UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 Identification No.)
incorporation or organization)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 431-7040
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------------------------------------- -----------------------------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Rights to Purchase Series A Participating Preferred Stock New York Stock Exchange
As of December 31, 1999, common shares outstanding totaled 26,410,804. The
aggregate market value of the common shares of Alaska Air Group, Inc. held by
nonaffiliates, 26,359,795 shares, was approximately $926 million (based on the
closing price of these shares, $35.125, on the New York Stock Exchange on such
date).
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 / /
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be Incorporated
- -------------------------------------- --------------------------------------------------
Definitive Proxy Statement Relating to Part III
2000 Annual Meeting of Shareholders
Exhibit Index begins on page 35.
PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
Alaska Air Group, Inc. (Air Group or the Company) is a holding company that was
incorporated in Delaware in 1985. Its two principal subsidiaries are Alaska
Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). Both
subsidiaries operate as airlines, although their business plans, competition and
economic risks differ substantially. Alaska is a major airline, operates an all
jet fleet, and its average passenger trip length is 865 miles. Horizon is a
regional airline, operates jet and turboprop aircraft, and its average passenger
trip is 277 miles. Individual financial information for Alaska and Horizon is
reported in Note 11 to Consolidated Financial Statements. Air Group's executive
offices are located at 19300 Pacific Highway South, Seattle, Washington 98188.
The business of the Company is somewhat seasonal. Quarterly operating income
tends to peak during the third quarter.
ALASKA
Alaska Airlines is an Alaska corporation that was organized in 1932 and
incorporated in 1937. Alaska serves 35 cities in six states (Alaska, Washington,
Oregon, California, Nevada and Arizona), one city in Canada and six cities in
Mexico. In each year since 1973, Alaska has carried more passengers between
Alaska and the U.S. mainland than any other airline. In 1999, Alaska carried
13.6 million passengers. Passenger traffic within Alaska and between Alaska and
the U.S. mainland accounted for 23% of Alaska's 1999 revenue passenger miles,
West Coast traffic (including Vancouver, Canada) accounted for 68% and the
Mexico markets 9%. Based on passenger enplanements, Alaska's leading airports
are Seattle, Portland, Los Angeles and Anchorage. Based on revenues, its leading
nonstop routes are Seattle-Anchorage, Seattle-Los Angeles and Seattle-San Diego.
At December 31, 1999, Alaska's operating fleet consisted of 89 jet aircraft.
HORIZON
Horizon, a Washington corporation, began service in 1981 and was acquired by Air
Group in 1986. It is the largest regional airline in the Pacific Northwest, and
serves 35 cities in five states (Washington, Oregon, Montana, Idaho, and
California) and five cities in Canada. In 1999, Horizon carried 5.0 million
passengers. Based on passenger enplanements, Horizon's leading airports are
Seattle, Portland, Boise and Spokane. Based on revenues, its leading nonstop
routes are Seattle-Portland, Seattle-Vancouver and Seattle-Spokane. At December
31, 1999, Horizon's operating fleet consisted of 22 jet and 40 turboprop
aircraft, with the jets providing 64% of the 1999 capacity. Horizon flights are
listed under the Alaska Airlines designator code in airline computer reservation
systems.
Alaska and Horizon integrate their flight schedules to provide the best possible
service between any two points served by their systems. In 1999, 25% of
Horizon's passengers connected to Alaska. Both airlines distinguish themselves
from competitors by providing a higher level of customer service. The airlines'
excellent service in the form of advance seat assignments, attention to customer
needs, high-quality food and beverage service, well-maintained aircraft, a first
class section aboard Alaska aircraft and other amenities is regularly recognized
by independent studies and surveys of air travelers.
1
ALLIANCES WITH OTHER AIRLINES
Alaska and Horizon have marketing alliances with other airlines that allow
reciprocal frequent flyer mileage accrual and redemption privileges and
codesharing on certain flights as set forth below. The purpose of the alliances
is to enhance Alaska's and Horizon's revenues by (a) providing our customers
more value by offering them more travel destinations and better mileage
accrual/redemption opportunities, (b) gaining access to more connecting traffic
from other airlines, and (c) providing members of alliance partners' frequent
flyer programs an opportunity to travel on Alaska and Horizon while earning
mileage credit in the alliance partners' program.
CODESHARING-- CODESHARING--
FREQUENT ALASKA FLIGHT # OTHER AIRLINE FLIGHT #
FLYER ON FLIGHTS OPERATED ON FLIGHTS OPERATED
AGREEMENT BY OTHER AIRLINES BY ALASKA/HORIZON
--------- ------------------- ----------------------
MAJOR U.S. OR
INTERNATIONAL AIRLINES
American Airlines Yes Yes No
British Airways Yes No No
Canadian Airlines Yes Yes Yes
Continental Airlines Yes Yes Yes
KLM Yes No Yes
Lan Chile Yes No Yes
Northwest Airlines Yes Yes Yes
Qantas Yes No Yes
TWA Yes No No
COMMUTER AIRLINES
American Eagle Yes* Yes No
Era Aviation Yes* Yes No
Harbor Airlines Yes* Yes No
Trans States Airlines Yes* Yes No
PenAir Yes* Yes No
Reeve Aleutian Airways Yes* Yes No
* This airline does not have its own frequent flyer program. However, Alaska's
Mileage Plan members can accrue and redeem miles on this airline's route system.
BUSINESS RISKS
The Company's operations and financial results are subject to various
uncertainties, such as intense competition, volatile fuel prices, a largely
unionized labor force, the need to finance large capital expenditures,
government regulation, potential aircraft incidents and general economic
conditions. This report may contain forward-looking statements that are based on
the best information currently available to management. The forward-looking
statements are intended to be subject to the safe harbor protection provided by
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are indicated by phrases
such as "the Company believes", "we anticipate" or any other language indicating
a prediction of future events. Whether these statements are ultimately accurate
depends on a number of outside factors that the Company cannot predict or
control. The following discussion of business risks sets forth the principal
foreseeable risks and uncertainties that my materially affect these predictions.
2
COMPETITION
Competition in the air transportation industry is intense. Any domestic air
carrier deemed fit by the DOT is allowed to operate scheduled passenger service
in the United States. Together, Alaska and Horizon carry 2.5% of all U.S.
domestic passenger traffic. Alaska and Horizon compete with one or more domestic
or foreign airlines on most of their routes. Some of these competitors are
substantially larger than Alaska and Horizon, have greater financial resources
and have more extensive route systems. Due to its shorthaul markets, Horizon
also competes with the automobile.
Most major U.S. carriers have developed, independently or in partnership with
others, large computerized reservation systems (CRS). Airlines, including
Alaska, and Horizon, are charged industry-set fees to have their flight
schedules included in the various CRS displays used by travel agents and
airlines. These systems are currently the predominant means of distributing
airline tickets. In order to reduce anti-competitive practices, the DOT
regulates the display of all airline schedules and fares.
FUEL
Fuel costs were 13.3% of the Company's total operating expenses in 1999. Fuel
prices, which can be volatile and are largely outside of the Company's control,
can have a significant impact on the Company's operating results. Currently, a
one cent change in the fuel price per gallon affects annual fuel costs by
approximately $3.7 million. The Company believes that operating fuel efficient
aircraft is an effective hedge against high fuel prices. The Company has in the
past hedged against its exposure to fluctuations in the price of jet fuel, but
has not done so in recent years. The Company expects to resume hedging in 2000.
UNIONIZED LABOR FORCE
Labor costs were 35% of the Company's total operating expenses in 1999. Wage
rates can have a significant impact on the Company's operating results. At
December 31, 1999, labor unions represented 86% of Alaska's and 44% of Horizon's
employees. The air transportation industry is regulated under the Railway Labor
Act, which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions. The Company cannot
predict the outcome of union contract negotiations nor control the variety of
actions (e.g. work stoppage or slowdown) unions might take to try to influence
those negotiations.
LEVERAGE AND FUTURE CAPITAL REQUIREMENTS
The Company, like many airlines, is relatively highly leveraged, which increases
the volatility of its earnings. Due to its high fixed costs, including aircraft
lease commitments, a decrease in revenues results in a disproportionately
greater decrease in earnings. In addition, the Company has an ongoing need to
finance new aircraft deliveries and there is no assurance that such financing
will be available in sufficient amounts or on acceptable terms. See Item 7 for
management's discussion of liquidity and capital resources.
GOVERNMENT REGULATION; INTERNATIONAL ROUTES
Like other airlines, the Company is subject to regulation by the Federal
Aviation Administration (FAA) and the United States Department of Transportation
(DOT). The FAA, under its mandate to ensure aviation safety, can ground
aircraft, suspend or revoke the authority of an air carrier or
3
its licensed personnel for failure to comply with Federal Aviation Regulations
and levy civil penalties. The DOT has the authority to regulate certain airline
economic functions including financial and statistical reporting, consumer
protection, computerized reservations systems, essential air transportation and
international route authority. The Company is subject to bilateral agreements
between the United States and the foreign countries to which the Company
provides service. There can be no assurance that existing bilateral agreements
between the United States and the foreign governments will continue or that the
Company's designation to operate such routes will continue.
RISK OF LOSS AND LIABILITY; WEATHER
The Company is exposed to potential catastrophic losses in the event of aircraft
accidents or terrorist incidents. Consistent with industry standards, the
Company maintains vigorous safety, training and maintenance programs, as well as
insurance against such losses. However, any aircraft accident, even if fully
insured, could cause a negative public perception of the Company with adverse
financial consequences. Unusually adverse weather can significantly reduce
flight operations, resulting in lost revenues and added expenses.
OTHER INFORMATION
FREQUENT FLYER PROGRAM
All major airlines have developed frequent flyer programs as a way of increasing
passenger loyalty. Alaska's Mileage Plan allows members to earn mileage by
flying on Alaska, Horizon and other participating airlines, and by using the
services of non-airline partners, which include a credit card partner, telephone
companies, hotels and car rental agencies. Alaska is paid by non-airline
partners for the miles it credits to member accounts. With advance notice,
Alaska has the ability to change the Mileage Plan terms, conditions, partners,
mileage credits and award levels.
Mileage can be redeemed for free or discounted travel and for other travel
industry awards. Upon accumulating the necessary mileage, members notify Alaska
of their award selection Over 70% of the flight awards selected are subject to
blackout dates and capacity-controlled seating. Alaska's miles do not expire. As
of the year-end 1998 and 1999, Alaska estimated that 1,101,000 and 1,129,000
round trip flight awards were eligible for redemption by Mileage Plan members
who have mileage credits exceeding the 20,000 mile free round trip domestic
ticket award threshold. Of these eligible awards, Alaska estimated that 812,000
and 921,000, respectively, would ultimately be redeemed. For the years 1997,
1998 and 1999, approximately 185,000, 191,000 and 226,000 round trip flight
awards were redeemed and flown on Alaska and Horizon. These awards represent
approximately 3.2% for 1997, 3.1% for 1998, and 3.7% for 1999, of the total
passenger miles flown for each period.
Alaska maintains a liability for its Mileage Plan obligation that is based on
its total miles outstanding, less an estimate for miles that will never be
redeemed. The net miles outstanding are allocated between those credited for
travel on Alaska, Horizon or other airline partners and those credited for using
the services of non-airline partners. Miles credited for travel on Alaska,
Horizon or other airline partners are accrued at Alaska's incremental cost of
providing the air travel. The incremental cost includes the cost of meals, fuel,
reservations and insurance. The incremental cost does not include a contribution
to overhead, aircraft cost or profit. A portion of the proceeds received from
non-airline partners is also deferred. At December 31, 1998 and 1999,
4
the total liability for miles outstanding and for estimated payments to partner
airlines was $28.0 million and $40.0 million, respectively.
EMPLOYEES
Alaska had 10,040 active full-time and part-time employees at December 31, 1999.
Alaska's union contracts at December 31, 1999 were as follows:
- -----------------------------------------------------------------------------------------------
NUMBER OF
UNION EMPLOYEE GROUP EMPLOYEES CONTRACT STATUS
- -----------------------------------------------------------------------------------------------
Air Line Pilots Pilots 1,214 Amendable 4/30/03
Association International
- -----------------------------------------------------------------------------------------------
Association of Flight attendants 1,814 Amendable 10/29/03
Flight Attendants
- -----------------------------------------------------------------------------------------------
International Rampservice 1,100 Amendable 1/10/04
Association of and stock clerks
Machinists and
Aerospace Workers
Clerical, office and 3,228 Amendable 10/29/02
passenger service
- -----------------------------------------------------------------------------------------------
Aircraft Mechanics Mechanics, inspectors 1,130 Amendable 12/25/02
Fraternal Association and cleaners
- -----------------------------------------------------------------------------------------------
Mexico Workers Mexico airport 81 Amendable 4/1/00
Association personnel
of Air Transport
- -----------------------------------------------------------------------------------------------
Transport Workers Dispatchers 18 Amendable 2/9/02
Union of America
- -----------------------------------------------------------------------------------------------
Horizon had 4,139 active full and part-time employees at December 31, 1999.
Horizon's union contracts at December 31, 1999 were as follows:
- ------------------------------------------------------------------------------------------------
NUMBER OF
UNION EMPLOYEE GROUP EMPLOYEES CONTRACT STATUS
- ------------------------------------------------------------------------------------------------
International Brotherhood Pilots 693 Initial contract
of Teamsters In negotiation
- ------------------------------------------------------------------------------------------------
Association of Flight attendants 413 Amendable 1/28/03
Flight Attendants
- ------------------------------------------------------------------------------------------------
Transport Workers Mechanics and 567 Amendable 5/18/01
Union of America related classifications
Dispatchers 25 Amendable 5/10/02
- ------------------------------------------------------------------------------------------------
National Automobile, Station personnel 110 Amendable 1/17/01
Aerospace, Transportation in Vancouver and
and General Workers Victoria, BC, Canada
- ------------------------------------------------------------------------------------------------
5
During the first quarter of 1999, a federal mediator was assigned to assist
Horizon and the International Brotherhood of Teamsters in the negotiation of an
initial labor contract covering pilots. Negotiations have taken place since then
and further negotiations are planned for the first quarter of 2000.
ITEM 2. PROPERTIES
AIRCRAFT
The following table describes the aircraft operated and their average age at
December 31, 1999.
- ---------------------------------------------------------------------------------
PASSENGER AVERAGE AGE
AIRCRAFT TYPE CAPACITY OWNED LEASED TOTAL IN YEARS
- ---------------------------------------------------------------------------------
ALASKA AIRLINES
Boeing 737-200C 111 7 1 8 19.4
Boeing 737-400 138 9 31 40 4.7
Boeing 737-700 120 6 -- 6 0.2
McDonnell Douglas MD-80 140 16 19 35 9.6
- ---------------------------------------------------------------------------------
38 51 89 7.6
- ---------------------------------------------------------------------------------
HORIZON AIR
de Havilland Dash 8 37 -- 40 40 4.3
Fokker F-28 69 9 13 22 16.0
- ---------------------------------------------------------------------------------
9 53 62 8.5
- ---------------------------------------------------------------------------------
Part II, Item 7, "Management's Discussion and Analysis of Results of Operations
and Financial Condition," discusses future orders and options for additional
aircraft.
Nineteen of the 38 aircraft owned by Alaska as of December 31, 1999 are subject
to liens securing long-term debt. Alaska's leased B737-200C, B737-400 and MD-80
aircraft have lease expiration dates in 2000, between 2002 and 2016, and between
2000 and 2013, respectively. Horizon's leased de Havilland Dash 8 and Fokker
F-28 aircraft have expiration dates between 2000 and 2014 and 2000 and 2002,
respectively. Alaska and Horizon have the option to extend most of the leases
for additional periods, or the right to purchase the aircraft at the end of the
lease term, usually at the then fair market value of the aircraft. For
information regarding obligations under capital leases and long-term operating
leases, see Notes to Consolidated Financial Statements.
At December 31, 1999, all of Alaska's aircraft meet the Stage 3 noise
requirements under the Airport Noise and Capacity Act of 1990. However, special
noise ordinances restrict the timing of flights operated by Alaska and other
airlines at Burbank, Orange County, San Diego and San Jose. In addition, Orange
County restricts the type of aircraft and number of flights.
GROUND FACILITIES AND SERVICES
Alaska and Horizon lease ticket counters, gates, cargo and baggage, office space
and other support areas at the majority of the airports they serve. Alaska also
owns terminal buildings at various Alaska cities.
Alaska has centralized operations in several buildings located at or near
Seattle-Tacoma International Airport (Sea-Tac) in Seattle, Washington. The owned
buildings, including land
6
unless located on leased airport property, include: a three-bay hangar facility
with maintenance shops; a flight operations and training center; an air cargo
facility; a reservations and office facility; two office buildings; its
corporate headquarters; and two storage warehouses. Alaska also leases a two-bay
hangar/office facility at Sea-Tac. Alaska's other major facilities include: a
regional headquarters building, an air cargo facility and a leased hangar/office
facility in Anchorage; a Phoenix reservations center; and a leased two-bay
maintenance facility in Oakland.
Horizon owns its Seattle corporate headquarters building. It leases an
operations, training and aircraft maintenance facility in Portland, and a
maintenance facility in Boise.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, search warrants and a grand jury subpoena (for the U.S.
District Court for the Northern District of California) were served on Alaska.
In addition, the Federal Aviation Administration (FAA) issued a letter of
investigation to Alaska relating to maintenance performed on an MD-80 aircraft.
In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In
July 1999, Alaska responded informally to the notice and the FAA has not taken
any further action. In November 1999, the grand jury issued a second subpoena on
Alaska. To the Company's knowledge, no charges have been filed as a result of
the grand jury investigation.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Alaska Air Group, Inc., their positions and their
respective ages (as of March 1, 2000) are as follows:
NAME POSITION AGE OFFICER SINCE
- ------------------ ----------------------------------------- ----- -------------
John F. Kelly Chairman, President and Chief 55 1981
Executive Officer of Alaska
Air Group, Inc.; Chairman and
and CEO of Alaska Airlines, Inc.;
Chairman of Horizon Air Industries, Inc.
Bradley D. Tilden Vice President/Finance 39 1999
and Chief Financial Officer
of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Keith Loveless Vice President/Legal and Corporate Affairs, 43 1996
General Counsel and Corporate Secretary
of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
- -----------------------------------------------------------------------------------------
Mr. Kelly has been employed as an officer of Air Group or its subsidiary, Alaska
Airlines, for more than five years. Mr. Tilden joined Alaska Airlines in 1991,
has been controller of Alaska Airlines and Alaska Air Group since 1994 and
became CFO in February 2000, upon the retirement of Harry G. Lehr. Mr. Loveless
joined Alaska Airlines in 1986, has been associate general counsel of Alaska
Airlines since 1993, corporate secretary since 1996 and has been vice
president/legal and general counsel since September 1999.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1999, there were 26,410,804 shares of common stock issued and
outstanding and 4,450 shareholders of record. The Company also held 2,746,304
treasury shares at a cost of $62.7 million. The Company has not paid dividends
on the common stock since 1992. Air Group's common stock is listed on the New
York Stock Exchange (symbol: ALK).
The following table shows the trading range of Alaska Air Group common stock on
the New York Stock Exchange for 1998 and 1999.
- --------------------------------------------------------------------------
1998 1999
-------------------- -------------------
High Low HIGH LOW
-------- -------- -------- -------
First Quarter 61 38-1/4 54-11/16 42-5/8
Second Quarter 62-9/16 43-3/8 51-15/16 38-1/16
Third Quarter 61-3/16 32-1/16 46-5/8 38
Fourth Quarter 45-11/16 26 43-3/4 33-1/8
- --------------------------------------------------------------------------
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL DATA:
YEAR ENDED DECEMBER 31 (IN MILLIONS,
EXCEPT PER SHARE AMOUNTS):
Operating Revenues $1,417.5 $1,592.2 $1,739.4 $1,897.7 $2,082.0
Operating Expenses 1,341.8 1,503.2 1,600.4 1,686.7 1,882.1
Operating Income 75.7 89.0 139.0 211.0 199.9
Nonoperating expense, net (a) (41.7) (24.7) (15.4) (6.6) 20.8
Income before income tax 34.0 64.3 123.6 204.4 220.7
Net Income $17.3 $38.0 $72.4 $124.4 $134.2
Average shares outstanding 13.485 14.241 14.785 23.388 26.372
Basic earnings per share $1.28 $2.67 $4.90 $5.32 $5.09
Diluted earnings per share 1.26 2.05 3.53 4.81 5.06
- -----------------------------------------------------------------------------------------------------------------------------------
AT END OF PERIOD (IN MILLIONS, EXCEPT
RATIO):
Total assets $1,313.4 $1,311.4 $1,533.1 $1,731.8 $2,180.1
Long-term debt and capital lease 522.4 404.1 401.4 171.5 337.0
obligations
Shareholders' equity 212.5 272.5 475.3 789.5 930.7
Ratio of earnings to fixed charges 1.28 1.57 2.10 2.93 3.14
- -----------------------------------------------------------------------------------------------------------------------------------
ALASKA AIRLINES OPERATING DATA:
Revenue passengers (000) 10,140 11,805 12,284 13,056 13,620
Revenue passenger miles (RPM) (000,000) 8,584 9,831 10,386 11,283 11,777
Available seat miles (ASM) (000,000) 13,885 14,904 15,436 16,807 17,341
Revenue passenger load factor 61.8% 66.0% 67.3% 67.1% 67.9%
Yield per passenger mile 11.59CENTS 11.67CENTS 12.49CENTS 12.50CENTS 12.90CENTS
Operating revenues per ASM 8.23CENTS 8.70CENTS 9.38CENTS 9.32CENTS 9.69CENTS
Operating expenses per ASM 7.71CENTS 8.10CENTS 8.51CENTS 8.17CENTS 8.68CENTS
Average full-time equivalent employees 6,993 7,652 8,236 8,704 9,183
- -----------------------------------------------------------------------------------------------------------------------------------
HORIZON AIR OPERATING DATA:
Revenue passengers (000) 3,796 3,753 3,686 4,389 4,984
Revenue passenger miles (RPM) (000,000) 841 867 889 1,143 1,379
Available seat miles (ASM) (000,000) 1,414 1,462 1,446 1,815 2,194
Revenue passenger load factor 59.5% 59.3% 61.5% 63.0% 62.9%
Yield per passenger mile 31.48CENTS 33.14CENTS 32.56CENTS 29.01CENTS 28.77CENTS
Operating revenues per ASM 19.77CENTS 20.61CENTS 21.00CENTS 19.16CENTS 18.96CENTS
Operating expenses per ASM 19.47CENTS 20.60CENTS 20.60CENTS 18.16CENTS 17.83CENTS
Average full-time equivalent employees 2,864 2,891 2,756 3,019 3,603
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes capitalized interest of $0.2 million, $1.0 million, $5.3 million,
$6.6 million and $10.2 million for 1995, 1996, 1997, 1998, and 1999,
respectively.
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ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
Quarter Ended December 31 Year Ended December 31
---------------------------------------- -------------------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 CHANGE 1998 1999 CHANGE
Operating Revenues:
Passenger $333.5 $362.5 8.7 $1,410.4 $1,519.6 7.7
Freight and mail 19.8 19.4 (2.0) 83.7 80.0 (4.4)
Other - net 19.4 22.3 14.9 72.2 81.2 12.5
----------------------- --------------------------
Total Operating Revenues 372.7 404.2 8.5 1,566.3 1,680.8 7.3
----------------------- --------------------------
Operating Expenses:
Wages and benefits 115.0 131.1 14.0 466.1 505.5 8.5
Employee profit sharing 3.7 2.3 (37.8) 19.7 18.4 (6.6)
Contracted services 11.8 14.9 26.3 48.7 55.6 14.2
Aircraft fuel 39.1 61.0 56.0 162.3 205.2 26.4
Aircraft maintenance 17.2 26.9 56.4 77.6 96.0 23.7
Aircraft rent 41.2 36.7 (10.9) 158.9 157.2 (1.1)
Food and beverage service 12.5 12.1 (3.2) 49.1 49.1 0.0
Commissions 22.5 17.8 (20.9) 94.4 91.0 (3.6)
Other selling expenses 18.9 20.5 8.5 75.2 82.2 9.3
Depreciation and amortization 15.9 18.7 17.6 61.9 67.9 9.7
Loss on sale of assets 0.6 0.0 NM 1.0 0.4 NM
Landing fees and other rentals 14.8 14.8 0.0 59.4 66.5 12.0
Other 24.9 28.6 14.9 98.0 109.5 11.7
----------------------- --------------------------
Total Operating Expenses 338.1 385.4 14.0 1,372.3 1,504.5 9.6
----------------------- --------------------------
Operating Income 34.6 18.8 (45.7) 194.0 176.3 (9.1)
----------------------- --------------------------
Interest income 6.8 5.4 23.2 21.7
Interest expense (4.0) (5.2) (17.4) (16.3)
Interest capitalized 1.5 2.5 5.1 8.3
Other - net (0.1) 3.4 (14.4) 6.4
----------------------- --------------------------
4.2 6.1 (3.5) 20.1
----------------------- --------------------------
Income Before Income Tax $38.8 $24.9 (35.8) $190.5 $196.4 3.1
======================= ==========================
OPERATING STATISTICS:
Revenue passengers (000) 3,211 3,296 2.6 13,056 13,620 4.3
RPMs (000,000) 2,749 2,834 3.1 11,283 11,777 4.4
ASMs (000,000) 4,204 4,316 2.7 16,807 17,341 3.2
Passenger load factor 65.4% 65.7% 0.3 pts 67.1% 67.9% 0.8 pts
Breakeven load factor 58.0% 61.7% 3.7 pts 58.0% 59.1% 1.1 pts
Yield per passenger mile 12.13CENTS 12.79CENTS 5.4 12.50CENTS 12.90CENTS 3.2
Operating revenue per ASM 8.87CENTS 9.36CENTS 5.6 9.32CENTS 9.69CENTS 4.0
Operating expenses per ASM 8.04CENTS 8.93CENTS 11.0 8.17CENTS 8.68CENTS 6.3
Fuel cost per gallon 52.6CENTS 80.4CENTS 52.8 54.6CENTS 67.1CENTS 22.9
Fuel gallons (000,000) 74.3 75.9 2.2 297.4 306.0 2.9
Average number of employees 8,787 9,182 4.5 8,704 9,183 5.5
Aircraft utilization (block hours) 11.2 10.9 (2.7) 11.5 11.2 (2.6)
Operating fleet at period-end 84 89 6.0 84 89 6.0
NM = Not Meaningful
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HORIZON AIR FINANCIAL AND STATISTICAL DATA
Quarter Ended December 31 Year Ended December 31
----------------------------------- ---------------------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 Change 1998 1999 Change
Operating Revenues:
Passenger $84.9 $96.4 13.5 $331.7 $396.7 19.6
Freight and mail 2.7 2.9 7.4 10.7 11.2 4.7
Other - net 1.5 1.5 0.0 5.4 8.0 48.1
------------------------- ---------------------
Total Operating Revenues 89.1 100.8 13.1 347.8 415.9 19.6
------------------------- ---------------------
OPERATING EXPENSES:
Wages and benefits 28.1 32.6 16.0 105.1 124.3 18.3
Employee profit sharing 0.4 (0.4) (200.0) 3.5 4.4 25.7
Contracted services 2.5 3.1 24.0 9.0 11.8 31.1
Aircraft fuel 8.0 14.0 75.0 30.2 44.6 47.7
Aircraft maintenance 11.3 11.9 5.3 43.3 48.7 12.5
Aircraft rent 10.2 10.5 2.9 40.6 42.8 5.4
Food and beverage service 0.7 0.7 (0.0) 2.5 2.6 4.0
Commissions 4.3 4.1 (4.7) 17.3 19.4 12.1
Other selling expenses 5.5 5.4 (1.8) 19.6 22.0 12.2
Depreciation and amortization 4.1 4.4 7.3 12.9 16.7 29.5
Loss (gain) on sale of assets (0.1) 0.0 NM 0.0 0.5 NM
Landing fees and other rentals 4.7 5.6 19.1 17.2 22.2 29.1
Other 7.3 7.7 5.5 28.4 31.1 9.5
------------------------- ---------------------
Total Operating Expenses 87.0 99.6 14.5 329.6 391.1 18.7
------------------------- ---------------------
Operating Income 2.1 1.2 (42.9) 18.2 24.8 36.3
------------------------- ---------------------
Interest expense (0.1) (0.2) (1.0) (1.5)
Interest capitalized 0.3 0.3 1.5 1.9
Other - net 0.1 0.2 0.2 0.3
------------------------- ---------------------
0.3 0.3 0.7 0.7
------------------------- ---------------------
Income Before Income Tax $2.4 $1.5 (37.5) $18.9 $25.5 34.9
========================= =====================
Operating Statistics:
Revenue passengers (000) 1,186 1,243 4.8 4,389 4,984 13.6
RPMs (000,000) 311 350 12.3 1,143 1,379 20.6
ASMs (000,000) 486 560 15.3 1,815 2,194 20.9
Passenger load factor 64.0% 62.4% (1.6)pts 63.0% 62.9% (0.1)pts
Breakeven load factor 62.2% 61.3% (0.9)pts 59.1% 58.4% (0.7)pts
Yield per passenger mile 27.28CENTS 27.57CENTS 1.0 29.01CENTS 28.77CENTS (0.8)
Operating revenue per ASM 18.32CENTS 17.99CENTS (1.8) 19.16CENTS 18.96CENTS (1.1)
Operating expenses per ASM 17.89CENTS 17.77CENTS (0.7) 18.16CENTS 17.83CENTS (1.8)
Fuel cost per gallon 55.6CENTS 84.6CENTS 52.1 57.7CENTS 69.9CENTS 21.2
Fuel gallons (000,000) 14.4 16.5 14.6 52.5 63.9 21.7
Average number of employees 3,257 3,846 18.1 3,019 3,603 19.3
Aircraft utilization (block hours) 7.8 8.1 3.8 7.9 8.1 2.5
Operating fleet at period-end 60 62 3.3 60 62 3.3
NM = Not Meaningful
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INDUSTRY CONDITIONS
The airline industry is cyclical due to a high correlation between demand for
air travel and general economic conditions. Generally speaking, economic
conditions have been strong during the years covered by this discussion. Because
the industry has high fixed costs in relation to revenues, a small change in
load factors or fare levels has a large impact on profits.
For most airlines, labor and fuel account for almost half of operating expenses.
The strong economy has increased employee turnover and put upward pressure on
labor costs. Fuel prices have been volatile in the last three years. For Alaska
Airlines, fuel prices, decreased 4% in 1997, decreased 25% in 1998 and increased
23% in 1999.
In recent years, airlines have reduced their ticket distribution costs by
capping travel agent commissions, by decreasing commission rates from 10% to 5%,
by partially eliminating paper tickets and by selling tickets directly to
passengers via the Internet.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998 Consolidated net income in 1999 was $134.2 million, or
$5.06 per share (diluted), compared with net income of $124.4 million, or $4.81
per share in 1998. The 1999 results (fourth quarter impact) included an
after-tax gain on sale of Equant N.V. of $2.2 million ($0.08 per diluted share).
The 1998 results included an after-tax charge of $10.1 million ($0.38 per
diluted share) for a litigation settlement. Consolidated operating income was
$199.9 million in 1999 compared with $211.0 million in 1998. Higher fuel prices
impacted operating income by approximately $41.6 million. Alaska's annual
operating income decreased $17.7 million, while Horizon's improved $6.6 million.
Financial and statistical data for Alaska and Horizon is shown in Item 6. A
discussion of this data follows.
ALASKA AIRLINES
REVENUES
Capacity increased by 3.2% primarily due to additional flights in the Arizona,
Mexico and Southern California markets Traffic grew by 4.4%, resulting in a 0.8
point increase in passenger load factor. The Canada and Mexico markets
experienced the largest increases in load factor. Passenger yields were up 3.2%,
with virtually all markets showing an increase over last year. New marketing
alliances with other airlines, improved yield management techniques and small
fare increases have helped improve yields. The higher load factor combined with
the higher yield resulted in a 4.0% increase in revenue per available seat mile
(ASM). Consequently, passenger revenues increased 7.7%.
Freight and mail revenues decreased 4.4%, due to lower average freight rates,
and lower mail volumes carried. Other-net revenues increased 12.5%, due to
increased revenue from travel partners in Alaska's frequent flyer program.
12
EXPENSES
Operating expenses grew by 9.6 % as a result of a 3.2% increase in capacity and
a 6.3% increase in cost per ASM. The increase in cost per ASM was partly due to
higher fuel prices in 1999. Excluding fuel, cost per ASM increased 4.1%.
Explanations of significant year-over-year changes in the components of
operating expenses are as follows:
- - Wages and benefits increased 8.5% due to a 5.5% increase in the
number of employees combined with a 2.8% increase in average wages
and benefits per employee. Employees were added in all areas to
service the 4.3% increase in passengers carried. Average wage rates
increased due to annual increases in the current pilot's contract,
combined with the impact of new labor agreements signed in the second
half of 1999.
- - Contracted services increased 14% due to greater use of temporary
employees (particularly in computer systems development), higher
rates for ground handling services and increased navigation fees in
Canada and Mexico.
- - Fuel expense increased 26%, due to a 23% increase in the price of
fuel combined with a 3% increase in fuel consumption.
- - Maintenance expense increased 24%, exceeding the 3% increase in block
hours, due to increased airframe and engine overhaul expense, and
higher costs for landing gear repairs. In addition, a $2.7 million
credit related to brake repairs was recorded in 1998.
- - Commission expense decreased 4% on an 8% increase in passenger
revenue. In 1999, 67% of ticket sales were made through travel
agents, versus 70% in 1998. In 1999, 6% of ticket sales were made
through Alaska's Internet web site versus 2% in 1998. In addition,
the commission rate paid to travel agents decreased from 8% to 5% for
sales made after October 18, 1999.
- - Other selling expenses increased 9%, in line with the 8% increase in
passenger revenues.
- - Depreciation increased 10%, primarily due to purchasing nine new
aircraft in 1999.
- - Landing fees and other rentals increased 12%, higher than the
2% increase in landings, due to rate increases at Seattle,
Portland and several other airports.
- - Other expense increased 12%, partly due to recording a $2.7 million
property tax credit in 1998. Absent this tax credit, the increase
would have been 9%, higher than the 3% increase in capacity, due to
higher expenditures for personnel expenses, professional services,
operating supplies, passenger remuneration and recruiting. Insurance
costs decreased due to lower passenger liability rates.
13
HORIZON AIR
REVENUES
Capacity grew by 20.9%, primarily due to added flights in the Canada, Montana
and California markets. Traffic grew by 20.6%, resulting in a 0.1 point decrease
in passenger load factor. Passenger yields were down less than 1% in spite of a
6% increase in average passenger trip length. The small decreases in yield and
load factor resulted in a 1.1% decrease in revenue per ASM. Consequently,
passenger revenues increased 19.6%, slightly less than the 20.9% increase in
capacity.
EXPENSES
Operating expenses grew by 18.7% as a result of a 20.9% increase in capacity and
a 1.8% decrease in cost per ASM. Explanations of significant year-over-year
changes in the components of operating expenses are as follows:
- - Wages and benefits increased 18.3% due to a 19.3% increase in the
number of employees. Employees were added in all areas to service the
14% increase in passengers carried.
- - Contracted services increased 31%, higher than the 21% increase in
capacity, due to increased navigation fees in Canada, higher ground
handling and security charges and greater use of computer and other
consultants.
- - Fuel expense increased 48%, due to a 22% increase in fuel
consumption combined with a 21% increase in the price of fuel.
- - Maintenance expense increased 13%, in line with the 15% increase in
block hours flown.
- - Commission expense increased 12%, less than the 20% increase in
passenger revenue, because a smaller percentage of sales were made
through travel agents and commission rates dropped from 8% to 5% in
October 1999.
- - Depreciation and amortization expense increased 30%, primarily
due to purchase of F-28s in late 1998 and added depreciation on
aircraft spare parts and station equipment.
- - Landing fees and other rentals increased 29%, higher than the 21%
increase in capacity, primarily due to a full year of rent on the new
Portland operations center and rate increases at Seattle and Portland
airports.
CONSOLIDATED NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $27.4
million over 1998 due to a $16.5 million litigation settlement charge in 1998,
$4.9 million lower interest expense and a $3.6 million gain on sale of Equant
N.V. (a telecommunication network company owned by many airlines) in 1999.
1998 COMPARED WITH 1997 Consolidated net income in 1998 was $124.4 million, or
$4.81 per share (diluted), compared with net income of $72.4 million, or $3.53
per share in 1997. Consolidated operating income was $211.0 million in 1998
compared with $139.0 million in 1997. Lower fuel prices accounted for $56.9
million of the $72.0 million improvement in operating income.
14
ALASKA AIRLINES Operating income increased 44.5% to $194.0 million, resulting in
a 12.4% operating margin as compared with a 9.3% margin in 1997. Operating
revenue per ASM decreased 0.6% to 9.32 cents while operating expenses per ASM
decreased 4.1% to 8.17 cents. The decrease in revenue per ASM was primarily due
to a 0.2 point decrease in passenger load factor. Lower unit costs were largely
due to lower fuel prices.
HORIZON AIR During 1998, Horizon completed its transition to a simplified fleet
that uses more jet aircraft flying people longer distances with fewer
connections. These changes resulted in a more efficient operation, with lower
unit revenues (down 8.8%) and even lower unit costs (down 11.9%). As a result,
operating income increased to $18.2 million from $5.8 million in 1997, resulting
in a 5.2% operating margin as compared to 1.9% in 1997.
CONSOLIDATED NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $8.8
million over 1997 due to lower interest expense (due to conversion of
convertible bonds in 1998 and other debt repayments) and higher interest income
(due to higher cash balances). These were partly offset by a $16.5 million
charge for a litigation settlement in July 1998.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
- -------------------------------------------------------------------------------------------------------
December 31, 1998 DECEMBER 31, 1999 Change
- -------------------------------------------------------------------------------------------------------
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $ 306.6 $ 329.0 $22.4
Working capital (deficit) 2.9 (36.8) (39.7)
Long-term debt and
capital lease obligations 171.5 337.0 165.5
Shareholders' equity 789.5 930.7 141.2
Book value per common share $ 30.11 $ 35.24 $5.13
Debt-to-equity 18%:82% 27%:73% NA
Debt-to-equity assuming aircraft
operating leases are capitalized
at seven times annualized rent 67%:33% 64%:36% NA
- -------------------------------------------------------------------------------------------------------
1999 FINANCIAL CHANGES The Company's cash and marketable securities portfolio
increased by $22 million during 1999. Operating activities provided $330 million
of cash in 1999. Additional cash was provided by the issuance of new debt ($232
million), sale and leaseback of three Dash 8-200 aircraft ($30 million), flight
equipment deposits returned ($8 million) and the exercise of stock options ($6
million). Cash was used for $565 million of capital expenditures, including the
purchase of nine new Boeing 737 aircraft, two formerly leased Boeing 737s, three
new Dash 8-200 aircraft, flight equipment deposits, an aircraft simulator and
airframe and engine overhauls, and for $27 million of debt repayment.
Shareholders' equity increased $141 million primarily due to net income of $134
million and issuance of $6 million of common stock under stock plans.
15
FINANCING ACTIVITIES During the third quarter of 1999, Horizon sold three Dash
8-200 aircraft and leased them back for 15 years. During the fourth quarter of
1999, Alaska issued $232 million of 7.6% fixed rate debt secured by eight
aircraft.
COMMITMENTS At December 31, 1999, the Company had firm orders for 68 aircraft
requiring aggregate payments of approximately $1.5 billion, as set forth below.
In addition, Alaska has options to acquire 26 more B737s and Horizon has options
to acquire 25 CRJ 700s. Alaska and Horizon expect to finance the new planes with
either leases, long-term debt or internally generated cash.
DELIVERY PERIOD - FIRM ORDERS
- -----------------------------------------------------------------------------------------------------------------
AIRCRAFT 2000 2001 2002 2003 2004 2005 TOTAL
- -----------------------------------------------------------------------------------------------------------------
Boeing 737-700 7 6 -- -- -- -- 13
Boeing 737-900 -- 5 5 -- -- -- 10
de Havilland Dash 8-400 5 10 -- -- -- -- 15
Canadair RJ 700 -- -- 8 6 14 2 30
- -----------------------------------------------------------------------------------------------------------------
Total 12 21 13 6 14 2 68
=================================================================================================================
Payments (Millions) $328 $425 $263 $168 $262 $34 $1,480
=================================================================================================================
DEFERRED TAXES At December 31, 1999, net deferred tax liabilities were $140
million, which includes $144 million of net temporary differences offset by $4
million of Alternative Minimum Tax (AMT) credits. The Company believes that all
of its deferred tax assets, including its AMT credits, will be realized through
profitable operations.
YEAR 2000 COMPUTER ISSUE The Company implemented a project to ensure that its
systems will function properly in the year 2000 and thereafter. In fact,
virtually all systems have worked properly in the year 2000. In addition, the
Company has not experienced any year 2000 related problems with its significant
suppliers with which its systems interface or exchange data. The direct costs of
projects solely intended to correct year 2000 problems were approximately $2
million. Due to lower than normal passenger traffic, Alaska and Horizon
canceled, in advance, flights late in the day on December 31, 1999 and early in
the day on January 1, 2000. Lost operating profit on each day was estimated at
$800,000.
NEW ACCOUNTING STANDARDS During June 1998, the Financial Accounting Standards
Board issued FAS 133, Accounting for Derivative Instruments and Hedging
Activities The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Due to the Company's minimal use of derivatives, the new standard is
expected to have no material impact on its financial position or results of
operations. FAS 133 is effective for the Company's fiscal year beginning January
1, 2001.
AIRCRAFT ACCIDENT On January 31, 2000, Alaska Airlines flight 261 from Puerto
Vallarta enroute to San Francisco, went down in the water off the coast of
California near Point Mugu. The flight carried 83 passengers and five crew
members. There were no survivors. Consistent with industry standards, the
Company maintains insurance against aircraft accidents. Any aircraft accident,
even if fully insured, could cause a negative public perception of the Company
with adverse
16
financial consequences. However, the Company believes this accident will not
result in a material adverse impact on the financial position or results of
operations of the Company.
1998 FINANCIAL CHANGES The Company's cash and marketable securities portfolio
increased by $94 million during 1998. Operating activities provided $310 million
of cash in 1998. Additional cash was provided by the sale and leaseback of nine
B737-400 aircraft and 12 Dash 8-200 aircraft ($402 million) and the return of
$33 million of equipment deposits. Cash was used for $613 million of capital
expenditures, including the purchase of nine new B737-400 aircraft, a previously
leased B737-400 aircraft, 12 new Dash 8-200 aircraft, flight equipment deposits
and airframe and engine overhauls and the repayment of debt ($46 million).
Shareholders' equity increased $314 million due to the conversion of $186
million of convertible bonds into common stock, net income of $124 million and
issuance of $7 million of common stock under stock plans.
1997 FINANCIAL CHANGES The Company's cash and marketable securities portfolio
increased by $111 million during 1997. Operating activities provided $205
million of cash in 1997. Additional cash was provided by the sale and leaseback
of four B737-400 aircraft and 13 Dash 8-200 aircraft ($247 million), issuance of
common stock ($129 million) and issuance of long-term debt ($28 million). Cash
was used for $439 million of capital expenditures including the purchase of two
new MD-83 aircraft, three new B737-400 aircraft, a previously leased B737-400
aircraft, 13 new Dash 8-200 aircraft, flight equipment deposits and airframe and
engine overhauls, net repayment of short-term borrowings ($47 million) and the
repayment of debt ($26 million).
EFFECT OF INFLATION Inflation and specific price changes do not have a
significant effect on the Company's operating revenues, operating expenses and
operating income, because such revenues and expenses generally reflect current
price levels.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14.
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------------- --------------------- ----------------- ---------------------
1998 1999 1998 1999 1998 1999 1998 1999
- --------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share)
Operating revenues $416.4 $461.2 $484.9 $529.7 $539.4 $589.1 $457.0 $501.9
Operating income 22.5 28.6 62.6 65.3 89.5 86.3 36.4 19.7
Net income 13.1 20.2 38.9 42.1 45.4 54.9 27.0 17.0
Earnings per share:
Basic 0.69 0.77 1.77 1.60 1.73 2.08 1.03 0.64
Diluted 0.56 0.76 1.51 1.59 1.72 2.07 1.02 0.64
- --------------------------------------------------------------------------------------------------------------------------------
The total of the amounts shown as quarterly earnings per share (EPS) may differ
from the amounts shown on the Consolidated Statement of Income because the
annual computation is made separately and is based upon average number of shares
(and equivalent shares for diluted EPS) outstanding for the year.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be
held on May 16, 2000. See "Executive Officers of the Registrant" in Part I
following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be
held on May 16, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Security Ownership of Certain Beneficial Owners and Management,"
incorporated herein by reference from the definitive Proxy Statement for Air
Group's Annual Meeting of Shareholders to be held on May 16, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Transactions with Management and Others," incorporated herein by reference
from the definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 16, 2000.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Consolidated Financial Statements: PAGE(S)
Selected Quarterly Consolidated Financial Information (Unaudited) 17
Consolidated Balance Sheet as of December 31, 1998 and 1999 20-21
Consolidated Statement of Income for the years ended
December 31, 1997, 1998 and 1999 22
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 24
Notes to Consolidated Financial Statements 25-32
Report of Independent Public Accountants 33
Consolidated Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 31, 1997, 1998 and 1999 34
See Exhibit Index on page 35.
(b) No reports on Form 8-K were filed during the fourth quarter of 1999.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
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.
By: /s/ John F. Kelly Date: February 25, 2000
---------------------------------
John F. Kelly, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on February 25, 2000 on behalf of
the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman, Chief Executive Officer, President and Director
-----------------------------------
John F. Kelly
/s/ Bradley D. Tilden Vice President/Finance and Chief Financial Officer
----------------------------------- (Principal Accounting and Principal Financial Officer)
Bradley D. Tilden
/s/ William S. Ayer Director
-----------------------------------
William S. Ayer
/s/ Ronald F. Cosgrave Director
-----------------------------------
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
-----------------------------------
Mary Jane Fate
/s/ Bruce R. Kennedy Director
-----------------------------------
Bruce R. Kennedy
/s/ R. Marc Langland Director
-----------------------------------
R. Marc Langland
/s/ Byron I. Mallott Director
-----------------------------------
Byron I. Mallott
/s/ John V. Rindlaub Director
-----------------------------------
John V. Rindlaub
/s/ Patricia Q. Stonesifer Director
-----------------------------------
Patricia Q. Stonesifer
/s/ J. Kenneth Thompson Director
-----------------------------------
J. Kenneth Thompson
/s/ Richard A. Wien Director
-----------------------------------
Richard A. Wien
19
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
- ------------------------------------------------------------------------ -----------------
As of December 31 (In Millions) 1998 1999
- ------------------------------------------------------------------------ -----------------
Current Assets
Cash and cash equivalents $29.4 $132.5
Marketable securities 277.2 196.5
Receivables - less allowance for doubtful
accounts (1998 - $1.0; 1999 - $1.0) 70.6 74.6
Inventories and supplies 44.1 54.3
Prepaid expenses and other assets 107.5 124.0
- ------------------------------------------------------------------------ -----------------
TOTAL CURRENT ASSETS 528.8 581.9
- ------------------------------------------------------------------------ -----------------
PROPERTY AND EQUIPMENT
Flight equipment 1,015.4 1,386.6
Other property and equipment 283.2 337.2
Deposits for future flight equipment 164.9 217.7
- ------------------------------------------------------------------------ -----------------
1,463.5 1,941.5
Less accumulated depreciation and amortization 417.0 486.7
- ------------------------------------------------------------------------ -----------------
1,046.5 1,454.8
- ------------------------------------------------------------------------ -----------------
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 29.6 31.8
- ------------------------------------------------------------------------ -----------------
14.8 12.6
- ------------------------------------------------------------------------ -----------------
TOTAL PROPERTY AND EQUIPMENT - NET 1,061.3 1,467.4
- ------------------------------------------------------------------------ -----------------
INTANGIBLE ASSETS - SUBSIDIARIES 57.5 55.5
- ------------------------------------------------------------------------ -----------------
OTHER ASSETS 84.2 75.3
- ------------------------------------------------------------------------ -----------------
TOTAL ASSETS $1,731.8 $2,180.1
======================================================================== =================
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------ -----------------
As of December 31
(In Millions Except Share Amounts) 1998 1999
- ------------------------------------------------------------------------ -----------------
CURRENT LIABILITIES
Accounts payable $84.3 $104.2
Accrued aircraft rent 75.5 81.8
Accrued wages, vacation and payroll taxes 79.4 83.0
Other accrued liabilities 80.9 99.5
Air traffic liability 178.6 183.7
Current portion of long-term debt and
capital lease obligations 27.2 66.5
- ------------------------------------------------------------------------ -----------------
TOTAL CURRENT LIABILITIES 525.9 618.7
- ------------------------------------------------------------------------ -----------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 171.5 337.0
- ------------------------------------------------------------------------ -----------------
OTHER LIABILITIES AND CREDITS
Deferred income taxes 99.2 144.0
Deferred income 41.5 37.4
Other liabilities 104.2 112.3
- ------------------------------------------------------------------------ -----------------
244.9 293.7
- ------------------------------------------------------------------------ -----------------
COMMITMENTS
- ------------------------------------------------------------------------ -----------------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value
Authorized: 5,000,000 shares - -
Common stock, $1 par value
Authorized: 100,000,000 shares
Issued: 1998 - 28,974,107 shares
1999 - 29,157,108 shares 29.0 29.2
Capital in excess of par value 473.9 480.0
Treasury stock, at cost: 1998 - 2,750,102 shares
1999 - 2,746,304 shares (62.7) (62.7)
Deferred compensation (1.3) (0.6)
Retained earnings 350.6 484.8
- ------------------------------------------------------------------------ -----------------
789.5 930.7
- ------------------------------------------------------------------------ -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,731.8 $2,180.1
======================================================================== =================
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
- --------------------------------------------------------------- -------------- ---------------
Year Ended December 31
(In Millions Except Per Share Amounts) 1997 1998 1999
- --------------------------------------------------------------- -------------- ---------------
OPERATING REVENUES
Passenger $1,574.5 $1,728.0 $1,904.8
Freight and mail 94.1 94.4 91.2
Other - net 70.8 75.3 86.0
- --------------------------------------------------------------- -------------- ---------------
TOTAL OPERATING REVENUES 1,739.4 1,897.7 2,082.0
- --------------------------------------------------------------- -------------- ---------------
OPERATING EXPENSES
Wages and benefits 531.7 594.4 652.6
Contracted services 48.8 55.5 64.9
Aircraft fuel 232.6 192.5 249.8
Aircraft maintenance 108.7 120.9 144.7
Aircraft rent 183.9 199.5 199.9
Food and beverage service 48.5 51.6 51.7
Commissions 106.6 97.5 99.0
Other selling expenses 80.4 94.8 104.1
Depreciation and amortization 68.3 75.1 84.8
Loss (gain) on sale of assets (1.9) 1.0 0.9
Landing fees and other rentals 66.2 76.3 88.4
Other 126.6 127.6 141.3
- --------------------------------------------------------------- -------------- ---------------
TOTAL OPERATING EXPENSES 1,600.4 1,686.7 1,882.1
- --------------------------------------------------------------- -------------- ---------------
OPERATING INCOME 139.0 211.0 199.9
- --------------------------------------------------------------- -------------- ---------------
NONOPERATING INCOME (EXPENSE)
Interest income 10.6 22.2 20.2
Interest expense (33.6) (21.2) (16.3)
Interest capitalized 5.3 6.6 10.2
Other - net 2.3 (14.2) 6.7
- --------------------------------------------------------------- -------------- ---------------
(15.4) (6.6) 20.8
- --------------------------------------------------------------- -------------- ---------------
Income before income tax 123.6 204.4 220.7
Income tax expense 51.2 80.0 86.5
- --------------------------------------------------------------- -------------- ---------------
NET INCOME $72.4 $124.4 $134.2
=============================================================== ============== ===============
BASIC EARNINGS PER SHARE $4.90 $5.32 $5.09
=============================================================== ============== ===============
DILUTED EARNINGS PER SHARE $3.53 $4.81 $5.06
=============================================================== ============== ===============
Shares used for computation:
Basic 14.785 23.388 26.372
Diluted 22.689 26.367 26.507
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON Capital in Treasury Deferred
SHARES Common Excess of Stock Compen- Retained
(In Millions) OUTSTANDING Stock Par Value at Cost sation Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 14.475 $17.2 $166.8 $(62.6) $(2.7) $153.8 $272.5
- ----------------------------------------------------------------------------------------------------------------------------------
1997 net income 72.4 72.4
Issuance of common stock 3.450 3.5 118.4 121.9
Stock issued under stock plans 0.349 0.3 7.1 7.4
Stock issued for convertible
subordinated debentures 0.008 0.2 0.2
Treasury stock sale 0.001
Employee Stock Ownership Plan
shares allocated 0.9 0.9
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 18.283 21.0 292.5 (62.6) (1.8) 226.2 475.3
- ----------------------------------------------------------------------------------------------------------------------------------
1998 net income 124.4 124.4
Stock issued under stock plans 0.196 0.3 6.4 6.7
Stock issued for convertible
subordinated debentures 7.747 7.7 175.0 182.7
Treasury stock purchase (0.002) (0.1) (0.1)
Employee Stock Ownership Plan
shares allocated 0.5 0.5
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 26.224 29.0 473.9 (62.7) (1.3) 350.6 789.5
- ----------------------------------------------------------------------------------------------------------------------------------
1999 net income 134.2 134.2
Stock issued under stock plans 0.183 0.2 6.1 6.3
Treasury stock sales 0.004
Employee Stock Ownership Plan
shares allocated 0.7 0.7
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 26.411 $29.2 $480.0 $(62.7) $(0.6) $484.8 $930.7
==================================================================================================================================
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
- -------------------------------------------------------------------------- ----------------- -----------------
Year Ended December 31 (In Millions) 1997 1998 1999
- -------------------------------------------------------------------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $72.4 $124.4 $134.2
Adjustments to reconcile net income to cash:
Depreciation and amortization 68.3 75.1 84.8
Amortization of airframe and engine overhauls 35.1 41.1 50.1
Loss (gain) on sale of assets (1.9) 1.0 0.9
Increase in deferred income taxes 22.8 26.9 44.8
Decrease (increase) in accounts receivable (2.9) 2.0 (4.0)
Increase in other current assets (10.6) (12.3) (26.7)
Increase in air traffic liability 3.4 12.2 5.1
Increase in other current liabilities 26.5 41.9 48.4
Other-net (7.9) (2.1) (7.5)
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by operating activities 205.2 310.2 330.1
- -------------------------------------------------------------------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 6.9 2.1 2.2
Purchases of marketable securities (443.6) (323.4) (137.8)
Sales and maturities of marketable securities 385.9 156.3 218.5
Flight equipment deposits returned 8.7 33.2 8.3
Additions to flight equipment deposits (68.4) (182.1) (177.0)
Additions to property and equipment (370.6) (431.3) (388.0)
Restricted deposits and other (2.0) (1.3) 5.9
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash used in investing activities (483.1) (746.5) (467.9)
- -------------------------------------------------------------------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 56.4 - -
Repayment of short-term borrowings (103.4) - -
Proceeds from sale and leaseback transactions 246.7 402.0 29.8
Proceeds from issuance of long-term debt 28.0 - 232.0
Long-term debt and capital lease payments (25.9) (45.5) (27.2)
Proceeds from issuance of common stock 129.3 6.6 6.3
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by financing activities 331.1 363.1 240.9
- -------------------------------------------------------------------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 53.2 (73.2) 103.1
Cash and cash equivalents at beginning of year 49.4 102.6 29.4
- -------------------------------------------------------------------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $102.6 $29.4 $132.5
========================================================================== ================= =================
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $28.7 $15.8 $6.6
Income taxes 22.1 48.5 35.1
Noncash investing and financing activities:
1997 and 1999 - None
1998 - $186.0 million of convertible debentures were converted
into 7.7 million shares of common stock.
See accompanying notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Alaska Air
Group, Inc. (Company or Air Group) and its subsidiaries, the principal
subsidiaries being Alaska Airlines, Inc. (Alaska) and Horizon Air Industries,
Inc. (Horizon). All significant intercompany transactions are eliminated.
Preparation of financial statements requires the use of management's
estimates. Actual results could differ from those estimates. Certain
reclassifications have been made in prior years' financial statements to
conform to the 1999 presentation.
Alaska and Horizon operate as airlines. However, their business plans,
competition and economic risks differ substantially. Alaska is a major
airline serving Alaska; Vancouver, Canada; the U.S. West Coast and Mexico. It
operates an all jet fleet and its average passenger trip is 865 miles.
Horizon is a regional airline serving the Pacific Northwest, Northern
California and Western Canada. It operates both jet and turboprop aircraft,
and its average passenger trip is 277 miles. Substantially all of Alaska's
and Horizon's sales occur in the United States. See Note 11 for operating
segment information.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. They are carried at cost, which
approximates market. The Company reduces its cash balance when checks are
disbursed. Due to the time delay in checks clearing the banks, the Company
normally maintains a negative cash balance on its books which is reported as
a current liability. The amount of the negative cash balance was $18.2
million and $22.6 million at December 31, 1998 and 1999, respectively.
INVENTORIES AND SUPPLIES
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence of flight
equipment expendable and repairable parts is accrued based on estimated
disposal date and salvage value. Surplus inventories are carried at their net
realizable value. The allowance at December 31, 1998 and 1999 for all
inventories was $20.2 million and $23.8 million, respectively.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which are as follows:
- --------------------------------------------------------------------------------
Aircraft and other
flight equipment 8-20 years
Buildings 10-30 years
Capitalized leases and
leasehold improvements Term of lease
Other equipment 3-15 years
- --------------------------------------------------------------------------------
Assets and related obligations for items financed under capital leases are
initially recorded at an amount equal to the present value of the future
minimum lease payments. The cost of major airframe overhauls, engine
overhauls, and other modifications which extend the life or improve the
usefulness of aircraft are capitalized and amortized over their estimated
period of use. Other repair and maintenance costs are expensed when incurred.
The Company periodically reviews long-lived assets for impairment.
INTANGIBLE ASSETS-SUBSIDIARIES
The excess of the purchase price over the fair value of net assets acquired
is recorded as an intangible asset and is amortized over 40
25
years. Accumulated amortization at December 31, 1998 and 1999 was $25.2
million and $27.2 million, respectively.
FREQUENT FLYER AWARDS
Alaska operates a frequent flyer award program that provides travel awards to
members based on accumulated mileage. The estimated incremental cost of
providing free travel is recognized as an expense and accrued as a liability
as miles are accumulated. Alaska also defers recognition of income on a
portion of the payments it receives from travel partners associated with its
frequent flyer program. The frequent flyer award liability, which is included
with other accrued liabilities, is relieved as travel awards are issued. The
liability at December 31, 1998 and 1999 was $28.0 million and $40.0 million,
respectively.
DEFERRED INCOME
Deferred income results from the sale and leaseback of aircraft, the receipt
of manufacturer or vendor credits, and from the sale of foreign tax benefits.
This income is recognized over the term of the applicable agreements.
LEASED AIRCRAFT RETURN COSTS
The costs associated with returning leased aircraft are accrued over the
lease period. As leased aircraft are retired, the costs are charged against
the established reserve. The reserve is part of other liabilities, and at
December 31, 1998 and 1999 was $48.7 million and $48.9 million, respectively.
PASSENGER REVENUES
Passenger revenues are considered earned at the time service is provided.
Tickets sold but not yet used are reported as air traffic liability.
CONTRACTED SERVICES
Contracted services includes the expenses for aircraft ground handling,
security, temporary employees and other similar services.
OTHER SELLING EXPENSES
Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, advertising and promotional costs. The
costs of advertising are expensed the first time the advertising takes place.
Advertising expense was $11.0 million, $17.9 million, and $17.0 million,
respectively, in 1997, 1998 and 1999.
CAPITALIZED INTEREST
Interest is capitalized on flight equipment purchase deposits and ground
facility progress payments as a cost of the related asset and is depreciated
over the estimated useful life of the asset.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns.
STOCK OPTIONS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock options. See Note 6 for more information.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward contracts, generally with
maturities of less than one month, to manage risk associated with net foreign
currency transactions. Resulting gains and losses are recognized currently in
other operating expense. The Company periodically enters
26
into interest rate swap agreements to hedge interest rate risk. The
differential to be paid or received from these agreements is accrued as
interest rates change and is recognized currently in the income statement.
The Company periodically enters into hedge agreements to reduce its exposure
to fluctuations in the price of jet fuel. A gain or loss is recorded if the
fuel index average exceeds the ceiling price or falls below the floor price.
There were no interest rate swaps or fuel hedges entered into in 1999.
NOTE 2. MARKETABLE SECURITIES
Marketable securities are investments that are readily convertible to cash and
have original maturities that exceed three months. They are classified as
available for sale and consisted of the following at December 31 (in millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
Cost:
U.S. government securities $214.1 $146.7
Asset backed obligations 31.7 19.3
Other corporate obligations 31.4 30.5
- --------------------------------------------------------------------------------
$277.2 $196.5
================================================================================
Fair value:
U.S. government securities $214.9 $146.2
Asset backed obligations 31.8 19.1
Other corporate obligations 31.3 29.9
- --------------------------------------------------------------------------------
$278.0 $195.2
================================================================================
There were no material unrealized holding gains or losses at December 31,
1998 or 1999.
Of the marketable securities on hand at December 31, 1999, 63% will mature
during 2000 and the remainder will mature during 2001. Based on specific
identification of securities sold, the following occurred in 1998 and 1999 (in
millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
Proceeds from sales $156.3 $218.5
Gross realized gains 0.2 0.4
GROSS REALIZED LOSSES -- 0.3
- --------------------------------------------------------------------------------
Realized gains and losses are reported as a component of interest income.
NOTE 3. OTHER ASSETS
Other assets consisted of the following at December 31 (in millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
Restricted deposits $ 69.1 $ 63.5
Deferred costs and other 15.1 11.8
- --------------------------------------------------------------------------------
$84.2 $75.3
- --------------------------------------------------------------------------------
At December 31, 1999, Alaska owned approximately 80,000 depository
certificates convertible, subject to certain restrictions, into the common
stock of Equant N.V., a telecommunication network company. The certificates
had an estimated fair value of $7 million. Alaska's carrying value of the
certificates was de minimis.
NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
At December 31, 1998 and 1999, long-term debt and capital lease obligations were
as follows (in millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
8.2%* fixed rate notes payable
due through 2015 $90.3 $309.5
5.5%* variable rate notes payable
due through 2009 85.2 73.5
- --------------------------------------------------------------------------------
Long-term debt 175.5 383.0
Capital lease obligations 23.2 20.5
Less current portion (27.2) (66.5)
- --------------------------------------------------------------------------------
$171.5 $337.0
================================================================================
* weighted average for 1999
At December 31, 1999, borrowings of $383.0 million are secured by flight
equipment and real property. During 1999, Alaska issued $232 million of debt
secured by flight equipment. The new debt has repayment terms of 12 to 16
years at fixed interest rates of approximately 7.6%.
At December 31, 1999, Alaska had a credit facility with commercial banks that
allows it to borrow up to $150 million until December 2004. Borrowings under
this facility bear interest at a rate that varies based on LIBOR. At December
31, 1999, no borrowings were outstanding under this credit facility.
27
Certain Alaska loan agreements contain provisions that require maintenance of
specific levels of net worth, leverage and fixed charge coverage, and limit
investments, lease obligations, sales of assets and additional indebtedness.
At December 31, 1999 the Company was in compliance with all loan provisions,
and under the most restrictive loan provisions, Alaska had $209 million of
net worth above the minimum.
At December 31, 1999, long-term debt principal payments for the next five years
were (in millions):
- --------------------------------------------------------------------------------
2000 $63.8
- --------------------------------------------------------------------------------
2001 $54.3
- --------------------------------------------------------------------------------
2002 $21.7
- --------------------------------------------------------------------------------
2003 $22.6
- --------------------------------------------------------------------------------
2004 $31.4
- --------------------------------------------------------------------------------
NOTE 5. COMMITMENTS
LEASE COMMITMENTS
Lease contracts for 104 aircraft have remaining lease terms of one to 17 years.
The majority of airport and terminal facilities are also leased. Total rent
expense was $218.7 million, $241.6 million and $244.3 million, in 1997, 1998 and
1999, respectively. Future minimum lease payments under long-term operating
leases and capital leases as of December 31, 1999 are shown below (in millions):
- --------------------------------------------------------------------------------
Operating Leases Capital
AIRCRAFT FACILITIES LEASES
-------- ---------- ------
2000 $ 180.1 $27.8 $ 4.1
2001 161.7 21.4 4.1
2002 160.0 12.4 4.1
2003 145.7 10.8 4.1
2004 121.6 9.3 8.5
Thereafter 983.4 127.7 0.4
- --------------------------------------------------------------------------------
Total lease payments $1,752.5 $209.4 25.3
========================
Less Amount Representing Interest (4.8)
- --------------------------------------------------------------------------------
Present value of capital lease payments $20.5
================================================================================
AIRCRAFT COMMITMENTS
The Company has firm orders for 23 Boeing 737 series aircraft to be delivered
between 2000 and 2002, 15 Dash 8-400s between 2000 and 2001, and 30 Canadair
RJ 700 jets between 2002 and 2005. The firm orders require payments of
approximately $1.5 billion between 2000 and 2005. As of December 31, 1999,
deposits of $211 million related to the firm orders had been made. In
addition to the ordered aircraft, the Company holds purchase options on 26
Boeing 737s and 25 CRJ 700s.
NOTE 6. STOCK PLANS
Air Group has three stock option plans, which provide for the purchase of Air
Group common stock at a stipulated price on the date of grant by certain
officers and key employees of Air Group and its subsidiaries. Under the 1996,
1997 and 1999 Plans, options for 1,331,000 shares have been granted and, at
December 31, 1999, 1,092,150 shares were available for grant. Under all
plans, the incentive and nonqualified stock options granted have terms of up
to approximately ten years. Substantially all grantees are 25% vested after
one year, 50% after two years, 75% after three years and 100% after four
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants in 1997, 1998 and 1999, respectively: dividend yield of 0%, 0% and
0%; volatility of 34%, 35% and 40%; risk-free interest rates of 5.69%, 5.67%
and 5.53%; and expected lives of 5, 5 and 5 years. Using these assumptions,
the weighted average fair value of options granted was $14.04, $19.33 and
$17.39 in 1997, 1998 and 1999, respectively.
Air Group follows APB Opinion 25 and related Interpretations in accounting for
stock options. Accordingly, no compensation cost has been recognized for these
plans. Had compensation cost for the Company's stock options been determined in
accordance
28
with Financial Accounting Standard 123, net income and earnings per share
(EPS) would have been reduced to the pro forma amounts indicated below.
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
Net income (in millions):
As reported $72.4 $124.4 $134.2
Pro forma 71.4 122.2 131.0
Basic EPS:
As reported $4.90 $5.32 $5.09
Pro forma 4.83 5.23 4.97
Diluted EPS:
As reported $3.53 $4.81 $5.06
Pro forma 3.48 4.73 4.94
- --------------------------------------------------------------------------------
Changes in the number of shares subject to option, with their weighted average
exercise prices, are summarized below:
- --------------------------------------------------------------------------------
Shares Price
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 1996 991,825 $18.57
Granted 245,800 35.25
Exercised (349,575) 17.36
Canceled (8,125) 17.03
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 1997 879,925 23.72
Granted 324,900 47.45
Exercised (159,475) 17.88
Canceled (5,200) 36.88
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 1998 1,040,150 31.96
Granted 494,400 46.81
Exercised (148,688) 20.19
Canceled (47,050) 38.66
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 1999 1,338,812 $38.51
================================================================================
EXERCISABLE AT YEAR-END
December 31, 1997 161,775 $19.08
December 31, 1998 253,350 22.92
December 31, 1999 434,612 28.95
The following table summarizes stock options outstanding and exercisable at
December 31, 1999 with their weighted average remaining contractual lives:
- --------------------------------------------------------------------------------
Range of Remaining
Exercise prices Life (years) Shares Price
- --------------------------------------------------------------------------------
Outstanding:
$15.00 to $24.00 6.3 338,150 $20.34
$35.25 to $39.69 9.0 689,062 38.26
$47.00 to $57.31 8.4 311,600 47.45
- --------------------------------------------------------------------------------
$15.00 to $57.31 6.8 1,338,812 $35.87
- --------------------------------------------------------------------------------
Exercisable:
$15.00 to $24.00 242,800 $19.53
$35.25 to $39.69 102,862 35.25
$47.00 to $57.31 88,950 47.40
- --------------------------------------------------------------------------------
$15.00 to $57.31 434,612 $28.95
- --------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Four defined benefit and five defined contribution retirement plans cover
various employee groups of Alaska and Horizon.
The defined benefit plans provide benefits based on an employee's term of
service and average compensation for a specified period of time before
retirement. Pension plans are funded as required by the Employee Retirement
Income Security Act of 1974 (ERISA). The defined benefit plan assets consist
primarily of marketable equity and fixed income securities. The following table
sets forth the status of the plans for 1998 and 1999 (in millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION
Beginning of year $307.4 $371.8
Service cost 22.5 25.8
Interest cost 21.9 25.3
Amendments -- 9.8
Change in assumptions 27.1 (54.9)
Actuarial gain (0.4) (1.9)
Benefits paid (6.7) (6.6)
- --------------------------------------------------------------------------------
END OF YEAR $371.8 $369.3
- --------------------------------------------------------------------------------
PLAN ASSETS AT FAIR VALUE
Beginning of year $289.2 $373.0
Actual return on plan assets 54.4 27.8
Employer contributions 36.1 42.9
Benefits paid (6.7) (6.6)
- --------------------------------------------------------------------------------
END OF YEAR $373.0 $437.1
- --------------------------------------------------------------------------------
FUNDED STATUS 1.2 67.8
Unrecognized loss (gain) 7.2 (40.7)
Unrecognized transition asset (0.3) (0.1)
Unrecognized prior service cost 49.4 54.8
- --------------------------------------------------------------------------------
Prepaid pension cost $ 57.5 $ 81.8
================================================================================
WEIGHTED AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 6.75% 7.75%
Expected return on plan assets 10.0% 10.0%
Rate of compensation increase 5.5% 5.4%
29
Net pension expense for the defined benefit plans included the following
components for 1997, 1998 and 1999 (in millions):
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
Service cost $ 17.3 $ 22.4 $ 25.8
Interest cost 17.3 21.9 25.3
Expected return on assets (22.1) (28.7) (36.7)
Amortization of
prior service cost 0.2 3.8 4.4
Recognized actuarial loss 1.0 -- 0.1
Amortization of
transition asset (0.3) (0.2) (0.2)
- --------------------------------------------------------------------------------
Net pension expense $ 13.4 $ 19.2 $ 18.7
================================================================================
Alaska and Horizon also maintain an unfunded, noncontributory benefit plan
for certain elected officers. The $23 million unfunded accrued pension cost
for this plan was accrued as of December 31, 1999.
The defined contribution plans are deferred compensation plans under section
401(k) of the Internal Revenue Code. Some of these plans require Company
matching contributions based on a percentage of participants' contributions.
One plan has an Employee Stock Ownership Plan (ESOP) feature. The ESOP owns
Air Group common shares, which are held in trust for eligible employees. The
Company has recorded deferred compensation to reflect the value of the shares
not yet allocated to eligible employees' accounts. As these shares are
allocated to employees, compensation expense is recorded and deferred
compensation is reduced. Total expense for the defined contribution plans was
$11.7 million, $11.6 million and $13.5 million, respectively, in 1997, 1998
and 1999.
PROFIT SHARING PLANS
Alaska and Horizon have employee profit sharing plans. Profit sharing expense
for 1997, 1998 and 1999 was $13.5 million, $23.2 million and $22.8 million,
respectively.
OTHER POSTRETIREMENT BENEFITS
The Company allows retirees to continue their medical, dental and vision
benefits by paying all or a portion of the active employee plan premium until
eligible for Medicare, currently age 65. This results in a subsidy to
retirees because the premiums received by the Company are less than the
actual cost of the retirees' claims. The accumulated postretirement benefit
obligation (APBO) for this subsidy at December 31, 1998 and 1999 was $20.1
million and $25.4 million, respectively. The APBO is unfunded and is included
with other liabilities on the Consolidated Balance Sheet. Annual expense
related to this subsidy is not considered material to disclose.
NOTE 8. INCOME TAXES
Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expense for tax and financial reporting purposes.
Deferred tax assets and liabilities comprise the following at December 31 (in
millions):
- --------------------------------------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------
Excess of tax over book
depreciation $162.9 $195.8
Employee benefits -- 3.4
Other - net 3.7 3.8
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 166.6 203.0
- --------------------------------------------------------------------------------
Loss carryforward (0.1) (0.1)
Alternative minimum tax (22.7) (3.5)
Capital leases (2.6) (3.4)
Ticket pricing adjustments (2.2) (1.7)
Frequent flyer program (10.5) (14.9)
Employee benefits (5.7) --
Aircraft return provisions (16.4) (14.9)
Deferred gains (8.4) (13.9)
Capitalized interest (2.2) (2.5)
Inventory obsolescence (4.8) (8.4)
- --------------------------------------------------------------------------------
Gross deferred tax assets (75.6) (63.3)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 91.0 $ 139.7
================================================================================
Current deferred tax asset $ (8.2) $ (4.3)
Noncurrent deferred tax liability 99.2 144.0
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 91.0 $ 139.7
================================================================================
30
After consideration of temporary differences, taxable income for 1999 was
approximately $155 million.
The components of income tax expense were as follows (in millions):
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------'
Current tax expense:
Federal $ 26.4 $43.0 $ 31.0
State 1.9 7.8 6.8
- --------------------------------------------------------------------------------
Total current 28.3 50.8 37.8
- --------------------------------------------------------------------------------
Deferred tax expense:
Federal 18.5 27.8 45.5
State 4.4 1.4 3.2
- --------------------------------------------------------------------------------
Total deferred 22.9 29.2 48.7
- --------------------------------------------------------------------------------
Total tax expense $51.2 $80.0 $86.5
================================================================================
Income tax expense reconciles to the amount computed by applying the U.S.
federal rate of 35% to income before taxes as follows (in millions):
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
Income before income tax $123.6 $204.4 $220.7
================================================================================
Expected tax expense $43.3 $71.5 $77.2
Nondeductible expenses 2.9 3.0 2.6
State income tax 4.1 6.2 6.7
Other - net 0.9 (0.7) --
- --------------------------------------------------------------------------------
Actual tax expense $51.2 $80.0 $86.5
================================================================================
Effective tax rate 41.4% 39.1% 39.2%
================================================================================
NOTE 9. EARNINGS PER SHARE
Basic EPS is calculated by dividing net income by the average number of
common shares outstanding. Diluted EPS is calculated by dividing net income
plus the after-tax interest expense on convertible debt by the average common
shares outstanding plus additional common shares that would have been
outstanding if conversion of the convertible debt and exercise of
in-the-money stock options is assumed. EPS calculations were as follows (in
millions except per share amounts):
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
Net income $72.4 $124.4 $134.2
Avg. shares outstanding 14.785 23.388 26.372
- --------------------------------------------------------------------------------
Basic earnings per share $4.90 $5.32 $5.09
================================================================================
Net income $72.4 $124.4 $134.2
After-tax interest on:
6-1/2% debentures 5.3 2.2 --
6-7/8% debentures 2.3 0.3 --
- --------------------------------------------------------------------------------
Diluted EPS income $80.0 $126.9 $134.2
- --------------------------------------------------------------------------------
Avg. shares outstanding 14.785 23.388 26.372
Assumed conversion of:
6-1/2% debentures 6.151 2.543 --
6-7/8% debentures 1.608 0.255 --
Assumed exercise of
stock options 0.145 0.181 0.135
- --------------------------------------------------------------------------------
Diluted EPS shares 22.689 26.367 26.507
- --------------------------------------------------------------------------------
Diluted earnings per share $3.53 $4.81 $5.06
================================================================================
NOTE 10. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows (in millions):
- --------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $29.4 $29.4
Marketable securities 277.2 278.0
Restricted deposits 69.1 69.1
Long-term debt 175.5 175.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $132.5 $132.5
Marketable securities 196.5 195.2
Restricted deposits and
depository certificates 63.5 70.5
Long-term debt 383.0 383.0
- --------------------------------------------------------------------------------
The fair value of cash equivalents approximates carrying value due to the
short maturity of these instruments. The fair value of marketable securities
is based on quoted market prices. The fair value of restricted deposits
approximates the carrying amount. The fair value of restricted depository
certificates convertible into the common stock of Equant N.V. is $7 million
based on
31
sales of Equant N.V. stock in 1999. The fair value of long-term debt
approximates carrying value.
NOTE 11. OPERATING SEGMENT INFORMATION
Financial information for Alaska and Horizon follows (in millions):
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
Operating revenues:
Alaska $1,447.9 $1,566.3 $1,680.8
Horizon 303.6 347.8 415.9
Elimination of
intercompany
revenues (12.1) (16.4) (14.7)
- --------------------------------------------------------------------------------
Consolidated 1,739.4 1,897.7 2,082.0
- --------------------------------------------------------------------------------
Depreciation and amortization expense:
Alaska 56.9 61.9 67.9
Horizon 11.2 12.9 16.7
Interest income:
Alaska 12.2 23.2 21.7
Horizon 0.1 -- --
Interest expense:
Alaska 25.0 17.4 16.3
Horizon 1.8 1.0 1.5
Pretax income:
Alaska 127.4 190.5 196.4
Horizon 6.3 18.9 25.5
Air Group (10.1) (5.0) (1.2)
- --------------------------------------------------------------------------------
Consolidated 123.6 204.4 220.7
- --------------------------------------------------------------------------------
Capital expenditures:
Alaska 293.0 420.1 482.7
Horizon 145.9 193.4 82.3
Total assets at end of period:
Alaska 1,370.7 1,548.8 1,981.2
Horizon 158.0 187.1 213.0
Air Group 668.0 790.5 945.7
Elimination of
intercompany
accounts (663.6) (794.6) (959.8)
- --------------------------------------------------------------------------------
Consolidated $1,533.1 $1,731.8 $2,180.1
- --------------------------------------------------------------------------------
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Alaska Air Group, Inc.:
We have audited the accompanying consolidated balance sheet of Alaska Air
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alaska Air Group, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
January 25, 2000
33
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc. Schedule II
- --------------------------------------------------------------------------------------------------------------
Additions
Beginning Charged (A) Ending
(In Millions) Balance to Expense Deductions Balance
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.3 $1.0 $(1.1) $1.2
============= ============== ============= =============
Obsolescence allowance for flight
equipment spare parts $16.1 $3.4 $(1.5) $18.0
============= ============== ============= =============
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $38.6 $11.4 $(6.8) $43.2
============= ============== ============= =============
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.2 $1.2 $(1.4) $1.0
============= ============== ============= =============
Obsolescence allowance for flight
equipment spare parts $18.0 $6.2 $(4.0) $20.2
============= ============== ============= =============
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $43.2 $13.1 $(7.6) $48.7
============= ============== ============= =============
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.0 $1.2 $(1.2) $1.0
============= ============== ============= =============
Obsolescence allowance for flight
equipment spare parts $20.2 $5.2 $(1.6) $23.8
============= ============== ============= =============
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $48.7 $12.1 $(11.9) $48.9
============= ============== ============= =============
- --------------------------------------------------------------------------------------------------------------
(A) Deduction from reserve for purpose for which reserve was created.
34
EXHIBIT INDEX
Certain of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference from the document
described in parenthesis. Certain others are filed herewith.
3.(i) Articles of Incorporation of Alaska Air Group, Inc. as amended
through May 21, 1996
3.(ii) Bylaws of Alaska Air Group, Inc., as amended through Feb. 8, 1996
(Exhibit 3.(ii) to 1995 10-K)
4.1 Amended and Restated Rights Agreement dated 8/7/96 between Alaska
Air Group, Inc. and The First National Bank of Boston, as Rights
Agent (Exhibit 2.1 to Form 8A-A filed 8/8/96)
10.1 Lease Agreement dated Feb. 1, 1979 between Alaska Airlines, Inc.
and the Alaska Industrial Development Authority (AIDA) (Exhibit
10-15 to Registration Statement No. 2-70742)
10.2 Lease Agreement dated April 1, 1978 between Alaska Airlines,
Inc. and the AIDA (Exhibit 10-16 to Registration Statement No.
2-70742)
10.3 Management Incentive Plan (1992 Proxy Statement)
10.4 Loan Agreement dated as of December 1, 1984, between Alaska
Airlines, Inc. and the Industrial Development Corporation of the
Port of Seattle (Exhibit 10-38 to 1984 10-K)
10.5 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended
through May 19, 1992 (Registration Statement No. 33-52242)
#10.6 Lease Agreement dated January 22, 1990 between International Lease
Finance Corporation and Alaska Airlines, Inc. for the lease of a
B737-400 aircraft, summaries of 19 substantially identical lease
agreements and Letter Agreement #1 dated January 22, 1990 (Exhibit
10-14 to 1990 10-K)
#10.7 Agreement dated September 18, 1996 between Alaska Airlines,
Inc. and Boeing for the purchase of 12 Boeing 737-400 aircraft
(Exhibit 10.1 to Third Quarter 1996 10-Q)
#10.8 Agreement dated August 28, 1996 between Horizon Air Industries,
Inc. and Bombardier for the purchase of 25 de Havilland Dash 8-
200 aircraft (Exhibit 10.2 to Third Quarter 1996 10-Q)
10.9 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and George D. Bagley (1996 Proxy Statement)
10.10 Alaska Air Group, Inc. 1996 Long-Term Incentive Equity Plan
(Registration Statement 333-09547)
10.11 Alaska Air Group, Inc. Non Employee Director Stock Plan
(Registration Statement 333-33727)
10.12 Alaska Air Group, Inc. Profit Sharing Stock Purchase Plan
(Registration Statement 333-39889)
10.13 Alaska Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity
Plan (Registration Statement 333-39899)
10.14 Alaska Air Group, Inc. Supplementary Retirement Plan for Elected
Officers (Exhibit 10.15 to 1997 10-K)
10.15 1995 Elected Officers Supplementary Retirement Plan (Exhibit 10.16
to 1997 10-K)
#10.16 Agreement dated December 21, 1998 between Horizon Air
Industries, Inc. and Bombardier for the purchase of 25 Canadair
regional jets series 700 aircraft
10.17 Alaska Air Group, Inc. 1999 Long-Term Incentive Equity Plan
(Registration Statement 333-87563)
*10.18 Alaska Air Group, Inc. Change of Control Agreement dated 27
October 1999
*12 Calculation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-K)
*23 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
35