UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes_ No_
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The registrant has 13,832,508 common shares, par value $1.00, outstanding
at March 31, 1996.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or Air
Group) unaudited financial statements: (i) consolidated balance sheets as
of March 31, 1996 and December 31, 1995; (ii) consolidated statements of
income for the three months ended March 31, 1996 and 1995; (iii)
consolidated statement of shareholders' equity for the three months ended
March 31, 1996; and, (iv) consolidated statements of cash flows for the
three months ended March 31, 1996 and 1995. Also attached are the
accompanying notes to the Company's consolidated financial statements that
have changed significantly during the three months ended March 31, 1996.
These statements, which should be read in conjunction with the financial
statements in the Company's annual report on Form 10-K for the year ended
December 31, 1995, include all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods. The adjustments made were of a normal recurring nature.
Air Group is a holding company incorporated in Delaware in 1985. Its
principal subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
First Quarter 1996 Compared with First Quarter 1995 The consolidated net
loss for the first quarter of 1996 was $7.2 million, or $.52 per share,
compared with a net loss of $16.3 million, or $1.22 per share, in 1995.
The operating loss for the first quarter of 1996 was $4.5 million compared
to an operating loss of $18.3 million for 1995. The smaller operating loss
reflects higher average fares and load factors at both Alaska and Horizon.
Airline financial and statistical data is shown following the Air Group
financial statements. A discussion of this data follows.
Alaska Airlines Operating revenues increased 20.5% to $280.4 million.
Passenger revenues, which accounted for 87% of total operating revenues,
increased 22.6% on an 18.6% rise in passenger traffic. Capacity increased
10%, primarily due to more flying in the Alaska, Arizona and Nevada
markets. The load factor increased from 56.4% in 1995 to 60.7% in 1996,
and passenger yields rose 3.4% to 11.53 cents in 1996, reflecting an
improved balance between supply and demand for air travel on the West
Coast.
Freight and mail revenues increased less than 1% as higher freight volumes
were offset by lower mail volumes and rates. Other-net revenues rose 17.7%
due to increased revenues from travel partners in Alaska's frequent flyer
program.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis for Alaska for the first quarters of 1996
and 1995.
Alaska Airlines Operating Expenses Per ASM (In Cents)
%
1996 1995 Change Change
Wages and benefits 2.61 2.48 .13 5
Aircraft fuel 1.22 1.04 .18 17
Aircraft maintenance .39 .37 .02 5
Aircraft rent 1.02 1.05 (.03) (3)
Commissions .56 .50 .06 12
Depreciation & amortization .41 .46 (.05) (11)
Landing fees and other rentals .34 .34
Other 1.55 1.52 .03 2
Alaska Airlines Total 8.10 7.76 .34 4
Alaska's higher unit costs were primarily due to higher fuel prices, higher
wages and benefits per employee, and heavier passenger loads. Significant
unit cost changes are discussed below.
Wages and benefits per ASM increased 5% due to higher average wage rates
per employee (in part due to longevity increases in labor contracts), and
higher expense rates for health insurance and pensions. The number of full-
time equivalent employees increased 9%, which was in line with the 10%
capacity increase. However, revenue passengers increased 23%, which
resulted in a 13% increase in productivity as measured by passengers per
employee.
Fuel expense per ASM increased 17%, due to a 14% increase in the price of
fuel. Approximately half of the fuel price increase is due to a 4.3 cent
Federal excise tax on domestic fuel consumption that began October 1, 1995.
Pending legislation in Congress to extend the exemption from this tax has
not been acted upon due to the Federal budget impasse.
Commission expense per ASM increased 12% because passenger revenues, upon
which commissions are paid, increased 23% or approximately 12 percentage
points over the 10% ASM growth.
Depreciation and amortization expense per ASM decreased 11% primarily due
to a 6% increase in aircraft utilization.
Other expense per ASM increased 2% primarily due to higher costs related to
heavier passenger loads, such as booking fees, communications charges and
credit card commissions.
Horizon Air Operating revenues increased 15.4% to $72.5 million.
Passenger revenues, which accounted for 95% of total operating revenues,
increased 16.2% on a 12.2% rise in passenger traffic. Capacity increased
9.5% due to the greater use of larger capacity Fokker F-28 jets and Dornier
328 turboprop aircraft. The load factor increased from 57.7% in 1995 to
59.1% in 1996, reflecting a better matching of capacity to demand.
Passenger yields rose 3.6% to 33.02 cents in 1996 due to fare increases and
inclement weather that forced some passengers to travel on short notice at
higher fares.
Freight and mail revenues increased 8% due to increased capacity, while
other-net revenues decreased 11% due to reductions in revenues from
providing services to other airlines.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon for the first quarters of 1996 and 1995.
Horizon Air Operating Expenses Per ASM (In Cents)
%
1996 1995 Change Change
Wages and benefits 6.42 6.42
Aircraft fuel 2.16 1.88 .28 15
Aircraft maintenance 2.81 2.71 .10 4
Aircraft rent 2.43 2.61 (.18) (7)
Commissions 1.37 1.40 (.03) (2)
Depreciation & amortization .80 .68 .12 18
Landing fees and other rentals .87 .94 (.07) (7)
Other 3.87 3.96 (.09) (2)
Horizon Air Total 20.73 20.60 .13 1
Horizon's unit costs increased 1% primarily due to the net effect of higher
fuel prices and depreciation on aircraft improvements, offset by
efficiencies related to the greater use of higher capacity aircraft
Consolidated Other Income (Expense) Non-operating expense decreased $2.6
million to $9.0 million primarily due to lower interest rates on variable
debt and smaller average debt balances. Increased interest income earned
on higher cash balances was partially offset by a $.6 million loss on the
disposal of three Fairchild Metroliner III aircraft.
Income Tax Credit Accounting standards require the Company to provide for
income taxes each quarter based on its estimate of the effective tax rate
for the full year. The volatility of air fares and the seasonality of the
Company's business make it very difficult to estimate full-year pretax
results. In addition, a relatively small change in pretax results can
cause a significant change in the effective tax rate due to the magnitude
of nondeductible expenses, such as goodwill amortization and employee per
diem costs. In estimating the 46.7% tax rate for the first quarter of
1996, the Company considered a variety of factors, including the U.S.
federal rate of 35%, estimates of nondeductible expenses and state income
taxes, and the 49.1% tax rate used for full year 1995. This rate is
evaluated each quarter and adjustments are made if necessary.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
March 31, 1996 December 31, 1995 Change
(In millions, except debt-to-equity and per share amounts)
Cash and market securities $ 138.9 $ 135.1 $ 3.8
Working capital (deficit) (62.3) (106.4) 44.1
Long-term debt and
capital lease obligations 505.2 522.4 (17.2)
Shareholders' equity 210.4 212.5 (2.1)
Book value per common share $15.21 $ 15.67 $(0.46)
Debt-to-equity 71%:29% 71%:29% NA
The Company's cash and marketable securities portfolio increased by $4
million during the first three months of 1996. Operating activities
provided $44 million of cash during this period. Additional cash was
provided by the sale and leaseback of two B737-400 aircraft ($57 million)
and proceeds received from the issuance of common stock ($5 million). Cash
was used for the repayment of short-term borrowings ($66 million), airframe
and engine overhauls and other capital expenditures ($21 million), and the
repayment of debt ($20 million).
The working capital deficit decreased by $44 million primarily due to the
sale and leaseback of two B737-400 aircraft.
Shareholders' equity decreased only $2 million in spite of a $7 million net
loss due to the issuance of $5 million of common stock under stock plans.
PART II. OTHER INFORMATION
ITEM 5. Other Information
The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1995.
Hence, the Company ceased collecting these taxes on January 1, 1996.
Management believes that some form of these taxes will likely be reinstated
in 1996 on a prospective basis and that it is unlikely that any
reinstatement will be retroactive.
During April 1996, Air Group received approximately $10 million from
issuance of 374,000 common shares as a result of management employees
exercising investment options at $27 per share. Air Group could receive
another $51 million and issue 1,900,000 additional common shares if all the
investment options were exercised. These events would likely result in a
reduction in the working capital deficit, an increase in shareholders'
equity and book value per share, a reduction in the debt-to-equity ratio
and a modest dilution of earnings per share.
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibit 11 - Statement regarding computation of per-share earnings.
Exhibit 27 - Financial data schedule.
(b)No reports on Form 8-K were filed during the first quarter of 1996.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: May 1, 1996
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
March 31, Dec. 31,
(In Millions) 1996 1995
Current Assets
Cash and cash equivalents $64.6 $25.8
Marketable securities 74.3 109.3
Receivables - net 115.1 88.5
Inventories and supplies 45.7 44.8
Prepaid expenses and other assets 55.1 70.0
Total Current Assets 354.8 338.4
Property and Equipment
Flight equipment 797.4 845.9
Other property and equipment 222.6 219.1
Deposits for future flight equipment 40.7 40.7
1,060.7 1,105.7
Less accum. depreciation and amort. 325.3 312.8
735.4 792.9
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 23.8 23.3
20.6 21.1
Total Property and Equipment - Net 756.0 814.0
Intangible Assets - Subsidiaries 63.1 63.6
Other Assets 89.1 97.4
Total Assets $1,263.0 $1,313.4
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, Dec. 31,
(In Millions) 1996 1995
Current Liabilities
Accounts payable $58.5 $69.2
Accrued aircraft rent 44.3 44.1
Accrued wages, vacation and payroll taxes 46.8 45.8
Other accrued liabilities 60.3 55.7
Short-term borrowings
(Interest rate: 1995 - 6.2%) - 65.9
Air traffic liability 169.9 124.4
Current portion of long-term debt and
capital lease obligations 37.3 39.7
Total Current Liabilities 417.1 444.8
Long-Term Debt
Capital Lease Obligations 505.2 522.4
Other Liabilities and Credits
Deferred income taxes 34.3 41.0
Deferred income 19.9 20.0
Other liabilities 76.1 72.7
130.3 133.7
Shareholders' Equity
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1996 - 16,990,582 shares
1995 - 16,718,684 shares 17.0 16.7
Capital in excess of par value 160.2 155.4
Treasury stock, at cost:
1996-3,158,074; 1995-3,153,608 shares (71.9) (71.8)
Deferred compensation (3.5) (3.6)
Retained earnings 108.6 115.8
210.4 212.5
Total Liab. and Shareholders' Equity $1,263.0 $1,313.4
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended March 31
(In Millions except Per share Amounts) 1996 1995
Operating Revenues
Passenger $312.6 $259.4
Freight and mail 21.4 21.1
Other - net 17.4 14.1
Total Operating Revenues 351.4 294.6
Operating Expenses
Wages and benefits 114.3 99.8
Aircraft fuel 50.5 39.2
Aircraft maintenance 23.5 20.6
Aircraft rent 44.1 41.7
Commissions 23.0 20.3
Depreciation and amortization 17.1 16.9
Landing fees and other rentals 15.0 14.0
Other 68.4 60.4
Total Operating Expenses 355.9 312.9
Operating Loss (4.5) (18.3)
Other Income (Expense)
Interest income 2.6 1.4
Interest expense (11.1) (13.3)
Loss on disposition of assets (0.7)
Other - net 0.2 0.3
(9.0) (11.6)
Loss before income tax (13.5) (29.9)
Income tax credit (6.3) (13.6)
Net Loss ($7.2) ($16.3)
Loss Per Share $(0.52) $(1.22)
Shares used for computation 13.7 13.4
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS'
Alaska Air Group, Inc.
Common Stock
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Millions) Value Par Value at Cost sation Earnings Total
Balances at December 31, 1995 $16.7 $155.4 $(71.8) $(3.6) $115.8 $212.5
Net loss for the three months
ended March 31, 1996 (7.2) (7.2)
Stock issued under stock plans 0.3 4.8 5.1
Treasury stock purchase
(4,466 shares) (0.1) (0.1)
Employee Stock Ownership Plan
shares allocated 0.1 0.1
Balances at March 31, 1996 17.0 160.2 (71.9) (3.5) 108.6 210.4
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Three Months Ended March 31 (In Millions) 1996 1995
Cash and cash equivalents at beginning of year $25.8 $11.6
Cash flows from operating activities:
Net loss (7.2) (16.3)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 17.1 16.9
Amortization of airframe and engine ovhls 7.6 5.5
Loss on disposition of assets 0.7 -
Decrease in deferred income taxes (6.7) (11.6)
Increase in accounts receivable (26.6) (7.3)
Decrease in other current assets 14.1 2.4
Increase in air traffic liability 45.5 24.3
Increase (decrease) in other current liab. (4.9) 3.1
Other-net 4.5 (0.6)
Net cash provided by operating activities 44.1 16.4
Cash flows from investing activities:
Proceeds from disposition of assets 1.0 0.1
Purchases of marketable securities (13.4) (0.8)
Sales and maturities of marketable securities 48.4 32.9
Restricted deposits 2.5 (0.7)
Additions to property and equipment (20.5) (21.5)
Net cash provided by investing activities 18.0 10.0
Cash flows from financing activities:
Proceeds from short-term borrowings - 4.0
Repayment of short-term borrowings (65.9) (25.0)
Proceeds from sale and leaseback transactions 57.4 -
Long-term debt and capital lease payments (19.7) (12.8)
Proceeds from issuance of common stock 4.9 -
Net cash used in financing activities (23.3) (33.8)
Net increase (decrease) in cash and cash equivalents 38.8 (7.4)
Cash and cash equivalents at end of year 64.6 4.2
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) 9.0 10.7
Income taxes (refunds) (0.8) (2.0)
Noncash investing and financing activities None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE THREE MONTHS ENDED MARCH 31, 1996
Alaska Air Group, Inc.
Note 1. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1995)
During the first quarter of 1996, Alaska's lease commitments increased
approximately $96 million due to the sale and leaseback of two B737-400
aircraft under 18-1/2-year operating leases.
Airline Financial and Statistical Data
Quarter Ended March 31
Alaska Airlines Horizon Air
% %
Financial Data (in millions): 1996 1995 Change 1996 1995 Change
Operating Revenues:
Passenger $245.1 $200.0 22.6 $69.0 $59.4 16.2
Freight and mail 18.7 18.6 0.5 2.7 2.5 8.0
Other - net 16.6 14.1 17.7 0.8 0.9 (11.1)
Total Operating Revenues 280.4 232.7 20.5 72.5 62.8 15.4
Operating Expenses:
Wages and benefits 91.5 79.1 15.7 22.7 20.7 9.7
Aircraft fuel 42.8 33.1 29.3 7.6 6.1 24.6
Aircraft maintenance 13.6 11.9 14.3 9.9 8.8 12.5
Aircraft rent 35.6 33.3 6.9 8.6 8.5 1.2
Commissions 19.6 15.8 24.1 4.9 4.5 8.9
Depreciation and amortization 14.2 14.7 (3.4) 2.8 2.2 27.3
Landing fees and other rentals 11.9 10.9 9.2 3.1 3.1
Other 54.5 48.1 13.3 13.8 12.7 8.7
Total Operating Expenses 283.7 246.9 14.9 73.4 66.6 10.2
Operating Loss (3.3) (14.2) (0.9) (3.8)
Interest income 2.6 1.5
Interest expense (8.9) (10.5) (0.1) (0.2)
Other - net 0.3 0.4 (0.6)
(6.0) (8.6) (0.7) (0.2)
Loss before income tax credit $(9.3) $(22.8) $(1.6) $(4.0)
Operating Statistics:
Revenue passengers (000) 2,576 2,096 22.9 907 864 5.0
RPM's (000,000) 2,126 1,793 18.6 209 186 12.2
ASM's (000,000) 3,500 3,182 10.0 354 323 9.5
Passenger load factor 60.7% 56.4% 4.3 pts 59.1% 57.7% 1.4 pts
Breakeven load factor 64.2% 64.4% (0.2)pts 60.0% 62.0% (2.0)pts
Yield per passenger mile 11.53c 11.15c 3.4 33.02c 31.87c 3.6
Operating expenses per ASM 8.10c 7.76c 4.4 20.73c 20.60c 0.6
Fuel cost per gallon 68.5c 60.1c 14.1 73.6c 64.6c 14.0
Average number of employees 7,297 6,681 9.2 2,840 2,806 1.2
Aircraft utilization(block hours) 10.9 10.4 4.9 7.6 8.1 (5.7)
Operating fleet at period-end 74 72 2.8 62 67 (7.5)
c=cents