UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| x | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2005.
OR
| ¨ | ||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period fromto
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 91-1292054 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer | |
Identification No.) |
19300 Pacific Highway South,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. Yesþx Noo¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþx Noo¨
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 27,231,82527,603,113 common shares, par value $1.00, outstanding at JuneSeptember 30, 2005.
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; operational disruptions; compliance with financial covenants; our ability to attract and retain qualified personnel; third-party vendors and partners; continuing operating losses; our significant indebtedness; and downgrades of our credit ratings and 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
| ITEM 1. | Condensed Consolidated Financial Statements |
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
| June 30, | December 31, | |||||||
| (In Millions) | 2005 | 2004 | ||||||
Current Assets | ||||||||
| Cash and cash equivalents | $ | 31.2 | $ | 28.0 | ||||
| Marketable securities | 694.9 | 845.9 | ||||||
| Receivables — net | 125.8 | 99.4 | ||||||
| Inventories and supplies — net | 46.1 | 42.0 | ||||||
| Deferred income taxes | 75.5 | 74.7 | ||||||
| Fuel hedge contracts | 123.6 | 65.7 | ||||||
| Prepaid expenses and other current assets | 102.0 | 86.6 | ||||||
Total Current Assets | 1,199.1 | 1,242.3 | ||||||
Property and Equipment | ||||||||
| Aircraft and other flight equipment | 2,236.7 | 2,294.3 | ||||||
| Other property and equipment | 471.6 | 471.8 | ||||||
| Deposits for future flight equipment | 203.6 | 67.1 | ||||||
| 2,911.9 | 2,833.2 | |||||||
| Less accumulated depreciation and amortization | 979.9 | 924.9 | ||||||
Total Property and Equipment — Net | 1,932.0 | 1,908.3 | ||||||
Intangible Assets | 38.6 | 38.6 | ||||||
Fuel Hedge Contracts | 70.9 | 30.3 | ||||||
Other Assets | 129.9 | 115.5 | ||||||
Total Assets | $ | 3,370.5 | $ | 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
Alaska Air Group, Inc.
| June 30, | December 31, | |||||||
| (In Millions) | 2005 | 2004 | ||||||
Current Liabilities | ||||||||
| Accounts payable | $ | 132.6 | $ | 143.8 | ||||
| Accrued aircraft rent | 58.5 | 75.3 | ||||||
| Accrued wages, vacation and payroll taxes | 111.3 | 133.0 | ||||||
| Other accrued liabilities | 350.9 | 301.6 | ||||||
| Air traffic liability | 375.6 | 250.2 | ||||||
| Current portion of long-term debt and capital lease obligations | 57.0 | 53.4 | ||||||
Total Current Liabilities | 1,085.9 | 957.3 | ||||||
Long-Term Debt and Capital Lease Obligations | 979.5 | 989.6 | ||||||
Other Liabilities and Credits | ||||||||
| Deferred income taxes | 137.0 | 173.6 | ||||||
| Deferred revenue | 313.8 | 304.7 | ||||||
| Other liabilities | 253.2 | 245.0 | ||||||
| 704.0 | 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 -29,880,002 shares 2004 - 29,777,388 shares | 29.9 | 29.8 | ||||||
| Capital in excess of par value | 498.5 | 496.5 | ||||||
| Treasury stock, at cost: 2005 - 2,648,177 shares 2004 - 2,651,368 shares | (60.4 | ) | (60.5 | ) | ||||
| Deferred stock-based compensation | (2.8 | ) | (3.4 | ) | ||||
| Accumulated other comprehensive loss | (85.0 | ) | (81.6 | ) | ||||
| Retained earnings | 220.9 | 284.0 | ||||||
| 601.1 | 664.8 | |||||||
Total Liabilities and Shareholders’ Equity | $ | 3,370.5 | $ | 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
Alaska Air Group, Inc.
| Three Months Ended June 30 | ||||||||
| (In Millions Except Per Share Amounts) | 2005 | 2004 | ||||||
Operating Revenues | ||||||||
| Passenger | $ | 697.5 | $ | 637.9 | ||||
| Freight and mail | 24.9 | 24.2 | ||||||
| Other — net | 34.1 | 39.2 | ||||||
Total Operating Revenues | 756.5 | 701.3 | ||||||
Operating Expenses | ||||||||
| Wages and benefits | 227.3 | 246.4 | ||||||
| Contracted services | 34.8 | 31.9 | ||||||
| Aircraft fuel | 175.2 | 128.6 | ||||||
| Aircraft maintenance | 58.2 | 50.1 | ||||||
| Aircraft rent | 47.0 | 47.0 | ||||||
| Food and beverage service | 12.1 | 13.6 | ||||||
| Other selling expenses and commissions | 37.8 | 35.6 | ||||||
| Depreciation and amortization | 35.3 | 34.0 | ||||||
| Landing fees and other rentals | 51.9 | 46.6 | ||||||
| Other | 53.1 | 50.9 | ||||||
| Restructuring charges | 14.7 | — | ||||||
| Impairment of aircraft and related spare parts | — | 37.2 | ||||||
Total Operating Expenses | 747.4 | 721.9 | ||||||
Operating Income (Loss) | 9.1 | (20.6 | ) | |||||
Nonoperating Income (Expense) | ||||||||
| Interest income | 7.1 | 6.1 | ||||||
| Interest expense | (15.3 | ) | (12.6 | ) | ||||
| Interest capitalized | 1.3 | 0.3 | ||||||
| Fuel hedging gains | 27.5 | 25.9 | ||||||
| Other — net | — | 0.2 | ||||||
| 20.6 | 19.9 | |||||||
| Income (loss) before income tax | 29.7 | (0.7 | ) | |||||
| Income tax expense | 12.3 | 1.0 | ||||||
Net Income (Loss) | $ | 17.4 | $ | (1.7 | ) | |||
Basic Earnings (Loss) Per Share | $ | 0.64 | $ | (0.06 | ) | |||
Diluted Earnings (Loss) Per Share | $ | 0.56 | $ | (0.06 | ) | |||
Pro Forma Results(assuming change in method of accounting was applied retrospectively): | ||||||||
| Pro forma net income | NA | $ | 2.2 | |||||
| Pro Forma Basic and Diluted Income Per Share | NA | $ | 0.08 | |||||
| Shares used for computation: | ||||||||
| Basic | 27.200 | 26.818 | ||||||
| Diluted | 33.273 | 26.818 | ||||||
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
Alaska Air Group, Inc.
| Six Months Ended June 30 | ||||||||
| (In Millions Except Per Share Amounts) | 2005 | 2004 | ||||||
Operating Revenues | ||||||||
| Passenger | $ | 1,284.5 | $ | 1,191.7 | ||||
| Freight and mail | 45.2 | 42.8 | ||||||
| Other — net | 69.3 | 64.8 | ||||||
Total Operating Revenues | 1,399.0 | 1,299.3 | ||||||
Operating Expenses | ||||||||
| Wages and benefits | 472.0 | 488.2 | ||||||
| Contracted services | 65.4 | 59.4 | ||||||
| Aircraft fuel | 321.9 | 236.4 | ||||||
| Aircraft maintenance | 119.4 | 100.9 | ||||||
| Aircraft rent | 93.1 | 94.8 | ||||||
| Food and beverage service | 23.6 | 25.2 | ||||||
| Other selling expenses and commissions | 75.2 | 74.0 | ||||||
| Depreciation and amortization | 69.5 | 70.1 | ||||||
| Landing fees and other rentals | 104.1 | 89.2 | ||||||
| Other | 104.5 | 100.6 | ||||||
| Restructuring charges | 22.1 | — | ||||||
| Impairment of aircraft and related spare parts | — | 39.6 | ||||||
Total Operating Expenses | 1,470.8 | 1,378.4 | ||||||
Operating Loss | (71.8 | ) | (79.1 | ) | ||||
Nonoperating Income (Expense) | ||||||||
| Interest income | 13.0 | 10.7 | ||||||
| Interest expense | (29.4 | ) | (25.3 | ) | ||||
| Interest capitalized | 2.1 | 0.6 | ||||||
| Fuel hedging gains | 135.7 | 26.4 | ||||||
| Other — net | (2.9 | ) | (0.2 | ) | ||||
| 118.5 | 12.2 | |||||||
| Income (loss) before income tax and accounting change | 46.7 | (66.9 | ) | |||||
| Income tax expense (benefit) | 19.4 | (22.5 | ) | |||||
| Income (loss) before accounting change | 27.3 | (44.4 | ) | |||||
| Cumulative effect of accounting change, net of tax | (90.4 | ) | — | |||||
Net Loss | $ | (63.1 | ) | $ | (44.4 | ) | ||
Basic Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $ | 1.01 | $ | (1.66 | ) | |||
| Cumulative effect of accounting change | (3.33 | ) | — | |||||
| Net Loss Per Share | $ | (2.32 | ) | $ | (1.66 | ) | ||
Diluted Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $ | 0.90 | $ | (1.66 | ) | |||
| Cumulative effect of accounting change | (2.72 | ) | — | |||||
| Net Loss Per Share | $ | (1.82 | ) | $ | (1.66 | ) | ||
Pro Forma Results(assuming change in method of accounting was applied retrospectively): | ||||||||
| Pro forma net loss | NA | $ | (38.3 | ) | ||||
| Pro Forma Basic and Diluted Loss Per Share | NA | $ | (1.43 | ) | ||||
| Shares used for computation: | ||||||||
| Basic | 27.173 | 26.798 | ||||||
| Diluted | 33.256 | 26.798 | ||||||
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.
6
Alaska Air Group, Inc.
| 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 | Income (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 six months ended June 30, 2005 | (63.1 | ) | (63.1 | ) | ||||||||||||||||||||||||||||
| 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 | (7.4 | ) | ||||||||||||||||||||||||||||||
| Income tax effect | 2.7 | |||||||||||||||||||||||||||||||
| (4.7 | ) | (4.7 | ) | |||||||||||||||||||||||||||||
| Total comprehensive loss | (66.5 | ) | ||||||||||||||||||||||||||||||
| Amortization of deferred stock-based compensation | 0.6 | 0.6 | ||||||||||||||||||||||||||||||
| Treasury stock sales | 0.003 | — | — | 0.1 | 0.1 | |||||||||||||||||||||||||||
| Stock issued for employee stock purchase plan | 0.066 | 0.1 | 1.2 | — | 1.3 | |||||||||||||||||||||||||||
| Stock issued under stock plans | 0.037 | — | 0.8 | — | 0.8 | |||||||||||||||||||||||||||
Balances at June 30, 2005 | 27.232 | $ | 29.9 | $ | 498.5 | $ | (60.4 | ) | $ | (2.8 | ) | $ | (85.0 | ) | $ | 220.9 | $ | 601.1 | ||||||||||||||
(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.
7
Alaska Air Group, Inc.
| Six Months Ended June 30 (In Millions) | 2005 | 2004 | ||||||
Cash flows from operating activities: | ||||||||
| Net loss | $ | (63.1 | ) | $ | (44.4 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Cumulative effect of accounting change, net of tax effect | 90.4 | — | ||||||
| Restructuring charges | 22.1 | — | ||||||
| Impairment of aircraft and related spare parts | — | 39.6 | ||||||
| Depreciation and amortization | 69.5 | 70.1 | ||||||
| Amortization of airframe and engine overhauls | — | 35.1 | ||||||
| Stock-based compensation | 0.6 | — | ||||||
| Changes in fair values of open fuel hedge contracts | (105.9 | ) | (24.1 | ) | ||||
| Loss on sale of assets | 1.4 | 1.4 | ||||||
| Changes in deferred income taxes | 16.9 | (13.2 | ) | |||||
| Increase in receivables — net | (26.4 | ) | (0.4 | ) | ||||
| Increase in prepaid expenses and other current assets | (20.0 | ) | (24.1 | ) | ||||
| Increase in air traffic liability | 125.4 | 103.9 | ||||||
| Increase (decrease) in other current liabilities | (13.6 | ) | 27.4 | |||||
| Increase in deferred revenue and other-net | (7.0 | ) | 17.5 | |||||
| Net cash provided by operating activities | 90.3 | 188.8 | ||||||
Cash flows from investing activities: | ||||||||
| Proceeds from disposition of assets | 3.4 | 4.4 | ||||||
| Purchases of marketable securities | (598.3 | ) | (440.3 | ) | ||||
| Sales and maturities of marketable securities | 751.3 | 396.6 | ||||||
| Property and equipment additions: | ||||||||
| Aircraft purchase deposits | (152.8 | ) | (5.5 | ) | ||||
| Capitalized overhauls | — | (24.5 | ) | |||||
| Aircraft and other flight equipment | (73.3 | ) | (50.3 | ) | ||||
| Other property and equipment | (21.6 | ) | (22.4 | ) | ||||
| Aircraft deposits returned | 7.5 | 14.0 | ||||||
| Restricted deposits and other | 1.0 | — | ||||||
| Net cash used in investing activities | (82.8 | ) | (128.0 | ) | ||||
Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt, net | 20.0 | 94.6 | ||||||
| Long-term debt and capital lease payments | (26.5 | ) | (144.8 | ) | ||||
| Proceeds from issuance of common stock | 2.2 | 1.6 | ||||||
| Net cash used in financing activities | (4.3 | ) | (48.6 | ) | ||||
| Net change in cash and cash equivalents | 3.2 | 12.2 | ||||||
| Cash and cash equivalents at beginning of period | 28.0 | 158.8 | ||||||
Cash and cash equivalents at end of period | $ | 31.2 | $ | 171.0 | ||||
| Supplemental disclosure of cash paid (refunded) during the period for: | ||||||||
| Interest (net of amount capitalized) | $ | 26.0 | $ | 24.7 | ||||
| Income taxes | 1.1 | (42.9 | ) | |||||
| Noncash investing and financing activities: | ||||||||
| Assets acquired under long-term debt and capital leases | — | 30.6 | ||||||
| Credit received for flight deposits deferred in other liabilities | 9.7 | — | ||||||
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.
8
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 JuneSeptember 30, 2005, as well as the results of operations for the three and sixnine months ended JuneSeptember 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 and 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 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 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 income (loss) 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 (in millions, except per share amounts):
9
| 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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Income (loss) before accounting change As reported | $ | 17.4 | $ | (1.7 | ) | $ | 27.3 | $ | (44.4 | ) | ||||||
| Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.2 | — | 0.4 | — | ||||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects | (1.3 | ) | (1.2 | ) | (2.3 | ) | (2.3 | ) | ||||||||
Pro forma income (loss) before accounting change | $ | 16.3 | $ | (2.9 | ) | $ | 25.4 | $ | (46.7 | ) | ||||||
| Net income (loss) as reported | $ | 17.4 | $ | (1.7 | ) | $ | (63.1 | ) | $ | (44.4 | ) | |||||
| Add: Total stock-based compensation expense recognized under the intrinsic value-based method, net of related tax | 0.2 | — | 0.4 | — | ||||||||||||
| Deduct: Total stock-based compensation expense determined under fair value- based methods for all awards, net of related tax | (1.3 | ) | (1.2 | ) | (2.3 | ) | (2.3 | ) | ||||||||
| Pro forma net income (loss) | $ | 16.3 | $ | (2.9 | ) | $ | (65.0 | ) | $ | (46.7 | ) | |||||
| Basic EPS before accounting change: | ||||||||||||||||
| As reported | $ | 0.64 | $ | (0.06 | ) | $ | 1.01 | $ | (1.66 | ) | ||||||
| Pro forma | $ | 0.60 | (0.11 | ) | $ | 0.93 | (1.74 | ) | ||||||||
| Basic EPS: | ||||||||||||||||
| As reported | $ | 0.64 | $ | (0.06 | ) | $ | (2.32 | ) | $ | (1.66 | ) | |||||
| Pro forma | $ | 0.60 | (0.11 | ) | $ | (2.39 | ) | (1.74 | ) | |||||||
| Diluted EPS before accounting change: | ||||||||||||||||
| As reported | $ | 0.56 | $ | (0.06 | ) | $ | 0.90 | $ | (1.66 | ) | ||||||
| Pro forma | $ | 0.53 | (0.11 | ) | $ | 0.84 | $ | (1.74 | ) | |||||||
| Diluted EPS: | ||||||||||||||||
| As reported | $ | 0.56 | $ | (0.06 | ) | $ | (1.82 | ) | $ | (1.66 | ) | |||||
| Pro forma | $ | 0.53 | (0.11 | ) | $ | (1.87 | ) | (1.74 | ) | |||||||
10
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 amortizemethod to thedirect expensemethod. 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 expensemethod, overhaul costs are expensed as incurred. The Company believes 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’s approved maintenance program for the majority of its airframes now focuses more on shorter, but more frequent, maintenance visits. Management also believes that thedirect expensemethod is the predominant method used in the airline industry. Accordingly, effective Januar yJanuary 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 expensemethod on net income for the period ended JuneSeptember 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.
Note 3. Restructuring Charges
During the second quarter of 2005, Alaska announced that it was contractingcontracted 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 arewere originally estimated at $16.1 million, which was recorded in the second quarter.
During the third quarter of 2004, Alaska announced a management reorganization and the closure of its Oakland heavy maintenance base, contracting out of the Company’s fleet service and ground support
equipment and facility maintenance functions, as well as other initiatives.
11
The following table displays the activity and balance of the severance and related costs components of the Company’s restructuring accrual as of and for the sixnine months ended JuneSeptember 30, 2005. The restructuring charge adjustment relates to our changechanges in estimated costs of medical coverage extended to impacted employees and a change in the number of employees affected. We expectaffected since the original accrual was recorded. The Company expects to record similaradditional adjustments in future quarters as actualthe number of impacted employees that select the extended medical costs becomecoverage becomes known. There were no restructuring charges during the first six months of 2004 ($ in millions):
| Accruals for Severance and Related Costs | |||||
| Balance at December 31, 2004 | $ | 38.7 | |||
| Restructuring charges | 16.1 | ||||
| Restructuring charge adjustments | (2.0 | ) | |||
| Cash payments | (29.5 | ) | |||
| Balance at June 30, 2005 | $ | 23.3 | |||
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 duringin the third and fourth quartersquarter of 2005. The balanceaccrual for severance and related costs at JuneSeptember 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 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 recorded a charge of $0.3 million for certain costs associated with the lease termination, all of which has been paid as of June 30, 2005.
Note 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.
The Company’s operations are inherently dependent upon the price and availability of aircraft fuel, which accounted for 20.0%approximately 20% of all of 2004 and 22.2%24% of year-to-date 2005 operating expenses (excluding impairment and restructuring charges). To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into swap agreements and call options for crude oil.
12
| Reported fuel expense includes only the effective portion of gains associated with hedge positions that settled during the current period on contracts that existed at March 31, 2004 to the extent that mark-to-market gains were already included in Accumulated Other Comprehensive Loss at March 31, 2004. |
The following table summarizes realized fuel hedging gains and changes in fair value of hedging contracts outstanding as of JuneSeptember 30, 2005 and 2004 (in millions):
| Alaska Airlines | Horizon Air | |||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 154.7 | $ | 117.0 | $ | 24.2 | $ | 16.6 | ||||||||
| Less: gains on settled hedges included in fuel expense | (3.2 | ) | (4.4 | ) | (0.5 | ) | (0.6 | ) | ||||||||
| GAAP fuel expense | $ | 151.5 | $ | 112.6 | $ | 23.7 | $ | 16.0 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (21.3 | ) | (3.2 | ) | (3.2 | ) | (0.4 | ) | ||||||||
| Economic fuel expense | $ | 130.2 | $ | 109.4 | $ | 20.5 | $ | 15.6 | ||||||||
| Mark-to-market hedging gains included in nonoperating income (expense) | $ | 2.6 | $ | 19.6 | $ | 0.4 | $ | 2.7 | ||||||||
13
| 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 | |||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 285.7 | $ | 213.7 | $ | 43.6 | $ | 31.2 | ||||||||
| Less: gains on settled hedges included in fuel expense | (6.6 | ) | (7.5 | ) | (0.8 | ) | (1.0 | ) | ||||||||
| GAAP fuel expense | $ | 279.1 | $ | 206.2 | $ | 42.8 | $ | 30.2 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (37.0 | ) | (3.2 | ) | (5.7 | ) | (0.4 | ) | ||||||||
| Economic fuel expense | $ | 242.1 | $ | 203.0 | $ | 37.1 | $ | 29.8 | ||||||||
Mark-to-market hedging gains included in nonoperating income (expense) | $ | 80.3 | $ | 20.1 | $ | 12.7 | $ | 2.7 | ||||||||
| Approximate % of | Approximate Crude | |||||||||||
| Expected Fuel | Gallons Hedged | Oil Price per | ||||||||||
| Requirements | (in millions) | Barrel | ||||||||||
| 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 | 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 | |||||||
| 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 JuneSeptember 30, 2005 and December 31, 2004 were $194.5$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.
14
At JuneSeptember 30, 2005 and December 31, 2004 , other assets consisted of the following (in millions):
| June 30, 2005 | December 31, 2004 | |||||||
| Restricted deposits (primarily restricted investments) | $ | 87.3 | $ | 84.2 | ||||
| Deferred costs and other | 42.6 | 27.7 | ||||||
| Restricted cash for senior convertible notes | — | 3.6 | ||||||
| $ | 129.9 | $ | 115.5 | |||||
| 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 | |||
Note 6. Mileage Plan
Alaska’s Mileage Plan liabilities are included under the following balance sheet captions (in millions):
| June 30, 2005 | December 31, 2004 | |||||||
Current Liabilities: | ||||||||
| Other accrued liabilities | $ | 154.6 | $ | 136.6 | ||||
Other Liabilities and Credits (non-current): | ||||||||
| Deferred revenue | 256.6 | 252.9 | ||||||
| Other liabilities | 20.0 | 19.8 | ||||||
| Total | $ | 431.2 | $ | 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 7. Employee Benefit Plans
Pension Plans-Qualified Defined Benefit
Net pension expense for the three and sixnine months ended JuneSeptember 30 included the following components (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Service cost | $ | 11.8 | $ | 13.7 | $ | 25.5 | $ | 27.4 | ||||||||
| Interest cost | 12.9 | 12.0 | 25.8 | 24.0 | ||||||||||||
| Expected return on assets | (12.5 | ) | (10.7 | ) | (25.0 | ) | (21.4 | ) | ||||||||
| Amortization of prior service cost | 1.2 | 1.3 | 2.4 | 2.6 | ||||||||||||
| Actuarial gain | 3.6 | 3.7 | 7.2 | 7.4 | ||||||||||||
| Net pension expense | $ | 17.0 | $ | 20.0 | $ | 35.9 | $ | 40.0 | ||||||||
| 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 $19.3$30.7 million and $38.6$69.3 million in contributions during the three and sixnine months ended JuneSeptember 30, 2005, respectively, and expects to contribute an additional $19.3 million to these plans during the remainder of 2005.respectively. The Company made $16.5 million and $32.9$49.4 million in contributions to its defined benefit pension plans during the three and sixnine months ended JuneSeptember 30, 2004, respectively.
15
Net pension expense for the unfunded, noncontributory defined benefit plans for certain elected officers of the Company for the three and sixnine months ended JuneSeptember 30 included the following components (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Service cost | $ | 0.3 | $ | 0.3 | $ | 0.6 | $ | 0.6 | ||||||||
| Interest cost | 0.4 | 0.5 | 0.8 | 1.0 | ||||||||||||
| Actuarial gain | 0.1 | 0.2 | 0.2 | 0.4 | ||||||||||||
| Net pension expense | $ | 0.8 | $ | 1.0 | $ | 1.6 | $ | 2.0 | ||||||||
| 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 sixnine months ended JuneSeptember 30 included the following components (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Service cost | $ | 1.0 | $ | 1.2 | $ | 2.0 | $ | 2.4 | ||||||||
| Interest cost | 1.1 | 1.3 | 2.2 | 2.6 | ||||||||||||
| Amortization of prior service cost | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | ||||||||
| Actuarial gain | 0.5 | 0.7 | 1.0 | 1.4 | ||||||||||||
| Net periodic benefit cost | $ | 2.5 | $ | 3.1 | $ | 5.0 | $ | 6.2 | ||||||||
| 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 8. Earnings Per Share
Income per Share” requires that companies use income from continuing operations before extraordinary items and the cumulative effect of an accounting changeshare was calculated as the “control number” in determining whether potential common shares are dilutive or antidilutive. As the Company reported income before the accounting change for bothfollows (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 sixnine months ended JuneSeptember 30, 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 three and six months ended June 30, 2005,2004, 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. Outstanding options to purchase 1.9 0.9 million and 1.8
million common shares were excluded from the calculation infor the quarter and nine months ended September 30, 2005, respectively, as the impact of those options would have been antidilutive. For the threequarter and sixnine months ended JuneSeptember 30, 2004, options to purchase 3.93.3 million and 3.2 million common shares, and the effect of the senior convertible notesrespectively, 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).
16
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Basic Earnings (Loss) Per Share | ||||||||||||||||
| Income (loss) before accounting change | $ | 17.4 | $ | (1.7 | ) | $ | 27.3 | $ | (44.4 | ) | ||||||
| Weighted average shares outstanding | 27.200 | 26.818 | 27.173 | 26.798 | ||||||||||||
| Income (loss) per share before accounting change | $ | 0.64 | $ | (0.06 | ) | $ | 1.01 | $ | (1.66 | ) | ||||||
| Cumulative effect of accounting change, net of tax | NA | NA | $ | (90.4 | ) | NA | ||||||||||
| Weighted average shares outstanding | NA | NA | 27.173 | NA | ||||||||||||
| Per share cumulative effect of accounting change | NA | NA | $ | (3.33 | ) | NA | ||||||||||
| Net income (loss) | $ | 17.4 | $ | (1.7 | ) | $ | (63.1 | ) | $ | (44.4 | ) | |||||
| Weighted average shares outstanding | 27.200 | 26.818 | 27.173 | 26.798 | ||||||||||||
| Net income (loss) per share | $ | 0.64 | $ | (0.06 | ) | $ | (2.32 | ) | $ | (1.66 | ) | |||||
Diluted Earnings (Loss) Per Share | ||||||||||||||||
| Income (loss) before accounting change | $ | 17.4 | $ | (1.7 | ) | $ | 27.3 | $ | (44.4 | ) | ||||||
| Interest on convertible notes, net of tax | 1.3 | — | 2.5 | — | ||||||||||||
| Diluted income (loss) before accounting change | $ | 18.7 | $ | (1.7 | ) | $ | 29.8 | $ | (44.4 | ) | ||||||
| Weighted average diluted shares outstanding | 33.273 | 26.818 | 33.256 | 26.798 | ||||||||||||
| Income (loss) per share before accounting change | $ | 0.56 | $ | (0.06 | ) | $ | 0.90 | $ | (1.66 | ) | ||||||
| Cumulative effect of accounting change, net of tax | NA | NA | $ | (90.4 | ) | NA | ||||||||||
| Weighted average shares outstanding | NA | NA | 33.256 | NA | ||||||||||||
| Per share cumulative effect of accounting change | NA | NA | $ | (2.72 | ) | NA | ||||||||||
| Net income (loss) | $ | 17.4 | $ | (1.7 | ) | $ | (63.1 | ) | $ | (44.4 | ) | |||||
| Interest on convertible notes, net of tax | 1.3 | — | 2.5 | — | ||||||||||||
| Diluted net income (loss) | $ | 18.7 | $ | (1.7 | ) | $ | (60.6 | ) | $ | (44.4 | ) | |||||
| Weighted average shares outstanding | 33.273 | 26.818 | 33.256 | 26.798 | ||||||||||||
| Net income (loss) per share | $ | 0.56 | $ | (0.06 | ) | $ | (1.82 | ) | $ | (1.66 | ) | |||||
17
Note 9. Operating Segment Information
Operating segment information for Alaska and Horizon for the three and sixnine month periods ended JuneSeptember 30 was as follows (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Operating revenues: | ||||||||||||||||
| Alaska | $ | 616.3 | $ | 577.6 | $ | 1,139.6 | $ | 1,068.9 | ||||||||
| Horizon | 140.6 | 124.7 | 261.8 | 235.0 | ||||||||||||
| Other* | 0.2 | 0.2 | 0.5 | 0.5 | ||||||||||||
| Elimination of intercompany revenues | (0.6 | ) | (1.2 | ) | (2.9 | ) | (5.1 | ) | ||||||||
| Consolidated | $ | 756.5 | $ | 701.3 | $ | 1,399.0 | $ | 1,299.3 | ||||||||
| Income (loss) before income tax and accounting change: | ||||||||||||||||
| Alaska | $ | 22.1 | $ | (2.8 | ) | $ | 37.5 | $ | (56.0 | ) | ||||||
| Horizon | 11.1 | 4.7 | 15.7 | (5.7 | ) | |||||||||||
| Other* | (3.5 | ) | (2.6 | ) | (6.5 | ) | (5.2 | ) | ||||||||
| Consolidated | $ | 29.7 | $ | (0.7 | ) | $ | 46.7 | $ | (66.9 | ) | ||||||
| Total assets at end of period: | ||||||||||||||||
| Alaska | $ | 3,105.8 | $ | 3,144.8 | ||||||||||||
| Horizon | 325.9 | 290.7 | ||||||||||||||
| Other* | 774.6 | 809.2 | ||||||||||||||
| Elimination of intercompany accounts | (835.8 | ) | (882.7 | ) | ||||||||||||
| Consolidated | $ | 3,370.5 | $ | 3,362.0 | ||||||||||||
| 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. |
Note 10. Long-Term Debt and Capital Lease Obligations
At JuneSeptember 30, 2005 and December 31, 2004, long-term debt and capital lease obligations were as follows (in millions):
| June 30, 2005 | December 31, 2004 | |||||||
| Fixed rate notes payable due through 2020 | $ | 536.4 | $ | 361.3 | ||||
| Variable rate notes payable due through 2020 | 349.8 | 531.2 | ||||||
| Senior convertible notes due through 2023 | 150.0 | 150.0 | ||||||
| Long-term debt | 1,036.2 | 1,042.5 | ||||||
| Capital lease obligations | 0.3 | 0.5 | ||||||
| Less current portion | (57.0 | ) | (53.4 | ) | ||||
| $ | 979.5 | $ | 989.6 | |||||
18
| 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 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 JuneSeptember 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 JuneSeptember 30, 2005, there are no outstanding borrowings on this credit facility.
In the second quarterand 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 affected debt arrangements range from 5.2% to 6.3%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 of 2005, Alaska finalized a pre-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 a credit of $9.7 million received from the manufacturer. The $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 JuneSep 30, 2005, the Company has firm purchase commitments for 4443 aircraft requiring aggregate future payments of approximately $1.4$1.3 billion. In addition to the 15 options noted above, Horizon hashad 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 leases, long-term debt or internally generated cash.
Note 12. Contingencies
The Company is a party to routine 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
19
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. In the unlikely event that the arbitrator’s decision is overturned, Alaska may be required to pay wages retroactively to May 1, 2005 as if the contract that existed prior to the arbitrator’s decision were still in effect. On July 21, 2005, the Company filed a motion to dismiss the lawsuit. TheOn October 28, 2005, the district court granted the Company’s motion will be decided on evidence submitted or following oral argument. Ato dismiss. This decision is expected in the third quarter of 2005. At this time, the Company has no reasonsubject to believe that an unfavorable outcome is likely.
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. InOn 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 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 and the IAM’s counterclaim areis still pending in federal court. A discovery schedulecourt and a September 2006 trial date have not yethas been set.set for the IAM’s counter claim. The Company has filed a motion to dismiss the IAM’s counter claim. At this time, the Company has no reasonis not certain as to believe thatwhat 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 one-month LIBOR plus a specified margin. Any borrowings will be secured by the Company’s rights under the Boeing purchase agreement. The initial draw on the facility was $61.3 million, which was used to reimburse Alaska for the facility’s portion of the pre-delivery payments made to date.
Horizon entered into an unfavorable outcome is likely.
aircraft purchase agreement in October 2005 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 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 seven CRJ700 model aircraft.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
| % | % | |||||||||||||||||||||||
| Financial Data (in millions): | 2005 | 2004 | Change | 2005 | 2004 | Change | ||||||||||||||||||
| Operating Revenues: | ||||||||||||||||||||||||
| Passenger | $ | 561.2 | $ | 519.9 | 7.9 | % | $ | 1,032.5 | $ | 969.2 | 6.5 | % | ||||||||||||
| Freight and mail | 23.9 | 23.1 | 3.5 | % | 43.2 | 40.8 | 5.9 | % | ||||||||||||||||
| Other — net | 31.2 | 34.6 | -9.8 | % | 63.9 | 58.9 | 8.5 | % | ||||||||||||||||
| Total Operating Revenues | 616.3 | 577.6 | 6.7 | % | 1,139.6 | 1,068.9 | 6.6 | % | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Wages and benefits | 182.0 | 203.7 | -10.7 | % | 381.7 | 404.5 | -5.6 | % | ||||||||||||||||
| Contracted services | 31.6 | 29.4 | 7.5 | % | 59.4 | 52.5 | 13.1 | % | ||||||||||||||||
| Aircraft fuel | 151.5 | 112.6 | 34.5 | % | 279.1 | 206.2 | 35.4 | % | ||||||||||||||||
| Aircraft maintenance | 50.2 | 40.7 | 23.3 | % | 100.3 | 84.2 | 19.1 | % | ||||||||||||||||
| Aircraft rent | 29.3 | 27.9 | 5.0 | % | 57.7 | 57.4 | 0.5 | % | ||||||||||||||||
| Food and beverage service | 11.5 | 13.0 | -11.5 | % | 22.4 | 24.2 | -7.4 | % | ||||||||||||||||
| Other selling expenses and commissions | 31.2 | 31.3 | -0.3 | % | 63.9 | 65.2 | -2.0 | % | ||||||||||||||||
| Depreciation and amortization | 30.7 | 30.4 | 1.0 | % | 61.0 | 63.2 | -3.5 | % | ||||||||||||||||
| Landing fees and other rentals | 40.5 | 35.3 | 14.7 | % | 81.1 | 68.5 | 18.4 | % | ||||||||||||||||
| Other | 41.5 | 38.1 | 8.9 | % | 79.9 | 75.8 | 5.4 | % | ||||||||||||||||
| Restructuring charges | 14.7 | — | NM | 22.1 | — | NM | ||||||||||||||||||
| Impairment of aircraft and related spare parts | — | 36.8 | NM | — | 36.8 | NM | ||||||||||||||||||
| Total Operating Expenses | 614.7 | 599.2 | 2.6 | % | 1,208.6 | 1,138.5 | 6.2 | % | ||||||||||||||||
| Operating Income (Loss) | 1.6 | (21.6 | ) | NM | (69.0 | ) | (69.6 | ) | NM | |||||||||||||||
| Interest income | 7.6 | 6.3 | 13.9 | 11.6 | ||||||||||||||||||||
| Interest expense | (12.4 | ) | (10.7 | ) | (23.9 | ) | (21.5 | ) | ||||||||||||||||
| Interest capitalized | 1.2 | 0.2 | 1.9 | 0.3 | ||||||||||||||||||||
| Fuel hedging gains | 23.9 | 22.8 | 117.3 | 23.3 | ||||||||||||||||||||
| Other — net | 0.2 | 0.2 | (2.7 | ) | (0.1 | ) | ||||||||||||||||||
| 20.5 | 18.8 | 106.5 | 13.6 | |||||||||||||||||||||
| Income (Loss) Before Income Tax and Accounting Change | $ | 22.1 | $ | (2.8 | ) | NM | $ | 37.5 | $ | (56.0 | ) | NM | ||||||||||||
Operating Statistics: | ||||||||||||||||||||||||
| Revenue passengers (000) | 4,232 | 4,116 | 2.8 | % | 8,083 | 7,707 | 4.9 | % | ||||||||||||||||
| RPMs (000,000) | 4,317 | 4,104 | 5.2 | % | 8,214 | 7,684 | 6.9 | % | ||||||||||||||||
| ASMs (000,000) | 5,543 | 5,635 | -1.6 | % | 10,913 | 10,813 | 0.9 | % | ||||||||||||||||
| Passenger load factor | 77.9 | % | 72.8 | % | 5.1 pts | 75.3 | % | 71.1 | % | 4.2 pts | ||||||||||||||
| Yield per passenger mile | 13.00¢ | 12.67¢ | 2.5 | % | 12.57¢ | 12.61¢ | -0.3 | % | ||||||||||||||||
| Operating revenue per ASM | 11.12¢ | 10.25¢ | 8.4 | % | 10.44¢ | 9.89¢ | 5.6 | % | ||||||||||||||||
| Operating expenses per ASM (a) | 11.09¢ | 10.63¢ | 4.2 | % | 11.07¢ | 10.53¢ | 5.2 | % | ||||||||||||||||
| Operating expense per ASM excluding fuel, impairment and restructuring charges(a) | 8.09¢ | 7.98¢ | 1.4 | % | 8.31¢ | 8.28¢ | 0.4 | % | ||||||||||||||||
| Raw fuel cost per gallon (a) | 179.5¢ | 131.6¢ | 36.4 | % | 167.7¢ | 124.4¢ | 34.8 | % | ||||||||||||||||
| GAAP fuel cost per gallon (a) | 175.8¢ | 126.7¢ | 38.8 | % | 163.8¢ | 120.0¢ | 36.5 | % | ||||||||||||||||
| Economic fuel cost per gallon (a) | 151.1¢ | 123.1¢ | 22.7 | % | 142.1¢ | 118.2¢ | 20.2 | % | ||||||||||||||||
| Fuel gallons (000,000) | 86.2 | 88.9 | -3.1 | % | 170.4 | 171.8 | -0.8 | % | ||||||||||||||||
| Average number of employees | 9,144 | 10,255 | -10.8 | % | 9,180 | 10,120 | -9.3 | % | ||||||||||||||||
| Aircraft utilization (blk hrs/day) | 10.7 | 11.1 | -3.6 | % | 10.3 | 10.7 | -3.7 | % | ||||||||||||||||
| Operating fleet at period-end | 109 | 108 | 0.9 | % | 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 |
21
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
| % | % | |||||||||||||||||||||||
| Financial Data (in millions): | 2005 | 2004 | Change | 2005 | 2004 | Change | ||||||||||||||||||
| Operating Revenues: | ||||||||||||||||||||||||
| Passenger | $ | 136.9 | $ | 120.4 | 13.7 | % | $ | 254.6 | $ | 226.9 | 12.2 | % | ||||||||||||
| Freight and mail | 0.9 | 1.1 | -18.2 | % | 1.9 | 2.0 | -5.0 | % | ||||||||||||||||
| Other — net | 2.8 | 3.2 | -12.5 | % | 5.3 | 6.1 | -13.1 | % | ||||||||||||||||
| Total Operating Revenues | 140.6 | 124.7 | 12.8 | % | 261.8 | 235.0 | 11.4 | % | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Wages and benefits | 43.1 | 40.9 | 5.4 | % | 86.3 | 82.4 | 4.7 | % | ||||||||||||||||
| Contracted services | 6.1 | 5.2 | 17.3 | % | 11.6 | 10.4 | 11.5 | % | ||||||||||||||||
| Aircraft fuel | 23.7 | 16.0 | 48.1 | % | 42.8 | 30.2 | 41.7 | % | ||||||||||||||||
| Aircraft maintenance | 8.1 | 9.4 | -13.8 | % | 19.2 | 16.7 | 15.0 | % | ||||||||||||||||
| Aircraft rent | 17.6 | 19.1 | -7.9 | % | 35.3 | 37.4 | -5.6 | % | ||||||||||||||||
| Food and beverage service | 0.6 | 0.6 | 0.0 | % | 1.2 | 1.0 | 20.0 | % | ||||||||||||||||
| Other selling expenses and commissions | 7.3 | 6.7 | 9.0 | % | 14.0 | 13.2 | 6.1 | % | ||||||||||||||||
| Depreciation and amortization | 4.3 | 3.3 | 30.3 | % | 7.9 | 6.3 | 25.4 | % | ||||||||||||||||
| Landing fees and other rentals | 11.7 | 10.3 | 13.6 | % | 23.5 | 20.2 | 16.3 | % | ||||||||||||||||
| Other | 9.6 | 10.7 | -10.3 | % | 20.9 | 21.8 | -4.1 | % | ||||||||||||||||
| Impairment of aircraft and spare engines | — | 0.4 | NM | — | 2.8 | NM | ||||||||||||||||||
| Total Operating Expenses | 132.1 | 122.6 | 7.7 | % | 262.7 | 242.4 | 8.4 | % | ||||||||||||||||
| Operating Income (Loss) | 8.5 | 2.1 | NM | (0.9 | ) | (7.4 | ) | NM | ||||||||||||||||
| Interest income | 0.4 | 0.4 | 0.7 | 0.6 | ||||||||||||||||||||
| Interest expense | (1.5 | ) | (1.0 | ) | (2.7 | ) | (2.3 | ) | ||||||||||||||||
| Interest capitalized | 0.1 | 0.1 | 0.2 | 0.3 | ||||||||||||||||||||
| Fuel hedging gains | 3.6 | 3.1 | 18.4 | 3.1 | ||||||||||||||||||||
| 2.6 | 2.6 | 16.6 | 1.7 | |||||||||||||||||||||
| Income (Loss) Before Income Tax | $ | 11.1 | $ | 4.7 | NM | $ | 15.7 | $ | (5.7 | ) | NM | |||||||||||||
Operating Statistics: | ||||||||||||||||||||||||
| Revenue passengers (000) | 1,638 | 1,454 | 12.7 | % | 3,113 | 2,721 | 14.4 | % | ||||||||||||||||
| RPMs (000,000) | 620 | 535 | 15.9 | % | 1,160 | 985 | 17.8 | % | ||||||||||||||||
| ASMs (000,000) | 849 | 792 | 7.2 | % | 1,631 | 1,484 | 9.9 | % | ||||||||||||||||
| Passenger load factor | 73.0 | % | 67.5 | % | 5.5 pts | 71.1 | % | 66.4 | % | 4.7 pts | ||||||||||||||
| Yield per passenger mile | 22.08¢ | 22.50¢ | -1.9 | % | 21.95¢ | 23.04¢ | -4.7 | % | ||||||||||||||||
| Operating revenue per ASM | 16.57¢ | 15.75¢ | 5.2 | % | 16.05¢ | 15.84¢ | 1.3 | % | ||||||||||||||||
| Operating expenses per ASM (a) | 15.57¢ | 15.49¢ | 0.5 | % | 16.11¢ | 16.34¢ | -1.4 | % | ||||||||||||||||
| Operating expense per ASM excluding fuel and impairment charges(a) | 12.78¢ | 13.43¢ | -4.9 | % | 13.48¢ | 14.12¢ | -4.5 | % | ||||||||||||||||
| Raw fuel cost per gallon (a) | 187.6¢ | 136.1¢ | 37.7 | % | 175.1¢ | 128.4¢ | 36.4 | % | ||||||||||||||||
| GAAP fuel cost per gallon (a) | 183.7¢ | 131.1¢ | 40.2 | % | 171.9¢ | 124.3¢ | 38.3 | % | ||||||||||||||||
| Economic fuel cost per gallon (a) | 158.9¢ | 127.1¢ | 25.0 | % | 149.0¢ | 122.8¢ | 21.3 | % | ||||||||||||||||
| Fuel gallons (000,000) | 12.9 | 12.2 | 5.7 | % | 24.9 | 24.3 | 2.5 | % | ||||||||||||||||
| Average number of employees | 3,414 | 3,414 | 0.0 | % | 3,389 | 3,379 | 0.3 | % | ||||||||||||||||
| Aircraft utilization (blk hrs/day) | 8.5 | 8.4 | 1.4 | % | 8.9 | 8.0 | 11.3 | % | ||||||||||||||||
| Operating fleet at period-end | 65 | 64 | 1.6 | % | 65 | 64 | 1.6 | % | ||||||||||||||||
| 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 |
22
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.:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Alaska Airlines, Inc.: | ||||||||||||||||
| ($ in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Unit cost reconciliations: | ||||||||||||||||
| Operating expenses | $ | 614.7 | $ | 599.2 | $ | 1,208.6 | $ | 1,138.5 | ||||||||
| ASMs (000,000) | 5,543 | 5,635 | 10,913 | 10,813 | ||||||||||||
| Operating expenses per ASM | 11.09¢ | 10.63¢ | 11.07¢ | 10.53¢ | ||||||||||||
| Operating expenses | $ | 614.7 | $ | 599.2 | $ | 1,208.6 | $ | 1,138.5 | ||||||||
| Less: aircraft fuel | (151.5 | ) | (112.6 | ) | (279.1 | ) | (206.2 | ) | ||||||||
| Less: restructuring charges | (14.7 | ) | — | (22.1 | ) | — | ||||||||||
| Less: impairment of aircraft | — | (36.8 | ) | — | (36.8 | ) | ||||||||||
| Operating expense excluding fuel, restructuring charges, and impairment charge | $ | 448.5 | $ | 449.8 | $ | 907.4 | $ | 895.5 | ||||||||
| ASMs (000,000) | 5,543 | 5,635 | 10,913 | 10,813 | ||||||||||||
| Operating expense per ASM excluding fuel, restructuring charges, and impairment charge | 8.09¢ | 7.98¢ | 8.31¢ | 8.28¢ | ||||||||||||
Reconciliation from GAAP pretax income (loss): | ||||||||||||||||
| Pretax income (loss) reported GAAP amounts | $ | 22.1 | $ | (2.8 | ) | $ | 37.5 | $ | (56.0 | ) | ||||||
| Less: mark-to-market hedging gains included in nonoperating income (expense) | (2.6 | ) | (19.6 | ) | (80.3 | ) | (20.1 | ) | ||||||||
| Add: restructuring charges | 14.7 | — | 22.1 | — | ||||||||||||
| Add: impairment of aircraft and related spare parts | — | 36.8 | — | 36.8 | ||||||||||||
| Pretax income (loss) excluding restructuring charges, impairment charge, government comp and mark-to-market hedging gains | $ | 34.2 | $ | 14.4 | $ | (20.7 | ) | $ | (39.3 | ) | ||||||
| Three Months Ended June 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 154.7 | $ | 1.80 | $ | 117.0 | $ | 1.32 | ||||||||
| Less: gains on settled hedges included in fuel expense | (3.2 | ) | (0.04 | ) | (4.4 | ) | (0.05 | ) | ||||||||
| GAAP fuel expense | $ | 151.5 | $ | 1.76 | $ | 112.6 | $ | 1.27 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (21.3 | ) | (0.25 | ) | (3.2 | ) | (0.04 | ) | ||||||||
| Economic fuel expense | $ | 130.2 | $ | 1.51 | $ | 109.4 | $ | 1.23 | ||||||||
| Fuel gallons (000,000) | 86.2 | 88.9 | ||||||||||||||
| Mark-to-market gains (losses) included in non-operating income related to hedges that settle in future periods | $ | 2.6 | $ | 19.6 | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 285.7 | $ | 1.68 | $ | 213.7 | $ | 1.24 | ||||||||
| Less: gains on settled hedges included in fuel expense | (6.6 | ) | (0.04 | ) | (7.5 | ) | (0.04 | ) | ||||||||
| GAAP fuel expense | $ | 279.1 | $ | 1.64 | $ | 206.2 | $ | 1.20 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (37.0 | ) | (0.22 | ) | (3.2 | ) | (0.02 | ) | ||||||||
| Economic fuel expense | $ | 242.1 | $ | 1.42 | $ | 203.0 | $ | 1.18 | ||||||||
| Fuel gallons (000,000) | 170.4 | 171.8 | ||||||||||||||
| Mark-to-market gains (losses) included in non-operating income related to hedges that settle in future periods | $ | 80.3 | $ | 20.1 | ||||||||||||
23
Alaska Airlines, Inc.:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Horizon Air Industries, Inc. | ||||||||||||||||
| ($ in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Unit cost reconciliations: | ||||||||||||||||
| Operating expenses | $ | 132.1 | $ | 122.6 | $ | 262.7 | $ | 242.4 | ||||||||
| ASMs (000,000) | 849 | 792 | 1,631 | 1,484 | ||||||||||||
| Operating expenses per ASM | 15.57¢ | 15.49¢ | 16.11¢ | 16.34¢ | ||||||||||||
| Operating expenses | $ | 132.1 | $122.6 | $ | 262.7 | $ | 242.4 | |||||||||
| Less: aircraft fuel | (23.7 | ) | (16.0 | ) | (42.8 | ) | (30.2 | ) | ||||||||
| Less: impairment of aircraft | — | (0.4 | ) | — | (2.8 | ) | ||||||||||
| Operating expense excluding fuel and impairment charge | $ | 108.4 | $ | 106.2 | $ | 219.9 | $ | 209.4 | ||||||||
| ASMs (000,000) | 849 | 792 | 1,631 | 1,484 | ||||||||||||
| Operating expense per ASM excluding fuel and impairment charge | 12.78¢ | 13.43¢ | 13.48¢ | 14.12¢ | ||||||||||||
Reconciliation from GAAP pretax income (loss): | ||||||||||||||||
| Pretax income (loss) reported GAAP amounts | $ | 11.1 | $ | 4.7 | $ | 15.7 | $ | (5.7 | ) | |||||||
| Less: mark-to-market hedging gains included in nonoperating income (expense) | (0.4 | ) | (2.7 | ) | (12.7 | ) | (2.7 | ) | ||||||||
| Add: impairment of aircraft and related spare parts | — | 0.4 | — | 2.8 | ||||||||||||
| Pretax income (loss) excluding impairment charge and mark-to-market hedging gains | $ | 10.7 | $ | 2.4 | $ | 3.0 | $ | (5.6 | ) | |||||||
| Three Months Ended June 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 24.2 | $ | 1.88 | $ | 16.6 | $ | 1.36 | ||||||||
| Less: gains on settled hedges included in fuel expense | (0.5 | ) | (0.04 | ) | (0.6 | ) | (0.05 | ) | ||||||||
| GAAP fuel expense | $ | 23.7 | $ | 1.84 | $ | 16.0 | $ | 1.31 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (3.2 | ) | (0.25 | ) | (0.4 | ) | (0.03 | ) | ||||||||
| Economic fuel expense | $ | 20.5 | $ | 1.59 | $ | 15.6 | $ | 1.28 | ||||||||
| Fuel gallons (000,000) | 12.9 | 12.2 | ||||||||||||||
| Mark-to-market gains (losses) included in non-operating income related to hedges that settle in future periods | $ | 0.4 | $ | 2.7 | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| (in millions) | Cost/Gal | (in millions) | Cost/Gal | |||||||||||||
| Fuel expense before hedge activities (“raw” or “into-plane” fuel cost) | $ | 43.6 | $ | 1.75 | $ | 31.2 | $ | 1.28 | ||||||||
| Less: gains on settled hedges included in fuel expense | (0.8 | ) | (0.03 | ) | (1.0 | ) | (0.04 | ) | ||||||||
| GAAP fuel expense | $ | 42.8 | $ | 1.72 | $ | 30.2 | $ | 1.24 | ||||||||
| Less: gains on settled hedges included in nonoperating income (expense) | (5.7 | ) | (0.23 | ) | (0.4 | ) | (0.01 | ) | ||||||||
| Economic fuel expense | $ | 37.1 | $ | 1.49 | $ | 29.8 | $ | 1.23 | ||||||||
| Fuel gallons (000,000) | 24.9 | 24.3 | ||||||||||||||
| Mark-to-market gains (losses) included in non-operating income related to hedges that settle in future periods | $ | 12.7 | $ | 2.7 | ||||||||||||
24
($ 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 | ||||||||||||
Horizon Air Industries, Inc.
($ 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 | ||||||||||||
| 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.
Third Quarter in Review and Current Events
In the secondthird quarter, of 2005, despite nearlyrelatively flat capacity,passenger traffic at Alaska, revenues continued to improve due to higher ticket yields resulting from industry wide fare increases. The flat passenger traffic resulted from reduced capacity, in light of the operational difficulties described below, despite record load factors during the quarter. Horizon continued to see significant increases in passenger traffic, at both Alaska and Horizon, coupled with a modest improvementresulting in ticket yields at Alaska over prior year.increased revenues, offset by slightly lower yield. Operating expenses per available seat mile increased 4.2%6.1% at Alaska to 11.0910.46 cents and 0.5%6.7% at Horizon to 15.5715.75 cents compared to the secondthird quarter of 2004. Fuel is a major component of our operating costs and fuel prices reached record highs once again induring the second quarter. At Alaska, our unit costs excluding fuel, impairment,a navigation fee refund and restructuring charges during the secondthird quarter of 2005 increased slightlyby 2.4% to 7.53 cents compared to the secondthird quarter of 2004. This is primarily due to the capacity reduction in capacity at Alaska fromduring the prior year quarter duesummer. Compared to the reductionthird quarter of our 2005 summer flight schedule.2004, Horizon however, continued to see improvementhad a 1.3% increase in unit costs excluding fuel impairment, and restructuring charges over the prior period. Our cost per available seat mile excluding fuel, impairment, and restructuring charges increased 1.4% at Alaska to 8.09 cents and declined 4.9% at Horizon to 12.78 cents compared to the second quarter of 2004.
Although revenues and pretaxpre-tax income at Alaska have improved over the prior year, we are facingfaced 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 has beenwas operational performance that iswas well below our goal.goal during much of the third quarter. Our operational performance, measured by on-time arrivals and departures, declined significantly from the secondthird 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 reduced our 2005 summer capacity throughout the remainder of 2005 from our original expectations through schedule reductions and the elimination of certain flights. This capacity reduction will impact our revenue in the third and fourth quarters, although the impact is not known at this time.
Labor Costs and Negotiations
25
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 majorityunion members in the fourth quarter of Alaska’s aircraft technicians on July 27, 2005. The Company will resume talks
We are pleased with the AFAcontracts that have been reached recently and AMFA soon to determine next steps in these processes.
26
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 4 to our condensed consolidated financial statements.
The implications of this change are twofold: First, our earnings can 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 secondthird 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 secondthird 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 $3.0$22.8 million compared to $22.3$57.2 million in the secondthird quarter of 2004. Second, to a large extent, the impact of our fuel hedge program will not be reflected in fuel expense. In the secondthird quarter of 2005, we recorded gains from settled fuel hedges totaling $28.2$43.5 million, but only $3.7$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 secondthird quarter of 2004, gains of $5.0$4.0 million on settled hedges were recorded as an offset to fuel expense and gains of $3.6$9.7 million were 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 2322 and 24.
We continue to believe that our fuel hedge program is an important part of our strategy to reduce our exposure to volatile fuel prices.
Impairment of 737-200C Aircraft in 2004Restructuring Charges
During the secondthird quarter of 2004, our Board approvedAlaska announced a plan to acceleratemanagement reorganization and the retirementclosure of our Boeing 737-200Cits Oakland maintenance base, contracting out of the Alaska’s fleet service and remove those aircraft from service earlier than initially planned. As a resultground support equipment and facility maintenance functions, as well as other initiatives. Severance and related costs associated with this restructuring during the third quarter of this decision,2004 were $27.5 million. In the third quarter of 2005, we recorded an impairment charge totaling $36.8a $1.4 million (pretax)(pre-tax) positive adjustment to write down the fleetrestructuring accrual related to its estimated fair market value.
Aircraft CommitmentOther Events
In August 2005, Alaska Airlines, Inc. entered intorecorded 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 aircraft purchase$11.0 million refund ($6.3 million, net of tax) recorded during the third quarter of 2004.
In October 2005, Horizon finalized an agreement with The Boeing Company to purchase 35 B737-800twelve Bombardier Q400 aircraft with deliveriesdelivery dates beginning in JanuaryDecember 2006 and continuing through April 2011. The purchaseJuly 2007. This agreement, includes optionsin 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 1520 Q400 aircraft. In connection with the agreement, Bombardier agreed to provide certain remarketing assistance for up to twelve Q200 aircraft with deliveries between July 2007 and April 2009. The order also includes rightscurrently leased 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 an additional 50 737-800sof up to 38 new Boeing 737-800 aircraft (23 of which are firm orders) under the same terms ascurrent aircraft purchase agreement. The facility will expire on August 31, 2009 and the interest rate is based on one-month LIBOR plus a specified margin. Any borrowings will be secured by the Company’s rights under the Boeing purchase agreement.
We began daily non-stop service from Los Angeles to Mexico City in August 2005 and Seattle to Dallas/Fort Worth in September 2005.
Capacity Outlook
For the fourth quarter of 2005, Alaska and Horizon expect capacity to be flat and up approximately 10%2% and 8%, respectively, compared to 2004 capacity. We recently reduced the estimated capacity forecast for the remainder of
27
Comparison of Three Months Ended JuneSeptember 30, 2005 to Three Months Ended JuneSeptember 30, 2004
Our consolidated net income for the secondthird quarter of 2005 was $17.4$90.2 million, or $0.56$2.71 per diluted share, versus a net loss of $1.7$74.0 million, or $0.06$2.29 per diluted share, in the secondthird quarter of 2004.
Our consolidated pre-tax net income for the quarter was $29.7$146.8 million compared to a pre-tax loss of $0.7$119.2 million for the secondthird quarter of 2004. Both the 2005 and 2004 results include certain significantnotable items that impact the comparability of the quarters. These items are discussed in the “Second“Third Quarter in Review and Current Events” section beginning on page 25.24. 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 and relatively flat operating expenses.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.
Financial and statistical data comparisons for Alaska and Horizon are shown on pages 2120 and 22,21, respectively. On pages 2322 and 24,23, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures.
Alaska Airlines Revenues
Operating revenues increased $38.7$56.5 million, or 6.7%8.9%, during the secondthird quarter of 2005 as compared to the same period2004 due to a 12.4% increase in 2004. For the quarter,operating revenue passenger miles (RPMs or traffic) increased 5.2% over prior year and ticket yields per passengeravailable seat mile increased approximately 2.5%.(RASM) offset by reduced ASMs. The increase in yield per passenger mileRASM was driven by a result of a modest7.4% increase in ticket yields that resulted from increases in ticket prices industry-wide designed to offset higher fuel prices.
Load factor increased 3.0 percentage points to 79.0% for the third quarter of 2005. The increase in2005 due primarily to the nearly flat passenger traffic offset by the capacity decrease, resulted in an increase in load factor
28
Freight and mail revenues increased $0.8by $0.7 million, or 3.5%2.9%, compared to the same period in 2004 becauseas 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 revenues.
Other-net revenues decreased $3.4increased $8.3 million, or 9.8%26.2%, primarily due to the termination of contract maintenance work that we were performing for third parties in the second quarter of 2004 and are no longer performing. This was offset by increases in Mileage Plan revenues resulting from higher award redemption on our partner airlines and an increase in cash receipts from miles sold.
Alaska Airlines Expenses
For the quarter, total operating expenses increased $15.5$17.1 million, or 2.6%2.9%, as compared to the same period in 2004, despite a 1.6% decrease in capacity.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 4.2%6.1% from 10.639.84 cents in the secondthird quarter of 2004 to 11.0910.46 cents in the secondthird 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 fuel costs, the restructuring charge related to the subcontracting of the ramp services operation in Seattle,aircraft maintenance, contracted services, costs, aircraft maintenance, and landing fees and other rentals, offset by a decline in wages and benefits and food and beverage service.selling expenses. Operating expenseexpenses per ASM excluding fuel, restructuringthe navigation fee refund, and impairmentrestructuring charges increased 1.4%2.4% as compared to the same period in 2004. Our estimates of costs per ASM, excluding fuel and restructuring or impairment charges,the items noted above for the third quarter, fourth quarter and full year of 2005, are 7.4 cents, 7.47.8 cents and between 7.8 and 7.98.0 cents, respectively.
Explanations of significant period-over-period changes in the components of operating expenses are as follows:
29
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.
30
For the secondthird quarter, operating revenues increased $15.9$14.4 million, or 12.8%10.3% as compared to 2004. This increase is due largely to increased traffic, in the native network, partially offset by a 1.9%1.1% decline in ticket yields.
For the three months ending JuneSeptember 30, 2005, capacity increased 7.2%9.8% and traffic was up 15.9%13.6%, compared to the same period in 2004 due primarily to the addition of one CRJ 700,CRJ-700, four additional seats on each of our Q400’s and an increase in the average trip length. Passenger yield decreased 1.9%1.1% to 22.0822.14 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 $16.5$16.7 million, or 13.7%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 $9.5$21.0 million, or 7.7%17.1%, as compared to the same period in 2004.2004 primarily due to increases in raw or “into-plane” fuel costs, wages and benefits and aircraft maintenance. Operating expenses per ASM increased 0.5%6.7% as compared to 2004. Operating expenses per ASM excluding fuel and impairment charges decreased 4.9%increased 1.3% as compared to the same period in 2004. Operating expenses in 2004 include $0.4 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 any special charges, for the third quarter, fourth quarter and full year of 2005 are 12.2 cents, 13.613.8 cents, and 13.213.4 cents, respectively.
Explanations of other significant period-over-period changes in the components of operating expenses are as follows:
31
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 $20.6$56.6 million in the secondthird quarter of 2005 compared to $19.9$62.4 million during the same period of 2004. Interest income increased $1.0$0.7 million due to a larger average marketable securities portfolio in the secondthird quarter of 2005.2005, offset by a larger interest payment in 2004 related to the navigation fee refund. Interest expense (net of capitalized interest) increased $1.7$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 agreements.
Fuel hedging gains include $24.5$40.1 million in gains from fuel hedging contracts settled in the secondthird quarter of 2005 compared to $3.6$9.7 million in 2004. In addition, fuel hedging gains include net mark-to-market gains on unsettled hedge contracts, net of $3.0the reclassification of previously recorded mark-to-market gains for settled hedges, of $22.8 million in 2005 and $22.3$57.2 million in 2004.
Comparison of SixNine Months Ended JuneSeptember 30, 2005 to SixNine Months Ended JuneSeptember 30, 2004
Our consolidated net lossincome for the sixnine months ended JuneSeptember 30, 2005 was $63.1$27.1 million, or $1.82$0.93 per diluted share, versus a net loss of $44.4$29.6 million, or $1.66$0.98 per diluted share, during the same period of 2004.
32
2004 results include certain significantnotable items as stated below that impact the comparability of the six-month periods. nine-month periods:
Financial and statistical data comparisons for Alaska and Horizon are shown on pages 2120 and 22,21, respectively. On pages 2322 and 24,23, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures. A discussion of the six-monthnine-month data follows.
Alaska Airlines Revenues
Operating revenues increased $70.7$127.2 million, or 6.6%7.5%, during 2005 as compared to 2004.
Yield per passenger mile decreased 0.3%, although the yield trended higher in the second quarter,increased 2.5% to 12.93 cents and passenger load factor increased 4.23.8 points during the first sixnine months of 2005 as compared to the same period in 2004. The increasesIncreases in traffic with relatively flat yields drove the 6.5%and yield resulted in a 7.2% increase in passenger revenues in 2005.
Freight and mail revenues increased slightly by $2.4$3.1 million, or 5.9%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.
Other-net revenues increased $5.0$13.3 million, or 8.5%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 are no longer performing.
Alaska Airlines Expenses
For the sixnine months ended JuneSeptember 30, 2005, total operating expenses increased $70.1$87.2 million, or 6.2%5.0%, as compared to the same period in 2004. Operating expenses per ASM increased 5.2%5.6% in 2005 as compared to 2004. The increase in operating expenses is due largely to the significant increases in raw or “into-plane” fuel costs, restructuring charges related to the subcontracting of the ramp services operation in Seattle and the closure of the Oakland hangar, contracted services costs, aircraft maintenance, contracted services, and landing fees and other rentals, offset by a decline in wages and benefits, food and beverage service, other
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Explanations of significant period-over-period changes in the components of operating expenses are as follows:
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 gains from settled hedges recorded during the period, our “economic,” or net, fuel expense increased | |||
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.
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For the first sixnine months of 2005, operating revenues increased $26.8$41.2 million, or 11.4%11.0% as compared to 2004. This increase is due largely to the increased traffic in the native network and the contract flying for Frontier Airlines, which began in January 2004, partially offset by a 4.7%3.1% decline in ticket yields.
For the sixnine months ended JuneSeptember 30, 2005, capacity increased 9.9% and traffic was up 17.8%16.2%, compared to the same period in 2004, due to an increase in contract flying with Frontier and harmonization flying with Alaska, the addition of one CRJ 700CRJ-700 in March 2005 and four additional seats on each of our Q400’s. Contract flying with Frontier represented approximately 9.5%9.1% of passenger revenues and 22.4%22.3% of capacity, during the first halfnine months of 2005 compared to 8.6%8.8% and 19.5%20.8%, respectively, in the first sixnine months of 2004. Passenger load factor increased 4.74.0 percentage points to 71.1%72.5%. Passenger yield decreased 4.7%3.1% to 21.9522.02 cents, reflecting the inclusion of the Frontier contract flying, the yield for which is significantly lower than native network 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 $27.7$45.4 million, or 12.2%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 sixnine months of 2005 increased $20.3$41.3 million, or 8.4%11.3%, as compared to the same period in 2004.2004, 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 decreased 1.4%increased 1.3% as compared to 2004. Operating expenses per ASM excluding fuel and impairment charges decreased 4.5%2.6% as compared to the same
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Explanations of other significant period-over-period changes in the components of operating expenses are as follows: