.46 | ¢ | 9.84 | ¢ | 10.86 | ¢ | 10.28 | ¢ | ||||||||
Operating expenses | $ | 608.9 | $ | 591.8 | $ | 1,817.5 | $ | 1,730.3 | ||||||||
Less: aircraft fuel | (176.6 | ) | (130.2 | ) | (455.7 | ) | (336.4 | ) | ||||||||
Less: restructuring charges | 1.4 | (27.5 | ) | (20.7 | ) | (27.5 | ) | |||||||||
Add: navigation fee refund | 4.7 | 7.7 | 4.7 | 7.7 | ||||||||||||
Less: impairment of aircraft and related spare parts | — | — | — | (36.8 | ) | |||||||||||
Operating expenses excluding fuel, navigation fee refund, restructuring and impairment charges | $ | 438.4 | $ | 441.8 | $ | 1,345.8 | $ | 1,337.3 | ||||||||
ASMs (000,000) | 5,822 | 6,012 | 16,735 | 16,825 | ||||||||||||
Operating expenses per ASM excluding fuel, navigation fee refund, restructuring and impairment charges | 7.53 | ¢ | 7.35 | ¢ | 8.04 | ¢ | 7.95 | ¢ | ||||||||
Reconciliation to GAAP income before taxes and accounting change: | ||||||||||||||||
Income before taxes and accounting change, excluding mark-to-market hedging gains, navigation fee refund, restructuring and impairment charges | $ | 106.0 | $ | 64.1 | $ | 85.3 | $ | 24.8 | ||||||||
Add: mark-to-market hedging gains included in nonoperating income (expense) | 19.9 | 50.3 | 100.2 | 70.4 | ||||||||||||
Less: restructuring charges | 1.4 | (27.5 | ) | (20.7 | ) | (27.5 | ) | |||||||||
Add: navigation fee refund and related interest received | 5.7 | 11.0 | 5.7 | 11.0 | ||||||||||||
Less: impairment of aircraft and related spare parts | — | — | — | (36.8 | ) | |||||||||||
GAAP income before taxes and accounting change as reported | $ | 133.0 | $ | 97.9 | $ | 170.5 | $ | 41.9 | ||||||||
Aircraft fuel reconciliations: | ||||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 179.5 | $ | 1.99 | $ | 133.7 | $ | 1.40 | ||||||||
Less: gains on settled hedges included in fuel expense | (2.9 | ) | (0.04 | ) | (3.5 | ) | (0.04 | ) | ||||||||
GAAP fuel expense | $ | 176.6 | $ | 1.95 | $ | 130.2 | $ | 1.36 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (34.9 | ) | (0.39 | ) | (8.5 | ) | (0.09 | ) | ||||||||
Economic fuel expense | $ | 141.7 | $ | 1.56 | $ | 121.7 | $ | 1.27 | ||||||||
Fuel gallons (000,000) | 90.4 | 95.8 | ||||||||||||||
Mark-to-market gains included in non-operating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 19.9 | $ | 50.3 | ||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 465.2 | $ | 1.78 | $ | 347.4 | $ | 1.30 | ||||||||
Less: gains on settled hedges included in fuel expense | (9.5 | ) | (0.04 | ) | (11.0 | ) | (0.04 | ) | ||||||||
GAAP fuel expense | $ | 455.7 | $ | 1.74 | $ | 336.4 | $ | 1.26 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (71.9 | ) | (0.28 | ) | (11.7 | ) | (0.05 | ) | ||||||||
Economic fuel expense | $ | 383.8 | $ | 1.46 | $ | 324.7 | $ | 1.21 | ||||||||
Fuel gallons (000,000) | 260.8 | 267.6 | ||||||||||||||
Mark-to-market gains included in non-operating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 100.2 | $ | 70.4 | ||||||||||||
22
Horizon Air Industries, Inc.($ in millions) Three Months Ended March 31, Unit cost reconciliations: 2005 2004 Operating expenses $ 130.6 $ 119.8 ASMs (000,000) 782 692 Operating expenses per ASM 16.69 ¢ 17.30 ¢ Operating expenses $ 130.6 $ 119.8 Less: aircraft fuel (19.1 ) (14.2 ) Less: impairment of aircraft and spare engines — (2.4 ) Operating expenses excluding fuel and impairment charge $ 111.5 $ 103.2 ASMs (000,000) 782 692 Operating expenses per ASM excluding fuel and impairment charge 14.25 ¢ 14.91 ¢ Pretax income (loss) reported GAAP amounts $ 4.6 $ (10.4 ) Less: mark-to-market hedging gains included in nonoperating income (expense) (12.3 ) — Add: impairment of aircraft and spare engines — 2.4 Pretax loss excluding impairment charge and mark-to-market hedging gains $ (7.7 ) $ (8.0 )
Aircraft fuel reconciliations:
| Three Months Ended March 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 19.5 | $ | 1.63 | $ | 14.6 | $ | 1.22 | ||||||||
| Less: gains on settled hedges included in fuel expense | (0.4 | ) | (0.04 | ) | (0.4 | ) | (0.04 | ) | ||||||||
| GAAP fuel expense | $ | 19.1 | $ | 1.59 | $ | 14.2 | $ | 1.18 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (2.5 | ) | (0.2 | ) | — | — | ||||||||||
| Economic fuel expense | $ | 16.6 | $ | 1.38 | $ | 14.2 | $ | 1.18 | ||||||||
| Fuel gallons (000,000) | 12.0 | 12.0 | ||||||||||||||
| Mark-to-market gains included in non-operating income related to hedges that settle in future periods | $ | 12.3 | — | |||||||||||||
($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Unit cost reconciliations: | ||||||||||||||||
Operating expenses | $ | 143.5 | $ | 122.5 | $ | 406.2 | $ | 364.9 | ||||||||
ASMs (000,000) | 911 | 830 | 2,542 | 2,314 | ||||||||||||
Operating expenses per ASM | 15.75 | ¢ | 14.76 | ¢ | 15.98 | ¢ | 15.77 | ¢ | ||||||||
Operating expenses | $ | 143.5 | $ | 122.5 | $ | 406.2 | $ | 364.9 | ||||||||
Less: aircraft fuel | (27.5 | ) | (18.2 | ) | (70.3 | ) | (48.4 | ) | ||||||||
Less: impairment of aircraft | — | — | — | (2.8 | ) | |||||||||||
Operating expense excluding fuel and impairment charge | $ | 116.0 | $ | 104.3 | $ | 335.9 | $ | 313.7 | ||||||||
ASMs (000,000) | 911 | 830 | 2,542 | 2,314 | ||||||||||||
Operating expense per ASM excluding fuel and impairment charge | 12.73 | ¢ | 12.57 | ¢ | 13.21 | ¢ | 13.56 | ¢ | ||||||||
Reconciliation to GAAP income before taxes and accounting change: | ||||||||||||||||
Income before taxes and accounting change, excluding mark-to-market hedging gains and impairment charge | $ | 14.4 | $ | 17.5 | $ | 17.4 | $ | 11.9 | ||||||||
Add: mark-to-market hedging gains included in nonoperating income (expense) | 2.9 | 6.9 | 15.6 | 9.6 | ||||||||||||
Less: impairment of aircraft and related spare parts | — | — | — | (2.8 | ) | |||||||||||
GAAP income before taxes and accounting change as reported | $ | 17.3 | $ | 24.4 | $ | 33.0 | $ | 18.7 | ||||||||
Aircraft fuel reconciliations: | ||||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 28.0 | $ | 2.04 | $ | 18.7 | $ | 1.44 | ||||||||
Less: gains on settled hedges included in fuel expense | (0.5 | ) | (0.04 | ) | (0.5 | ) | (0.04 | ) | ||||||||
GAAP fuel expense | $ | 27.5 | $ | 2.00 | $ | 18.2 | $ | 1.40 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (5.2 | ) | (0.38 | ) | (1.2 | ) | (0.09 | ) | ||||||||
Economic fuel expense | $ | 22.3 | $ | 1.62 | $ | 17.0 | $ | 1.31 | ||||||||
Fuel gallons (000,000) | 13.7 | 13.0 | ||||||||||||||
Mark-to-market gains included in non-operating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 2.9 | $ | 6.9 | ||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 71.6 | $ | 1.85 | $ | 49.9 | $ | 1.34 | ||||||||
Less: gains on settled hedges included in fuel expense | (1.3 | ) | (0.03 | ) | (1.5 | ) | (0.04 | ) | ||||||||
GAAP fuel expense | $ | 70.3 | $ | 1.82 | $ | 48.4 | $ | 1.30 | ||||||||
Less: gains on settled hedges included in nonoperating income (expense) | (10.9 | ) | (0.28 | ) | (1.6 | ) | (0.04 | ) | ||||||||
Economic fuel expense | $ | 59.4 | $ | 1.54 | $ | 46.8 | $ | 1.26 | ||||||||
Fuel gallons (000,000) | 38.6 | 37.2 | ||||||||||||||
Mark-to-market gains included in non-operating income (expense) related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains togains on settled hedges included in nonoperating income (expense) | $ | 15.6 | $ | 9.6 | ||||||||||||
23
ITEM 2.
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q. All statements in the following discussion that are not reports 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.
Air Group’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge atwww.alaskaair.com. www.alaskaair.com. The information contained on our website is not a part of this quarterly report on Form 10-Q. As used in this Form 10-Q, the terms “Air Group,” “our,” “we” and the “Company” refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise.
First
Third Quarter in Review and Current Events
In the firstthird quarter, of 2005,despite relatively flat passenger traffic at Alaska, revenues continued to improve over the first quarter of last year due to recordhigher ticket yields resulting from industry wide fare increases. The flat passenger traffic andresulted from reduced capacity, in light of the operational difficulties described below, despite record load factors at both Alaska and Horizon. Ticket yields, however,during the quarter. Horizon continued to decline year over year, although we began to see some improvementsignificant increases in ticket pricespassenger traffic, resulting in the latter part of the quarter. Operating expenses remain an area of focus.increased revenues, offset by slightly lower yield. Operating expenses per available seat mile increased 6.1% at Alaska to 11.0610.46 cents and decreased 3.5%6.7% at Horizon to 16.6915.75 cents compared to the firstthird quarter of 2004. We continued to show improvement in our unit costs excluding fuel, impairment, and restructuring charges during the first quarter of 2005, although the rate of improvement slowed compared to recent quarters. Our cost per available seat mile excluding fuel, impairment, and restructuring charges declined 0.7% at Alaska to 8.55 cents and 4.4% at Horizon to 14.25 cents.
Fuel is a major component of our operating costs and fuel prices reached record highs once again during the quarter. At Alaska, our unit costs excluding fuel, a navigation fee refund and restructuring charges during the third quarter of 2005 increased by 2.4% to 7.53 cents compared to the third quarter of 2004. This is primarily due to the capacity reduction during the summer. Compared to the third quarter of 2004, Horizon had a 1.3% increase in unit costs excluding fuel to 12.73 cents.
Although revenues and pre-tax income at Alaska have improved over the firstprior year, we faced several operational difficulties during much of the third quarter due to the combined effects of the recent labor and operational changes across our company. The result was operational performance that was well below our goal during much of the third quarter. Our operational performance, measured by on-time arrivals and departures, declined from the firstthird quarter of 2004. However, in September, we began to see improvement in these metrics and expect the positive trend to continue through the remainder of the year. In order to improve our operational performance, we have recently reduced our 2005 summer capacity throughout the remainder of 2005 from our original expectations.
Accounting Change
Effective January 1, 2005, we changed our method of accounting for major airframe and engine overhauls from thecapitalize and amortizemethod to thedirect expensemethod. Accordingly, effective January 1, 2005, we wrote off the net book value of our
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previously capitalized airframe and engine overhauls for all aircraft in a charge totaling $144.7 million pre-tax ($90.4 million after tax). See Note 2 to our condensed consolidated financial statements for further details.
Restructuring Charges
Asset impairment and rental charges of $8.0 million related to our decision to terminate the lease at our Oakland heavy maintenance base were recorded in the first quarter of 2005. During the third quarter of 2004, Alaska announced a management reorganizationexpectations through schedule reductions and the closureelimination of its Oakland heavy maintenance base, contracting out of related heavy maintenance, contracting out of the Company’s fleet service, ground support equipment and facility maintenance functions, maintenance shops and other initiatives. In total, we believe these restructuring activities will result in a reduction of approximately 900 employees when fully implemented through the first half of 2005. Severance and related costs associated with this restructuring were estimated and recorded at $53.4 million in 2004. Cash paid during the first quarter of 2005 was $20.3 million and an adjustment of $0.6 million was recorded to reduce the estimated accrual for related medical benefits. We expect savings from these job-related initiatives to be approximately $35 million per year when fully implemented.certain flights.
As part of our ongoing cost saving initiatives, we continue to look at all aspects of our business. In the remainder of 2005, we may contract out other activities or initiate other restructuring activities which would result in further restructuring charges.
Labor Costs and Negotiations
Despite ongoing negotiations in late 2003 and much of 2004, we were unable to reach a new agreement with the Air Line Pilots Association (ALPA) and, therefore submitted to binding arbitration, the decision of which became effective on May 1, 2005. The arbitration resulted in an average pilot wage reduction of approximately 26%, various work rule changes which should result in productivity improvements, and higher employee health care contributions. No changes were made
Subsequent to the pilots’ pension or profit sharing plans.
We continue to pursueend of the restructuring of our other labor agreements so that they are in line with what we believe to be market. Our objectives as we restructure these agreements are to achieve market labor costs, productivity and employee benefit costs. For example, we recently presented a contract offer to the International Association of Machinists (IAM, representing our ramp workers) and believe that this work group is in the process of voting on our offer. The offer, as presented, includes a generous voluntary severance package (similar to that used with our mechanics in Oakland and the voluntary management reductions), wage reductions, and work
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rule changes. If we are unable to reachthird quarter, Alaska reached an agreement with the IAM,Aircraft Mechanics Fraternal Association (AMFA) resulting in a new four year contract covering Alaska’s approximately 700 aircraft technicians. This contract includes, among other items, a market-based wage increase of approximately 10% and a one-time $1,000 bonus to each of the employees covered under the contract.
Also, in October 2005, Horizon reached an agreement with the Transport Workers Union for a new three-year contract covering 21 dispatchers at Horizon. Additionally, Horizon has reached a tentative agreement with AMFA on a three-year contract covering Horizon’s more than 400 mechanics and fleet service agents. This tentative agreement is expected to be voted on by the union members in the fourth quarter of 2005.
We are pleased with the contracts that have been reached recently and we will consider subcontractingare continuing to negotiate with our Seattle ramp operationsother workgroups to reach agreement on contracts that would benefit both our employees and our shareholders. None of the contract negotiations is at an impasse or has reached the 30-day cooling off period required under the Railway Labor Act that would trigger self help. Therefore, we currently believe the risk of a third partywork stoppage or other material service disruption in the near future. During the first quarter of 2005, we executed an agreement with a third party that would provide ramp operations in Seattle if we are unable to reach a negotiated agreement. Additionally, Horizon continues to be in negotiations with the American Mechanics Fratnernal Association (AMFA, representing our mechanics and related classifications) using the services of a mediator from the National Mediation Board.future is low.
Mark-to-Market Fuel Hedging Gains
Beginning in the second quarter of 2004, we lost the ability to defer, as a component of comprehensive income, recognition of any unrealized gain or loss on our fuel hedge contracts until the hedged fuel is consumed. We lost this ability because the price correlation between crude oil, the commodity we use to hedge, and West Coast jet fuel fell below required thresholds. For more discussion, see Note 54 to our condensed consolidated financial statements.
The implications of this change are twofold: First, our earnings arecan be more volatile as we mark our entire hedge portfolio to market each quarter-end and report the gain or loss in other non-operating income or expense, even though the actual consumption willcould take place in a future period. In times of rising fuel prices such as the firstthird quarter of 2005, this will have the effect of increasing our reported net income or decreasing our reported net loss. Our mark-to-market gains recorded in the firstthird quarter of 2005 for contracts that settle in future periods, net of the reclassification of previously recorded mark-to-market gains for settled hedges, were $90.0$22.8 million compared to $0.4$57.2 million in the firstthird quarter of 2004. Second, to a large extent, the impact of our fuel hedge program will not be reflected in fuel expense. In the firstthird quarter of 2005, we recorded gains from settled fuel hedges totaling $22.0$43.5 million, but only $3.8$3.4 million of that gain is reflected as an offset to fuel expense with the balance reported in other non-operating income. In the firstthird quarter of 2004, gains of $3.5$4.0 million on settled hedges were recorded as an offset to fuel expense and theregains of $9.7 million were no gains recorded in non-operating income related to settled hedges.
We have provided information on mark-to-market gains or losses, as well as calculations of our economic fuel cost per gallon on pages 2122 and 22.23.
We continue to believe that our fuel hedge program is an important part of our strategy to reduce our exposure to volatile fuel prices.
Frontier JetExpress
On January 1, 2004, Horizon began operating regional jet service branded as Frontier JetExpress under a 12-year agreement with Frontier Airlines. Service under this agreement became fully operational duringRestructuring Charges
During the secondthird quarter of 2004, Alaska announced a management reorganization and the closure of its Oakland maintenance base, contracting out of the Alaska’s fleet service and ground support equipment and facility maintenance functions, as well as other initiatives. Severance and related costs associated with this restructuring during the third quarter of 2004 were $27.5 million. In the third quarter of 2005, we recorded a $1.4 million (pre-tax) positive adjustment to the restructuring accrual related to this and other initiatives as discussed in Note 3 to our condensed consolidated financial statements.
Other Events
In August 2005, Alaska recorded a net refund totaling $5.7 million ($3.6 million, net of tax) from the Mexican government related to navigation fees paid in 2004. Approximately $4.7 million of the refund was recorded as a reduction to operating expenses and $1.0 million was recorded as interest income in non-operating income. This is compared to an $11.0 million refund ($6.3 million, net of tax) recorded during the third quarter of 2004.
In October 2005, Horizon isfinalized an agreement to purchase twelve Bombardier Q400 aircraft with delivery dates beginning in December 2006 and continuing through July 2007. This agreement, in part, replaced firm orders for seven CRJ-700 aircraft that were to be delivered over the next several years. This agreement also provides for an option to purchase up to an additional 20 Q400 aircraft. In connection with the agreement, Bombardier agreed to provide certain remarketing assistance for up to twelve Q200 aircraft currently operating nine regional jetleased by Horizon for a fee as set forth in the agreement.
In October 2005, Alaska finalized a $172 million variable rate revolving loan facility to provide a portion of the pre-delivery funding requirements of Alaska’s purchase of up to 38 new Boeing 737-800 aircraft (23 of which are firm orders) under the Frontier JetExpress brand. Flying under this agreement represented 16.2% of Horizon’s capacitycurrent aircraft purchase agreement. The facility will expire on August 31, 2009 and 7.4% of passenger revenues for the quarter ended March 31, 2004. For
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the quarter ended March 31, 2005 (whichinterest rate is more representative of ongoing operations), flying under this agreement represented 23.0% of Horizon’s first quarter capacity and 10.0% of passenger revenue.
The arrangement with Frontier provides for reimbursement of costsbased on one-month LIBOR plus a base mark-upspecified margin. Any borrowings will be secured by the Company’s rights under the Boeing purchase agreement. Upon closing, we drew $61.3 million on the facility.
We began daily non-stop service from Los Angeles to Mexico City in August 2005 and certain incentives. However, since Horizon is not responsible for many of the typical costs of operations such as fuel, landing fees, marketing costs and station labor and rents and combined with longer trip lengths, revenue per available seat mile (ASM), and cost per ASM for this flying is significantly lower than Horizon’s native network flying.Seattle to Dallas/Fort Worth in September 2005.
Outlook
For the fourth quarter of 2005, Alaska and Horizon expect capacity increases of slightly underto be up approximately 2% and approximately 12%8%, respectively, overcompared to 2004 capacity. We have recently reduced the estimated capacity increase for Alaska because
Results of schedule reductions that are being made to improve operational reliability. The expected capacity increase at Alaska is due largely to the annualization of the additional seats added to the B737-400 fleet during the fourth quarter of 2004 and the addition of three B737-800s, two of which were added in the first quarter of 2005, offset by the retirement of two B737-200s in 2004. Horizon’s expected capacity increase is due largely to the annualization of aircraft additions in the first half of 2004, the addition of one new CRJ-700 in the first quarter of 2005, and higher utilization resulting from the annualization of the contract flying for Frontier. In addition, Horizon has completed the addition of a row of seats to the Q400 fleet increasing capacity from 70 to 74 seats. When complete, this will result in an increase of approximately 1.5% in available seat miles on an annualized basis.Operations
During the first quarter of 2005, we announced service to Dallas/Fort Worth beginning in July 2005.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31,September 30, 2005 to Three Months Ended March 31,September 30, 2004
Our consolidated net lossincome for the firstthird quarter of 2005 was $80.5$90.2 million, or $2.39$2.71 per diluted share, versus a net loss of $42.7$74.0 million, or $1.59$2.29 per diluted share, in the firstthird quarter of 2004.
Our consolidated operating loss for the first quarter of 2005 was $80.9 million compared to a loss of $58.5 million during the same period of 2004.
Our consolidated pre-tax net income before the accounting change for the quarter was $17.0$146.8 million compared to a pre-tax loss of $66.2$119.2 million for the firstthird quarter of 2004. TheBoth the 2005 and 2004 results include certain significantnotable items that impact the comparability to 2004.of the quarters. These items are discussed in the “First“Third Quarter in Review and Current Events” section beginning on page 23. 24. Excluding those items, the quarter over quarter improvement can be characterized by higher revenues and slightly lower non-fuel operating costs, offset by significantly higher fuel costs. Wages and benefits declined significantly due to some of the recent initiatives and the new pilot contract at Alaska. However, these declines were largely offset by higher operating expenses in other areas such as contracted services and aircraft maintenance.
Financial and statistical data comparisons for Alaska and Horizon are shown on pages 1920 and 20,21, respectively. On pages 2122 and 22,23, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures.
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Alaska Airlines Revenues
Operating revenues increased $32.0$56.5 million, or 6.5%8.9%, during the third quarter of 2005 as compared to 2004 due to a 12.4% increase in operating revenue per available seat mile (RASM) offset by reduced ASMs. The increase in RASM was driven by a 7.4% increase in ticket yields that resulted from increases in ticket prices designed to offset higher fuel prices and higher load factors. The capacity decrease is primarily a direct result of the reduction in our flight schedule that was announced in June 2005, offset by the addition of three B737-800s in the first nine months of 2005
Load factor increased 3.0 percentage points to 79.0% for the third quarter of 2005 due primarily to the nearly flat passenger traffic combined with fewer departures. We expect that load factors will continue to improve and that yields and passenger unit revenues will be higher in the fourth quarter of 2005 compared to 2004, although not to the extent that we had in the third quarter.
Freight and mail revenues increased by $0.7 million, or 2.9%, compared to the same period in 2004 as a result of a relatively new mail contract we have in the State of Alaska that began in the third quarter of 2004 and fuel surcharges added to our freight services during the third quarter of 2005, offset by lower freight volumes.
Other-net revenues increased $8.3 million, or 26.2%, primarily due to increases in Mileage Plan revenues resulting from higher award redemption on our partner airlines and an increase in cash receipts from miles sold, of which a portion is recognized immediately as other revenue.
Alaska Airlines Expenses
For the quarter, total operating expenses increased $17.1 million, or 2.9%, as compared to the same period in 2004, although operating expenses excluding fuel, the navigation fee refund and restructuring charges, decreased by $3.4 million, or 0.8%. Operating expenses per ASM increased 6.1% from 9.84 cents in the third quarter of 2004 to 10.46 cents in the third quarter of 2005. The increase in operating expenses is due largely to the significant increase in raw or “into-plane” fuel costs and increases in aircraft maintenance, contracted services, and landing fees and other rentals, offset by a decline in wages and benefits and selling expenses. Operating expenses per ASM excluding fuel, the navigation fee refund, and restructuring charges increased 2.4% as compared to the same period in 2004. Our estimates of costs per ASM, excluding the items noted above for the fourth quarter and full year of 2005, are 7.8 cents and 8.0 cents, respectively.
Explanations of significant period-over-period changes in the components of operating expenses are as follows:
During the second quarter of 2005, we entered into a fuel contract whereby the spread between crude oil prices and jet fuel prices is fixed for approximately one-third of our fuel consumption. This contract has resulted in approximately $6.0 million in savings for Air Group during the third quarter of 2005.
See page 22 for a table summarizing fuel cost per gallon realized by Alaska (the economic cost per gallon), the cost per gallon on a GAAP basis (including hedging gains recorded in aircraft fuel) and fuel cost per gallon excluding all hedging activities.
Horizon Air Revenues
For the third quarter, operating revenues increased $14.4 million, or 10.3% as compared to 2004. This increase is due largely to increased traffic, partially offset by a 1.1% decline in ticket yields.
For the three months ending September 30, 2005, capacity increased 9.8% and traffic was up 13.6%, compared to the same period in 2004 due primarily to the addition of one CRJ-700, four additional seats on each of our Q400’s and an increase in the average trip length. Passenger yield decreased 1.1% to 22.14 cents per passenger mile due primarily to an increase in average trip lengths across the native network, partially as a result of increased harmonization flying with Alaska. Passenger revenues increased by $16.7 million, or 12.4%, due primarily to the increase in traffic resulting from increased harmonization flying with Alaska and in our native network.
Horizon Air Expenses
Operating expenses for the third quarter of 2005 increased $21.0 million, or 17.1%, as compared to the same period in 2004 primarily due to increases in raw or “into-plane” fuel costs, wages and benefits and aircraft maintenance. Operating expenses per ASM increased 6.7% as compared to 2004. Operating expenses per ASM excluding fuel increased 1.3% as compared to the same period in 2004. Our estimates of costs per ASM, excluding fuel and any special charges, for the fourth quarter and full year of 2005 are 13.8 cents, and 13.4 cents, respectively.
Explanations of other significant period-over-period changes in the components of operating expenses are as follows:
During the second quarter of 2005, we entered into a fuel contract whereby the spread between crude oil prices and jet fuel prices is fixed for approximately one-third of our fuel consumption. This contract has resulted in approximately $6.0 million in savings for Air Group during the third quarter of 2005.
See page 23 for a table summarizing fuel cost per gallon realized by Horizon (the economic cost per gallon), the cost per gallon on a GAAP basis (including hedging gains recorded in aircraft fuel) and fuel cost per gallon excluding all hedging activities.
Consolidated Nonoperating Income (Expense)
Net nonoperating income was $56.6 million in the third quarter of 2005 compared to $62.4 million during the same period of 2004. Interest income increased $0.7 million due to a larger average marketable securities portfolio in the third quarter of 2005, offset by a larger interest payment in 2004 related to the navigation fee refund. Interest expense increased $2.5 million primarily due to interest rate increases on our variable rate debt and the changes to some of our variable rate debt agreements to slightly higher fixed rate arrangements. Capitalized interest increased $2.3 million from $0.5 million in the third quarter of 2004 to $2.8 million in the third quarter of 2005. This increase is due to the significant increase in deposits for future flight equipment resulting from our new aircraft purchase agreement for B737-800 aircraft.
Fuel hedging gains include $40.1 million in gains from fuel hedging contracts settled in the third quarter of 2005 compared to $9.7 million in 2004. In addition, fuel hedging gains include net mark-to-market gains on unsettled hedge contracts, net of the reclassification of previously recorded mark-to-market gains for settled hedges, of $22.8 million in 2005 and $57.2 million in 2004.
Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004
Our consolidated net income for the nine months ended September 30, 2005 was $27.1 million, or $0.93 per diluted share, versus $29.6 million, or $0.98 per diluted share, during the same period of 2004.
Our consolidated income before income tax and the accounting change for the nine months of 2005 was $193.5 million compared to $52.3 million for the first nine months of 2004. Both the 2005 and
2004 results include certain notable items as stated below that impact the comparability of the nine-month periods:
Financial and statistical data comparisons for Alaska and Horizon are shown on pages 20 and 21, respectively. On pages 22 and 23, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures. A discussion of the nine-month data follows.
Alaska Airlines Revenues
Operating revenues increased $127.2 million, or 7.5%, during 2005 as compared to 2004.
Yield per passenger mile increased 2.5% to 12.93 cents and passenger load factor increased 3.8 points during the first nine months of 2005 as compared to the same period in 2004. The increaseIncreases in revenuestraffic and yield resulted from an 8.9%in a 7.2% increase in passenger traffic, offset by a 3.7% declinerevenues in ticket yields. For the three months ended March 31, 2005, capacity increased 3.7% as compared to 2004. The capacity increases are primarily due to the annualization of additional seats added to the B737-400 fleet during the fourth quarter of 2004 and the addition of two B737-800s in the first quarter of 2005, partially offset by the retirement of two B737-200s in 2004. The traffic increase of 8.9% outpaced the capacity increase of 3.7%, resulting in an increase in load factor from 69.1% to 72.6%. The decline in yield per passenger mile was a result of continued industry-wide pricing pressure, dropping 3.7% compared to the first quarter of 2004, although yields improved as the quarter progressed. We expect that load factors will continue to be strong and that yields and passenger unit revenues will begin to stabilize or trend slightly higher through the second quarter of 2005.
Freight and mail revenues increased $1.6$3.1 million, or 9.0%4.7%, compared to the same period in 2004 because of a relatively new mail contract we have in the State of Alaska that began during the third quarter of 2004 and fuel surcharges added to our freight services during the third quarter of 2005, offset by lower freight revenues.volumes.
Other-net revenues increased $8.4$13.3 million, or 34.6%14.7%, due largely to an increase in Mileage Plan revenues, resulting from higher award redemption on our partner airlines and an increase in cash receipts from miles sold, of which a portion is recognized immediately as other revenue, offset by the termination of contract maintenance work that we were performing for third parties in the second quarter of 2004 and to a lesser extent, higher revenues from our contract flying with PenAir which started in January 2004.are no longer performing.
Alaska Airlines Expenses
For the threenine months ended March 31,September 30, 2005, total operating expenses increased $54.6$87.2 million, or 10.1%5.0%, as compared to the same period in 2004. Operating expenses per ASM increased 6.1% from 10.42 cents5.6% in the first quarter of 20042005 as compared to 11.06 cents in the first quarter of 2005.2004. The increase in operating expenses per ASM is due largely to the significant increases in raw or “into-plane” fuel costs, contracted services costs, aircraft maintenance, contracted services, and landing fees and other rental costs,rentals, offset by a decline in wages and benefits, food and beverage service, selling expenses, depreciation and amortization aircraft rent, and other selling expenses and commissions.an impairment charge in 2004 related to our Boeing 737-200 fleet. Operating expense per ASM excluding fuel, the navigation fee refund, restructuring and restructuringimpairment charges decreased by 0.7%increased 1.2% as compared to 8.55 centsthe same period in 2004. As noted above, operating expenses per ASM compared to 8.61 cents per ASM in 2004. Excluding any benefit from labor cost reductions, our estimates of costs per ASM, excluding fuel and restructuring or impairment charges, forwas also negatively impacted by the second quarter, third quarter, fourth quarter and full year of 2005 are 7.85 cents, 7.20 cents, 7.80 cents and between 7.80 and 7.85 cents, respectively. We are evaluating the impact of the pilot arbitration results and expect to provide updated cost estimates in May.summer capacity reductions.
Explanations of significant period-over-period changes in the components of operating expenses are as follows:
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Aircraft fuel increased $119.3 million, or 35.5%, due to a 38.6% increase in the GAAP fuel cost per gallon, offset by a 2.5% decrease in fuel gallons consumed. During the first nine months of 2005, Alaska also realized $81.4 million of gains from settled hedges, the majority of which are recorded in other non-operating income (expense). The total gains from settled hedges of $81.4 million represents 47.7% of Alaska’s income before taxes and the accounting change.
After including all | ||||
29See page 22 for a table summarizing fuel cost per gallon realized by Alaska (the economic cost per gallon), the cost per gallon on a GAAP basis (including hedging gains recorded in aircraft fuel) and fuel cost per gallon excluding all hedging activities.
Horizon Air Revenues
For the first quarternine months of 2005, operating revenues increased $10.9$41.2 million, or 9.9%11.0% as compared to 2004. This increase is due largely to the increased traffic in ourthe native network and ourthe contract flying for Frontier Airlines, which began in January 2004, partially offset by a 7.8%3.1% decline in ticket yields.
For the threenine months ended March 31,September 30, 2005, capacity increased 13.0%9.9% and traffic was up 20.0%16.2%, compared to the same period in 2004.2004, due to an increase in contract flying with Frontier and harmonization flying with Alaska, the addition of one CRJ-700 in March 2005 and four additional seats on each of our Q400’s. Contract flying with Frontier represented approximately 10.0%9.1% of passenger revenues and 23.0%22.3% of capacity, during the first quarternine months of 2005.2005 compared to 8.8% and 20.8%, respectively, in the first nine months of 2004. Passenger load factor increased 4.0 percentage points to 69.0%72.5%. Passenger yield decreased 7.8%3.1% to 21.8222.02 cents, reflecting the inclusion of the Frontier contract flying, the yield for which is significantly lower than native network flying.flying and an increase in average trip lengths across the native network, partially due to an increase in harmonization flying with Alaska. Passenger revenues increased by $11.2$45.4 million, or 10.5%12.6%, due primarily to the increase in traffic resulting from increased harmonization flying with Alaska and the increase in Frontier contract flying.
Horizon Air Expenses
Operating expenses for the first nine months of 2005 increased $10.8$41.3 million, or 9.0%11.3%, as compared to the same period in 2004, primarily due to increases in fuel costs, wages and benefits, aircraft maintenance and landing fees and other rentals, partially offset by a decline in aircraft rent. Operating expenses per ASM increased 1.3% as compared to 2004. Operating expenses per ASM decreased 3.5% as compared to 2004 from 17.30 cents in the first quarter of 2004 to 16.69 cents in the first quarter of 2005. Operating expenses per ASM excluding
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fuel and impairment charges decreased 4.4%2.6% as compared to the same period in 2004. Operating expenses in 2004 include $2.4 million related to an impairment charge on our held-for-sale F-28 aircraft and spare engines to lower the carrying value of these assets to their estimated fair value. Our estimates of costs per ASM, excluding fuel and special charges, for the second quarter, third quarter, fourth quarter and full year of 2005 are 13.2 cents, 12.0 cents, 12.8 cents and 13.0 cents, respectively.
Explanations of other significant period-over-period changes in the components of operating expenses are as follows:
Aircraft fuel increased $21.9 million, or 45.2%, due to a 40.1% increase in the GAAP fuel cost per gallon from $1.30 in 2004 to $1.82 in 2005. During the first nine months of 2005, Horizon also realized $12.2 million of gains from settled hedges, the majority of which are recorded in other non-operating income (expense). The total gains from settled hedges of $12.2 million represents 37.0% of Horizon’s pre-tax income. After including all gains from settled hedges
recorded during the | ||||
See page 23 for a table summarizing fuel cost per gallon realized by Horizon (the economic cost per gallon), the cost per gallon on a GAAP basis (including hedging gains recorded in aircraft fuel) and fuel cost per gallon excluding all hedging activities.
Consolidated Nonoperating Income (Expense)
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Net nonoperating income was $97.9$175.1 million in the first quarter of 2005 compared to net expense of $7.7$74.6 million during the same period ofin 2004. Interest income increased $1.3$3.0 million due to a larger average marketable securities portfolio in 2005, offset by a larger interest payment in 2004 related to the first quarter of 2005.navigation fee refund. Interest expense (net of capitalized interest) increased $0.9$6.6 million primarily due to interest rate increases on our variable rate debt.debt and the changes to some of our variable rate debt agreements to slightly higher fixed rate agreements. Capitalized interest increased $3.8 million from $1.1 million in the first nine months of 2004 to $4.9 million in the first nine months of 2005. This increase is due to the significant increase in deposits for future flight equipment resulting from our new aircraft purchase agreement for B737-800 aircraft.
Fuel hedging gains include $18.2$82.8 million in gains from fuel hedging contracts settled in the first quarternine months of 2005 compared to none$13.3 million in 2004. In addition, fuel hedging gains include net mark-to-market gains on unsettled hedge contracts, net of $90.0the reclassification of previously recorded mark-to-market gains for settled hedges, of $115.8 million in 2005 and $0.4$80.0 million in 2004.
Consolidated Income Tax Expense (Benefit)Benefit
Accounting standards require us to provide for income taxes each quarter based on either our estimate of the effective tax rate for the full year or the actual year-to-date effective tax rate if it is our best estimate of our annual expectation. TheAs the volatility of airfares and fuel prices and the seasonality of our business make it difficult to accurately forecast full-year pretax results.pre-tax results, we use the actual year-to-date effective tax rate to provide for income taxes. In addition, a relatively small change in pretaxpre-tax results can cause a significant change in the effective tax rate due to the magnitude of nondeductible expenses, such as employee per diem costs, relative to pretaxpre-tax profit or loss. Our effective income tax rate on pre-tax income before the accounting change for the third quarter and first quarternine months of 2005 is 41.8%.38.6% and 39.3%, respectively. We applied our estimated 2005 year-to-date compositemarginal rate of 37.5% for the cumulative effect of the accounting change. In arriving at these rates, we considered a variety of factors, including year-to-date pretaxpre-tax results, the U.S. federal rate of 35%, estimated year-to-date nondeductible expenses and estimated state income taxes. We evaluate our tax rate each quarter and make adjustments when necessary.
Change in Accounting Policy
Effective January 1, 2005, the Companywe changed itsour method of accounting for major airframe and engine overhauls from thecapitalize and amortize method to thedirect expense method. Under the capitalize and amortizeformer method, these costs were capitalized and amortized to maintenance expense over the shorter of the life of the overhaul or the remaining lease term. Under thedirect expense method, overhaul costs are expensed as incurred. The Company believesWe believe that thedirect expensemethod is preferable because it eliminates the judgment and estimation needed to determine overhaul versus repair allocations in maintenance activities. Additionally, the Company’sour approved maintenance program for the majority of itsour airframes now focuses more on shorter, but more frequent, maintenance visitsvisits. We also believe that result in a higher portion of the work being repair activity. Management also believes that the direct expense method is the predominant method used in the airline industry. Accordingly, effective January 1, 2005, the Companywe wrote off the net book value of itsour previously capitalized airframe and engine overhauls for all aircraft in a charge totaling $144.7 million pre-tax ($90.4 million after tax). The Company doesWe do not believe disclosing the effect of adopting thedirect expense method on net income for the period ended March 31,September 30, 2005 provides meaningful information because of changes in the Company’sour maintenance program, including the execution of a “Power“power by the hour” engine maintenance agreement with a third party in late 2004.
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Critical Accounting EstimatesPolicies
For information on ouradditional critical accounting estimates,policies, see Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2004.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and liquidity.
| March 31, 2005 | December 31, 2004 | Change | ||||||||||
| (In millions, except per share and debt-to-capital amounts) | ||||||||||||
| Cash and marketable securities | $ | 763.5 | $ | 873.9 | $ | (110.4 | ) | |||||
| Working capital | 178.0 | 285.0 | (107.0 | ) | ||||||||
| Long-term debt and capital lease obligations | 980.4 | 989.6 | (9.2 | ) | ||||||||
| Shareholders’ equity | 584.5 | 664.8 | (80.3 | ) | ||||||||
| Book value per common share | $ | 21.50 | $ | 24.51 | $ | (3.01 | ) | |||||
| Long-term debt-to-capital | 63%:37 | % | 60%:40 | % | NA | |||||||
| Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 80%:20 | % | 78%:22 | % | NA | |||||||
| September 30, 2005 | December 31, 2004 | Change | ||||||||
| (In millions, except per share and debt-to-capital amounts) | ||||||||||
Cash and marketable securities | $ | 745.7 | $ | 873.9 | $ | (128.2 | ) | |||
Working capital | 206.5 | 285.0 | (78.5 | ) | ||||||
Long-term debt and long-term capital lease obligations | 970.0 | 989.6 | (19.6 | ) | ||||||
Shareholders’ equity | 699.6 | 664.8 | 34.8 | |||||||
Book value per common share | $ | 25.34 | $ | 24.51 | $ | 0.83 | ||||
Long-term debt-to-capital | 58%:42% | 60%:40% | NA | |||||||
Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 76%:24% | 78%:22% | NA | |||||||
During the threenine months ended March 31,September 30, 2005, our cash and marketable securities decreased $110.4$128.2 million to $763.5 million.$745.7 million at September 30, 2005. This decrease reflects cash used for property and equipment additions, net of aircraft deposit returns and proceeds from asset dispositions, of $102.5$304.4 million and cash used in financing activities of $7.6$1.5 million, and cash used in operating activities of $3.3 million.
Cash Providedpartially offset by (Used in) Operating Activities
During the first quarter of 2005, net cash used in operating activities was $3.3 million, compared to cash provided by operating activities of $21.6 million during the same period of 2004. The decline was driven by sharp increases in fuel costs offset by higher revenues.$180.2 million.
Cash Provided by (Used in) InvestingOperating Activities
Cash
During the first nine months of 2005, net cash provided by investingoperating activities was $229.0$180.2 million compared to $283.5 million during the first quarternine months of 2004. The decrease is due largely to the significant increases in the cost of fuel in the current year, cash payments made for severance, and a $42.7 million tax refund in 2004
Cash Used in Investing Activities
Cash used in investing activities was $180.0 million during the first nine months of 2005, compared to cash used$219.1 million in investing activities of $97.8 million during the same period of 2004. We had net sales of $128.0 million of marketable securities and net purchases of $330.4 million and $102.5$304.4 million for property and equipment additions, net of aircraft deposit returns and proceeds from asset dispositions. During the threefirst nine months ended March 31,of 2005, our aircraft related capital expenditures net of aircraft deposit returns and proceeds from asset dispositions, increased $52.3$190.9 million as compared to the
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same period of 2004, primarily reflecting the net payment of $101.2 million related to the aircraft purchase commitment entered into during the second quarter of 2005 to acquire 35 B737-800 aircraft, as a result of two new aircraft purchases in 2005.well as additional scheduled pre-delivery payments. As of January 1, 2005, we no longer have capital expenditures related to overhauls as those maintenance activities are expensed as incurred under our maintenance accounting policy adopted on that date. We expect capital expenditures to be approximately $230.0$450.0 million for the full year of 2005.2005 and approximately $430 million (of which $400 million is expected to be aircraft related) in 2006 as we begin to take delivery of several aircraft.
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was $7.6$1.5 million during the first quarternine months of 2005 compared to net cash provided by financing activities of $48.2$96.3 million during the same period in 2004. There was one debt issuance during the first nine months of 2005 of $20.0 million, which is secured by flight equipment. This note has a fixed interest rate of 6.07% and the payment term is 15 years. Additionally, we received $13.9 million in proceeds from issuances of common stock during the first nine months of 2005 compared to $2.3 million in the same period of 2004. ThereDebt issuances and proceeds from common stock issuance during the period were no new debt issuances in the first quarter of 2005. There wereoffset by normal long-term debt payments of $8.6 million during 2005.$35.4 million.
We plan to meet our capital and operating commitments through cash flowinternally generated funds from operations and from cash and marketable securities on hand at March 31,September 30, 2005 totaling $745.7 million, along with proceeds from our new pre-delivery payment facility used to provide assistance with our pre-delivery funding requirements on the purchase of $763.5 million.new B737-800 aircraft, and additional debt financing. We also have restricted cash of $10.8$6.5 million, which is intended to collateralize interest payments due over the next twelve monthsthrough March 2006 on our $150 million floating rate senior convertible notes due 2023 issued in 2003.
Bank Line of Credit Facility
During 2004, Alaska repaid its $150 million credit facility and, on December 23, 2004, that facility expired. On March 25, 2005, Alaska Airlines, Inc. finalized a $160 million variable rate credit facility with a syndicate of financial institutions that will expire in March 2008. Any borrowings will be secured by either aircraft or cash collateral. The interest rate on the credit facility varies depending on certain financial ratios specified in the agreement with a minimum interest rate of LIBOR plus 200 basis points.
Any borrowings will be secured by either aircraft or cash collateral. This credit facility contains contractual restrictions and requires maintenance of specific levels of net worth, maintenance of certain debt and leases to net worth, leverage and fixed charge coverage ratios, and limits on liens, asset dispositions, dividends, and certain other expenditures. Such provisions restrict Alaska Airlines from distributing any funds to Alaska Air Group in the form of dividends and limit the amount of funds Alaska Airlines can loan to Alaska Air Group. As of March 31,September 30, 2005, Alaska could loan up to $300.0 million was available to loan to Alaska Air Group without violating the covenants in the credit facility. As of March 31,September 30, 2005, there are no outstanding borrowings on this credit facility and the Company has no immediate plans to borrow using this credit facility.
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Supplemental Disclosure of Noncash Investing and Financing Activities
We received a $9.7 million credit toward our purchase deposits related to the aircraft purchase agreement entered into during the second quarter of 2005. This credit was recorded as additional purchase deposits and is included in other liabilities on our consolidated balance sheet and will be applied to future aircraft upon delivery.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Aircraft Purchase Commitments
At March 31,
In addition to the commitments below, Alaska has options to acquire 15 B737’s and purchase rights for 50 more. In October 2005, we hadHorizon entered into a purchase agreement to acquire 12 Q400 aircraft with deliveries beginning in December 2006 and continuing through July 2007. The purchase agreement also includes options to purchase an additional 20 aircraft. Concurrent with the execution of this purchase agreement, Bombardier has agreed to provide certain remarketing assistance for up to 12 DHC-8 Series 200 aircraft previously leased by Horizon for a fee as set forth in the agreement. In association with the purchase of the 12 Q400 Aircraft, Horizon and the manufacturer have agreed to terminate firm orders for 12 aircraft requiring aggregate payments of approximately $318.6 million, as set forth below. In addition, Alaska had options to acquire 23 additional B737’s, and Horizon had options to acquire 12 Q400’s and 21 CRJ 700’s. 7 CRJ700 model aircraft.
Alaska and Horizon expect to finance the firm orders and to the extent exercised, the option aircraft with leases, long-term debt or internally generated cash. We expect to purchase the B737-800are currently negotiating agreements for debt financing for 14 Boeing 737-800 aircraft to be delivered in July with cash on hand.
through May 2007. The following table summarizes aircraft purchase commitments and payments by year:
| Delivery Period - Firm Orders | ||||||||||||||||||||||||||||
| April 1 – December 31, | Beyond | |||||||||||||||||||||||||||
| Aircraft | 2005 | 2006 | 2007 | 2008 | 2009 | 2009 | Total | |||||||||||||||||||||
| Boeing 737-800 | 1 | 3 | — | — | — | — | 4 | |||||||||||||||||||||
| Bombardier CRJ700 | — | 2 | 2 | 2 | 2 | — | 8 | |||||||||||||||||||||
| Total | 1 | 5 | 2 | 2 | 2 | — | 12 | |||||||||||||||||||||
| Payments (Millions) | $ | 46.6 | $ | 123.7 | $ | 54.5 | $ | 53.0 | $ | 40.8 | $ | — | $ | 318.6 | ||||||||||||||
Delivery Period - Firm Orders
Aircraft | October 1-December 31, 2005 | 2006 | 2007 | 2008 | 2009 | Beyond 2009 | Total | ||||||||||||||
Boeing 737-800 | — | 10 | 8 | 5 | 3 | 9 | 35 | ||||||||||||||
Bombardier Q-400 | — | 2 | 10 | — | — | — | 12 | ||||||||||||||
Bombardier CRJ700 | — | 1 | — | — | — | — | 1 | ||||||||||||||
Total | — | 13 | 18 | 5 | 3 | 9 | 48 | ||||||||||||||
Payments (Millions) | $ | 28.3 | $ | 397.2 | $ | 364.0 | $ | 169.5 | $ | 119.9 | $ | 261.2 | $ | 1,340.1 | |||||||
Contractual Obligations
The following table provides a summary of our principal payments under current and long-term debt obligations, capital lease obligations, operating lease commitments, aircraft purchase commitments and other obligations as of March 31, 2005.September 30, 2005, adjusted for the subsequent Horizon agreement as discussed above. This table excludes contributions to our various pension plans, which we expect to be approximately $55$60 million to $65$70 million per year through 2008.
| April 1 - December 31, | Beyond | |||||||||||||||||||||||||||
| (in millions) | 2005 | 2006 | 2007 | 2008 | 2009 | 2009* | Total | |||||||||||||||||||||
| Current and long-term debt and capital lease obligations* | $ | 44.9 | $ | 57.0 | $ | 60.1 | $ | 63.2 | $ | 67.0 | $ | 742.2 | $ | 1,034.4 | ||||||||||||||
| Operating lease commitments | 174.5 | 284.7 | 196.0 | 190.4 | 174.7 | 942.1 | $ | 1,962.4 | ||||||||||||||||||||
| Aircraft purchase commitments | 46.6 | 123.7 | 54.5 | 53.0 | 40.8 | — | $ | 318.6 | ||||||||||||||||||||
| Interest obligations (1) | 43.9 | 52.4 | 49.3 | 47.4 | 42.3 | 211.8 | $ | 447.1 | ||||||||||||||||||||
| Other purchase obligations (2) | 21.1 | 29.1 | 29.4 | 29.7 | 30.0 | 154.5 | $ | 293.8 | ||||||||||||||||||||
| Total | $ | 331.0 | $ | 546.9 | $ | 389.3 | $ | 383.7 | $ | 354.8 | $ | 2,050.6 | $ | 4,056.3 | ||||||||||||||
(in millions) | October 1-December 31, 2005 | 2006 | 2007 | 2008 | 2009 | Beyond 2009* | Total | ||||||||||||||
Current and long-term debt and capital lease obligations* | $ | 20.4 | $ | 58.5 | $ | 61.6 | $ | 64.9 | $ | 68.2 | $ | 754.0 | $ | 1,027.6 | |||||||
Operating lease commitments | 47.3 | 247.0 | 219.8 | 210.4 | 193.7 | 986.0 | 1,904.2 | ||||||||||||||
Aircraft purchase commitments | 28.3 | 397.2 | 364.0 | 169.5 | 119.9 | 261.2 | 1,340.1 | ||||||||||||||
Interest obligations (1) | 16.3 | 52.7 | 51.5 | 49.7 | 47.2 | 159.9 | 377.3 | ||||||||||||||
Other purchase obligations (2) | 6.1 | 29.1 | 29.4 | 29.7 | 30.0 | 154.5 | 278.8 | ||||||||||||||
Total | $ | 118.4 | $ | 784.5 | $ | 726.3 | $ | 524.2 | $ | 459.0 | $ | 2,315.6 | $ | 4,928.0 | |||||||
| * | Includes $150 million related to the Company’s senior convertible notes due in 2023. Holders of these Notes may require the Company to purchase all or a portion of their Notes, for a purchase price equal to principal plus accrued interest, on the 5th, 10th, and 15th anniversaries of the issuance of the Notes, or upon the occurrence of a change in control or tax event. See Note 10 in the condensed consolidated financial statements. |
| (1) | For variable rate debt, future obligations are shown above using interest rates in effect as of September 30, 2005. |
| (2) | Includes obligations under our long-term power-by-the-hour engine maintenance agreement. |
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price equal to principal plus accrued interest, on the 5th, 10th, and 15th anniversaries of the issuance of the Notes, or upon the occurrence of a change in control or tax event, as defined in the agreement. See Note 11 in the consolidated financial statements.
(1) For variable rate debt, future obligations are shown above using interest rates in effect as of March 31, 2005.
(2) Includes obligations under our long-term power-by-the-hour maintenance agreement.
New Accounting Standards
During the fourth quarter of 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, “Share Based Payment: An Amendment of SFAS Nos. 123 and 95”. The new standard requires companies to recognize as expense the fair value of stock options and other equity based compensation issued to employees as of the grant date. This new standard will apply to both stock options that we grant to employees and our Employee Stock Purchase Plan, which features a look-back provision and allows employees to purchase stock at a 15% discount. Our options are typically granted with gradedratable vesting provisions, and we intend to amortize compensation cost over the service period using the straight linestraight-line method. Due to a recent decision by the Securities and Exchange Commission, implementation of SFAS 123R will be effective January 1, 2006. We intend to use the “modified prospective method” upon adoption whereby previously awarded but unvested equity awards are accounted for in accordance with SFAS 123R and prospective amounts are recognized in the income statement instead of simply being disclosed. Once adopted, we expect our stock basedstock-based compensation expense, as measured under SFAS 123R, will be approximately $6 million to $10 million per year on a pre-tax basis.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset
Retirement Obligations —- an interpretation of FASB Statement No. 143.” FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The FIN also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of our fiscal year ending December 31, 2005. FIN 47 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable or a pronouncement includes specific transition provisions. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” for the reporting of the correction of an error and a change in accounting estimate. SFAS No. 154 is effective beginning January 1, 2006. SFAS No. 154 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 is effective for our fourth quarter. We are currently evaluating the impact, if any, that EITF 05-6 will have on our financial position, results of operations or cash flows.
Effect of Inflation- and Price Changes
Inflation and price changes other than for aircraft fuel do not have a significant effect on our operating revenues, operating expenses and operating income.
Risk Factors
Alaska and Horizon are parties to marketing agreements with certain domestic air carriers, including Northwest Airlines and Delta Air Lines. These agreements provide that certain flight segments operated by Alaska or Horizon are held out for sale as Northwest or Delta as “codeshare” flights. In addition, the agreements provide that members of Alaska’s Mileage Plan program can redeem miles for flights on Northwest or Delta.
In September 2005, Northwest and Delta filed for protection under Chapter 11 of the Bankruptcy Code. Either carrier could propose plans of reorganization that would seek to modify or terminate some or all of these agreements. However, the nature and extent of risk cannot be quantified at this time.
For a discussion of our other risk factors, see Item 7 of the Company’s Annual Report for the year ended December 31, 2004 on Form 10-K under the caption “Risk Factors.”
ITEM 3.
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no material changes in market risk from the information provided in Item 7A “Quantitative and Qualitative Disclosure About Market Risk” in our 2004 10-K10K except as follows:
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Fuel HedgingPrices
We purchase jet fuel at prevailing market prices, and seek to manage the risk of price fluctuations through execution of structured pricing purchase agreements and a documented hedging strategy. We utilize derivative financial instruments as hedges to decrease our exposure to the volatility of jet fuel prices. We believe there is risk in not hedging against the possibility of fuel price increases. At March 31,September 30, 2005, we had fuel hedge contracts in place to hedge 158.050.4 million gallons of our expected jet fuel usage during the remainder of 2005, 181.4 million gallons in 2006, 65.886.0 million gallons in 2007 and 5.431.7 million gallons in 2008. This represents 50%, 42%, 15%,20% and 1%7% of our anticipated fuel consumption in 2005, 2006, 2007 and 2008, respectively. Prices of these agreements range from $28.81$32 to $51.56$50 per crude oil barrel. We estimate that a 10% increase or decrease in crude oil prices as of March 31,September 30, 2005 would impact the fair value of our hedge portfoliohedging positions by approximately $54.1$41.0 million and $51.3$40.1 million, respectively.
As of March 31,September 30, 2005 and December 31, 2004, the fair values of our fuel hedge positions were $189.5$211.8 million and $96.0 million, respectively. Of these amounts, $124.4$140.7 million of the 2005 fair value amounts and $65.7 million of the 2004 fair value amounts were included in current assets in the condensed consolidated balance sheets based on the settlement dates for the underlying contracts. The remaining $65.1$71.1 million 2005 fair value and $30.3 million 2004 fair value is reflected as a non-current asset in the condensed consolidated balance sheets.
During the second quarter of 2005, we entered into a fuel contract whereby the spread between crude oil prices and jet fuel prices is fixed for approximately one-third of our fuel consumption. This contract has resulted in approximately $6.0 million in savings for Air Group during the third quarter of 2005.
Please refer to pages 2122 and 22,23, as well as to Note 54 in the condensed consolidated financial statements, for company specific data on the results of our fuel hedging program.
Financial Market Risk
During the first nine months of 2005, we issued $20.0 million of debt secured by flight equipment, having an interest rate of 6.07% and a payment term of 15 years.
In the second and third quarters of 2005, the Company exercised its option under several of its existing variable rate long-term debt arrangements to fix the interest rates through maturity. The fixed rates on these recently affected debt arrangements range from 5.2% to 6.5%. These changes did not result in any gain or loss in the consolidated statements of operations.
Subsequent to the end of the third quarter, as noted above, we finalized a $172 million purchase deposit facility to assist with our pre-delivery funding requirements on the firm B737-800 aircraft. The initial draw on the facility was $61.3 million.
Our pension obligation is highly sensitive to changes in the interest rate environment and our estimated return on assets. Our preliminary assessment of our projected pension benefit obligation, accumulated benefit obligation, and expected return on plan assets, assuming a consistent discount rate from the prior year, would result in a tax effected charge to equity as of December 31, 2005 of approximately $20 million. However, due to the sensitivity of the obligation to changes in the discount rate used, a 25-basis point downward shift in the discount rate used to value our pension obligation would result in an additional tax affected charge to equity of approximately $20 million.
ITEM 4.
| ITEM 4. | Controls and Procedures |
As of March 31,September 30, 2005, 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 the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is communicated to our certifying officers on a timely basis.
Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective.
We made no changes in our internal controls over financial reporting during the fiscal quarter ended March 31,September 30, 2005, that our certifying officers concluded materially affected, or are reasonably likely to materially effect,affect, our internal control over financial reporting.
37
We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal controls over financial reporting are effective, future events affecting our business may cause us to modify our these controls and procedures in the future.
PART IIII. OTHER INFORMATION
ITEM 1.
| ITEM 1. | Legal Proceedings |
Our pilotIn May 2005, the Air Line Pilots Association filed a lawsuit in federal district court in Seattle to overturn the current labor contract provided that, if a negotiated agreement on the entire contract could not be reachedcovering Alaska’s pilots as established by December 15, 2004, ten contract issues plus wage rates would be submitted to an interest arbitrator. The parties did not reach an agreement, and each party submitted five issues to binding arbitration, resulting in a decision that becamearbitrator, which was effective on May 1, 2005. TheOn July 21, 2005, the Company filed a motion to dismiss the lawsuit. On October 28, 2005, the district court granted the Company’s motion to dismiss. This decision is subject to appeal.
In March 2005, the Company filed a claim against the International Association of Machinists (IAM) seeking to compel arbitration resultedof the dispute regarding the subcontracting of the Company’s ramp service operation in an average pilot wage decreaseSeattle. On May 10, 2005, the IAM filed a counter claim against the Company alleging that the Company violated the status quo and engaged in bad faith bargaining. On May 13, 2005, the Company announced that it had subcontracted the ramp service operation in Seattle, resulting in the immediate reduction of approximately 26%, various work rule changes resulting475 employees represented by the IAM. Shortly after this event, the IAM filed a motion for a preliminary injunction seeking to reverse the subcontracting by the Company. That motion was heard and denied by a federal court judge on June 2, 2005. The Company’s lawsuit is still pending in productivity improvementsfederal court and higher employee health care contributions. No changes were madea September 2006 trial date has been set for the IAM’s counterclaim. The Company has filed a motion to dismiss the pilots’ pension or profit sharing plans.IAM’ counterclaim. At this time, the Company is not certain as to what the outcome will be.
We are a party to ordinary routine litigation incidental to our business and with respect to which no material liability is expected. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
ITEM 2.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
ITEM 3.
| ITEM 3. | Default on Senior Securities |
None.
ITEM 4.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
None.None
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ITEM 5.
| ITEM 5. | Other Information |
No changes have been made to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our definitive proxy statement for our 2005 annual meeting of shareholders.
| ITEM 6. | Exhibits |
ITEM 6. Exhibits
See Exhibit Index on page 41.47.
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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: November 9, 2005 | ||||
Date: May 6, 2005
| By: | /s/ Brandon S. Pedersen | |||||
Brandon S. Pedersen | ||||||
Staff Vice President/Finance and Controller | ||||||
| By: | /s/ Bradley D. Tilden | |||||
Bradley D. Tilden | ||||||
| Executive Vice President/Finance and Chief Financial Officer | ||||||
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.
The following exhibits are numbered in accordance with Item 601 of Regulation S-K.
| Exhibit No. | Description | ||
| 10** | |||
| 10.1* | Supplement to Master Purchase Agreement dated October 18, 2005 by and between Horizon Air Industries, Inc. and Bombardier, Inc.*** | ||
| 10.2* | Credit Agreement dated | ||
| Section 302 Certification of Chief Executive Officer Pursuant to | |||
| Section 302 Certification of Chief Financial Officer Pursuant to | |||
| Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |||
| Section | |||
| Filed herewith. |
| ** | Previously filed. |
| *** | Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission. |
4147