ALASKA AIR GROUP INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


(Mark One)
(X)		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003.
		OR
( )		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________

Commission file number 1-8957

ALASKA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		91-1292054 (I.R.S. Employer Identification No.)

19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)

Registrant’s telephone number, including area code: (206) 392-5040

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The registrant has 26,707,579 common shares, par value $1.00, outstanding at October 31, 2003.

TABLE OF CONTENTS


PART I. FINANCIAL STATEMENTS
	ITEM 1. Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
	ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 6. Exhibits and Reports on Form 8-K
Signatures
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

TABLE OF CONTENTS


		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosure About Market Risk
Item 4.		Controls and Procedures
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 6.		Exhibits and Reports on Form 8-K
Signatures

Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements that are based on the best information currently available to management. These 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 statements relate to future events or our future financial performance and involve known and unknown risks and uncertainties that may cause our actual results or performance to be materially different from those indicated by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “forecast,” “may,” “will,” “could,” “should,” “expect,” “plan,” “believe,” “potential” or other similar words indicating future events or contingencies. Some of the things that could cause our actual results to differ from our expectations are: economic conditions; the continued impact of terrorist attacks, global instability and potential U.S. military involvement; our significant indebtedness; downgrades of our credit ratings; the competitive environment and other trends in our industry; changes in laws and regulations; changes in our operating costs including fuel; changes in our business plans; interest rates and the availability of financing; liability and other claims asserted against us; labor disputes; our ability to attract and retain qualified personnel; and inflation. For a discussion of these and other risk factors, review the information under the caption “Risk Factors” in Amendment No. 1 to our registration statement on Form S-1 filed on August 23, 2003 as well as Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results.

PART I. FINANCIAL STATEMENTS
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.

ASSETS


	December 31,		September 30,
(In Millions)	2002		2003

Current Assets
Cash and cash equivalents	$	269.0	$	221.7
Marketable securities		366.8		526.9
Receivables - net		125.4		142.1
Inventories and supplies		71.9		68.0
Deferred income taxes		61.2		83.4
Prepaid expenses and other current assets		82.0		80.5

Total Current Assets		976.3		1,122.6

Property and Equipment
Flight equipment		2,066.4		2,304.7
Other property and equipment		430.9		448.8
Deposits for future flight equipment		93.5		89.2

		2,590.8		2,842.7
Less accumulated depreciation and amortization		811.4		891.5
Total Property and Equipment - Net		1,779.4		1,951.2

Intangible Assets		50.9		50.9

Other Assets		74.1		114.7

Total Assets	$	2,880.7	$	3,239.4

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.

LIABILITIES AND SHAREHOLDERS’ EQUITY


		December 31,			September 30,
(In Millions)		2002			2003

Current Liabilities
Accounts payable		$	132.1		$	125.6
Accrued aircraft rent			76.0			66.9
Accrued wages, vacation and payroll taxes			87.4			87.3
Other accrued liabilities			222.2			259.7
Air traffic liability			211.6			265.7
Current portion of long-term debt and capital lease obligations			48.6			55.7

Total Current Liabilities			777.9			860.9

Long-Term Debt and Capital Lease Obligations			856.7			1,041.0

Other Liabilities and Credits
Deferred income taxes			157.2			200.3
Deferred revenue			232.0			238.7
Other liabilities			201.2			215.5

			590.4			654.5

Shareholders’ Equity
Common stock, $1 par value
	Authorized: 100,000,000 shares
	Issued: 2002 - 29,309,726 shares 2003 - - 29,426,315 shares		29.3			29.4
	Capital in excess of par value		483.3			485.1
	Treasury stock, at cost: 2002 - 2,736,287 shares 2003 - - 2,729,393 shares		(62.5	)		(62.3	)
Accumulated other comprehensive income (loss)			(80.2	)		(84.6	)
Retained earnings			285.8			315.4

			655.7			683.0

Total Liabilities and Shareholders’ Equity		$	2,880.7		$	3,239.4

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.


Three Months Ended September 30
(In Millions Except Per Share Amounts)		2002			2003

Operating Revenues
Passenger		$	570.7		$	645.8
Freight and mail			21.1			22.6
Other - net			28.8			33.8

Total Operating Revenues			620.6			702.2

Operating Expenses
Wages and benefits			224.1			237.9
Contracted services			22.2			24.4
Aircraft fuel			82.7			94.7
Aircraft maintenance			35.8			42.4
Aircraft rent			48.3			49.2
Food and beverage service			18.6			17.6
Commissions			7.2			4.6
Other selling expenses			32.5			31.5
Depreciation and amortization			34.4			32.7
(Gain) loss on sale of assets			(0.3	)		0.1
Landing fees and other rentals			38.1			43.3
Other			51.5			45.0

Total Operating Expenses			595.1			623.4

Operating Income			25.5			78.8

Nonoperating Income (Expense)
Interest income			6.0			5.5
Interest expense			(11.2	)		(13.3	)
Interest capitalized			0.6			0.4
U.S. government compensation			0.4			—
Other - net			(2.0	)		(3.2	)

			(6.2	)		(10.6	)

Income before income tax			19.3			68.2
Income tax expense			6.8			27.5

Net Income		$	12.5		$	40.7

Basic Earnings Per Share		$	0.47		$	1.53

Diluted Earnings Per Share		$	0.47		$	1.52

Shares used for computation:
	Basic		26.549			26.660
	Diluted		26.562			26.796

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.


Nine Months Ended September 30
(In Millions Except Per Share Amounts)		2002			2003

Operating Revenues
Passenger		$	1,552.0		$	1,678.2
Freight and mail			59.4			63.6
Other - net			85.0			89.7

Total Operating Revenues			1,696.4			1,831.5

Operating Expenses
Wages and benefits			638.8			697.5
Contracted services			69.3			74.5
Aircraft fuel			222.6			265.0
Aircraft maintenance			121.3			140.2
Aircraft rent			141.6			146.1
Food and beverage service			49.9			46.6
Commissions			31.1			11.4
Other selling expenses			96.2			87.7
Depreciation and amortization			100.7			98.2
(Gain) loss on sale of assets			(0.8	)		0.2
Landing fees and other rentals			103.9			120.6
Other			150.9			139.3

Total Operating Expenses			1,725.5			1,827.3

Operating Income (Loss)			(29.1	)		4.2

Nonoperating Income (Expense)
Interest income			16.1			11.5
Interest expense			(34.7	)		(38.6	)
Interest capitalized			1.4			1.9
U.S. government compensation			0.5			71.4
Other - net			8.9			2.7

			(7.8	)		48.9

Income (loss) before income tax and accounting change			(36.9	)		53.1
Income tax expense (benefit)			(12.8	)		23.5

Income (loss) before accounting change			(24.1	)		29.6
Cumulative effect of accounting change			(51.4	)		—

Net Income (Loss)		$	(75.5	)	$	29.6

Basic and Diluted Earnings (Loss) Per Share:
Income (loss) before accounting change		$	(0.91	)	$	1.11
Cumulative effect of accounting change			(1.93	)		—

Net Earnings (Loss) Per Share		$	(2.84	)	$	1.11

Shares used for computation:
	Basic		26.543			26.621
	Diluted		26.543			26.680

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.


												Accumulated
		Common					Capital in Treasury					Other
		Shares			Common		Excess of		Stock,			Comprehensive			Retained
(In Millions)		Outstanding			Stock		Par Value		at Cost			Income (Loss)			Earnings		Total

Balances at December 31, 2002:			26.573		$	29.3	$	483.3	$	(62.5	)	$	(80.2	)	$	285.8	$	655.7

Net income for the nine months ended September 30, 2003																29.6		29.6
Other comprehensive income (loss):
Related to marketable securities:
	Change in fair value												(3.6	)
	Reclassification to earnings												3.8
	Income tax effect												(0.1	)

													0.1					0.1

Related to fuel hedges:
	Change in fair value												14.6
	Reclassification to earnings												(21.9	)
	Income tax effect												2.8
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