Exhibit 99.1
Investor Update - Impact of New Accounting Standards
References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.
This update includes prior year impacts for the new revenue recognition accounting standard and retirement benefits accounting standard that became applicable for the Company beginning January 1, 2018. We have elected to apply the new standards using a full retrospective transition, which required us to adjust prior period financial information for the new standards. For a more complete discussion of the new accounting standards, and their impacts on our accounting policies, see our first quarter 2018 Form 10-Q filed on May 4, 2018.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
The historical condensed consolidated statements of operations presented below reflect the adoption of the new standards related to revenue recognition and retirement benefits (the standards). Line items not impacted by the standards have been condensed for presentation herein. Upon adoption of the standards, the presentation of certain line items was modified to address the new accounting requirements. Certain immaterial reclassifications have been made to "as reported" financial statements to conform to classifications used in the current year.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, 2016 (a) | | Twelve Months Ended December 31, 2017 |
| | | | | Adjustments | | | | | | Adjustments | | |
| | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted |
| Operating Revenues | | | | | | | | | | | | | | | | |
| Passenger Revenue | | $ | 5,006 |
| | $ | 386 |
| | $ | — |
| | $ | 5,392 |
| | $ | 6,818 |
| | $ | 483 |
| | $ | — |
| | $ | 7,301 |
|
| Mileage plan other revenue | | 429 |
| | (59 | ) | | — |
| | 370 |
| | 482 |
| | (64 | ) | | — |
| | 418 |
|
| Cargo and other revenue | | 496 |
| | (333 | ) | | — |
| | 163 |
| | 633 |
| | (458 | ) | | — |
| | 175 |
|
| Total Operating Revenue | | 5,931 |
| | (6 | ) | | — |
| | 5,925 |
| | 7,933 |
| | (39 | ) | | — |
| | 7,894 |
|
| Operating Expenses | | | | | | | | | | | | | | | | |
| Wages and benefits | | 1,382 |
| | — |
| | 12 |
| | 1,394 |
| | 1,924 |
| | — |
| | 7 |
| | 1,931 |
|
| Selling expenses | | 225 |
| | 23 |
| | — |
| | 248 |
| | 357 |
| | 11 |
| | — |
| | 368 |
|
| Special items—merger-related costs | | 117 |
| | — |
| | — |
| | 117 |
| | 118 |
| | (2 | ) | | — |
| | 116 |
|
| All other operating expenses | | 2,860 |
| | — |
| | — |
| | 2,860 |
| | 4,271 |
| | — |
| | — |
| | 4,271 |
|
| Total Operating Expenses | | 4,584 |
| | 23 |
| | 12 |
| | 4,619 |
| | 6,670 |
| | 9 |
| | 7 |
| | 6,686 |
|
| Operating Income | | 1,347 |
| | (29 | ) | | (12 | ) | | 1,306 |
| | 1,263 |
| | (48 | ) | | (7 | ) | | 1,208 |
|
| Nonoperating Income (Expense) | | | | | | | | | | | | | | | | |
| Other—net | | 1 |
| | — |
| | 12 |
| | 13 |
| | (4 | ) | | — |
| | 7 |
| | 3 |
|
| All other nonoperating income (expense) | | (3 | ) | | — |
| | — |
| | (3 | ) | | (52 | ) | | — |
| | — |
| | (52 | ) |
| | | (2 | ) | | — |
| | 12 |
| | 10 |
| | (56 | ) | | — |
| | 7 |
| | (49 | ) |
| Income (loss) before income tax | | 1,345 |
| | (29 | ) | | — |
| | 1,316 |
| | 1,207 |
| | (48 | ) | | — |
| | 1,159 |
|
| Income tax expense (benefit) | | 531 |
| | (12 | ) | | — |
| | 519 |
| | 173 |
| | 26 |
| | — |
| | 199 |
|
| Net Income (Loss) | | $ | 814 |
| | $ | (17 | ) | | $ | — |
| | $ | 797 |
| | $ | 1,034 |
| | $ | (74 | ) | | $ | — |
| | $ | 960 |
|
| |
(a) | As the acquisition of Virgin America closed on December 14, 2016, amounts include Virgin America results for the period December 14, 2016 through December 31, 2016. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2017 | | Three Months Ended June 30, 2017 |
| | | | | Adjustments | | | | | | Adjustments | | |
| | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted |
| Operating Revenues | | | | | | | | | | | | | | | | |
| Passenger Revenue | | $ | 1,484 |
| | $ | 118 |
| | $ | — |
| | $ | 1,602 |
| | $ | 1,807 |
| | $ | 138 |
| | $ | — |
| | $ | 1,945 |
|
| Mileage plan other revenue | | 119 |
| | (19 | ) | | — |
| | 100 |
| | 128 |
| | (19 | ) | | — |
| | 109 |
|
| Cargo and other revenue | | 146 |
| | (108 | ) | | — |
| | 38 |
| | 167 |
| | (119 | ) | | — |
| | 48 |
|
| Total Operating Revenue | | 1,749 |
| | (9 | ) | | — |
| | 1,740 |
| | 2,102 |
| | — |
| | — |
| | 2,102 |
|
| Operating Expenses | | | | | | | | | | | | | | | | |
| Wages and benefits | | 448 |
| | — |
| | 2 |
| | 450 |
| | 469 |
| | — |
| | 1 |
| | 470 |
|
| Selling expenses | | 81 |
| | 2 |
| | — |
| | 83 |
| | 97 |
| | 5 |
| | — |
| | 102 |
|
| Special items—merger-related costs | | 40 |
| | (1 | ) | | — |
| | 39 |
| | 24 |
| | — |
| | — |
| | 24 |
|
| All other operating expenses | | 1,011 |
| | — |
| | — |
| | 1,011 |
| | 1,019 |
| | — |
| | — |
| | 1,019 |
|
| Total Operating Expenses | | 1,580 |
| | 1 |
| | 2 |
| | 1,583 |
| | 1,609 |
| | 5 |
| | 1 |
| | 1,615 |
|
| Operating Income | | 169 |
| | (10 | ) | | (2 | ) | | 157 |
| | 493 |
| | (5 | ) | | (1 | ) | | 487 |
|
| Nonoperating Income (Expense) | | | | | | | | | | | | | | | | |
| Other—net | | (3 | ) | | — |
| | 2 |
| | (1 | ) | | (1 | ) | | — |
| | 1 |
| | — |
|
| All other nonoperating income (expense) | | (14 | ) | | — |
| | — |
| | (14 | ) | | (13 | ) | | — |
| | — |
| | (13 | ) |
| | | (17 | ) | | — |
| | 2 |
| | (15 | ) | | (14 | ) | | — |
| | 1 |
| | (13 | ) |
| Income (loss) before income tax | | 152 |
| | (10 | ) | | — |
| | 142 |
| | 479 |
| | (5 | ) | | — |
| | 474 |
|
| Income tax expense (benefit) | | 53 |
| | (4 | ) | | — |
| | 49 |
| | 183 |
| | (2 | ) | | — |
| | 181 |
|
| Net Income (Loss) | | $ | 99 |
| | $ | (6 | ) | | $ | — |
| | $ | 93 |
| | $ | 296 |
| | $ | (3 | ) | | $ | — |
| | $ | 293 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2017 | | Three Months Ended December 31, 2017 |
| | | | | Adjustments | | | | | | Adjustments | | |
| | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted |
| Operating Revenues | | | | | | | | | | | | | | | | |
| Passenger Revenue | | $ | 1,824 |
| | $ | 134 |
| | $ | — |
| | $ | 1,958 |
| | $ | 1,703 |
| | $ | 93 |
| | $ | — |
| | $ | 1,796 |
|
| Mileage plan other revenue | | 122 |
| | (17 | ) | | — |
| | 105 |
| | 113 |
| | (9 | ) | | — |
| | 104 |
|
| Cargo and other revenue | | 174 |
| | (127 | ) | | — |
| | 47 |
| | 146 |
| | (104 | ) | | — |
| | 42 |
|
| Total Operating Revenue | | 2,120 |
| | (10 | ) | | — |
| | 2,110 |
| | 1,962 |
| | (20 | ) | | — |
| | 1,942 |
|
| Operating Expenses | | | | | | | | | | | | | | | | |
| Wages and benefits | | 475 |
| | — |
| | 2 |
| | 477 |
| | 532 |
| | — |
| | 2 |
| | 534 |
|
| Selling expenses | | 91 |
| | 1 |
| | — |
| | 92 |
| | 88 |
| | 3 |
| | — |
| | 91 |
|
| Special items—merger-related costs | | 24 |
| | (1 | ) | | — |
| | 23 |
| | 30 |
| | — |
| | — |
| | 30 |
|
| All other operating expenses | | 1,091 |
| | — |
| | — |
| | 1,091 |
| | 1,150 |
| | — |
| | — |
| | 1,150 |
|
| Total Operating Expenses | | 1,681 |
| | — |
| | 2 |
| | 1,683 |
| | 1,800 |
| | 3 |
| | 2 |
| | 1,805 |
|
| Operating Income | | 439 |
| | (10 | ) | | (2 | ) | | 427 |
| | 162 |
| | (23 | ) | | (2 | ) | | 137 |
|
| Nonoperating Income (Expense) | | | | | | | | | | | | | | | | |
| Other—net | | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | 2 |
| | 2 |
|
| All other nonoperating income (expense) | | (12 | ) | | — |
| | — |
| | (12 | ) | | (13 | ) | | — |
| | — |
| | (13 | ) |
| | | (12 | ) | | — |
| | 2 |
| | (10 | ) | | (13 | ) | | — |
| | 2 |
| | (11 | ) |
| Income (loss) before income tax | | 427 |
| | (10 | ) | | — |
| | 417 |
| | 149 |
| | (23 | ) | | — |
| | 126 |
|
| Income tax expense (benefit) | | 161 |
| | (3 | ) | | — |
| | 158 |
| | (224 | ) | | 35 |
| | — |
| | (189 | ) |
| Net Income (Loss) | | $ | 266 |
| | $ | (7 | ) | | $ | — |
| | $ | 259 |
| | $ | 373 |
| | $ | (58 | ) | | $ | — |
| | $ | 315 |
|
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
The historical condensed consolidated balance sheets below reflect the adoption of the new standards related to revenue recognition (the standard) as well as other classification changes. Line items not impacted by the standard have been condensed for presentation herein. Upon adoption of the standard, the presentation of certain line items was modified to address the new accounting requirements. Certain immaterial reclassifications have been made to "as reported" financial statements to conform to classifications used in the current year.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| | As Reported | | Adjustments - Revenue Recognition | | As Adjusted | | As Reported | | Adjustments - Revenue Recognition | | As Adjusted |
| ASSETS | | | | | | | | | | | |
| Current Assets | | | | | | | | | | | |
| Prepaid expenses, fuel hedge contracts and other current assets | $ | 121 |
| | $ | 6 |
| | $ | 127 |
| | $ | 127 |
| | $ | 6 |
| | $ | 133 |
|
| All other current assets | 1,929 |
| | — |
| | 1,929 |
| | 2,019 |
| | — |
| | 2,019 |
|
| Total Current Assets | 2,050 |
| | 6 |
| | 2,056 |
| | 2,146 |
| | — |
| | 2,152 |
|
| | | | | | | | | | | | |
| Total Property and Equipment—Net | 5,666 |
| | — |
| | 5,666 |
| | 6,284 |
| | — |
| | 6,284 |
|
| | | | | | | | | | | | |
| Total Other Assets | 2,246 |
| | — |
| | 2,246 |
| | 2,310 |
| | — |
| | 2,310 |
|
| | | |
| | | | | | | | |
| Total Assets | $ | 9,962 |
| | $ | 6 |
| | $ | 9,968 |
| | $ | 10,740 |
| | $ | 6 |
| | $ | 10,746 |
|
| | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | |
| Air traffic liability | $ | 849 |
| | $ | (87 | ) | | $ | 762 |
| | $ | 937 |
| | $ | (131 | ) | | $ | 806 |
|
| Deferred Revenue | 484 |
| | 102 |
| | 586 |
| | 518 |
| | 117 |
| | 635 |
|
| Other accrued liabilities | 394 |
| | 1 |
| | 395 |
| | 400 |
| | — |
| | 400 |
|
| All other current liabilities | 808 |
| | — |
| | 808 |
| | 845 |
| | — |
| | 845 |
|
| Total Current Liabilities | 2,535 |
| | 16 |
| | 2,551 |
| | 2,700 |
| | (14 | ) | | 2,686 |
|
| | | | | | | | | | | | |
| Long-Term Debt, Net of Current Portion | 2,645 |
| | — |
| | 2,645 |
| | 2,262 |
| | — |
| | 2,262 |
|
| | | | | | | | | | | | |
| Other Liabilities and Credits | | |
| | | | | | | | |
| Deferred income taxes | 463 |
| | (110 | ) | | 352 |
| | 454 |
| | (84 | ) | | 370 |
|
| Deferred revenue | 640 |
| | 309 |
| | 949 |
| | 699 |
| | 391 |
| | 1,090 |
|
| Other liabilities | 417 |
| | (21 | ) | | 396 |
| | 451 |
| | (26 | ) | | 425 |
|
| All other liabilities and credits | 331 |
| | — |
| | 331 |
| | 453 |
| | — |
| | 453 |
|
| Total Other Liabilities and Credits | 1,851 |
| | 178 |
| | 2,028 |
| | 2,057 |
| | 281 |
| | 2,338 |
|
| | | | | | | | | | | | |
| Shareholders' Equity | | | | | | | | | | | |
| All other Shareholders' Equity | (637 | ) | | — |
| | (637 | ) | | (733 | ) | | — |
| | (733 | ) |
| Retained earnings | 3,568 |
| | (188 | ) | | 3,380 |
| | 4,454 |
| | (261 | ) | | 4,193 |
|
| | 2,931 |
| | (188 | ) | | 2,743 |
| | 3,721 |
| | (261 | ) | | 3,460 |
|
| Total Liabilities and Shareholders' Equity | $ | 9,962 |
| | $ | 6 |
| | $ | 9,968 |
| | $ | 10,740 |
| | $ | 6 |
| | $ | 10,746 |
|
OPERATING STATISTICS (unaudited)
The operating statistics included in the table below were impacted by the adjustment of prior year financial information as part of the adoption of new accounting standards. Due to the reclassification of the majority of Other revenue to Passenger revenue, Passenger revenue per available seat mile (PRASM) is not restated below as it closely correlates with revenue per available seat mile (RASM). Yield represents passenger revenue per revenue passenger mile (RPM), or the average revenue for flying one passenger one mile. Cost per available seat mile excluding fuel and special items (CASMex) is used to help track progress toward reduction of non-fuel operating costs. These operating statistics are commonly reviewed by management when evaluating performance.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RASM | | Yield | | CASMex |
| | As Reported | | As Adjusted | | % Change | | As Reported | | As Adjusted | | % Change | | As Reported | | As Adjusted | | % Change |
Full Year 2016 (a) |
| 13.44 | ¢ | |
| 13.43 | ¢ | | (0.1 | ) | |
| 13.45 | ¢ | |
| 14.49 | ¢ | | 7.7 | |
| 8.23 | ¢ | |
| 8.32 | ¢ | | 1.1 |
| | | | | | | | | | | | | | | | | | |
| Q1 2017 |
| 12.15 | ¢ | |
| 12.09 | ¢ | | (0.5 | ) | |
| 12.68 | ¢ | |
| 13.69 | ¢ | | 8.0 | |
| 8.37 | ¢ | |
| 8.38 | ¢ | | 0.1 |
| Q2 2017 |
| 13.46 | ¢ | |
| 13.46 | ¢ | | — |
| |
| 13.33 | ¢ | |
| 14.35 | ¢ | | 7.7 | |
| 7.94 | ¢ | |
| 7.98 | ¢ | | 0.5 |
| Q3 2017 |
| 13.12 | ¢ | |
| 13.06 | ¢ | | (0.5 | ) | |
| 13.21 | ¢ | |
| 14.18 | ¢ | | 7.3 | |
| 7.98 | ¢ | |
| 8.00 | ¢ | | 0.3 |
| Q4 2017 |
| 12.34 | ¢ | |
| 12.21 | ¢ | | (1.1 | ) | |
| 12.84 | ¢ | |
| 13.54 | ¢ | | 5.5 | |
| 8.64 | ¢ | |
| 8.68 | ¢ | | 0.5 |
| Full Year 2017 |
| 12.78 | ¢ | |
| 12.72 | ¢ | | (0.5 | ) | |
| 13.03 | ¢ | |
| 13.95 | ¢ | | 7.1 | |
| 8.23 | ¢ | |
| 8.25 | ¢ | | 0.2 |
| |
| (a) | As the acquisition of Virgin America closed on December 14, 2016, amounts include Virgin America results for the period December 14, 2016 through December 31, 2016. |
NON-GAAP ADJUSTED NET INCOME AND EPS RECONCILIATION (unaudited)
The following tables reconcile the company's GAAP net income and earnings per diluted share ("diluted EPS"), restated for the new accounting standards, to adjusted amounts:
|
| | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2016 | | Twelve Months Ended December 31, 2017 |
| (in millions, except per share amounts) | Dollars As Adjusted | | Diluted EPS
As Adjusted | | Dollars As Adjusted | | Diluted EPS
As Adjusted |
| GAAP net income and diluted EPS | $ | 797 |
| | $ | 6.41 |
| | $ | 960 |
| | $ | 7.75 |
|
| Mark-to-market fuel hedge adjustments | (13 | ) | | (0.10 | ) | | (7 | ) | | (0.06 | ) |
| Special items—merger-related costs | 117 |
| | 0.93 |
| | 116 |
| | 0.94 |
|
| Income tax effect | (24 | ) | | (0.19 | ) | | (41 | ) | | (0.33 | ) |
| Special tax (benefit)/expense | 17 |
| | 0.14 |
| | (280 | ) | | (2.26 | ) |
| Non-GAAP adjusted net income and diluted EPS | $ | 894 |
| | $ | 7.19 |
| | $ | 748 |
| | $ | 6.04 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 | | Three Months Ended June 30, 2017 |
| (in millions, except per share amounts) | Dollars As Adjusted | | Diluted EPS
As Adjusted | | Dollars As Adjusted | | Diluted EPS
As Adjusted |
| GAAP net income and diluted EPS | $ | 93 |
| | $ | 0.75 |
| | $ | 293 |
| | $ | 2.36 |
|
| Mark-to-market fuel hedge adjustments | 10 |
| | 0.08 |
| | 2 |
| | 0.02 |
|
| Special items—merger-related costs | 39 |
| | 0.30 |
| | 24 |
| | 0.19 |
|
| Income tax effect | (18 | ) | | (0.14 | ) | | (10 | ) | | (0.09 | ) |
| Non-GAAP adjusted net income and diluted EPS | $ | 124 |
| | $ | 0.99 |
| | $ | 309 |
| | $ | 2.48 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Three Months Ended December 31, 2017 |
| (in millions, except per share amounts) | Dollars As Adjusted | | Diluted EPS
As Adjusted | | Dollars As Adjusted | | Diluted EPS
As Adjusted |
| GAAP net income and diluted EPS | $ | 259 |
| | $ | 2.09 |
| | $ | 315 |
| | $ | 2.55 |
|
| Mark-to-market fuel hedge adjustments | (5 | ) | | (0.04 | ) | | (14 | ) | | (0.11 | ) |
| Special items—merger-related costs | 23 |
| | 0.19 |
| | 30 |
| | 0.24 |
|
| Income tax effect | (7 | ) | | (0.06 | ) | | (6 | ) | | (0.06 | ) |
| Special tax (benefit)/expense | — |
| | — |
| | (280 | ) | | (2.26 | ) |
| Non-GAAP adjusted net income and diluted EPS | $ | 270 |
| | $ | 2.18 |
| | $ | 45 |
| | $ | 0.36 |
|
